First International

Terrible results herald painful future


WE ARE now in the midst of the reporting season for the publicly listed shipping companies.

The results published are for the third quarter and the first nine months of 2011. They universally make terrible reading and as the results reflect business contracted earlier in the year, the future results will be equally bad, if not worse.

Already we have two companies that have filed for bankruptcy protection in the US, Omega and Marco Polo.

Saga Tankers is going into administration in Norway and some German shipping companies are also closing down.

Meanwhile, there are several other companies facing terminal decisions of one form or another. With the shipping banks in effect closing their doors except for first class existing customers or new business with substantial equity, the ability of these companies to restructure their debt is gone.

With hindsight, shipping companies should have restructured their finances two years ago and also raised more equity, which is today not available either.

With freight rates in tankers and dry bulk carriers at levels that barely cover operating expenses, and in some trades not even that, the outlook for survival is very doubtful.

The container sector is also facing a severe reduction in demand after a brief flurry earlier this year. Container companies are closing down services and laying up ships, but are now facing a massive orderbook of large ships delivering over the next three or four years. The big companies are squeezing out the smaller or weaker ones as overall demand declines.

Very few of the public companies have taken steps to reduce their fleets, cancel newbuilding orders or raise more equity from existing shareholders.

Furthermore, despite the dismal performance of most of these companies over the past few years there have been no changes in senior management or attempts to merge with other companies to consolidate operations and reduce general and administration costs.

In this environment it is interesting to read some of the commentary put out by the companies when they recently announced their results and also those of various analysts.

General Maritime has clearly reached a terminal point as it failed to disclose its full financials and is rumoured to have exhausted its cash reserves. Without a further injection from its shareholders it is doubtful that it can survive and with a market value today of $20m, down from its high of $5.3bn in 2007, it is doubtful that it can raise anything from its shareholders.

Overseas Shipholding Group announced its 10th consecutive quarter of losses and has a current market value of $375m compared with its peak of $2.75bn in mid-2007. The chief executive, Morten Antzen, who was just rewarded with a new five-year contract, discussed future buying opportunities and is not considering selling any ships or reducing a $100m corporate overhead. Chief financial officer, Myles Itken, rejected the idea of taking an impairment charge by revaluing the fleet. Analysts have calculated that the present cash reserves will run out by the end of 2012 and that marking the assets to market could wipe out the remaining equity.

Double Hull Tankers, which was created by OSG as an off balance sheet leasing company, has advised that it intends to return all the ships it has chartered from DHT at the end of their present charters beginning in 2012. With rates for large crude tankers trading below breakeven today, DHT will face more pressure on its cash flow. Its current market value is $80m, down from $1.17bn in the third quarter of 2007.

One of Denmark’s flagship tanker companies Torm revised its forecast for 2011 to a loss of $175m-$195m. This company is now 52% owned by the family trust of Greek shipowner Gabriel Panayotides, who also has a significant interest in a public dry cargo company, Excel Maritime Carriers, which also announced another quarter of losses.

Torm shareholders have seen the company’s market value decline from $3bn in 2007 to $71m today, while Excel shareholders have fared even worse, with their company’s value declining from $6.5bn in 2008 to $190m today.

There are many more publicly traded companies that have reported similar financial results from Italy, France, Germany, Japan, South Korea and Scandinavia. Doubtless there are countless private companies facing the same problems.

This shipping recession is deep and right across the board.

Most experts now agree that the entire shipping industry is facing the likelihood of very poor markets for at least the next two years and given the significant levels of debt that most shipping companies carry, there will be more collapses to come.

Some public companies choose to use earnings before interest, depreciation and amortisation to advertise their apparent profitability, but this masks the reality of a business that owns depreciating assets and has large debt. Shipping is a cash flow business and net cash flow is the only meaningful measure of a company’s viability. The balance sheet shows the book value of assets which are invariably written down over 25 years, but the market values of the ships should be shown in the notes to the accounts and adjustment made to the book values where there is a significant difference between these values.

As is now evident, there is little or no value in the companies themselves as they have no unique franchise value and operate in markets where there is little barrier to entry. They are also generating negative earnings taking into account all expenses including debt service.

This explains why we have not seen and are unlikely to see any corporate mergers or acquisitions, but may well see new investors like Wilbur Ross buying ships at distressed prices and continuing to trade them. n

Paul Slater is chairman of First International

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