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  • Writer's pictureRyan Lynch

Deriving Alpha from Operating Rents

Updated: Jan 13, 2022

In our most recent weekly analysis, we look at the public equity segment; specifically tanker companies. By using a sample of recent realized commercial returns, we seek to understand a potential trading Alpha strategy in the segment - one based on each company and its own operating rents ("operating alpha") versus a constructed index.

It goes without saying, corporate outperformance of any relative index is a derived valuation, not an exact science. Additionally, much in the way of operating rents can be attributed to prudential management strategy (or even luck). In this context, we are, in a sense, attempting to fit future randomness into a quantifiable distribution. As each operating team is imperative to their own future rents, in this analysis we hold whatever the current strategy, as static, for use in our forward valuations.

As with other public equities, many tanker platforms seek to represent a specific (within) market segment, or strategy. The latter seeks to reduce and/or eliminate a concern with "diversifying away returns" and affords an investor a "pure-play" on a segment of their choosing. All told, this allows both the operating company, and the investors the ability to trend ever-closer to the ever hopeful right-tail returns. Whether this strategy is good/bad/indifferent, is not the scope of this analysis; rather we look to deconstruct the operating rents (operating alpha) and reconstruct a realistic scope of potential future returns. The purpose here is to eliminate any "index" liquidity aggregation and backwardation bias as it may influence expected returns.

We would never be so bold as to suggest this is a crystal ball, rather one that takes a more defined view of what futures can do for a well informed valuation professional. We hope this analysis may prove to support both internal and external stakeholder expectations.

As a reminder this analysis excludes engine efficiency rents, which we feel are partially capture in corporate beta (higher capex for newer ships), however there is certainly alpha which is generated after controlling for oil price effect, so please reach out if you would like a run through on that aspect.

As always don't hesitate with any question or issues

MOIC Published 13 Dec
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