Navigator Holdings is riding the wave of American oil and gas
shale expansion -- and particularly U.S. exports. The U.K.-based
owner and operator of the world's largest fleet of handysize
seaborne gas carriers has carved out a profitable niche segment
Its handysize vessels, an industry term for ships that can get
into smaller ports, measure 15,000 to 20,000 cubic meters. They
transport liquefied petroleum gases (LPG) such as propane and
butane, ammonia and various petrochemical gases such as ethylene
"For the broader LPG segment, whichNavigator Holdings (
) is a part of, there's been a large drive for U.S. exports of
LPG as a function of all the domestic U.S. oil and gas production
that's going on," said Ben Nolan, director of maritime research
at Stifel Financial.
"Out of a lot of the shale oil and gas plays, like the Eagle
Ford Shale, the Permian Shale or the Marcellus Shale, (many)
produce a lot of this LPG as a byproduct of the oil and gas
drilling," he noted.
LPG production has increased to the point that America cannot
consume it all domestically -- and Navigator is gearing up just
as the prospect of more exports looms.
The company operates 24 semi-refrigerated and fully
refrigerated vessels, including five ethylene-capable vessels. It
also expects to take delivery of an additional 10 (six
ethylene-capable) with an option to build three more
semirefrigerated, ethylene-capable vessels in 2014, 2015 and
There's been a big push to develop export terminals out of the
U.S. to export LPG, Nolan notes.
Three exist now: two in Texas and one in Pennsylvania.
Expansion projects include nine additional export facilities
slated to come online in the next two years.
America is already tied for the position of the world's
largest LPG exporter. With the expansion, the nation's LPG export
capacity is expected to triple.
As exports of LPG rise, so will demand to transport it, and
Navigator is in the right spot to benefit from that. Its
semi-refrigerated vessels allow for cooling and pressurized
transport of traditional LPG cargoes and ethane or more
specialized petrochemical gases such as ethylene.
"The really interesting aspect of this company in particular
is not only the fact that they should benefit from all of the LPG
side of it traditionally, but also its potential for ethylene and
ethane trade out of the U.S.," Nolan said.
"It's relatively easy to transport propane or butane, you just
have to cool it or pressurize it," he added. "But for ethane you
have to do both, and ethane is a much better feedstock to make
Navigator has a market share of 27% in the global handysize
capacity segment and 33% in the semirefrigerated handysize
Its closest competitor controls 7% of the segment's fleet. As
Navigator takes delivery of more vessels, Nolan estimates its
handysize market share to grow to 29%.
The LPG Market
LPG is used in two areas. The first is residential
consumption, where propane is used for heating and cooking. It's
a clean fuel relative to coal, and in Asian markets it's been
used as a fuel for cars. Nolan expects demand for the residential
use to grow as the seaborne trade provides additional capacity at
a reduced cost.
The second use of LPG is as a petrochemical feedstock in the
industrial production of ethylene, propylene and butadiene.
Demand and pricing of LPG in industrial use are more dependent on
the cost of inputs that are used to make ethylene, which is the
primary component of plastic.
Nolan highlights the arbitrage that can be achieved due to
extreme pricing differentials on various continents for LPG.
"Current propane prices in Western Europe are approximately
$125 per barrel, but only $52 per barrel in the U.S. Gulf Coast,"
he wrote in a report. "With average transportation costs based on
current fuel prices and VLGC (very large gas carrier) rates of
about $4 per barrel, the arbitrage opportunity of buying U.S.
propane for export to Europe is clearly compelling."
Navigator went public last November at $19 a share, and the
stock hit a high of 27 a month later after surging more than 40%.
It's pulled back since late December and has been trading near
The company received net proceeds of $156 million. It expects
to use nearly half of the money to pay for the building of new
vessels. Ethylene-capable ships cost about $80 million each.
Of note is that W.L. Ross Group is the primary financial
sponsor of the company, with a 42% equity stake. It also
maintains a seat on the board of directors. W.L. Ross is one of
the world's leading turnaround groups and acquired ownership
interest in Navigator in 2012 from Lehman Bros., which was a
major equity holder after Navigator emerged from Chapter 11
bankruptcy reorganization in 2006.
Navigator is the 10th largest company by market cap in IBD's
Transportation-Ship industry group, which is ranked No. 61 of 197
groups tracked. Largest in the group areKirby (
),Teekay LNG Partners (
) andGolar LNG (
Nolan says one of the risks with a company such as Navigator
is that, despite high barriers to entry, the business is
commoditized. Anytime excess returns are realized, it creates an
incentive for competitors to enter the market.
A lengthy lead time exists before something like this could
happen. "There are only a handful of shipyards in the world that
produce this kind of vessel, and those shipyards are fully booked
through 2016," Nolan said.
Risk On The High Seas
Other risks include operating risk of the ship, a shipwreck or
a spill. The spills are not as severe as those that happen with
oil, Nolan notes.
Finally, the success of the industry depends on the oil and
gas production. If suddenly America were to disallow fracking, it
could substantially jar the shipping industry.
Navigator reported a 62% year-over-year surge in operating
revenue to $64 million in the last quarter. Net income rose 32%.
The company is generating healthy amounts of cash flow and rates
of return. Nolan expects operating cash flow to be in excess of
$125 million at year-end 2013. This should provide the company
plenty of room to handle necessary capital investments.
"This is a case where you have a tremendous amount of
incremental demand coming into the market, with a potential for a
lot more in their particular segment, and the supply side doesn't
react quickly enough," Nolan said. "And that creates a period of
time where rates of return can be really strong, and the people
with assets in the market during that period are going to be the
primary beneficiaries, and I think these are the guys."