Description

World Point Terminals LP (“WPT”) is a fee-based master limited partnership (“MLP”) with zero debt and a steady 8% distribution rate (with 1.35x coverage).  As someone who finds the equity and fixed income markets to be generally overvalued, WPT represents a mispriced, off-the-radar, well-run business with favorably-valued assets.  The units generate a nice baseline return profile of 8% a year with potential upside from a narrowing of the valuation gap relative to its peers and potential future distribution growth from growth initiatives.

WPT units came to market in 2013 at $20, traded up to $23 and then down to a low of $12 as oil prices plunged and MLP investors extracted money out of the sector.  With the recent rebound and stabilization of oil prices, the units have settled in the $15 range. 

This idea was found after discovering that St. Albans Global, the personal investment vehicle for WPT’s CEO Tony Novelly, was aggressively purchasing units in the low teens in 2H 2015 and then again in Q2 2016 in the $15 range. 

The units trade at 7.7x forward EBITDA and at an 8% yield compared to its peers, all of which are levered (avg. of 50% debt to total cap) and trade at an average of 10.3x EV / EBITDA with an average distribution yield of 9.5%.  This material valuation discount, along with a clean balance sheet and the highest distribution coverage ratio among its peers at 1.3x, creates an attractive margin of safety for this type of investment.   I am also encouraged with the fact you are co-investing alongside not only the sponsor (Apex Oil), but also the CEO’s personal investment vehicle (St. Albans), which has been consistently adding to its position over the last year. 

The major knocks on this idea would be management’s secrecy and lack of communication with investors, perceived contract renewal risk (shortened duration and pricing), potential lack of material future distribution growth and underperformance of yielding assets in an increasing interest rate environment should that occur. 

Why is WPT Mispriced?

Before going into an overview of WPT’s business, I think the units are mispriced relative to its peers for a number of reasons:  1) Management prefers to not communicate to the street (they only host one investor call annually, the only forum where investors may ask questions ), 2) Street coverage is negligible with the analysts frustrated and neutral on the stock due to the Company’s lack of communication of a sufficient growth plan, 3) An overly conservative balance sheet for an MLP (which I prefer as a conservative investor); and 4) Units are thinly traded (ADTV of 28K shares), as the sponsor and affiliates own almost half of the MLP with a market capitalization of only $525MM.

After researching the sponsor as best I could, Apex Oil and its founder Tony Novelly, I have made the conclusion that the MLP is under levered and probably will be for the foreseeable future given Mr. Novelly’s aversion to debt following his experience with Apex Oil that filed for bankruptcy in 1987.    

This profile on Novelly provides a little insight (start at 2:40): https://www.youtube.com/watch?v=Vkws_fymeE4

Also, as profiled in an article from the St. Louis Business Journal in 2014 (following this write up) and from some other articles I read on Novelly, it seems that this super secretive businessman has shied away from debt since Apex filed in the late 80s.   This theme is consistent with another one of Novelly’s investments in Futurefuel Corp (FF), which has over half of its capitalization in cash with, incidentally, a lack of earnings calls, as well. 

Given Mr. Novelly’s conservatism and participation in personally purchasing millions of dollars in shares through his investment vehicle (almost 325,000 shares since 2H15) in the $12-15 range over the last year, I am comfortable investing alongside him and his entities, even if he prefers to not communicate with the street. 

Overview

WPT owns, operates, develops and acquires storage terminals related to the storage of light and heavy refined products and crude oil.   Terminals are located in the East Coast, Gulf Coast and Midwest regions of the United States and collectively have a combined available storage capacity of 15.5 million barrels.  Most facilities are located on major waterways for ship and barge access for petroleum products and have truck racks with efficient loading logistics and several terminals have rail or pipeline access.

How Does WPT Make Money?

84% of revenue is generated from storage fees, the majority of which are base storage fees which are fixed monthly fees paid at the beginning of each month to reserve dedicated tanks or storage capacity.  Customers are required to pay for these base storage fees regardless of the actual storage capacity used and sometimes will pay excess storage fees for volumes handled in excess of the originally contracted amount.

The remaining 16% of revenues are generated from: 1) ancillary fees for heating, mixing and blending products, transferring between tanks, rail car loading and dock operations and 2) fees for injecting additives (sometimes mandated by regulations).

Key customers include refiners, major integrated oil companies and oil traders (distribution and marketing).  Apex Oil, WPT’s sponsor represented approximately 38% of revenue in 2015 with Phillips 66 representing another 11%.  While Apex does not disclose financials as a private company, WPT management has said on prior calls that Apex is very strong from a credit perspective and did “very well” in recent volatile oil market conditions.

92% of storage capacity is currently under contract with 91% on average under contract for the last five years.   Terminal service agreements generally have primary contract terms that range from one to five years. 

Upon expiration of the primary contract term, agreements renew automatically for successive renewal terms that range up to three years unless terminated.  The weighted average term of service agreements is currently a little more than one year, principally due to the sponsor (“Apex”) shortening the duration of its services agreements with WPT.

While a significant portion of tankage is subject to a one year commitment, customers have historically continued to renew or expand their business and the top ten customers have used WPT’s services for an average of more than ten years. 

Refiners typically use terminals because they prefer to subcontract terminaling and storage services. Distributors and marketers utilize terminals as they require access to large strategically located storage capacity in close proximity to demand markets, export markets, transportation infrastructure and refineries.

WPT Asset Overview

Demand / Supply Drivers

Demand for refined products and crude oil are the principal drivers for storage demand and while historically when demand decreases, operations have generally remained consistent as: 1) WPT mitigates the risk of reduced volumes and pricing by negotiating contracts with minimums based on available capacity and 2) Sharp decreases in demand for refined products and crude generally increase the short and medium-term need for storage of products (spot demand), as customers search for buyers at appropriate prices. 

On the margin, the lifting of the ban on crude oil exports last year has moderately improved demand for storage in WPT’s Galveston and Albany terminals (even though most of the product stored are distillates) and in recent quarters, the market has seemed to firm up and spot capacity is slowly turning into contracted capacity.

On its Q116 call (3/30/2016), management said it is seeing rates firm as demand for tankage has moderately improved with pricing 5-10% greater than last year.  As WPT enters Q3 2016, the environment for re-contracting is more favorable as 315K bbls of WPT capacity have moved off the spot market and into long-term contracts.

Regional supply considerations are important when evaluating risks.  Barriers to entry in the terminaling and storage business include cost and execution risk, permitting and development and the finite number of sites that are suitable for development (particularly for marine terminals). 

Despite such barriers to entry, there has been significant new construction of residual fuel storage facilities in the Gulf Coast in recent years which has slightly affected WPT’s spot storage (currently .2mm bls or 1% of total capacity) and .421mm bls of tankage (2.8% of capacity) unutilized at WPT’s Galveston terminal (approx 13% of WPT’s total capacity).  

Growth Opportunities 

With respect to growth, management has publicly stated their preference as a strategy is to try to grow through third party acquisitions and organic growth.  Management has commented that depressed oil prices have limited the M&A opportunity set due to uncertainty in the market in light of the false notion that companies that would be forced to monetize midstream assets due to oil price volatility.  WPT is spending approximately $20 million a year in growth capex and has been measured and incremental in its approach.

Management has guided to $20 million of growth capex in 2016 in line with 2015.  The principal focus will be directed toward ongoing upgrades at WPT’s acquired Blakeley Island and Chickasaw terminals and some spending at Glenmont and some other miscellaneous projects.  Should WPT consider embarking on a material growth plan it has approximately $200MM of liquidity to do so, but currently, has not drawn upon its credit facility.

While WPT has made a few drop downs and acquisitions, there has yet to be a meaningful one that moves the needle to warrant an increase of distributions.    In 2015, WPT increased storage capacity by approximately 5.6% due to a drop down related to an acquisition.  Distributions have been consistently $1.20 a year with a solid cash flow to distribution ratio of about 1.3x +, the highest among its peers and on an unlevered basis.

I think a limiting factor for the lack of incremental dropdowns for WPT could be the relatively depressed valuation of WPT itself as well as a lack of what MLP investors would consider to be a more optimal cap structure.  In many cases, MLPs were created to exploit a valuation arbitrage where the MLP can use its higher equity value relative to the sponsor (due attracting a yield-hungry MLP investor base) and better access to the credit markets (by pledging assets) to acquire assets from the sponsor at values higher than what the sponsor originally spent to create such assets.

Drop down transactions are usually accomplished with MLP equity, debt or a combination thereof and theoretically is accretive to both parties (MLP unit holders and sponsor), because A) MLP investors pay up for yield and as distributions grow, the value of the MLP increases which is positive for both investors and the sponsor and B) The sponsor often benefits from a material gain on the sale of its assets to the MLP.  It is this virtuous cycle of value creation that benefitted MLP investors and sponsors for years, until it didn’t. 

On a side note, the sponsor usually participates in the future growth of distributions when certain thresholds are met via an Incentive Distribution Right (“IDR”) agreement, so it really is sort of circular in some way.  WPT ‘s IDR does have such incentives in place, but it seems that management has placed more of an emphasis on operating its business conservatively as opposed to growing distributions.

MLPs can tend to be confusing to non-MLP investors and in many cases are just exercises in financial engineering.  In the case of last year when oil prices plunged, MLP investors got crushed.  This is why I view WPT’s conservative balance sheet as a real net positive (I have no opinion on the direction of oil prices) and look at this investment from a different perspective, as a relatively a safe and attractive alternative to fixed income (8% unlevered return on real assets) with real assets and equity upside should management continue to execute and grow the business.

Distribution Snapshot

Valuation

WPT trades at a clear 2.5x EV/EBITDA turn discount to its peers and is unlevered.  Every turn of EBITDA represents approximately $2 of incremental value to the equity.  Based upon this, one can argue that fair value for the units today is $17-20 (15%-35% upside from here, excluding distributions), however it is likely the valuation gap will persist unless WPT:  1) Increases its distributions through growth initiatives (however peers only grew distributions 2.3% on avg. LTM) and 2) Decides to change its course and begins to tell its story to the street (if past is prologue, this is admittedly unlikely).   In the meantime, I am comfortable earning an 8% yield in a base case scenario along with the potential for a valuation re-rating.

Key Risks

·      Sponsor Risk:  Investors are beholden to Apex Oil (roughly half of contracted capacity) both a meaningful economic owner of WPT units as well as a customer.   Apex’s shortening of its contracts (down from ~3 years to over 1+), does demonstrate some favorability to the sponsor, but looking at this holistically, I do not view this as a material threat to WPT.  Perhaps Apex prefers to maintain flexibility to not lock into higher prices or swap out commited capacity to a new customer at higher rates / better term should the demand exist.  I do not see Apex cutting off its nose to spite its face here, but as in most cases with MLPs, the sponsor does have the upper hand.  Also, the CEO's aggressive personal purchase of stock at current levels gives me further comfort on this. 

·      Oil Price Volatility:  While their business is relatively resilient, sentiment in the sector drives down valuation and volatility creates uncertainty.  Also, overbuilding in certain regions may lead to supply gluts as seen in the Gulf region but that seems to be slowly correcting itself.

·      Credit Availability and Customer Concentration:  Loss of a key customer could impair cash flow and ability to meet distributions.  That said, WPT customer relationships have lasted on average around ten years and historically there haven’t been any major customer losses.  Important to consider Apex is 38% of revenue with Phillips number two with 11% of revenues. 

·        Management:  Not much disclosure, very little communication. You have to gain comfort in the fact you interests are aligned with them.

·        Liquidity:  It is poor and a major market correction could severely impair the value of the units.  You can’t really trade around this all too well.

Article On Apex / WPT CEO Tony Novelly (Taken from the St. Louis Business Journal)

St. Louis’ Shadow Sheik

Aug 29, 2014, 5:00am CDT

The losses were piling up.

In the middle of negotiations with his creditors, 12 of whom were owed $533 million, P. Anthony “Tony” Novelly jumped up, according to an account in the Washington Post, made an obscene hand gesture at his bankers, called them stupid and exited.

It was late 1987, and what followed was one of the largest bankruptcy cases in the St. Louis area ever. Apex Oil, founded in the 1930s by Charles Mintz, had become a virtually silent — but powerful — giant under Novelly and Sam Goldstein, with annual sales of more than $6 billion in the early 1980s. But it got bogged down during a two-and-a-half-year bankruptcy, the result of falling oil prices and a stock market crash, and emerged a smaller firm that reorganized around oil trading, oil terminal operations and shipping.

Now, more than two decades later, Apex has rebounded — big time. It’s No. 73 onForbes’ list of America’s Largest Private Companies with annual revenue of more than $6 billion, according to various securities filings, up from an estimated $1.5 billion around the turn of the century. And Novelly has in the past decade helped take several related companies public, pushing his share in those energy firms, excluding Apex, to more than $300 million. It’s a novel move for a man whose primary business is shrouded in secrecy.

A ‘private’ man

Interviews — however brief ­— with Novelly’s current and former colleagues suggest he is among the most low-key of St. Louis millionaires. You won’t find him in the society pages; many of St. Louis’ serial board members and civic leaders say they’ve either never met him or didn’t get past “hello.”

A St. Louisan who grew up in Dogtown, Novelly, now 70, attended Christian Brothers High School. The son of a printer who “didn’t make much money,”Novelly paid his own way at CBC by working at a grocery, according to an interview he gave to the Horatio Alger Association after winning its award in 2000. The association gives self-made Americans the award in hopes of giving students role models.

“I didn’t dream big dreams as a child,” Novelly told the Horatio Alger Association. “I just wanted to have enough money to live comfortably, and I knew education was the key to that sort of life.”

In 1998, he gave a 10,000-square-foot Town & Country home and 20 acres to the all-boys school. It later built its new campus on the property, said to be worth nearly $6 million at the time.

He graduated from Saint Louis University with a bachelor of science degree in 1965. Novelly currently sits on the Catholic university’s board of trustees, and is friendly with President Emeritus Lawrence Biondi.

(Although Biondi has never given specifics, he said in 2000 that as head of the university’s endowment committee, Novelly helped increase the endowment fund by 25 percent. It stood at $956 million as of November.)

Pasta House co-founder Kim Tucci previously served on SLU’s board. Tucci, like many others, said he doesn’t know Novelly well, but did offer that the oil baron is close with Tony Pietoso, founder of Cafe Napoli in Clayton, and Dominic Galati, of Dominic’s on The Hill and Dominic’s Trattoria in Clayton. Galati declined comment. Pietoso did not return calls.

Novelly’s friends, according to a Baltimore Sun report, enjoy his company on a 130-foot yacht.

“He’s private, but very loyal,” said an associate who did not want to be named speaking publicly about “the boss.”

Over a barrel

The success that brought those luxuries didn’t come overnight.

Novelly, who worked for Shell Oil after graduating from SLU, returned to St. Louis for a job at Apex Oil. In 1978, he told the Horatio Alger Association, he decided he should either buy the business or leave. So Novelly entered a 10-year partnership with Goldstein, whose father-in-law, Mintz, founded Apex.

Apex in 1981 bought Clark Oil & Refining Corp. of Milwaukee for $523 million using a $740 million line of credit. As the oil market tanked, Novelly tried and failed to sell Clark to infamous businessman Sam Zell.

Later, the banks came knocking. During the ensuing bankruptcy proceedings, which included 53 Apex affiliates, Novelly was accused of misdeeds.

A court-ordered report found that Novelly and Goldstein had moved more than $125 million outside the reach of creditors. A Bermuda firm for which Novelly is still president, AIC Ltd., figured prominently in that report, which Apex criticized. The allegations were resolved as part of a reorganization plan in which Apex paid its unsecured creditors up to $20 million in cash and $40 million in debt securities, or payment of 64 cents to 86 cents on the dollar.

Novelly pegged his debt at $40 million, and, after the company’s reorganization plan was approved in August 1990, it took him five years to pay it off, according to the account he gave the Horatio Alger Association.

Fuel for growth

After being forced to contract, Novelly was determined to expand his empire.

He founded Viceroy Acquisition Corp. in 2005 to raise funds for biofuel acquisitions, and in 2006 the company raised $172.5 million in a public offering of 22.5 million shares.

Viceroy then acquired a plant in Batesville, Arkansas from Eastman Chemical for $75 million.

Futurefuels Chemical Co. — now FutureFuel Corp. — was born.

It planned to manufacture products for the “emerging fuels market” there.

Revenue usually climbed; it was $196 million in 2009 and $283 million last year.

Still, the company, also led by President Lee Mikles, struggled with profitability at times, according to Ian Gilson, who previously covered the company for Zacks Small Cap Research.

“It was surprising that FutureFuel had never been able to get the cost of production to a level where it would at least break even,” Gilson said.

It didn’t help that a federal tax credit worth $1 per gallon of fuel expired at the end of 2011. Still, “there was no reason they should not have been breaking even prior to the subsidy,” Gilson said.

Chemicals contributed 91 percent of the company’s $150.8 million revenue in 2006.

Novelly diversified, turning more and more to biofuels. Revenue from biofuels increased 48 percent from $191.4 million in 2012 to $283.4 million last year.

The chemicals business contributed $161.5 million in revenue last year, and the company boosted its profit 116 percent, to $74 million. (A delay on federal guidelines for the amount of renewable fuel that must be used in the U.S. hampered profit in the most recent quarter; FutureFuel reported net income of $5.3 million, a 71 percent drop from the prior-year quarter.)

Novelly, chairman and CEO of FutureFuel, which is headquartered in Apex Oil’s building in Clayton, 8235 Forsyth Blvd., holds $266 million worth of company stock at its current price, roughly $15 a share.

More recently, Novelly took public World Point Terminals, an operator of petroleum-products terminals, which store, blend and distribute crude oil, refined petroleum products and other liquids.

The company offered 8,750,000 shares in August 2013 and raised $175 million.

World Point’s success is tied directly to Apex; in 2013 approximately 34 percent of the company’s $83.8 million in revenue was derived from Apex. Net income rose 8 percent that year, to more than $32 million.

Branching out

Another company, FCB Financial Holdings, which operates 54 retail banks around coastal Florida, will soon offer 8.7 million shares at $24 to $27 per share.

Novelly’s interest in that firm is worth, at minimum, $30.5 million.

Back in the private realm, Novelly has additional companies, including St. Albans Global Management, the trading vehicle for his investments.

Apex’s subsidiaries or affiliated companies include Apex Towing Company,Clark Oil Trading Company, Petroleum Fuel and Terminal Company, Enjet Incorporated of Houston and Trinidad Resort and Club in Bellaire, Michigan.

“It takes as much energy to think big as it does to think small, so most times I try to do things big,” he told the Horatio Alger Association. “You also have to try to make good decisions. We are all victims of every decision we have ever made.”

Catalyst

Increased growth of distribution.

Better communication with the street.