Navigator Ships Liquid Gas In U.S. Energy Export Boom
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 for itself.
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 and propylene.
"For the broader LPG segment, whichNavigator Holdings ( NVGS ) 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 2016.
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 ethylene."
Navigator has a market share of 27% in the global handysize capacity segment and 33% in the semirefrigerated handysize segment.
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 25.
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 ( KEX ),Teekay ( TK ),Teekay LNG Partners ( TGP ) andGolar LNG ( GLNG ).
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."