I first met Anthony Argyropoulos in the late 1990s or early 2000s, when he was at Jefferies, where he was instrumental in establishing their marine banking business. He left Jefferies in 2004 and joined Cantor Fitzgerald, where through 2011 he established and ran one of the most successful and in-demand marine transportation investment banking practices in the world. Now he is the founder of Athens-based Seaborne Capital Advisors, which is a company that provides advisory services to marine transportation companies and offshore drilling and supply boat companies. I remember a splendid dinner at Ithaki, perhaps the best restaurant in the Athens area, as one of the highlights of the many trips I made to Greece to work with shipping clients. Anthony has raised $2 billion in 12 IPOs and $1.3 billion in 14 follow-on offerings, and another $1.1 billion in offerings of notes and at-the-market shares. He has been instrumental in $3.6 billion of mergers, acquisitions, restructurings and advisory assignments. He holds an MBA in Finance from Bentley College, and is a frequent speaker at global shipping events, and a contributor to several publications.
We spoke earlier this week on the telephone. Anthony was on a cellphone somewhere near the water, which was appropriate, and I was taking notes in my office in New York.
JA: Anthony, you worked with two of the most powerful securities trading companies in the United States - Jefferies and Cantor-Fitzgerald - and you were definitely one of the leaders in the shipping underwriting business. I have no idea how many IPOs and follow-on offerings you did, but probably more than anyone else. Now your company doesn't have a public or trading platform at all. Why is that?
AA: In our capacity as specialist industry bankers the principal work we did for all those shipping companies in the past was basically corporate finance work. That is we helped companies structure themselves properly and prepared them to go public. We were instrumental in what I refer to as the first face in the emergence of the shipping industry in the capital markets. The buyers of those securities were almost 100% institutional, with little retail participation. Later and particularly since the financial crisis retail participation increased. It became apparent to us that the ability to distribute securities in that way was fast becoming a commodity business, and the real value was in the advisory services. We help companies locate capital, we help them structure for going public, and then we bring in investment banks for their distribution capabilities. We are basically leveraging their distribution capabilities. Most investment banks are receptive to that. It is a very competitive field as you know, and depending on what type of product we want to sell - common stock, converts, bonds, and preferred stock - we can use different banks. Equities can be more institutional or more retail, so we can create syndicates, and serve our clients better without being tied to a specific investment bank.
JA: Did you invent a new type of boutique banking structure at Seaborne? Do you know of others that function the way you do?
AA: I don't believe I know of a company in shipping or offshore drilling that does what we do precisely, but I would imagine there are similar companies in other industry verticals. The thing is that creating real distribution capability is very expensive and the cost has to spread over a number of industry verticals and active trading in the secondary markets. It is by no accident that investment banks are organized this way. The infrastructure is too big, so you have to be a big bank to do it. In our case, we build up a relationship of trust with clients over a period of years as a boutique that is specialized and that helps companies grow. We were successful in completing some of the more challenging transactions. Our goal at Seaborne when it comes to investment banks as well as institutional investors is to be one of the firms they want to call in order to get insight into our industry. We have a very detailed information sheet that we put out every two weeks; it's called the Seaborne Peer Group Comparative Company Analysis, and it follows all the types of cargo shipping: dry bulk, containers, tankers and LNG vessels. We also have a unique set of historical data on charter rates and asset values on all these sectors organized in a way to assist institutional investors understand the shipping cycle and probable scenarios they should expect in the future.
JA: How did you happen to spread out to oil service?
AA: There are two things that happened. One of our clients, Dry Ships (DRYS), acquired Ocean Rig UDW Inc (ORIG) and started to invest heavily in ultra-deepwater drilling assets, specifically drill ships. They ordered 8 of them, substantially increasing the size of the company.
In addition to that we began to come across other opportunities in the offshore support sector, platform supply vessels and anchor handlers, for example.
JA: Anchor handlers?
AA: There are a number of different assets in offshore drilling. First there is a jack-up rig. They don't need anchors because they are used in shallow water. They have four legs or pylons and you literally jack them up from the solid floor under the water and they stand on their own. In addition to shallow water, there are three other sectors: midwater markets (3,000 to 5,000 feet), deepwater markets (5,000 to 7500 feet), and ultra-deepwater markets (more than 7500 feet). All the assets in these markets are floaters that have anchors to keep them in place. They can be moved by raising the anchors, so you can move these platforms with relative ease from one location to another. Anchor handling and towing is a specific type of business. Platform supply vessels take equipment and disposables to the offshore rigs: things like drilling mud, pipe and supplies used in drilling. Crews are usually brought in on different vessels. Platform supply vessels also take waste and used oil away from the platform and dispose of them according to regulations. Wherever you have offshore drilling assets, you have these boats that are peripheral assets that you need to operate.
JA: And geographically where is this type of drilling concentrated?
AA: Our clients are mostly in midwater and deepwater market geographies that are expanding offshore of Brazil and offshore of West Africa. Of course there are also pockets of activity in the Gulf of Mexico, Asia and even East Africa now. The North Sea has been quite stagnant, but there is some activity on the Norwegian continental shelf, but nothing like the expansion off West Africa.
JA: Do you see IPOs or follow-on offerings picking up in marine transportation?
AA: I do, but when it comes to the three main shipping sectors (dry bulk, crude oil and containers), I don't see those picking up until there is more stability in the charter markets, perhaps sometime next year. There is significant interest now in product tankers - tankers that carry refined petroleum products, and we have just seen Ardmore complete an IPO (ASC). Scorpio Tankers (STNG) has been a big success story that did a $200 million follow-on offering last week; they have more than 50 vessels now. And Capital Product Partners LP (CPLP) has been gaining in share price and market cap.
Container ships are closer to the dry bulk and crude oil tankers. Rates and values are not indicating a sustainable recovery is around the corner that would indicate that the market has turned, and that supply and demand are reaching a new equilibrium.
JA: How about LNG and LPG?
AA: They are doing very well in general and we have seen a number of offerings. Teekay LNG Partners (TGP), GasLog Ltd (GLOG), Golar LNG Partners (GMLP), and StealthGas Inc (GASS). StealthGas did a $100 million follow-on offering this spring. And there are several potential IPOs lined up in the LNG sector and in the product tanker space. Where you see the fundamentals lined up there is institutional demand.
One other observation is that we have seen after the financial crisis and this deep crisis in shipping, a lot of private equity capital come in, focused on shipping as a deep value cyclical play. Hedge funds and mutual funds that invest in shipping are basically more momentum-driven, so they don't care if they miss the first 15% or 20% of appreciation as long as the trend is established. But PE players like Oaktree Capital, Monarch Alternative Capital, Wilbur Ross, and Carlyle are some of the more active PE funds in this area. They typically have about a 5-year horizon, sometimes longer.
JA: What kinds of companies do they look at? How about Torm?
AA: There are companies trading at their multi-year lows. They technically have little or no equity because in many cases their debt far exceeds the current value of their assets. If you are able to look at those assets based on midcycle levels, there is value. You can find companies where the breakup value is negative, but those companies still have small market equity value representing the optionality inherent in a cyclical business near a trough, in spite of the fact that they have negative NAV or breakup value. Torm and Excel are examples.
JA: Do you see the rise in production and use of natural gas as a threat to deepwater drilling?
AA: No, I do not. The reason behind that is first and foremost all the marginal demand for crude oil comes from China and the Far East. Seventy percent of the global increase in demand is attributed to China. That demand cannot easily be substituted with natural gas. Crude oil consumption for non transportation purposes peaked several years ago, but even there, natural gas is not a ready substitute for crude oil in industry or utilities in developing countries and certainly not for refined petroleum in vehicle transportation. Of course that can change in ten years. I have heard speculation that when oil is found in offshore areas in such great quantities, we will see the price of oil go down. The breakeven price of oil found in offshore areas is high, just to make the projects possible, somewhere around $60 per barrel. The projects have a very long lead time - maybe a 3-year exploration cycle and a 4-year field development cycle and longer production period compared to recent land based discoveries. And don't forget that although the marginal cost of oil from OPEC nations is much lower and could drop further, the national budget breakeven prices in places like Saudi Arabia and Russia is near the $70 to $100 per barrel range. When prices go below these levels their tendency is to curtail production.
We live in a world that is still growing in population and consuming more energy. And there is some uncertainty about how long the US in its drive for energy independence can maintain growing levels of production of oil and natural gas. The depletion curves are not generally agreed and may be much steeper than expected.
JA: How about marine pollution? Will that add to the cost of shipping?
AA: There is a new type of vessel that is becoming an industry standard. They are called Eco-friendly vessels. They use less fuel and have lower emissions. They achieve that savings by having lower horsepower in their engines, some level of increased engine software, and certain design features of the hull and the type of paint that is used under the hull. They use roughly up to 20% less fuel than a traditional vessel. Interestingly it does not make the vessels more expensive as this is driven primarily by new building capacity and demand, just less expensive to operate. The advantage in consumption though declines as a percentage when charter rates increase.
JA: How about clean water problems?
AA: The problem is that you can have all the best procedures, the best training, the best manuals in the world on how to dispose of various things and how to keep sludge in separate compartments, and so forth. Almost every complies with these procedures, but sometimes you get a rogue operator who releases pollutants into coastal waters. The US Coast Guard is very careful about that. In these cases when rogue operators are caught, there are very heavy fines, and the vessels and cargoes are held hostage for the payment of the fines.
JA: We read a lot about piracy.
AA: There are still areas of the world where it is a problem, like east Africa. What is happening is that the industry is hiring ex-military personnel and in a majority of cases now they are successful in keeping pirates from boarding vessels.
JA: Do you have a crystal ball? Any ideas on the future of the shipping industry?
AA: Well I left my crystal ball at home but, barring economic recessions, I think the shipping industry will do better overall over the next 3 years. The pace of newbuilding deliveries has slowed down significantly, and there has been a lot of demolition activity of older assets, so that on balance there will be more equilibrium. I would caution that we are not going to see a repeat of the extremely high market we saw in the last decade. On the other hand we don't really need to see those in order for the industry to be very profitable. At that time China was growing extremely rapidly and the shipping fleet took a while to respond with additional capacity. However after several years of exceptionally high markets there was a substantial increase in the capacity of the fleet. Now demand is growing, but not as fast. Still, rates could double or even quadruple from current levels, this is the nature of the shipping industry it has always been that way. The dry bulk fleet at the end of 2008 was slightly in excess of 400 million deadweight tons. By the end of this year it will be 700 million deadweight tons. So even though demand continued to increase during that period of time at about 6% per annum, it did not nearly double in line with the fleet growth. As a result we may see much better markets, but not near the dry bulk market of 2007-2008.
A lot of money can be made in the shipping industry and it is highly dependent on timing. Rates and asset values can double or even quadruple, and if your timing is right, you can make a fortune.
On the other hand you have the offshore drilling industry, where you do not see assets tripling in value. An ultra-deepwater rig is not going to triple in value. Offshore is cyclical, but steadier operating margins are healthier through the cycle compared with shipping. Money is made primarily from operations as opposed to capital appreciation. And don't forget that drillers are much more equity-funded, using far less financial leverage. And it is much more consolidated than shipping, so the entities are much bigger.
JA: Do you see consolidation coming to the shipping industry?
AA: I think that will happen, but slowly. The LNG and container sectors are much more consolidated than the other sectors. Significant containership owners like, Danaos (DAC) Costamare (CMRE) and Seaspan Corporation (SSW) have huge market shares. There are emerging operators like Box Ships (TEU) and Diana Containerships (DCX) that will also be consolidators when the market recovers. In dry bulk sector the largest market share is a Chinese-owned company, but there are no companies with market shares in dry bulk like there are in the gas or containership sectors.
JA: Words of wisdom for investors?
AA: The model of shipping companies with high leverage with the associated significant debt service and strict financial maintenance covenants, combined with newbuilding capital expenditures and dividend policies is the wrong model for public companies. On the first downturn it is bound to fail. Nordic American Tankers (NAT) and Diana Shipping (DSX) are much less leveraged. That may be the difference between winners and losers. The industry needs fewer public companies with large market capitalizations - in excess of $2.0 billion - liquidity in their trading activity, low to no financial leverage, limited to no new buildings and high distributions to shareholders through the cycle.
JA: What about the financial crisis in Greece? Will it have an effect on shipping?
AA: The companies that we think of as Greek are established for the most part in offshore jurisdictions such as the Marshall Islands or Liberia, so the assets are owned abroad. What may change is taxation of Greek nationals or residents who have shipping but it is unlikely to affect even the Greek based management companies themselves as they employ a lot of relatively highly paid people in Greece. Most of the management companies can migrate to other countries easily within a year anyway. So at the individual level Greek residents who have substantial shipping interests may get taxed a bit more- but individuals, not the entire industry. Otherwise there will be a massive exit of shipping interests from the country.
JA: Thanks, Anthony.