ANW - Buyout, World Trade Pickup Spell Growth For Floating Gas Stations

When oil tankers and other seagoing vessels fuel up in distant ports like Gibraltar and Singapore, they rely on smaller boats, called bunkers, to do the job.
Bunkering is a highly fragmented industry with lots of mom-and-pop operations competing to fuel up ships and tankers in local markets.
With international trade slumping in the recent recession and credit hard to come by, many of these smaller operations have run into trouble.
This has meant opportunity for Piraeus, Greece-based Aegean Marine Petroleum Network (NYSE:ANW - News), said to be the only publicly traded bunkering pure-play on a U.S. market.
With supple bank credit lines and a secondary share offering providing capital, Aegean is moving to expand its presence in ports around the world.
Key Acquisition
In early January, it announced it would acquire Verbeke Bunkering, a leading supplier of marine fuel in the busy Low Countries ports of Antwerp, Belgium, and Rotterdam and Amsterdam, Holland. A secondary offering this week raised just under $140 million, some of which will pay for the deal. More deals could follow.
"The global credit downturn has stressed a lot of mom and pops," noted Craigh Cepukenas, co-manager of Artisan Small Cap Value fund. The Artisan fund holds more than 500,000 Aegean shares. Cepukenas says the Greek firm has "an ongoing opportunity to acquire assets at a bargain price."
Access to credit is an even bigger concern for small firms when oil prices rise, as they have generally done in recent months. These firms must hold fuel inventories. "They have high working capital requirements," noted Stephen Williams, a London-based analyst with Simmons & Co.
As the price of fuel climbs, so do their working capital costs, he adds. If firms have cash flow problems, as well as limited credit access, they could wind up selling assets at a discount.
But it's not just the availability of assets that is helping Aegean now. It's also the quality of Aegean assets that has impressed some investors.
Because of concerns over potential oil spills, many ports are pushing a shift to double-hulled bunkering vessels.
"The idea is that with a double hull, if there's a collision, the outer hull might be pierced but the inner hull would protect the liquid," explained Williams.
Aegean has been building up its fleet of double-hulled vessels. The Verbeke buyout will add 18 double-hulled bunkering vessels to the nine it already has, wrote Douglas Mavrinac, head of the maritime group at Jefferies & Co., in a January report.
"They will have the largest fleet of double-hulled bunkering vessels once the deal is done," said Artisan portfolio manager Cepukenas. And it will be a fleet of relatively new vessels.
Cepukenas estimates that with the new vessels, the fleet will have an average age of "seven to eight years."
Of course, those ships will do Aegean little good if they sit idle. The key to profitability is capacity utilization. World trade seems to be picking up after slumping during the global recession, so that's a positive.
"The world is back in growth mode, and they're beneficiaries," said Williams.
But with new boats on order and others coming via the Verbeke deal, Aegean may have to find new ports to play in. This is not as simple as it sounds. To get into new ports where rivals are already entrenched, Aegean "must deal with local authorities," noted Williams. This can be costly.
Aegean has been expanding its presence in ports, adding nine since its December 2006 IPO, Aegean President E. Nikolas Tavlarios told analysts last fall. Tangiers, he added, was the most recent addition.
One potential growth area is South America, where Aegean currently has little presence.
The alternative to gaining entry to new ports is for Aegean to deploy more vessels in ports where it already has presence. But in so doing, Aegean runs the risk of "cannibalizing" its existing business in those ports, said Williams.
Williams sees risk to Aegean if it cannot "efficiently deploy" its new vessels. He is a bit cautious on the stock. "I like the company. The business model is good. I do think sometimes the stock price is a little rich," said Williams.
But some large investors see substantial upside for Aegean.
"We think the latest acquisition will be accretive pretty quickly," said Don Hodges, co-manager of the multi-cap Hodges Fund, which owns more than 500,000 shares. He sees a chance for Aegean to build on its recent strong results.
New Markets
In its third quarter, Aegean leveraged sales growth in Gibraltar, Greece and the United Arab Emirates to post net income of just over $14 million. At 33 cents a share, earnings were up a tidy 32% over the 25 cents reported for the third quarter of 2008.
Cepukenas notes that many analysts expect earnings of roughly $1.90 in 2010. But he is more optimistic. "I think it could go as high as $2.20," he said.
More optimistic still is Hodges. With Verbeke, he reasons, Aegean will be an even bigger buyer of marine fuel. This should translate into lower costs.
"They'll be able to buy product more cheaply," said Hodges. He also expects further pickup in international trade. Hodges expects robust earnings growth. "We think they have earnings potential of $4 a share by 2011-2012," he said. "We're in it for the longer pull."

Shorting the Economic Recovery - SH or SPY

PERHAPS ONE OF THE greatest failings in the run-up to the financial meltdown was a lack of perspective — an inability by many market participants to see the big picture. Not so with Kevin Duffy and Bill Laggner, principals of the Dallas-based hedge fund Bearing Asset Management. With the help of their proprietary credit-bubble index, developed in 2004, the managers sounded early warnings on housing and credit excesses, and capitalized handsomely on their forecasts by shorting Fannie Mae, Freddie Mac, money-center banks and brokers, builders, mortgage insurers and the like.

Students of the Austrian school of economics, which espouses a free-market philosophy that ascribes business-cycle booms and busts to government meddling with interest rates, the pair is solidly in the contrarian camp, believing that the worst for the markets may be yet to come.

The two established Bearing in June 2002 after running their own money and, before that, a stint by Duffy at Lighthouse Capital Management and by Laggner at Fidelity. Bearing now has about $60 million under management, and they have returned on average an impressive 18.28% annually since setting up shop. They hold refreshingly against-the-grain views on what's ahead.

Barron's: You've said that perhaps the most redeeming feature of capitalism is failure. Please explain.

Duffy: Any healthy system needs a way to correct error and remove waste. Nature has extinction, the economy has loss, bankruptcy, liquidation. Interfering in this process lengthens feedback loops. Error and waste are allowed to accumulate, and you ultimately get a massive collapse.

Capitalism is primarily attacked by two groups: utopians who wish to impose a more "compassionate" system, and political capitalists who want to enjoy the fruits of success without bearing the pain of failure. They use the coercion of the state to gain privileges, at the expense of everyone else.

As a country we've become less tolerant of economic failure. The result has been a series of interventions, such as meddling in the credit markets, promoting homeownership and creating a variety of safety nets for investors. Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable. The interventionists never see the bust coming, then blame it on "capitalism."

Do you see the S&P 500 retesting its lows of this year?

Duffy: It's difficult to know. It depends on how much money gets printed. In real terms, can we get cut in half from here? We think so. S&P earnings are distorted because of accounting changes for banks and brokers; if banks were marked to market, S&P earnings next year could fall to $45 a share. Bullish sentiment is rivaling the 2007 top, and volatility has fallen dramatically. We like the VXX, an exchange-traded note that's based on S&P 500 short-term volatility as measured by the VIX index. It's down 67% this year, and fits into the whole idea that complacency is very high.

Indeed. Are there any sectors of the market that you do find attractive?

Duffy: We are long consumer staples, discount retailers and pharmaceuticals. One way to participate is through the Gabelli Healthcare & Wellness Trust

What are your other themes?

Laggner: We are heavily short Japanese and U.S. government long-term bonds. Greece's deficit to GDP is approaching 15%. If you look at the proposed debt-ceiling increase in the U.S. [the Senate voted Thursday on a near-term increase to $12.4 trillion from $12.1 trillion] and at the current administration's planned spending, we are probably going to be at roughly 13% deficit to GDP this fiscal year, so basically we are Greece, where 10-year-bond yields rose 160, 170 basis points. [A basis point is a hundredth of a percentage point.] U.S. bonds are down about 20% this year, so we see a process in which creditors just shy away from funding our long-term obligations, and long-term rates keep creeping higher.

The Fed has controlled the long end by monetizing Treasuries and mortgage-backed securities. If they see the long end getting away and decide to come back into the market and buy, that will result in a much lower dollar and higher gold prices. Gold is reflecting not just inflation but instability around the world related to these business models that have been adopted by governments.

What about the big banks? When do we see the denouement?

Laggner: There is some deleveraging in the consumer space, but little or none in the professional-speculator space, the bank money-center space. Credit Suisse is apparently allowing its hedge-fund clients to return nearly to the leverage levels at the peak, in '07. Assuming financial-accounting regulators reinstate off-balance-sheet rules on securitizations early next year, Barclays estimates it will bring roughly $500 billion in off-balance-sheet assets back onto bank balance sheets in 2010. That is going to force the banks to raise capital. A lot of structured finance is carried on the books of banks at close to par.

The FDIC [Federal Deposit Insurance Corp.] took over Corus Bank and Guaranty Bank and liquidated their books, and that debt is going for anywhere from 33 to 37 cents on the dollar. Until the regulators force banks to realize these losses, it's like the entire financial sphere is in suspended animation. A large chunk of CMBS [commercial-mortgage-backed securities] aren't being serviced. The same with residential mortgages, whether in the loan-modification-market program or not: Banks are able to carry a lot of these loans as performing loans, even though they are not performing. Japan tried the same thing, and it just lengthened the process. And we are going down that Japanese road.

Goldman Sachs Lifts Price Targets On Chemical Stocks

Goldman Sachs is making positive comments on the specialty and diversified chemical sector today, saying its compelling exposure to cyclical end markets could fuel a powerful earnings rebound in 2010-2011.

The firm updated estimates and price targets for a number of stocks in the sector.

Top stock ideas in the sector for 2010 are Dow Chemical (NYSE: DOW) and Albemarle (NYSE: ALB), both are Conviction Buy List rated.

Price Target Changes:
EI DuPont de Nemours & Co. (NYSE: DD) (Neutral): Price target from $35 to $41
Dow Chemical (NYSE: DOW) (CL-Buy): Price target from $37 to $38
Praxair Inc. (NYSE: PX) (Buy): Price target from $97 to $105
Air Products & Chemicals Inc. (NYSE: APD) (Buy): Price target from $97 to $107
PPG Industries Inc. (NYSE: PPG) (Neutral) Price target from $62 to $71
Monsanto Co. (NYSE: MON) (Neutral) Price target from $81 to $88
Eastman Chemical Co. (NYSE: EMN) (Buy) Price target from $72 to $77
Ecolab Inc. (NYSE: ECL) (Neutral) Price target from $51 to $56
Sigma-Aldrich Corporation (Nasdaq: SIAL) (Neutral) Price target from $59 to $63
Celanese Corp. (NYSE: CE) (Neutral) Price target from $30 to $35
Sherwin-Williams Co. (NYSE: SHW) (Neutral) Price target from $62 to $70
Nalco Holding Co. (NYSE: NLC) (Neutral) Price target from $28 to $30
Valspar Corp. (NYSE: VAL) (Buy) Price target from $32 to $36
Cytec Industries Inc. (NYSE: CYT) (CL Sell) Price target from $31 to $39
Airgas Inc. (NYSE: ARG) (Neutral) Price target from $55 to $60
Westlake Chemical Corp. (NYSE: WLK) (Sell) Price target from $23 to $26
Albemarle Corp. (NYSE: ALB) (CL Buy) Price target from $42 to $50
Rockwood Holdings Inc. (NYSE: ROC) (Neutral) Price target from $28 to $29
Compass Minerals International Inc. (NYSE: CMP) (Neutral) Price target from $80 to $82