Shipping titan John Fredriksen's $11 billion fortune has soared while the tanker industry has been tanking. His secret offers a lesson for every industry
In the shipping industry John Fredriksen is known as the Viking King. The hard-nosed son of a shipyard welder who grew up on the wrong side of Oslo, Norway, Fredriksen got his start running cargoes of fish, became an oil trader in Beirut and made his first fortune in the early 1980s as what his biographer called “the Ayatollah’s lifeline”, moving Iranian crude during the Iran-Iraq war. His tankers were hit by Iraqi missiles three times. Since then Fredriksen has built the world’s biggest oil tanker fleet, operated by his public company, Frontline, and has amassed one of the world’s biggest fortunes—$11.3 billion at last count, making him the 75th richest person in the world.
His most impressive feat, though, is still in the making. Shipping is cyclical, but there’s been no cycle like this one. Five years ago when the economy, and oil imports, were soaring, tankers were chartered for as much as $96,000 per day, and Fredriksen, earning his moniker, declared that the shipping business was the best it had been since the time of the Vikings. By last year lower demand and resurgent US oil production saw those same tankers renting for closer to $20,000. Fredriksen’s longtime right-hand man, Tor Olav Trøim, provided the historical update: Shipping hadn’t been this bad since Europe was gripped by the Black Death. “The market,” Fredriksen tells me, “has collapsed totally.”
Yet Fredriksen’s fortune is up 180 percent in the past three years. The Viking King, it turns out, embraced two of the most classic rules of a cyclical business: He socked away cash during the good times and diversified mightily, buying assets on the cheap.
So it’s no matter that the shipping business is in the toilet. Over the past decade Fredriksen has taken out more than $3 billion in dividends from Frontline and sister companies like Ship Finance International and Golden Ocean. He’s reinvested that cash in new companies like Marine Harvest, the world’s largest salmon farmer; Golar LNG, which ships liquefied natural gas; and Seadrill, which operates deepwater oil-and-gas drill ships.
Seadrill is Fredriksen’s most wildly successful investment. He founded the company in 2005 and built it by acquiring established drillers and building dozens of new rigs, which now compete with the likes of Transocean to bore the deepest holes in the seas. The best rigs are leased out to oil companies for upwards of $600,000 per day. “There’s already a shortage of deepwater rigs,” says Fredriksen, pointing to increased drilling off Brazil, western Africa and the Gulf of Mexico. Seadrill’s shares now account for nearly half—$5 billion—of Fredriksen’s fortune and delivered nearly $400 million in dividends last year.
And because nearly all his vehicles are publicly traded, Fredriksen has taken outside investors along for the ride. “You have to share with others and treat them fair,” he says. “It’s like investing with Warren Buffett,” fawns Trøim.
Those investments look extra-prescient given Frontline’s struggles. Last year the company lost $530 million; shares collapsed by 85 percent on fears that the company would run out of cash to pay bondholders, let alone the $400 million it owes for new ships it pre-ordered in the good years.
But even here Fredriksen is acting smart. In December Fredriksen announced that he would personally bail out Frontline, pledging $500 million of his own cash to cover losses. “It’s not something we wanted to do, but something we had to do,” says Fredriksen. A lot of his competitors didn’t have that option: Last November General Maritime, the tanker operator controlled by Peter Georgiopoulos, filed for Chapter 11 bankruptcy protection. Genmar, which had taken on too much debt in recent years to finance acquisitions, is now fighting with creditors over the terms of a restructuring.
In contrast, Fredriksen’s backstop was just temporary. In December he broke Frontline in two. The new entity, called Frontline 2012, was spun off to hold the fleet’s prime assets—the newest ships—and most of the debt. While the old ships require $30,000 per day to break even—uneconomical given the current $20,000 rates—the new ships can operate for between $4,000 and $10,000. Enough to turn an operating profit and handle the debt.
“It’s a strange thing,” says Fredriksen. “If you build today you have the lowest capital cost and the lowest operating cost.”
To capitalise Frontline 2012, Fredriksen in mid-December raised $285 million in a private placement and co-invested with outsiders dollar-for-dollar. “The alternative—massive equity dilution or bankruptcy—was much, much worse,” says Douglas Mavrinac, managing director at Jefferies & Co.
(This story appears in the 27 April, 2012 issue of Forbes India. To visit our Archives, click here.)