(WPT) Shipping Magnate John Fredriksen
(WPT) Shipping Magnate John Fredriksen Sticks to His ‘gut Feelin
g’: Invest

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Shipping Magnate John Fredriksen Sticks to His ‘gut Feeling’: Invest
2012-09-23 02:30:18.577 GMT


Shipping Magnate John Fredriksen Sticks to His ‘gut Feeling’:
Invest

By Edward Robinson;Michelle Wiese Bockmann
Sept. 23 (Washington Post) -- The flow of much of the
world's oil is controlled from a small suite of offices perched
over a Tiffany & Co. store in the Chelsea section of London.
That's where John Fredriksen, a Norwegian shipping magnate worth
$13.2 billion, manages the world's largest fleet of supertankers,
the most valuable deep-water drilling company and an armada of
about 128 vessels that carry minerals, grains and liquefied
gases.
Every morning, he plows through a stack of reports on the
operations of his maritime empire. Whenever he makes a
bet-the-company move, which he does every few years, Fredriksen
sets the data aside. "I still work on a gut feeling," he says in
a conference room adorned with a painting of a supertanker named
Kathrine, after one of his two daughters.
As he navigates the worst shipping market since the 1970s,
Fredriksen's instincts are telling him to buy. He's investing
$7 billion in 18 rigs to pump oil from beneath the ocean floor
and $4 billion in four dozen new vessels to transport liquefied
natural gas, gasoline, propane and other fuels. Although
Fredriksen loves tankers, he's trying to increase his dominance
over the global trade of liquid energy in most of its forms.
Fredriksen, 68, is making the biggest wager in a
swashbuckling career that has brought billions of dollars in
windfalls as well as bitter setbacks — such as the four months he
spent in jail charged with fraud. A stout man with the weathered
face of a mariner, Fredriksen is fond of joking that 42 of the 50
years he has worked in the tanker trade have been awful.
Whether he's holding court with Norwegian money managers at
the ritzy Theater Cafe in Oslo or downing beers with shipowners
at industry confabs in Athens, the chatty billionaire loves being
the big dog in tankers. Although he quit school at age 16,
Fredriksen lives in a refurbished 18th-century rectory with two
acres of gardens in Chelsea that's worth $172 million.
He bases his latest investments on the plunging prices of
vessels rather than on economic- and petroleum-growth forecasts,
which he says are too uncertain to be useful. At $535 million,
the cost of a deep-water rig in Singapore yards is down 31
percent from its 2008 peak, and Chinese and South Korean
shipbuilders are accepting supertanker orders for about
$80 million, half of what they cost at their high in 2007.
Huge risk
"Basically, I'm a trader," Fredriksen says. "I think as we
are sitting here, we are very close to the bottom of the market,
and I like to be a buyer at the bottom. This is the game."
He is taking a huge risk: If he floods the markets with too
many vessels, they could further drive down the charter rate that
oil producers, traders and refiners pay owners like him to pump
and carry their precious juice. The rates for crude carriers are
hovering at 10-year lows following a spate of overbuilding before
the 2008 financial crash. It doesn't help that the euro zone's
economy, which contracted 0.2 percent in the second quarter, is
sliding toward recession and that growth in the U.S. remains
anemic.
Fredriksen's feel for the rhythms of the shipping cycle have
made him the most influential oil-tanker owner since the days
when Greek tycoon Aristotle Onassis ruled the sea lanes. In 1996,
he started expanding Bermuda-based Frontline just as China's
accelerating demand for oil coincided with a shortage of ships to
carry it.
Frontline's shares exploded, returning an average 70 percent
every year from 1999 to 2007. Today, his 42 supertankers, which
are the length of three football fields, account for 7 percent of
the carrying capacity in the global fleet. Fredriksen domiciles
nearly all his companies in Bermuda, which has no corporate
income taxes.
Shipowners often follow his lead: After news broke in
February that he was building vessels to carry fuels, rivals
rapidly placed orders for 21 of their own. And he plans to be the
first major tanker owner to launch a fleet of so-called eco-ships
that will burn 20 percent less marine fuel than existing vessels
and reduce the No. 1 expense in the industry.
"Fredriksen is very respected and probably feared," says
billionaire Wilbur Ross, who invested $300 million last year in
Diamond S Shipping, a tanker company. "One of the strange things
about shipping is, you make your big money based on your entry
point in the market and the exit point, and he's brilliant at
both."
‘Old-fashioned adventurer’
Fredriksen is beginning to exert his sway in the
fast-growing deep-water drilling and natural gas markets. In
2005, he founded Seadrill with $200 million in equity and five
deep-water rigs. Seven years later, it boasts 48 rigs, and its
shares trading in Oslo have soared six-fold, closing at $40.23 a
share Sept. 10, bestowing the company with an industry-leading
$18.7 billion market capitalization.
Fredriksen, Seadrill's chairman, wants the company to win
the race for new sources of oil thousands of feet below the
seafloor in places such as the Gulf of Mexico. And his Golar LNG
has 13 ships and is investing $2.7 billion in 13 new ones set for
delivery beginning in 2013. He's counting on charter rates to
carry liquefied natural gas, which have reached an all-time high
amid surging demand from Asia, to continue climbing as utilities
turn to cleaner sources of power than coal.
The tycoon's journey through the maritime world reads like
an international thriller. In the 1960s, Fredriksen learned how
to trade oil in Beirut and arranged to lease tugs and barges to
the U.S. military as it shipped supplies into the Mekong Delta
during the Vietnam War. And in the 1980s, Fredriksen ran crude
for Iran during its armed conflict with Iraq.
"He's an old-fashioned adventurer," says Harry Theochari, a
maritime lawyer. "The money's great, but what he really enjoys is
the cut and thrust of the game."
Proudly old school, Fredriksen shuns computers and is fond
of wearing a cravat. He insists on reading everything on paper
and maintains records on his companies in 19 suitcases. He
rummages through them at his Chelsea office, hunting for patterns
to discern the state of play in the tanker cycle.
‘Sign it in my own blood’
Even when he jets off in his Gulfstream G550 to his seaside
villa in Marbella, Spain, or his penthouse condominium in Cyprus,
he's eyeing deals. About the only time he's away from work is
when he's fly-fishing with friends in the Norwegian wilderness.
Fredriksen can be an exacting boss. Minutes before a 2009
share offering for his commodities shipping firm, Golden Ocean
Group, he called its chief executive, Herman Billung, and asked
him to guarantee that a cash-flow forecast for every ship in his
fleet in the next three years would prove correct.
"They kind of asked me to sign it in my own blood," Billung
says. The forecast was largely borne out, and Fredriksen had it
laminated and keeps it on his desk.
He has learned to laugh in a wild industry in which he's
taken the occasional nine-digit loss. Tor Olav Troeim, his top
deputy, recounts how the market got so bad in the 1970s that
other shipowners were scuttling brand-new vessels to collect on
the insurance.
"There was one tanker on the way from the shipyard that
happened to hit the ground," Troeim, 49, says while sitting at
the conference room table with Fredriksen.
"The rocks!" Fredriksen says, guffawing. "The rocks!"
"The crew was in the lifeboats," Troeim says. "It was a
total loss, and it looked a little suspicious."
Fredriksen bursts into wheezing laughter. "It's a hard
business," he says.
Fredriksen frowns when the conversation turns to Seadrill.
"John hates the offshore business; he doesn't think it's fun,"
says Troeim, shooting his boss a mischievous look. "But he's very
good at it."
Fredriksen pockets $1 million a day in dividends from his 23
percent stake in the company. He says he finds oil drilling dull
compared with tankers, where you can earn back a year's losses in
the space of a week. "I've been in tankers for 50 years, and I
like it," he says. "For me, it's still fun."
Welder’s son
The son of a welder, Fredriksen grew up near the port of
Oslo. In 1960, he left school and took a job at a shipping
brokerage as a courier. He enrolled in night school to finish his
education but found the telex at work a more interesting source
of knowledge. Its coded messages showed which companies wanted to
send freight overseas and which shipowners were seeking charters.
"Seeing the information flow, I knew that if I had the right
information, I could do things," Fredriksen says.
After leaving Norway, he spent the 1960s working as a broker
in New York, Singapore and Athens. In 1973, he bought his first
freighter, the Caricom, and lost his $700,000 investment after
its engine broke down in the Caribbean.
Then he saw his chance to cash in. In 1973, the Organization
of Petroleum Exporting Countries approved an embargo on oil
shipments to the United States to retaliate for the Nixon
administration's support of Israel in the Yom Kippur War. After
long-term charter rates for tankers fell to historic lows from
1973 to 1977, Fredriksen, who was then in his early 30s, scooped
up the contracts. When rates rebounded in 1978, he leased out the
vessels on the daily spot market at prices that were many times
higher than what he paid. The trade helped him earn $40 million,
his first big payday.
By the early 1980s, Fredriksen was struggling to run his
fleet amid political upheaval in the Persian Gulf. President
Jimmy Carter had embargoed oil exports from Iran after Islamic
revolutionaries seized the U.S. Embassy in Tehran in 1979 and
took 52 Americans hostage. Then, in 1980, Iran and neighboring
Iraq went to war, further choking off the flow of oil through the
Strait of Hormuz. Fredriksen says he was having trouble
chartering out his tankers, and he agreed to carry crude for
National Iranian Oil to a refinery in Syria. "There was no other
business at that time," he says.
Gunboat confrontation
So in 1983, he started shipping 700,000 metric tons of oil
every month in two tankers from Iran's Kharg Island terminal via
the Suez Canal to Syria, says Morten Kristiansen, a managing
director at Norocean Stockholm, a Swedish shipping firm, who
worked with Fredriksen. The job was perilous: Iraqi pilots hit
the tankers in early 1986 with Exocet missiles, killing two crew
members.
Fredriksen squared off against the Iranian national tanker
company after it fell behind on $10 million in lease payments for
five of his tankers operating in the Persian Gulf, Kristiansen
says. Fredriksen confiscated the ships, some loaded with oil,
moved them out of Iranian waters and held them back until Tehran
paid up.
The Iranian navy dispatched a gunboat, but U.S. warships,
which were escorting Kuwaiti tankers through the Gulf, steamed
between the adversaries. In the end, Fredriksen agreed to sell
the tankers to the Iranians.
In Oslo, he faced a legal disaster. In 1986, prosecutors
charged Fredriksen and senior executives with directing crews to
steal crude from vessels and use it as bunker fuel to power them.
They also accused him of defrauding the cargo's insurer, Gard,
and endangering the lives of crew members by using crude as a
marine fuel. He denied the allegations.
Kristiansen says what appeared to be theft was a problem in
how the oil was weighed. He says the Iraqis had destroyed the
shore tanks at Kharg Island. Crews had to load crude directly
into Fredriksen's tankers without letting it sit for a few days
so that sand and sediment could settle. The oil weighed less on
delivery because the solids settled during the voyage. "They
claimed we stole thousands of tons, and it was pure rubbish,"
Kristiansen says.
Jail time
Fredriksen was locked up in a jail for almost four months
pending a trial. He lost weight and taught himself to knit,
producing sweaters for his twin daughters, Kathrine and Cecilie.
Fearful his business was doomed, he directed Kristiansen to sell
his fleet even though transport rates and ship valuations were
rising. The decision cost him $300 million.
"That used to be a lot of money," Fredriksen says with a wry
smile. He says he paid a fine of $250,000 five years later to
settle the case, and he didn't admit guilt.
By 1996, Fredriksen had resettled in London and Cyprus, and
he eventually became a citizen of the Mediterranean nation, which
doesn't tax dividend-based income. That year, he took control of
Frontline, a Swedish tanker company, in a $462 million deal and
moved it from Stockholm to the Oslo Stock Exchange, and to the
New York Stock Exchange in 2000. He started acquiring tankers,
and within five years Frontline had 80 ships valued at
$4.6 billion.
His timing was spot on: Average weekly charter rates for
supertankers soared 676 percent from January 1997 to their
all-time high of $229,484 a day in December 2007, according to
Clarkson, the world's No. 1 ship broker.
The tanker rally was so rich that Fredriksen says he started
to worry it wasn't sustainable. To diversify his investments, he
started Seadrill in 2005. His calculus was simple: The average
age of a deep-water rig was 20 years, and yet there was only one
new vessel on order, largely because operators preferred the
cheaper route of refurbishing them.
Fredriksen says he talked to his contacts in major oil
companies and learned they'd probably lease new rigs if given the
chance. After taking over five older rigs, he ordered six new
ones for $2.7 billion without bothering to lock up long-term
contracts.
In December 2005, Troeim, wearing a Viking helmet, opened a
presentation at a Houston investors conference by declaring, "We
are the speculators!" Sure enough, by February 2009, day rates
for Seadrill's rigs had doubled to more than $600,000 from August
2005.
Ships seized
Even as Seadrill emerged as a source of wealth, Fredriksen
focused on tankers. At a gala dinner in March 2008 by the
Connecticut Maritime Association in Stamford, executive Morten
Arntzen introduced Fredriksen as the organization's new
commodore. As he stood to receive the honor, Fredriksen couldn't
resist whispering in his rival's ear that he'd just acquired
almost 10 percent of his company's shares. "How Morten managed
not to choke was anyone's guess," says Jim Lawrence, chairman of
publisher Marine Money International.
The good times ended when the credit crackup shrank
worldwide demand for crude 2.3 percent from 2007 to 2009, the
first contraction since 1993. Shipowners, who had ordered 210
supertankers for delivery from 2008 to 2011, were saddled with
too many vessels. Charter rates sank to $7,254 a day in September
2011 from their high in 2007. The rate was $9,470 the week ending
Aug. 10. General Maritime, with 32 tankers, was one of many firms
around the world to file for bankruptcy protection or to have its
ships seized by creditors since 2011.
Frontline also faced ruin. It lost $530 million on
$810 million in revenue in 2011, and its stock dropped 27 percent
this year, closing at $3.14 on Sept. 6.
In December, Fredriksen rescued his tanker company by
splitting it and shifting 11 of his best ships and $666 million
in debt into a new firm, Frontline 2012.
Thanks to his practice of awarding fat dividends from his
companies when profits were soaring, he had won the confidence of
investors who might otherwise steer clear of the battered tanker
industry. In May, he raised $210 million in equity for Frontline
2012.
"If he got paid, we got paid," says Jeremy Kramer of
Neuberger Berman, an asset-management firm that invested in
Frontline from 2002 to 2004 and also took a stake in Frontline
2012. "That generated a lot of goodwill."
Danger looms
Frontline 2012 is going after the transport of gasoline and
other finished fuels as newly opened refineries in India and the
Middle East supplant shuttered operations in the U.S. and Europe.
Fredriksen's new fleet, with streamlined hulls and
cleaner-burning engines, should cut fuel consumption, which
accounts for more than half of the expenses in tankers. These
eco-ships may save Frontline 2012 about $7,000 a day in fuel
costs for midsize vessels.
Fredriksen, who lost his wife, Inger, to cancer in 2006, is
grooming his 28-year-old twins to take a larger role in running
the companies. Kathrine is a director at Golar, and Cecilie has a
board seat at Frontline. "We are hoping they will get interested
in the business," he says. "It's not a normal business. It's 24
hours a day."
Fredriksen's fortunes mostly will be shaped by Seadrill's
$7 billion gamble. Although the company has leased its rigs — in
July, BP agreed to pay $4 billion for three vessels for 19 years
— Seadrill's $10 billion in total debt is more than double the
revenue it expects to collect in its current fiscal year. The
danger looms that Seadrill and its rivals will overbuild and
drive down charter rates, squeezing profitability.
"That's the nature of the business, and that's why it's
important to get long-term contracts to ride out the downturns,"
says Alf Thorkildsen, Seadrill's chief executive.
Back at his Chelsea offices, Fredriksen has deployed some of
his fortune in an energy-trading firm in London, an investment
firm that's buying up subprime mortgages in North America and
Europe and even the world's largest salmon-fishing enterprise,
Oslo-based Marine Harvest. If one of his many companies takes a
hit, he'll have another to fall back on.
"I always tell John that when everything goes to hell, he
can have a house in California and eat salmon and watch his
bankrupt ships in layup," Troeim says.
Fredriksen, his ice-blue eyes twinkling, roars with
laughter.
The full version of this Bloomberg Markets article appears
in the magazine's October issue.