ATCO - Atlas Corp

[petec]

Why is Atlas Corp even paying a dividend when David can allocate capital at such a high rate of return? It makes no sense...

 

Yes, it's interesting. This brings them to $690m of cash deployed this year (not counting deals announced in 2019 but closed in 2020). That's substantiallly all of 2020 operating cash flows, so cash is being deployed at a prodigious rate.

 

The last two deals involve four ships, built in 2011, 2012, 2018, and 2018, purchased for a total of $322m. Both deals generate a current run rate of $20m in ebitda, for $40m in total. Without knowing the lease details we can't calculate an IRR, but:

- If you assume 70% debt financing at 5% and a 20% tax rate (well above the corporate average) you get an ROE of 24% at the current run rate. If these flows are maintained for 4 years, equity is repaid.

- Total contracted revenues for the two deals are about $320. Assuming Seaspan's corporate average ebitda margin of 63% (using low end of 2020 guidance range) that's $200m in ebitda, or 5 years at the current run rate, acquired for $176m.

 

I agree!  Probably two reasons for the dividend...legacy dividend from Seaspan...Washington family may want an income stream without selling any more equity.  Fat dividend now, but I suspect it will grow slowly in the future, and will probably drop to about 2.5-3% as the stock hits fair value...$14-15.  Cheers!

 

Agreed. And it won’t just be the Washingtons. There’s another big shareholder that needs cash flow, as discussed extensively on this board.

 

But also: while the hypothetical ROEs look great, I did point out that we don’t know the real IRR because we don’t know the lease terms (nor, indeed, the rates the ships will earn when the leases end). Also, these assets have *relatively* short-lives, and an x% ROE on a short lived asset is much less valuable than the same ROE on a long-lived one. Treat my maths as a paper exercise only.

[petec]

@Parsad, I don't think you answered this question upthread and I'd be really interested in your thoughts.

 

On APR - what makes you think they have found efficiencies fast? Ebitda guidance has not changed since the deal closed, and the major impact to ebitda growth has been Mexicali which was in place before the deal closed. I think it will be a great deal, but I don't see evidence that Atlas has made a big difference yet. Am I wrong?

[Kokomo]

https://www.eagleview.com/newsroom/2020/10/eagleview-hires-ryan-courson-chief-financial-officer/

 

BELLEVUE, Wash., October 1, 2020 – EagleView, a leading technology provider of aerial imagery, data analytics and GIS solutions, today announced the appointment of Ryan Courson as Chief Financial Officer. At EagleView, Courson will report to CEO Chris Jurasek, and will lead the finance, corporate development, and legal organizations.

[Parsad]

@Parsad, I don't think you answered this question upthread and I'd be really interested in your thoughts.

 

On APR - what makes you think they have found efficiencies fast? Ebitda guidance has not changed since the deal closed, and the major impact to ebitda growth has been Mexicali which was in place before the deal closed. I think it will be a great deal, but I don't see evidence that Atlas has made a big difference yet. Am I wrong?

 

https://www.bizjournals.com/jacksonville/news/2020/08/14/apr-energy-laying-off-50-employees.html

 

https://www.fool.com/earnings/call-transcripts/2020/08/11/atlas-corp-atco-q2-2020-earnings-call-transcript/

 

Please turn to Slide 7, where I will provide APR developments for the quarter. As we communicated at our 2019 Investor Day, we see tremendous upside potential in APR, and are working toward transforming the business to the next level. I'm very pleased to announce the recent appointment of Brian Rich as the President and COO. Brian has deep expertise and networks in the global energy and power sector and was formerly President and COO of APR between 2012 and 2015. Brian is well aligned with APR's priority focus going forward, and we are confident in his leadership to drive APR's operational excellence and sustainable growth.

 

APR's power fleet utilization for Q2 was supported by mobilization of eight turbines across three power plants in Mexicali. These eight turbines contributed $12 million of revenue in Q2, and we expect these projects to contribute approximately $41 million of adjusted EBITDA during 2020. Due to the mobile and fast power nature of the APR's fleet, we expect the utilization to fluctuate as these turbines are put on different contracts around the world. However, we are confident in our ability to maintain a strong utilization.

 

While COVID-19 has impacted APR's business through a reduction in overall global power consumption, we continue to structure the business as a long-term oriented energy solution provider. Our priority is to sustain and improve asset utilization, while focusing on extending the duration of existing contracts. This will require a shift in focus of our partnerships and solution offerings.

 

In addition, we will continue to be more selective on potential deployment opportunities around the world that meet our risk management criteria. We also continue to execute on our business strategy with strong commitment to ESG, divesting idle diesel generators and making operational improvements. Just to highlight, during the Q2, APR's overall plant availability was maintained at over 98% and an LTIR of 0.72.

 

Further down:

 

APR is a business secured by medium-term contracts with strong upside as additional capacity is deployed either on additional long-term projects or lucrative short-term fast track power solutions. While the decline in power consumption from COVID has slowed down our pipeline of potential projects, Brian Rich and his team are focused on deploying our assets and building a high quality pipeline of global opportunities.

 

Down further:

 

Bing Chen -- President and Chief Executive Officer

 

Yes Michael, I think the way to -- that's why I think the way we look at the APR business to a certain extent is similar to Seaspan's is that we're going to work on both opportunities to improve the utilization. One is through the extension. The other one is through the new business opportunities. As you know, that APR's fleet is more than half, it's under long-term contract. The current COVID obviously has certain impact in terms of the reductions to overall -- the power consumption. However, I think we believe it's temporarily slowing down the decision-making process and also of course result in some, I think, cancellation of the projects. For example, back in May, the Puerto Rico prefer had a demand for about 350 megawatts of power. But due to this COVID and for the peak season, they did not need to have this power, so therefore there are certain impacts.

 

However, I think as we continue to working on both the existing type of opportunities, that the management team are working on other opportunities such as flare -- we started looking at other opportunities such as flare to gas, LPG, and other grid stabilization, so to broaden our portfolio of offerings, so therefore, that we will have more opportunities to get the turbines utilized. So over the period, I think we are still confident we will be able to improve the turbines' utilization through the expansion and also the new opportunities.

 

Ryan Courson -- Chief Financial Officer

 

And then Michael, just as a clarification, for the third quarter pro forma for the Mexicali, what you'll see is 80% utilization for the APR power utilization fleet.

 

Cheers!

[Xerxes]

https://www.economist.com/business/2020/10/10/how-covid-19-put-wind-in-shipping-companies-sails

 

"Shipping is a business where, in the words of Martin Stopford of Clarksons, firms “make a living and occasionally make a killing”. This year, it appears, belongs to the second category. What is going on?"

 

 

[ourkid8]

Q3 2020 earnings released.

 

https://ir.atlascorporation.com/press-releases

 

[Sparky627]

BV=14.57/sh

[nwoodman]

https://www.zerohedge.com/markets/la-box-signal-spikes-and-charter-rates-go-through-roof

 

Charter rates highest since 2011

 

Another market indicator is container-ship charter rates. Carrier fleets are a mix of owned and leased vessels. Leases can last for months or years. The more capacity carriers need to service future cargo demand, the higher the charter rates and the longer the charter durations.

 

Alphaliner reported this week that charter rates have gone “through the roof,” with rates “rising quickly for all ship types on the back of increasingly tight supply.”

 

It said that the 7,500- to 11,000-TEU segment remains sold out, as do the 5,300- to 7,499-, wide-bream 4,300- to 5,499-TEU, and the 3,000- to 3,999-TEU segments.

 

 

Few container ships left to charter (Photo: Kees Torn/Flickr)

The classic Panamax 4,000- to 5,299-TEU segment “is nearly sold out” and “is seeing charter rates that would have been unthinkable only a few months ago,” said Alphaliner.

 

Hapag-Lloyd chartered the 5,039-TEU CSL Manhattan for five to six months at $25,000 per day, “a rate level unseen for this class of ship since 2011,” noted Alphaliner. It also reported a 12-month charter of a 4,400-TEU vessel at $19,750 per day, up 11% from what a comparable ship went for two weeks before. “Similar tonnage is now being discussed at over $20,000 a day,” noted Alphaliner.

 

Tonnage available to charter is vanishing. According to Alphaliner, there are only 107 ships inactive, totaling 378,802 TEUs, representing just 1.6% of the total global fleet.

 

Of those, 13 ships (55,198 TEU) are sanctioned Iranian ships and nine (73,990 TEU) are at the yards for maintenance of scrubber retrofits. Excluding those categories, the inactive fleet is a mere 1.05% of the world total.

 

Industry pricing power is a lot stronger than what I had expected.

 

“Seaspan's current operating fleet of 125 vessels has an average age of approximately seven years and an average remaining lease period of approximately four years, on a TEU-weighted basis.”

 

Cheers

 

nwoodman

[ourkid8]

85% of their 2021 revenue is under long-term contracts so that means 15% will benefit off higher rates! If Seaspan can lock in these higher rates under long term contracts, this will be a big win for us shareholders!!! I am very bullish on the prospects and direction of this company. 

 

https://www.zerohedge.com/markets/la-box-signal-spikes-and-charter-rates-go-through-roof

 

Charter rates highest since 2011

 

Another market indicator is container-ship charter rates. Carrier fleets are a mix of owned and leased vessels. Leases can last for months or years. The more capacity carriers need to service future cargo demand, the higher the charter rates and the longer the charter durations.

 

Alphaliner reported this week that charter rates have gone “through the roof,” with rates “rising quickly for all ship types on the back of increasingly tight supply.”

 

It said that the 7,500- to 11,000-TEU segment remains sold out, as do the 5,300- to 7,499-, wide-bream 4,300- to 5,499-TEU, and the 3,000- to 3,999-TEU segments.

 

 

Few container ships left to charter (Photo: Kees Torn/Flickr)

The classic Panamax 4,000- to 5,299-TEU segment “is nearly sold out” and “is seeing charter rates that would have been unthinkable only a few months ago,” said Alphaliner.

 

Hapag-Lloyd chartered the 5,039-TEU CSL Manhattan for five to six months at $25,000 per day, “a rate level unseen for this class of ship since 2011,” noted Alphaliner. It also reported a 12-month charter of a 4,400-TEU vessel at $19,750 per day, up 11% from what a comparable ship went for two weeks before. “Similar tonnage is now being discussed at over $20,000 a day,” noted Alphaliner.

 

Tonnage available to charter is vanishing. According to Alphaliner, there are only 107 ships inactive, totaling 378,802 TEUs, representing just 1.6% of the total global fleet.

 

Of those, 13 ships (55,198 TEU) are sanctioned Iranian ships and nine (73,990 TEU) are at the yards for maintenance of scrubber retrofits. Excluding those categories, the inactive fleet is a mere 1.05% of the world total.

 

Industry pricing power is a lot stronger than what I had expected.

 

“Seaspan's current operating fleet of 125 vessels has an average age of approximately seven years and an average remaining lease period of approximately four years, on a TEU-weighted basis.”

 

Cheers

 

nwoodman

[nwoodman]

Seaspan announces that it has entered into purchase orders to build five high-quality 12,200 TEU containerships. Upon completion and delivery, all five vessels will commence long-term charters with a leading global liner company and are subject to vessel purchase obligations at the conclusion of the charters.

 

https://filecache.investorroom.com/mr5ircnw_seaspan/1034/download/Newbuild%20Project%20v00F%2020201207.pdf

[petec]

Loadstar.com speculates the newbuild customer is MSC: https://theloadstar.com/msc-buys-more-second-hand-ships-and-may-be-eyeing-seaspan-newbuilds/

 

The article also quotes London-based shipbroker Braemar ACM as saying that there is “aggressive buying interest” from carriers. MSC has apparently spent $260m on 13 small/mid sized ships since August.

 

It seems to me there is a clear shortage of supply in everything but the largest vessels.

[NBL0303]

Loadstar.com speculates the newbuild customer is MSC: https://theloadstar.com/msc-buys-more-second-hand-ships-and-may-be-eyeing-seaspan-newbuilds/

 

The article also quotes London-based shipbroker Braemar ACM as saying that there is “aggressive buying interest” from carriers. MSC has apparently spent $260m on 13 small/mid sized ships since August.

 

It seems to me there is a clear shortage of supply in everything but the largest vessels.

 

One thing I'm wondering about is why MSC is doing this "through" Atlas? They are allowing Atlas to capture some of the value by doing this long-term lease with an option to buy it at the end. Why not just buy the ships themselves?

[Castanza]

Loadstar.com speculates the newbuild customer is MSC: https://theloadstar.com/msc-buys-more-second-hand-ships-and-may-be-eyeing-seaspan-newbuilds/

 

The article also quotes London-based shipbroker Braemar ACM as saying that there is “aggressive buying interest” from carriers. MSC has apparently spent $260m on 13 small/mid sized ships since August.

 

It seems to me there is a clear shortage of supply in everything but the largest vessels.

 

One thing I'm wondering about is why MSC is doing this "through" Atlas? They are allowing Atlas to capture some of the value by doing this long-term lease with an option to buy it at the end. Why not just buy the ships themselves?

 

I was wondering this too. Is there an obligation ("carrier committed") or "option "to purchase these ships at the end of the lease? The article worded it both ways. It's hard to think of an advantage MSC would gain from this other than potentially skipping out on maintenance costs?

[kab60]

Loadstar.com speculates the newbuild customer is MSC: https://theloadstar.com/msc-buys-more-second-hand-ships-and-may-be-eyeing-seaspan-newbuilds/

 

The article also quotes London-based shipbroker Braemar ACM as saying that there is “aggressive buying interest” from carriers. MSC has apparently spent $260m on 13 small/mid sized ships since August.

 

It seems to me there is a clear shortage of supply in everything but the largest vessels.

 

One thing I'm wondering about is why MSC is doing this "through" Atlas? They are allowing Atlas to capture some of the value by doing this long-term lease with an option to buy it at the end. Why not just buy the ships themselves?

Less capital intensity, no residual risk. To earn a higher return on their capital. Ship leasing is as old as the industry.

[gfp]

"are subject to vessel purchase obligations at the conclusion of the charters."

 

I don't know anything about MSC but wouldn't the usual reasons be to keep the debt off their balance sheet, relative borrowing costs between Atlas and MSC, MSC leverage ratios, etc...?  MSC is taking the residual risk here, not Atlas

[kab60]

"are subject to vessel purchase obligations at the conclusion of the charters."

 

I don't know anything about MSC but wouldn't the usual reasons be to keep the debt off their balance sheet, relative borrowing costs between Atlas and MSC, MSC leverage ratios, etc...?  MSC is taking the residual risk here, not Atlas

Yes, I didn't look into the details of the transaction (who has residual risk), but it is basically two different business models with different costs of capital. Most liners are trying to optimize their balance sheet and return an adequate return on their capital, and reducing the capital employed and the capex is a major part in that.

[gary17]

down 12%!

[gfp]

I wonder if the drop has more to do with the disclosure that Fairfax is parting with some Atlas securities in the Riverstone Europe divestiture than people hedging convertible exposure.  This doesn't seem like a big deal either way but volatility is always appreciated.

 

https://www.sec.gov/Archives/edgar/data/1794846/000156459020057216/atco-6k_20200930.htm

[NBL0303]

How are the quarterly results being perceived? It doesn't seem bad or surprising to me - but maybe I'm missing something.

 

What is going on with the Fairfax Riverstone Europe divestiture - are they selling some of their preferreds/convertibles?

[Cigarbutt]

^Riverstone UK, the previously 100%-owned insurance runoff sub, was deconsolidated last year during the first part of the sale (formation of a joint venture) and now the assets and liabilities will be 100%-owned by another party in early 2021. In short, this means that ≈ 2.7B of portfolio investments will be 'transferred' along the matching ≈ 2.3B insurance liability contracts. It seems FFH has the ability to decide if they transfer the Atlas securities or if they replace those assets with equivalent fair value. FFH can shuffle portfolio investments around, depending on various criteria.

[gfp]

This is the press release on today's notes offering, fwiw:

https://www.sec.gov/Archives/edgar/data/1794846/000156459020057216/atco-ex992_431.htm

[gary17]

this is all very complex stuff for me to comprehend...  seems like market is saying b/c of these events  ATCO is worth 12% less

[hasilp89]

this is all very complex stuff for me to comprehend...  seems like market is saying b/c of these events  ATCO is worth 12% less

 

any time prem is involved it gets confusing...

[Nelg]

Agreed. And it won’t just be the Washingtons. There’s another big shareholder that needs cash flow, as discussed extensively on this board.

 

But also: while the hypothetical ROEs look great, I did point out that we don’t know the real IRR because we don’t know the lease terms (nor, indeed, the rates the ships will earn when the leases end). Also, these assets have *relatively* short-lives, and an x% ROE on a short lived asset is much less valuable than the same ROE on a long-lived one. Treat my maths as a paper exercise only.

 

I think the bolded part is key. Wouldn't returns be significantly lower once you account for required debt payments? The company has been trying to reduce the scheduled principal payments (which is fine by me and makes sense...to an extent), but these ships ultimately have a ~25y useful life.

 

So if you assume the required debt payments on these vessels are amortized over say 15y, IRRs on these recent deals look weak.

 

When Sokol joined Seaspan as Chairman, he berated the previous management team for levering up to build new ships, and then when the downturn hit, their balance sheet didn't allow them to buy (almost) new ships at less than 50% of cost (ie, the Sam Zell strategy - your competitive advantage is your opportunistic buying which gives you an asset cost base that is >50% lower than everyone else).

 

Newbuild ship costs haven't dropped by that much, and with charter rates not looking that different from ~2015 (I think) it seems like they're just doing what the previous management did. How is this point of view incorrect?

[Nelg]

Sokol grew Mid-American at a 23% ROE for about 20 years.  His strength is capital-intensive businesses and making them very efficient.  Bing is no slouch either!  Cheers!

 

Yes. I’ve never really trusted that number because my source is Prem and I think he can be a bit sloppy with figures. But Sokol is definitely one of my big reasons for owning Atlas.

 

Actually, all you have to do is look at what Mid-American was earning when Berkshire acquired it in 1999 ($104M) and what it was making in 2010, shortly before Sokol left...$1,131M.  That's about 26% annualized over 10 years in earnings growth.  He essentially did the same thing 10 years earlier growing earnings from $10M to $104M.  Cheers!

 

Well, no. You also have to look at whether Berkshire contributed capital during that time. I’m sure you and others know the answer, but I don’t, which is why I take the CAGR as unproven!

 

Yes, BRK invested about $5b of additional equity capital after the acquisition (and another $1b of equity capital after Sokol left to fund the NV Energy acquisition).

 

If anyone's wondering, this is the history on CalEnergy/MidAmerican (I have gone through all their 10-Ks, though not in great detail - so I think the below is mostly correct:

- Sokol took over in Feb 1991.

- FY 1991 results:

NI $26.6m (vs 1990 NI $12m)

FFO $47.6m (don't have the 1990 number)

FD shares 36.5m (don't have 1990 FD shares outstanding)

= EPS $0.73/share & FFO $1.31/share

 

I don't have 1991 balance sheet numbers, but the below are 1992 numbers:

Recourse Net Debt/ FFO: -0.3x (ie, net positive unrestricted cash)

Total Net Debt/ FFO: 2.8x

 

- BRK acquisition of MidAmerican closed sometime in 2000.

- FY 2000 results:

NI $133m

FFO $597m

FD shares 43.8m

= EPS $3/share & FFO $14/share

 

Recourse Net Debt/ FFO: 3.6x

Total Net Debt/ FFO: 9.8x

 

Leverage was clearly higher, but when BRK acquired MidAmerican, they owned 2 regulated utilities in the UK and US and had a larger independent power plant portfolio...ie, the business quality was superior vs the small geothermal portfolio they owned when Sokol took over.

 

- IMO the "Sokol era" ended around 2009. He sold most of his MidAmerican shares (ie, to BRK) in 2009 for a cool $123m, and started the NetJets restructuring around this time.

- FY 2009 results:

NI $1.16b

FFO 3.3b

FD shares 75m

= EPS $15/share & FFO $44/share

 

Recourse Net Debt/ FFO: 1.6x

Total Net Debt/ FFO: 5.2x

 

There were huge one-time gains from their "failed" acquisition attempt of Constellation Energy Group in 2008 - they made a ton of money from termination fees and their financial restructuring there. And of course, Sokol was credited for the BYD investment which was made in 2008 and I believe is still held within the MidAmerican/BH Energy entity.