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.

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.