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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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SpaceX Explosion Reveals Hidden Opportunities In Space Investment

SpaceX

Last Thursday a SpaceX rocket exploded during a propellant filling operation at Cape Canaveral. The rocket was a Falcon 9 and is designed to transport satellites. Investors have looked on in envy in recent years as groups like Elon Musk’s SpaceX and Jeff Bezo’s Blue Origin have grown at a breathtaking pace. Despite that, neither firm shows any signs of going public soon. Firms like Boeing and Lockheed Martin are heavily involved in the space business, but frankly their business model is being disrupted by the SpaceX and Blue Origin. Investors looking to get exposure to this burgeoning area of the economy have had few options … so far. The SpaceX explosion highlights a backend way to invest in the space.

The Space X rocket that exploded was part of a $62 million launch operation, but it also included among other things, an AMOS-6 satellite on board valued at more than $200 million. Facebook owned this satellite and it was going to provide Internet access to parts of Africa. Thus the loss of the rocket is a $250M plus hit – and that’s where the opportunity comes in. Such losses highlight the importance of risk mitigation through insurance – and the space insurance industry is one that investors can invest in.

Following the most recent explosion however, eyes have focused on who pays the bill for the rocket and its payload. For SpaceX to have an insurance policy they must pay a premium to big name insurance companies like AIG, Allianz, AON, or XL Catlin. Last year there were $500 million in claims; double the premiums being paid.

In other words, all it takes is 2 to 3 explosions a year for the insurance market to run into trouble – such problems can actually be a good thing. Typically, in catastrophe insurance markets, whether it is hurricanes or rocket explosions, a bad year leads to a good year. In bad years, some players exit the market, and everyone raises premium prices. That typically leads to a strong follow-up year in which the industry is more profitable thanks to higher prices.

This would have been SpaceX’s 29th launch and 9th launch this year. The company hasn’t had a shuttle crash since June 2015, which is fairly lucky considering 1 in every 20 rockets explode. The rocket was fully insured for the launch but, because this was two days earlier, it falls under pre-launch insurance, which only covers certain supplies on board.

With the commercialization of space exploration, private corporations are beginning to send more and more aircrafts into orbit. In previous years, SpaceX would only send 6 rockets annually but this number is likely to grow to 9 this year and potentially double digits in the future. SpaceX may not have insured their Falcon 9; they do not disclose this information. If SpaceX did not, they may consider doing so in the future, along with other similar companies.

Several companies’ stocks tumbled with the news this past Thursday. SpaceX is privately owned but Elon Musk’s other company, Tesla, fell more than 4.8 percent. Facebook’s stock remained steady upon hearing the news.

Space Satellite Communications (Space Com), the company that owned the Facebook satellite, saw a plunge in their shares. The company was valued at $4,320/share but following the news immediately dropped to $2,000/share. The stock now rests at $2,700/share.

Space Com has requested $50 million from SpaceX for destroying their satellite or a free ride on their next rocket. Space Com is also demanding $200 million from Isreal Aerospace Industries, the manufacturers of the AMOS-6 who hold the claim to the insurance policy. Space Com then has to pay back upset bondholders and the state. Related: What Drove The 2016 Oil Price Rise?

Investors should short Tesla, seeing as they have to pay bondholders $422 million by the end of the quarter. On top of this, the merger with Solar City is continuing to bring bad news to both the companies’ stocks. There is also doubt that Tesla will be able to meet production goals on their new model 3 by next year.

Space Com will likely see a rebound in their stock once all debts have been settled. There is a promising merger in the process for the company with Xinwei of China, so investors should react accordingly upon announcement.

SpaceX is in the process of recovering from the loss of their rocket but will likely begin preparations for their next launch shortly. They have a series of missions planned for the near future.

With an increase in annual launches there is a high likelihood of rocket explosions becoming even more numerous. These commercial space companies will feel a greater need to insure their rockets and their payloads, increasing the demand for insurance policies. By investing in insurers like AON or XL Catlin, companies that protect these rockets, investors can see a correlation between returns and development of the space industry, predominantly private.

By Michael McDonald of Oilprice.com

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