Will All Shipping Companies Suffer Equally?

by: Judy Weil

Forbes reported Thursday that the Baltic Dry Index, which measures dry bulk shipping rates around the world, fell 3.9% to 733 points, the lowest reading since 1987 and down 94% since May’s high. If shipping companies are banking on China, one look at record contraction in its manufacturing sector will cure that.

Ship Finance International (NYSE:SFL) and Frontline Ltd. (NYSE:FRO) recently reported sharply different results. Ship Finance maintained its dividend, for example, while Frontline cut. (From Frontline Ltd.’s Q308 conference call:)

The reduction in the dividend was taken after a thorough evaluation of different items but of course the newbuilding commitments, the weak fundamentals that we foresee in 2009, and also the squeeze in the credit market was important in that consideration.

Ship Finance maintained its dividend after prudently locking in long term rates. Frontline used short term contracts and suffered mightily from it. Forbes said day rates on Capesize ships were at $2,773 last Wednesday, down from $172,078 a year ago.

From Ship Finance International Ltd. Q308 conference call:

The vessel operating expenses are down from the previous quarter and also compared to the same period of last year, and we see the fruits of our deliberate avoidance of operating expense risk, as we have seen those expenses escalate very substantially over the last few years.

All vessels to Frontline are operated at $6,500 per day fixed by Frontline and that includes dry docking. When Frontline reported their numbers today, they reported an average operating expense year-to-date of $11,000 per day, which is significantly over the $6,500 per day that we pay.

From Frontline:

Rates dramatically changed in the third quarter in 2008. There was a complete sentiment turn basically from fear of oil supply to fear of demand.

The high rates for VLCCs were $164,000 per day to lows down to $29,500. At the end of July the market for VLCCs fell more then 100 WS point within one week and our strategy of fixing short higher paying [AGE] voyages proved to be wrong.

Profit sharing was beneficial (from SFL):

The profit share agreement with Frontline has been very favorable for the company… The profit share has generated approximately $90 million in average annual incremental cash flow which is more than $400 million over the 4.5 year period the company has been in existence and this has enabled the company to fuel significant growth. And based on the market outlook we expect that the profit share to be significant also for the fourth quarter this year.

Frontline has announced that four vessels will be dry docked into the third quarter and this will of course influence the profit share contribution from those vessels.

Book values (from SFL):

The book value of our assets are significantly below market values for the third quarter and as an illustration: For the Frontline fleet they had around $3.7 billion charter fee value for the third quarter. We have approximately $1.7 billion book value in our balance sheet and the loans we have against those vessels amounts to approximately $1.2 billion.

Frontline is banking on China and oil price gains (from FRO):

A positive thing in the market is the stimulus package which is being introduced. We hope that of course they will mean increased demand for oil and consumption.

Strategic stock building in China has not happened yet. There has been various discussion that maybe one way of spending money in China is to buy oil at the present low price and then do some stock building. This will of course be a positive for the tanker market.

Finally, oil prices [are] in contango meaning that the forward price is higher then the present price. The contango right now is around $7 to $8 per barrel six months ahead which has made it attractive for various oil companies and oil traders to fix VLCCs and put the ships in storage.

Frontline appears more exposed to credit market uncertainty:

The company expects maximum $300 million in additional funds will be needed to complete the full financing of the company’s newbuilding commitments. If credit markets don’t improve before 2012, this might have to be funded from the operational earnings from existing and new vessels.

Delay in ship deliveries:

The main wildcard in the tanker order book for Suezmaxes is that basically half of the order book is ships going to be built at Greenfield Shipyards, e.i. shipyards that have not built any Suezmax tankers before and delays will happen and is already happening.

The yard where we ourselves have eight ships on order, have seen delays and we have already adjusted our deliveries with one quarter and we expect further delays there. The light blue in 2008 is five ships from Rongsheng should have been delivered this year and they’ll be delayed onto next year. So we see further delays there.


Finally the Gulf of Aden we have put in there, that’s a lot of media attention these days of piracy and most likely some owners already have decided they will go around the Cape and we ourselves will put into a policy that we will try and follow the escort ships, or marine ships that are in the region so there will be some delays.

But SA’s Tim Plaehn writes that Ship Finance International’s (SFL) results are closely intertwined with Frontline Ltd.’s (FRO) because Frontline leases most of its tankers from Ship Finance and the companies share profits from leased ships. He notes:

Frontline is the big gorilla in the tanker market and their long term fleet growth plans will eventually reward shareholders with piles of dividends. However, FRO has a daily break-even of $24,800 for their Suezmax tankers. Nordic American Tanker (NYSE:NAT) with their small, all Suezmax fleet has a break even of less than $10,000.

Even though results are different, could one's difficulties bring down the other?