Publicly listed ship owners have struggled with the idea of ‘pure play’ over the past decade. They still are.
The pure play model assumes many buyers of shipping equities do so to complement or hedge something else. Oil investors buy oil tanker stocks. Gas investors by liquefied natural gas carrier stocks. Investors in coal, iron ore and grain producers buy dry bulk shipping stocks.
Consequently, a vessel owner going public should focus purely on a specific sector. To own both dry bulkers and tankers would theoretically turn off both oil and grain investors who do not want exposure outside their respective interests.
But the pure-play strategy is exactly what most successful private owners avoid. Private owners survive by diversifying. Different shipping segments are frequently uncorrelated. When one sector plunges, another rises.
As former shipping executive Oivind Lorentzen once argued, “In an industry as cyclical as shipping, you’re asking for trouble if you’re not diversified. If you’re too specialized in one sector, you’re asset-driven, not management-driven. If you’re playing to your audience [investors], you’re letting your audience drive your business.”
What’s in a name?
The pure play-versus-diversification issue reared its head yet again on June 11, with the announcement that Performance Shipping (NASDAQ: DCIX) – formerly a pure box-shipping company – had bought two tankers.
Performance Shipping began life as Diana Containerships in 2010, when it was spun off its by parent, Simeon Palios-led dry bulk company Diana Shipping (NYSE: DSX). The name was changed to Performance Shipping in February 2019; by dropping its ‘containerships’ moniker, it clearly telegraphed to investors that diversification was ahead.
Entities associated with Palios bought two Aframax-class tankers built in 2011 from Maersk – the 104,623 deadweight ton (DWT) Maersk Jeddah and the 104,588 DWT Maersk Jamnagar. Performance Shipping purchased the two tankers for a combined price of $60 million. Of that, $10 million was paid in the form of shares to Palios to cover the deposit he previously paid to Maersk.
“The acquisition of these vessels represents an important step in the company’s diversification from the container industry into other areas of the shipping sector,” said Palios.
The strategic change for Performance Shipping stands in contrast to a corporate decision by Aristidis Pittas-led Euroseas (NASDAQ: ESEA) in 2018. Euroseas had long operated a diversified fleet of small container ships and bulkers. In May 2018, it opted for the pure-play strategy, keeping its box ships in Euroseas and spinning its bulkers off into a separate listed entity called EuroDry (NASDAQ: EDRY).
Meanwhile, it’s not uncommon for listed shipping companies to diversify their fleet compositions but not change their company branding. Capital Product Partners (NASDAQ: CPLP), sponsored by Greek owner Evangelos Marinakis, went public with a fleet of product tankers in 2007, then diversified into crude tankers in 2011 and began buying container ships in 2013.
It sold all of its product and crude tankers to Diamond S Shipping (NYSE: DSSI) earlier in 2019 – and yet, today, as a pure container-ship-owning company, it’s still branded Capital Product Partners.
George Economou-led DryShips (NASDAQ: DRYS) is another player whose brand name has lost touch with its physical fleet. DryShips, which is named for its dry bulk vessels, went public in 2005. It diversified into the offshore sector in 2007 and tankers in 2011.
It planned a spin-off of the tankers under a new company called TankShips in 2014, but scuttled that idea and sold its tankers instead. It bought very large gas carriers (VLGCs) in 2017, considered a spin-off called Gas Ships, and gave that plan up and sold its VLGCs in 2018.
DryShips currently owns a diversified fleet that includes bulkers and several ‘non-dry’ ships – tankers and offshore support vessels.
The more important question for public shipping is not about branding, it’s about fairness to investors who buy stock to obtain exposure to one sector and suddenly find themselves exposed to another.
The legal response to that concern is that investors are not given any guarantees on fleet composition. If they don’t like the new direction, they can sell their stock.
However, it becomes more complicated when questions of corporate governance emerge and the monetary stakes are high. Two recent high-profile examples involved the public companies of the Navios Group, led by Greek ship owner Angeliki Frangou, and those of the Scorpio Group.
The Navios Group has a diversified fleet that is split into separate and more targeted listed entities. In 2016, Navios Acquisition (NYSE: NNA), the group’s tanker arm, offered a loan to its parent, dry bulk owner Navios Holdings (NYSE: NM).
At the time, tankers were performing much better than bulkers. An investor in Navios Acquisition sued, claiming that the loan terms were far too attractive for Navios Holdings. The suit was ultimately dropped and the loan terms were revised to be more favorable to Navios Acquisition, but the incident caused significant negative publicity for the Navios Group.
The controversial move for the Scorpio Group came in October 2018, when Scorpio Tankers sold 162.2 million shares at a 12 percent discount to the pre-offering closing price, and Scorpio Bulkers bought one-third of those shares, giving it an 11 percent stake in Scorpio Tankers.
This generated questions on whether Scorpio Tankers could have pulled off the offering at that price without the large-scale buying of Scorpio Bulkers, and whether the Scorpio Tankers investment was really in the best interests of all Scorpio Bulkers stockholders compared to all other possible uses of the company’s money.
Since that deal was done, Scorpio Bulkers has reaped significant benefits from its product tanker ownership, providing further evidence in favor of diversification. In the first quarter of 2019, Scorpio Bulkers reported a non-cash gain of $15 million and a cash dividend of $500,000 as a result of its stake in Scorpio Tankers.
The controversy was addressed on the latest Scorpio Bulkers conference call with analysts. Deutsche Bank shipping analyst Amit Mehrotra commented, “It’s important to understand what Scorpio Bulkers is, given that so much of its net asset value is attributed to Scorpio Tankers. It’s obviously a great investment, but to be fair, there has been criticism about the corporate governance implications, rightfully or wrongfully.
“This is a conference call about a dry bulk company, and we’ve spent more time talking about the product tanker market than the dry bulk market. Isn’t that weird to you? Is Scorpio Bulkers now a diversified holding company?” he asked Scorpio Bulkers’ management.
In response, Scorpio Bulkers president Robert Bugbee emphasized that “maybe all of the billionaires of shipping have had diversified portfolios. They really don’t see anything wrong with making money, and that’s what has happened here.”
Once again, it boiled down to the philosophical conflict between the traditional private-owner mantra of diversified fleets and the accepted public model of pure plays.
Most of the executives of public shipping companies came from the private side – and many still own substantial private fleets – so it makes sense that managerial sentiment remains in favor of diversification, even if most managers are not as open about it as Bugbee. And that’s probably a good thing for the public equity investors, even if it’s not what they initially signed up for.