The shipping industry has been in a downturn for quite some time, but it seems the worst may be yet to come.
On June 7, 2011, Bloomberg published an article citing the bearishness of Frontline (FRO) chairman John Fredriksen. The latter is quoted as saying that the oil-tanker market will "collapse" in a "year or two." Fredriksen proclaims confidently, "We'll wait until the market collapses and then we'll buy up what's there."
We are a bit perplexed by this statement because Frontline is a leveraged company in its own right, with $2.3 billion of net debt and $768 million of tangible book value as of March 31. Frontline shares are down nearly 60% in the past 12 months. If the tanker market collapses, as Fredriksen predicts, how will Frontline be in a position to be a buyer of distressed assets? Won't the company be too busy trying to shore up its own balance sheet?
The shipping industry currently raises many more questions than it provides answers. Most of all, it seems suicidal for the industry to remain on a path of supply growth outstripping demand growth. Is it truly impossible for shippers to delay or cancel deliveries, or does every management team believe it will be the one to take advantage of everyone else's plight by growing its fleet?
Another question concerns the large financial leverage of most shippers. Standing against the debt are long-term shipping assets whose market values -- if not so much book values -- have crumbled and may continue to decline, rendering many companies effectively insolvent. Will the holders of the debt wipe out the equity owners before the next upturn in shipping, or are the debt holders too passive/naive to take advantage. As we look at many Greek shippers, it seems as if their creditors would simply be happy to get their money back -- they do not appear to be clamoring to take control of the actual ships. Does this create an opportunity to selectively buy into some leveraged shippers trading at depressed multiples of book value? The list includes General Maritime (GMR) (trading at 0.5x tangible book value), Overseas Shipholding Group (OSG) (0.5x tangible book), and Top Ships (TOPS) (0.1x tangible book), to name a few.
Time will surely answer the above questions, but for now it seems prudent to stay away even from companies like Frontline, whose chairman's confidence we find perplexing. Fredriksen may end up being right in the end, but if shipping rates take another big leg down, as he predicts, we may have an opportunity to buy Frontline shares quite a bit below the recent price of $18 per share.