ANW is supplies marine fuel to ships in port and at sea.  The refueling business is going thru a positive regulatory structural change and ANW is the only pure play company in the space.  As a result of this regulatory change, competition is being decreased by 30% over the next six to twelve months while demand for refueling services is growing by 8-10% per year for the next several years.  This secular tailwind will enable ANW to earn $3.50 - $3.75 in ’09 (vs. consensus of $2.35) and $5 in 2010.  At current levels, the stock is trading for 9x ’09 and less than 7x ’10 for a non-cyclical business.  I believe it is worth at least $60, or 80% above current levels. 

 

Marine (bunker) fuel usage is responsible for 20% of global demand, or 180 – 200M tons of fuel.  There are three delivery methods to refuel a ship: ship to ship, land to ship and pipeline to ship.  Ship to ship is best alternative because it is 6x faster than a truck and 3x faster than a pipeline and also less expensive (don’t have to pay docking fees).  As a result, 80% of the market uses the ship to ship method.  There are approximately 200 ports with commerce but only 50 commercial ports that sell fuel.  Of these 50, there are 20 meaningful places that a refueler can operate.  I define meaningful as having good traffic, a friendly government as well as access to supply.

 

 

 

Competition generally comes from four places:

 

Bunker fuel suppliers:

            Oil majors                     40%

            Regional operators         30%     2 – 3 ships

            National oil co’s            15%

            Independents                 15%   *ANW operates here – largest…also Chemoil (Singapore)

 

ANW is an independent and the only pure play public company in the space.  Its primary competitor is Chemoil, which trades on the Singapore exchange (Chemoil also has a fuel trading business so its numbers are not directly comparable).  Some of you have probably also heard of World Fuel Services (INT).  They have a marine business but it is a brokerage business (think CH Robinson (CHRW) for the marine business).  A company will call INT tell them they will be in a port next week…..INT gets fuel and sets up transaction to use either ANW, a smaller operator or  a pipeline.  INT is nothing more than a middleman – that is why its margins are so much smaller.

INT also has one or two barges in England and Brazil where they compete with ANW.   For the oil majors, refueling is non-core business.  As a result, much of the competition for refueling services comes from small regional operators who typically operate three or four ships. 

 

The International Maritime Organization (IMO) is phasing out the use of single hull tankers by the end of 2008.  For those of you that don’t know the difference between a single hull ship and a double hull ship, you can think of a double hull tanker like a bathtub in a bathtub – it is a safer way to transport fuel (if a single hull leaks it leaks into the ocean, if a double hull leaks it leaks into the second bathtub).

 

The types of ships used for refueling are small, specialized ships (special pumps, hoses etc) that are approximately 5,800 dead weight tons (dwt).  In comparison, a VLCC can be 400,000 dwt and dry bulk ships can be 40,000 – 250,000 dwt’s.   Currently, there are 3400 specialty bunkering tankers 1800 of which are single hull and 1600 of which are double hull.  Due to the IMO regulations, approximately 1400 of these single hull tankers are coming out of supply over next few years.  The current order book for double hull refueling ships stands at 388 thru 2012.  As a result, there will be net deletions of 1,000 refueling ships, or 27% of current supply (competition).   The key here is that the removal of these ships is happening as you read this; most will be complete by year end 2008.  I anticipate the balance to be complete by mid 2009. 

 

While supply is contracting by almost 30%, demand is growing (by 8-10%) and quantifiable.  The demand for ANW’s services depends on the number of ships at sea and NOT the amount of cargo that moves from place to place.  This is because it takes just about the same amount of fuel to move a containership from point A to point B regardless of whether it filled to 80% capacity or 95% capacity.   To calculate demand, one must look at the order book for new ships which is mostly full through 2011.  Order books for containerships, crude carriers, dry bulk ships etc are growing at 8-10% per year and scrapping rates are very low (due to relatively high day rates).  Order book to fleet ratios sit at 35 – 45%. 

 

ANW’s business model is simple; they charge a markup (spread) above the cost of bunker fuel.  Historically, this spread has ranged from between $23 and $25 per metric ton (currently in the $525 - $550 range).  Conversations that I have had with management and private operators makes me believe that given the current secular change in the industry that a spread of closer to $32 to $33 is the right number (the company had Q2 earnings last week and reported gross spreads of $31.80).  Sell side models assume $27 - $28 per ton.   For every $1 difference in pricing between my model and sell side estimates, it represents $0.25 in earnings power.  This is the primary reason I am $1 - $1.25 above consensus estimates for next year. 

 

In the refueling business, utilization is defined as how many metric tons per day per ship are being delivered.  The capacity of an average ship is about 4k tons.  The average volume delivered per vessel per day is only 600 tons, so ANW has an enormous amount of business model leverage if they are able to deliver more fuel per day per ship.  Prior to last quarter, the company used to tell investors that their “theoretical utilization peak” was 800 tons per day.  In fact, they are breaching 1,000 tons per day in certain service centers.  The reported trend in utilization rates has been down for the past few quarters (620 – 585 – 550) and this is being misunderstood by the investment community.  The company has opened several new service centers (ports) over the past year and these ports are included in the total utilization numbers.  A port typically takes between nine months and a year to ramp, yet the company is giving equal weighting to a port operating at 0 tons a day when first opening as it is to a mature port operating at 800 tons per day.  Think of it like a retail store including all new store openings in same sale store comps on day one – it would make a fast growing retailer look like it is having negative comps.  When stripping out the newer service centers, utilization rates have been increasing at very strong levels.   To put the leverage in perspective, improved utilization rates can easily add $0.50 - $1.50 to my numbers for the next one to two years.   Given the contraction in supply, I wouldn’t be surprised if utilization rates improve significantly from current levels and my numbers prove to be conservative. 

 

ANW is at a structural advantage relative to its customers.  On average, refuelers hold their inventory for two weeks.  With fuel prices at relatively high levels and companies up and down the supply chain tightening credit, it takes a big and clean balance sheet to be able to purchase an adequate amount of supply to deliver to its customers.  As I mentioned previously, most of ANW’s competitors are regional operators with a few ships that don’t have a big enough balance sheet to purchase this inventory.  As a result, ANW is gaining market share in all of their service centers.  Additionally (and equally as important), this provides ANW with a rollup opportunity.  The company has begun with the purchase of ICS (Canadian company) last quarter.  In the few months since it has owned ICS, it has doubled volumes.  This is a direct result of ICS having extremely robust demand but not enough fuel to deliver to its customers (because its balance sheet wasn’t big enough to purchase adequate inventory and these customers were going elsewhere).

 

ANW’s current fleet stands at 26 ships.  Additionally, it has another 24 ships on order to be delivered between this quarter and 2010 (the company also owns two barges, two roro vessels and four storage vessels).  These 24 ships represent 4% of the 388 double hull refueling ships to be delivered over the next several years.   These new ships will provide earnings growth for the next several years.  Combining these new ships with improved pricing and higher utilization rates creates an earnings trajectory that is being overlooked in the current environment.   

 

$1.42B mkt cap (42.5M shares)

+ $255M debt

$1.7B EV

 

Volume = 450k shares

$ volume = $15M

Short = 5 days

 

9x my ’09 estimate of $3.75

<7x my ’10 estimate of $5

 

It is rare to find a company operating in a market that is experiencing such a positive structural change.  In my opinion, given these secular tailwinds, the improving pricing and utilization metrics and built in growth from new vessels will enable the company to garner a (conservative) 12x multiple off my 2010 estimate.  This would value the stock at $60, or 80% above current levels.  If the company does indeed hit my numbers, the actual multiple could be a lot higher given the earnings trajectory from 2006 – 2010 (less than $1 to $5).     

 

Singapore                                  31.5M tons                    15%                             5

Northern Europe and UK           20                                 10                                 4

UAE / Fujairah                          14                                 10-15                            3

Gibraltar                                   4                                  30                                 5

West Africa / Ghana                 4                                  5                                  3

Greece                                     4                                  15                                 3

Jamaica                                                600k                             15                                 3

 

 

 

1)      IMO delays mandates / 3^rd world countries don’t enforce rules

a.       All major ports have already started

b.       Commercial obsolescence - single hull tankers don’t have technical capabilities to carry multiple types of fuel so the move towards double hull is moving faster than many think

c.       EU most aggressive – 25% of world sales volume

 

2)      Global economy

a.       Mostly insulated – ships use same amount of fuel whether 80% full or 100% full

b.       More ships being built over next three years – quantifiable demand growth

c.       Scrap rates never have gone above a few percent…and with rates so high today hard pressed to imagine co’s will scrap

d.       Cancelation rates never really exceed 15% (would move the 8-10% demand growth to 6.5 – 7.5%...this scenario still creates an (almost) equally good environment for ANW).

 

3)      Newbuild vessel delivery delays

 

4)      General execution / dry-dock days

 

5)      High fuel prices

a.       Shippers tend to fill up ½ tank (working capital drain)

b.       Does make price increases optically easier

c.       ….but high fuel prices are also good for ANW as it makes their spread a lesser percentage of the overall fuel cost

 

 

1)      International Maritime Organization (IMO) phasing out the use of single hull tankers (reduced capacity)

2)      Growth in shipbuilding order book (increased demand)

3)      Improved pricing

4)      Volume growth – expanding the fleet

5)      Better utilization

6)      Competitive advantage – ability to use balance sheet

7)      Improved margins

8)      Estimates that are too low