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Dr. Clemens Scholl was born in Salzburg, Austria. He went to school and high school in the french-speaking part of Belgium, studied physics and mathematics at the University of Cologne, Germany. He obtained a PhD in nuclear physics magna cum laude, and conducted experimental research at several... More
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Tolbiac Capital KG
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  • Independent Tankers Corp. – The sum of the (moving) parts

    I have recently outlined in the first part of this article why Independent Tanker Corp. Ltd. (ITCL) is a neglected security that is rarely traded and sometimes traded at ridiculously low prices (there have been instances when the stock has traded at just $0.01, which equals to a P/E ratio of about 0.05 or a price-to-book ratio of 0.01). On average, the stock has traded at about a P/E ratio of 2 over the last two years. In this article, I intend to go more into the details about ITCL’s business and explain the challenges and opportunities the company is facing.

    The actors

    I would like to begin with a presentation of the different entities involved. To make the introduction a little easier, I prepared a diagram that outlines the relationships involved. Let’s begin at the top. The “man behind the curtain” is John Fredriksen (his followers refer to him by the honorific “Big John” or simply his initials “JF”). John Fredriksen used to be Norway’s richest man, until he relinquished his Norwegian citizenship and became a citizen of Cyprus. According to Forbes, he ranks among the 100 richest people on the planet. Mr. Fredriksen has interests in very diverse industries, such as offshore drilling, salmon farming and debt collection. One of his main interests and the main source of his wealth is shipping. Mr. Fredriksen’s shipping interests are concentrated in four companies in which he holds large stakes:

    • Frontline (NYSE:FRO), the world’s largest oil tanker operator. Market capitalization is around $2bn, Fredriksen controls 34% of the shares. Frontline has a fleet of 23 suezmax tankers, 54 VLCC (very large crude carrier) tankers, and 8 OBO (Ore-bulk-Oil) ships. The shares are traded mainly in Oslo and on the NYSE.
    • Ship Finance International (NYSE:SFL), a shipowning company leasing ships and offshore drilling rigs to different companies. Market capitalization is around $1.7bn, Fredriksen controls 43% of the shares. SFL owns 8 suezmax tankers and 22 VLCCs (all chartered to Frontline), 21 bulk carriers, 9 containerships, 10 offshore rigs and vessels and 2 chemical tankers. Shares are traded on the NYSE and in Oslo.
    • Golden Ocean (OTCPK:GDOCF) a dry bulk shipping company in which Mr. Fredriksen controls a 40% stake. Market capitalization is around $650m. Golden Ocean owns 2 kamsarmax ships (with one additional under bareboat charter), 5 capesize vessels (with 5 additional under commercial management), and 4 panamax vessels (with 2 more under bareboat charter and additional 6 chartered vessels). Golden Ocean owns 10% of Knightsbridge Tankers (VLCCF), a company that was partly owned by Frontline more than a decade ago. Shares of Golden Ocean are traded in Oslo and on the pink sheets in the U.S.
    • Golar LNG Ltd. (NASDAQ:GLNG), a liquefied natural gas shipping company, in which he has a 46% stake. It has a market capitalization of $1bn. Shares are traded in Oslo and on the NYSE.

    Shareholding structure around ITCL

    Shareholders of ITCL and trading

    The object of our attention, Independent Tankers Corp. Ltd. (ITCL), is a subsidiary of Frontline, which controls 82.5% of ITCL's shares. ITCL owns 3 suezmax tankers and 6 VLCCs.

    In the spin-off, Fredriksen’s Hemen Holding received 5.2m shares, or 6.97% of ITCL’s capital. During this year, although liquidity was almost inexistent, Fredriksen managed to get hold of a little more than 300,000 shares through market purchases, increasing his stake in ITCL to 7.38%. A very impressive feat given the almost inexistent trade in ITCL’s shares (see chart). Fredriksen, as well as the Norwegian life insurance company KLP (which increased its stake to 4.7%) were the only big bidders for large blocks of stock on the Oslo OTC exchange during the whole year. Taken together, Frontline, Fredriksen and KLP control 70.75m shares, or 94.5% of the company.


    As I mentioned previously, trades in the US listing of ITCL are sometimes executed at ridiculous prices (like $0.01). ITCL is mainly traded in Norway on the Oslo OTC market. In order to enable readers to better compare the (OTC:ITKSF) listing to the Oslo trades, I used the trade data from the Oslo exchange and converted the prices to US dollars using the daily USD/NOK exchange rate. As you can see, the prices at which transactions are executed in Oslo are much more sensible and averaged around $0.6-$0.7 over the last two years. That would however still be quite cheap, at a current P/E of around 3 or a current P/B of around 0.7.


    Company structure of ITCL

    ITCL is organized as a holding company. Each ship belongs to a certain company that owns it, and some of these companies have been grouped together for the purpose of issuing a combined serial mortgage note to finance the shipowning companies. The three companies directly owned by ITCL are

    ITCL’s strategy is to have long-term charters with reputable parties. Its vessels are currently chartered to the oil majors Chevron (CVX) and BP (BP).

    ITCL’s charters

    ITCL generates all of its revenues from the charters of its ships, so the details of these charters are absolutely crucial for the company.

    Below, I created a chart that presents the charter profile of ITCL’s vessels. I used the data given by ITCL in its quarterly reports, news releases and presentations.

    The least appealing part of ITCL is its California Petroleum subsidiary, which owns the three Suezmax tankers. These tankers are chartered to Chevron at very favourable rates (for Chevron, that is) which are barely “break-even”, and Chevron has the option to purchase all vessels for $1 at the expiration of the charter in 2015. I do not expect any significant profit contribution from this subsidiary.

    The Golden State subsidiary consists of only two VLCC carriers, the Antares Voyager and the Phoenix Voyager. Both vessels are chartered to Chevron. The charter of the Phoenix Voyager was not terminated and it will continue at least until March 2013 at the profitable rate of $28,500 per day. If Chevron decides not to continue chartering the vessel, it will have to give a non-binding notice of termination until March 2012. If the charter is renewed, it would last until March 2015. After that period, the vessel would trade at a market rate. There is no purchase option for Chevron on this ship. Profits generated from this ship will be good for the foreseeable future (more than two years at least), and it is currently the ship in ITCL’s fleet that commands the highest (fixed) day rate. The Phoenix Voyager will most certainly contribute more than $4m in net income to ITCL (net income in 2009 was $3.7m) in 2010.

    Unfortunately, Chevron has terminated the equally profitable charter of the Antares Voyager, and it ceased to operate for Chevron on Dec 7th 2010. ITCL has recently received approval of the bondholders of Golden State’s notes to sell the Antares Voyager. More details on the sale and its impact on ITCL will be given later.

    Charter profile of ITCL as of December 2010

    The Windsor subsidiary controls four VLCCs chartered to BP which were initially chartered at a bareboat rate of  $24,895 per day. On a certain date depending on the ship (see figure) these bareboat rates have converted (or will convert) to a “market related” charter with a base rate of $20,000 per day. Currently day rates are below this level, so this buffer is a very good safety mechanism. BP has the option to terminate the charters every year and has to give advance notice. Currently, all ships except the British Pride are already on the “market related” rate, and the British Pride will move to market related pricing in the second half of next year. If VLCC rates do not improve from current abysmal levels, this could mean a decrease in profits, as the $20,000/day minimum is 20% below the current bareboat charter. The spot market rates are however very volatile. On average, day rates this year have been above the $20,000 level, which could actually mean that the Windsor group should do rather well if the charters remain.

    The British Progress will remain chartered until at least February 2012, the British Purpose until at least July 2012, the British Pride until at least August 2012.

    The charter of the British Pioneer will terminate in January 2011, and ITCL is currently seeking Bondholder’s approval for a sale of the vessel.

    The sale of the Antares Voyager

    The impact of a sale of the British Pioneer is difficult to evaluate since Windsor does not file reports with the SEC. The Golden State companies however have detailed filings outlining the financial situation of the shipowning companies. That should enable us to calculate the potential impact of a sale on ITCL’s finances.

    Golden State Petro (IOM 1-A), the company that owns the Antares Voyager, has a principal amount of mortgage notes outstanding of $52,950,000 as of Dec 8th 2010 (see consent solicitation). From the latest annual report, the depreciation, restricted cash and interest expenses and income can be calculated. There will be around $28.5m of restricted cash available (after interest income on restricted cash and interest expense on the outstanding debt). The vessel itself is carried at $47.9m on the books. Golden State Petro (IOM 1-A)  should currently have $20.9m equity.

    Potential benefits to ITCL depend heavily on the price the Antares Voyager would fetch.

    R.S. Platou shipbrokers (which publishes outstanding research on the shipping markets and are a highly recommended read) and the Baltic Panel publish resale values on a regular basis. Recent data indicates a resale market value of around $60m for a ten year old 300,000 dwt tanker. estimated resale value of the VLCC Antares Voyager

    This would give approximately $54m for the 12 year old Antares (see figure). The Antares is heavier than 300’ dwt, so one could argue that this would lead to a slightly higher price which could offset any transaction costs.

    I estimate that if the Antares can fetch $54m, this would provide $29.5m in net cash (roughly $0,39 per share) inside the Golden State group.

    Sale Proceeds (estimated)

    $ 54.0m

    + Restricted cash available for repayment

    + $ 28.5m

    - Debt repayment

    - $ 53.0m

    Cash after vessel sale

     $ 29.5m

    - current equity

    - $ 20.9m

    Profit from the sale of the ship

    $ 8.6m

     If the ship can be sold at $54m, it would also produce a one-time gain of around $8.6m (or $0.11 per share) as the ship is sold over book value. This a very rough estimate as it does not take into account potential extra expenses related to the debt redemption, as well as transaction costs for the sale of the ship, but it provides a good first idea of the impact of the sale.

    While the profit contribution from the Antares Voyager will be missed in future quarters, the associated debt will not. The total debt at the end of the year would, in addition to the $11m reduction promised by management in the last quarterly report, decrease by a total of $64m. ITCL’s total debt at the end of Q3 2010 stood at $428.5m. After the sale of the Antares, total debt could thus decrease to $364.5m.

    Together with a profit of around $3m for Q4 (from the ongoing business), the sale of the Antares Voyager and the associated possible one-time gain and debt reduction could significantly improve ITCL’s balance sheet and equity ratio. The cash provided by the sale of the ship could be used to buy back a portion of Golden State’s outstanding notes.

    While shareholders of ITCL have long been waiting for a dividend, I do not expect a distribution in the near future as ITCL’s equity buffer is still low. However, a successful sale of the British Pioneer early next year might change this. If a similar calculation to the one carried out above can be made for the Pioneer, the total debt level of ITCL could approach $300m in H1 2011, while equity could approach $100m (depending of course very much on the realized price for both vessels). Achieving a 30% equity ratio would be quite a light speed jump for ITCL. And as far as the share price goes, $100m equity is $1.34 per share …

    Disclosure: I am long FRO, SFL, GLNG, BP.

    Additional disclosure: I am long Independent Tankers corp. I have no position in CVX, VLCCF or Golden Ocean. The analysis I made is based on many assumptions. Please conduct your own due diligence before trading in any security.
    Dec 19 7:43 AM | Link | 8 Comments
  • Independent Tanker Corp. is "tantalizing".

    The sufferings of Tantalus are close to those of the value investor. The legendary Phrygian was banished to the deepest recesses of the Underworld after serving the gods a banquet made of the flesh of his own son. Tantalus’ punishment was to stand in a pool of water beneath a fruit tree with low branches. Whenever he reached for the fruit, the branches raised his intended meal from his grasp. Whenever he bent down to get a drink, the water receded before he could get any.

    In a similar way, great companies often escape the value investor’s grasp. There are two reasons for that. One is that the stocks of great companies are nearly always too expensive. Their stock prices, like Tantalus’ tree branches, are always too high. As Graham notes, “the great majority of common stocks of strong companies must be considered speculative during most of the time, simply because their price is too high to warrant safety of principal in any intelligible sense of the phrase.(1)  Consider Apple (NASDAQ:AAPL), Mc Donald’s (NYSE:MCD) or (NASDAQ:AMZN). They are certainly great companies, but their market value arguably exceeds the value to a private owner by wide margins.

    This brings us to the other Tantalic longing of the investor: a great company that he is unable to buy. This mostly applies to private companies. Who wouldn’t want to own a piece of Bloomberg? of Cargill? of Mars inc.? Well, you can’t, they are privately owned. And the business is so good that the owners will never sell.

    In other instances, the business may be publicly traded, but liquidity, like the water at Tantalus’ feet, is so low that it is virtually impossible to really “get in” (at least if you have a lot of money to invest).


    However, tremendous opportunities for the smaller investor can often be found in this space. After all, “liquidity is only important when you want to exit a position”(2). The small investor, if there are no low-hanging fruit, might find value by looking at the waters below.

    It is such a company that I want to report about today: Independent Tankers Corporation (ITCL) (website: I believe that (at least on the basis of the last quoted price) it is currently the cheapest share on the planet. If you have never heard about the company, don’t look up its current price. Please do so only after reading the facts that I’m going to present, and after you’ve come to your own (first) conclusions about its value. You will be very surprised. Due to its length, I have broken this article down in two parts. The first one (which you are currently reading) outlines the history and business of ITCL, and gives a first overview of its earnings profile and financial situation – which will already prove my point that ITCL’s stock market value is quite out of line. If you found this article interesting, you are encouraged to read the second part, which will give more details on ITCL’s finances and operations, as well as catalysts for value realization and outlook for the company.

    What is ITCL ?

    Besides the valuation, the very name of ITCL is a joke. Independent Tankers is not “independent” at all. It came to be in 1998 after Frontline (NYSE:FRO), the world’s largest oil tanker operator, bought ten oil tankers for $9.5m from Cambridge Fund Management.
    The ships consisted of four Suezmax oil tankers (a tanker class that has dimensions suited for navigating the Suez Canal) and six VLCCs (an acronym for “very large crude carrier”, the largest oil tankers to navigate the seas). These ships were chartered on long-term fixed contracts to BP (NYSE:BP) and Chevron (NYSE:CVX). These contracts provided ITCL with stable, predictable income enabling it to service and progressively retire its debt, and build up equity while also depreciating the vessels. I will provide more colour on the detailed financials later.
    Some ten years later (2008), Frontline decided to partially distribute shares in ITCL to its shareholders. This was done via a spin-off of 20% of ITCL’s shares to existing FRO shareholders (on a 1 to 5 basis). At that point, ITCL had a book value of $23m, meaning that FRO had compounded its original investment at an annual rate of 9.2%. Not bad. But it gets better.

    The problem with the spin-off was its small absolute value. FRO shareholders only got one ITCL share having a book value of about $0.30 for five FRO shares (trading at around $45 at the time), meaning the spin-off was worth a measly $0.06 per Frontline share. To put it the other way around, you had to own $375,000 worth of Frontline stock to get $500 worth of ITCL stock (on a book-value basis). Needless to say, a plethora of FRO shareholders (myself included) were stuck with a position in ITCL that was so small that the commissions would have virtually eaten up all the proceeds from a sale. So the natural decision was not to sell, and maybe wait for a further distribution from Frontline, which still owned 80% of the shares. So much for “independent” tankers. There are some 75m shares outstanding, 61.7m shares are owned by parent Frontline (FRO) and 5.5m shares by John Fredriksen's holding company (Hemen Holding). Thus nearly 90% of the shares are with company insiders, and only 6m shares are "available" for trading (in theory). Most of these shares are probably also closely held. I know I won't sell mine.

    Analyzing ITCL

    When there are no sellers, there are no buyers either. Thus the stock became the epitome of illiquid. After a few weeks of bigger blocks changing hands, ITCL - the stock - fell into total oblivion. Meanwhile, ITCL - the company - was doing fine. The first chart shows the net income that ITCL generated every quarter in the last four years.

    Net quarterly income of ITCL (<a href='' title='Independent Tankers Corp., Ltd.'>OTC:ITKSF</a>) over the last 15 quarters.

    As you can see, ITCL’s earnings were very stable, owing to the nature of its fixed-rate contracts with the oil majors. On average, ITCL earned $3.7m every quarter for the last 15 quarters. The variation in net income in Q1 and Q2 of this year were due to the sale of a vessel, where the income and associated costs were booked in different quarters (more on that in part II). Given the steady nature of earnings, how would you value the company ? Let’s say you would put an earnings multiple of  ten on this income stream of $14.8m a year (a yield of 10%), that would give you a value of $148m for the company (which would be nearly $2 per share). Feel free to use any other multiple you see fit, and remember that number.

    Now, let’s look at the balance sheet. In the first quarter of 2007, one year before FRO floated it, ITCL had $14.2m in equity and total assets of nearly $800m. ITCL was leveraged nearly 60 to 1, with a mere 1,8% equity ratio. But the steady earnings that ITCL was accumulating (remember those $3.7m quarterly earnings) were slowly piling up on the balance sheet. By the time of its flotation, the equity had increased to $23m (equity ratio of 2.8%), and one year later it was $37.9m (5.4%). Look at the following figure which details the balance sheet evolution over the last 15 quarters:

    evolution of ITCL

    ITCL has slowly but steadily been deleveraging its balance sheet. The last quarter showed $63.7m in equity and $492m in assets which corresponds to an equity ratio of nearly 13%. The assets on the balance sheet consist of cash (mostly restricted to service the mortgages on the ships) and the vessels, which are depreciated, with an useful life of 20-25 years. Details on a valuation of the ships and the structure of ITCL's cash assets will be provided in part II of this report.

    The current equity ratio of 13% is still a far cry from what would generally be considered as “rock solid”, but it is on an increasing path, as can be seen from the following figure, which plots the evolution of ITCL's equity ratio over the last four years:

    Evolution of ITCL

    The book value of $64m is much smaller than the value we got from an earnings multiple of ten ($148m). It would correspond to an earnings multiple closer to four, which is arguably quite cheap. The current book value of $64m gives a book value per share of $0.85. Together with the equity ratio, the book value per share of ITCL has been increasing nicely, as can be seen in the figure below. Since its flotation nearly three years ago, ITCL has compounded book value at an incredible 46% per year. If you look at the longer time frame since 1998 when Frontline took over the vessels for $9.5m, this original investment has compounded at 17.2% per year for 12 years. Has your portfolio managed that kind of steady high return over such a long period ?

    Independent Tankers: evolution of book value per share over the last four years

    Conclusions for part I

    As you will probably agree with me, based on the numbers I presented (which are all taken from ITCL’s quarterly reports available on its website, and the SEC filings of its subsidiaries [more on that in the second part]), you’d probably value ITCL – the company – somewhere between its $64m book value and $150m based on a conservative earnings multiple. That would mean between $0.85 and $2 per share. I will now allow you to look up how Mr. Market is currently pricing ITCL - the stock. ITCL trades in the U.S. under the symbol ITKSF.PK on the pink sheets. The last trade was yesterday at $0.01. One wonders what the sellers might have been thinking. Over the last six months, shares have traded in the range $0.01-$0.48. I’ll let you figure out what the corresponding P/E and P/B ratios are, and I challenge you to find a similarly mispriced security. If you want to know more about ITCL, the details of its finances, a comparison to peers and future prospects, stay tuned for part II which I will publish within the next days.

    While you may have become excited about the stock, remember Tantalus and his "liquidity" drying up. ITCL is highly illiquid, and it is near impossible to find sellers (or buyers). You would love to buy the whole company at $0.01 per share, but it turns out that's impossible. As you might want to grasp for shares, they might prove elusive and disappear. However, patience is a virtue, and personally I have managed to acquire a substantial position, although it took me two years to build it. If you keep trying, you might be able to grasp a few shares at a good price (and I believe anything below $0.5 is a great price). As I will explain in the second part, this stock is only for people who are willing to hold it for a longer period of time and enjoy its compounding of book value. If it's difficult to get in it is probably impossible to get out (at least at the current time) - the $0.01 trades are probably reflecting that fact. Your time horizon should be very long.

    (1) Graham & Dodd, Security Analysis, 6th edition 2009, p. 107
    (2) Guy Spier, Aquamarine Fund, presentation at value investing congress 2010

    Disclosure: I am long FRO, SFL, BP, GLNG.

    Additional disclosure: I am long ITKSF.PK, the stock this article is about (but the system doesn't recognize).I have no position in the other stocks mentioned (GOOG, MCD, AMZN, CVX, VLCCF). I am a long-term investor and have no near-term plans to dispose of any of the stocks mentioned in the article that I currently own.
    Dec 15 7:09 PM | Link | 2 Comments
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