‘Things Cannot Get Worse’ in Shipping

In a week when the twenty-two-year-old Norwegian Magnus Carlsen was crowned the world’s chess champion, when the crypto-currency Bitcoin reached $900 on behalf of Bernanke’s quasi-endorsement for its potential for (legitimate) digital applications, when the S&P closed above 16,000 for the first time, when the world’s ultimate ‘buy and hold’ value investor Warren Buffett announced a new $3.5 billion position in an ‘old economy’ energy company ExxonMobil, it was also a week when it was revealed that the world’s ultimate trader investor George Soros took a position in several dry bulk, publicly traded companies in Q3 2013.  The collective investment by the Soros Fund Management is only a few million dollars (less than $7 million, in all) and a very minor slice of the fund overall (less than 1%), but the message was amplified in the shipping press that shipping is indeed in a cyclical recovery. The companies that benefited from Soros’ seal of approval were Dryships (ticker: DRYS), Baltic Trading (ticker: BALT), Navios Maritime Holdings (ticker: NM), Navios Maritime Partners (ticker: NMM), Safe Bulkers (ticker: SB), Diana Shipping (ticker: DSX) and the product tanker company Ardmore Shipping (ticker: ASC).

The momentum keeps building that shipping is indeed in a cyclical recovery. Asset prices for vessels have kept improving on fairly solid activity of vessel trading and acquisitions by mostly financially-oriented or –sponsored buyers (as compared to buyers putting significant own equity in the deals.) There are micro-trends within the market, and market segments are coming to and moving from favor on a regular basis.

While capesize vessels were definitely the flavor of the month a couple of months ago (when rates at $40,000 pd but now below $20,000 pd), in the mainstream shipping, the enthusiasm has moved over to the crude tanker market. For one thing, freight rates for VLCCs have approached $50,000 pd recently (vs. $13,000 pd year-to-date average); for another, the line of thinking in the crude tanker space is that ‘things in the tanker market cannot get any worse’, so by default, the market has to move up. On that note, there has been the acquisition of a 2012-VLCC tanker at a price believed to be just shy of $90 million, while the ever-active Scorpio Tankers (ticker: STNG) is rumored to have placed an order of four VLCCs at S. Korea’s DSME at about $90 million per vessel; this order is on top of the ten (10) VLCCs announced just this week by Navig8 and DHT Maritime. $90 million for modern VLCCs while the year-to-date freight average of $15,000 pd is considered that ‘things cannot get worse.’

Shale oil in the US was the development that had been the crude tanker market’s undoing, originally in 2009, with the US not having to import as much crude oil as before. Product tankers were the main beneficiaries of the market shift, with excess refined petroleum products getting exported from the US. And, indeed, the product tanker market has benefited handsomely over the last couple of years, so much so as some to believe that the market is now oversupplied.

But shale still has affected many markets, whether directly or indirectly.

Dynagas LNG Partners (ticker: DLNG) has been successful very recently with their listing on NASDAQ raising about $220 million, although the pricing of $18/sh was on the lower end of the pricing range.  While crude oil from the US is exported on a ‘ban unless basis’ while natural gas is exported on a ‘export unless basis’, trade of natural gas has been on the ascendant which explains the interest in DLNG. Staying with the gas products of the shale trade, Navigator Gas Holdings (ticker: NVGS) was the beneficiary this week of the public markets with their robustly pricing IPO at $19/sh and raising $230 million. The company has been sponsored by W.L. Ross and has been active in both the handysize and VLGC sectors, with the latter being the major beneficiary of the shale gas trade in the form of propane gas.

Still serving the propane gas transport, BW LPG was very successful and very well received in the US and able to price strongly to raise about $500 million this week, again, despite any perceived competition from the NVGS offering. BW LPG is world’s largest VLGC owner with 36 vessels overall, 19 of which are owned VLGCs. The news of these IPOs in just a week for the gas trade bode well for more gas hopefuls in the US markets, Dorian LPG (partially supported by Scorpio Tankers) and Avance Gas Holdings (a Frontline 2012, Stolt-Nielsen and Sungas Holdings joint venture).  This week’s earnings call with StealthGas (ticker: GASS) however made it clear that the gas market has already started getting crowded and charterers started preferring modern and bigger tonnage (a more critical point than the tramp dry bulk market when fuel efficiencies and economies of scale do not translate directly to the bottom line.)

Fairly active times in shipping… when ‘things cannot get worse’…