Analysis: Some Cisco investors urge an exit from set-top box unit
By Sinead Carew
NEW YORK (Reuters) - Cisco Systems Inc Chief Executive John Chambers is facing growing pressure from investors to exit its television set-top box business, where revenue has been plummeting and profit margins trail the rest of the company.
The problem is that there are few obvious buyers for the unit - the former Scientific Atlanta that Cisco bought for $6.9 billion in 2005 - so Chambers might have no choice but to close the business, analysts said.
Cisco stunned the market on November 13 by warning that revenue would fall as much as 10 percent this quarter and keep declining for several quarters. It blamed everything from emerging economy weakness and political backlash in China to company-specific problems, such as market share losses in network equipment and declining sales in set-top boxes.
Investors are hoping Chambers gives a clear break-down of the individual impact of all these problems at Cisco's Financial Analysts Conference on Thursday.
But for many, the ailing set-top box business has emerged as a particular sore spot. Raymond James analyst Simon Leopold said it could represent as much as a third of Cisco's roughly $1 billion revenue miss for its current quarter.
The unit, which generates roughly 5 percent of total revenue, had a 20 percent decline in sales in Cisco's first fiscal quarter ended in October. And Chambers has warned that the decline in this business would continue for "a number of quarters," but did not say when it might improve.
With such a bleak outlook, it might be time for the company to move on from the "past its prime" set-top box business, said Peter Karazeris, an analyst at Thrivent Asset Management, which holds 4 million Cisco shares among its $82 billion in managed assets.
"I'd like to see more definitive action there," said Karazeris, who sees a strategy change as a potential boost for the stock at a time when Cisco investors have little to look forward to. "I think this is diluting the attention."
However, Karazeris said it is not clear how exactly Cisco should move on from the business, whether it could find a buyer or should just shut it down.
Since its November warning, Cisco shares have fallen more than 11 percent compared with a 2 percent increase in the Nasdaq composite index. The shares of smaller network equipment rival Juniper have risen almost 12 percent in the same period.
Cisco bought Scientific Atlanta to enter the business of set-top boxes, which are connected to TV sets to receive and unscramble digital signals, and can also support services such as video on demand.
But this past February, Cisco said it had started to forgo sales of less profitable set-top boxes and was instead seeking higher margin business from video service providers. At best, traditional set-top boxes offer roughly half the gross profit margins Cisco seeks to maintain company wide.
Cisco has said so far that it will keep offering set-top boxes to big customers who want a whole package of products and services, but it will focus primarily on supporting so-called cloud-based video services.
Cloud-based services, which can include mobile video access and digital video recording, rely on high-end equipment on the operator's network rather than the set-top boxes inside consumer homes. But such services are nascent, so it is unclear when they will bear fruit.
In the meantime, Cisco has let sales dwindle at the set-top box business, which has $2.6 billion in annual revenue, as it instead favors products that can help achieve its target non-GAAP gross margins of 61 percent to 62 percent.
Since set-top boxes only generate profit margins in a range of 25 percent to 30 percent, according to Needham & Co analyst Richard Valera, there might be no way for Cisco to keep selling these products if it is to maintain its goals.
"The only way for them to fix it is to effectively walk away from that business," said Valera, who sees no chance of an uptick in set-top box margins, which he says are "fundamentally incompatible with the business model they want."
NOT A CORE BUSINESS
Valera said Cisco's biggest rival Arris Group Inc would be unlikely to have the capacity to buy the business as it spent $2.35 billion buying Motorola's set-top box business from Google Inc in April.
If Cisco's unit were to command a valuation that was similar to the Motorola deal, it would fetch just $1.8 billion, well below the 2005 Scientific Atlanta purchase price.
Arris led the global market in 2012 followed closely by Cisco, then U.K.-based Pace Plc and Echostar Corp ahead of South Korea's Samsung Electronics Co Ltd, according to data from market research firm IHS.
One person familiar with Cisco said set-top boxes are not a core business for the company, and noted that Cisco has shown a willingness to step away from businesses that did not fit in with its bigger strategy in the past. The person cited its 2011 shutdown of its Flip video camera business, acquired just two years earlier for $590 million.
Some investors still hope Cisco can turn around the set-top business, but they want answers sooner rather than later.
"They've been kicking the can down the road on that one," said Scott Rodes, an analyst at investment firm Bahl & Gaynor Investment Counsel Inc.
He wants more details about Cisco's prospects in cloud services and its intentions for the existing business. His firm holds about 4.79 million Cisco shares.
Peter Tuz, President at Chase Investment Counsel Corp, which has under 10,000 shares of Cisco in its $520 million assets under management, said "traditional set top boxes will be challenged going forward" as consumers switch to online video.
Tuz added that Cisco should put the unit, "on a fairly short leash, give it another year or so, then take action if it is determined it can't grow or produce decent returns going forward."
(Additional reporting by Nicola Leske. Editing by Andre Grenon)
Shell to GE Lured by Gas-Fueled Ships on Record Supply
UPDATE 1-HSH in talks with investors to sell shipping portfolios
* Seeks to sell tanker, bulker portfolios
* Portfolios worth several hundred millions of euros each
* HSH vows to not sell the portfolios on the cheap
* HSH confident will do fine in ECB stress test (Adds quotes, background)
By Arno Schuetze
FRANKFURT, Nov 22 (Reuters) - Troubled German public-sector bank HSH is in talks to sell two shipping portfolios to investors in a bid to reduce high-risk loans that prompted the bank to seek an additional bailout earlier this year.
"Two deals are in the making, one regarding tankers, the other regarding bulkers", Chief Executive Constantin von Oesterreich told Reuters on the sidelines of a banking congress in Frankfurt.
"Both deals involve a handful of ships and have a volume of several hundred millions of euros, but they will not yet be finalised this year - mostly because of the high complexity of these deals", he added.
Banks are increasingly looking at forced sales of ships to recoup some of the loans owed to them by shipping companies hit by a four-year sector slump, the worst on record.
The two HSH deals would follow a move by the bank earlier this year to cut its exposure to bad shipping loans by persuading struggling debtors to transfer ownership of some vessels to U.S.-listed shipping company Navios.
HSH has financed 2,800 ships in total and has 25 billion euros ($35 billion) worth of shipping loans on its books. Of these loans, 9 billion euros, equivalent to 1,100 ships, have been transferred to its restructuring unit.
"The goal is that buyers will operate the ships more successfully than the current owners", Oesterreich said, regarding the deals currently in the making.
He added HSH would not dump the portfolios at any price.
"There is always an element of speculation involved (from a buyer's perspective). But the buyers are not going to get them for a song," Oesterreich said. "We need to make sure we safeguard our upside potential."
He declined to disclose the bidders' names but said that a combination of shipping groups, which have the knowhow to operate ships, and private equity groups, which have the financial resources, made a lot of sense.
He referred to the example of private equity investor Oaktree Capital which has formed a joint venture with Greek shipping group Petros Pappas' Oceanbulk.
Oesterreich also said he does not expect the shipping sector to pick up before the end of 2014, adding that he still sees HSH breaking even next year.
Separately, Oesterreich said he expects HSH to pass a European banking health check by the European Central Bank and the European Banking Authority without asking its owners for extra capital.
"We will do fine in the asset quality review and stress test," Oesterreich said, adding that nonetheless it would be a challenge for HSH.
"We have a belt and braces", he said, referring to additional state aid received by its owners earlier this year.
($1 = 0.7429 euros) (Additional reporting by Andreas Kröner; Editing by Thomas Atkins and Mark Potter)
Credit-Driven China Glut Threatens Surge Into Bank Crisis
By Bloomberg News - Nov 19, 2013
In China’s “Shipping Valley,” where the Yangtze River empties into the sea north of Shanghai, the once-bustling home of the nation’s biggest private shipbuilder is deadly quiet on a recent morning.
Rows of dilapidated five-story dormitories in the city of Nantong, previously housing China Rongsheng Heavy Industries Group Holdings Ltd.’s 38,000 employees, were abandoned after the shipbuilder teetering on collapse cut almost 80 percent of its workers over the past two years. Most video arcades, restaurants and shops serving them have closed.
A $6.6 trillion credit binge during the past five years, encouraged by Beijing policy makers as stimulus to combat a global economic slowdown, now threatens to stoke a debt crisis. At stake are trillions of yuan in bank loans that companies producing everything from ships to steel to solar power are struggling to repay as the world’s second-largest economy heads for the weakest annual expansion since 1999.
Rongsheng, which is seeking a government bailout after accumulating 25 billion yuan ($4.1 billion) in unpaid loans as of June, including to Bank of China Ltd., is a casualty of over-investment gone bust. In Nantong, the only remaining market is selling past-its-shelf-life bread, woolly shoe pads and other dusty items at a discount as shopkeeper Qiu Aibing prepares to wind down before winter. There’s no sign of a single customer.
Related: Chinese Steer Billions Abroad in Quest for Safety
“After I’m done selling all this stuff, I’ll be gone,” said Qiu, briefly lifting his eyes from a TV and casting a careless look at the half-empty shelves. “The workers didn’t have money to spend anyway because there’s no work to be done, and many of them haven’t been paid for months.”
China’s biggest banks are already affected, tripling the amount of bad loans they wrote off in the first half of this year and cleaning up their books ahead of what may be a fresh wave of defaults. Industrial & Commercial Bank of China Ltd. and its four largest competitors expunged 22.1 billion yuan of debt that couldn’t be collected through June, up from 7.65 billion yuan a year earlier, regulatory filings show.
“In the next three to four years, industries with excess capacity will be the main source of credit loss for banks and their nonperforming loans as China cleans up the legacy,” said Liao Qiang, a Beijing-based director at Standard & Poor’s. “The speed of the process will depend on the government’s determination and whether they are willing to incur short-term pain for long-term gain.”
Premier Li Keqiang, who took office in March, pledged to open the economy to market forces and strip power from the government in a process he described as “very painful and even feels like cutting one’s wrist.” In July, he vowed to curb overcapacity, which the government blames for driving down prices, eroding profits and generating pollution. Policy makers meeting in Beijing last week said they would elevate the role of markets in the nation’s economy.
China’s economy probably will expand 7.6 percent in 2013, the weakest pace since 1999, even as growth rebounded in the third quarter, according to the median estimate of economists surveyed by Bloomberg News.
Shang Fulin, China’s top banking regulator, this month urged lenders to “seek channels to clean up bad loans by industries with overcapacity to prevent new risks from brewing” and refrain from dragging their feet in dealing with the issue.
China’s credit quality started to deteriorate in late 2011 as borrowers took on more debt to serve their obligations amid a slowing economy and weaker income. Interest owed by borrowers rose to an estimated 12.5 percent of China’s economy from 7 percent in 2008, Fitch Ratings estimated in September. By the end of 2017, it may climb to as much as 22 percent and “ultimately overwhelm borrowers.”
Meanwhile, China’s total credit will be pushed to almost 250 percent of gross domestic product by then, almost double the 130 percent of 2008, according to Fitch.
The nation might face credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years, particularly by non-bank lenders such as trusts, exceeding that seen prior to other credit crises, Goldman Sachs Group Inc. estimated in August.
Rongsheng, whose assets jumped sevenfold between 2007 and 2012 when government-directed lending led to a shipbuilding boom, also has loans outstanding to Export-Import Bank of China and China Development Bank Corp., state-owned policy banks set up to provide financial support at a cheaper cost to companies and industries endorsed by the government. Rongsheng may post a second consecutive loss of 2 billion yuan this year and a 1.1 billion yuan loss in 2014, according to a median estimate of analysts in a Bloomberg survey.
Rongsheng now relies on its remaining 8,000 workers to build the world’s biggest cargo ships for Brazil’s iron-ore producer Vale SA and Oman Shipping Co., as well as smaller vessels and oil tankers. Workers in its shipyards, mostly from other parts of China, and local staff in its Shanghai office have had their salaries delayed, sometimes by two months, a person with knowledge of the matter said.
“I can still manage to survive by cutting expenses here and there, but many migrant workers can’t -- not with only 20 yuan in their pockets and not knowing their next payday,” said Liu Guojun, a blue-uniformed dormitory maintenance and security worker who earns 2,000 yuan a month. “There’s a surge in theft and other petty crimes around here as a result.”
Rongsheng declined in an e-mail to answer questions about its operations. Spokesmen for ICBC and China Construction Bank Corp. declined to comment on the prospect of rising bad loans, while those at Bank of China, Agricultural Bank of China Ltd. and China Development Bank didn’t respond to requests.
The pain is being experienced by Rongsheng’s peers nationwide. A third of the country’s 1,600 shipyards may shut down within five years amid a global vessel glut, Wang Jinlian, secretary general of the China Association of the National Shipbuilding Industry, said in July.
To Ji Fenghua, chairman of Nantong Mingde Heavy Industry Group Co., another struggling “Shipping Valley” builder specializing in high-end vessels, that’s an understatement.
“I won’t be surprised if half of the shipbuilders fail, given the excess capacity,” said Ji, recounting the day in July 2012 that hundreds of his workers who hadn’t been paid in three months besieged his office building.
The company was strapped for cash as state-backed banks recalled their loans after the banking regulator ordered that new financing be stopped for shipbuilders and some other businesses. Deprived of new credit to pay off old debts, Ji and his fellow founders emptied their own bank accounts, collateralized their homes to banks and hit up relatives and acquaintances for cash.
“Every cent of the money we earned and borrowed was used to repay banks, leaving us nothing to pay workers or the suppliers,” Li said. “We have banks to thank for our boom, and we have them to blame for our doom.”
Mingde Heavy eventually survived the crisis with government help. Its cash shortage continues even as the company continues to take orders for stainless-steel chemical tankers.
The central government pledged 4 trillion yuan in economic stimulus during the global financial crisis starting in 2008. In 2009, Export-Import Bank of China committed to 160 billion yuan of credit to the nation’s two largest state-run shipbuilders, while Bank of China agreed to help smaller and private companies, according to statements from banks.
Easy access to credit helped Chinese banks churn out record profits and reduce bad-loan ratios to less than 1 percent as of June 30 from 2.8 percent at the end of 2008.
“The 2008 stimulus exacerbated an industrial glut that has been in existence since 2003,” S&P’s Liao said. “We expect the government to take measured steps in a crackdown on overcapacity because they need to weigh the impact on financial stability.”
Nonperforming loans at Chinese banks increased for an eighth consecutive quarter in the three months ended Sept. 30 to 563.6 billion yuan, extending the longest streak in at least nine years. Still, they account for just 0.97 percent of the nation’s outstanding loans, according to the China Banking Regulatory Commission.
The bad-loan ratio could climb to as high as 1.5 percent in the next few quarters, according to Lian Ping, chief economist at Shanghai-based Bank of Communications Co. Most of the increase, he said, will come from the provinces of Jiangsu, where Nantong is located, and Zhejiang, south of Shanghai, where small businesses have been hit hard by the slowdown.
In the first six months of this year, soured loans increased by 18 billion yuan in Jiangsu, more than any other Chinese province, followed by Zhejiang and Shanghai, the official Xinhua News Agency reported.
“There are many capital-and-labor-intensive industries that have relied on bank loans and policy support for their past success,” Lian of the Bank of Communications said. “But now the tide is turning against them.”
Shipbuilding isn’t the only industry affected by overcapacity. Also in Jiangsu, about 130 kilometers (80 miles) southwest of Nantong, Wuxi Suntech Power Co., the main unit of the industry’s once-biggest supplier, went bankrupt with 9 billion yuan of debt to China’s largest banks, according to a Nov. 12 report by Communist Party-owned Legal Daily. Suntech Power Holdings Co., the parent firm, defaulted on $541 million of offshore bonds to Wall Street investors.
About 1 gigawatt of solar-panel production, more than 40 percent of the company’s 2011 module manufacturing capacity, was idled at one of two factories, according to a statement issued by Shunfeng Photovoltaic International Ltd., which agreed to buy Wuxi Suntech on Nov. 1 for 3 billion yuan. A gigawatt is about as much as what a new nuclear reactor can supply.
Government and banks’ support for the solar industry since late 2008 has resulted in at least one factory producing sun-powered products in half of China’s 600 cities, according to the China Renewable Energy Society in Beijing. China Development Bank, the world’s largest policy lender, alone lent more than 50 billion yuan to solar-panel makers as of August 2012, data from the China Banking Association showed.
China accounts for seven of every 10 solar panels produced worldwide. If they ran at full speed, the factories could produce 49 gigawatts of solar panels a year, 10 times more than in 2008, according to data compiled by Bloomberg. Overcapacity has driven down prices to about 84 cents a watt, compared with $2 at the end of 2010. The slump forced dozens of producers like Wuxi Suntech into bankruptcy.
An unidentified local bank reported a 33 percent nonperforming-loan ratio for the solar-panel industry, compared with 2 percent at the beginning of the year, with the increase due to Wuxi Suntech, China Business News reported in September.
“The real situation is much worse than the data showed” after talking to chief financial officers at industrial manufacturers, said Wendy Tang, a Shanghai-based analyst at Northeast Securities Co., who estimates the actual nonperforming-loan ratio to be as high as 3 percent. “It will take at least one year or longer for these NPLs to appear on banks’ books, and I haven’t seen the bottom of deterioration in Jiangsu and Zhejiang yet.”
The Wuxi government in 2007 planned to build a 2.2-square-kilometer solar-panel park with projected sales of 100 billion yuan by 2012. The area is now covered with weeds and construction waste, left undeveloped because of overcapacity.
The same is true in industries such as steel and cement, which were named by the State Council as facing a “serious” glut. China’s economic planners have sought to rein in the steel industry since at least 2004, when work on a 10.6 billion yuan project in Jiangsu was halted. Even so, annual capacity has risen to 970 million metric tons, according to the steel association, exceeding the industry’s output by 35 percent in 2012. China produces seven times more than No. 2 Japan.
About 10 million tons of aluminum production capacity is being built at a time when the industry incurred combined losses of 670 million yuan in the first half, with some producers in central and eastern China facing severe losses, the Ministry of Industry of Information Technology said in July.
That month the ministry ordered more than 1,400 companies in 19 industries including steel, ferro alloys and cement to cut excess production capacity this year, an indication that the government is pursuing pledges to fix fundamental issues in the economy even as growth slows. Excess capacity was supposed to be idled by September and eliminated by year-end.
China’s land ministry yesterday told local authorities to ban allocations for any new production projects by overcapacity industries including steel and shipbuilding, the official Xinhua News Agency reported.
“The central government is hawkish in its tone, but when it comes to execution by local governments, the enforcement will be much softer,” Bank of Communications’ Lian said. “Many of these firms are major job providers and taxpayers, so the local government will try all means to save them and help them repay bank loans.”
When hundreds of unpaid Mingde Heavy workers took to the streets for a second time last November, the local government stepped in by lining up other firms to vouch for Mingde so banks would renew its loans. Mingde Heavy avoided failure by entering into an alliance with a shipping unit of government-controlled Jiangsu Sainty Corp., which also imports and exports apparel.
“I have everything I need to become a top-tier shipbuilder but the money,” said Ji, Mingde’s chairman. “I used to be proud that we are an independent, private company without government interference. Not anymore. The pressure is much less when you have a rich mother-in-law.”
Under President Xi Jinping’s reforms laid out last week, the private sector will be boosted by looser state controls, while local government officials will be evaluated not only on increases in GDP but also on indicators such as energy consumption, overcapacity and new debt.
China’s lending spree has created a debt burden similar in magnitude to the one that pushed Asian nations into crisis in the late 1990s, according to Fitch Ratings.
As companies take on more debt, the efficiency of credit use has deteriorated. Since 2009, for every yuan of credit issued, China’s GDP grew by an average 0.4 yuan, while the pre-2009 average was 0.8 yuan, according to Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co.
“If credit allocation in China improves, the ultimate credit cycle and economy downturn will be mitigated,” Werner wrote in an Oct. 21 note to investors. “However, if China continues to rely on debt to fund its economic growth, the country’s ultimate credit cycle will be more severe.”
Based on current valuations, investors are pricing in a scenario where nonperforming loans at the largest Chinese banks will make up more than 15 percent of their loan books, according to Werner, who forecasts a 2.5 percent to 3.5 percent bad-loan ratio by the end of 2015. A further decline in GDP growth would lead to more soured loans and weaker earnings, he said.
Lenders so far haven’t reported significant deterioration in loan quality. Bank of China said it had 251.3 billion yuan of loans to industries suffering from overcapacity as of the end of June, accounting for 3 percent of the total. Its nonperforming-loan ratio for those businesses stood at 0.93 percent, the same level reported for the entire bank.
At China Construction Bank, loans to industries with overcapacity fell about 8 billion yuan in the first half of the year to 180.8 billion yuan, while at Bank of Communications, the amount was 72 billion yuan or 2.3 percent of the total, the banks reported.
Credit growth may slow over the next year and a half from the 20 percent to 25 percent gains in recent years to about 15 percent, Josh Klaczek, head of Asia financial services for JPMorgan Chase & Co., said in July. The expansion of nonperforming loans will depress profits and curb the ability of banks to increase dividends, and if more loans sour, lenders may need to raise capital, he said.
“Banks currently have the ability to absorb a decent amount of bad loans, and local government involvement will slow the speed of NPL increases,” S&P’s Liao said.
While China’s cabinet in July urged mergers and curbs in the shipbuilding industry, it called for continued financial support to help “quality companies” maintain their operations.
In Nantong, handmade-noodle-shop owner Ma Shuntian said he’s still a believer, even after losing 50,000 yuan this year. Ma and his wife pumped almost 1 million yuan into the restaurant five years ago after selling everything they had in Qinghai province and moving to the area where Rongsheng’s workers reside. In a good year, selling noodles brought in more than 100,000 yuan in profit.
“I hope Rongsheng can come through this crisis and the town comes back to life,” said Ma, a father of three. “If they earn big money, I can earn small.”
Goldman Sachs Upgrades RPC Inc. (RES) to Buy
Nov 18, 2013 08:42AM
Goldman Sachs upgraded RPC Inc. (NYSE: RES) from Neutral to Buy with a price target of $22.00 (from $18.00).
Analyst Michael Cerasoli cited: (1) exposure to increasing completion activity, (2) meaningful leverage to the Permian in West Texas, (3) solid balance sheet, and (4) potential for share repurchases and dividend increases.
RPC Inc Raised to Buy From Neutral by Goldman Sachs
10 new VLs pending
Two high-profile shipowners are pursuing VLCC newbuilding orders in a sign of shifting sentiment toward the long-maligned sector.
Hyundai Heavy Industries
Navig8 is in talks for eight VLCC newbuildings split between South Korea and China, while DHT Maritime has lined up two units in Korea, market sources tell TradeWinds.
Both companies are expected to approach investors to back the orders shortly. The investor view toward the crude sector in general and VLCCs in particular is showing the first signs of warming, some believe.
But near-term opportunities to enter the VLCC space appear constrained by yard capacity.
Navig8 is said to have secured four berths at Hyundai Heavy Industries for delivery in the fourth quarter of 2016 into 2017, and four slots at China's Shanghai Waigaoqiao Shipyard (SWS) for 2016. Meanwhile DHT has lined up two berths at Hyundai for late 2016 or early 2017.
Pricing information was not available, but was expected to be north of $90m for Korean builds and a little under $90m in China.
Navig8, which recently made moves into products and chemical carriers, declined comment when approached by TradeWinds.
DHT boss Svein Moxnes Harjfeld also declined to comment directly, but made reference to management’s remarks on the last quarterly earnings call.
“As (we said), we are looking closely at various projects, hence our name tag is being put on various rumours,” he said. “If we’re doing a deal like what you suggest we would certainly be advising the market.”
While Navig8 stayed mum, US-based commercial director Jason Klopfer was asked about prospects for a crude-market recovery during an appearance at last week’s Marine Money conference in New York.
He noted that Navig8 has extensive activity in crude including trading 20 VLCCs. Forecasts that note a decline in crude movements to the US fail to mention that longer-haul voyages have been maintained and could expand, including traffic from West Africa to China.
“We expect negative fleet growth of 4% over the next three years without availability of newbuilding berths,” Klopfer said.
“We think things will gradually improve within the next year, with significant improvement as we approach 2015.”
DHT owns four VLCCs with an average age of about 12 years, two suezmaxes and two aframaxes. It was recapitalised through an investment by private-equity partner Anchorage Capital in 2012.
Navig8 is one of the world’s largest pool operators and commercially manages some 210 vessels across varied operating sectors.
Earlier this year it tapped Oslo’s over the counter (OTC) market for more than $300m to back an investment in LR2 products tanker newbuildings.
It also formed a joint venture with private-equity power Oaktree Capital to back a newbuilding programme in chemical carriers.
Teekay Sees Oil-Tanker Rates Rising as Demand Growth Beats Fleet / BLOOMBERG
By Alaric Nightingale - Nov 15, 2013
Teekay Corp. (TK), the largest U.S.- traded owner of crude tankers, said charter rates for mid-size vessels will probably rise next year as demand expands and ship supply either stays the same or contracts.
There will be almost no growth for the next two years in the supply of Suezmaxes and Aframaxes hauling about 1 million barrels and 650,000 barrels of oil respectively, Christian Waldegrave, research manager for the Hamilton, Bermuda-based company, said in a presentation on Teekay’s website yesterday. The fleet of the smaller vessels may even decline while demand will increase by 3 to 4 percent, he said.
Overseas Shipholding Group and General Maritime Corp. were among U.S.-based owners that sought bankruptcy protection in the past two years as the global tanker fleet expanded faster than demand. Daily earnings for Suezmaxes will climb 9 percent next year to $16,200 while those for Aframaxes will advance 7 percent to $15,000, according to the averages of 43 analyst estimates compiled by Bloomberg.
“The crude tanker order book is really rolling off now,” Waldegrave said. “You don’t need much demand growth to get better utilization rates and therefore better tanker rates.”
Teekay owns crude and refined-product tankers, liquefied gas carriers, ships that store and process oil found offshore, and shuttle tankers. Its shares rose 37 percent to $43.87 in New York this year.
CSX and GE to use natural gas to fuel locomotives
By Nate Monroe Wed, Nov 13, 2013 @ 5:01 pm
CSX Corp. and a division of General Electric announced Wednesday they will explore technology that would allow locomotives to run on liquefied natural gas, an agreement the companies say could revolutionize the railroad industry.
Jacksonville-based CSX says it will work with GE Transportation over the coming months on a test plan to outfit some diesel-powered locomotives with a kit that will give them the capability to also run on liquefied natural gas — an increasingly popular fuel because of its relatively low cost and lower emissions.
“LNG technology has the potential to offer one of the most significant developments in railroading since the transition from steam to diesel in the 1950s,” said Oscar Munoz, executive vice president and CEO of CSX, in a statement. “That change took many years to complete and began with a lot of unknowns, and this one is no different.”
Natural gas-powered trains can travel greater distances with fewer stops for refueling, the companies said, in addition to the economic and environmental benefits compared with traditional diesel.
Asked how many trains would be outfitted with GE’s natural gas kit, Carla Groleau, CSX’s communications director, said the company is in the “very early stages of evaluating LNG as a locomotive fuel.”
The companies are also exploring LNG technology for other classes of trains and working with government agencies “to ensure safety, realize environmental and other benefits and advance LNG deployment,” according to a joint release from CSX and GE.
“As we enter a new era of energy sources and what’s possible for rail transport, we are excited to partner with CSX and lead the LNG transformation for the industry,” said Russell Stokes, CEO of GE Transportation, in a statement.
The companies’ announcement comes at a time when the LNG industry is making other local inroads.
Last month, a company co-founded by Texas billionaire and energy magnate T. Boone Pickens announced it has plans to construct a natural gas processing and fueling terminal in North Jacksonville, while major tenants at Jacksonville’s port are also exploring natural gas as an alternative fuel for vessels.
Nate Monroe: (904) 359-4289
LONDON -- Shipping operators and investors are pouring billions of dollars into building oceangoing tankers to transport diesel, gasoline and aviation fuel -- scrambling to keep up with North America's energy boom.
The shipbuilding frenzy is another effect of an energy revolution unfolding in the U.S. and Canada, where new drilling and extraction technology has unlocked vast reservoirs of crude oil and natural gas.
The U.S. still imports crude oil to meet demand, but the newly tapped American oil has lowered costs for refiners. That is allowing them to better compete with their overseas rivals, ratcheting up exports and fueling demand for new tankers.
New York-based Scorpio Tankers Inc. has grown from a little-known firm of around a dozen ships in 2010 into one of the world's biggest products-tanker operators, with about 50 vessels. Scorpio has on order 65 new ships, worth between $3.5 billion and $4 billion, expected to be delivered by the beginning of 2016.
"In its simplest terms, the U.S. exports -- and refinery expansions around the world -- are transforming product-tanker shipping demand," said Robert Bugbee, Scorpio's president.
In July, U.S. refiners exported a record 3.8 million barrels of products a day, according to the latest monthly data from the Energy Information Administration. That is up nearly two thirds from 2010 exports.
Nikolay Dyvik, head of shipping research at Oslo-based DNB Markets, expects that to translate into annual demand growth for product tankers of 7% in terms of capacity on average over the next three years. In comparison, demand for crude-oil tankers will likely decline by 1.5% over the same period, partly on the expectation that U.S. imports of crude will continue to fall.
It isn't just U.S. refining exports driving tanker demand. Across the globe, growth in refining capacity is likely to rise to 2.1% a year over the next 10 years, up from 1.1% a year in the past decade, according to industry estimates.
That has already boosted the global fleet of refined-product tankers in recent years, according to global maritime advisers Drewry. New ship orders shot up from 68 vessels in 2010, to 116 in 2012. With 80 ships ordered in the first nine months of the year, 2013's tally should top that, analysts said.
The combined tonnage of new orders rose to 5.8 million in 2012 from 3.3 million in 2010.
Meanwhile, industry officials estimate private-equity players pumped around $5 billion into financing product tankers over the past three to four years.
For some analysts, the shipbuilding is raising red flags amid gluts in other sectors such as container ships, crude-oil tankers, and bulk carriers used for transporting commodities such as coal and grain.
"The combination of rock-bottom prices to build new ships and the fast-growing investment in product tankers will lead to excess capacity," said Lars Jensen, chief executive of Copenhagen-based SeaIntel Maritime Analysis. "In a cyclical industry like shipping, overcapacity is part of the game."
But for now growing exports are driving investment from both traditional shipping players and outsiders.
Maersk Tankers, a unit of Danish shipping giant AP Moller-Maersk, plans to invest around $400 million for up to 10 product tankers, while trying to sell a number of crude-oil tankers, people familiar with the situation said.
Blackstone Group LP and Greek shipping firm Eletson Holdings teamed up this month to form Eletson Gas, a new shipping company said to be worth around $700 million that will transport liquefied petroleum gas, or LPG, a refined product used in cooking and heating. Blackstone will provide the capital to build new ships or acquire used ones.
The new demand is even luring back some tanker operators who gave up on refined products years ago. Athens-based Metrostar Management Corp. exited the tankers market in 2010, but now has 10 ships on order, plus options for two more. "The dynamic change in the crude and products market was the defining factor leading us to re-enter the specific sector," said Ioannis Theodorakis, an executive at Metrostar.
Credit: By Costas Paris
Oil Tankers Hired Before Cargo Confirmation, Driving Earnings Up
By Rob Sheridan - Nov 11, 2013
Oil companies are hiring the biggest tankers to carry crude even before confirming the ships will have cargoes to carry, helping to drive owners’ earnings higher, according to Global Hunter Securities.
Charterers hired five very large crude carriers last week to load in December, Global Hunter analyst Omar Nokta said in an e-mailed report today. Such bookings are normally organized between the 10th and 15th of each month and the fact that ships were hired earlier suggests a relative vessel shortage, he said.
A surplus of tankers available to load cargoes in the Persian Gulf over a 30-day forward period was the lowest since June 4 as of Oct. 29, data compiled by Bloomberg show. Charter rates for VLCCs on the benchmark Saudi Arabia-to-Japan voyage had a 10th straight weekly gain last week, the longest rising run since 2004, data compiled by Bloomberg showed.
“Lots of ships are being taken,” said Nigel Prentis, the head of consulting at Hartland Shipping Services Ltd., a London-based shipbroker. “This is resulting in a bit of a scramble and a shortage of vessels, which is unusual.”
Charterers booked 40 VLCCs to load in the week ended Oct. 19, a jump of 60 percent from the average since the start of June, Nokta said last month. Chinese oil refineries will increase processing by 6.3 percent to 10.1 million barrels a day this quarter, the biggest expansion of any country or region, the International Energy Agency in Paris estimates.
Hire rates for VLCCs, each able to haul 2 million barrels of oil, gained 2.8 percent to 59.03 Worldscale points on the benchmark route on Nov. 8, according to the Baltic Exchange in London. The carriers are earning $44,707 a day on the voyage, compared with a daily loss of $7,694 at this year’s low in February, the shipping bourse’s data show.
“It’s encouraging for owners, but I doubt it’s sustainable overall,” Prentis said.
The VLCC fleet’s carrying capacity will increase 0.9 percent this year, according to data from Clarkson Plc, the world’s largest shipbroker. That’s less than its estimate for an increase of 2.9 percent in demand for the carriers, which transport almost half of the world’s oil cargoes.
Tomorrow’s Leader Award: Westport lawyer drives engine partnerships
Scorpio Orders Dominate in Biggest Tanker Bets Since 2008
By Rob Sheridan - Oct 21, 2013
Scorpio Tankers Inc. (STNG) is leading the biggest construction boom for vessels hauling diesel and oil products since the recession five years ago with plans to have 54 refined-fuel carriers built.
The Monaco-based company, founded in 2009 by an investor whose family has owned ships for six decades, ordered more vessels than any other operator in a year when spending of $4.4 billion on new capacity is already the most since 2008, according to data from Clarkson Plc (CKN), the biggest shipbroker. Almost all of Scorpio’s carriers will be launched next year.
The spending shows that shipping of fuels is recovering even as earnings plunge to an all-time low across the merchant fleet. Demand for tankers is rising as the U.S. exports unprecedented amounts of oil products and Middle East refineries expand capacity at a record pace. Owners are betting the shipments will mean longer-than-normal voyages to Europe, where declining profits are causing refineries to close.
“Shifting refinery capacity to Saudi Arabia and the Middle East and increased oil-product exports from the U.S. has led to increased demand for oil-product tankers,” Scorpio President Robert Bugbee said by phone yesterday. “We clearly have first-mover advantage.”
Daily rates for the ships averaged $13,284 this year, 24 percent more than in 2012 and the most since 2008, according to a Clarkson measure of earnings across all types of product tankers. Rates peaked at $49,273 in January 2006, spurring a surge in orders for new vessels just before the global recession. Returns fell as low as $3,491 by April 2009.
Earnings for Large-Range-2 tankers, each hauling as much as 115,000 metric tons of cargo, will average $18,000 a day next year, or 10 percent more than in 2013, according to the average of four analyst estimates compiled by Bloomberg.
Shipping companies ordered $1.67 billion of LR tankers in the past two years and 207 smaller Medium-Range vessels valued at $6.8 billion, data from London-based Clarkson show. Their $4.4 billion of investment this year is the highest since the recession that began in 2008.
Scorpio was formed in 2009 by Chairman and Chief Executive Officer Emanuele Lauro, whose grandfather Glauco Lolli-Ghetti married into an Italian shipping family in the early 1950s, its website shows. The company’s investment program exceeds $3 billion, Bugbee said.
“Scorpio is positioning itself to become the largest oil-product tanker owner,” said Eirik Haavaldsen, an analyst at Oslo-based Pareto Securities AS whose recommendations on the shares of shipping companies returned 20 percent in the past year. “They were very early in setting out to do this. Refining infrastructure is moving to the Middle East and other crude-producing regions, and more refineries are coming.”
Shares of Scorpio rose 59 percent to $11.28 this year in New York and will advance another 5.4 percent to $11.89 in 12 months, according to the average of 12 analyst estimates. The six-company Bloomberg Tanker Index climbed 29 percent in 2013.
Scorpio has ordered about six times more new tankers than Frontline 2012 Ltd. (FRNT), which is controlled by billionaire John Fredriksen and has the second-largest construction program, according to Clarkson. Shares of Frontline 2012, based in Hamilton, Bermuda, climbed 56 percent this year to 42 kroner in Oslo and will gain another 46 percent to 61.46 kroner in a year, the average of five predictions shows.
A.P. Moeller-Maersk A/S, the largest shipping line by market value, said Oct. 15 it was considering investing in new MR tankers, in part because of rising Persian Gulf exports. Wilbur Ross, the billionaire who spent $900 million with other investors to buy 30 product tankers in 2011, said in August of this year shipping markets should start improving late in 2014, with the biggest gains related to trade in oil and gas from new reserves such as those found in shale formations.
Europe may present the biggest threat to the anticipated rally in rates because it buys 32 percent of the 20 million barrels a day of oil products shipped annually. The 17-nation euro area’s economy will shrink 0.3 percent this year after a 0.7 percent contraction in 2012, according to the mean of 56 economist estimates compiled by Bloomberg.
The continent consumed less gasoline every year since 1999, according to data from BP Plc. Demand for diesel and other middle distillates slumped 2.3 percent in 2012 to the lowest level since 2003, the data show.
World economic growth next year will be weaker than previously expected, the International Monetary Fund said Oct. 8, reducing its forecast to 3.6 percent from 3.8 percent. That may curtail gains in fuel consumption, in turn slowing the easing in the glut of shipping capacity. The supply of product tankers expanded faster than demand in seven of the past eight years, Clarkson data show.
“As an investor, you want both profit on your operations and return on your assets, which is not the case in the product market yet,” Klaus Rud Sejling, chief commercial officer of Maersk’s tanker unit, wrote in an Oct. 15 e-mail. “Demand in the MR market will develop positively, and this rhymes with the fact that this market is now doing relatively well. There is an ongoing shift in refinery capacity.”
Scorpio ordered 46 product carriers this year, the most of any owner, according to Clarkson. It will report net income of $21 million for this year after losing $26.5 million in 2012, according to the mean of six analyst estimates.
Frontline 2012 is amassing a fleet of 60 product tankers, gas carriers, and coal and iron-ore transporters. It will report profit of 432.5 million kroner this year, from 8.1 million kroner in 2012, according to the average of six estimates. The orders for fuel tankers represent Fredriksen’s largest-ever investment in the industry, according to Arctic Securities ASA in Oslo.
U.S. refineries are exporting the most refined products in at least two decades as the country extracts the most crude oil since 1992. The government prohibits the overseas sale of most types of crude, spurring shipments of fuels instead. Refiners sent an average of 2.97 million barrels a day abroad this year, the most since at least 1993, Energy Department data show.
Middle East refineries will increase their combined capacity by 530,000 barrels a day this year, a 6.4 percent expansion that is the most in data going back to 1994, according to Pareto Securities AS, an investment bank in Oslo.
Shipments to Europe will extend voyages for tankers because they will replace traditional trade routes. A journey from Latvia to France, a benchmark route for European rates, is 1,300 miles. The same cargo from Saudi Arabia would have to travel 6,200 miles and from the U.S. Gulf of Mexico about 5,600 miles.
“People are investing in product tankers because of this change in trading patterns, which is starting to finally bear fruit,” said Nigel Prentis, the head of consulting at Hartland Shipping Services Ltd., a London-based shipbroker. “Oil trading has been turned on its head.”
Maersk Monster Ships Create Capacity Glut to Clip Kuehne
By Richard Weiss - Oct 15, 2013
A.P. Moeller-Maersk A/S (MAERSKB)’s fleet of 1,300-foot container ships has worsened a capacity glut that’s depressing freight rates and eroding earnings, Kuehne & Nagel International AG (KNIN), the No. 1 sea-freight forwarder, said today.
The three Triple-E class ships, the largest in the world, are exacerbating the effects of slowing demand on routes linking Asian exporters with consumers in Europe, Kuehne & Nagel Chief Financial Officer Gerard van Kesteren said in an interview after the company’s third-quarter profit missed analyst estimates.
Maersk has ordered 20 Triple-E vessels as the Copenhagen-based company seeks to cut operating costs per container and grab a bigger slice of a market that’s struggled to recover from the global slump and European debt crisis. Kuehne & Nagel, whose stock fell the most since March on the profit figures, is among companies most exposed to the capacity glut as it buys deck space from Maersk and its competitors to consolidate shipments.
“There is structural overcapacity, and now the 18,000-container ships are being put into production by Maersk, creating extra overcapacity,” van Kesteren said. “Shipping lines are trying to get business back. It’s cutthroat competition.”
Shares of Schindellegi, Switzerland-based Kuehne fell 4.3 percent, the steepest intraday decline since March 4, and were trading 4 percent lower at 113 francs as of 4:02 p.m. in Zurich.
A recent rate increase of $1,600 per 40-foot box hasn’t held and prices that began at below $1,000 and spiked at more than $2,500 are now at about $1,500 for some shipments to northern Europe, said Philip Damas at Drewry Maritime Equity Research in London, adding that while companies will lift fees by $1,800 from Nov. 1 the gain will “erode” quickly.
“There is persistent overcapacity, and the shipping companies are not reducing it enough,” he said. “The Triple-E is one factor, but there are a lot of big ships around.”
Cancellations of entire services and the parking of ships would be needed to deliver a permanent boost, and shippers are loath to take such steps and risk market share, Damas said.
“Price increases by the shipping lines are imminent, but we doubt they will stick,” van Kesteren said. “Volatility of freight rates remains extremely high.”
Kuehne’s earnings before interest and taxes rose 8.3 percent to 195 million Swiss francs ($265 million) in the three months through September. That was 3 percent below the 201.9 million francs predicted by analysts.
Sea-freight volumes rose less than 1 percent, which van Kesteren said was the weakest in about four years, adding that Kuehne has surrendered some tonnage to focus on profitability.
The company reiterated that its marine volumes should rise 3 percent this year, outpacing market growth of 2 percent. Air freight will increase by 3 percent to 4 percent, compared with a global market that it forecasts won’t expand.
Investors are Betting Against Westport Innovations Inc. (WPRT) Should You?
October 15, 2013
by Zacks Equity Research Published on October 15, 2013 | 0 Comments
Many investors appear to be quite bearish Westport Innovations Inc. (WPRT - Snapshot Report) especially if you look at the percentage of the float that is sold short for this stock. Currently, 23.2% of the float is sold short, suggesting an extreme level of bearishness for WPRT.
However, it is worth noting that earnings estimates have actually been moving higher for the company, despite the pessimism. Thanks to these rising estimates, we actually have a Zacks Rank #2 (Buy) on WPRT, so we clearly don’t believe in the negativity surrounding this firm, and are instead looking for shares of WPRT to move higher in the weeks ahead.
COPENHAGEN, Oct 15 (Reuters) - Danish oil and shipping group A.P. Moller-Maersk is planning to buy new product tanker ships, according to Danish business daily Borsen.
Marketing Director Klaus Rud Sejling from its Maersk Tankers unit said that the unit has to continuously develop its fleet to stay competitive.
"Therefore, we are looking at the possibility of replacing certain parts of the fleet," he told Borsen.
He did not give further details, but Borsen, without citing its sources, said Maersk Tankers was planning to buy 10 new long-haul and mid-range product tankers.
Product tankers carry refined oil products such as gasoline, diesel and aviation fuel.
Maersk Tankers operates one of the world's largest fleets of tanker ships, 162 by the end of 2012. Its rivals include Norway's Frontline and U.S. company TeeKay Tankers .
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