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.