Almost done with 2012. A tough year, but probably somewhat better than 2011 for the tankermarket. Yes, tanker biggie OSG collapsed. But from what is being discovered now, this wasa company that hid the degree of their rot well. FRO ended 2011 with a major restructuring,one that split the company into two. As this year winds down and with the way events played out,it appears FRO will survive. It seems like the restructured FRO will, minus a bunch of vessels, exit2012 in a similar manner as 2011. By that I mean, an uncertain upcoming year, no bank debt, somecash and the same types of obligations- capital leases, ITCL bond obligations, and theconvertible bond obligations. But there are some differences.The OBO category will disappear from the fleet by early 2013. Not sure on the exact revenuecontribution the OBO vessels provided, but my guess is probably less than $100M. Still, the OBOs ontime-charters were a reliable income resource in 2012, one the company will not have most of next year.Likewise, the SH VLCCs. While not major revenue producers, each vessel exit from the FRO fleet provided,or, will provide in Q1 2013, a small pile of cash.FRO made an installment payment on the two Suezmax newbuilds, so it looks like capex spendingwill show up in 2013. The FRO CFO suggested the company could get 70% financing on the vessels.If so, that would be both good and bad. Good because it will reduce FRO's cash burn rate. I figure, 70% financing would only require another $20M cash on FRO's part. OTOH, bad because bank financing typically adds restrictions and covenants. Of course, with Fredriksen workingbehind-the-scenes, FRO always have a wild card. But since one of the vessels delivers in thefirst half of 2013, we will find out soon enough.
One other related item- the tie-in's between Fredriksen entities. They exist and since they don't show on a Balance Sheet, it is sometimes easy to overlook (or miss entirely if one doesn'tfollow a Fredriksen company closely). With FRO, the 2011 restructuring created two of them.FRO prepaid SFL $50M in profit-share. That cash went towards paying down SFL's debt on thetankers and OBO vessels. It is a nice offset that only gets breached when the vessels leasedfrom SFL cross over the cash-sweep hurdle. That's at a 25% rate too.There seems to be a second one. This one is between FRO and Frontline 2012 (FRNT). I'm stilltrying to figure its implications, but I interpret it as a positive for FRO. Their Q3 financialstatements included this item in the footnotes--As part of the Restructuring described in Note 3, Frontline 2012 agreed to fully reimburse and indemnify the Company for all payments made under any guarantees issued by the Company to the shipyard in connection with the newbuilding contracts acquired and to reimburse the Company for all costs incurred in connection with these guarantees. One way to interpret that paragraph is FRNT reimbursing FRO all the capital spent on the5 VLCCs, which would be around $200M. Since FRNT is currently private equity, that reimbursement might not have to be cash. It could just as well end up being a future equityallocation of FRNT. Either way, it seems to be an intangible for FRO.
1. From the FRO relationship with VLCCF. We are provided with general administrative services by ICB Shipping (Bermuda) Limited, or the General Manager. The General Manager isa wholly owned subsidiary of Frontline. The General Manager subcontracts the services provided to the Company and its subsidiaries to Frontline Management (Bermuda) Limited, another wholly owned subsidiary of Frontline.Not sure how this may have changed with the FRO split with FRNT.2. Why do you think FRO took a nosedive this week?Bob
Not sure how this may have changed with the FRO split with FRNT. For now, the vessel management function has stayed with FRO. The restructuring event was notreally about fleet management. Even the FRNT vessels are managed by FRO. At least from myperspective, the restructuring was to create an entity that could participate in a tanker sector recovery.2. Why do you think FRO took a nosedive this week? For me, I got to add shares at year-end :)Seriously though, I have no idea. Most of the US-listed crude tanker shipping companies dipped a little, so it could just be a sector rotation. For me, I feel FRO's Q4 results will be better than Q3, and likely better than the analysts (average) expectations, so I am comfortable jumpingin at the price pull-back.
One other related item- the tie-in's between Fredriksen entities. They exist and since they don't show on a Balance Sheet, it is sometimes easy to overlook This, in my opinion, is the biggest issue in investing with a JF company - is he going to tweak it for the benefit of himself leaving the rest of us ordinary stockholders holding the bag? I think that must be the reason the yields on his companies remain so high - not just the volatility of the tanker market, but - is Frederiksen going to move stuff - debt,equity, tankers etc - from one entity to another?RWS
Happy Holidays! Nice to hear from youI think that must be the reason the yields on his companies remain so high - not just the volatility of the tanker market, but - is Frederiksen going to move stuff - debt,equity, tankers etc - from one entity to another?RWS Looking at Fredriksen's history of the last decade or so, it seems the asset or debt movementsseem to be more about unlocking value. This has been the case when FRO grew too big after theoriginal Golden Ocean (tanker and dry bulk) acquisition. He created two spin-offs, Ship Finance Intl (SFL)- tankers and OBO, and Golden Ocean - Dry bulk, and had FRO restart as, mostly manager,of the tanker fleet. The ITCL subsidiary is more an anchor now, but it once was a decent stable entity that allowed FRO to meet its working capital requirements. The Golar partnership (GMLP)was about unlocking value from Golar (GLNG). I think in one recent presentation, GLNG mgmtsuggested that the dropdowns had unlocked $900M of value from GLNG. JF accomplished that withoutdiluting GLNG, and has added a significant newbuild fleet of LNG tankers to GLNG book.Of course, he now needs a way to pay for those 11 LNG tankers and two FSRUs. If one canstomach it, that's the risk side of the JF journey. IMHO, the high yield is part of thetrade-off for going on that ride. Again, not for everyone.
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