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.