SOME CRUDE FACTS: (TANKERS)
There are three basic classes of oil tankers. Panamax and Handysize are names given to the smallest, with capacities of 80,000 dead-weight tons or less. Stelmar specializes in these. ULCCs and VLCCs are the largest, carrying 120,000 dwt and owned by companies like Frontline. Suezmax and Aframax are the names given to ships with capacities of between 80,000 and 120,000 dwt. General Maritime owns 27 Aframax and 19 Suezmax vessels, with a combined capacity of 5.5 million dwt, compared with 16.4 million dwt for Frontline.
Management says Suezmax and Aframax ships offer several advantages. They're versatile, since they can service nearly all ports and routes. And charter rates for these vessels have historically been less volatile than those for larger ships. Big oil spills, along with terrorism fears, have forced oil companies to be more selective about their shippers, offering higher rates for modern, double-hull vessels run by established companies. General's fleet consists mostly of double-hull ships, with an average age of 11.8 years, less than the industry average of 12.7.
The market for oil tankers depends, naturally, on supply and demand. Supply is on the rise, with 30 million dwt of added capacity expected in 2004 and another 26 million in 2005. That normally might be a problem for shippers. But last December the International Maritime Organization agreed to eliminate single-hull tankers by 2010. That means that 40% of the world's tankers will have to be scrapped by then.
Jefferies analyst Magnus Fyhr forecasts that net tanker demand will increase by 3% per year in 2004 and 2005. "Our case is very conservative as any incremental oil demand growth and potential inventory build should result in significant upside to our charter rate assumptions and EPS estimates," wrote Fyhr in a Dec. 10 research note.
General Maritime's stock price has backed off by a dollar or so to around $20 since the company reported fourth-quarter earnings of 68 cents a share (excluding an $18.8 million write-down of five single-hull tankers), missing analysts' consensus expectation of 71 cents. Net voyage revenue (gross voyage revenue less voyage-specific costs) rose 127% to $95.5 million. Total operating expenses, though, rose a higher-than-expected 106% to $35.3 million, because of year-end compensation, the opening of a new charter office in London and a stronger Euro increasing repair costs.
Net voyage sales for the year increased by 131% to $336.6 million. Total sales rose 101% to $454 million for the year — considerably faster than General's three-year average rate of 56%. The quickening sales are partly a result of the acquisition of 19 vessels in the second quarter of 2003. The purchase increased the company's debt/capitalization ratio — historically one of the industry's lowest — to 60% from 37%, but management has since used free cash flow to pay it back down to 52%. Analysts project debt to shrink to between 45% and 50% of capital by the end of the first quarter of 2004.
Fyhr doesn't seem worried about the fourth-quarter earnings miss, and calls General's shares "attractively valued." He says the company is well positioned to benefit from 3.6% demand growth for Suezmax ships in 2004, combined with only a 2.6% increase in supply. Each $1,000 increase in Suezmax rates translates to an extra 18 cents in annual earnings per share for General, notes Fyhr. (Fyhr doesn't own shares of General Maritime; Jefferies doesn't have an investment-banking relationship with the company.)
Compared with its peers, General Maritime's shares appear to be a bargain. They trade at just 5.5 times 2004 earnings and 3.2 times cash flow, compared with average P/E and P/CF multiples of 8.1 and 5.1, respectively, for tanker companies. Considering that the value of General Maritime's net assets is projected to hit $23 a share in 2004, there seems little reason that shares of this well-oiled sales machine should stay this low.