Tanker IPO Rumblings

Over the past few days, we have heard rumblings about several shipping IPOs in the pipeline. BDI has been out there, a Tanker Company, Scorpio Tankers, announced their IPO last night, and we hear a few others may be following. The new model appears to be; small fleet with low debt, strong management team, sell a large portion of the company, and use proceeds to buy cheap assets at "distressed" levels. BDI has been looking for such vessels for a while now, and others are out there searching on both the dry and wet side so that they can try and push through the IPO window over the next six months.

Gone are the high dividend payout model, and we say good riddance! Almost every high-dividend payout tanker model was doomed to fail from the start (Arlington and DHT being the most prominent). Paying out all your cash is a sure way to a slow death since they are dependent on the capital markets to raise money to replenish their fleet. The only company that succeeds at this is NAT since they have NO Debt and a management team that has executed this model for a long time now, but NAT's return on equity remains low compared to others in the industry and if the market was to recover in a big way, its valuation would revert back to below its levered peers.

Growth is always important for shipping companies, and we were always surprised about how popular the "high dividend model" was as it is a great tool for investment bankers to guarentee fees (as companies must continually do follow-on offerings), for shipowners to get high premiums to their Net Asset Values, but not great as for long-term shareholders as these companies couldn't retain enough of its cash to either grow the fleet or pay down debt if/when the markets turned sour as they did in 2009 and ended up having to restructure their dividend policies or sell out. Dividends are important, but a prudent dividend strategy (ala TNP) should be prefered to wild dividend swings although it doesn't seem that way.

We think these new tanker deals will hinge on investor's trust that the management teams will be able to effectively execute their business plans. So it will be important to have names that are respected in the industry behind these deals. However, with the current tanker market backdrop, it will be interesting to see how much appetite there will be for these types of deals.