The Livanos family name holds a revered place in Greek shipping history. Its prominence continues under Peter Livanos, owner of privately held Ceres Shipping and chairman of publicly listed liquefied natural gas (LNG) shipping company GasLog Ltd (NYSE: GLOG).
When ocean shipping titans of Livanos’ stature make a public appearance, it is an ‘E.F. Hutton moment’ – when they talk, people listen. On June 19, Livanos spoke at length at the Marine Money Week conference in New York, opening up on his entry into the family business, his decision to focus on LNG shipping, and his current market outlook.
Peter Livanos is the son of George P. Livanos, who built up Greece’s largest merchant fleet in the 1980s and 1990s. Hoping his son would follow in his footsteps, George gave Peter the capital to buy his first ships. Peter instead used the money to buy luxury car manufacturer Aston Martin, of James Bond fame.
“It was one of my early mistakes, the first of many,” he recalled in a discussion moderated by Michael Tusiani, chairman emeritus of consultancy Poten & Partners.
“I was trying to develop a certain independence from a very successful man, my father. He was not only a good businessman but a great father. When I inevitably failed, he came to my rescue and in so doing, re-engaged me in the shipping business, which is something that I came to love and still do.”
The rewards and risks of LNG
Livanos inherited Ceres Shipping after his father passed away in 1997, and in 2000, he made a strategic decision to change the business focus to LNG. “My view was that in order to achieve the right value return for what I believed was a very high-quality operating platform that my father had created, we needed to move into a more upscale sector,” he explained.
“The commodity tanker and dry cargo spaces in which we’d had a strong presence had become and continue to be ‘price takers.’ There is very little value ascribed to the differentiation in the way the ships are operated. We felt, and I continue to believe, that a superior operating platform can give you an enhanced value proposition in the LNG space.”
With enhanced value prospects come increased risks. LNG is “potentially riskier” than tankers and bulkers, he believes.
“The traditional markets are commoditized and quite cyclical and go through periods of boom and bust, but you’re always able to modify your capital allocation through the sale of assets or the acquisition of assets.
“In the LNG space, you depend very much on your ability to use your assets in a profitable manner to make your value return. There is a very limited ability to monetize your capital,” he said. In other words, in LNG shipping, you make the majority of your money from the cash flow from operations, not from buying and selling ships.
“In addition to that, your ability to use your assets in the LNG space very much depends on a small number of strategic counterparties. If you have a tanker and find your ship unemployed for some reason, you can always find a cargo if you lower the price. In the LNG space, there can be no cargo at any price, and the effects of sitting and waiting [unemployed] are significantly more expensive than they would be with a commodity [tanker or bulker] ship.”
What makes Livanos so bullish in the face of those risks is his faith in the LNG commodity itself. “I believe the LNG shipping industry is on a journey not dissimilar to that of the tanker industry in the 1950s – a journey that’s in lock-step with the commodity.
“I believe natural gas has a very important role to play as the world becomes more environmentally aware and that it also has a very important role to play as a transportation fuel. I believe that 10 years from now, the LNG industry has the potential to double, both in terms of the scale of the shipping fleet and the number of end-users.”
Long-term chartering and spot trends
The caveat, as always, is that the number of new ships that are built can outpace even very strong demand, depressing rates and leaving some vessels unemployed.
LNG shipping employment is divided into the spot market, in which rates can fluctuate dramatically between lows of $30,000-40,000 per day and highs nearing $200,000 per day, and the much steadier long-term contract market, which is currently garnering rates of around $70,000 per day.
Long-term charters had traditionally been for 15 to 20 years in duration plus extension options, but the ‘new normal’ is for durations of 7 to 12 years. Asked whether $70,000 per day is sufficient for a charter of only seven years, Livanos responded, “You have to measure the charter rate against the cost of acquiring a newbuilding. A newbuilding used to cost in the mid-$200 million range. Now it’s slightly below $200 million. So, at the moment, I believe rates are giving an adequate return on the assets.
“Of course, I’d like to see rates higher, and I believe we probably will see higher rates in the next couple of years,” he continued.
The headwind is that new entrants into the LNG ship-owning arena are having to lower their long-term charter rates to break into the business. “There are some new entrants who have taken rates that we as an established player did not feel were appropriate, and which we would not have taken,” he said.
GasLog Ltd and GasLog Partners (NYSE: GLOP) recently removed their ships from the Cool Pool – a co-operative commercial arrangement focused on the spot market – due to greater confidence in the long-term charter market.
“The Cool Pool committed us to a very short-term revenue strategy and while we will continue to have ships in the spot market, our movement out of the Cool Pool is because of a shift in our view towards a more medium- and long-term revenue strategy,” disclosed Livanos.
LNG shipping capacity in the spot market is comprised of vessels ordered speculatively and not attached to a particular liquefaction (export) project, as well as vessels that were ordered with long-term charters attached to a specific project that are delivered by yards before the project itself is online.
With 117 conventional LNG ships currently under construction, representing 22 percent of the on-the-water fleet, Livanos was asked how spot rates would be affected and whether all of these deliveries could be absorbed.
“The answer is ‘yes,’ but not right away. Everyone can see that the commodity is in a macro growth trend, but it’s not going to be a smooth line. There have been and there will continue to be hiccups in the supply/demand balance.
“I believe we will go through a period of relatively tight [vessel] supply in the next two years, but I also believe that two or three years from now, we may find ourselves in a very similar position to what we saw in 2014, when there were more than enough ships to meet demand.
“There will be volatility. We will ultimately use all 117 of those ships, and the others that will be ordered, but there will be times when there is a mismatch – and one should be incredibly cautious about that, because it is very expensive to own a ship that is not working.”
Technological change and obsolescence
On a positive note, today’s high number of newbuilding orders should be offset somewhat by the retirement of older vessels, particularly given the rapid pace of technological change.
“In all of my years in shipping, I don’t believe there has ever been a technology curve as steep as in LNG shipping between 2000 and today. We saw fundamental changes in propulsion twice, dramatic improvements in [cargo] containment systems, efficiency improvements, and a fundamental shift [upward] in the size of the ships. The LNG ship you build today is significantly different than a ship built 10 or 15 years ago.
“I don’t think technology is ever capped. However, I do believe we’ve reached a flattening of the technology improvements for LNG shipping. There will inevitably be more improvements, but at this stage, I believe we’ve taken most of the meat off the bone.”
There are now an estimated 200 vessels powered with old-fashioned steam turbines that are due to come off of their long-term charters over the next five years. Livanos pointed out that around 70 of these vessels were built before 2000.
Will charterers re-employ those archaic assets given all of the more efficient modern-built ships they will have to choose from? Livanos responded, “I suspect that would be a bit like putting your mother on a DC-6 to fly to California. It works, but you probably wouldn’t do it.”