Should a public shipping company be a pure play — owning just tankers, container ships, bulkers or gas carriers — or should it do as the traditional private family shipowners do, and own a mixed fleet?
The answer is important: It affects how attractive a shipping stock is to investors, and in the case of extreme rate troughs, it affects the chances a public company can avoid restructuring or insolvency.
Shipping’s pure-play-versus-mixed-fleet debate has been ongoing for more than a decade, and in 2021, there have been major moves from one camp to the other.
From pure plays to mixed fleets
Costamare (NYSE: CMRE) purchased another seven bulk carriers last week, bringing its dry bulk fleet to 44 ships with aggregate capacity of 2.4 million deadweight tons (DWT). Sponsored by Greece’s Constantakopoulos family, Costamare went public in 2016 as pure-play container-ship lessor; it now owns 77 box ships with capacity of 586,000 twenty-foot equivalent units. It began diversifying into dry bulk and switched to being a mixed-fleet owner in June.
Container-ship and bulker owner Navios Partners (NYSE: NMM) completed its merger with crude- and product-tanker owner Navios Acquisition on Oct. 15. The Navios Group, backed by Angeliki Frangou, was once a poster child of pure plays, having five separate public entities (a spiderweb of sibling listings rivaled in complexity only by the former Teekay Group family tree). Today, the consolidated Navios Partners boasts 142 vessels spanning wet bulk, dry bulk and box shipping and is being pitched as a unique, broad-based proxy on global trade.
Evangelos Marinakis-sponsored Capital Product Partners (NYSE: CPLP) took delivery of its latest liquefied natural gas (LNG) carrier on Nov. 29. The company went public as a product-tanker owner and ultimately transformed into a nearly pure owner of container ships. It now owns 15 container ships totaling 105,352 TEUs and began diversifying into LNG shipping in late August, buying six LNG vessels to date for a combined $1.2 billion.
Castor Maritime (NASDAQ: CTRM) was taken public as a pure dry bulk owner by the children of former Excel Maritime boss Gabriel Panayotides. Castor began diversifying into tankers in February. It now owns nine tankers in addition to 19 bulkers.
From mixed fleets to pure plays
Decisions of large players like Costamare and Navios might suggest the public pendulum is swinging toward mixed fleets. In fact, there are new pure plays as well. There’s no trend in favor of one direction or the other.
On Dec. 3, StealthGas (NASDAQ: GASS), founded by Harry Vafias, spun off a separately listed entity, Imperial Petroleum (NASDAQ: IMPP). StealthGas had owned 45 liquefied petroleum gas (LPG) carriers, three product tankers and one crude tanker. The spinoff created two pure plays: StealthGas kept the LPG ships and Imperial took the crude and product tankers.
On Nov. 30, dry bulk owner Diana Shipping (NYSE: DSX), backed by the Palios family, spun off a separately listed entity, OceanPal (NASDAQ: OP). Diana put three older bulkers focused on the spot market into OceanPal, with Diana remaining focused on staggered time charters for newer ships. (Diana had previously spun off pure-play Diana Containerships in 2011. That company subsequently sold its container ships and transformed into a tanker pure play in 2020, renamed Performance Shipping [NASDAQ: PSHG].)
South Africa’s Grindrod Shipping (NASDAQ: GRIN) sold its remaining product tankers in April, becoming a pure play on small-size bulk carriers.
Golar LNG (NYSE: GLNG) went public as an LNG shipowner, then diversified into floating liquefaction and power plants. It sold its power-plant business in April and is going back to a targeted approach, with a spinoff of its LNG carrier fleet from the floating liquefaction division. Golar announced Wednesday that eight of its LNG carriers would be sold to a new entity, Cool Company (CoolCo), which will raise money and list in Oslo in Q1 2022. CoolCo will be 30% owned by Golar LNG and Idan Ofer-founded Eastern Pacific will be the largest shareholder.
This year also saw huge upside from an earlier pure-play move of Aristides Pittas’ Euroseas (NASDAQ: ESEA), which originally owned both container ships and bulkers. In 2018, its bulkers were spun off in a separately listed company, EuroDry (NASDAQ: EDRY), rendering Euroseas a container-ship pure play. Between Jan. 1 and Sept. 1, Euroseas’ share price more than quadrupled.
Pros and cons of pure plays
Owners with ships in a single category are viewed as more understandable and attractive to investors.
If you want to bet that container leasing rates are going up, you can buy shares in a company like Euroseas, Danaos (NYSE: DAC) or Global Ship Lease (NYSE: GSL). If you think rates for Capesizes (bulkers of around 180,000 DWT) will rise, you can buy Seanergy (NASDAQ: SHIP), which specifically pitches itself as “the only pure-play Capesize company listed in the U.S.” If you believe in Suezmaxes (crude tankers with capacity of 1 million barrels), you can buy shares of Suezmax specialist Nordic American Tankers (NYSE: NAT).
Such companies provide commoditized bets on cyclical transport demand for the underlying cargo. Management decisions are largely limited to the spot versus time-charter ratio, acquisitions and divestments, and financial leverage.
Basil Karatzas, founder of Karatzas Marine Advisors, told American Shipper, “Companies focused on one sector are easier for analysts to understand and model and it makes it easier for them to target specific institutional investors. It makes it easier for investors to understand, whether they’re institutional or retail.” As for pure-play companies being little more commoditized bets, he noted, “That’s what some investors want.”
The problem for single-segment owners comes when demand in that segment collapses. “If the market goes your way, it’s a great thing. But having all of your eggs in one basket can become very, very critical in a bad market,” warned Karatzas.
Pros and cons of mixed fleets
The traditional private model is to own ships across multiple segments, buying assets at low prices when a particular segment troughs and selling them at high prices when a particular segment peaks, using proceeds from sales of high-priced ships in one segment to buy low-priced ships in another.
The loftier cycle peaks from which family fortunes are made are rare, usually separated by long stretches of rate weakness. Sector diversification gives private owners a better chance to survive lengthy cyclical lows so they can still be in the game when a big boom finally strikes.
According to Karatzas, “As a private shipowner, you would rather be in different markets because they typically do not bottom and peak at the same time and you have more room for error.”
Evercore ISI analyst Jon Chappell told American Shipper: “We think about the publicly traded companies because that’s what we do … but in the rest of the shipping world, it’s not pure plays, and the guys who have done incredibly well — who are not public — trade assets around different parts of the cycle.” The model on the private side, said Chappell, is about “someone who made four times their money on a 4,000-TEU container ship and he’s able to sell that at the peak and buy some tanker assets at what he thinks is the trough.”
Navios Partners is now the closest thing to the private model in the public arena. During the Capital Link New York Maritime Forum in October, Frangou maintained that her dry bulk-tanker-container platform has created scale, resilience, volatility mitigation and better capital access.
She said that income from healthy segments like containers can be “redeployed to get a better entry point at lower points in the cycle” in weak segments like tankers. She also said that high charters rates for Navios Partners’ container ships effectively translate into lower breakevens for its tankers.
The question ahead is whether shipping’s stock investors, who are now primarily retail investors, will be attracted to this. On one hand, the decisions of a CEO matter a lot more with mixed fleets than with pure plays, so there’s theoretically much more potential for a “management premium.” On the other hand, mixed fleets are designed to smooth out the extreme highs and lows of shipping cycles, and retail investors are attracted to shipping stocks by the extreme highs of the cycles.
According to Clarksons Platou Securities, “In our view, the jury is still out [on mixed fleets versus pure plays]. With Navios Partners … time will tell if that larger and diversified approach captures a wider audience.”
Drivers of public fleet decisions
When the topic of pure plays versus mixed fleets is debated on shipping conference panels — which happens often, year after year — the implication is that there’s one right answer for the industry and public companies should strategically gravitate toward it.
That’s not how individual management teams make fleet decisions, which explains why there are some companies going one way this year and other companies going the opposite direction.
When shipping companies go public, they almost always debut with a pure-play model, because that’s the easiest sell. That’s generally the moment when there is the most strategic or philosophical influence on the fleet-composition question.
Over time, management sees opportunities arise that may compel a switch to a mixed-fleet model. Or, management may have defensive reasons to make the switch. Then, after public companies have evolved away from their initial pure plays, some see new opportunities to make more money by splitting off a portion of the fleet and creating a pure play yet again.
In some instances, when companies go from one segment to multiple segments, “they may have found a way to opportunistically buy cheap ships [and add them to the public fleet] so it’s not strategic, it’s opportunistic,” said Karatzas. In other cases, “these situations are the product of the [original] business model failing or the execution failing. It is not engineered. It is just an emergency solution because the original plan failed.”
The decision to create Navios Partners’ unique listed dry bulk-tanker-container platform arose just months before $398 million in bond debt matured for the group’s tanker arm, Navios Acquisition.
Clarksons Platou Securities analyst Omar Nokta said at the time of the deal in late August: “We view this agreement as part rescue, as [Navios Partners] is effectively bailing out [Navios Acquisition] ahead of its November bond maturity, and part opportunistic, as [Navios Partners] is acquiring a solid tanker fleet at an ideal countercyclical time.”
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