Monday, June 25, 2007


Sapuracrest & A Man Called John Fredriksen

RM1.40 to RM1.70 to RM2.00, I am still bullish on Sapuracrest. Forbes estimates John Fredriksen's fortune at USD 1.9 billion, putting him in 293rd place on the list of 587 persons believed to have more than USD 1 billion in net worth. Fredriksen is a self-made tanker tycoon who grew up in a working class neighbourhood on Oslo's east side. He now controls the largest fleet of oil tankers in the world and also has a variety of other business interests. SeaDrill is the latest adventure of John Fredriksen, who is generally considered the most successful entrepreneur in Norway. Fredriksen is almost a serial entrepreneur, and a very successful one at that. His strategy is in consolidating and leveraging a very diffuse and undermanaged industry. He did the same to Frontline and made money a few times over, before heading up Seadrill.

SeaDrill is a relatively new company, just about two years old, and was IPO'd on the Oslo exchange at the end of 2005. Fredriksen owns a bit more than 30% of it, just as he did with Frontline. Their mission is fairly clear; they want to be a significant consolidator in the offshore rig industry, and within five years, their goal is to become a leading drilling contractor with a focus on Asia, West Africa, and worldwide deep water areas, all of which should be high growth sectors. They plan to grow through purchasing new buildings and used rigs, acquiring other operators, and taking strategic positions in related companies.

The combined fleet of Smedvig and SeaDrill is fairly impressive: "a diversified and modern fleet of nine jack-up drilling rigs (including five under construction), seven semi-submersible drilling rigs (including five under construction), three ultra-deepwater drillships (including two under construction), two FPSOs and 13 tender rigs (including two under construction). A total of 34 units (of which 14 under construction)." That's a big boost from the initial portfolio of less than a year ago, which consisted of just three 20-year-old jack-ups and two floating production vessels before they began their buying spree. The forced merger with Smedvig, along with Mosvold, which had attractive new building orders and a large minority position in Apexindo, the big Indonesian driller, gives SeaDrill a good starting point. But if Fredriksen's history is any indicator, they'll continue to aggressively acquire smaller operators and try to leverage large minority positions like Apexindo to gain control of more vessels and rigs.

At their current rate, SeaDrill indicates that once their newbuildings that are now on order have been delivered SDRL, they will be the most modern and second largest operator of ultra-deepwater equipment (after Transocean). And with the Smedvig acquisition, they've also acquired excellent, seasoned management with experience in this specific business, something Fredriksen's executive team of Tor Olav Troim and Kate Blankenship, both of whom have been with him for a while and helped engineer Frontline and Ship Finance Limited, don't seem to have.

It's also possible that another Fredriksen company (or former Fredriksen company, as he no longer controls them) will play a role here. Ship Finance Limited was created as a way to finance tankers, initially buying up the Frontline fleet and leasing them back to Frontline, which was basically financial engineering that allowed Frontline to offload very valuable assets and become an operating company with lower book value but huge cash flows. It is likely in a few years to see a similar relationship develop with SeaDrill, with SFL buying SeaDrill's fleet and leasing them back at relatively low long term rates for SeaDrill to manage and sublease to operators. Fredriksen has historically focused on cash flow and cash earnings, and on dividending out excess cashflow to investors.

James Winchester, a veteran shipping analyst at Lazard Frères has said of him, "He's a modern-day Onassis. The tanker king. He landed squarely in the sweet spot of the tanker cycle, with the largest fleet of ships." In 2001 an article on Forbes.com described him as having "a tanker fleet bigger than anything Aristotle Onassis ever had."

Hence for Seadrill to buy into Sapuracrest is a big show of confidence and be tapped into the big league. Plus it is very likely Seadrill will buy a lot more Sapuracrest shares. Judging from their track record, 10% is nothing, they'd be looking to accumulate at least 20%-25%. Fredriksen's involvement shocked a lot of government officials in Singapore as they had been trying their best to woo him to invest into Singapore. Sigh, the sad thing is that most in Malaysia's political and investing circle did not even know who Fredriksen is. Just imagine Li Ka Shing coming to invest in a company in Malaysia or Warren Buffett investing in a company in Malaysia: that is how significant the move is. The amount of synergies and leverage that now affords Sapuracrest being within Seadrill's armada are gigantic. A lot more upside from here for Sapuracrest.

7 comments:

SAMMY MU said...

Market is expecting a stronger collaboration and synergistic deal between both companies subsequent with the entry but it is yet to be seen. One should only view the stake acquisition more seriously for closer collaboration if Seadrill raises its stake beyond 20%.

It is worrying to see the continued rise in SapuraCrest’s trade receivables, which is about 75% of its FY07 revenue. SapuraCrest is pricey. Thus, investors have better options to consider other undervalued stocks like Pantech and
Perisai Petroleum. A PER of 14x on FY09 earnings that gives a target price of RM1.33.

Salvatore_Dali said...

sammy,

yes but historical earnings u would not want to touch sapuracrest ... like i said before, why sapcrest, its the company's unique assets, if your read deeper and examine the assets within, they have a very interesting "capacity asset" which a company like Seadrill will be able to leverage enormously.

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solomon said...

Agreed. Salvatore's investing idea is the business model esp. the unique asset SapuraCrest is about to have.

Historical earning is not a good yardstick in this case. The Oil tycoon from his background will not stop until 25-30% shareholding. To think abt it, he also would not be too naive to buy in, if he have not had close door with the SapCrest Management. You need the owner blessing.

My bet is on marine support. Natural choice is Tanjung offshore and Petra.

bOcyOGL said...

is there any advantages of having a low book value? (why sell assets out and rent back?)

Salvatore_Dali said...

a lot of companies engage in sell and leaseback strategy, such as MAS ... it basically allows you to cash out and make better use of the cash elsewhere ... by leasing back, you will be able to match revenues with costs better... sell and leaseback works for steady revenue type assets, if its predictable and consistent ... why have a few planes on your books as they get depreciated in value, and at the end of the day you will have to sell and replace ... the strategy improves cashflow and better utilisation of cash...

solomon said...

Salvatore,

You need to consider the tax savings too, if the leaseback is done in offshore.

What is the TP for SapuraCrest and the rest of your picks?