Stock Strategies
Tanker Stocks II: Some IPOs Worth Watching
John Rubino
03/09/01 - 12:08 PM EST
Wednesday's Wall Street Journal crunched the numbers on the past couple of years' tech IPOs. And just as you'd expect, the result was ugly. The deals underwritten by the four worst-performing investment banks are down an average of more than 50% -- and that's apparently from the offering price, not the much-higher price that most of these stocks hit on their first day of trading. But you have to be careful about drawing the wrong conclusion here. Just because so many tech IPOs were losers in 2000 doesn't mean all IPOs are bad news. Like anything else, some are disasters waiting to happen, and some are good, solid companies that should do just fine. Examples of the latter might be the IPOs (one just completed, others soon to be) of several oil tanker companies. I did a column on the current fleet of tanker stocks in
February, and the story still looks solid. Global oil demand is up, and should remain so, while new regulations are forcing older single-hulled tankers into retirement at a time when shipyard capacity is too tight to completely offset the resulting decline in capacity. As a result, the tanker companies with mostly new ships should make good money right through this year's recession, and great money in the expansion that follows. This is the first time in decades that the tanker biz has had happy long-term prospects, so private operators are lining up to go public. The first two in the pipeline differ in some important, inside-game ways. But they're both mirror images of last year's tech IPOs, in that they're real businesses with real earnings, offered at prices on the cheap side of reasonable. Based on analyses provided by tanker industry magazines Marine Money (
www.marinemoney.com) and Trade Winds (
www.tradewinds.no), here they are: Stelmar Shipping (SJH - Cramer's Take - Stockpickr) owns and operates 11 relatively young, double-hulled tankers, and has contracted to build four and buy another 10 second-hand. When the new ships are delivered, Stelmar's will be one of the biggest fleets of relatively small (in oil tanker terms, at least) vessels. Its average age will be 7.4 years, or about half the industry norm. One of the basic decisions tanker companies have to make is whether to lock in current rates by chartering ships for long periods of time, or bet on future price increases by offering capacity on the spot market. The first offers consistent cash flow, but foregoes the possibility of a windfall should prices rise. The second is high-risk (if shipping rates, um, tank) but potentially higher-reward. Stelmar goes for consistency by chartering two-thirds of its capacity for periods of one to seven years. Many of its ships are currently chartered at rates below the spot-market level, which means it's less profitable than operators with more free capacity. On the other hand, it's generating stable cash flow with less risk. The March 6 IPO gave the company a market cap of $130 million and valued the stock at a slight discount to book (like I said, a nice contrast to last year's make-believe tech valuations). The proceeds of $84 million will cover part of the cost of the fleet expansion. The rest will come from $140 million in new debt, so leverage will be high, but not out of line with the rest of the industry. General Maritime (proposed ticker GMR: NYSE), also known as Genmar, owns 20 mostly big tankers with a total capacity about twice that of Stelmar. The average age of its fleet is around 9.5 years, again nice and young by industry standards. Its operating strategy is more aggressive than Stelmar's; by making about two-thirds of its capacity available on the spot market, it trades greater volatility for the chance at a big payoff. And so far, so good. At today's high spot rates, Genmar is turning a nice profit. Another place where these two differ is in how they'll use the IPO proceeds. Genmar plans to pay down about $115 million of debt, essentially cashing out some of its early investors. So while it's not keeping the money in the company, the IPO will give it a less-leveraged balance sheet. This deal hasn't been priced yet, but it looks likely to be in the same range as Stelmar's, at a slight discount to book value. Now for the downside: Each of these stocks has (or will have, in General Maritime's case) a float of less than $200 million, too low for most money managers to notice. And neither company seems all that interested in providing information. Stelmar's home page offers a "News" button, for example, but click on it, and instead of recent press releases, you get a note telling you to check back. Strange, from a company that just went public, but not that unusual in an industry that isn't used to dealing with interested investors. On the other hand, it's kind of refreshing to see companies just doing their thing and letting the results speak for themselves.