What is the best strategy for maintaining the profitability of the BW Group?
It’s difficult to stay consistently profitable in an industry with so much volatility, especially if you include the volatility of asset prices and mark the assets to market on a prudent basis. The best strategy is to have a strong enough balance sheet to withstand the volatility and the less profitable periods, and to avoid becoming overexposed in any particular segment.
A good example of this is the LPG sector, where we are actually very positive about the outlook but did an IPO and sold down some shares. On the one hand, we have been investing very heavily in anticipation of significant demand changes, but we are also conscious that sharing risks and rewards with other investors is a way to balance our portfolio so that we are not overexposed in a particular segment.
Public market investors and fund managers take exactly the same approach, investing in a number of companies to achieve diversification. If you are a public investor, it is unlikely that you would put your entire fund into one stock.
Why did you choose Oslo for the IPO of BW LPG?
Oslo has a strong historical standing as a maritime capital, with a self-reinforcing cluster of peer companies attracting other companies. This is visible in the maritime cluster (bringing together ship ownership, finance, Class, insurance, technology, etc.) and also in the stock exchange. The Oslo Børs is a strong exchange for shipping and offshore. It is well regulated and maintains good quality, but is not overly burdensome with the listing process. It shows how, once you have the right grouping of companies, you also get the right investor base and attention from banks and research analysts.
How does government regulation and legislation impact profitability in the shipping industry?
Governments have a critical role to play in establishing the rules of the road and ensuring a level playing field. Regulation is essential as long as it is well considered and gives people reasonable time to adjust. We have seen plenty of good legislation in the industry to improve safety or environmental performance.
A prime example is the Singapore government’s approach in creating a stable, long-term fiscal framework where they give visibility on how companies will be treated from a tax perspective. This is very important when we are investing in long-term assets. We have seen in other places that changeability and volatility in tax policies make it very difficult to sustain a business.
On the negative side of government involvement, we see more governments starting to intervene and undermine the market by insisting on local content or providing other forms of subsidy or protection. While the intention to support local industry and employment may be understandable, insisting on a high percentage of local content in a short space of time can be damaging for investor confidence and local consumer interests. If international companies cannot find suitable partners or local capabilities (for instance, to build high-value ships or offshore units), then they may simply refrain from investing. If local players are protected from the normal workings of a competitive market place, then consumers will usually suffer from poor value goods and services.
So governments have to walk a fine line – providing the right regulatory framework and incentives to stimulate business development but always ensuring a sufficiently open market place so that capital is allocated efficiently.
Which factors govern the profitability of the BW Group?
The factors that preoccupy us currently are the market, the impact of supply and demand, capital flows − because that often determines the supply side of the market; costs, particularly of fuel; and talent with its related impact on safety and performance.
The energy market is as volatile as the shipping market these days. How is it affecting you?
In terms of the market, we are at a juncture where energy flows are changing and the demand side is quite hard to read. Shale gas is a transformative phenomenon, and I am not sure that anyone has a perfect answer to how it is all going to develop and which areas will be the winners and the losers.
Some of the market changes hinge on political decisions, for instance, how much LNG or crude oil will be allowed to be exported from the U.S., where will it flow, how will the geopolitics unfolding in Eastern Europe develop? We work hard to understand the market and flows but we are careful not to think we can see perfectly into the future. What can help is to take a balanced approach either in terms of diversification or in terms of how one structures the balance sheet, so as to be prepared for surprises.
Capital is flowing into shipping again. Is this a positive development?
We are a very capital-intensive industry, so the availability of capital has a large impact. When capital is insufficient, it can create a lot of stresses in the system. But it is almost more dangerous when capital is over-abundant, because people start ordering too many assets and create over-supply. We are seeing a bit of that now because of all the liquidity in the global system. Some of it is being channeled through banks, some through private equity firms, and some through public markets. But a lot of it is finding its way into shipping. And that creates a high risk of overcapacity.
We are trying to manage this by looking at whether there are ways to collaborate and benefit from these capital flows, but also with an eye to the risks that they create. It is a case of trying to look at it positively, while being aware of the downside. We definitely haven’t always gotten it right. We just try to get it right as often as possible and to be disciplined. We should not get too carried away when things look good, and not get too depressed when things look bad.
How do you handle the challenge of spiraling bunker costs?
We focus on fuel costs, both as a business cost, but also because of the impact we have on the environment. We try to manage fuel consumption on our existing fleet very proactively, while looking to invest selectively in new fuel-efficient modern ships.
Just scrapping older ships has a huge environmental impact too, so it is not a silver bullet solution. We are also investing actively in maritime and environmental technologies, both as a user and also as an investor and incubator of good ideas.
What are the keys to making wise investments in technology?
We go beyond just being users of new technology to help promising technologies and young companies develop. This involves capital investment to help them grow, as well as providing access to our engineering input, test bedding on our vessels, our industry network, and so on.
In terms of the stage of investment, we look for proven technologies that have ideally achieved some level of sales. We seldom come in and seed an idea when it is just a concept. In terms of technology type, we do a wide scan to ensure we understand the entire landscape and do extensive research to ensure that we pick the best in class. We have a company called Green Marine Capital fully focused on this. We believe one needs a rigorous, focused approach to pick the best technologies.
We have a dual objective here: firstly, it is good business and we can underwrite our own return on investment; secondly, it has a very positive social impact. Talk is cheap – it is easy to talk about how the industry should do more, and we are all on a collision course with the environment. We are trying to do something about it and put some energy and capital behind it.
