Gener8 Maritime Inc. (NYSE:GNRT) offers investors a deep value and growth opportunity; and is a potential buyout target; BUT it is their debt structure that sets them apart from the competition.
Thesis: For those that don't fear volatile earnings power, Gener8 shares offers a 50% upside in the short term (less than 12 months); and we target over 100% returns in a year.
Numbers at a Glance
|82.68 M shares outstanding||Price: $4.49|
|MKT Cap: $371.24 M||EV: 1.65 B|
|P/E: 3.39||EV to EBITDA: 7.76|
|P/B: .26||POCF: 1.23|
|Rev Growth (3Y) 29.10%||Value based on DCF: $14.02|
|LT Debt: $1.214 B||Cash: $100 M|
The need for transporting oil around the globe is not going away. However, although not tied to the commodity price of oil, like its cargo, charter rates (prices paid for the renting of the vessels) fluctuate with supply and demand of the use of the vessels themselves. Oil production cuts may drive oil prices higher, but have a negative effect on charter rates. Refinery interruptions can decrease demand. Conversely, growing oil production, consumption and aging fleets scheduled for scrap, increase charter rates.
Like all crude carriers, Gener8 is trading at a significant discount to book. When we compare GNRT to its peers (see below), the numbers show value. However, we see the value spread even greater when we consider that Gener8 has the youngest fleet (4.3 years average based on DWT basis). Almost all of GNRT's fleet are Eco vessels which saves them about $5000 per day. While GNRT represents a deep value, growth and takeover play, it is their debt structure that sets them apart from their competitors (which also may make them an even more attractive takeover or merger candidate).
|Price to Book||Operating Margins|
Takeover Candidate - Bahri, FRO, EURN
Gener8 screams out as an attractive acquisition or investment for the National Shipping Company of Saudi Arabia (Bahri) who announced their plans to invest $1.5 Billion to acquire Very Large Crude Carriers (VLCCs). Bahri merged in 2014 with the former shipping division of Saudi Aramco and is on the hunt for modernizing and building their fleet of VLCCs. While Bahri and Saudi Aramco have not acquired ship owners in the past, it would be both prudent and logical for them to do so with Gener8.
"Oil prices is one thing but the oil demand keeps growing, so we have a great opportunity to capitalise on the business," Abdulkareem, Bahri's president said regarding their announcement.
Click on this link to see Bahri's announcement.
Frontline and Euronav currently trade at a P/B of .79 and .75 respectively. If they are smart, they will try and use their stock as currency to buy up attractive competitors that trade well below that multiple. They could buyout GNRT at over $12 per share in stock, and be well ahead since GNRT is trading at 1/3 the Price to Book ratio that both Frontline and Euronav are trading at.
While the majority of GNRT's board is made up of independent directors, chances are any deal would have to be friendly. GNRT's loan covenants require Peter Georgiopoulos to be part of any change of control, or the lenders can call the debt (unless the lenders agree). If it were a stock deal, wherein GNRT could get paid a price close to its liquidation value, and get it in stock that trades at a discount to the issuer's breakup value, GNRT's board and Peter, might just agree.
DEBT and why it makes GNRT different
All debt is not created equal. Gener8 was able to lock in interest rates (through hedges against the floating libor - see below) and terms for their new builds that give them an advantage over competitors. Rather than doing a sale and lease back of vessels to raise cash (EURN recently raised cash by selling and leasing back 4 vessels in December with Wafra Capital Partners), GNRT has sufficient funds and credit facilities to pay for their remaining two new builds and sufficient working capital. Competitors to GNRT who have debt maturing sooner than GNRT, and have older vessels, will undoubtedly have to refinance at higher rates in a difficult banking (for ship owners) environment and to find fresh funds to modernize their fleets. Banks are still licking their wounds. For a full description of the current banking environment please read the following link to an article entitled "Shipping Loans Weigh Down Banks" written by Yasmin Osman and published in Handelsblatt Daily on January 10, 2017. Click for article Here.
Gener8 doesn't have to contend with refinancing for years to come. Below is a breakdown of GNRT's debt as of September 30, 2016:
Long Term Debt:
|Korean Export Credit Fac.||$565.65 M Libor plus 2.75%||due date 9/2020|
|Sinosure Credit Fac.||$292.15 M Libor plus 2%||due date 2/2022|
|Senior Notes||$169.95 M 11% in Stock Accrual||2020|
|Financing Facility||$419.98 M Libor plus 3.75%||9/2020|
Availability under Korean and Sinosure lines: $385 million with $307 million to be used for new builds remaining.
GNRT has purchased interest rate swaps to effectively lock in their rates which are tied to Libor.
Summary of GNRT and the landscape:
Gener8 Maritime, Inc is a US based seaborne crude carrier. Gener8 was formed as a result of a merger between General Maritime corporation, a company founded in 1997 by the Chairman and CEO of Gener8, Peter Georgiopoulos, and Navig8 Crude Tankers, a company sponsored by Navig8 Group, a well-known pool manager. Gener8's fleet profile consists of 22 VLCC (Very Large) carriers (plus 2 new builds scheduled for delivery by mid-march 2017), 11 Suezmax, 4 Aframax and 2 Panamax carriers. GNRT is a pure play in the crude carrier space. More than 80% of the total DWT capacity of GNRT is through their VLCCs. All vessels but the two Panamax are employed in "pools." Pools are a group of vessels that may be owned by different ship owners that market their vessels together to customers in order to produce efficiencies as the vessels are deployed worldwide. Per GNRT's filings, GNRT's customers (direct and indirect) include Saudi Aramco, BP (NYSE:BP), Shell, S-Oil, Exxon (NYSE:XOM), Chevron (NYSE:CVX), Repsol, Valero(NYSE:VLO), and Petrobas (NYSE:PBR). The majority of GNRT's fleet is considered "eco" friendly and garners a higher daily rate. In addition, the ECO vessels optimize speed and fuel efficiencies.
Gener8 has an experienced and tenacious management team.
Peter Georgiopoulos, a Greek American born in The Bronx, was a former banker that became a legitimate shipping tycoon. Mr. Georgiopoulos' lore came from taking $80 million in capital and returning $1.4 Billion to his shareholders in General Maritime through dividends and buybacks. Like many shipping companies, General Maritime hit rough times when the oil shipping industry collapsed and filed bankruptcy in 2011. Peter's time in the penalty box was not long. Mr. Georgiopoulos, along with COO John Tavlarios, and CFO Leonidas Vrondissis, worked with hedge fund Oaktree, who loaned General Maritime $200 Million, and led the merger of General Maritime with Navig8 Crude Tankers in 2015. Mr. Georgiopoulos took the merged company, Gener8 Maritime, public in June of 2015.
Recent S-3 filing we see as prudently being prepared and part of being public one year. The three listed "selling shareholders" had registration rights. When asked about using GNRT's stock as currency, Peter Georgiopoulos commented in a conference call dated May 12 when the stock was trading at around $7.65 by stating the following:
"Well, we would love to use our currency, obviously that's not an opportunity right now. I think though, if you were to say to me when I spend a dollar on a new shipboard or a dollar buying back our stock where it's trading, I think we probably be better off spending a dollar buying back our stock given where it's trading…"
Earnings Expectations for Q4 and fiscal 2016
Revenues are expected to be ~$95 million for Q4 '16 compared to ~$100 million for Q4 '15 and Q4 EBITDA estimates are $54 million vs. $67 million for 2015.
Annual Revenues for 2016 are estimated to be $390 million vs. $334 million for 2015, and EBITDA $250 Million vs $216 Million for 2015. While our estimates are lower for the fourth quarter and year-end, we see the current value proposition too attractive to wait and see. Revenues for 2017 appear to be looking higher than 2016 as the fourth quarter showed significant improvements in the daily charter rates (see below macro).
Daily charter rates for the 4 th quarter are in the mid $30k range, which is up from the 3 rd quarter which averaged around $28k. The first quarter seems to be positioned for over $40k per day rate.
Despite a significant push for environmentally friendly alternative fuels, oil consumption remains steady and continues to grow annually. According to the International Energy Agency
" For 2016, the IEA Oil Market Report forecasts worldwide average demand of nearly 96 million barrels of oil and liquid fuels per day - that works out to more than 35 billion barrels a year. Production breached 97 million barrels per day (mb/d) in late 2015, and Medium-Term Oil Market Report 2016 foresees demand crossing the 100 mb/d threshold towards the end of its five-year outlook period."
This 96 million bpd oil consumption is up from 55 million barrels per day in 1983 (almost a straight line).
Why the disconnect between intrinsic value and the market price?
The disconnect may be the most exaggerated with GNRT, but all of the crude carriers stocks are depressed and have been punished far below the actual EBITDA for the trailing twelve months would justify. In fact, the EBITDA numbers for the group are solid. There are multiple factors at play here but all with the same theme.
Investors, including shipping companies, shareholders and lenders got smoked in their dry bulk and container ship investments as the capacity from added new builds orders prior to the recession came online. (look at the chart on DryShips (NASDAQ:DRYS))
Crude carrier over supply is far less. We estimate that in early 2017, the new builds coming online will only be about 5% oversupply versus other shipping sectors that experienced two times the capacity versus demand. As a result of the disaster in dry bulk and container carrier business, a spill over to the crude carriers has been the lower price of new builds and the lower price of secondary ships. There is a disconnect in the charter rates that afford crude carriers solid EBITDA numbers and the price of newly built carriers and the 5 year and younger vessels. In fact, new build pricing hit a 12 year low this past summer. At KORR, we believe this pricing pressure was due to diverse ship owners, who hold dry bulk and or container ships along with crude carriers, have been under heavy pressure to raise cash. The assets they held that could find bids were the crude carriers and not dry bulk or container vessels. The order book for new VLCCs is low which should mean the slight oversupply for 2017 should be absorbed well.
Dry bulk and container cargo ship supply will take a considerable amount of time to stabilize the oversupply.
A new investor base will reap the rewards while the previous investor base regroups.
Time Charter Rates for all classes of vessels are volatile and are based on many factors. During the period between 2010 and 2013 daily rates plummeted to the low to mid-teens so earnings can and are volatile. Peter Georgiopoulos divides his time between Gener8, and Aegean Maritime Petroleum. Recently GNRT filed an S3 registration statement. The registration included provisions for the company to issue debt, equity and register a select few shareholders shares. We do not believe that the Company will issue equity at current prices and will not until the shares are materially higher. Risk of paying for the remaining new builds is not a concern.
The shipping industry is not for investors who shy away from volatility. While KORR is not ready to dip into the dry bulk and container markets, we see the dirty crude carrier business well positioned for great returns in the year ahead.
At KORR Value ( www.korrag.com), we typically stick to small to mid-cap listed stocks wherein we see a temporary disconnect between intrinsic value and market price. We believe over the time, the market is efficient and will eventually get the valuation right and close the gap.
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Disclosure: I am/we are long GNRT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are long GNRT. We may elect to add to our position or liquidate our position at any time; and without updating this blog. We have no current business relationship with GNRT or any company mentioned in the article. Readers are encourage to do their own due diligence and speak to an investment adviser prior to making any investment.