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David Sun

GMR AT A GLANCE

P/E ► 12.1 AVG EV/EBITDA ► 12.1 HIGH ROA ► 5.9% AVG ROE ► 11.8% AVG Debt to Equity ► 2.41 AVG Current Ratio ► 0.969 AVG Interest Coverage Ratio ► 2.24 AVG

 

 

 

 

 

 

General Maritime Corporation (NYSE: GMR) is a tanker company that ships crude oil and petroleum products. The company has fewer ships than many of its competitors, but attempts to offset this disadvantage by focusing exclusively on the mid-size (80,000-200,000 deadweight tonnes) tanker market^[1]. Its singular focus on one market segment allows it to compete more effectively with larger companies-- most of which operate in several markets-- in terms of scale. For instance, GMR had 21 mid-size tankers in its operating fleet at the end of January 2008.^[2] Although Overseas Shipholding Group, the company's primary competitor, has 4 times as many ships, it only has 23 midsized tankers.^[3].

The number of tankers and the overall tonnage available to transport crude oil grew faster than world oil demand from 2005 through 2007. The resulting oversupply of tankers in 2007 and 2008 have led to a decrease in the rates that GMR and its competitors can charge for voyages made under short-term contracts . Rates for an Aframax tanker, a common type of mid-sized tanker, were down 50% from Q4 2004 to Q4 2007)^[4]. GMR, which generates approximately 75% of its revenues from short-term or spot contracts, has seen its revenues drop by more than 50% over the same period.

Company Overview

As of January 2008, the company owned 21 vessels, all of which were medium-sized.^[5] The average age of GMR's fleet has dropped from just under 12 years in 2004^[6] to 9.5 years as of January 2008^[7]. Additionally, while only 60% of GMR's fleet was double-hulled in 2004, it has been fully double-hulled since 2005.^[8] The company was able to achieve modernization by aggressively selling its non-double-hull vessels. Single-hulled tankers are not as safe and will be phased out by 2026, in accordance with the 1973 International Convention for the Prevention of Pollution from Ships. Since then, the company's safety record has been a strong selling point to potential charterers.^[9]

As of March 2007, nearly 70% of GMR's fleet was employed on long-term time charter contracts.^[10] Historically, however, spot market contracts have been the source of most of the company's revenue.

GMR's fleet of double hulled ships is well suited to do business in the Atlantic Basin because of the stricter environmental regulations. As a result, the company transports a lot of oil to the United States, the world's leading importer of crude oil. .^[11]

GMR's revenue peaked in 2004 due to high utilization rates. It has fallen significantly since then as increasing tanker supply driven down both utilization and charter rates.

^[12]

^[13]

Trends and Forces

• GMR's high debt load leaves it vulnerable to interest rate fluctuations. As of the end of 2006, GMR had $50 million in long term debt.^[14] This soared to $545 million of floating rate debt as of the end of the Q3 in 2007, as a result of a dividends to shareholders that were funded through debt.^{[15] [16]} The company's debt load represented almost 70% of their market cap at the beginning of 2008, and any change in interest rates will have a significant impact on the company's free cash flow.

• Exchange rates mean higher expenses and lower real revenue. Because the functional currency of the international tanker industry is the U.S. Dollar, the depreciation of the dollar means less real revenue for GMR. Moreover, GMR's revenues and operating costs are in U.S. Dollars, while some operating expenses and overhead costs are in other currencies like the British Pound, Japanese Yen, Singapore Dollar, Australian Dollar, and Norwegian Kroners. To combat the weakening dollar, the company has in the past entered into forward contracts to acquire Euros for Dollars^[17], but this practice has proven unsustainable in the face of a steadily weakening dollar. ^[18]

• World tanker supply is growing faster than tanker demand. Too many tankers mean that GMR will have to lower its charter rates. While GMR hedges against such risks by employing many of its ships on long-term, fixed-rate charters, it nevertheless earns most of its revenues from spot market charters whose rates have historically been tied to the supply and demand balance for carrying capacity.^[20] For example, from the fourth quarter of 2004 to the fourth quarter of 2007, the carrying capacity of the world tanker fleet rose 18% to 395 million deadweight tonnes while global oil demand grew 3.5% to 87.2 million barrels a day. During the same period, rates in the spot market for an Aframax vessel (a typical mid-sized tanker) fell 50% to $41,000 per day.^[21] On the other hand, GMR may also be poised to take advantage of a shift in the supply-demand balance for tankers. The company has many fewer ships than its competitors^[22] and also one of the lowest fleet carrying capacities among the large tanker companies (see below). Since tanker values drop in periods of oversupply, GMR could benefit from the opportunity to buy tankers cheaply.

Competitors

Some of GMR's major competitors include:

• Frontline, a crude oil shipping company that operates 83 vessels worldwide and has a total tonnage of approximately 19.35 million dwt.^[23]
• Overseas Shipholding Group, a U.S. based tanker company that transports crude oil, petroleum product, and liquefied natural gas internationally. Domestically, they also operate a U.S. Flagged fleet^[24]..
• Teekay Corporation provides international transportation for crude oil and petroleum products, and operates approximately evenly in the charter and spot markets. They have a total capacity of 4.2 million dwt^[25].
• Tsakos Energy Navigation is a Bermuda-based tanker company that maintains a fleet that is diverse and largely capable of traveling through icy waters.

General Maritime Corporation pursues a strategy of utilizing only mid-size Aframax and Suezmax vessels while other competitors focus on larger carriers (like FRO) or a mixture of carriers (like OSG or TNP). While they are a smaller tanker company, they thrive on the relationships they've built with their customers.

Note that dwts measure shipping capacity.

Footnotes

1. ↑ GMR Tanker Industry Overview
2. ↑ GMR's fleet
3. ↑ OSG Fleet
4. ↑ Teekay's Q4-2007 Tanker Market Report and Teekay's Q4-2004 Tanker Market Report
5. ↑ GMR's Fleet
6. ↑ GMR 2006 Annual Report, Financial Highlights
7. ↑ GMR's Fleet
8. ↑ GMR 2006 Annual Report, Financial Highlights
9. ↑ GMR Business Strategy
10. ↑ GMR 2006 Annual Report, Page 3
11. ↑ GMR Tanker Industry Overview
12. ↑ Google Finance: GMR Income Statement
13. ↑ GMR 2006 Annual Report, Page 22
14. ↑ GMR 2006 Annual Report, Page 38
15. ↑ GMR 10Q, 3rd Quarter 2007
16. ↑ GMR 2006 Annual Report, Page 28
17. ↑ GMR 2006 Annual Report, Page 38
18. ↑ GMR 2006 Annual Report, Page 38
19. ↑ Federal Reserve Release
20. ↑ MarketWatch article on Oil-Tanker stocks
21. ↑ Teekay's Q4-2007 Tanker Market Report and Teekay's Q4-2004 Tanker Market Report
22. ↑ Google Finance: GMR Overview
23. ↑ FRO 2006 10-K, page 26
24. ↑ OSG 2006 10-K, Page 9
25. ↑ TK 2006 10-K, Page 17