Shipping Titan John Fredriksen's Secret to Success

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.

Meanwhile, the old Frontline, saddled with the older ships, has had its debt ballast lifted. It might be able to survive on its own if tanker rates have bottomed out. Eventually the old Frontline will likely go to the scrap heap along with its tankers: “It’s very ugly,” says Trøim, predicting that virtually every ship built between 1990 and 2005 will be scrapped in the next five years and shippers will balk at taking delivery on ones they ordered at $150 million when they’re now worth $80 million.

Instead of slogging through this mess, Fredriksen, 67, could relax and enjoy the comforts of his mansion in London’s Chelsea (the one for which Russian billionaire Roman Abramovich offered him $200 million) while grooming his heirs, daughters Cecilie and Kathrine, to take his place.

Yet, says Trøim, he leads a peripatetic life, splitting time between London, Spain, Barbados, Bermuda and Norway and a few weeks a year in Singapore to tour shipyards. He’s a citizen of tax haven Cyprus. And while the Fredriksen sisters sit on the boards of Seadrill, Frontline and Golar, they’re unlikely to fill Dad’s shoes. “We are trying very hard to get them interested in the business,” says Fredriksen. “I’m not pushing them; it’s a man’s business.”

Fredriksen isn’t the most encouraging role model. “He treats himself so hard,” says Trøim. “He is extremely competitive. He is never satisfied with his successes. I think of something John’s wife once said to him: ‘Life is not a penalty.’”

Since she died in 2006, Fredriksen has only sped up his activity. “I’ve been doing this for 50 years,” Fredriksen says. “If I stopped I would probably drop dead.”

To gear up for what promises to be the buying binge of a lifetime, Fredriksen recently sold more than $1 billion worth of Seadrill shares. So as not to send the wrong message to Seadrill’s lesser investors, Fredriksen gave the buyers a put option to sell the shares back to him at the price they paid. Tellingly, his acquisition vehicle will likely be the newly formed Frontline 2012. He’s in no rush, expecting the industry’s “Black Death” to last another five years before turning around.

He’s done this before. Back in 1997 he sucked up the junk bonds of Golden Ocean, a Vancouver-based bulk shipper that went bust after the Asian collapse. Paying as little as 17 cents on the dollar for bonds, Frontline grabbed control of 17 ships for just $65 million cash and later spun out Golden Ocean again for a hefty return.

You can’t invest in Frontline 2012 yet; a public listing remains a ways off. But you can piggyback on Fredriksen’s other companies, including newly formed Archer Ltd, which specialises in the engineering and drilling of both onshore and offshore oil and gas wells and is listed on the Oslo Stock Exchange.

Archer started as a spinout from Seadrill in 2007 and doubled in size last year with the acquisitions of Allis-Chalmers Energy and Great White Energy. The goal is to build Archer into a leading oil services company within three years, says Trøim. Expect a US share listing sometime soon. Just don’t expect this shipping king to relax—or to buy a yacht. “A yacht? No, I never have time,” says Fredriksen. “I prefer to stay ashore.”