On December 12, 2012 Ultrapetrol (ULTR) announced that Southern Cross Group had invested $220 million in the Company, acquiring a 78 percent equity stake and 59% of the voting power. Ultrapetrol stock holders should cheer this infusion of capital because without it the Company would likely have run out of cash by now. If you don't believe me, review the cash flow statement in the Q3 2012 6-K (foreign issuer equivalent to 10-Q). If ULTR didn't receive the cash advance during the quarter for the barges being built for a third party, it literally would have run out of cash.
Southern Cross paid $2.00 per share for its stake. I'm surprised how long the stock has remained under that price since the SC deal closed...we are just now close to breaking through $2.00 a share.
For several years now, ULTR management has talked a good game. They have strategies to grow their River and Offshore Supply Businesses, and for the most part, are executing on those plans. Yet the decline in profitability is staggering. Management has rapidly levered up the balance sheet, with debt totaling $519M as of Sept. 30, 2012. While revenues are up modestly, profitability is down measurably. Cash flow from operations for the first three quarters of 2012 totals a measly $2.5M. Free-cash-flow is negative $30M as their growth plans include a lot of new capital expenditures. The Company is saddled by huge interest expense, rapidly rising operating costs and huge receivables that never seem to get collected. Obviously SC has to make some changes if there is any hope of seeing a positive return on its investment. Here is what I, as an outsider looking in, would do to increase shareholder value.
1. - Shut down the Ocean Business. It is generating the least amount of EBITDA and has the lowest potential for future growth. ULTR operates four product tankers and two small container ships in their Ocean business, all of which operate on regional trade routes in South America. They are decent businesses, but they don't have the potential to generate big returns for ULTR. The Company needs to focus on generating high cash flow. ULTR paid $26M for its two container ships in 2011. Maybe it could get an additional $5M a piece for the product tankers? That is ~$45M they can use to reduce debt and reduce carrying costs. They just don't have the luxury of running maintaining all three business segments when they each have such low profit margins.
2. - I would implement a company-wide plan to reduce operating costs. With each quarterly report, I am amazed to see how rapidly expenses are increasing, well in excess of the increases in revenues. How does this continually happen? I know there is a disconnect between wage inflation and when the Company can raise prices on its customer contracts, but if they continue to have costs rise at this rate, there will be no possibility of healthy profits in any of their business segments. Management has, for years, let expenses run out of control. Now is the time to take a serious look at cutting the fat across the entire Company and restore a level of profitability that is sustainable over the long-term. I have to think Southern Cross has experience doing this, and I look forward to hearing their plans in this regard going forward.
3. - Make deleveraging a priority. The level of debt at this Company is out of control and is unsustainable. Management had a policy of growing the top-line without any regard for the added cost. This needs to end. Some serious cost/benefit analysis needs to be done on all capital projects. They need to set strict requirements for returns on capital. I was excited to see that all $80M of the Convertible Notes were tendered as of the expiration...the more that debt can be reduced, the more ULTR's interest expense is reduced. Right now, interest costs are choking profitability, costing nearly $40M per year on the income statement. The big bogey is of course the $180M bullet due in November 2014. Ideally, the Company would be generating sizeable amounts of positive operating cash flow by then and could refinance a portion of it while paying off some as well. Whatever happens, ULTR should be able to refinance that debt at a decent cost now that they have the influx of cash from Southern Cross.
I am hopeful that Southern Cross knows what they are doing and can quickly implement the necessary changes to return ULTR to profitability. Before this deal came to pass, ULTR was very close to going bankrupt in my opinion. While the Menendez brothers will continue to be the public face of this Company, my hope is that the new Board members from SC will really take charge and make the tough decisions the Menendez brothers could never make. I am high on the Company's prospects going forward, as long as changes are made; the status quo is unacceptable.