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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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  • Independent Tankers Corp. – The sum of the (moving) parts 8 comments
    Dec 19, 2010 7:43 AM | about stocks: FRO, SFL, GLNG, GOGL, GDOCF, CVX, BP

    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.
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Comments (8)
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  • James Duade
    , contributor
    Comments (311) | Send Message
    Bravo Clemens, excellent work. I hope that Mr. Market comes around on this undervalued security.
    19 Dec 2010, 11:51 AM Reply Like
  • Asia Stock Tracker
    , contributor
    Comments (77) | Send Message
    Great article. What do you think about tanker market ? Next year, there will be new supply coming out . Is it the time to buy tankers stocks right now ?
    22 Dec 2010, 11:11 AM Reply Like
  • biomedlives
    , contributor
    Comments (262) | Send Message
    Do you regard the depreciation rates on the tankers as realistic?
    25 Dec 2010, 10:39 AM Reply Like
  • Clemens Scholl
    , contributor
    Comments (641) | Send Message
    Author’s reply » biomedlives,
    the current price curve (shown in the picture in the article) indicates your average VLCC currently loses around $4m of its original value per year (or around 4%). This indicates a useful life of around 20-25years, the same value ITCL uses.
    Since the depreciated value of the Antares Voyager ($47.9m) is well below the current market price indicated for ships of this age ($54m), I believe the depreciation is very realistic. The depreciation used currently for the Antares Voyager is around $3m per year. This is in agreement with the market indications since the purchase price was lower ($86m) than the value indicated for a new vessel today ($107m). The depreciation rate was lowered last year because management revised upwards its estimate for scrapping values to a more realistic value.
    As of the end of 2009, Golden State A had depreciated the vessel to 60% of the purchase price (to $51m from $86m), a similar rate of depreciation is indicated by the market (63/107=59%).
    Since the company is domiciled in Bermuda, there are no tax advantages in playing with the depreciation rate, and the management of the company and of Frontline are among the best in the shipping business. I have no reason to doubt their financial statements.
    25 Dec 2010, 11:24 AM Reply Like
  • RossTheBoss
    , contributor
    Comments (2) | Send Message
    Hi Clemens!
    Any comments to det Q4 Figures? I se we still building equity, 0,92$ pr share now. Lastes report from Antares Voyager was AG - JAMNAGAR WS 70 fix date 08.03.2011
    11 Mar 2011, 06:08 AM Reply Like
  • Clemens Scholl
    , contributor
    Comments (641) | Send Message
    Author’s reply » Well, you are obviously aware of all the important facts. There is not much I can add, aside from the wish that I'd like to know what the Pioneer is currently doing.
    The latest Platou monthly indicates the resale value for tankers has softened further: $100m for 310k new, $82m for 305k 5y, and $55m for 300k 10y. Current value of the Antares is thus more or less $50m I would say.
    11 Mar 2011, 08:36 AM Reply Like
  • RossTheBoss
    , contributor
    Comments (2) | Send Message
    Hi Clemens!
    Whats your thoughts about the future for ITCL. Back in black Q1-Q2? I've managed to accumulate some shares at OTC in Oslo at 0,5 NOK. P / B 0,08 NOK. Hope that this will be a good investment in the long run. With todays spot rates ITCL will still build equity
    16 Apr 2012, 08:38 AM Reply Like
  • Clemens Scholl
    , contributor
    Comments (641) | Send Message
    Author’s reply » hi Ross,
    Q1 should be in the black according to the fixtures I've seen.
    I hope they can either get good spot rates for the forseeable future (maybe even a charter? but I'm probably dreaming here) or sell the spot tankers at a good price.
    In one way or another, I'd really wish there was some resolution to the corporate structure. The current listing is clearly not working for the owners, neither FRO nor the minority shareholders. Zero liquidity and a super-depressed share price. FRO should either spin the shares out completely or exchange the freefloat shares back into FRO shares.
    16 Apr 2012, 09:42 AM Reply Like
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