Monday, November 5, 2018

More Aegean woes

Latest from Lloyd's List:

Aegean Marine Petroleum Network has laid out its findings to date from a lengthy internal investigation by its audit committee and it does not make pretty reading for shareholders of the New York-listed company, with up to $300m of company cash and other assets now held to have been “misappropriated” through fraud. 

I met some Glencore management, who run their fuel oil business from the Chemoil merger, just last week at a conference in Athens. They alerted me to the fact that despite so many months since the Mercuria take over, the company was still a mess and there were no published accounts.

We will see whether the US authorities will intervene on the fraud charges related to the receivables. Usually this goes nowhere and the shareholders simply lose their money.

I never liked this set up from the initial IPO. This is reflected in my previous blog articles. The company was very badly run in a difficult and low margin business with a lot of debt against receivables. That was an unsustainable and high risk business Strategy.

Since the initial IPO, I have consistently advised countless institutional investors to stay away from ANW.

Mercuria have the financial and operational means to turn this around but it will need a lot of restructuring. IMO 2020 is going to be a revolution to the fuel supply industry and likely to change the credit terms with the substantial increase in fuel costs.

Monday, October 22, 2018

The scrubbers conundrum

IMO 2020 is a daunting challenge for the shipping industry. After initially a long period of ‘wait and see’ with considerable verbal resistance to retrofitting their ships with scrubbers, there is a sudden rush since June this year of companies jumping on the bandwagon to retrofit their fleet with scrubbers. Whether over time this proves an effective means to meet the environmental challenges ahead for the industry remains to be seen. It is likewise questionable in terms of the interests of the shipping industry as a whole. 

The IMO 2020 regulation places an impossible burden on the shipping industry. Normally environmental regulations on matters like exhaust emissions start with the engine makers and refining industry, not with the end users of the equipment. 

Here the shipping industry will be monitored and fined for exhaust emissions from not using compliant low sulfur fuel oil (LSFO). The existing fleet is equipped with engines designed to burn heavy sulfur fuel oil (HSFO). It not clear that the refining industry will be able to supply sufficient LSFO. The refinery industry is not mandated to do this under IMO 2020. They do not know themselves how much HSFO will continue to be used and how much LSFO will be needed. Changing the refinery cycle to produce LSFO requires investment. Also possibly this will necessitate change of supply chain for crude oil in favor of lighter crude grades more amenable for production of LSFO.

None of the means of compliance for ship owners is guaranteed to be without risks, expenses and issues. 
  • Scrubbers are an exception in the IMO 2020 legislation that allow ship owners to continue to burn HSFO in their engines. No one knows for how long the regulatory authorities will continue to permit this exception. The technology is based on land applications in heavy industries like power plants. Scrubbers are heavy and expensive equipment. The residues from the process have a disposal issue. The process requires additional energy and has maintenance costs. Fitting scrubbers is a costly capital investment in the millions of dollars per vessel as well as requiring off-hire and expenses for installation. The CAPEX may be recovered in the operation of the vessel with cheaper HSFO but no one yet knows how much the price differentials will be between HSFO and LSFO and how long or soon will be the payback. The growing sentiment for scrubbers at least for larger tonnage comes from fear of being left out with charterers, who will give preference to vessels that can burn the cheaper HSFO. Some major oil company charterers are offering period charters at substantial premium to current T/C rates for vessels fitted with scrubbers. 
  • Burning compliant LSFO will have considerably higher costs than previously with the HSFO. Nobody knows whether there will be sufficient supply. Ships could be forced to wait for supply and be immobilized. There are no clear fuel standards. There are technical and safety issues in burning LSFO in conventional engines built to run on HSFO. 
  • LNG is prima-facie an elegant alternative but this practically can only apply to new buildings since the costs of refitting existing vessels with new main engines is simply not practical nor feasible. The major oil companies are preparing to supply LNG for fuel but so far availability is only at a few major ports and use of LNG as fuel is only feasible regionally in ECA areas like the Caribbean, Northwest Europe and the Baltic Sea. With LNG, there is another potential environmental issue with methane slip, where there might be future regulation. 
Lately in the Trump administration in the US, there is growing concern about the impact of higher transportation costs to consumers from IMO 2020 and talk about finding some means for delay in implementation of IMO 2020. Since these regulations have been ratified many years ago, the general feeling is that delay in implementation is not too likely. Simply, 2020 will be a tumultuous year in the fuel business and there will be considerable lenience until supply issues are settled. 

There will be three categories of vessels: 
  • Those fitted with scrubbers, mainly larger vessels with higher fuel consumption that perform long haul voyages. 
  • The modern ECO vessels without scrubbers with low fuel consumption. • All the other vessels available. •
  • Smaller vessels will be the least affected. Many of them are burning mainly gasoil distillates, trading in ECA’s. They are too small physically to fit scrubbers.
A key issue for the shipping industry is the incidence of the higher fuel costs – on the ship owners or on the charterers? The shipping industry is a very low margin business with some sectors like tankers making operating losses. Already fuel costs are mounting this year with the rise in oil prices internationally. The liner companies are posting fuel surcharges. Already some are starting surcharges for IMO 2020. The shippers are protesting but given that this sector also is low margin and low making, there is not much to protest or otherwise more liner company bankruptcies. 

My view is that the shipping industry would be best served to boycott scrubbers and force the higher fuel costs on the charterers, letting the politicians face the regulators over the higher costs to consumers for use of more expensive fuel. Also slow steaming is a constructive measure that reduces emissions as well as oversupply of vessels for better utilization of the existing fleet. 

The shipping industry, however, is highly fragmented. Shipping companies have no market pricing power. They are price takers. Essentially it is a highly competitive, low margin business with low returns on assets and investment, except for market swings and asset arbitraging. 

2020 will be an interesting year. There may be a silver lining in term of more cargo volume, especially in the product tanker sector to supply LSFO and generally lower supply of vessels with increased scrapping pressure on older, less fuel efficient tonnage and vessels taken out of the market for scrubber refitting.

How IMTT/ MIC compares to the major international players like VOPAK and Oil Tanking.

The Macquarie Group (MIC) made a strategic decision in 2014 to acquire International Matex and enter into the liquid storage business. Liquid storage is an international business dominated by VOPAK and Oil Tanking both with a global presence of terminals in key hub locations, either direct investment or in joint ventures. Generally the share performance of MIC has disappointed compared to VOPAK. They are very different business models. 

MIC owns, operates and invests in a portfolio of infrastructure businesses in the United States.

The heart of MIC is International-Matex Tank Terminals (IMTT). IMTT has ten marine terminals located on the East, West and Gulf Coasts and the Great Lakes regions of the United States, and two partially owned terminals in the Canadian provinces of Quebec and Newfoundland.

IMTT has a dominant market position in the New York Harbor and lower Mississippi River, which are two key port areas in the United States. 

IMTT enjoys approximately a one-third market share for bulk liquid storage in the NYH (the largest terminal), and has approximately two-thirds market share on the lower Mississippi River with the St. Rose, Gretna and Avondale, Louisiana facilities. 

They compete in the liquid storage business with Royal Vopak among others. VOPAK is the world’s leading independent tank storage company. They have a 400 year history and operate a global network of terminals located at strategic locations along major trade routes. MIC management is a relative newcomer to the liquid storage business, buying an existing operator with a 70 year history.

MIC entered on the surge of the US energy renaissance with increased domestic production. They have focused on the US regionally. Whilst liquid storage is a major part of MIC, their focus is portfolio investment in infrastructure and IMTT is only one of four business segments: 
  • Atlantic Aviation: a provider of fuel, terminal, aircraft hangaring and other services primarily to owners and operators of general aviation (GA) jet aircraft at 70 airports throughout the U.S.
  • International-Matex Tank Terminals (IMTT): a business providing bulk liquid terminals, 
  • MIC Hawaii: comprising an energy company that processes and distributes gas and provides related services (Hawaii Gas) and several smaller businesses collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy in Hawaii;
  • Cntracted Power: comprising electricity generating assets including a gas-fired facility and controlling interests in wind and solar facilities in the U.S. 
MIC had major earnings miss in February and reported that its free cash flow would likely decline by between 8 and 10 percent in 2018. It announced cutting its dividend by 28%. This resulted in a major share sell off over 40%. Since then its share value has not recovered significantly. In July, MIC entered an agreement to sell their Bayonne Energy Center for US$ 900 mio with a net proceeds of US$ 650 mio of which US$ 150 mio will be used to reduce their revolving credit facilities. MIC has a BBB- credit rating by S&P. 

MIC has had a public dispute with MOAB Capital over debt levels and executive compensation. This happens in these cases of disappointing investor results. 

VOPAK operates 66 terminals in 25 countries. It concentrates entirely on the liquid storage business. It has an AAA- credit rating by S&P and a much more consistent earnings results and dividend history than MIC. 

The liquid storage business has had its challenges the last few years. Much of this has to do with declining occupancy rates in oil storage, which a major component for both IMTT and VOPAK. Oil storage is very sensitive to price arbitrage and oil futures. In backwardization pricing environment, there is little incentive to store oil. This year the rise in oil prices has restored contango and a better environment for storage. 

Fuel oil remains an unsettled market with impending implementation of IMO 2020. The fuel importation market looks promising with structural deficits. VOPAK has invested heavily in LNG/ LPG storage in anticipation of future growth demand. IMTT has largely ignored this sector. It has a much larger exposure to refined products than VOPAK, which has a more balanced mix of products. MIC is investing in a US$ 225 mio program to repurpose and reposition IMTT, leveraging IMTT’s privileged position to respond to market changes and capitalize on growth opportunities. By comparison, VOPAK is spending end maximum EUR 750 million on sustaining and service improvement capex for the period 2017-201 as well as an additional EUR 100 million in new technology, innovation programs and replacing IT systems including terminal management software in the US with the latest in cybersecurity. 

I have always considered VOPAK a much better managed business than MIC. Of course they have different approaches and they are not entirely comparable. VOPAK is a dedicated international liquid storage provider. IMTT is a major part of MIC, it is a US liquid storage provider. MIC is invested in other infrastructure projects beyond liquid storage.

Friday, July 28, 2017

Brookfield buys into TeeKay Offshore

TeeKay Offshore Partners (TOO) has been an industry leader in the shuttle tanker and floating storage business. It most direct competitor is Knutsen Offshore, more recently listed but an established operator with Japan’s NYK as partners. Although the offshore business is under stress, shuttle tanker are on long term employment, there are entry barriers to the business and the assets are in limited supply. TOO has recently struck up a new business partnership with Brookfield Business Partners - a new dominate shareholder - that rewrites their balance sheet. This ring fences TOO liabilities for parent TeeKay Corp and makes TOO a formidable player in the marine offshore infrastructure market.

Latest 1st Quarter financial results for TOO showed profits of US$ 15 mio and distributable cash flow double that amount. Both the shuttle tankers and the FPSO floating storage business were profitable. There were no Auditors remarks. These were better result than a year ago 1st quarter 2016, when they had some small losses, most likely from asset impairment charges. Their bank leverage is on the high side (70%) but not yet to the point of breaching LTV covenants.

What destabilized TOO was the generally poor business climate and concerns about possible future difficulties. The catalyst for this was last June when their Lenders sold some US$ 75 mio of the company's secured debt in the secondary market at a discount, reportedly at levels between US$ 0.75 and 0.85 on the dollar.

This precipitated a panic in the share price and spiked over to the parent company TeeKay Corp. It was all about future issues, not  present liquidity issues that risked possible insolvency. There was the matter of future asset values for very specialized assets in a narrow resale market. Oil rig assets in recent distressed sales have lost as much as 60-70% of their value. There was the matter of future contract renewals. In fact, TOO was recently obliged to renew at reduced rate one of its FPSO contracts. Queiroz Galvao Exploracao e Producao. Finally, there was the impact on TeeKay Corp struggling itself in the currently beleaguered tanker market.

The situation was an opportunistic investment for Brookfield Business Partners with a capital injection of US$ 610 million. Brookfield is taking a 60% stake in the company. TeeKay Corp retains a 14% share in the business, injecting a smaller capital amount of US$ 30 mio. Brookfield is also taking a 49% stake in the general partner and providing them an intercompany loan of US$ 200 mio, allowing them to restructure their debt and extend maturities.

They are planning to separate the shuttle tanker business from the offshore floating storage and placing an order for four additional shuttle tankers.

Brookfield is reputedly a low risk investor, seeking 15% long term returns, which is a realistic target in the shipping industry. Given the general situation in Offshore and uncertainties with low oil prices, etc,, it may take a few years until recovery but there is a fair likelihood that the curtailment of new offshore projects the last few years will lead to shortages as older fields like the North Sea are depleted and new projects in the future.

Thursday, June 22, 2017

Odfjell acquiring Georgiopoulos chemical vessels to be delivered and taking the commercial management of the delivered vessels in a common pool.

When Peter Georgiopoulos jumped on the band wagon back in 2014 and moved into the chemical tanker sector with a speculative order in China and establishing Chemical Transportation Group, it was clear that the MR/ handysize stainless sector was clearly going to be over invested and rates would disappoint from the excess capacity.  I have mentioned this in a prior post: Is Peter G’s sudden foray into chemical tankers a clear signal to short the sector?

Peter was a chemical tanker outsider with no knowledge of the industry and a career of speculative asset plays. Peter G is essentially an asset trader with mixed reputation on operating profits. He has made some very good asset plays and had also some very bad calls resulting in disastrous hits for his investors that crashed into bankruptcy and reorganization like Genmar and Genco.

Now we see Georgiopoulos monetizing half of his chemical fleet and breaking off from his pool managers, Hansa Tankers, to a new pool with Odfjell, who already has Celsius Tankers backed by Breakwater as clients. This appears a wise move on his part. Doubtful that he is making the profits that he expected but then he walked into a sector of the market where he had no experience.

Chemical tankers have had traditionally poorer returns on asset than any other shipping sector. It is small market that is only 3% of the entire tanker market. Stainless steel chemical tankers are expensive, specialized assets that only a few can operate efficiently because of the parcel nature of the cargo lots and the need for a contract base with end users. The vessels are often built to order for the needs of the major operators. It is generally a very narrow resale market where the best contenders are a handful of peer operators. It is difficult to time the sales because the vessels are committed to contracts and cannot easily be freed up. Because it Is a relatively small market size, it does not take a lot of ordering to flood the market with over capacity.

A great deal of ordering has been motivated by the shipyards. In this particular cases, Ding Heng in China wanted to develop a niche market reputation for handysize stainless-steel chemical tankers. Building a stainless chemical vessel is much more difficult than an LPG carrier. In the case of LPG vessels, the cargo tanks are pre-fabricated by the manufacturer and then mounted into the vessel by the shipyard. LPG vessels only have a very few cargo tanks. In the case of stainless steel vessel, the cargo tanks are many and they have to be built into the vessel. This work is very costly and requires skilled welders that know how to work with stainless steel. It can also result in painful, loss making contracts for novice shipyards with higher construction costs, unexpected delays and performance problem.

The Italians built the last generation of stainless vessels back in the late 1990’s under state yard subsidy schemes. They were replaced in part by a new generation of vessel with Marine Line coating built speculatively in Turkey. None of these vessels built every made much money for their owners from these two periods of ordering binges.

The Japanese have been very successful in building high quality clad stainless vessels with very standardized designs without room for modifications. They are supported by domestic Japanese owners, who then time charter them on a long term basis to the major operators like Stolt, Odfjell and Tokyo Marine. These are very reliable cookie cutter designs of good quality.

The above major chemical tanker operators are a ‘defacto’ industry oligopoly. The entry barriers with the end users for major contracts are substantial. They create base cargoes for which profits come from the completion cargos on the spot market. As in any competitive, relatively low margin business, the major operators are best served with a mixed fleet of chartered and owned vessels, where they can add and subtract tonnage according to market conditions. Speculative owners are very much price takers in this process.

Georgiopoulos tried to soften this by turning to Hansa Tankers in Bergen, Norway for pool employment. Hansa was a break off from the collapse of Bryggen Tankers where one of the partner, Hans Solberg, decided to go on his own. Hans Solberg has built up a very impressive commercial/ pool management business in this sector with an impressive roster of clients, comprised of some major Japanese names, some institutional investors in the sector like Princimar and Greek operators like Interunity and Georgiopoulos who moved into the sector a vessel operators without chemical tanker commercial management skills. Commercial management in the chemical sector is a lucrative business.

Currently, the chemical markets are weak. Last year was not a good year and this year is proving difficult. The Odfjell move makes sense and is no surprise as part of the inevitable chemical tanker industry consolidation process. You have a major chemical tanker operator partially absorbing a novice operator as well as undercutting Hansa commercial management and poaching the existing Georgiopoulos vessels to their own management.

Monday, June 19, 2017

Major Management changes after Aegean Petroleum disappoints with signficant earnings shortfall

Aegean Petroleum (ANW) with its unusual business model compared to its bunker supplier peer competitors has been courting trouble for a long time that is finally beginning to roost on is management.  The company reported much worse than expected earnings for 1st Quarter 2017. Its CEO John Tavlarios resigned.  Neither Tavlarios - as director - nor Peter Georgiopoulos as Aegean Chairman garnered enough shareholder votes to continue on the Aegean Board of Directors.  Aegean announced that they want to move to an asset light business model, effectively throwing in the towel and following their competitors’ business model.  In my mind, it was a miracle that they were able to continue their previous course for so long in this brutal, overly competitive, low margin business.

I have been warning for years on Aegean and its weak and incoherent business strategy.  See my previous posts.  Aegean Marine Petroleum Network: lagging competitors with low return on investment and mounting financial expense eroding earnings margins

The marine bunker business has the worst earnings margins in the fuel business.  The competition is brutal.  The normal course of most marine bunker companies is eventually to sell out to competitor companies.  Aegean stock price performance – always below NAV - has been crying out for years that its shareholders would be better served by this path given that a merger with an established competitor like World Fuel would offer them better value. 

Many of the peer companies are arms of major commodities traders such as the case of Chemoil that was acquired by Glencore.  Others like World Fuels (INT) are highly diversified in the fuel business in other more profitable areas like fuel for land trucking and jet aviation.  They are companies that have low leverage and are able to finance their sales with ample working capital. 

Aegean followed an inherently Greek strategy to build up assets and leveraged up in the process with debt.  Their IPO was to acquire an owned fleet of double hull bunker vessels and somehow gain competitive advantage with this delivery system. Never mind that marine bunker supply is a trading business and these assets are cost to them as part of their delivery system in their sales to customers, making this a ludicrous strategy for competitive advantage.   

Why Aegean attracted so many major value investors is something that I find inscrutable.  I have done consulting work on Aegean over the years for some of them and the experience was disconcerting.  I discovered the most incredible misconceptions about Aegean.  Many actually believed that Aegean with its bunker vessels was another Greek shipping company with tankers instead of a bunker supplier!!!! They were shocked when I tried to bring them to reality of the Aegean business model and explain to them how the bunker fuel business works. 

Several years later under the urging of Aegean’s founder, Mr. Melissanides, who had some land in Fujairah, Aegean embarked upon a strategy of building oil terminals for its bunker oil to be sold to customers.   

Now liquid storage for third parties as a business Is normally more profitable with better returns than selling bunker oil or even transporting oil for third parties, but this was to acquire the physical commodity and then sell it to its customers in competition with its peer competitors.  The logic was along the same lines as its fleet of bunker tankers.  Adding these assets to the balance sheet as well as the bunker fuel inventory required additional financing, for which Aegean increased its leverage and finance costs. 

By comparison, Glencore – a major trading company – upon acquiring Chemoil started to divest of Chemoil storage facilities to lighten up the balance sheet on the logic that rented space would be cheaper and more efficient.  Moreover, peer competitor companies generally avoid physical bunker commodity, preferring to purchase from producers like major oil companies and hedge their sales to customers with derivatives.   They all fostered an asset light business model to support their bunker trading business competitively given the very low margins on sales.  Concurrently, they wanted to keep finance costs to a minimum. 

Aegean actively bought market share as a growth strategy and raised additional capital to do so.  Over time, Aegean got more and more bogged down with a heavy asset based balance sheet and aimless expansion without a coherent strategy for competitive advantage and better earnings margins. 

Personally, I give enormous credit to John Tavlarios that he managed as well as he did to hold on for so long given the extensive challenges that he faced with such an unproductive business strategy against a lean, brutal competition.  But these dramatic events where Aegean now publicly want  themselves to move to a more asset light business model that they have finally seen the light and thrown the towel here. 

Agile low-cost newcomers are cropping up in their major fuel hubs.  The market is saturated with back to back trading entities.  Aegean is going to have to start selling off its assets, deleverage and consider potentially exiting less profitable markets. 

The biggest jack asses in this mess are Aegean’s two largest shareholders  Canada’s Senvest Management and US-based Towle & Co. who bought into Aegean and are the largest shareholders.  They should have realized years ago the incongruities in Aegean with its asset heavy approach.  The case speaks for itself!  Hopefully, they will work themselves out of this to create some value for their investors.  Despite the challenges, I believe that Aegean shareholders could see better days with the management in the right hands.

Wednesday, June 14, 2017

Hunter Maritime Capesize acquisition deal flops

It is very surprising that a shipping acquisition deal promoted by the Saverys SPAC, Hunter Maritime and a major NY investment bank, Morgan Stanley would fall flat on its face with investors.  Saverys is a well-known and regarded figure in shipping circles.  Morgan Stanley is a major Wall Street investment bank that has done a lot of  high profile shipping deals.  What went wrong???

This deal was for the purchase of the 175,000-dwt Charlotte Selmer and Greta Selmer (built 2011), the 175,000-dwt Tom Selmer (built 2011), and the 175,000-dwt Lene Selmer and Hugo Selmer (both built 2010). They were all built by Chinese shipyard New Times Shipbuilding.  It was a pure asset deal, not the purchase of a going concern company.  

The originally announced price tag of US$ 139,4 million was higher than the US$ 123 million market valuation.  Eventually the price was reduced to US$ 133.5 million, still a rather hefty premium.   The deal hinged on completing a tender offer to buy back 8.2 million of its Class A common shares, roughly half of the shares sold to the public last year, at $10 per share.  Too many shares were tendered.  

Several knowledgeable sources explained that Investors hated this proposed deal.  Normally to induce SPAC investors to stay and recycle the investor base to de-SPAC, there has to be an acceptable arbitrage over the nominal US$ 10 share value.  The share buyback, moreover, was at par and gave shareholder nothing from it. The deal was poorly put together: small for a US$ 150 mio raise.  Even worse arbitrage and in a sub-sections that traded at a discount of P/Nav!!!  

Morgan Stanley is not considered by the Street a SPAC bank.  They appear to have fallen flat on their faces, unable to help Saverys/ Hunter recycle the shares nor assist in structuring the deal properly to be workable with shareholders in term of the share arbitrage. Why was Morgan Stanley not on the ball here???

Hunter has a 24-month deadline from its public offering last November to find potential acquisitions or return capital to its shareholders. The company said it is still looking for potential acquisitions.