BMI View: BMI believes that the Saudi Arabian shipping company Bahri, known as the National Shipping Company of Saudi Arabia (NSCSA) until a change of name in April 2012, has a strong growth outlook over the coming years. The recent launch of its dry bulk arm, Bahri Dry Bulk (BDB) and the upcoming absorption of fellow Saudi oil tanker operator Vela will help the firm maintain profit growth like that achieved in the most recent quarter, ended September 30.
Bahri and Vela have reached agreement with the Saudi Arabian Oil Company (Saudi Aramco) and Vela on the terms and conditions by which Bahri will take over the fleet and operations of Vela. Vela is the wholly owned subsidiary of Aramco, formed to cater solely to the oil giant's transportation needs. Through the agreement, Bahri will pay US$1.3bn to Vela in total, comprising US$832.75mn in cash and 78.75mn in new shares, priced at SAR22.25 (US$5.93). The statement said: 'Pursuant to the terms of a long-term shipping contract, which has an initial term of 10 years, Bahri will become the exclusive provider of VLCC crude oil shipping services to Saudi Aramco for crude oil sold by Saudi Aramco on a delivered basis.'
The agreement between the two companies means that all that is now required for the merger to go ahead is the necessary regulatory clearance. The deal follows a memorandum of understanding struck between the two tanker operators in June ( see our online service, 'Saudi Arabian Merger Bad News For Others', June 28). As we noted at the time, the merger will make Bahri one of the largest crude oil tanker operators in the world; the total fleet of the new entity would entail 77 vessels, including 32 VLCCs, 20 chemical tankers, five product tankers, four ro-ros. Further to these the newly enlarged company would have an orderbook of 16 newbuildings.
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The effect of the merger, as things currently stand, would be to make the newly enlarged company the fourth-largest operator of crude oil tankers in the world. Bahri is currently in sixth place, while Vela lags in tenth. Once the move is completed - the companies are aiming to have the deal sewn up in November - only the Fredriksen Group ( Frontline and Frontline 2012), Mitsui OSK Lines and Nippon Yusen Kaisha would have larger fleets.
BMI believes that the deal will see Bahri enjoy huge growth in business, potentially to the detriment of other tanker operators, as it will enjoy the exclusive deal to transport Aramco's oil products where the oil giant previously needed to charter in vessels from various operators. We note that it is not only in liquid bulk that Bahri is expanding rapidly but also in dry bulk shipping.
In August BDB began operations ( see our online service, 'Bahri Dry Bulk Begins Operations', August 7). We note that the dry bulk subsidiary has a similar deal with the Saudi Arabian grains company Arabian Agricultural Services Company (Arasco) to that which it will enjoy with Aramco once the merger with Vela is completed. As BDB is a joint venture (JV) with the grains company, the shipping firm will enjoy an exclusive deal on transporting Arasco's grain. The JV is 60% owned by Bahri, with the remaining 40% controlled by Arasco. Arasco sub-lets the vessels from BDB for its grain import business.
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We believe that both of these deals will see Bahri's profits continue to climb in the coming years. Saudi Arabia has continued to increase oil production through 2012 in a bid to control rising prices and allay supply-side fears largely caused through the recalcitrant nature of Iran. Increased production needs more vessels in which to transport the oil and oil products, and Bahri is perfectly placed to cater for this. In terms of the dry bulk operations, increasing grain imports over the medium term as Saudi Arabia ceases to be a producer will keep BDB's dry bulk tankers in business; in 2010/11, the United States Department of Agriculture (USDA) reported that Saudi Arabia's production of wheat had fallen by 30% year-on-year (y-o-y); in the same period the country's wheat imports increased by 11%.
Bahri posted a sharp 157.3% y-o-y jump in net profit to SAR60.2mn (US$16.05mn) in Q312, compared with SAR23.4mn (US$6.23mn) in the same period a year before. Over the three-quarter period from January to September net profit rose by 145% to SAR427.4mn (US$113.95mn). CEO of Bahri, Saleh Nasser al-Jasser, attributed the rise in profit to a number of factors including the lower fuel consumption due to the slowing of ships and the income from BDB.