ATCO - Atlas Corp

[WneverLOSE]

Shipping rates are going down, China Containerized Freight Index -4.3%, freightos -4%

 

While it was known rates will go down the question when had a big importance, if its a real unraveling to lower levels it came much faster than everyone thought in their EOY commentary.

 

 

[petec]

As I mentioned earlier, its hard for me to wrap my mind around this.  You are essentially saying we have the capacity to double our newbuild order book.  This is just insane. 

 

They're doing close to $700m of cash flow per year before you factor in rolling short term contracts into a hard market, which could add $200m for a couple of years. I think they have over $2bn of cash flow to deploy from now to the end of 2023. Assuming 60% debt financing that could fund $5bn worth of ships. I think they have done about half of that so far.

 

I think they have got a bit of leeway.

 

I forgot about dividends, and I propbably underestimated the total spend so far (more like $3-3.5bn). So they have probably spent most of their firepower. We will see.

[bluedevil]

To me, the most interesting thing about all of these new builds is what it says about the current ships that Seaspan has.

 

The new builds show a big appetite by liners to lock in long-term charters (e.g., 12 years; 18 years), even though the market is hard and presumably the charter rates are elevated.

 

It suggests that Seaspan has a receptive audience when it goes to liners and talks about extending out the charters for existing ships.  Seaspan has said that was a goal before, and it makes  a lot of sense because Seaspan has a wall of ships that come off charter in 2022-2024, where it would be ugly if rates remain low for a long time.

 

Between the new builds and, hopefully, some extensions, Seaspan seems like they have had an opportunity to really extend their contract pipeline (about 4 years at end of Q3) and ensure the company has solid cash flows for years ahead.  You could see the stock re-rate if those extensions have happened -- they list individual ships and charters in their annual report.

 

That would address one major risk with Atlas.  The other is that one of the liners goes bankrupt and the contracted cash flow evaporates.  The last year is very comforting to me on that front - has shown that the consolidation of liners has led to profitability through ups and downs of a wild market.

 

So -- Atlas has earned about .26 a share in recent quarters.  Assuming that's a normalized number (new builds should push higher, but let's not count to offset risk as other charters come off and may charter at lower rates), and the stock is trading at about 13x earnings.  Where those earnings should be -- again, assuming some success with extensions of existing charters -- very stable and predictable over time given it is predicated on long term contracts with stable counterparties.

 

Seems attractive to me even with the run up in the stock.  And you have working for you an all star capital allocator and operator in Sokol.

 

[petec]

I agree Atco will try to use this hard market to term out their leases. How easy it will be, I don’t know. A liner only has an incentive to agree an extension when the lease rate is below the market rate. And for the bigger ships, I struggle to find good data on where the market is.

[bluedevil]

Agreed.  My guess is that ATCO will be happy to lease out ships at below current market rates (which would still be in absolute terms attractive) in exchange for duration.  They've been pretty clear about that.  I think that's why you are seeing this flurry of new build activities come to Seaspan. 

 

 

 

[petec]

Agreed.  My guess is that ATCO will be happy to lease out ships at below current market rates (which would still be in absolute terms attractive) in exchange for duration.  They've been pretty clear about that.  I think that's why you are seeing this flurry of new build activities come to Seaspan. 

 

 

 

 

I’m sure that’s right. What I’m less clear on is where current market rates are vs Seaspan’s existing leases for bigger ships. Is it possible that the price they pay for extending some of their 3-7 year leases is a lower rate?

[bluedevil]

It gets a little hard to tell without knowing details on the ships, their technology, etc.

 

But I do think it is very possible that the rates will go lower than they are today.  Seaspan has a bunch of ships that come off charter this year and next year or two that have current charter rates (for newer, 10k and 8.5k ships) of 37k per day; 29k per day; 42k per day, according to their 20F.

 

Even in hard market, i have seen a deal at 9000 TEUs for 23k a day for Danaos for a couple of year charter, which is lower obviously than any of those rates!

 

So, the charters that Atlas has from past seem at quite high rates and doubt they will see those when they re-charter, but my hope is this market lets them do extensions that are at lower rates but not too much lower. 

 

 

[petec]

Where did you see the Danaos deal?

 

According to this, two year rates for 4250 TEU ships are currently 28k, which is more supportive of Seaspan’s current lease rates: https://www.vhbs.de/?id=28&L=1

[petec]

Shipping rates are going down, China Containerized Freight Index -4.3%, freightos -4%

 

While it was known rates will go down the question when had a big importance, if its a real unraveling to lower levels it came much faster than everyone thought in their EOY commentary.

 

That’s a pretty small dip after a huge rally. Contex is still rising. I wouldn’t ring the bell yet ;)

[bluedevil]

Where did you see the Danaos deal?

 

According to this, two year rates for 4250 TEU ships are currently 28k, which is more supportive of Seaspan’s current lease rates: https://www.vhbs.de/?id=28&L=1

 

It is an interview transcript on Seeking Alpha. Link below. 2 used ships on 2 year charters acquired in October 2020.

 

https://www.google.com/amp/s/seekingalpha.com/amp/article/4399640-containership-update-insights-from-6-bagger-danaos-corp-podcast-transcript

[petec]

Thanks. Both contex and the Shanghai index have roughly doubled since October so the opportunities to re-lease today may be much stronger.

 

Some interesting commentary in that transcript about

- how attractive acquisitions were up to October - they paid one-third of cost for two ten year old ships which they put on 2y charters at a 20% ebitda yield.

- how unattractive newbuilds were up to October. The day rates for newbuilds and 10 year old vessels were not that different, but the costs were 2-3x higher for newbuilds.

 

I infer that:

- Seaspan’s economics on its acquisitions last year might be superb.

- Things have changed radically since October given how fast Seaspan have acted on newbuilds.

 

Also, Danaos comment that in October, newbuild costs were not far from cost (ie shipyard margins were not high). I wonder if Seaspan have seen a window in which the leases available on newbuilds are attractive, but that hasn’t fed into shipyard margins yet.

[bluedevil]

That all makes sense to me.

 

If you look at the charts (thanks for pointing them out!), the prices start surging higher in November.  Seaspan announced one newbuild deal in December (presumably negotiations started before surge), but that was a unique case.  18 year charters and liner has obligation to buy the ships at the end of the lease term, so very little economic risk for Seaspan and a bit of a unique bucket.

 

Seaspan started really putting the chips on the table in early Feb, when rates were and had been very high for a few weeks. Bing’s messaging had been clear in past that they have set return criteria and new builds did not meet it and they were looking only at second hands, so that clearly changed.

 

The fact that liners are taking the other side of the trade suggests they are concerned prices may not get better in the years ahead. Why else lock into new builds now when price is so high?  That should give us a chance to strike extensions.

[ValuePadawan]

https://www.nytimes.com/2021/03/06/business/global-shipping.html

 

"Peter Baum’s company in New York, Baum-Essex, uses factories in China and Southeast Asia to make umbrellas for Costco, cotton bags for Walmart and ceramics for Bed Bath & Beyond. Six months ago, he was paying about $2,500 to ship a 40-foot container to California.

“We just paid $67,000,” he said. “This is the highest freight rate that I have seen in 45 years in the business.”

In early September, he waited 90 days to secure space on a ship for a container of wicker chairs and tables."

[Viking]

https://www.nytimes.com/2021/03/06/business/global-shipping.html

 

"Peter Baum’s company in New York, Baum-Essex, uses factories in China and Southeast Asia to make umbrellas for Costco, cotton bags for Walmart and ceramics for Bed Bath & Beyond. Six months ago, he was paying about $2,500 to ship a 40-foot container to California.

“We just paid $67,000,” he said. “This is the highest freight rate that I have seen in 45 years in the business.”

In early September, he waited 90 days to secure space on a ship for a container of wicker chairs and tables."

 

Correction: March 6, 2021

An earlier version of this article misstated the amount that Peter Baum said his company, Baum-Essex, had just paid in shipping costs. It was $6,000 to $7,000, not $67,000.

—————————-

Atlas earnings will be interesting :-)

[gfp]

Its Monday Morning so of course 2 new press releases - they've sure been busy:

 

https://ir.atlascorporation.com/2021-03-08-Seaspan-Continues-to-Execute-Quality-Growth-Strategy-with-Order-for-Six-Containership-Newbuilds

 

https://ir.atlascorporation.com/2021-03-08-Atlas-Announces-Joint-Venture-Agreement-with-Zhejiang-Energy-Group-to-Partner-on-Global-Maritime-and-Power-Opportunities

[petec]

Its Monday Morning so of course 2 new press releases - they've sure been busy:

 

https://ir.atlascorporation.com/2021-03-08-Seaspan-Continues-to-Execute-Quality-Growth-Strategy-with-Order-for-Six-Containership-Newbuilds

 

https://ir.atlascorporation.com/2021-03-08-Atlas-Announces-Joint-Venture-Agreement-with-Zhejiang-Energy-Group-to-Partner-on-Global-Maritime-and-Power-Opportunities

 

I can't keep up any more.

 

Interesting sidenote: I just read the FFH letter, and thought Prem's reference to Atlas having ordered 31 new ships was a mistake. Today I find out he is right, but I am not sure he should have published the news before Atlas did!

 

I note that these ships deliver from late 2023 onwards, later than most of what has been announced so far. This is important from a cash/investment capacity perspective.

[NBL0303]

Does anyone have any insight into the Joint Venture press release for the development of power? Is that just basically a dressed-up way of saying, they are doing this joint venture with a Chinese company so they can do business in China - is that what is going on with that?

[petec]

Does anyone have any insight into the Joint Venture press release for the development of power? Is that just basically a dressed-up way of saying, they are doing this joint venture with a Chinese company so they can do business in China - is that what is going on with that?

 

They already do a ton of business in China on the shipping side. It might be a way in for APR. But the release refers to developing projects. I have no idea, frankly. Hopefully it will be discussed on the call.

[ourkid8]

It's released:

 

https://finance.yahoo.com/news/atlas-reports-fourth-quarter-full-210500707.html

[WneverLOSE]

I don't get it, a year passed and the fleet got 2 years younger vs getting 1 year older.

2019 : 1,023,000 TEU, 123 ships with average age of 7 years (TEU weighted)

2020 : 1,073,200 TEU, 127 ships with average age of 5 years (TEU weighted)

 

What am I missing ?  ???

[petec]

It's released:

 

https://finance.yahoo.com/news/atlas-reports-fourth-quarter-full-210500707.html

 

CFOPS less pref dividends, which I track, came in at $195m. This is a quarterly record by some distance, despite APR’s Mexicali project rolling off. I don’t think the growth can all be from acquired ships. Maybe we are starting to see the impact of small ships on short contracts rolling over in a hard market. If so, there is more to come. Call will be interesting.

[petec]

I don't get it, a year passed and the fleet got 2 years younger vs getting 1 year older.

2019 : 1,023,000 TEU, 123 ships with average age of 7 years (TEU weighted)

2020 : 1,073,200 TEU, 127 ships with average age of 5 years (TEU weighted)

 

What am I missing ?  ???

 

Where are you seeing this? All I can see is this sentence at the bottom of page 9 of the release: "Seaspan’s fully delivered fleet of vessels has an average age of approximately 5 years and an average remaining lease period of approximately 7 years, on a TEU weighted basis."

 

So could it be that the 5 year figure includes the order book and the 7 year figure refers to lease duration, not ship age?

 

The 7 year figure for lease duration is up from 4, I believe - a huge extension in a short period of time.

[WneverLOSE]

I don't get it, a year passed and the fleet got 2 years younger vs getting 1 year older.

2019 : 1,023,000 TEU, 123 ships with average age of 7 years (TEU weighted)

2020 : 1,073,200 TEU, 127 ships with average age of 5 years (TEU weighted)

 

What am I missing ?  ???

 

Where are you seeing this? All I can see is this sentence at the bottom of page 9 of the release: "Seaspan’s fully delivered fleet of vessels has an average age of approximately 5 years and an average remaining lease period of approximately 7 years, on a TEU weighted basis."

 

I see it in that exact line, doesn't it say that the fleet that they have right now (not including ships that are yet to be delivered) is 5 years old ?

 

Seaspan's fleet consists of 127 containerships representing total capacity of approximately 1,073,200 TEU. We also have 31 vessels under construction and 2 second-hand vessels with aggregate TEU of 487,000. Seaspan's fully delivered fleet of vessels has an average age of approximately 5 years and an average remaining lease period of approximately 7 years, on a TEU-weighted basis.

 

So could it be that the 5 year figure includes the order book and the 7 year figure refers to lease duration, not ship age?

 

The 7 year figure for lease duration is up from 4, I believe - a huge extension in a short period of time.

 

the 7 year figure I mentioned is from the 2019 Q4 release but I don't know, I'm confused about that, hopefully they will explain what they meant in the call or the annual report , Other than that you are right they extended existing charters quite a lot but sacrificed rates in doing so, high range of the guidance is "only" 11% higher, will have to see how intelligent it was to do so based on how rates do in the coming years.

 

I would like to have seen also a charter coverage chart for the next few years in order to judge rates exposure better although it seems the entire portfolio is pretty much fully booked for the next few years for good and for worse.

 

 

EDIT : the presentation is live now, the PRO-FORMA age of the fleet is 5 years so now it makes sense, they should have said it better on the earnings release

[petec]

I think they said it pretty clearly if you read that sentence carefully. “Fully delivered” refers to the order book and the 7y figure explicitly refers to the lease term.

 

The majority of their fleet by TEU was on long term contract anyway. 4 years was quite a long duration when you consider the smaller ships on 6 months. Only the smaller ships were ever going to benefit from a short term spike in rates. Duration was always going to be the play in an upcycle and they’ve nailed it, frankly.

[bluedevil]

Most interesting nugget in today's conference call for me:

 

For recent new builds, they are spending CapEx of 3.7 billion, while locking in revenue of 5.9 billion during the charter terms.

 

Of course, they also get to keep the boats at the end of the charters.

 

Seems like attractive returns.

 

They also stated on the call that all of these new builds are satisfying their hurdle rate of very high unlevered single digits on equity, and high teens double digit with leverage.