StockBoxPick: Aegean Marine Petroleum (ANW)
Company Type: Fast Grower Recent Share Price: 19.05
August 27, 2007
By Chandler Lutz
The Short Story
Aegean Marine Petroleum is a marine fuel logistics company poised for long term growth. This firm supplies and markets petroleum products to commercial seagoing vessels through its service centers and fleet of double-hull bunkering tankers. This fleet of double-hull bunkering tankers gives ANW a major advantage as regulation is eliminating much of the competition from single-hull bunkering tankers. Supported by a strong balance sheet and high growth rates, Aegean is an attractive investment at current valuations.
In Depth Analysis
The Business:
Aegean Marine Petroleum became a public company in December 2006. This Greek company supplies marine petroleum products to commercial boats. Currently, ANW has 15 double hull bunkering tankers in its fleet, along with two floating storage facilities. The double hull bunkering tankers, like the Aegean Tiffany seen on the left, are stationed at various service centers around the world and fuel commercial vessels. ANW uses the double-hull bunkering tankers to fuel ships at both port and at sea. Basically, Aegean makes money by buying marine fuel from local suppliers and then reselling it at a margin to commercial boats as they pass through Aegean’s service areas. This industry is very capital and working capital intensive which is why shipping companies have to outsource these activities to companies like Aegean. The capital intensive nature of this sector also provides ANW with significant barriers to entry and gives Aegean a large competitive advantage over smaller firms.
Aegean currently has five centers strategically located. They opened there first center in their home country of Greece, then Gibraltar, the United Arab Emirates, Jamaica and finally in Singapore. I like to think of Aegean as a kind of retail company with locations in various areas of the world. Just like a retail company, ANW plans to grow by opening new service centers and selling more at existing ones. We can use some familiar metrics, such as sales at existing service centers, to evaluate Aegean’s performance but we will need to look at some different numbers to understand Aegean’s unique business model. Unlike a normal retail company you might find at the mall, Aegean sells a product that is in constant demand and never goes out of style: oil.
Growth Plans:
No analysis of Aegean is complete without a significant discussion of growth. As you may have already noticed, analysts expect ANW to grow earnings at the monumental rate of 42 percent a year which results in a very attractive PEG. The question is how will Aegean reach these high expectations? Management’s answer lies in increasing the number of double-hull bunkering tankers and the number of service stations. Between now and 2010, ANW has contracts to add 28 new double-hull bunkering tankers to its fleet and has an option to build another four (currently ANW has 15 double-hull bunkering tankers and two floating storage utilities). Additionally, ANW plans to open one service center in Q3 2007, one in Q4 2007 and three more additional service centers by 2010 to bring the total number of service centers to ten (currently Aegean has five service centers). It is worthwhile to note that management does not expect the two new service centers that will open during 2007 to contribute to profits immediately. It takes time for these centers to gain traction and build a significant customer base; which is currently happening with Aegean’s newest service center in Singapore which they opened in mid-2006. Initially, these aggressive growth plans seem overambitious and would usually scare me away, but Aegean, in its retail like nature, only needs to duplicate its past successes rather than inventing a completely new process. Unlike other companies which have to develop new products in order to grow, such as software companies, Aegean simply needs to apply what it has learned in previous endeavors to its new operations. To gain insight into how Aegean’s growth prospects affect earnings we will examine the performance of their current service centers.
Performance of Existing Service Centers:
Currently, Aegean has five service centers located in Greece, Gibraltar, the United Arab Emirates, Jamaica and Singapore. Sale of petroleum, which the company measures in Metric Tons (MT), is one of Aegean’s key performance drivers in the sense that as Aegean sells more fuel they make more money. Sales of petroleum increased to 795 million metric tons in Q2 2007 which is a 43 percent jump over the second quarter of 2006. This 43 percent jump in volume contributed to ANW’s 131 percent rise in net income to six million dollars (excluding the sale of Aegean Hellas in which ANW recorded a one million dollar gain). Another key metric for ANW is gross spread per metric of marine fuel sold. To develop these numbers management simply takes the revenue from all fuel sold minus the cost of that fuel and divides the difference by the number of metric tons of fuel sold. Gross spread per metric ton can be represented by the following formula:
The units for this metric are dollars and the higher the gross spread per metric ton, the more profit ANW makes from each metric ton of fuel sold. The following table (from Aegean’s 2006 annual report, highlight mine) summarizes ANW’s past gross spread margins per metric ton:
As you can see, gross spread per metric has increased substantially in the past. Management cites effective pricing policies and their ability to purchase products of favorable terms as the reason for this large surge. It is important to note that management expects these figures to decline in the short and medium term as they open new service centers that are subject to more local competition. This effect may already be seen with regards to the Singapore service station which commenced operations on June 2, 2006. During Q2 2007, ANW’s gross spread per metric ton was 25.1 dollars per metric ton. However, in the long term management expects these numbers to rise over previous highs as ANW fends off competition and certain environmental regulations take place (see below).
At every one of ANW’s service centers past growth of sales volumes has been quite strong (from 2006 annual report, the following table reflects sales of marine petroleum products in each of the service centers):
Sales Volume By Service Center:
All of the service centers have exhibited strong growth. Management expects this growth to continue going forward as Aegean increases their number of double-hull bunkering tankers and market conditions continue to tip in ANW’s favor. Additionally, Aegean’s Singapore station is starting to gain traction and a strong customer base which is evinced by a 100% increase in sales volume between Q1 2007 and Q2 2007.
The last key business metric that we will discuss is vessel utilization. Vessel utilization, in this sense, is how much sales volume each ship in Aegean’s fleet generates. These numbers are described in the following graph:
Average Daily Sales Volume by Vessel
The Graph (from Q2 earnings presentation) displays the growth of the average daily sales volume per vessel. As you can see, the trend is increasing upward. Management hopes to continue to grow these numbers each quarter and does not have a maximum goal. The driver in this metric is the growth in sales volume.
The industry, the competition and environmental regulation:
The most exciting part of this industry, for Aegean’s investors are the upcoming environmental regulations. In 2008, the European Union and the International Maritime Organization are banning single hull tankers. This is great news for Aegean since all the tankers in the company’s fleet are double-hull and so are the new tankers Aegean is in contract to receive. In fact with 28 new bunkering tankers on order, Aegean estimates they control 15-20 percent of the current orderbook (the number of new ships under contract to be built). Management takes a straight line depreciation for all of its ships and estimates that the life of a vessel is 30 years. However, with the banishment of single-hull tankers it is possible that the book value for Aegean’s ships will not reflect their true worth as demand increases for double hull tankers when the regulations take affect. Another benefit of the regulation will be the decrease in competition. As single-hull tankers are taken out of the market, Aegean will increase its customer base which management expects will have a positive effect on gross spread margins.
Aegean also has advantages over the competition due to the capital intensive and working capital intensive nature of the sector. Since Aegean is so well financed (see below), they are able to use cash instead of credit to purchase marine fuel from the spot markets which allows the firm to receive large discounts. Also, their favorable lines of credit have allowed them to expand the number of service centers and vessels to capitalize on favorable market conditions.
The global marine fuel industry is a 55 billion dollar business and management expects the commercial shipping industry to continue on its exponential growth path. International trade is cyclical in nature, but the market for marine fuel does not follow this trend. Aegean does expect demand for marine fuel to keep rising as a large number of commercial are currently under construction.
Like other companies in commercial shipping, the price of fuel negatively affects Aegean since the company needs more funds to buy a certain amount of fuel when prices are higher. However, since Aegean has such a strong balance sheet compared to smaller competitors, they can use higher fuel prices to capture market share as other firms fail to meet demand. Fuel supply shortages can also affect Aegean and its competitors. To combat these shortages, Aegean has acquired two floating storage facilities which can supply fuel when necessary.
The Financing:
Since Aegean participates in such a capital intensive business, dependable financing is extremely important. With its IPO in December of 2006, Aegean raised 185.2 million dollars in cash and has a secured senior credit facility worth 183.4 million. Before we dive into the specifics of the company’s financing, I want to state that this credit facility is conditioned on the founder and head of corporate development, Dimitris Melisanidas, owning at least 35 percent of the shares. Incorporating the fact that this credit facility has a term of about 11 more years we can infer the following: (1) There is high insider ownership so management’s interest will stay aligned with shareholders; (2) Mr. Melisanidas will not dump all of his shares on the market and adversely affect the share price and (3) management will maintain a long term focus (since they cannot sell the shares for a number of years).
To return to the company’s finances, Aegean’s balance sheet remains flush 46 million in cash but there is 42 million of long term debt which is up from 32.6 million in Q4 2006. These long term debt figures may seem alarming at first, but with closer analysis we conclude that there is really nothing to worry about. In the 2006 Annual report, ANW gives the repayment dates of their bank debt:
Annual principal payments required (thousands of dollars):
As you can see, most of this debt is not due for a very long time which will give ANW some wiggle room if trouble arises. Also, this debt structure allows ANW to focus on growth in the short terms and then pay down debt once the large proceeds start rolling in.
Valuation Point and Traditional Metrics:
We don’t believe traditional metrics like return on like Return on Equity (ROE) are as important measures for Aegean given the length of time necessary for their service centers to gain traction (Management expects that the two service centers it will open in 2007 will not contribute to profit for 2007). For ANW, however, all of these evaluation techniques are in line or better than industry averages. Aegean expects these metrics to decrease in the short term as they open new service stations but increase in the long term as they realize the results from the new tankers and service stations.
The current buying point for Aegean is very attractive especially since there is small institutional ownership in the company. Also, as a dockworker strike ends in Greece, operations in Singapore continue to grow, and short-term refinery fluctuations in Jamaica stabilize volumes at these stations could increase sales volumes substantially. Additionally, with new service centers opening around the world complemented by additional vessels; ANW has the potential to increase profits and shareholder value in the medium and long term
Risks:
The biggest risk for Aegean is a poor execution of their growth plan. However, we believe Aegean’s solid financing and experienced management will help the company overcome this risk. Since Aegean is financing the construction of new vessels through debt, a large increase in interest rates would adversely affect the company’s growth plans.
Concludsion
Aegean Marine Petroleum has excellent growth potential, great financing, significant barriers to entry and able management that is focused on maximizing shareholder value. Even though we need to carefully watch Aegean’s progress, this firm is a great long term investment that may provide excellent market beating returns.
Chandler Lutz Owns Shares of Agean Marine Pegroleum (ANW)