- Geopolitical tension rises as the conflict between Europe, Ukraine and Russia widens.
- Increased tension is a threat for the current bull market, investors should take precautionary measures.
- Here is why I consider Royal Vopak as the perfect hedge against a potential trade war with Russia.
Tension rises in Europe, as the crisis in Ukraine widens every single day. The European Union, together with the United States and other partners, extended their sanctions against Russia, targeting its financial sector and oil and gas industry. Last week, Russia took a dramatic step by putting a ban on agriculture products from Western Europe. Political analysts consider Russia's move as the next step towards a full scale trade war between Europe and the United States on the one hand and Russia on the other.
Without a doubt, the stock market will suffer from increasing geopolitical tensions around the globe. Therefore, I find it useful to think about precautionary measures and hedges against a potential trade ware with Russia. Despite from traditional safe havens like Gold, investors could also consider particular stocks that will benefit from a trade war. One of these stocks is Royal Vopak NV (OTCPK:VOPKF). In this article, I will argue why Royal Vopak NV as the perfect hedge against the rising geopolitical tensions in Europe and the potential trade war with Russia.
First of all, what is Vopak all about? Vopak is the global leader in independent storage of bulk liquids, including crude oil, chemicals, vegetable oils and liquefied gas. The company offers high quality services with respect to storage and transshipments of these bulk liquids. To deliver high quality services, Vopak owns 79 terminals in 29 different countries around the world. Although the terminals are well spread around the world, 30% of Vopak's terminal capacity is located in the Netherlands.
Vopak is a Dutch company and, not surprisingly, headquartered in Rotterdam, the Netherlands. The company reported EUR 1.3 billion (USD 1.75 billion) in annual revenue and staffed 6,000 employees last year. Vopak currently has a market capitalization of $5.7 billion. The stock primarily listed at the Euronext Stock Exchange in Amsterdam, the Netherlands (ticker: VPK.AE). Should investors consider trading Vopak, I suggest to preliminary look at Vopak's Euronext listing, because of its liquidity.
As I mentioned above, Vopak is the global leader in independent storage of bulk liquids, measured by storage capacity. Its main competitors are Oiltanking Partners L.P. (NYSE:OILT), Kinder Morgan Energy Partners L.P. (NYSE:KMP), Buckeye Partners L.P. (NYSE:BPL) and Nustar Energy L.P. (NYSE:NS). One of Vopak's major strengths is its well spread global portfolio of terminals, which totals 31 million cubic meters of storage capacity. For comparison, Oiltanking Partners ranks number 2 with only 24 million cubic meters of storage capacity.
Trade war hedge
Second, why do I consider Vopak a good hedge against a widening trade war between Europe and Russia? One of the most important factors in the crisis between Europe and Russia is energy. Several countries in Europe currently depend on Russian gas supplies, most importantly Germany. Europe will not be able to supply the region's total energy demand on its own. Therefore, Europe is looking for alternative solutions in order to decrease and eventually end its energy dependence on Russia.
The most likely solution is that the U.S. will supply more gas to Europe. The Obama administration already approved additional gas exports to Europe. I expect that more gas will be exported in the upcoming years, especially since energy independence from Russia is a hot topic in European politics. Since there is no pipeline from the U.S. to Europe, the natural gas will most likely be shipped as liquefied natural gas (hereafter: LNG). LNG is efficient and safe, because it is up to 600 times smaller than normal natural gas.
I expect that most of the LNG shipments from the U.S. to Europe will go to the Port of Rotterdam in the Netherlands, because the Port of Rotterdam is the most important LNG hub for Western Europe. The Port has the infrastructure to handle the world's largest LNG tankers and pipelines to supply gas to other parts of Europe. Vopak will benefit from increasing LNG shipments, because the company has a strong presence in the Port and the LNG needs to be stored before it can be processed and distributed.
Based on my findings above, I believe Vopak is a good hedge against an escalating trade war between Europe and Russia. Unlike its main competitors, Vopak has a strong presence in the Port of Rotterdam and I expect a sharp increase in LNG shipments to this Port. Vopak should benefit, because the company has the necessary storage capacity and transshipment services to support the distribution of LNG. As a result, occupancy ratios are likely to go up and this will support financial performance in the long run.
Vopak's share performance has been disappointing. The stock lost about 19% of its value over the past twelve months. This was caused by a worse than expected performance in the first quarter of this year. Vopak's occupancy ratio in the first quarter was 88% compared to 89% in 2013 and 93% in 2012. Further, foreign currency translations effected the company's earnings. As a result, the company's EBITDA in the first quarter declined from EUR 138.4 (USD 185.5) million to EUR 123.8 (USD 165.9) million.
Vopak expects to fully recover its financial performance by the end of 2016. The company expects its EBITDA in 2016 to exceed its record setting EBITDA of 2012. New terminals will more than offset lower the occupancy ratio and negative foreign currency translation effects. However, Vopak did not anticipate a scenario with increased LNG shipments to Europe on a short-term. In case that this scenario does occur, Vopak's EBITDA will recover even faster and this will be a boost for the company's share price.
Following the disappointing performance in the first quarter and the poor performance of the stock, Vopak trades at a price/earnings ratio of 15.8 times this year's expected earnings. The company's dividend yield increased as well. Vopak currently yields 2.7%. I consider Vopak's valuation as cheap and its dividend yield as attractive for dividend investors, especially compared to Vopak's most important competitors (see graph below).
Kinder Morgan Energy Partners
* Forward P/E ratio instead of trailing P/E ratio, because trailing P/E ratio >50.0
Conclusion and risks
Based on the information above, I believe investors should consider Vopak as an investment. The company's P/E ratio is the lowest among its competitors Oiltanking Partners, Kinder Morgan Energy Partners, Buckeye Partners and Nustar Energy. Vopak pays a 2.7% annual dividend as well. Further, Vopak is the global leader in independent storage of bulk liquids. To remain the global leader, the company plans to increase terminal capacity from 31 million cubic meters by the end of 2013 to 37 million cubic meters by the end of 2018. Unlike most its peers, Vopak operates terminals all around the world. This could provide Vopak with an additional competitive advantage, as the company has the opportunity to serve large clients with global businesses.
Further, I would like to point out that Vopak could benefit from increased LNG shipments from the U.S. to Europe, because of its strong presence in the Port of Rotterdam. This port offers all the necessary infrastructure to handle the largest ships in the world and the port also has a network of pipelines to supply the European markets. I believe this scenario is likely in case that the trade war between Europe and Russia escalates even further. In that case, Vopak's occupancy ratio will improve, as will its financial performance. Therefore, I rank Vopak as my number 1 hedge stock against an escalating conflict with Russia.
Finally, I would like to discuss several risks related to investing in Vopak. First of all, Vopak reports its earnings in euro's and its main listing is in euro's as well (Euronext in Amsterdam, the Netherlands). This makes the investment vulnerable for foreign currency effects. For U.S. investors, the EUR/USD exchange rate may have a negative effect on the total return of their investments. Further, Vopak experienced headwinds in 2013 and 2014. For example, Vopak's first quarter occupancy ratio dropped from 93% in 2012 to 88% in 2013. The company expects to recover the financial performance by the end of 2016, however, this includes forward looking statements from the company and the final results remain to be seen.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.