For a company that had only one bad quarter 2.5 years ago as the marketplace changed, Aegean Marine Petroleum Network (ANW) has been accused of everything from lying to kidnapping the Lindbergh baby. It is perhaps one of the most misunderstood companies I have ever seen. In reality, it is a company that has seen consistent and steady gains in operating results and one that has a solid future. Let me start by dispelling some myths:
1. Gross margin and revenues are not important indicators here - gross profit in dollar terms is. One of the greatest disservices of the CFA program and Business schools is it teaches people to run the same ratio analysis on every company. People are expected to treat a retailer the same as an oil company the same as a bank the same as a trucking company. That has never been true and one of the biggest flaws in this basic generic approach is it misses the impact of inflation.
ANW sells fuel oil to ships. It earns a mark-up on the fuel of basically $25-$30 per ton of fuel. So if fuel is selling for $400 per ton, ANW makes $25-$30 per ton. If fuel is selling for $800 per ton, ANW makes $25-$30 per ton. The higher the price of fuel, the higher revenue will be and the lower gross margin will be. The gross margin is half the percentage at $800 as it is at $400 - very simple math, and very simple to understand.
Yet, one does not have to look very far among the various financial websites to find numerous articles and headlines about how ANW's revenue growth is questioned when fuel prices were weak in a quarter or complaining about gross margin when fuel prices are high. This is shoddy analysis by people who do not understand the most basic part of ANW's operating model. Fuel spread * volume = gross profit in dollar terms. Every part of that equation has been seeing steady improvement. These figures can be found easily in every earnings release.
Gross Profit $
2. ANW is not Brightoil or Chemoil. In 2010, the market place changed for fueling. Prior to that, the bulk of the world's fueling happened in about 8 ports. Huge among those were Singapore and Hong Kong. The price of fuel soared and the pricing of shipping fell setting up a squeeze on customers. Customers responded by buying less than full tanks to conserve their own working capital. They further responded by slow steaming to burn less fuel overall. The result was a huge glut of fueling vessels in the same ports. There were two options: stay or move. Brightoil and Chemoil stayed in the glutted Asian ports and continue to suffer from lower fuel spreads that can be one-third to one-half of other ports. ANW moved capacity to other ports and set up several new ones such as Panama. It was able to get exclusive fueling rights in many ports, which is why its spread rose. Historically, the spread ranges between $20-$30 per ton. There was a short period in 2010 when the customer demand shifts caused spreads to fall to $9.
Essentially, ANW fixed its problem by moving vessels around to higher profit areas. Brightoil and Chemoil stayed and continue to post much lower spreads.
3. ANW's debt is very misunderstood. ANW owns half its fleet free and clear. Debt on vessels is dropping and there is significant cushion. Thus the debt situation is improving. The following is found in the earnings presentations following each quarter:
Fixed Asset Debt
FA Debt/TTM EBITDA
The rest of the debt on the books represents working capital. Here is more of the operating model the nay-sayers have never bothered to learn. ANW is dealing in fuel - again, you do not have to look very far on the financial boards to find people claiming that higher inventories will go bad on them and have to be sold at a discount as though they are selling fruit (again, one-size-fits-all ratio analysis), and ignoring that the price of fuel rising or falling means inventories, receivables, and payables all rise or fall too.
What is left out is ANW does not buy fuel until it has been contracted for with a customer. Thus, the inventory on the books is presold at a set price. The inventory turns over about every 10 days. ANW also only deals with higher quality customers - Carnival Cruise Lines, Frontline, the US Navy... So there is no risk in the inventories and fuel does not have a 10 day expiration date on it. ANW pays its suppliers about every 12 days. It has to post Letters of Credit for payables - standard in the industry - and this accounts for part of the used credit lines it carries. Inventory vs. Payables is a cash producing area for ANW and both rise and fall in tandem.
That leaves Receivables. These turn over every 25 days and are from the customers who bought the fuel. This is a cash drain for ANW and is working capital they finance with the credit lines. When fuel rises, the same volume of fuel requires more cash to finance as a receivable. Bad debts are essentially unknown at ANW because they deal with larger customers of higher credit quality and they get a workman's lien on the customer's boat until the fuel is paid for. Total losses have been less than $100,000 over 6 years. Receivables exceed the amount borrowed on working capital lines. Thus, ANW has effectively secured short-term receivables that pay off 100-cents on the dollar paying off credit lines and if all the receivables were paid to $0, after paying the banks, this would produce cash too.
Because ANW has such high quality receivables, it has also been able to factor them and expand sales without having to borrow more money. These deals are done at 90-100 cents on the dollar with ANW paying about 2% annualized on them, they turn over more than once a month, and ANW retains the remaining equity portion of receivables that also turns over more than once per month.
The net on ANW's debt is there is about $6.50-$7.00 in net asset value on the fleet. And depending on the quarter, about $1.00-$2.00 in net asset value in working capital. Liquidation value would be above today's trading value for the stock.
The groundwork for a $20 future for this stock is already in-place. 25% of the world's fueling boats in existence in 2011 are effectively obsolete. This is due to the increasing ban on single-hulled boats and increasing sulfur regulations. The sulfur requires more blends of fuel and larger boats with multiple fuel tanks have a huge operating cost advantage over fueling boats with only one tank that have to make multiple trips to shore to change out fuels for every customer they serve. ANW has the largest double-hulled and modern fleet of bunker tankers in the world. The volume sold by its boats will increase as fuel usage by shipping companies continues to grow and there are fewer competitors.
ANW could sell an incremental 800,000 tons of fuel per quarter with the current fleet. Every 50,000 tons is worth 2 cents in EPS. The company is currently making about 60-65 cents per share annualized with volumes already rising. Earnings can rise to about $1.80-$1.90 just from rising fuel volumes. One deal that should help volumes is ANW has an agreement with Sinopec to supply their customers when they are in ANW ports.
Fuel spreads can also recover more. With exclusive deals in places like Panama and even some of the Asian ports seeing a recovery in fuel spreads as weaker players vanish. On current fuel volumes, $1 in higher spreads is worth 15-cents in EPS per year. On the higher potential volumes noted above, a $1 change moves that to 20-cents in EPS. So if ANW picks up $2 in spread in the future, that becomes earnings of $2.10-$2.30.
Fuel spreads are also expected to rise by cutting out higher cost floating fuel storage and replacing it with land storage where ANW can custom blend more fuels and improve purchasing mechanisms. This move is well in the works already.
Even if the PE is only 10x on a company posting high rates of EPS growth, ANW goes over $20 in a couple of years. The company's free cash flow is also going to improve as the fuel storage construction is complete and the boat additions are already complete. ANW has talked about returning cash to shareholders as a higher dividend too. That will help the stock price as well.
Its new credit lines should be in place shortly. (The February 4 6-F filing notes this.) The banks have continually lent ANW more money over the years as it has grown and fuel prices rose. As shown above, the credit lending to ANW is not high-risk at all. The company has announced that it has new terms in place and will sign a new global credit facility shortly.
Disclosure: I am long ANW.