The 80-20 rule versus the buy low/sell high mantra
Navig8 Chief Executive Nicholas Busch had plenty of reasons to feel confident when he took the stage at the recent Marine Money event in London. His seven-year old company is mostly in the right markets at the right time and in the one poor one, provides a classic owners’ solution: the pool.
In another era, Navig8 might be seen as a controversial beast. This fully-integrated service provider operates the world’s largest independent pools but it is also owner, operator and an active charterer, enabling it to offer employment optionality to its owners. Its technical and commercial shipmanagement and bunker operations have the cost bases covered, rarely the traditional approach of shipping market players.
So while Busch talked a strong book at Marine Money, his angle was different. In fact he scolded an industry he thinks has become obsessed with what to buy or sell and when and spends too little time on how to operate and manage investments.
“As an industry we spend close to no time on the ‘how’ and even ‘who’ will manage the assets. As a result we are plagued with inefficiencies from an operational standpoint,” he said. “I would estimate that as little as 10 or 20% of time is spent on how to operate assets. Our focus has been on how to operate the ships.”
The point is that when markets are good, owners might pay less attention to costs or the efficiency at which their fleets operate. Tankers may be riding high right now but the bad times are a recent memory. Dry bulk is under water and even pooling is unlikely to prevent the need for scrapping this year. Costs are still high despite the oil price.
Busch’s contention is that focussing on the how is the best way to answer the when and what to invest in. Navig8 began with the top line but Bush says they quickly realised that inefficiencies in global logistics were costing them and their owners money.
The last four years have seen a focus on cost optimisation across four verticals; revenue, cost, technical and assets. To maximise revenues Navig8 sought to increase the ratio of the ships’ laden (fee-earning) days to time in ballast, drawing on the information flow from the ships and partners and using improved information processing to make better decisions. “Scale matters but what we quickly figured out is that if you only saw your owners once or twice a year, you wouldn’t have the customer relationships you needed. If you expand your information base you can get it faster,” he says.
Working across multiple pools and trades, Busch pitches Navig8 as a one stop shop, processing 3,000 cargoes every week, fixing 240 vessels a month and harnessing hundreds of vessel reports to maximise the earnings from the receivables, while owners get a single invoice.
The next stage, he says was to tackle the company’s biggest cost. Busch politely described bunker procurement as notoriously opaque – it was obvious that if the company could buy in bulk it could get better terms and pricing. The approach taken was the same as for commercial operations: improve the information flow and you will be more efficient, whether on port availability or quality of suppliers and apply the procurement and planning know-how gained as an end user.
“We didn’t focus initially on pricing, because we knew money was being lost in logistical inefficiency, off-spec product and claims support, so we wanted to save the owners time and then money.” Starting ‘small’ in 2011 with 100 clients, Navig8 procured 1m tonnes a figure that had grown by 2015 to 5m tonnes per year. Busch reckons its dedicated subsidiary now stems a bunker delivery every 2.2 hours, every day of the year.
“What we do is find things that logically work. Our technical management operation started before commercial and has always been core. We looked after our own assets but also decided we could help our pool partners with evaluations, vetting and newbuilding supervision.”
In this sense, Navig8 is providing the kind of services that have been denuded from traditional shipping companies (and have rarely existed at investment funds), offering them with the kind of market reach beyond a traditional third party shipmanager.
The search for linkage between its technical and commercial management operations led in 2012 to the development of an asset management operation as an advisory service for new cash-rich, expertise-poor investors. Given the money flowing into shipping, Busch figured he could go beyond advice of when to invest in steel and advise on structured coverage and exposure, enabling investors to go long or short on time charters too.
This team manages Navig8’s own investments and has expanded its third party services, drawing on its advisory role alongside the company’s other services. This part of the business has arranged $1.25bn of equity and $1.6bn of bank financing for investors in the chemical, product and crude tankers segment, as well as the small matter of merging its Navig8 Crude Tankers operation with General Maritime Corporation to form one of the world’s largest VLCC operators.
“Fortunes can be made on what you invest in and when [but I think] the industry needs to focus more on the operational issues. We can’t expect investors to know this stuff but if a market stays low for long time start they will increasingly look for companies who can operate assets efficiently on their behalf,” he concluded. “There are many ways to be more efficient. Scale is the first step but I think we should be focussing 80-90% of our effort on how and once we get that sorted, we can spend 10-20% on what and when.”