Petrobras - the only source of hope...

In 2006 Petrobras estimated that they needed 146 new OSVs, to be able to cope with the high level of exploration and production increase on the Brazilian continental shelf, from 2010 to 2020. This winter they announced many long term contracts for PSVs, giving the North Sea spot market a boost by chartering a lot of the available tonnage. The same is about to happen in the AHTS spot market; the official plan is that they will charter some 4 AHTS vessels on 4+4 contracts, but the word on the street is that its going to be more than that.

In my last post i wrote about Siem Offshore, and one reason for my positive view of this company is that they have proved to be a strong contender for these contracts. If they get 4 of the AHTS contracts they've secured the cash flow and income of the company for the next few years. A good trigger for a company valued at a P/B of 0.7...

Petrobras ranking

Ben Graham, offshore and stocks

When Benjamin Graham looked for potential investments, the first thing he looked at was the book value of the company. Why? Because future cash flows are hard to determine with any certainty, the only thing you can be sure of is what the assets of a company is worth. After the rapid gain in stock markets the last year, a lot of companies has exceeded a price on equity of one; implying that they are going to make money for next years.

The question is why some companies don't reach these levels. And whether that is because they are going to lose a lot of money, or because the market has a mistaken view of the company. I've looked into some offshore supply providers, and the difference in the price of equity is huge. Some of the discounts and premiums can easily explained by newbuilding programs or huge amounts of debt. But I have found that in some cases the reasons for a price difference is not good enough to explain e.g. the 25% difference in price on equity between SIOFF and DESSC.

I have to admit that there is a reason why you should not invest in either of these companies: The current market. The only reason they are making money is because of (old) long term contracts; the current spot market for these kinds of services is at or below break even levels. So until Petrobras decides to charter AHTSs again, and rig activity increases around the world, it's going to be painful for the offshore supply companies. But maybe it's a great time to buy shares in great companies at a low price also?

I hope so, because I've already bought some SIOFF shares...

Mania

If you look at the history of stock markets, it seems that the world suffers from some kind of bipolar disorder. The housing market, Internet companies or the whole economy of a country gets overvalued in such a grand scale, that the only way to reach equilibrium is to start from scratch. Enormous amounts of money are lost, and made, on the following price moves. About a year after, some people get the blame for what happened, and some gets famous for exploiting the negligence of everyone else, to see what was about to happen.

Why is this relevant? Well, shipping is always one of the industries that suffers the most from any downturn. They might not be leveraged to the breaking point, they may even have contracts guaranteeing their cash flow for many years to come. The problem that arises is that of counter-party-risk and catastrophic day rates. Now some might say that other industries are exposed to the exact same problems, and that is true. There is only one big difference. The pricing of freight is, as all other services, a matter of supply and demand. What differs shipping from other industries is that the demand side of the equation (largely based on change in world trade) is very volatile, while the supply must be planned years before. This means that there will be some years with an oversupply of ships and some years where the cost of freight skyrockets. This is due to the fact that the cost of transport is very low compared to the other costs of manufacturing and selling the product. This means that charterers are willing to pay whatever price the ship owner wants in a tight market.

In other words shipping is either euphoria or depression. Which make it a very interesting industry to follow. Exaggeration is the rule, not the exception - which also make it very profitable if you are able to seen through all the emotions and noise.