|Shares Out. (in M):||20||P/E||25.0x||12.0x|
|Market Cap (in $M):||1,420||P/FCF||25.0x||9.0x|
|Net Debt (in $M):||675||EBIT||150||295|
|TEV (in $M):||2,100||TEV/EBIT||10.0x||5.0x|
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SEACOR Holdings is not well covered on the sell side, but is known by value investors for its high quality management team and historical ability to create value buying and selling assets and businesses. It doesn’t currently screen cheap trading at 9x EV/EBITDA on Bloomberg’s numbers, but we think that the EV is overstated, and the recent EBITDA numbers don’t give an accurate representation of the business. We think CKH trades at <5x EV to normalized EBIT, exposed to a set of businesses with very favorable medium term tailwinds and a culture and management team that allocates capital very intelligently. We’ll take you through the three major businesses, discuss the “non-core” assets, clarify the capital structure and accounting, and conclude by putting it all together.
19 Anchor Handling Towing Supply (AHTS) vessels used to tow, position, and moor rigs and other equipment. Average day rates on AHTS vessels have fluctuated between 20k and 40k per day over the past 7 years (I go back to 2006 in this analysis, which is a bit arbitrary, but I figure it includes a few years before the financial crisis and 2 years of data before the 2008 commodity peak). 2012 average day rates were ~26k.
47 Crew vessels used mainly to transport oil industry personnel from place to place around the seas. Average day rates have been in the 6-7.5k range, with 2012 at ~7.3k.
25 Standby Safety vessels, mostly in the North Sea, used to respond to emergencies. Average day rates have been in the 8.5-10k range with 2012 coming in at ~9.7k.
35 Supply vessels, including 9 mini-supply vessels, used to lug around cargo and construction material around offshore oil & gas installations. Average day rates have been in the 12-16K range for large supply vessels, with 2012 at around 16k, and 6-8k for mini-supply vessels, with 2012 at around 7.5k.
20 Liftboats, which are used as stand-alone platforms to conduct various offshore work including platform construction, rig maintenance, and other various offshore energy construction work. SEACOR only provides data for a year on these as they were recently acquired by this division, so 2012 day rates came in at ~20k, which is not out of the realm of the historical average for the class size and age of SEACOR’s fleet (we looked at various other firms’ historical day rates on liftboats to get a good grasp on this).
A small bunch of other specialty offshore vessels that service the offshore oil & gas as well as offshore wind industries. We mention the above 5 categories separately as they each contribute close to $100M in revenue.
A few points about these vessels and the business in general:
Costs on these vessels, as long as they are not laid up, are constant. Of course, that means utilization is king and that almost every dollar in incremental revenue falls to the bottom line.
The microeconomics of the business are such that all other things being equal, the younger the vessel and the larger the vessel, the higher the day rate that said vessel could command. This is least true in the standby safety vessels, where all that matters is the existence of the ship, and is most true with the AHTS vessels, where the level of dynamic positioning technology and size of boat determine its capabilities. A small and old AHTS simply cannot physically be used to service a large modern rig due to both insufficient size as well as outdated dynamic positioning technology. SEACOR’s overall fleet is quite young (although not the youngest) with the average age of its AHTS vessels at 12 years old (and there are 8 crew vessels and 4 large supply vessels on order).
It doesn’t take a genius to figure out, based on the day rate ranges I’ve given above, that the largest needle-mover boat in the SEACOR fleet is the AHTS vessel, with the liftboats and Supply vessels coming in at a far second.
There is not too much in the way of customer captivity, pricing power, or sustainable competitive advantage in this business aside from cost discipline on the part of each particular company (arguably not a sustainable competitive advantage). That said, much of the activity in this business is contractually based, with contracts ranging from days to years, and as long as the big players stay sane on pricing, a driller is not going to use an unknown quantity for what is a mission critical application for a few dollars of discount. Reputation in this business very much matters, and our understanding is that SEACOR’s is solid. (side note: we caution that when comparing SEACOR’s cost structure to competitors such as Tidewater or Bourbon or Hornbeck based on simple margin analysis. SEACOR expenses maintenance capital expenditures, which everyone else in the world capitalizes. That said, when comparing return on total assets, SEACOR is quite ahead of competitors: EBITDA to Total Assets in 2012: CKH - 11.5%, TDW - 8.4%, Bourbon - 9%, Hornbeck - 8%, and that’s with SEACOR expensing its maintenance capex.) The bottom line is that SEACOR’s results in a particular year will essentially be driven by the overall supply/demand balance for OSVs together with SEACOR’s operational efficiency, and to a more limited extent, SEACOR’s relationships with customers.
The supply/demand balance for OSVs, particular the needle-moving AHTS vessels, has not been in favor of boat owners for the past two years. On the supply side, the pre-financial-crisis offshore boom also sparked a boom in the OSV order book leading to overbuilding and an oversupply of vessels in the market. On the demand side, the post-Macondo lull in GOM activity has had its obvious effect. The result has been very weak results out of SEACOR’s AHTS fleet for the past two years, which has greatly affected the overall segment’s results:
I also include some AHTS-specific information:
(a note on the AHTS data - SEACOR provides some of these lines, while I extrapolate others. The last 3 lines, in particular, are my estimates, as is the concept of “Gross Available Days,” which is simply the number of vessels multiplied by 365)
What is clear from the above tables is just how badly the AHTS operation has been lagging its own historical performance. In particular, I would point to day rates being the lowest since 2006, utilization rates at 2009 levels but somewhat improved from the miserable 2011, and approximate actual revenue from the AHTS vessels lower than in any other year, except, of course, 2011, which was even worse.
The thesis for the offshore marine segment turns out to be relatively simple:
The last two years have, to some extent, helped shake out some of the older AHTS ships on the market.
Offshore drilling activity in the GOM, as well as Brazil, will be on a significant upward trajectory over the next few years. This can be confirmed relatively simply by looking at the rig order book and talking to anyone in the business for less than 5 minutes. Offshore, especially deep water (where older vessels can’t really play) is the major game in town when it comes to increasing oil production.
The current worldwide OSV population (this includes both AHTS and Supply vessels) is approximately 3000. About 25% of this worldwide fleet is over 25 years old, which will make it very difficult for them to compete profitably with the newer OSVs, in addition to their inability to serve the rig fleet that is rapidly becoming more modern with each new delivery (see my comments above on how older OSVs simply do not have the capability to service modern rigs).
We think that the supply-demand imbalance we described above, which has been hurting OSV owners, will now be tilting in the opposite direction for the foreseeable future: The rig population will be increasing, helping demand for OSVs, and capacity will be coming out of the OSV market. This should positively affect dayrates and utilization rates for SEACOR Marine’s AHTS vessels.
A bit of simple math is sufficient to see that if day rates simply climb back to half-way between 2011 and 2010 levels, with 2010 levels of utilization, this segment will generate an extra $45M of revenue, at a contribution margin we estimate to be >80% given that much of the cost structure exists with or without utilization. This is in addition to the extra $25M in revenues we’d expect in a normal year from the Liftboat operation, which only had 3 quarters of operation in 2012 (though that $25M will be at a much lower contribution margin of ~30%, as we’re adding another quarter of full-fledged operations). We consider these numbers to be a more normal representation of this segment’s operations. The numbers you’d get in case SEACOR Marine is running on all cylinders are significantly higher, and we wouldn’t base our valuation on assuming boom times, but looking at the rig order book, the quality of SEACOR’s fleet, and potential scrappage would lead you to believe that the stars are aligning for this segment over the next half decade.
Overall, we believe that a normal run-rate of revenues for Offshore Marine is closer to $600M given the current asset base, and that that level of revenue will mean EBITDA margins in the range of ~30% as personnel and G&A costs benefit from operating leverage. Note that EBITDA here is the equivalent of what we normally call EBIT at any other company given SEACOR’s conservative accounting methodology, which expenses any maintenance capital expenditures. We are not making a 2013 forecast here, but coming up with what we believe is the normalized EBIT of the segment: about $180M.
SEACOR’s next segment is a collection of assets that services US inland river commerce. These operations include:
Dry Cargo Barge Pools - this is the primary operation in the inland river segment. SEACOR runs a fleet of ~1250 dry cargo barges on the US river system, with 700 of them owned outright and the rest pooled or managed by SEACOR. The dry cargo barges carry agricultural products such as grain and fertilizer, as well as commodities and industrial products including coal, cement, aggregates, scrap, ores, etc.
Liquid Tank Barges - SEACOR owns 75 barges that transport bulk liquid commodities include petroleum products and chemicals.
Fleeting & Terminal Facilities - these assets were recently acquired by SEACOR. The Terminal operations operate multi-modal terminal facilities (connecting rail, truck, and river traffic) for both dry and liquid commodities. The fleeting operations provide maintenance and repair services for barges and towboats at strategic locations along the US inland river system.
As part of all three of the above operations, as well as some independent servicing, SEACOR owns 20 towboats.
In addition to the US inland operation, SEACOR also has a small dry cargo barge business and associated towboats in Argentina and Colombia. The Argentine operations are tucked into a JV and don’t show up in consolidated revenues.
Let’s start with the relevant financial data here:
There’s a lot of information we put there, so let’s tease out what we think is salient for the barge operations (both dry and liquid):
But the factors that actually matter for profits in any particular year - revenues and expenses - have not correlated very well with the growth in segment assets:
Dry cargo barge revenues are up just about 25% from ‘09 through 2012 (95M to 118M). Expenses, on the other hand, are up a solid 40%.
EBITDA for the entire inland river segment is about flat over the entire period, and that is actually overstating the positives. The 2012 EBITDA of $52M includes about $12M in EBITDA from the Lewis & Clark acquisition (a Fleeting & Terminal operations acquisition), which was completed on 12/31/2011. So the legacy inland river operations only generated $40M in EBITDA in 2012, and the operations of the liquid barges were running on all cylinders, so that the performance of the dry cargo operations stands out as pretty bad in 2012.
The liquid unit tow and 10K-barrel-liquid-barge businesses have been on a tear (revenue-wise), in large part due to the shale drilling activity of the last few years, which has increased the demand for transporting oil, NGLs, and other liquid petro-chemicals along the inland river system. As we mentioned in the previous bullet point, you can surmise from this that the dry cargo business has been even worse than it looks.
The Fleeting and Terminal businesses were mostly acquired at the end of 2011 and generated, by our estimates, and based on disclosures in SEACOR’s MD&A, about $12M in EBITDA in 2012.
Our contention on the inland river segment is that, like SEACOR marine, it has faced the perfect storm over the past 3-4 years on both the revenue and expense side, mostly relating to the dry cargo operations, but also a bit with the liquid barge operations. The important macro factors to keep in mind include the following:
Revenue = price X volume. There are businesses where price and volume are not necessarily related (e.g., IT services, Investment Banking) , or where they are inversely related (e.g., internet advertising, consumer electronics, oil). For the dry Cargo barge business, they are very positively correlated. More grain production = more grain exports = more demand for shipping grain = higher prices = higher volumes.
Costs in the barge business, as implied in the above chart, are mostly a function of barge logistics costs (in 2012, these accounted for >60% of cash costs in the barge business). Barge logistics costs are very much a function of conditions on the major inland rivers, which are mostly determined by the weather. Flooding conditions make the inland rivers difficult to navigate and manage, while drought conditions make it even more difficult to navigate and manage.
With the above points in mind, let’s consider the 2011 and 2012 performance of the inland river barge operations. In 2011, the operations generated a 30% EBITDA margin on approximately $190M in revenue, but with elevated barge logistics costs as 2011 was a flood year, in which it was difficult to manage barge logistics on the Mississippi (in the chart above, I calculated a line titled “adjusted barge logistics rate” that applies the barge logistics costs to all the non-terminal and non-fleeting revenue, which does not have associated barge logistics expenses). In 2012, SEACOR’s barge operations generated a 21% EBITDA margin on approximately the same revenue base as 2011. 2012 was a serious drought year, which meant lower grain production, lower export volumes, and significantly higher barge logistics costs (that provided some sort of floor for rates). As you can see, capacity (available barge days) was up as SEACOR added to its barge fleet, but tons moved was down (and would have been down a lot more if not for both the added capacity as well as the ability to repurpose the dry cargo barges from carrying grain to carrying dry industrial commodities). So in 2012, the inland marine division got hit by the triple whammy of higher fixed costs capacity-wise, lower volumes/rates, and significantly higher logistics costs due to the drought. Not to mention the fact that the South American harvest was bountiful last year, which also hurt export volumes.
The reality is that because of the price/volume correlation here, there is a significant degree of operating leverage both to the downside and upside (although a 21% operating margin in a bad year isn’t all that bad). What we know for certain is that $52M is really your lower bound on EBITDA. Assuming even a return to 2011 metrics on shipping rates, logistics costs, and capacity utilization would bring revenues up to the $240M range and EBITDA to about $75M. We think the normalized earnings for the inland river segment will be quite a bit higher than that going forward given the return of midwest manufacturing (which will help keep the barges loaded not only down to the Gulf ports, but also back up the Mississippi), the shale gas boom, and better than terrible weather, but $75M is our normalized earnings estimate for this segment.
The last major SEACOR segment is Shipping Services, which is a hodgepodge of marine-based businesses, including:
Petroleum Transport - SEACOR manages 8 US-flag product tankers (5 owned, 2 leased-in, and 1 on a managed-only basis) that transport petroleum products to and from domestic ports via ocean routes.
Harbor Towing and Bunkering - SEACOR manages a fleet of 26 harbor tugs (23 owned, 3 leased in) that support larger oceangoing vessels during docking and undocking. Four of these vessels operate outside the US in St. Eustatius, along with five SEACOR-owned 5 liquid tank barges, all servicing a large oil storage terminal on the island.
Liner & Short Sea Transport - SEACOR operates 8 RORO (Roll-on/Roll-off) vessels that provide cargo transportation to and from various ports in Florida and the Carribean. This sub-segment also provides some logistical services in the course of its transportation offerings.
The financials on this division are a bit difficult to piece together due to the different segment treatment some of the sub-segments have had in past years, as well as a bizarre GAAP accounting treatment for a sale-leaseback transaction in 2010 that promises to warp the presentation of financials (in-particular leased-in costs) of this segment through 2015. So here is what we know/think, in order of certainty:
The Harbor operations generate $15-20M in annual EBITDA, and we think that is conservative. We’ve arrived at this number by looking at the Harbor-only numbers disclosed by SEACOR for 2006 through 2011, the average margins on revenues going back to 2006, and the number of Harbor-related vessels in the sub-segment as disclosed by SEACOR for the past 3 years. We’re being conservative here, as we think 2012 was at the higher end of this range (or better), but we wouldn’t bet on that going forward.
The Liner operations had only a partial year in 2011 as the operation was acquired in the middle of that year. On $22.5M in revenues that year, the sub-segment generated about $4. In my conversations with Rich Ryan, the SEACOR CFO, he was pretty clear that he thought the 2011-2012 performance of the vessels was subpar, that they knew this was the case when they made the acquisition, and that a lot of expense and effort has been invested in getting these vessels to operate more efficiently and generate as much cash as possible. He also mentioned that he’d expect this year to be the first year that they operate closer to the traditional SEACOR efficiency. Very conservatively, based on 2011 margin performance, and expectations of improvement from there, and annualized revenue of about $35M, we’d expect this sub-segment to earn somewhere in the $5-10M range in annual EBITDA.
The Petroleum Transport operations are a bit more difficult to crystallize into a normalized EBITDA number given the various changes that have occurred in recent years including the end of the ability to legally operate single-hull tankers and the sale-leaseback of two tankers in 2010 (out of 8). Backing out what we think the latter two operations earned in 2012, we think the “official” EBITDA number for the PetroTransport operations was $20-25M. From that, we subtract about $12M in non-cash earnings that SEACOR is forced to book due to the 2010 sale-leaseback amortization, but adding back a bit due extra maintenance expenses incurred in 2012, and you probably get $10-15M in normalized EBITDA for this sub-segment
Adding up the various sub-segments, we think Shipping Services can generate average EBITDA in the $35-45M range.
BEYOND THE CORE
Going through 10 years’ worth of SEACOR Chairman letters to investors, you will get the very real impression that SEACOR is a holding company run very differently than your typical public company. The chairman, Charles Fabrikant, is probably most responsible for this, but our impression is that his general attitude permeates the entire corporate culture. Aside from the fact that the letter is written in English and does not include any MBA-type platitudes like “creating shareholder value” and “capitalizing on our core competencies,” Fabrikant tells you very plainly how he thinks of each of the businesses the company runs, how they performed over the past year, how he views these businesses going forward, and where he thinks mistakes were made (his style is more Leucadia-like than Berkshire-like).
Also like Leucadia, and unlike Berkshire, Fabrikant is not averse to traffic both ways when it comes to buying and selling assets, even whole firms. Going through the past decade, you’d notice that when he does decide to sell operations, it is almost always at a significant premium to book value, and almost always at a premium to what he bought the assets for in the first place. He also has a “knack” for buying low and selling high. Thus, much of the SEACOR Marine asset base was acquired in the early part of the last decade, when such assets could be acquired relatively cheaply, and many of them were sold into the strong deepwater market before the financial crisis. Recently, Fabrikant has been acquiring and building more vessels in this segment, which tells you a bit about either where he thinks the business is heading (as we implied above, we think it’s very much in the right direction) or about the ability to buy and build such assets at prices that would imply double digit prospective cash on cash returns. In our description of the Petroleum Transport operations above, we mentioned the complex sale-leaseback transaction of two petroleum tankers. To get an idea of the price Fabrikant got for these, think about the following: The entire segment, i.e. all 8 tankers, had generated $20M, $35M, and $38M in EBITDA in the years 2007-2009, respectively. SEACOR sold two of these tankers for $180M cash upfront. Oh, and SEACOR leased them back and still makes money on the leaseback given that the vessels are chartered out through a 5 year contract ending in 2015, which is when SEACOR’s leaseback also ends. The point we’re trying to make is that from the standpoint of buying and selling assets, and running operations, the SEACOR team you buy into as a shareholder is really top-notch (which you can also tell by looking at compounded book value per share, which SEACOR, like Berkshire and Leucadia, charts for you at the end of each chairman’s letter). These guys care about one thing - true long term value creation (even though they rarely spell it out that way; Ryan reiterated to me a few times that in their everyday decisions, SEACOR management thinks essentially of cash on cash returns, not things like margin structure or how will this transaction make the financial statements look).
Non-Core Assets and Operations
Keeping the above in mind, we’ll go through what SEACOR owns and operates beyond the “Big 3” segments:
As a sanity check on the book value, these operations generated $90M in 2012 EBITDA. SEACOR owns, on average, 50% of each of the equity interests. Adjusting for the debt in Trailer Bridge that is owed to SEACOR, the combined EV of all these ventures (using SEACOR’s stated book value) is somewhere between $600M and $800M compared to $90M in EBITDA. So the numbers check out. Adjusting for the spinoff of the aviation business, the current book value of SEACOR’s equity interests is $270M.
Aside from equity investments, SEACOR has $250M in cash, another $200M in cash reserved for construction (which gets preferential tax treatment), $40M in restricted cash and marketable securities, and $110M of construction-in-progress on the books, most of which is related to SEACOR marine.
SEACOR has an Alcohol manufacturing business that generated ~$200M in 2012 revenues with almost nothing to speak of in terms of EBITDA ($3M). SEACOR just acquired this business in full last year, and so it will probably take another year or two before SEACOR starts to see real cashflow. We give this the $45M book value that it carries on the overall balance sheet.
Adding up our estimates of what SEACOR’s core operations generate in a “normal” year gives us ~$295M. Subtract ~$20M in corporate costs (excluding stock-based comp) leaves us with $275M in normalized EBITDA/EBIT. We’ll reiterate that this EBITDA number is the equivalent of an EBIT number anywhere else given SEACOR’s extreme conservatism in its accounting (expensing all maintenance capex).
In terms of EV, you have a $1.5B option-adjusted market cap (i.e. including all options with strikes under the current share price and adjusting for the cash received upon exercise). Tack on $675M in debt, but subtracting all the non-core assets we enumerated above (for a total of $900M) leaves you with an adjusted EV of about $1.3B. In other words, CKH trades for <5x normal EBIT. Thinking about this in another way, we calculate SEACOR’s levered FCF (defined as EBITDA minus maintenance capex minus interest minus taxes) as ~$165M on a $1.5B market cap, with the $900M in assets to boot (ranging in their levels of liquidity, but all fairly liquid given SEACOR’s history). Given the quality of the management team, their proven ability to create value, and our expectation that macro tailwinds favoring SEACOR’s major operations will allow it to print EBITDA numbers well in excess of our normalized number (and probably illuminate some non-core-asset values through monetization), we find SEACOR an extremely compelling investment.
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