More commonly known as GenMar, the company acquired seven ships this June for $620 million in a deal widely viewed as "transformational," since it added the first Very Large Crude Carrier's to the company's fleet and expanded its tonnage by almost 50%. (GenMar's sister company,
Genco Shipping & Trading
-- both founded by New York shipping entrepreneur Peter Georgiopolous -- made a similar deal, also in June, which has succeeded in
garnering the company's stock some bullish attention
But executives of General Maritime have also had to deal with increasing investor angst as its shares have declined precipitously this summer, losing more than half their value since May. True, a supremely weak market for crude-oil transportation services around the world has been partly to blame. (
have seen their stocks fall 30% and 37%, respectively, over the same period.)
But some GenMar shareholders have taken umbrage with the company's C-suite and its management of the business during the downturn. Why, some have wondered, hasn't GenMar bought back stock as its price falls toward its net-asset value? (NAV is a basic way of measuring what a shipping company is worth: the value of its ships.) On top of all that, the company's huge VLCC deal has been criticized as too risky, since it appears to amount to an enormous gamble on a recovery in tanker rates.
To get some answers,
sat down with GenMar Chief Financial Officer Jeff Pribor recently at the company's office on Park Avenue in Midtown Manhattan.
TheStreet: The company's share price has fallen sharply, and some investors have criticized the company for not buying back stock. What's your response to those concerns?
There is a place for buying back stock. It's in the toolkit of every company. But in shipping, you have to be really sensitive to share price relative to NAV. That's one of the factors. You also have to look at the overall leverage. I'm not sure it makes sense to use our cash right now to begin a big buyback program. I wouldn't say that's the most likely near-term course of action for us.
TheStreet: Tell me more about share price relative to NAV and how that works in you calculations when it comes to buybacks.
Typically, when shares are trading above NAV, you'd rather buy real ships than buying your shares. So share buybacks tend to happen more when share prices are at fairly significant discount to NAV.
TheStreet: What's the NAV now?
It's not a number that's published -- because it's based on opinions. But most people would say we're trading sort of right around our NAV. Therefore, it's not compelling on an NAV basis for us to buy back shares. And, look, it's something we'll always look at. It's in the toolkit. We've done close to $400 million in share buybacks over the last five years as part of our campaign to return cash to shareholders. So we've certainly been willing to look at that as a tool to create shareholder value.
But NAV is just one factor
in deciding whether to institute a buyback program. Here's the bigger, better way to answer your question: What we've said for the last 12 months, approximately, is that we have entered a period where the best use of cash is to buy cheap assets. We waited a long, long time
to make such a deal. The reason we returned $1.4 billion dollars in cash to shareholders over the last five years is assets were expensive. The better way at that time to create shareholder value was a combination of regular dividends, special dividends, and share buybacks, because assets were expensive. What we decided in the last 12 months is: we're in a period where asset prices are lower, so acquiring assets is the best way to create long-term shareholder value. That's why we did a $600 million acquisition in June. It's the better way to create value now than doing a moderate size share buyback program.
TheStreet: Explain the thesis behind the deal, since many consider it to be a pretty big gamble.
We only did the deal because it penciled out as being accretive -- to EPS, NAV and cash-flow per share. The way this deal penciled out, even with the issuance of $200 million in equity, it was accretive on all three metrics. If it wasn't, we wouldn't have done the deal. The deal supports $200 million dollars in equity issuance -- that's the kind of deal you wait five years for.
TheStreet: You're comfortable with the debt levels that are now on your balance sheet?
Our strategy is to have maximum prudent leverage. In a cyclical business like shipping, where cash flows and asset values change as much as they do, the best way to provide super gains for equity is to use leverage. But the trick, of course, is to not over-leverage the company. With the recent acquisition, because of the equity issuance, there was actually a bit of
-leveraging, which is kind of cool -- that we could grow accretively, but also at the same time take pressure off the balance sheet, or provide a little more cushion on the balance sheet.
But the broader concept is: At the bottom of the cycle, buy more assets using maximum prudent leverage. It provides the most pop for your equity on the upside. That's the game. Some analysts have written that a 20% increase in steel in values, or asset values, for General Maritime's fleet, would provide an 80% increase in net asset value per share, because of the leverage. So the benefits of an increase in asset value in a recovering market -- the potential benefits to our share price, assuming the stock trades in relation to asset value -- are manifest.
TheStreet: How has the company protected itself against the possibility that the tanker market will remain depressed?
One of the things we did almost a year ago, at the end of 2009, was issue $300 million in unsecured bonds. Why? Since there wasn't an acquisition at the time, we didn't want to issue equity. That would have been just dilution for no growth. Instead, we issued bonds. It wasn't de-leveraging, obviously, since it was bonds raised to pay down bank debt. But because the bonds are unsecured, it allowed us to have what we have today, which is five of our 38 vessels completely mortgage free, approximately $200 million in value.
That's essentially a form of equity. It's a complete safety net for us. If one were to hypothesize that the market stays south for awhile, one of the arrows we have in our quiver is $200 million dollars of unencumbered vessels. You can borrow against them; you can sell them to generate cash.
I don't think we'll need to do that. Our models don't suggest that that will be necessary. Our models suggest that we'll be in compliance with our covenants going forward, that our dividend will remain intact, that we'll get into next year and enjoy the benefits of a gradually improving tanker market. But to those who want to know: "What would you do, Jeff, if things stayed really bad for a lot longer than anyone had anticipated?" One of my answers is: "Here's a very significant safety net."
TheStreet: Speaking of the tanker market, the orderbook remains a concern. With GenMar levered up in preparation for an upswing, does the company worry about the supply side weighing on rates?
Here's my view on that. In terms of the tail and the dog, the dog is demand. It's not supply. The market is driven by demand. Supply can be an accelerator or a brake on that. The situation we're in now is, demand for oil has come off the bottom. Demand for tankers has not yet come off the bottom, because there's been an excess of inventory. But as demand continues to go up -- whether it's slower or faster, take your pick on the growth rate -- we will gradually work down that inventory, and demand for ships will grow.
Even if you want to be an orderbook bear, increased supply will change the slope of the upward curve of the tanker market as reflected in rates, but it won't be enough to crush the recovery. Steady increase in demand is what drives the market. Not to overstate the case, but why did the tanker market go bad? Nothing about an orderbook made it go bad. It's when the recession hit and oil demand cratered. And even a low orderbook wouldn't necessarily cause the market to go back up. Major inflection points in a cyclical market like tankers are caused by demand.
That said, the orderbook is important. But you have to note that approximately 20% of the orderbook in 2009 experienced slippage -- cancellation or delay. To date, through July, it looks like about only 70% or 71% of the orderbook has been delivered. So we're looking at a 30% rate for this year. The top line number for next year's orderbook is a big number. But it seems reasonable to expect that there will be a similar -- similar to 2010 -- reduction in the top line, especially when you consider that 2011 will be
most expensive ships in the orderbook cycle.
That's because of the three-year delay. In 2008, when the 2011 orderbook was ordered, that was the peak of newbuilding prices. The VLCC you could order today in a yard in China and Japan for somewhere between $100 to $110 million was $143 million dollars in 2008. You're going to be working hard to try to reduce that orderbook if you're the owners of those vessels.
I think the net growth of the fleet next year is going to be manageable, in the 3% to 5% range. And I see oil demand growth as being sufficient to absorb that kind of supply.
-- Written by Scott Eden in New York
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