Get 100% Upside From This Side Play On The U.S. Energy Boom

An image of a pair of glasses on a newspaper
Credit: Shutterstock photo

The domestic energy sector has gotten more than it bargained for during the so-called U.S. energy boom -- but in a good way if you view it from an economic standpoint.

As part of the sector's unprecedented success in extracting previously unattainable oil and gas reserves, there's now a major oversupply of certain useful by-products.

These by-products, which include propane, butane, ethane and other liquefied petroleum gases (LPGs), have value in North America, though prices are down due to the oversupply. But LPGs are in high demand and typically command premium prices overseas, especially in Europe and Asia.

So U.S. LPG exports appear set to keep soaring. Indeed, they could nearly triple by 2020 to almost 800,000 barrels per day from about 280,000 barrels per day in 2013, according to estimates from energy consultancy FACTS Global Energy Group.

One company in particular is positioned to capitalize on this trend. It's by far the leader in LPG transport through the smaller "handysize" tanker ships designed specifically to refrigerate and carry LPGs. The company's fleet includes 24 such ships, giving it about a 30% market share in terms of the industry's overall transport capacity, compared with 7% for its nearest rival. The company expects to purchase 10 more handysize tankers by 2016.

I'm referring to London-based Navigator Holdings (NYSE: NVGS ) , which was established in 1997 and went public late last year.

Since its New York Stock Exchange debut on Nov. 21, NVGS has climbed more than 25%. This is a small and fast-growing company, so I think its stock is likely to continue enriching shareholders handsomely over the long haul.

As the #1 player in LPG transport, Navigator has long been seeing high fleet utilization rates (93% last year and virtually 100% in 2012). Thus, annual revenues have grown rapidly -- nearly 41% a year for the past several years, from $82 million in 2010 to $266 million during the past 12 months, according to Morningstar. In the same period, net income rose 42% a year, to $50 million.

To help maximize its readiness for the coming spike in demand for LPG transport services, Navigator has wisely decided that six of the next 10 tankers it plans to acquire by 2016 will be capable of carrying ethylene (as well as propane, butane and other LPGs). This will bring the total number of ethylene-capable tankers in its fleet to 11.

Navigator GasAs the #1 player in LPG transport, Navigator has long been seeing high fleet utilization rates.

That capability should contribute significantly to revenues and profits for years, particularly in China. That country is already the world's largest consumer of LPGs used for heat and transportation, and many analysts expect it will show especially high demand for cheaper imported ethylene to use in petrochemical production.

For instance, analysts at resources consultancy Wood Mackenzie project China will account for nearly 50% of the world's growth in ethylene demand through 2030 as its efforts to achieve ethylene self-sufficiency stall, increasing reliance on imports. These analysts say China "will be one of the primary target markets for new ethylene equivalent export supply, with imports of ethylene equivalent forecast to double by 2030 to over 40 million (tons)."

India, the world's fourth-largest LPG consumer after China, the U.S., and Japan, could also be an increasingly common destination for Navigator. LPG consumption in India is rising about 7% a year, with the largest demand increases projected for less developed rural areas. Imports account for more than 20% of India's total annual LPG demand, which has already more than doubled to about 16 million tons per year during the past decade, according to the International Institute for Sustainable Development.

Despite Navigator's market leadership and clear opportunities for further success, analyst coverage of the firm's stock is still pretty light, with only two analysts currently weighing in. However, because of Navigator's exciting prospects and solid balance sheet, I think their growth projections are achievable.

These call for earnings per share ( EPS ) to more than double to $2.08 in 2015 from $1.02 now. If that occurs, investors would likely keep paying around 25 times earnings for Navigator's stock, which implies just over 100% upside to $52 in 2015 from the recent price of $25.45.

Risks to Consider: The LPG gas transport market is highly cyclical with regard to charter rates. Increased difficulty in chartering tankers at attractive rates could adversely impact Navigator's bottom line. The company could find itself in this position more in the future if its success in LPG transport attracts more competitors to the industry.

Action to Take --> With its unique ability to transport useful byproducts of domestic oil and gas drilling, Navigator Holdings is an excellent side play on the U.S. energy boom. There's strong demand for LPGs overseas but not a lot of companies with sufficient handysize tanker fleets to help get these commodities where they need to go. Navigator's clear leadership of this industry should keep it growing fast for years to come.

In terms of valuation, Navigator's current price-to-earnings (P/E) isn't cheap, but it's far below the industry average of 67. Plus, the stock's forward P/E, based on 2015's projected earnings, is only about 12, making the current price a good entry point.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2016 StreetAuthority, LLC. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Street Authority

Founded in 2001 by industry veterans, StreetAuthority is a financial research and publishing division of Investing Daily. Our mission is to help individual investors earn above-average profits by providing a source of independent, unbiased — and most of all, profitable — investing ideas. Unlike traditional publishers, StreetAuthority doesn’t simply regurgitate the latest stock market news. Instead, we provide in-depth research, plus specific investment ideas and immediate action to take based on the latest market events.

Learn More