Ahead of the curve

With the demise of some very significant financial institutions, and oil soaring to over US$145, all owners have witnessed quite an exceptional year. I am pleased to say the financial facilities we have were fixed a long time ago. Fortunately we are not in need of major financing in the current market, which is good for us, but that need could have some very serious implications for highly leveraged owners.

Speaking from a GEM point of view, this has been another very strong year for us. Three major things will mark it out for me, namely the company’s net profit performance, the revenue for the company, and receiving additional vessels from our partner yards in South Korea.

We also divested of two vessels. These were the two oldest in our fleet, and we made a good profit. It wasn’t a forced sale, but they were no longer a good fit with our profile. Age-wise the vessels were in excellent condition, but we are aiming to manage a fleet with an exclusively young profile.

The year’s not over yet, and we are ready to receive two more vessels before the end of this quarter, bringing the fleet size back up to 11. An additional six vessels will be received in 2009 bringing the fleet to 17. These are both Aframax vessels being built by Samsung and will be the largest in our fleet.

 

Quite a spending spree: is this a good time to expand?

In terms of the credit crunch our exposure to its effects are fairly small because we have no urgent need to raise capital. I think even if we went for financing we would still be able to source this, but it would definitely be at a higher cost than that which we secured three years ago. We deal exclusively with local banks, and these institutions have been with us for the past four, nearly five years.

We have vessels on order which need to be financed, but these loans do not need to be secured until 2011, by which time we hope the credit crunch will have eased and hopefully everybody will be glad to be beyond these exceptional circumstances. It’s not to say it has all been plain sailing. Business has been quite challenging, but for reasons outside the extreme financial situation.

So you have seen costs increase?

Certainly. The oil price skyrocketed during the year, and indirectly we have felt this. As an owner the bunkering, or fuel costs aren’t our responsibility, that falls to our charterers. However, we do buy a large quantity of lubes for the machinery on board our vessels, and those costs have risen with the feedstock price. Our biggest fixed-cost increase has been seen on the crewing side.
 

Salary demands have risen because of a shortage of supply in experienced seafarers. Crew demands have also changed, and accommodating these requests has a knock-on effect to us.

It’s important to see the crew as family men who sometimes need a bit more flexibility than a normal contract would allow, so by freeing people of obligations we have managed to maintain all of our best crew.

The main focus from our charterers isn’t just price. Maintaining the quality of the vessel, and the calibre of crew we bring with our ships are valuable commodities.

Owners can save cash instantly by recruiting cheaper, less experienced crew. By finding the best officers and ships masters, we build faith with the charterers.

Have you found a way to balance that and keep costs to a minimum?

In terms of offering better fuel consumption to our customers, there hasn’t really been a significant breakthrough that can greatly reduce fuel demands, but there are new inventions out there in the market that can help reduce fuel consumption and help the vessel run more efficiently.

One such example is a paint coating which allows the vessel to slip through the water more smoothly, and we are interested in learning more about all of these innovations so we can run our fleet more efficiently.

 

One notable cost reduction is that our insurance rates have decreased through safe operation. That’s in a time when most owners probably could not say the same. However, its highly likely that next year’s premiums will be affected by more than just performance. The fall out of the financial crisis is impossible to predict, but it’s sure to have an impact on industries like insurance.

Will you be sticking with your current business model?

Our success is built around the model we’ve been pursuing from day one. We buy vessels and invest in the asset. With a top quality fleet in place, our aim is to charter out roughly 70% of the vessels at any given time, and operate the balance on the spot market, under our own management. It’s a strong endorsement in itself that none of our shareholders are looking to dilute their shareholding.

The charters we look for are short to medium term. We are focusing on the two to five year deals as a standard, but we have done shorter term charters too. We have arranged ten year time charters but we don’t feel these are really a good fit with a relatively young company looking to grow at the rate we currently are. Our fleet are operating all over the world, and there’s no better feeling, than knowing we’ve got this global presence.

Does that global coverage insulate you from specific shocks?

To a certain extent this is true, but more than ever before the global economy is one unit. Just look at oil. Attacks in Nigeria, the price goes up. Hurricane in US, price goes up. Nobody can be totally disconnected from the global economy.

Two years ago you had your sights set on taking the company public. Is this still part of your plan?

No, not right now! It’s better for the company to wait, especially considering the volatility in the market. A lot of the companies on the DFM or DIFX right now are being penalised for being in a volatile marketplace.

We have increasing revenues, increasing net profits, and we have the ability to go to our shareholders if we need an injection of capital, so it’s much better we ride out the current situation. However, one day, it would be fantastic to list on one of the major markets.

What ambitions remain in place?

We are focused on becoming a ship owner of choice for the oil majors. There are several things that need to be done to reach the top of the game. We have focussed a lot on quality and safety and equipping the vessels with the best technology. This means we have built an excellent reputation in quite a short time, and at a time in the market is volatile.

We are positioning ourselves as the first choice of the oil majors, and if anyone can do that, then they are on the right track. This is our explicit goal, and this is certainly what we’re on-track for.

Already we have dealt with BP, Shell, Total, ExxonMobil and we enjoy a good relationship with these companies. When you are serving the oil majors you really have to step up your standards. It’s good to work with them because it raises the bar you work to.

To this end we have great relationships with our classification societies. Most of our vessels are classed with Lloyds Register, but the next four vessels on delivery will be classed with DNV. This is nothing to do with bad experience, and our relationship with Lloyds is excellent, but we think by having DNV on board too, we can increase the information exchange, and benefit by having two top players contributing to our business.

What external factors have you played to your advantage?

It’s fair to say that the launch time for GEM has been a major factor in our success to date. We launched at a time of cheap and readily available credit, and find ourselves in a fortunate position now. We launched at a time when the product shipping market was hungry for more vessels.

At the same time, banks in the Middle East had not really participated fully in ship financing, but there was an appetite to do so. Our model was instantly appealing, and very quickly the banks were facilitating loans and coming forward with good solutions.