Contrarian seduction
In the spring of 2011, the price per day for a very large crude oil carrier (VLCC) oil tanker voyage had deep-sixed from as high as $50,000-$75,000 in early 2010 to practically zero. Meanwhile, the order book at the tanker shipyards showed no sign of slowing. Like commercial real estate portending the boom's end, it was going to get worse before it got better. Supply and demand were jettisoned overboard.
Enter the contrarian value investor. In situations like this, which have happened from industry to industry since business began, contrarians like me look for the balance sheet strength to wait out the storm. You take decent odds that supply and demand have to equalize eventually, but because you don't know when the cycle will turn from "red sky at morning, sailors take warning" to "red sky at night, sailors' delight."
Of all the other major shipping categories -- dry bulk, container, crude oil, refined oil, liquefied natural gas (LNG), and liquefied petroleum gas (LPG), only the latter two have profited any owners in recent years. I didn't want to chase the growth there, but a more careful look at the little-or-none-sized order book for LNG and LPG tankers might have convinced me to buy Teekay LNG Partners (NYSE: TGP), part of the Teekay empire including Teekay Tankers (NYSE: TNK) and Teekay Corp. (NYSE: TK). (Here's my humble offering showing the roadmap for potential profits in LNG.) Still, that was more growth than value.
And there were some negatives I thought had a better chance of turning around at General Maritime than in the entire industry. Betting on a turnaround ahead, it took on massive debt in 2010 to purchase a fleet of VLCCs at what then seemed like unbelievably low prices.
So even as things got worse, the company did have assets to sell to reduce debt, it seemed, even at fire sale prices. My contrarian case was that the investor got a great price because of the VLCC buy error and a better shot at gains ahead, with a balance sheet able to make it 12 months-18 months waiting for a turnaround in VLCC rates. The herd's case was that the debt of the VLCC buy and would send the company to Davy Jones' locker long before any rate recovery.
I weighed the odds. There was all the bad, but then, on March 30, 2011, distressed debt super-investor Howard Marks' Oaktree Capital Group (NYSE: OAK) threw it a lifeline and agreed to loan General Maritime money. Shares traded at $2.03 after market that day.
In the spring of 2011, it looked as though General Maritime had 12 months-18 months to turn around its precarious balance sheet. There was good data behind it.
I was in with 1%. The upside seemed many times worth the risk.
What went wrong?
Or, what didn't go wrong?
First, the data for the turnaround was... the company's. Yes, it was all wonderfully sourced and from industry information providers without an anchor to drop (oh, all right, ax to grind). But, it was still framed by the company.
Next, despite analyzing distressed situations for years, my two brain cells failed to rub together. Oaktree Capital had offered a credit facility and invested $200 million, but this was a company managing almost $80-plus billion. Wow! What a commitment! Plus, the senior debt holder has the first call on the assets, which even at sinking prices for the tankers would be something. The stock warrants were a grain of sand on the beach -- Oaktree would have to pay a penny. What a risk!
Teekay, a company making money hand-over-fist with its LNG and LPG business, didn't need to pump its many-tentacled companies when it said last October that oil tanker supply and demand would recover in winter 2012-2013. (Here's my piece showing the roadmap for potential profits in LNG.) That was at least a few months beyond my analysis date of maximum pain.
My glasses had been more than rosy-colored -- fluorescent fuchsia? General Maritime didn't have that much time beyond the 12 month-18 month estimated window. A month after Teekay's prediction, General Maritime filed for bankruptcy. Oh, and Oaktree was back with a good deal for itself to help finance the company during bankruptcy. And why not?
With some luck and fancy footwork, I and other investors got out a week before bankruptcy with a dime for each dollar. Hey, beats a goose egg, but not by much.
Lessons learned
If you're going to make an investment where the downside is large, the upside better be almost life-changing. That was the mistake at General Maritime. So much more could go wrong that it just wasn't going to be enough for the risk, despite the slight chance of a massive upside. And, if you are going to do it anyway, size the position small. My error was not necessarily taking the risk -- who knew really what tanker rates would be in a world of uncertainty and probabilities -- but putting too much money on the line. I ended up putting in up to 4% of my portfolio.
And now? Only in the last year has brilliant billionaire bottom-feeder Wilbur Ross seen better times ahead, but he invested in refined oil shipping, not crude oil, and the rising liquefied petroleum gas shipping market. Meanwhile the industry's collapse was killing Norway's billionaire shipping magnate John Fredriksen, whose Frontline (NYSE: FRO) has spun off such great successes as the aptly named Ship Finance (NYSE: SFL) and also the aptly named drilling rig company Seadrill (NYSE: SDRL). But, Frontline itself has given back years of gains, crashing from $71.24 on June 17, 2008, to $16.66 at the March 6, 2009, market bottom, to Friday's $3.98 close. Ooops.
Then Fredriksen did his trademark financial engineering creating Frontline 2012 is where the opportunity is. But, it trades on the Oslo Exchange. Try to find even unsponsored ADRs here.
Tankers can tank. So if you're going to invest cyclically, especially here, you don't have to be in so early that it can kill you. You can invest after the cycle turns and still make money. After all, you don't know it's turned -- you just need some confirmation. You need that extra confidence so that you can evaluate the odds that your Titanic is going to miss the iceberg. We know what happens if it doesn't.
