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A New Skipper for Seatrain

A New Skipper for Seatrain
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April 9, 1978, Section F, Page 7Buy Reprints
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Seatrain Lines, the New York‐based shipping conglomerate and operator of the city's only sizable shipyard, had its share of hard times even before the latest storms started to swirl around the shipping industry. A pioneer in the shipping of containerized freight, the 47-year-old company last paid a dividend in 1959, and in 1975 it came perilously close to bankruptcy.

After two years of balance‐sheet rebuilding, Seatrain was hit by the nine‐week dock strike on the Atlantic coast; the company lost $6.3 million in fiscal 1978's first six months, which ended Dec. 31. Next, dock strikes abroad helped hold down earnings in the quarter ended March 31. To all of that, add the bleak outlook for shipbuilding, tanker chartering and world trade.

But Seatrain's new captain has not given way to gloom. He is Stephen Russell, an aggressive 38-year-old, who in November became president and heir apparent to Joseph Kahn, 61, the chairman. There is no chief executive officer; responsibility is shared by Mr. Russell, Mr. Kahn and the vice chairman, Howard M. Pack, 59.

Mr. Russell, who was born in Brooklyn and educated at Stuyvesant High School and Cornell, says the youthful management team he has assembled can keep Seatrain afloat and transform it into a more viable company. Good financial management and diversification outside of shipping are the key elements of his strategy.

The tough‐talking Mr. Russell joined Seatrain in 1974 as executive vice president and chief operating officer. He had previously worked for the RCA Corporation, the Hertz Corporation (an RCA subsidiary) and the Ford Motor Company, so his arrival at Seatrain caused something of a stir in the shipping industry, which has a reputation for inbred stodginess.

Mr. Russell immediately began to reshuffle management. As if carefully designing life preserver, he deliberately sought out young executives with strong financial backgrounds. He has pulled in other top executives from Hertz, BFL Communications, the C.I.T. Financial Corporation and Condren, Walker & Company. He also decentralized decision‐making, giving the managers of Seatrain's 41 subsidiaries responsibility for generating profits themselves rather than turning to central management for answers to every question.

“The shipping business is almost totally international, and there's no way you can run it from a central office,” said Mr. Russell during an interview in his small, sparsely furnished office on the 41st floor of 1 Chase Manhattan Plaza. Commenting on criticism that his management team knows little about shipping, Mr. Russell. said: “Transportation industries are basically very similar. To move from one to the other, all you have to do is relearn the jargon and the lingo.”

The transportation experience of the former high school newspaper editor has led him to embrace a theme that is popular in transportation circles today ‐the redeployment of assets. Seatrain, with about 4,000 employees, is now engaged in the chartering of tankers, management of port facilities, shipbuilding, container transportation and oil refining. As an integral part of the top management troika, Mr. Russell is trying to chart a new corporate course for Seatrain by acquiring more energy‐related. businesses and relying less on shipbuilding and shipping.

The latest such move came last month when Seatrain bought three small West Virginia coal‐mining companies. Also, an energy group was formed to run the company's other energy investments, all made since Mr. Russell moved into the executive .suite.

Seatrain purchased, in partnership with six Alaskan groups, 20 percent of the Alaska Petrochemical Company, a new venture formed to build a refinery to process the state's one‐eighth share - about 150,000 barrels, a day - of the oil from Prudhoe Bay. And Seatrain has purchased the Texas‐based Pride Refining Company for $30 million in notes and preferred stock. At the time of purchase, in August 1976, Pride had a refining capacity of 36,000 barrels day and annual revenues of $135 million. The acquisition was a key element in Seatrain's 112 percent profit jump in fiscal 1977.

Seatrain had had three consecutive years of losses, stemming mostly from the collapse of the charter market for oil tankers and cutthroat competition in the Atlantic container trade. In the three‐year fiscal 1973‐75 period, the company lost $42 million. In fiscal 1976 it earned $6.5 million, but more than half of that came from accounting credits accumulated in prior years. Income from Pride Refining helped push earnings to $14.8 million in fiscal 1977 on revenues of $463 million.

The addition of the refinery also strengthened Seatrain's balance sheet. In the 1973‐75 period, shareholders’ equity dwindled by more than half, to $18.2 million from $37 million. It recovered somewhat in fiscal 1976. But in fiscal 1977, a year after the refinery acquisition, it registered $41.6 million. The volume of long‐term debt has risen sharply in the last five years, reaching $331 million at the end of fiscal 1977, compared with $290 million in fiscal 1973. But the debtto‐equity ratio has remained about the same, 8 to 1.

There is some question, hOwevei, about the refinery's ability to continue its strong performance. The worldwide oil glut began to affect Pride's performance late last year. And major refineries, complaining that Government regulations are rigged in favor of small refiners, have been agitating for change for several years, clouding the outlook for the likes of Pride. Moreover, analysts say the newly acquired West Virginia coal properties may not help Seatrain's recovery because of weak demand for their metallurgical coal, used in steelmaking.

But the husky Mr. Russell confidently dismisses all this second guessing: “These are small investments, so the risk isn't that great, but they do give us a chance to get in there and learn the business.' Fuel is Seat-

He's pursuing more energy‐related companies, relying less on shipping.

rain's largest single cost factor, he said, so. it's logical that the company should be interested in energy. And the company has $120 million in carry‐forwards and must find some businesses whose profits can be sheltered by these tax credits.

The emphasis on oil has been accompanied by a de‐emphasis on shipbuilding. But the sad condition of the shipbtiilding market has had a lot to do with that. The Lloyd's Register of Shipping annual report disclosed last week that the volume of new ship orders in 1977 was the lowest ever.

Seatrain took over the old Brooklyn Navy Yard when the Pentagon abandoned it in 1969. Under terms of the 20‐year lease the company was to employ “when available” hard‐core unemployed workers from the neighboring Bedford‐Stuyvesant area. But the yard employs only 2,000 people, a fraction of original projections. Last month 300 people were laid off, and the hard‐core hiring provision of the lease has been waived.

Seatrain entered the tanker construction business at the height of a tanker building boom. Building four supertankers on speculation for use in its tanker‐chartering operation, the company has suffered financial reversals on all three ships completed. The fourth is being finished for Seatrain's own account with no charter in sight.

Mr. Russell says that the shipbuilding division will turn its attention to building tugs and barges and to doing more repair work. The reduced role of shipbuilding is reflected in the division's revenues, which fell from $196 million in fiscal 1975 to $17 million last year.

“We were growing so rapidly in the early 1970's that we picked up businesses that weren't economically sound,” Mr. Russell said. “No American yard can compete with foreign yards.”

Shipbuilding came and went very swiftly for Seatrain. Now the company is turning its attention toward its bread-and-butter businesses — chartering ships and hauling ocean freight. The company gets more than 60 percent of its revenues from these sources. But when one segment is up, the other is down. Previous management tried to solve the problem by expanding into port mangement, freight management and ship.’ building. But the new group is looking more closely at financial details.

They are coming up with an array of in= volved deals. Seatrain recently subleased, from a Brazilian company, the first two tankers it built. The Brazilians were losing money hauling oil from the Persian Gulf to Brazil. Seatrain got a very favorable rate and will use the tankers in the Strategic Petroleum Reserve trade, the Government program to build up American oil reserves for an emergency. Half of the oil must be transported in American‐flag ships. Seatrain stands to make tens of millions of dollars on this deal in three years.

Last fall, when oil began to flow from the trans‐Alaska pipeline, Seatrain was able to rid itself of a laid‐up supertanker, the Stuyvesant. The company had built the ship with a Government subsidy of 50 percent, but there was no profitable business for the ship when it came out of the Brooklyn yard. Subsidized American ships and foreign ships are forbidden by law to move Alaskan oil. So Seatrain repaid the Government subsidy, sold the ship to the General Electric Credit Corporation and leased it back from them. Seatrain then chartered the vessel out to the Standard Oil Company (Ohio) to haul the Alaskan oil.

The new financial expertise at Seatrain has also been helpful in managing the company's staggering debt. Two years ago Mr. Russell decided that the company had too many bank loans with interest rates above the prime rate. By shopping around and replacing the expensive loans with cheaper ones, he says, he saved the company $5 million in interest expense.

Seatrain has come under numerous investigations for rebating payments in some form to shippers. The practice is being scrutinized by the Federal Maritime Commission, grand juries and the Securities and Exchange Commission because it has increased in response to low prices the Russians are charging for moving general cargo. Shipping companies that belong to rate conferences — generally all the major companies in the non‐Communist world must adhere to rates set by the conference.

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