Frontline Billionaire Bets Tankers Collapsing: Freight Markets

Frontline Billionaire Bets Tankers Collapsing
Frontline Ltd.'s supertanker 'Front Shanghai'. Source: Frontline Ltd. via Bloomberg

The most bearish investor in the oil-tanker market right now may be the one with the most at stake.

At a time when analysts covering Frontline Ltd. expect shares of the world’s biggest supertanker operator to gain 1.7 percent in 12 months, its Chairman John Fredriksen says the biggest crash in the cost of ships has yet to happen. It will be within “a year or two” that the market “collapses,” the 67-year-old said in an interview in Oslo last month.

For Fredriksen, whose fortune was valued by Forbes magazine at $10.7 billion in March, that will be an opportunity to buy more vessels at a discount, he said. For other investors, it may mean that the more than doubling in freight rates predicted for next year by forward freight agreements, traded by brokers and used to bet on future shipping costs, is too optimistic.

“Betting against John Fredriksen tends to be a bad idea,” said Erik Nikolai Stavseth of Arctic Securities ASA in Oslo, whose recommendations on the shares of shipping companies returned 16 percent in three months. “He’s been a bellwether and he’s always been able to spot the cycle early,” said the analyst, who has a “sell” rating on Frontline and expects the U.S. shares to drop about 32 percent in a year.

The industry is contending with a glut of capacity as the fleet expands twice as fast as demand. Even as owners cut vessel speeds by an average of 11 percent in the past 12 months to save fuel and anchored 21 percent more ships, earnings slumped 81 percent. Rates on the Middle East-U.S. route have been negative since March, meaning owners are paying customers to use their ships, data from the Baltic Exchange in London show.

Aristotle Onassis

Fredriksen, born in Norway and a citizen of Cyprus, will be adding to a fleet that at its peak in 2005 was eight times bigger than the one Aristotle Onassis had when he died in 1975. Fredriksen has probably controlled the biggest tanker fleet of any investor in history, said Sverre Bjorn Svenning, an Oslo-based analyst at Astrup Fearnley, an investment bank.

“We’ll wait until the market collapses and then we’ll buy up what’s there,” Fredriksen said May 25.

Hemen Holding Ltd., a Cypriot holding company indirectly controlled by trusts Fredriksen established on behalf of his family, holds a 33.78 percent stake in Frontline, making it the largest shareholder, according to a filing in April with the U.S. Securities and Exchange Commission.

Frontline, based in Hamilton, Bermuda, will report a loss of $1.95 million this year, compared with net income of $161.4 million in 2010, according to the mean of 18 analyst estimates compiled by Bloomberg. They are anticipating profit rebounding to $33.7 million in 2012, the estimates show.

Freight Derivatives

Freight derivatives are also predicting a rally. Rates on the benchmark Saudi Arabia-to-Japan route will average $22,160 a day in 2012, compared with $9,952 now, according to data from Imarex ASA, a broker of forward freight agreements.

Shipping companies generally hire out their vessels on a mixture of single-voyage and long-term charters. A five-year charter costs $34,500 a day while a three-year accord is at $33,000, according to data from Clarkson Research Services Ltd., a unit of the world’s biggest shipbroker. Frontline said May 25 it needs $29,700 to break even on each of its supertankers.

“Our view seven months ago was that the tanker market was heading into a five-year nuclear winter and that’s the situation the industry is in now,” said Andreas Vergottis, an analyst at Tufton Oceanic Ltd., which manages the world’s largest shipping hedge fund. “The balance of power has transferred from owners of ships to users of ships.”

Charter Rates

The long-term charter rates helped shore up the value of second-hand ships. The cost of a 5-year-old supertanker slumped to $82.25 million by June 6, from as much $162 million in July 2008, according to the Baltic Exchange, better than the drop in returns for owners. Rates on the benchmark Saudi Arabia-to-Japan route rose to about $177,000 a day in July 2008.

Shares of Frontline dropped 58 percent in the past 12 months in Oslo trading, compared with an 18 percent decline in the Bloomberg Tanker Index. Frontline has the second-biggest weighting in the six-member gauge, behind Hamilton, Bermuda-based Teekay Corp., whose tankers haul about 10 percent of all seaborne oil supply.

Frontline will trade at 94.15 kroner in 12 months, compared with 92.6 kroner yesterday, the average of 17 analysts’ estimates compiled by Bloomberg show. The company, founded in 1985, has a market value of $1.3 billion, down from a peak of about $5.3 billion in 2008.

Seaborne oil cargoes will rise 3.2 percent this year, compared with 7.5 percent growth in the supply of all classes of tankers, according to Clarkson Research Services. About 90 percent of global trade moves by sea, according to the Round Table of International Shipping Associations.

Oil Prices

Oil traded in New York, a global benchmark, rose 40 percent in the past year, driven by demand, disruptions to Libyan supply and concern that protests in the Middle East may spread to Saudi Arabia and other key producers. The contract closed at $100.22 a barrel on June 3. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley predict prices will keep advancing.

The carrying capacity of the supertanker fleet will expand more than 10 percent this year and keep growing for at least the next three years, according to Maritime Strategies International Ltd., a London-based forecaster of freight costs.

Frontline’s fleet is dominated by ships hauling 2 million-barrel and 1 million-barrel cargoes. The bigger vessels are known as very large crude carriers and the others suezmaxes, named because they are the largest carriers able to pass through Egypt’s Suez Canal fully loaded. Daily rates for suezmaxes fell 81 percent to $6,163 in the past 12 months, according to the Baltic Exchange, which publishes prices for more than 50 maritime routes.

Ship-Fuel Costs

As returns tumbled, ship-fuel costs surged, gaining 29 percent to $655 a metric ton in a year, according to data compiled by Bloomberg. Some owners accept negative charter rates on single voyages because the customer will contribute to fuel costs, making it less expensive to sail to another region where earnings are higher.

Unprofitable charters won’t end any time soon because the fastest growth in oil demand is in Asia not western economies, said Tufton Oceanic’s Vergottis. It takes less time to ship Middle East crude to Asia than to the west, cutting down on journey times and freeing up tankers more quickly, he said.

The economy in China, the world’s biggest energy consumer, will expand 9.5 percent this year, more than three times the pace of the U.S., according to the median of as many as 72 economists’ estimates compiled by Bloomberg.

“It’s a brave investor who bets against these guys,” said Jonathan Chappell, a New York-based analyst at Evercore Partners Inc. “We are not as bearish as they are, but we believe it’s too early in the cycle to get involved in some of the leveraged shipping stocks, including their own.”

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