„Charles W. Morgan” – The story of the last whaleship: work of love, sweat and tears, but of blood, too

The Mystic Seaport museum in Connecticut launched in late July the sailing whaleship „Charles W Morgan”, allegedly the oldest and only remaining whaleship in the world. The „Morgan” was originally built in 1841 in New Bedford, Massachusetts when New Bedford and the adjacent area was then a major, and very prospering, whaling center worldwide. Like the wooden ships of her time, her expected life – between the dangers of limited maneuverability depending heavily on weather elements, cannibals and mutiny, Arctic ice and Confederate raiders, fire, woodworms, saltwater, was not expected to top twenty years, but it turned out that the „Morgan”, despite her many close calls, she ended up making an unheard of 37 voyages during eight decades of prime commercial life (average voyage duration was about four years.) Some interesting ‘personal’ accounts of her original ownership and the early restoration efforts can be found here.

Charles W Morgan – Outline

It cost about $27,000 to built the vessel at the yard of Jethro and Zachariah Hillman, and about another $26,000 to outfit her, about $1.5 million in total in today’s money. Her least profitable trip made about $200,000 while her most profitable trip brought in about four million dollars, all at today’s purchasing power again. Over her trading career, she generated more than $32 million in gross profits (at today’s PPP), mostly in the form of sperm oil, a waxy ester (prized as illuminant because of its bright, odorless flame), and whale oil made from the blubber of baleen whales (used for the production of soap, margarine and as cheaper illuminant due to her darker flame and fishy odor.)  At 110 ft long, 27 ft beam and 17 ft draft, she had three decks, sailing capacity of 13,000 square feet and with about 35 crew, she was classed as a 351 ton whaling ship. She could hold 3,000 barrels of 31.5 gallons each; given that, on average, each whale could fill fifteen barrels, each of the voyages meant the life of 200 whales, implying that the ship has been the production plant (and graveyard) of 7,000 whales. Just one ship.

We are of the opinion that killing whales is a despicable practice in our days and ought to be banned altogether, but we have to admit that whaling was ‘big business’ a couple of centuries ago and the industry has been the cause for advancement of naval architecture and navigation, exploration and trade, and a pillar of the development and growth of most of the New England area in the USA and many other ‘clusters’ for the trade worldwide.

We feel strongly and enthusiastically about the Mystic’s diligent work to rebuilt and restore the vessel to her original condition based on tools and craftsmanship technique from the time of her original construction.  The restoration so far has taken more than five years and has cost about seven million dollars employing 60 people.

Charles W Morgan – Under restoration (image source: Wiki Commons)

Imagine, if you please, what would be to sail on the vessel at her time: thirty five crew members packed in quarters no larger than two bedrooms, sailing around the Cape Horn for four years, away from families and loved ones, living on rations, no fresh food and vegetables onboard, with potable water stored in wooden casks for months, no bath, shower or toilet (just a ‘head’) battling the elements of nature, harpooning whales from the four small whale boats, towing the poor humongous beasts to the mother vessel, manually cutting, mincing, lifting, ‘trying out’ huge chunks of the meat, working on your knees and soaked in blood and fat (the decks of the vessel were not high enough to stand up, in order to preserve space.) With the exception of the captain and the first officer, a modern observer could justifiably say that being on the ship at such time was sort of voluntary indenture.

Working quarters – Elbows & Frames

How many things have changed since then? The ships; the people; the culture and the morals; ethics and what’s ‘right’ and ‘wrong’; major trades and industries important to local societies and even nations… Ships always have a story to share… from the people who dreamt of them, to the people who built them, to the people who sailed on them, to the people who serviced them, to the people who restored them way past their trading life.

We should take a minute listen to their sort of ‘Siren song’!

Charles W Morgan – In her previous glory (Photo credit: Mystic Seaport)

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© 2013 – 2014 Basil M Karatzas & Karatzas Marine Advisors & Co. All Rights Reserved.

Unless otherwise stated, images are provided by Karatzas Marine Advisors & Co. No part of this blog can be reproduced by any means or under any circumstances, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

In shipping, hope always springs eternal

Since late spring, freight rates especially in the dry bulk market have improved, and with them, the market mood for the industry has managed to find some much needed buoyancy, at least in the short term. There has been also the completion of the IPO for Ardmore Shipping (ticker: ASC) in the product tanker market, the first shipping IPO in the US markets since Scorpio Tankers (ticker: STNG) went public in March 2010, again in the product tanker market. So far, so good (as long as one ignores the existing product tanker orderbook and the additional orders that have been placed with the proceeds of this IPO.)

At least, in the product tanker market, freight rates have been respectable and have been above cash breakeven levels for most of the time in the last three years. What has been amazing though, it’s the rumor mill that Peter Georgiopoulos and General Maritime Corp. may be chasing a fleet of VLCC tankers, possibly the A.P. Møller Maersk VLCC fleet of about twenty supertankers. Maybe also the highflying Navios Group have their sights on these vessels or on another package of the same asset class, but there is at least an official denial by the company in this case. Møller has announced in the recent past that they are interested in divesting of assets and lines of business that do not fit their competitive advantage in the market place (read anything but containerships, terminals and their related businesses), so there might be some truth to the rumor that a quality, modern fleet of supertankers may be up for sale.  There has been some activity in the VLCC market recently, after a long permafrost season in this market. Recently, Sinochem purchased four VLCCs from the Clipper Group (all vessels were already on long-term charters to Sinochem), HOSCO divested of two very young VLCCs to European buyers and Mitsui OSK Lines have sold four VLCCs in the spring this year; with the exception of the MOSK Lines fleet that were slightly older than ten years of age, the rest of the tonnage sold so far has been younger than three years of age. Last time such a modern VLCC was sold was in January 2011 when Daewoo sold a (resale) VLCC with her contract in default at about $79 million to Sinokor; as a matter of comparison, HOSCO’s comparable tonnage (at least in age) were transacted at $54 million, a meaningful drop in pricing.

The Møller VLCC fleet is about four years old on average, and, individually priced, the vessels should fetch less than $50 million each (at least if recent transactions offer any type of guidance in an admittedly very illiquid market with known problems of ‘price discovery’); so this is a one-billion-dollar deal. Again, so far, so good; one billion dollars would get excited any self respecting investment banker, institutional investor, market consolidator, highflying maritime executive or any executive trying to find his way to the top (again).

As life would have it, today John Fredriksen’s flagship company Frontline (ticker: FRO) reported 2013 Q2 earnings.   This is a company that routinely posts the best performance in the VLCC market sector, and rightly considered the ‘bell cow’ of the segment. Their earnings report reflected just a very lousy and oversupplied market: while their estimated cash break even is $25,000 per diem, their Q2 earnings averaged just above $14,000 per diem. They also took an asset impairment charge of about $81 million. More importantly, the forward guidance has been bleak based on unfavorable market dynamics and an oversupplied market going forward. For starters, the USA is not anymore a great market for the VLCCs with the shale oil discoveries, and the Chinese prefer their own tonnage for the import needs. And, by the way, while the world VLCC fleet stands at 639 vessels (624 of them are double hull with more than one-third of the world fleet newer than four years old), there are still 57 vessels under contact to be built (just about 9% of the world fleet). Not a bright picture, any way one sees it.

Vessel prices have come down a long way; it was reported at the time that the Møller four VLCCs ordered in August 2008 at STX Shipbuilding had a contract price in excess of $140 million each, thus the $50 million estimated present price per vessel now looks like walking out of the Louvre with a boatload of Monet masterpieces in your backpack.  And possibly a van Gogh, too. But again, these vessels were making $14,000 per diem in 2013 Q2 with a top operator and their cash breakeven has been at (more than) $25,000 per diem. Just because asset prices have dropped precipitously, it doesn’t mean that a buyer / investor at these levels still cannot lose money. But the fact that there are rumors and even appetite to talk about such projects in the present market environment, it’s at least entertaining. Probably the next step would be an IPO…

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

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What’s in a number?

Shipping, being an international industry with many service providers necessary to ‘put on a show’, is rather an opaque business by standards long-established in many other industries. It’s not only the potential conflicts of interest and ‘self dealing’ that may be hidden under the cloud of opaqueness, but mainly the fact that many parties in the industry, and for many reasons, use same terminology but different definitions to communicate their message.

In the last decade when shipping was hot due to China’s stratospheric growth and comparable freight rate trajectory, many newcomers, especially institutional investors, started looking into shipping primarily through the public equity markets (think ‘shipping IPOs’.)  More recently, mostly private equity is also is taking a hard look at shipping and acquiring shipping assets. What we find amazing, to a certain extent, is the way information, especially quantitative information, is conveyed that may make certain companies or operators have an advantage or better performance, when in reality the main difference is that a different denominator is used in each case.

When more emphasis was on public equities a few years ago, there was confusion of what were  ‘vessel revenue days’ and ‘vessel operating days’, ‘off-hire’ and ‘utilization rate’, numbers that could affect the ‘Time Charter Equivalent’ (TCE) rate and show that some companies were generating more ‘alpha’ from the market. For instance, vessels have to be dry-docked every so often; a shipowner knowing that they have a dry-dock due coming up next year for a vessel, would they count those ten (approximately) dry-docking days as ‘revenue days’?  The vessel by law has to be dry-docked and those ten days are ‘lost days’ as far as revenue is concerned, no matter what; but some owners were starting their ‘revenue year’ with 365 days for the vessel while others with ten days fewer. Guess which owner has an advantage and why, as far as ‘performance’ is concerned.

More recently, with shipping in turmoil, and a dearth of newbuilding orders (temporarily, at least), shipbuilders had to offer something new, a compelling reason to entice new business in the middle of a deadstill market. How about efficiencies then, namely fuel efficiencies? With bunker prices high, fuel efficiency was a logical card to play. Now, we are not claiming to be naval architects and marine engineers, and also we do not claim that certain yards didn’t work very hard to improve indeed vessel designs. On the other hand, we have seen designs with claims of 30% in fuel efficiency, something that would require a revolution rather than evolution in the science of naval architecture, something that regrettably didn’t happen recently as far as we can tell. But again, some of these efficiencies were due to the fact smaller engines were used to propel the same vessel (definitely lower fuel consumption but at a trade off of under-powering the vessel and increasing the chance of an accident); other efficiencies were calculated at different drafts of the vessel than design draft, assuming certain conditions of trim that were placing limitations on the trade of the vessel, certain (favorable) weather conditions, etc.,  or the result was based on comparisons against patently outdated designs or poorly maintained vessels.  We understand that improvements in fuel efficiency are usually limited at the very best to less than 15% based against previous designs, ceteris paribus. We are not claiming that 15% in fuel savings is a negligible concern, but it’s quite different making an economic decision on whether a company should be undertaking multi-million dollar commitments for newbuildings based on baked information of 30% in fuel savings.

Now that passive investors such as private equity funds (passive at least in the form of vessel management) have been looking for third party vessel managers, vessels operators and pool managers, certain definitions have been stretched to the limit.  Under pool employment and third party vessel management for instance, the more of the vessel expenses and downtime the pool manager passes back to the vessel owner, the better the pool results, which not only means more profit for the pool manager, but mostly, better pool results to brag about that will be used in presentations to convince more owners to bring vessels under the pool. Repositioning a vessel? It may be an ‘owner’s item’, as far as some pool managers can tell. Ballasting a vessel to a loading port? Also, it could be an ‘owner’s item’. Loss of hire due to vetting and port state control inspections? Ditto.  Similarly for technical management, how much of spare parts have to be kept onboard the vessel? Is it an expense or an investment? How about the cost when a minor part is missing and the charterer places the vessel off-hire and refuses to pay freight for the downtime? How about the reputation and goodwill a vessel and her owner create with the chartering community by providing well equipped and maintained vessels? How about the higher demand and potentially higher price the vessel will obtain in the secondary market later on with the vessel coming for sale from a ‘good stable’, as the shipping lingo goes?

It’s the holy grail of business gurus, business schools and management experts  reaching for optimization; not to mention the genuine goal of many good companies and managers. And, no doubt, there will always be debated among bean-counters whether certain business cash ‘outflows’ are expenses or investments / capital improvements.  After all, that’s the ‘nature of the beast’.  On the other hand, there should be a certain amount of transparency on how certain numbers are achieved by the companies, the managers, the pool operators, etc But more importantly, parties receiving such information should look diligently ‘under the hood’ and demand a thorough explanation on how the numbers are defined. Just because one manager is ‘cheaper’ than another, or one pool is ‘better performing’ than another, etc is immaterial unless a common denominator can be established.  As they say, the devil is in the details, and sometimes such details can offer surprises.

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

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