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."
