Analyst Examines StealthGas in Context of The Shipping Man

In yet another example of The Shipping Man being used a reference point through which to analyze the market, investor and Seeking Alpha contributor Steven Reiman writes that the book inspired him to analyze Greek LPG shipping company StealthGas in a follow up to an article he’d written two years earlier.

StealthGas: Is It Time To Buy This Growing Shipping Company?

My first article for Seekingalpha was published almost exactly two years ago and was about the substantial discount that a Greek LPG shipping company was trading at in relation to its ability to generate cash. The company, aptly named StealthGas (GASS), operated in a niche market that had not fallen victim to the mass oversupply problems that other shipping sectors were experiencing and as such, was able to continue to hire out its ships and generate substantial cash flow.

Since writing about the company, StealthGas has appreciated substantially and while I booked some gains, I kept my streak of consistently selling too early alive by selling at a price much lower than the current 10.30 price. The main reason I sold out was a fundamental disagreement regarding the company’s capital allocation policy.

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My interest in returning to take another look at StealthGas was piqued by a book I recently finished reading called The Shipping Man, the main plot of which revolves around an American hedge fund manager that is trying to break into the shipping world. While at first simply trying to capitalize on the oversupply crisis in 2009 to purchase some ships on the cheap, Robert Fairchild, our hedge fund hero, eventually gets pulled deeper and deeper into the shipping world and in the process meets Greek and Norwegian shipping tycoons. While the book certainly does not have Hemmingway quality prose, the story is highly entertaining and serves as an excellent beginner’s course into the inner workings of the shipping industry.

In the spirit of Mr. Fairchild, let us also delve head first into StealthGas to see if the company is still selling at a discount to its intrinsic value.

“…there are no economies of scale in the shipping business, not beyond a fleet of 10 ships. That is the perfect sized fleet. You can capture the rest of the efficiencies by being the big client of a third party ship manager”

-Coco Jacobsen, Norwegian Shipping Mogul

When I last checked in with StealthGas, the company had around 30 handysize liquid petroleum gas (LPG) carriers, a few MR product tankers and one crude oil Aframax tanker. The company’s main strategy centers around their LPG fleet in which they hope to build a dominant position in the handysize segment and leverage the growing global supply of LPG, a supply that should only grow with the proliferation of unconventional drilling that has led to the unlocking of previously unreachable LPG resources.

As we can see below, company management has big plans to grow the fleet by a little over 50% by the end of 2015:

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So how is this major fleet expansion being financed? The answer, unsurprisingly, is with a combination of equity and debt with the equity financing coming from a large secondary offering that took place last April in which the company sold 12M shares, increasing the total shares outstanding by 60%. This offering was done at ~25% discount to the company’s net asset value per share.

As can be seen in the above slide exhibiting the fleet expansion, the company wasted little time in putting this money to work. Furthermore, management is so excited about growing the fleet that they announced yet another equity offering in early December that was only canceled due to the extremely negative response the announcement created in the market.

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Are you crazy, man? If you order a ship you will have dead money for 18 months…”

-Spyrolaki, Greek Shipping Tycoon

One of the large risks when investing in new ships is the long lead time it takes between the time you order the ship and the time you actually take possession of said vessel. In the interim period, a time that can generally be measured in years, the market can change. This was the trap that many shipping companies fell into in the late 2000′s. They purchased massive amounts of tonnage when spot rates were astronomically high due to then tight supply. However, when everyone had the same idea at the same time what resulted were far too many ships slipping out of shipyards from Southeast Asia and Japan as compared to what was needed. Combining this oversupply with the financial shock of 2008 caused the demise of many previously high flying shippers.

It is possible that StealthGas could fall into the same trap of ordering ships into an oversupplied market. Already the company has reported having trouble chartering out some of its older vessels. While this could merely be a function of the vessels being old, I would think that if the market was sufficiently robust, they would have no trouble chartering out any of their vessels.

Furthermore, company management has indicated that while the order book remains subdued in relation to other shipping segments, there are other players that are beginning to enter the arena, mainly Chinese and Japanese players. I could envision a scenario where people enter this segment enticed by the growth in unconventional drilling and thus too much supply is ordered to come online in the next few years. This would obviously act as a downward pressure on charter rates.

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“…charter rates and ship prices are linked and they end up at the same residual value. If the market goes up the charter keeps the upside and if the market goes down, they are likely to default or come back to you and restructure, at which point you have zero leverage because the market is so weak.”

-Spyrolaki, Greek Shipping Tycoon

Yet another danger that shippers face is charterers reneging on their contracts. StealthGas tries to stay out of the spot market as much as possible in order to limit revenue volatility. As such, the majority of the company’s fleet is on bareboat charters or time charters. While this improve revenue visibility, it does create a situation as described by our Greek shipping tycoon in which the charterer keeps the upside and but has leverage to renegotiate should the market turn south. While the segment StealthGas primarily operates in is known for its low volatility, the company has had experiences in the past where it has had to renegotiate with its charters that had run into financial difficulties.

The main point here is that while investors may think that there is some protection from market turbulence due to the long term nature of the company’s contracts, if the market collapses the charterers have all of the leverage and will most likely be able to renegotiate the terms that will most likely be unfavorable to StealthGas.

“The Norwegian sale and purchase brokers who sell you the ship will make money; the British banker who finances the ship will make money; the chartering brokers who find cargo will make money; and the manager who operates the ship on your behalf will make money…that is the point; everyone will make money…everyone except you”

-Spyrolaki, Greek Shipping Tycoon

Ultimately, I feel like the unfortunate American that Spyrolaki is addressing in the above. While I believe the management team at Stealthgas is better than most in terms of acting in the best interests of shareholders, I cannot reconcile the idea that they are acting in my best interests with the fact that they have issued shares at a 25% discount to NAV and were fully prepared to issue even more before the market backlash. Given the fact that there is little operating leverage to be had in this business model, the only reason for pushing forward such dilution is to simply build a bigger shipping empire. While this may ultimately work out for shareholders, if I am going to invest in an inherently risky industry like shipping, I want a management team that has a proven desire to increase value on a per share basis. It is for this reason that I currently hold no position in StealthGas.

Wilbur Ross on Viking Raid: “Readers will cry out for yet another book”

Viking Raid already has billionaire investor and CEO Wilbur Ross hungry for even more adventures from Robert Fairchild.

The real life shipping dynasty sent Marine Money this personal email lauding the Shipping Man sequel:

Viking Raid is a gripping novel about the shipping travails of Robert Fairchild and their surprise ending. It begins where Matthew McCleery’s first book, The Shipping Man, left off, but you can enjoy this one without having read its predecessor. Seamlessly woven into the plot are keen insights into the arcane worlds of Wall Street and Marine Transport plus an insider’s colorful descriptions of both industries’ favorite executive watering holes. Shipping experts especially will enjoy deciphering the real life characters on whom the author based Norwegian tanker spot market speculator Coco Jacobsen, London banker Alistair Gooding, Greek wheeler-dealer Spyrolaki and the other fascinating personas who populate this tale. This book is a must read and a quick read! In view of the author’s second resounding success, his readers will cry out for yet another book to complete the trilogy. I hope that Matthew will create one.

Marine Money thanks Mr. Ross for taking the time to share these compliments on the book and invites all Viking Raid readers to share their thoughts with us as well.

Financial Times References Robert Fairchild

A recent Financial Times article, “The shipping news: BDI does not mean buy, buy, buy,” makes reference to a passage in The Shipping Man in its opening paragraph:

“The shipping news: BDI does not mean buy, buy, buy”

Quoting apparently profound yet incomprehensible information generates revenue, says John DizardFTRobertFairchild

Robert Fairchild gazed deeply into the amber numbers illuminated on his Bloomberg terminal, staring in disbelief that something called the “BDI” has fallen by 97 per cent . . . as a New York City hedge fund manager who valued volatility, (he) was immediately intrigued by what he saw.

And as any political consultant, portfolio strategist, or art dealer could tell you, getting the revenues in is all about client management. There is no better way to do that than to quote some piece of information that is both apparently profound and yet incomprehensible, at least until the electrons dry on the wire transfer.

The BDI, or Baltic Dry Index, which measures a basket of daily time charter rates paid for different sizes of cargo ships, has been a useful means of confusing investor-clients for many years. The BDI has been used as a macroeconomic indicator, and yet seems to be so . . . real, made of steel. Not like some repo rate. One of Alan Greenspan’s client-management tools as Fed chair was the confusing interjection of freight-car loading numbers, or cardboard production.

Harmless fun, you think? Sadly, animals have been harmed during the making of this film. Such as your money. As the fictional Robert Fairchild finds out, things are a little more complicated than they seem when he tries a “contrarian” play guided by the BDI.

You cannot depend on these people to do your homework for you.

To read the full article, please visit FT.com.

The Shipping Man Saga Continues

Adobe Photoshop PDFMarine Money is pleased to announce the forthcoming release of Matthew McCleery’s Shipping Man sequel Viking Raid: A Robert Fairchild Novel.

Viking Raid features Fairchild in pursuit of his next shipping deal, only to find himself in over his head once more:

Combining a ship finance textbook with a jet setting geopolitical romp, Viking Raid picks up where The Shipping Man left off – on a journey into the famously private world of international shipping tycoons and their financiers.

At the conclusion of The Shipping Man, Robert Fairchild is sipping rosé on the Côte d’Azur with Coco Jacobsen and toasting to the success of their $300 million junk bond offering; six months later the CEO is in the 120-degree engine room of a supertanker discharging two million barrels of Saudi crude oil – afraid for his job and afraid for his life.

Fortunes change quickly in the volatile world of international oil shipping and Fairchild knows that unless he can find another $500 million soon his powerful Norwegian tanker tycoon boss will have little use for him.

When Robert convinces Coco to attempt an Initial Public Offering of Viking Tankers on Wall Street, the desperate American thinks his problems may have been solved – but the former hedge fund manager couldn’t be more wrong.

Instead, Fairchild finds himself stuck between an American shale gas wildcatter and The Peoples’ Republic of China in their competition for clean energy. Combining swashbuckling shipping adventure with corporate finance derring-do, Viking Raid puts Fairchild back at the table in the highest stakes casino in the world – with more than just his deal at risk.

Viking Raid is expected for release in 2013. Stay connected to the blog for further updates.

More Investors Cite Shipping Man’s Wisdom

Robert Fairchild’s sphere of influence continues to grow within investing circles.

Hedge fund manager and Dhandho Investor author Mohnish Pabrai recently recommended The Shipping Man  according to financial blog My Investing Notebook. Founder Shane Parrish, who also runs the popular blog Farnam Street, posted the following review of the book:

Why did Mohnish Pabrai recommend The Shipping Man?

It’s worth paying attention when a popular value investor such as Mohnish Pabrai recommends you read a fictional novel.

And that’s just what he did.

The Shipping Man is about, well, you guessed it: shipping.

And what’s interesting is that Mohnish has a history of successfully investing in shipping, having profitably invested in Genco Shipping and Frontline. So he knows the industry fairly well.

It starts off as my kind of book.

“The Greek laughed. “There are only three ways to get an advantage over your competitors in this business.

“What are they?” Robert asked.

Pay less for your ships, pay less to operate them or pay less for your capital. In a commodity business like shiping, the only thing that really matters is price.

It’s not often you find investing wisdom in a fiction book.

The basic premise of the novel is pretty simple. Robert Fairchild watches the Baltic Dry Index plunge 97%, registering an all time high and 25-year low within the span of 6 months. He gets excited. He gets drunk and ends up buying a ship and receiving an education.

The book is full of interesting nuggets. Let’s look at a few, shall we.

Consider this one on information:

“… another problem is that everyone has the same information, which means there is no hidden value; there is only the market. If the market goes up, you win. If the market goes down, you lose. and the moment you think there is no risk, that is the same moment you have failed to recognize the risk. At least the market doesn’t lie.“

Or this one on expertise:

“Robert Fairchild knew full well that he wasn’t an expert on shipping, but expertise, like everything in life, was relative. At that moment, all he needed was to know a little bit more about bunkers than John Harris and the other investors funneling out of the New York Yacht Club — which he did.”

And this advice: Never sell when things are bad.

“You know something, Robert, you should never sell when things are bad. You should only sell when things are good. This is what I tried to explain to Alex. When you want to cry really you should buy,” Coco said with his characteristically elegant simplicity. “When it comes to shipping, investors only lose money when they lose patience.”

Let’s end with this philosophical snippet:

“There will always be many good reasons not to do things in life, but people who achieve the great things are the ones who believe in themselves and find reasons to do things even when sometimes they do things that are not so smart.”

While I feel like I know a lot more about shipping after reading The Shipping Man, this is where my shipping education starts and not where it ends.

And no, I won’t be buying a ship anytime soon.

We at Marine Money are thrilled to hear such individuals as Pabrai and Parrish are enjoying our book.