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.

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 http://amaliatank.blogspot.gr/2013/01/aegean-marine-petroleum-network-lagging.html.

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.

Aegean Marine Petroleum Network: lagging competitors with low return on investment and mounting financial expense eroding earnings margins

Aegean Petroleum (ANW) has an unusual business model compared to its bunker supplier competitors.  Its sole focus is the low margin marine fuel business.  It prefers expansion in physical assets and shuns derivatives to hedge fuel purchases. This asset heavy business model means that expanding bunker sakes put pressure on its receivables financing, resulting in breached loan covenants. Mounting financial expense is eroding profit margins. Sales volume has lately been flat.  Aegean has been consistently behind its competitors in share price and financial performance.

Many investors confuse Aegean for a shipping company. In effect it is a commercial trading company focusing solely on the marine fuel market. This is highly competitive market place with margin pressures. Marine fuel market is less profitable business than aviation or land fuel markets. The shipping industry as a whole suffers from over indebtedness and over investment. Aegean rather than diversifying into more profitable fuel markets is investing heavily in new marine fuel supply points, mainly on the basis of local start-ups as well as building storage facilities for a bigger share in the marine fuel market despite eroding margins, poor shipping industry fundamentals and larger competitors, who are stronger financially and diversified in other more profitable fuel markets.

It is hard to see any coherent strategy for competitive advantage. The original concept of gaining market share from a fleet of double hull bunker tankers scarcely made any sense for a company, whose main activity was buying fuel from major oil companies and selling this to shipping companies at a mark-up for the service. The delivery service with the bunker tankers is included in fuel price and is a cost, not a source of revenue. Fuel oil supply is a highly competitive business, where price and bunker quality are the main customer concerns. Whether the fuel is delivered by a fancy new bunker tanker is not a major factor in choice of supplier.

Aegean, moreover, contracted its bunker fleet prior 2008 at top of the market yard prices. This strategy may actually in retrospect be putting Aegean at disadvantage with competitors, who chartered in tonnage avoiding long term involvement in costly physical assets as well as those who waited and are now covering their needs with tonnage at present lower yard prices. In fact, Aegean has been lately selling off older tonnage to rationalize its fleet at tell-tale vessel disposal losses.

The latest strategy for competitive advantage seems to be investment in storage facilities. This does not seem in concept very different from the old strategy of the bunker vessel fleet. The new storage facilities are not primarily to be rented out to 3rd parties for a new source of revenue, but rather to be used to accumulate fuel for flexibility in customer sales. Note that Aegean’s larger, more sophisticated competitors make use of derivatives desk in managing their customer commitments at lower cost and more efficiently. Some like Chemoil are even divesting of their storage facilities for better asset allocation.

Expanding fuel sales puts pressure on working capital because suppliers must pay in advance for the fuel that they supply to their customers, who then pay later for the purchases. For this reason, bunker suppliers often factor their receivables for cash. Aegean lacks free cash flow to facilitate larger receivables because so much of their free cash flow goes to investment in physical assets and debt service. Their bunker fleet is mortgaged, which entails debt service and interest costs to their bankers. Their quarterly earnings reports demonstrates higher interest expense than competitors like Chemoil, even though Aegean is a smaller company with lower sales turn-over. Larger competitors like World Fuel are much stronger financially with very little debt and their receivables factoring is on much better terms. They have better earnings margin from their fuel sales and more free cash flow available with very little encumbrance for debt service.

Aegean was obliged to state in their 2011 financial report that they had covenant violations with their lenders from their receivables financing. This year a major loan facility is up for renegotiation with lenders. It is hard to see how Aegean will manage lower finance costs than their competitors. This puts Aegean at disadvantage with them, so it is hard to see why Aegean is so interested in expanding when the additional market share is at diminishing financial returns.

Unlike competitors, Aegean also has an unusual management structure. Their management team is from Peter Georgiopoulos, who sits as Chairman. No one in the Georgiopoulos management team has a history in oil trading or bunker supplier business and the Chairman role appears to be largely a figure head position. The major shareholder in ANW owns Aegean Oil, a Greek-based domestic oil retail business, which is their sole physical supplier in Greek ports and has acquired land for envisaged ANW storage facilities in Dubai. Perhaps the shipping background biases this management team toward physical asset plays, albeit the main shareholder has a history of developing a successful retail fuel business in Greece.

The management depth of competitor bunker suppliers is formidable. Chemoil after the founder’s tragic deal was acquired by Glencore a major commodities trading house with enormous financial strength. Its present CEO, Tom Reilly was the former head of OceanConnect Holdings, Inc - an innovative company combining state of the art on-line technology as well as 24/7 traditional expertise to provide global energy and risk management products and services. He also held a major management position in a Texaco Chevron joint venture in bunkering and fuel trading. Michael J. Kasbar, President and CEO of World Fuels has worked in the fuel business all his career and was the driving force in World Fuel’s proven strategic acquisition record in diversified fuel markets.

Aegean stock performance in comparison with World Fuel speaks for itself in terms of the results of its strategy in a striking way as seen in the adjacent stock charts.

Whilst Aegean has fallen significantly since its initial IPO and stagnated with low volume, World Fuel has significantly outperformed and rewarded its investors.

Even Chemoil stock despite the succession turmoil has also outperformed Aegean and it has been improving lately after being acquired by Glencore with revamped management.

Given such dismal share performance with peer companies, what does Aegean management have in their heads using surplus company funds to repurchase shares?  Would not the interests of Aegean shareholders be better served by merging Aegean with a bigger, financially stronger and better managed fuel company like World Fuels in return for INT stock?  Indeed such has been the fate of many a marine fuel supplier company in this highly competitive sector!