Description

150M market cap with the stock at $5/sh.  We predict a growing stream of eps from a base of 1/sh in 2012.  We think that the stock has been overly punished because of its legacy as a dry bulk shipping company (since sold) and large capex program (which comes to an end in 2012).  We have been extraordinarily impressed with this management team's capital allocation.  Management has smartly taken the cash flows from a commodity dry bulk shipping business (via hedging) and invested the cash flows in two businesses where there are barriers to entry and strong growth prospects.  The EPS power of the company will be demonstrated in late 2011/2012 which will be a catalyst for the shares.

River business

ULTR has 35% share of this business followed by 3 other players (Navios, Fluviamar and Seacor w/ 12% share each).  This is a business that barges soybean and iron ore produced in the Hidrovia Region.  This region is crossed by navigable rivers (as large as Mississippi) that flow through Argentina, Brazil, and Bolivia.  This region of the world produces 51% of the world's soybean (based on 2009 figures - get 2010 if possible).  ULTR owns 591 barges and 30 push boats which represents 1M DWT of capacity.  Historically these barges and push boats were hand me downs from North America.  Of the 1452 barges in the Hidrovia region, 607 are over 35+ years old and 289 barges are 30-35 years old. 

ULTR has constructed a factory in Punto Alvear, Argentina that can produce barges that are 40% cheaper than existing barges.  The reason why they are cheaper is because they were purposely built for this region, are larger and use a cheaper grade of fuel (use a heavier grade of fuel oil which on average has been 30% cheaper than the diesel fuel that the current boats have used over the past 8 years). 

We believe that the region is undersupplied for transportation capacity and that barge is the cheapest way to get the soybean and iron ore out of the region (one barge has the carrying capacity of 15 railcars or ~ 58 tractor trailer trucks and a river barge is able to move 514 tons miles per gallon of fuel compared to 202 ton miles per gallon of fuel for rail transportation and 59 ton miles per gallon of fuel for tractor trailer transportation).  However, management has purposely not pushed price in order to make sure that new entrants did not enter the market as they are in the midst of a large rebuilding program. 

EPS in this segment are going to be driven by 2 things:

1)      ULTR is increasing the barge capacity by 67% from 6/30/10 to 12/31/15 at a cost that is 40% cheaper than anyone else.  This will start to impact the #'s in 2011.  In 2010, their fleet was 100% utilized despite low demand for iron ore in early 2010 (due to destocking from steel companies).  Someone else could build a factory but they have not and ULTR started theirs 3-4 years ago.  This is a not a commodity call but if you look at the USDA stocks to use ratio, it has never been lower.  Incremental supply of soybeans will be coming out of this region of the world (because it is cheaper to grow here and this region of the world has excess capacity) and barges are the cheapest way to get it out.

2)      They are re-engineering their push boat fleet (using the cheaper grades of fuel oil) which will increase EPS by 13m or 25cents/sh in 2011.

We have done a lot of work on their competitors and we believe that they are in financial difficulty (Fluviamar) or are not interested in adding capacity (Navios).  In fact on the 4Q conference call, the company stated that some of the competitors are buying incremental barge supply from ULTR which is an incremental EPS stream not included in our model.

As a result of this, we think that EBITDA in this division can go from $3M to $34M over the next 2 years assuming flat pricing as they leverage their recent investments.

Offshore business

In the offshore segment, ULTR operates PSV (platform service vessels).  Each new deepwater drilling rig requires 1.5x PSVs.  ULTR by virtue of its Brazilian roots has a strong relationship with Petrobras.  PBR has a $224b capex plan to take advantage of their recent exploration success.  By virtues of their Brazilian subsidiaries, ULTR has the competitive advantage of being able to operate a number of PSVs with cabotage trading privileges enabling those PSVs to obtain employment in preference to non-Brazilian flagged vessels.  Cabatoge means preferential treatment based on where the PSV or ship was built.  It's similar to the Jones act in the US.  All of ULTR's current drilling rigs are contracted to PBR at attractive rates over the next 3-4 years.  ULTR moved its PSVs that were based in the North Sea to Brazil at much better day rates than what they were getting previously. 

ULTR has a slide in their 4Q presentation which shows that there are not enough PSVs to support all of the drilling rigs that are required over the next 3 years.  They believe that there are 254 PSVs in the world and based on deepwater drilling rigs, demand will increase to 465 by 2013 (an increase of 211).  However, there are only 160 PSVs on the order book currently.  Above $75/bbl oil, we believe that the drilling rigs will be deployed.   

PSVs are a commodity but it is really tight commodity and Brazil is clearly using cabatoge laws to its advantage.  They need to create jobs and are using the success of the sub salt to create jobs e.g. Brazil is building a rig building shipyard that does not make sense economic sense just to create jobs.  However, in our EPS outlook we don't have much increase in price to be conservative.  ULTR's capex program should be winding down and we are modeling a double of their existing fleet over the next 18 months to 12 PSVs.  We expect EBITDA in this segment to increase from $17M to $52M over the next 2 years as they get the full year of 12 PSVs.

Ocean Business

The 3^rd segment that ULTR operates is their legacy dry bulk biz which is essentially wound down.  ULTR sold or hedged their exposure here and just manages refined product container ships in flag protected waters. EBITDA in this segment will go to $4M in 2012 from $86M in 2008.  2% of their capex will be invested in this segment going forward.

Summary

We think the company is incorrectly being viewed as a dry bulk company.  This is where it made most of its money previously (2/3 in 2008).  The company has invested its capital (310M over the past 4 years vs. EV of 600M - check) which will come to an end in 2011/2012.  The catalyst is the EPS power which we think will be a ~ 1/sh in 2011/2012 and will grow.  At some point the market will see this and we think the stock can get a 10x eps multiple or $10/sh, 100% upside from here.

Risks

Strength of South American FX will cause labor cost inflation

Drought in Hidrovia will negatively impact supply

Change in tax code.  ULTR does not pay taxes in their offshore/ocean segment because they are not subject to a particular country's tax system.  The river business is taxed South American rates of 20%.

Catalyst