Fairstar balances loss with increase in future contract revenue

The company reported an operating loss of USD2.6 million in the quarter and advised that it is currently in discussions with a Nordic/Dutch banking syndicate to re-finance its current secured loan facility. 

Philip Adkins CEO provided some further insight on the announcement: "Fairstar is well positioned for the future. Our "Red Box Strategy" has been further validated by new multi-voyage, high value contracts and extensions of existing contracts. We have slugged it out in the spot market this year and have won contracts that will generate the cash flow we require to meet our current financial obligations as well as continued to invest in our business. In early 2012 we will have escaped from the unpredictable and volatile economics of the spot market and begin to book predictable and consistent revenues every month for at least three to five years. Our future will be wedded to the growth of Australia as a major supplier of LNG and the ongoing demand for this energy source from the industrial nations in East Asia.

"We are disappointed to post an operating loss this quarter and do not expect 2011 to be a profitable year for Fairstar. However, we have maintained the financial strength and stability necessary to preserve and protect the underlying value of our business and positioned it to create sustainable value for our shareholders for many years to come." 

Fairstar said it achieved 61 percent utilisation for its vessels Fjord and Fjell in the third quarter of 2011, adding that the current pricing environment in the spot market for marine heavy transport is savage, with no sign of improvement for the foreseeable future. An excess of capacity chasing a declining number of cargoes has put further downward pressure on time charter revenues. 

High-value, multi-voyage, long term contracts that require a high degree of engineering support as well as operational expertise are the essence of the company's "Red-Box Strategy¨ and it said that "Red Box¨ revenues will commence in April 2012. 

Until then, Fairstar said it will have to face two formidable challenges. First of all it must continue to generate the cash flow required to meet its obligations, reduce debt and invest in its business. Secondly it must continue to hire and train the team it will need to deliver what is required of Fairstar for Gorgon. The next six months are critical. 

The company concluded that the marine heavy transportation market continues to evolve into three distinct segments. 

Is stated that the spot market continues to be characterised by extreme price competition, adding that operating margins in the third quarter were at levels close to or even below OPEX for most cargoes when more than one vessel was in the area. "The pricing environment suffers from a shortage of available cargoes and a severe over-supply of converted oil tankers. This market trend has continued in the second half of 2011 and shows no signs of abating. The barriers to entry for marine transport in the spot market are low." 

As a result, Fairstar said it expects some of the speculative tonnage being built in Asia by industry newcomers will enter into the spot market in the second half of 2011 and 2012, exacerbating the downward price spiral, adding that it has no intention of competing for this business in the future. 

For Fairstar, the most attractive segment of the marine heavy transport market will involve high value, multi-voyage energy infrastructure projects both onshore and offshore. These projects require a high degree of engagement with the client throughout the contract period. The barriers of entry for this segment are becoming increasingly higher as energy companies raise their standards for safety, reliability and proven past performance. Fairstar says it is unique in the industry as being the only company offering a fully dedicated team of mariners, engineers and project professionals who are employed by Fairstar. 

In the second half of 2011, Fairstar noted a significant increase in tender activity for high value, multi-voyage energy infrastructure projects, particularly in Australia and said it has has submitted several tender packages for these projects. It expects official announcements and contract awards to be released in the fourth quarter of 2011 for at least one of these major projects. 

Ending, Fairstar said that in spite of the disappointing operating results for the current financial year, the order book it has won for the coming three years means it will achieve its target of 80 percent fleet utilisation and T/C revenues averaging USD 80,000 per vessel. It said it is confident that these returns are sustainable for at least five years.