Major Chemical Tanker Operators continue to expand in liquid storage with new acquisitions and innovative financial partnerships

Both Stolt Tankers and Odfjell AS continue to leverage their considerable franchise in chemical transportation expanding in the chemical storage business. Both have a chemical logistics operation with sizeable cargo books. They control a major share of the chemical transport market. Liquid storage is a healthy growing business with good return on asset and attractive risk profile. This diversification enhances bottom line results, provides increased earnings stability and gives them competitive edge over peer competitors.

The chemical sector is traditionally a very low margin business with high operating costs and asset values, suffering from poor returns on investment. These companies have created a valuable franchise in chemical transportation, but they need earnings stability and improved returns on investment for their investors.

They have built up a global presence in chemical storage facilities that assists in meeting these goals. Sometimes, they have gone into new facilities alone like the recent Stolt acquisition of Den Hartogh Holdings bulk-liquid storage terminal in the Netherlands, other times in partnership with peer storage operators like VOPAK, Oiltanking and Vitol in select locations.

Odfjell chose a novel approach to finance the expansion of their terminal business in Europe and North America: a strategic partnership with Lindsay Goldberg LLC, a U.S.-based private equity firm. This firm has been involved in chemical projects in the past with their holdings in PL Propylene LLC (an evolution of an earlier Lindsay Goldberg sponsored venture, PetroLogistics). PL Propylene is now constructing the largest propane dehydrogenation plant in the world to service Gulf Coast propylene consumers. Lindsay Goldberg first entered the PetroLogistics venture by supporting their purchase of an ethylene pipeline.

It will be interested to see how the Odfjell-Lindsay Goldberg partnership evolves in the liquid chemical storage business.

Stolt in enviable position to issue bonds and lower its cost of capital

Stolt Nielson is chemical tanker leader with a strong contract base, consistently good P+L results and moderate financial leverage. They recently tapped the bond market to fund expansion opportunities and raise general corporate funds. After a swap, this results in a low fixed-rate US Dollar obligation. How are beleaguered peers like Eitzen Chemical and Berlian Laju Tankers (BLT) under the weight of their heavy debt loads/ leasing obligations with high finance costs going to compete with Stolt?

The Oslo-listed chemical tanker company has placed NOK 1.6 bn (US$ 300 mio) of five-year senior unsecured bonds. These bonds, which will be listed on the Oslo Stock Exchange, carry a coupon of three-month NIBOR plus 4.75%. Stolt has converted them though a swap to a fixed-rate US Dollar obligation of 6,63%.

The chemical tanker sector has less tonnage overhang supply problems that most other shipping sectors. Demand is expected to outpace supply as long as global GDP grows by 3% or more. The IMF forecasts 4.4% growth for 2011. Supply side characterized by newbuilding delays and high entry barriers. On a base case scenario, this would call for a 2,6% increase in fleet utilization that could lead to a 20% rise in asset values.

The only negative aspect for Stolt is that due their heavy contract book, rate increases would lag in their P+L results until contract book roll-over and rate renewal.

Presently time charter rates are flat in the chemical tanker market with stainless Dwt 19.900 tonnage fixed at rates of US$ 12.500 for twelve months. This business climate continues to favor Stolt over its weaker peers in the sector like Eitzen and BLT, who have to absorb the high financing costs, live with the slim margins and hope for upturn.

Aside from its chemical tanker business, Stolt also has a very lucrative chemical storage business that has a higher return on assets than the shipping business and a stable long term secured cash flow that adds earnings stability.

Eitzen and BLT are totally dependent on the vagaries of chemical tanker market and are paying easily double the financing cost of Stolt on a much higher debt load.

Should there be an unexpected double dip recession, their lenders will be facing some very nasty losses. Further if their financial position deteriorates, then Stolt will pick up market share from their end-user customers worried about rising contract performance risk.  Stolt would be in the enviable position of picking up their better assets at cut rate prices.

Chemical war of attrition

The chemical sector experienced some revival earlier this year, but rates softened again during the summer and there remains a great deal of uncertainty yet about the time of a market upturn. Financially weaker operators like Eitzen and BLT continue their optimism, the more established major operators like Stolt and Odfjell remain cautious and see a longer market recovery period.

The chemical tanker sector was badly hit by the 2008 GFC. Cargo volume dropped dramatically in nearly all trades. Markets during 2009 were sustained mainly by US chemical feedstock exports to China, with tonnage swelling in the FE struggling for return cargo. This year after a stronger first quarter, the chemical tanker market saw a pullback. The transatlantic trades slowed, not helped by continued weak petroleum product markets. Reduced requirements for aromatics from China, which sustained the market in 2009, led to less demand for larger commodity parcels (above 5,000 tons) and with plenty of available vessel space as a result. The biofuel market withered with the US putting a 54 cent/gallon import tariff on most foreign ethanol supply and Brazilian ethanol production has been hurt from high sugar prices and heavy rains in 2009.

Stolt has been outperforming its peers with its solid contract base, diversified income from storage and other activities, and its sound financial position with moderate leverage. Stolt was very fortunate in its CAPEX obligations because delays at the SLS Shipyard allowed them to renegotiate price and delivery of their Dwt 44.000 coated newbuildings placed in 2005 for ME commodity chemical trading and they eventually secured full refunds for their Dwt 43.000 stainless orders. STJS cargo volume transported was up 7.6% from 1Q10 albeit freight rates remaining flat. Stolt finished its 2Q2010 with US$ 27.5 mio net profit. 　

Stolt's main competitor Odfjell finished its 2Q2010 with a net loss of US$ 64 mio, but much of this was due to their decision to enter the new Norwegian tonnage tax system at a total cost of USD 42 million. Time-charter results per day increased by 2% compared to first quarter. Odfjell is not running any cash losses, but its balance sheet is somewhat weaker than Stolt with higher bank leverage.

Stolt expects a continued weak market for the rest of 2010 and 2011. Odfjell reports falling cargo volume in 3Q2010 accompanied by weakness in outbound voyages from US and Europe. They see increased competition for cargoes.

Ailing Eitzen Chemical with the recent exit of its CEO Annette Malm Justad and failure of its much touted merger with BLT gained reprieve by selling off its 74.3% stake in Eitzen Bulk, which brought a total profit of US$ 60.7 mio for the 2Q2010. Total freight income in the quarter dropped from US$ 31.03 mio to US$ 29.03 mio as the ethylene market remained weak and there were a number of drydockings. Eitzen has had extensive loan restructuring with its senior lenders and has extended its covenant waivers for several years, but it is far more dependent on a quick market recovery than financially stronger competitors. All the more so because it has a weak contract base, more dependence on the spot market and clean petroleum products.

The most optimistic and aggressive chemical operator, Berlian Laju (BLT), was recently down graded by Fitch, who cut its rating on the tanker owner from “B” to “–B” with a negative outlook. It also dropped its tag on BLT’s $400m unsecured notes from “CC” to “CCC”. Its Indonesian management believes fervently in rapid return to bull market conditions and it maintains a very aggressive new building program. This is an unlimited growth mentality similar to that of Seaspan's Gerry Wang, but without the support of long term SOE charterers to underwrite the business. BLT derives less than 10% of its revenues from Indonesian business, although lately it has shown interest to diversify into Indonesian FPSO and more domestic tanker cabotage business.

The weight of the shipowner’s significant capital expenditure requirements led Fitch to concerns that it may breach certain covenants if current market conditions persist. BLT leveraged up its balance sheet in 2007 when it purchased Chembulk from AMA at the peak of the market boom with a sizeable markup from the price that AMA had acquired this Connecticut-based chemical tanker operator from its founder Doug MacShane just a few months earlier in the beginning of the year. Having paid a premium price, the company strained considerably to raise the cash to complete the deal with AMA, selling and leasing back existing vessels in its fleet as well taking on heavy bank debt.

Eitzen and BLT have smaller vessels than Stolt and Odfjell. Particularly, the Eitzen fleet is concentrated in Dwt 12.000 stainless units and also has a fleet of coated chemical tonnage. BLT has some larger stainless tonnage in the Dwt 20.000 range, but this has come from their acquisiton of Chembulk, left largely with the US management. Their Asian fleet are smaller units. Both companies have smaller contract books than Stolt and Odfjell.

The future depends on how the markets play out. A V-recovery and bull market would greatly benefit BLT due its very high operating and financial leverage. A prolonged slack market will benefit Stolt with its resources to pick up distressed opportunities. Clearly Stolt and Odfjell with their stronger balance sheets and customer bases have more staying power than Eitzen and BLT. Eitzen needs very much a quick market recovery before its lenders become restless again and BLT could face loan restructuring with its senior creditors or even worse, be forced to sell off its Chembulk acquisition to raise cash.