John Fredriksen, the richest shipping investor, is spending $2.6 billion on the biggest fleet of fuel-efficient ships in history, betting that record energy costs and a global capacity glut won’t ease any time soon.
Frontline 2012 Ltd., in which he’s the biggest shareholder, said last week that its orders for new ships almost doubled to 53 after construction costs plunged for the vessels burning about 30 percent less fuel. Shares of the Hamilton, Bermuda- based company will gain 11 percent in 12 months, according to the average of six analyst estimates compiled by Bloomberg.
The billionaire’s fleet will be more competitive because fuel now represents about 75 percent of an average ship’s running costs, double the proportion a decade ago. The capacity of the merchant fleet is about 20 percent greater than demand, the largest glut since the early 1980s, according to Clarkson Plc (CKN), the world’s biggest shipbroker. Fredriksen’s company says its new vessels will be profitable at charter rates that wouldn’t cover operating expenses for existing carriers.
“Betting on Frontline 2012 is like betting on the future of shipping,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo, whose recommendations on shipping companies returned 20 percent in the past year. “Even if there is only a moderate recovery over the next five years or so, Frontline 2012’s earnings potential is substantial.”
Frontline 2012’s net loss of $3.94 million this year will rebound to profit of $32.3 million in 2014 and $151.4 million in 2015, according to the averages of 24 analyst estimates. Its shares climbed 63 percent to 44 kroner in Oslo trading this year and will reach 48.98 kroner in 12 months, the estimates show. The owner of 10 crude-oil tankers spun off from Frontline Ltd., once the largest supertanker operator, in December 2011.
The ClarkSea Index, a measure of industrywide earnings, averaged the lowest since at least 1993 last month, according to Clarkson. The Baltic Dry Index, a gauge of costs to ship iron ore, coal and grains, averaged the lowest so far this year since at least 1985, according to the Baltic Exchange, the London- based publisher of freight rates.
Frontline 2012 has orders for ships to carry crude, refined fuels, liquefied petroleum gas and dry-bulk commodities. It already paid $315 million of the $2.6 billion building program, according to a statement March 19. It will eventually have more than 100 vessels, making it the world’s largest fleet of so- called eco-ships, according to Stavseth.
Asked whether the company will become the world’s biggest commodity shipping company, Tor Olav Troeim, an aide to Fredriksen, said: “Maybe one of the most profitable ones. Low capital cost, low operating cost gives us a good start.”
A new-design tanker hauling 37,000 metric tons of gasoline will cut fuel use by about 29 percent, the company estimates. That’s equal to a saving of $7,000 a day based on consuming 25 metric tons of bunkers, or ship fuel, at $700 a ton.
Scorpio Tankers Inc. (STNG:US), a Monaco-based operator of refined- fuel carriers, and A.P. Moeller-Maersk A/S (MAERSKB), which has the largest container-shipping fleet, are among companies adopting similar strategies.
Those with conventional vessels are also making adjustments to reduce fuel costs. Tankers owned by Euronav NV (EURN), Europe’s largest publicly traded owner of the ships, burnt as much as 20 percent less fuel by sailing slower and adding equipment such as meters and propeller ducts, the Antwerp-based company said Jan. 22. D/S Norden A/S (DNORD), Europe’s biggest publicly traded commodity shipping company, said March 21 it let a tanker drift for hundreds of miles, saving $17,000 in fuel.
Frontline 2012’s anticipated savings are higher than those forecast by the Baltic and International Maritime Council, a trade group representing 65 percent of ship owners. Newer tankers hauling 37,000-ton cargoes will use 15 percent less fuel, the Bagsvaerd, Denmark-based group said in September.
The new ships are entering an industry contending with a glut across most vessel classes. The merchant fleet expanded 35 percent since 2008 while seaborne trade gained 14 percent, according to Clarkson. The capacity of crude-oil tankers and dry-bulk carriers will both grow faster than demand for at least two more years, Morgan Stanley estimates.
Demand for merchant ships, which handle about 90 percent of global trade, could fall further behind the fleet’s expansion should the global economy slow. The International Monetary Fund cut its 2013 forecast for global growth in trade to 3.8 percent in January, from 4.5 percent.
The 17-nation euro area’s economy, accounting for 20 percent of global imports and exports, will contract 0.2 percent this year after shrinking 0.6 percent in 2012, according to the average of 54 economist estimates compiled by Bloomberg. Growth in the U.S., the largest oil importer, will slow to 1.9 percent this year from 2.2 percent in 2012.
Seaborne trade in dry-bulk commodities will expand 5 percent to 4.2 billion tons this year while the fleet grows 7 percent, Clarkson estimates. Daily earnings for iron-ore- carrying Capesizes dropped 33 percent since the start of February, according to the Baltic Exchange. Demand to ship crude oil will advance 2.6 percent this year while the fleet expands 3.3 percent, Clarkson estimates. The largest tankers are earning $14,709 a day, 84 percent less than a year ago.
Frontline Ltd. (FRO), which has no orders for the newer fuel- efficient ships, says its supertankers need $24,200 a day to break even. Its shares plunged 30 percent to 13 kroner this year and will drop to 10.32 kroner in 12 months, according to the average of 16 analyst estimates. The Bermuda-based operator of 49 tankers said Feb. 22 it may not be able to repay $225 million of convertible bonds due April 2015 unless rates recover.
Norwegian-born Fredriksen, 68, is the world’s 63rd richest person, with a net worth of $14 billion, Bloomberg Billionaires estimates. He also has holdings in Seadrill Ltd. (SDRL), the second- largest oil-rig operator by market value; Golar LNG Ltd., an owner of liquefied natural gas carriers; and Marine Harvest ASA (MHG), the largest producer of farmed salmon.
Frontline 2012 said it’s taking advantage of “historically low” ship prices. A new Capesize in China, the world’s largest shipbuilding nation, costs $42 million, the lowest since 2003, according to data from Simpson, Spence & Young Ltd., the world’s second-largest shipbroker. A supertanker in South Korea costs $90 million, the least in nine years.
The ships will be built by STX Jinhae in South Korea and at the Longxue and Jinhaiwan yards in China, according to Frontline 2012. A very large crude carrier hauling 2 million barrels of oil takes about two years to build, Clarkson data show.
Fuel-efficient ships may speed the scrapping of older vessels, easing the glut. Tankers built to last for 25 years are now being dismantled after 15, Clarkson data show. Ships totaling 47.7 million deadweight tons will be demolished this year, close to last year’s record 58.3 million tons, the London- based broker estimates.
“Fleet capacity of nearly only fuel-efficient ships will give Frontline 2012 a very strong competitive advantage,” said Erik Folkeson, an analyst at Swedbank First Securities in Oslo, who expects the shares to trade at 51.57 kroner in 12 months. “Fuel-efficient ships will be more competitive and could trigger increased scrapping of older and uneconomical vessels.”
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