The Doha Securities Market-listed company plans to expand its fleet while the market is in a downturn.
QSC carries out all business activities relating to shipping including hiring, leasing, selling and operating vessels. It has a 10-member board of directors and its largest individual shareholders are Qatar Petroleum (QP) with 18 per cent, and Qatar Navigation with 15 per cent. Individuals own 40 per cent of the firm and the rest (27 per cent) is owned by other businesses.
QSC mainly operates in the energy sector and is engaged in several joint ventures with QP, including holding a 15 per cent stake in liquid natural gas (LNG) shipping company Nakilat, which was established in 2004 with the aim of becoming the state’s largest LNG transporter.
|Main business sectors||Shipping|
|Main regions||Global, headquartered in Qatar|
|Chairman||Salem bin Butti al-Naimi|
In addition, QSC has stakes ranging between 15 per cent and 29 per cent in nine LNG carriers, with a total capacity of 267,387 dry weight tonnes (DWT).
The firm has also set up a 50:50 joint venture company with Nakilat, called Gulf LPG Transport Company, which is awaiting the delivery of four liquid petroleum gas (LPG) tankers, each with a capacity of 54,000DWT.
Other joint ventures include a 50 per cent stake in Halul Offshore Servicing Company (HOSC), a one-third stake in chemical transportation business QIM Transport Incorporated, and a 25 per cent stake in Qatar Quarries & Building Materials Company. Since 2004, QSC has also had a 51 per cent stake in Qatar Engineering & Construction Company.
The firm’s seven wholly owned vessels carried out 108 voyages and moved 4 million tonnes of cargo in 2007.
The tankers are currently leased on time charters of between two and five years. Inter-national energy firms such as the US’ Exxon-Mobil Corporation and France’s Total are among the companies that have hired vessels. Others include Canada’s TK Shipping and Qatar Fertiliser Company (Qafco).
Until mid-2007, the firm engaged two of its vessels on the spot markets. “QSC operated clean-product handy-max tankers - the Jinan and Dukhan - on the spot market at very high rates until the middle of the year, to take advantage of the high freight levels,” says Kamal Kothari, chief executive officer of QSC. “After this, these vessels entered into time charters for a period of three years each. This was timed well as the spot markets witnessed a significant downturn after that.”
At the start of the year, QSC had nine vessels but has since sold two - the Ruwais tanker in January and the Alnoman tanker in February - boosting company profits for the year. According to Kothari, these assets were valued at record levels, prompting the decision to sell.
In addition to the offshore services joint venture HOSC, QSC has a wholly owned support services division. It has a contract for QP to provide harbour towage, pilot boat services and crew at Mesaieed port, with four fully owned tugs and two pilot boats. It also has a tug at the Halul island terminal.
“To cope with a request from Qatar Petroleum to meet the ever-growing vessel movements at the port of Mesaieed, QSC chartered in two tugs and a pilot boat, and deployed them under a variation to the existing QP contract,” says Kothari.
The company has recorded strong profit growth in recent years. Profits in 2008 were QR518m, compared with a record QR621.4m ($142m) in 2007, up 35 per cent from QR458.6 in 2006. In June 2008, profits stood at QR375.1m, broadly in line with the 2007 half-year figure of QR387.7m. But its third-quarter profits reflect the effects of the global shipping industry’s downturn. Earnings were QR459m versus QR477m for the same period in 2007.
The board of directors has recommended the distribution of a 35 per cent cash dividend for 2008, equal to QR3.50 per share. Earnings per share in 2008 stood at QR4.71, compared with QR5.55 in 2007.
Overall, the firm is seeking to grow its share of the global shipping market. Through its Nakilat joint venture, QSC is seeking to become the key shipping provider to Qatar’s energy sector. The company expects to own 56 LNG vessels by 2010, up from 29 in 2008.
Thanks to its decision to ensure all major vessels are locked into long-term charters, the firm has hedged against the current shipping downturn. Associated operational costs such as fuel now lie with the partners rather than QSC. In addition, the firm has been astute in only selecting financially strong partners that can weather the cost increases and demand fluctuations that are common in shipping.
It has been less successful in its construction operation, Qatar Engineering & Construction Company. However, this business has begun to recover thanks to a restructuring of operations. Margins in construction are considerably lower than in shipping, and divesting of this asset would reduce pressure on QSC’s operating costs.
A new raft of ships is under construction worldwide and will begin to hit the market in 2009, at a rate that is forecast to outperform demand growth, particularly in the current financial climate.
As these new vessels come to market, Kothari and the board will be making the most of any supply surplus to make new purchases at bargain prices. With none of its ships being more than three years old, it has minimal insurance claims and maintenance requirements, and is therefore in a strong position to grow its asset base.
Q&A Kamal Kothari, CEO
What is the outlook for the shipping market?
In the next 12 months, the shipping market is going to change. The number of ships on order today is unprecedented. Going on the number of ships currently on order, the global fleet will increase by 53 per cent in the next year.
A ship’s life is 20-30 years. Given the expected increase in the global fleet over the next 16 months, I do not see demand for this. The growth in India and China may not take place as expected.
How are the current financial market problems likely to affect you?
Today’s issues in the financial markets mean a slowdown in shipping demand. My tankers operate globally to internationally strong companies.
They are let on a time charter where the income is fixed, so to that extent we are immune from the global financial problems. We have exercised due diligence in choosing the counterparties to which we let our ships. The contract is fixed and is binding. Our ships are time chartered - some until 2013 and some until 2011.
What are the dangers introduced by counter-parties?
Shipping is cyclical. In a downturn, weak counterpartners might find that their profits are falling and they will try to frustrate or get out of the contract arrangement. We have to be careful who we lease to.
You have four liquid pet-roleum gas (LPG) tankers on order. Are you concerned about the market for these?
We have a joint venture company (Nakilat) with Qatar Petroleum. LPG is a by-product of LNG and with the amount produced by this country [Qatar] in the future, from 2011 or so, we will need 30 more not four. We already have stakes in nine LNG ships and these are on charter for 25 years.
Your overheads have increased considerably in 2007 and 2008. Why is this?
This is a consolidated figure. We are not just a shipping operator, we have our own EPC [engineering, procurement and construction] contractor. Its accounts are consolidated with ours and it is a huge company of 4,500 people.
It is mainly operating costs. Its margins are different. The company is no longer losing money but it was when we acquired it five or six ago, and we have turned it around. We restructured and changed the focus.
It now does mainly construction and maintenance in the energy sector.
What is the future for this contractor? Will you keep it?
We are happy with the new structure but there is always room for improvement. I am not sure what will happen tomorrow. The world is a dynamic place. This week can be very different to last week. Who predicted what happened in the financial markets?
Are you looking into any new business areas?
Yes, we have just won a contract to supply 35 million tonnes of aggregate to Qatar Quarries for five years from April 2010. This is 6-7 million tonnes a year and is worth QR1.1bn.
We do not have any bulk carriers at the moment so we are looking at different strategies. We have 18 months to optimise market conditions.
What is your key challenge?
The challenge is how to grow. I always believe we have the right strategy: sell ships when prices are high and buy when they are low. It was [US investment guru] Warren Buffet who said: “Be fearful when others are greedy. Be greedy when others are fearful.”
This philosophy applies to the stock markets and shipping. We have to employ our resources optimally in the next few months and buy when prices are at a low.