Clarification

Last week in our article on D/S Torm we were guilty of a number of errors, which are clarified below:

We misstated the differential in MR earnings between East and West. In fact, on a yearly basis the differential between the two basins is $2.7 million.

We deeply regret our statement that product carriers could not be built in China at this time. What was meant was that the new shipyards coming on stream in China will mainly build dry cargo vessels initially as tankers are too sophisticated to start-up with. There are a number of yards in China building product tankers.

With respect to dry cargo, Torm does intend to grow the model but to change and grow it in the present environment would be suicidal.

We deeply apologize for our errors.

D/S Torm

TMI?

What a week for investors! Starting with CMA’s annual event, con­tinuing with JPMorgan’s Conference and concluding with the Capital Link Forum, it is conceivable that even the most interest­ed observer of the industry may have suffered from information overload. Thankfully, with Good Friday, many of us had the oppor­tunity to recover with a long-weekend.

Despite the early start, the Capital Link Forum played to a full house. There were company presentations galore interspersed with lively and informative panel discussions. With far too much infor­mation to distill, here is a highly selected compendium of our out­takes.

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2008 Dahlman Rose Energy Supply Chain Conference

Last week’s conference showcased Dahlman Rose’s prowess in their chosen franchise -the energy supply chain. In a two day New York and Boston road show, they presented 29 companies covering the full range of the supply chain including offshore, exploration and production, drilling, offshore construction and shipping to a myriad group of investors. And as much as we appreciated the formal presentations, we really enjoyed the opportunity to sit and talk with the principals who presented their companies, a rare opportunity for us, in the casual atmosphere of the breakout room. The participants could not have been more generous in sharing their time to teach us about their companies and their industry.

The morning began with a keynote address by Mr. Simon Rose. We strongly suggest you beg, borrow or steal a copy of the presentation that distills the energy crisis in a mere 10 slides. The quick answer is that is all about motorization.

Rather than try to cover the conference, which is impossibility, given the breadth and depth, we have chosen instead to highlight discussions we had with Northern Offshore and Omega Navigation.

“Who Are Those Guys?”
Marion Woolie, the President and CEO, of Northern Offshore Ltd. began his short and picture filled presentation with the above referenced quote from the movie, “Butch Cassidy and the Sundance Kid.” For him, it reflected the company’s lack of recognition, which was one of the key issues that he encountered when he joined the company last year. But even in this short period of time, he has put his stamp on the company and the market now knows who they are.

Throwing off the shackles of the corporate world, Mr. Woolie has found his dream job, building a company from scratch. And although he is having fun doing it, it is quite a challenge. After emerging from a re-structuring with three older rigs, with an average age of 30 years, the company entered into an agreement last June with Maersk to purchase and leaseback three North Sea Jack-ups bringing the fleet to six and the average age down to 28. The company was then listed on the Oslo Bors in September 2007. And by the time the fourth quarter arrived, Mr. Woolie’s greatest challenge was to pull together a management team. He reached out to his network and brought together solid managers with whom he worked with for 15 to 20 years and who together have a combined 200 years of experience. And, they, too, are apparently having fun.

Flipping through rig pictures, Mr. Woolie described the employment picture of the fleet. The Energy Driller, a first generation semi-submersible is on a three-year charter to ONGC at $230,000 and operates in a water depth of 600-1,000 feet. The Energy Searcher, a drill ship, is working short-term in Southeast Asia for Total. The Energy Producer is working in the North Sea earning a tariff rather than a day rate. It is paid according to the volumes produced and the price of oil. These are the cash cows. Then there are the Maersk rigs, which are all operating in international waters. The rigs are earning $170,000 per day with two of them off contract in 2008 and the last in September 2009. The good news is that the Maersk Exerter, coming off the contract in May, has found follow-on work for 6 months at $250,000 per day. Given Northern’s past history, this deal was structured to minimize risk for the charterer by requiring a secured performance bond and a cash collateral account and an accelerated debt repayment schedule for the benefit of the bank. Specifically, the new rig debt has to be paid down to 0 in 2010 requiring principal payments of $100 million per year.

The best illustration of where the company was and how it has been transformed was shown in a calculation of uncontracted rig months, which Mr. Woolie describes as a health gauge. As of the fourth quarter 2007, 62% of the total available months were available. With market focus and execution, the new management team brought that figure down to 12.5% in the first quarter 2008. The total current backlog is $616 million, which compares to a market cap of $600 to $700 million indicating that the stock is cheap in management’s view.

The next task this management team faces is how to grow the company. Mr. Woolie doesn’t pull any punches. Organic growth through the placement of new rig orders is unlikely. Rig prices are too high and deliveries, now scheduled for 2011, are too slow. He is targeting existing rigs whether used or newbuildings under construction. It is the latter group that is of particular interest. He does not expect that all of the 150 rigs on order for delivery in 2008 and 2009 will be delivered on time, on budget and with a term contract and therein lies the opportunity. Finally when asked if he is going into deepwater or the jack-up market, his simple response is that it doesn’t matter as long as it adds value.

With respect to oil prices, his views remain traditional. He joked that oil prices are changing so quickly oil companies cannot keep up. He acknowledges a fundamental change but argues prices will remain cyclical. The trading range is certainly higher with lots of volatility. To Mr. Woolie, it is not the price but the direction. All of which is clouded for the moment by lots of emotion.

So, if anyone comes up to you and asks you “who are those guys,” the correct response is Northern Offshore’s posse. Watch your back!

Deferred Equity and Other Interesting Insights
We were also intrigued by a number of points in Omega Navigation Enterprises, Inc.’s (“Omega”) presentation including, in particular, the structuring of its yard financing.

Timing and creativity are crucial aspects of financing in general and we found both of these evident in Omega’s newbuilding financing. Omega had signed shipbuilding contracts, in 2007 with Hyundai Mipo, to construct five 37,000 DWT product/chemical IMO II/III tankers for $44.2 million each for a total cost of $221 million. The vessels are scheduled for delivery between March 2010 and February 2011.

Currently the shipyard is quoting the identical vessel for $47.5 million with delivery in 2011. However, market sources indicate the current value of the vessels is closer to $50 million particularly the earlier deliveries.

Financing for both the progress payments and post delivery is in place.  Our focus, however, is on the former, which minimizes the use of Omega’s cash flow while allowing the payment of dividends. To accomplish this, the progress payments are highly levered in the beginning with increasing amounts of equity required, as subsequent installments are due as follows:

The benefits of this structure are best illustrated in the chart that shows the sources of the progress payments through 2009.

Ultimately, as the process is reversed and more equity is injected and the capitalized interest is paid, the overall financing at delivery is 75%. The post-delivery financing benefited from being negotiated just before the credit crisis and is extremely competitive at a rumored LIBOR + 80 bps. All of this was made possible by the timely placement of the orders as well as the quality of the vessels and the shipyard and the company’s employment strategy.

Among other interesting insights provided at the presentation was Omega’s employment strategy. When it comes to time charters, they believe that 3 years is ideal as anything beyond that is steeply discounted. When feasible, upside protection is obtained through profit sharing agreements. Currently, 6 of their 8 vessels have such arrangements. Their fleet is currently time chartered to Norden, Torm and with Glencore. In the case of Norden and Torm, the vessels are operated in pools. Although all three are first-class, they find that Glencore is more creative and flexible as a consequence of their trading mentality.

On the other hand, Omega faces challenges. The company is frustrated by the fact that asset values and charter rates are disjointed making it difficult to do an accretive acquisition. And investors are concerned about the lack of liquidity of the company’s shares. Float is small with only 12 million shares trading making it difficult for an investor to take a position.

And, finally, financing of growth may be somewhat more difficult as it is already moderately leveraged with a net debt to capital of 63% and its shares carry a low valuation. Some relief will come from its re-structured debt facility, which is expected to close in Q1 2008. Both junior and senior facilities will be non-amortizing until the final repayment date in April 2011.

Despite these issues, the company is extremely well positioned to take advantage of evolving worldwide trading patterns resulting from roughly 5 million barrels per day of new refining capacity in the Middle East and India starting up by the end of the decade. These trades will involve longer hauls and therefore increased demand. To service this trade, Omega will have one of the youngest fleets with an average age of less than 2 years, which will be almost equally divided between the MR and LR1 sizes upon delivery of the newbuildings.

This pure play product company may just have gotten it right. With an established market position, fixed employment and carefully structured debt, the company’s dividend is protected in the interim while waiting for the market to catch-up.

In the interest of full disclosure and perhaps as an indication of the quality of the conference, we must confess that we were sufficiently intrigued by a number of presentations to buy shares in two companies, but not in the shipping sector, of course. We are certain that our investment was not quite what Mr. Rose hoped for but we expect that others, with more meaningful dollars to deploy, either took new positions or increased their holdings.

TORM Takes Half of FR8

Some people are better than others at sharing, and TORM seems to be right at the top of the list. After purchasing OMI jointly with Teekay this past spring and splitting the assets, TORM announced this week that it had acquired a 50% equity stake in FR8 from Projector for $125 million. The FR8 Group controls 25 vessels including three LR2 newbuildings for delivery in 2008. It owns six modern product tankers, comprising four MR and two LR1 vessels and has long-term charters on three LR2, four LR1 and 11 MR product tankers, with purchase options on three of these vessels. The group also commercially manages one LR2 vessel and has about 30 staff worldwide in Singapore, London and Veracruz. The full fleet list is shown on the next page.

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S&P Market Stays Active: Torm, Top, Excel, Ghandour & Haji-Ioannou

TORM Picks Up Six Tankers from LGR Navigazione

Rankings 2003 : Marking 2002 Performance

By Urs Dür

Every year the Rankings issuecauses as much controversy as applause and, hence, every year we at Marine Money try to make it better and more inclusive. The controversy arises from different interpretations of balance sheet and income (P&L) statement line items and the relevance of each of the tests to the public companies analyzed. This marks the third year that Rankings has been based on ratio analysis tests. 2000 Rankings, published in June/July 2001, had five tests over for 41 companies, with Coflexip Stena Offshore deemed the best performer. 2001 Rankings, published in July/August 2002, had 53 companies and eight tests, with D/S Torm the winner. This year, 2002 Rankings – with the dutiful assistance of Daniel Ahmad, our intern from The Yale School of Management and many years solving the world’s problems at the United Nations – consists of 60 companies – 18 having never before appeared – tested in nine ways to yield the best overall performer of 2002: Oceaneering International (NYSE: OII).

lic, traded for the full year of 2002 and had to have, by time of ranking in May 2003, printed and available income (P&L) and balance sheet statements for 2002.

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HøEGH FINALLY GOES…PRIVATE

By Matt McCleery and Urs Dür

In a move that we’ve been anticipating for several years, Aequitas Holdings, of which Leif O. Høegh is the Chairman and Morten W. Høegh and Westye Høegh are Directors, successfully tendered, the week of 1st May, for the 35% the shares in Oslo-listed Leif Hoegh (Oslo: LHO) that they did not already control.

Although we think it’s an important deal, it is not a huge one in dollar terms – Aequitas will pay $160 million in cash for the 35% of Leif Hoegh they do not already own, valuing the company’s equity at about $503m and allowing them to purchase the company for 3.1 4x EBITDA, a favorable multiple for the buyer especially when you consider how much of the fleet is on long term contracts.

Plus, thanks to the fact that Leif Hoegh had $250m in cash and equivalents at ’02 year end and balance sheet leverage of only 50%, Aequitas was able to finance its entire purchase LBO- style, using the cash in the company and equity on the balance sheet to support a acquisition debt financing arranged by Nordea, DnB and Hamburgische Landesbank Giroz. Even with the new debt in place, balance sheet book leverage will rise from about 50% to a bit more than 65%, still very reasonable based on the company’s industrial business model, and we would be surprised if Aequitas hasn’t advised banks that it will begin selling off its reefer and bulk interests and use the proceeds to pay down some debt, just a Marine Money guess on the latter.

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Deal of the Year – 2002 M&A and Joint Ventures

In shipping charter parties, a good broker makes both parties feel that they have won the negotiation, while it is likely that both have yielded more than they would have at the start. In shipping M&A brokers and advisors too are involved, but, unless the deal is an obvious one between friendly parties, this “good broker” dynamic is often lost because the deals are done in a public forum.

2002 was a down year in shipping in general and while there were some notable successes this year, see below, just as notable was the abundance of big merger ideas that did not come to fruition. Think about what did not happen in 2002 (so far):

1. Royal Caribbean/P&O Princess/Carnival saga.

1. Torm/Norden
   

1. AET and MISC/General Maritime/Teekay?
   

1. SCI Privatization and ???

1. Bergesen/Worldwide
   

1. Golar’s rumoured sale

1. Rumoured merger of PSA and NOL
   

The list goes on…

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