Shipping magnate John Fredriksen sticks to his ‘gut feeling’: Invest

September 22, 2012

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.


John Fredriksen, 68, chief executive of Bermuda-based Frontline, is the most influential oil-tanker owner since the days when Greek tycoon Aristotle Onassis ruled the sea lanes. (Henry Bourne/Bloomberg Markets)

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.

By the numbers

$13.2 billion

What John Fredriksen, the Norwegian shipping magnate, is worth. He manages the world’s largest fleet of supertankers and the most valuable deep-water drilling company.

$1 million a day

How much Fredriksen makes in dividends from his 23 percent stake in Seadrill, an offshore deep-water drilling company

$7,000 a day

What new eco-ships could save Frontline, Fredriksen’s tanker company. The new ships will burn 20 percent less marine fuel than existing vessels, the No. 1 expense in the industry.

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