NVGS - Navigator Gas

[Two Coins and Widow]

My first post ;) NVGS is the largest owner and operator of handysize liquefied petroleum gas carries. Navigator Gas has been put together with the U.S. oil and gas patches by Mr. Market. The share price dropped more than 40% from its peak. However, Navigator’s business remains largely unscathed by the dropping oil price. It has one of the most versatile and competitive fleet economics in seaborne transportation, the shrewd management team, the controlling interest held by Wilbur Ross.

 

The fleet size has been expanding while the charter rates have stayed firm.

 

Overview of the company and the back-of-the-envelope valuation: https://twocoinsandwidow.wordpress.com/2015/02/19/navigator-gas/ 

 

[Travis Wiedower]

Your blog post on Navigator was a great introduction to the company for me so thank you for that. I'm surprised no one here (or elsewhere really) seems too interested in this stock. It took some work to wrap my head around all the industry dynamics but I think there's great opportunity here. Below is my investment thesis on the company. My write-up delves into the bear case more than yours but we both came to the same conclusions.

 

http://traviswiedower.com/2015/05/27/navigator-holdings-nvgs/

[Pelagic]

Thank you both for the write ups on your blogs. I'm wondering if either of you could shed some more light on why it has fallen in correlation with oil prices. If significant quantities of NGLs are being rejected by oil and gas operations already, what was the market's reasoning behind the price drop?

[Travis Wiedower]

Honestly I don't have a great answer for you. I just think anything and everything related to oil has been crushed in the past year--deserved or not. My largest position is LGIH which is a homebuilder based in Texas. Very little (if any) correlation to oil but them being in oil-country is the only reason I could come up with to explain their shares plummeting last year.

 

A prolonged downturn could certainly hurt Navigator (which I touched on in my blog) so maybe everyone is assuming <$60 oil is here forever? When oil's high everyone thinks it'll last forever and same goes for when it's low.

[HJ]

Thank you guys for writing this up.  I also have been pondering this for a while, have traded in and out of NVGS.  I would just list out the following couple of arguments on the bear side, and would love to hear your thoughts.

 

1) I think in one of the conference calls, the CEO of NVGS mentioned that the bulk of ethelyne exports would be done in the form of pellets, processed, shipped out in bulk, which is certainly cheaper and easier to ship than ethane.  The process of freezing a gas, keep it frozen through the trip, and then gasify on the receiving end is costly.  By reference, LNG landed cost in Japan is now in the low teens USD, with long term contracts often priced in terms of oil.  Even though natural gas price onshore Australia trades with AUD$3 handle, there is speculation that LNG exports out of Australia may become uneconomic if oil were to revisit 40's.  In the chart that Travis has, the ratio of Asian Naptha vs. US Ethane declined from approximately 6:1 in summer of '14 to something close to 3:1 today.  There's also capital cost to convert feedstock for chemical plants.  I understand certain conversion projects have already been sanctioned in Europe, so ethane export will certainly occur out of US, but is the prospect of growth in ethane export volume suspect?  After all, there's a reason Sasol decided to build that new ethane cracker in US rather than converting the feedstock of a plant that they already have on a different continent.

 

2) I understand the flexibility of the handy sized LPG carrier vs. VLGC in terms of the ports that they can visit.  But there is a perception that VLGC's will be oversupplied (all the equity trades below book as an example), is there a scenario where VLGC's will take share from the handysized carriers on long distance routes, and force the handysized carriers to compete only on the local routes anyway?  i.e. they take delivery of LPG from a VLGC somewhere close to destinations, and only run local routes?  In the LNG parallel, there are companies already trying to receive LNG's offshore.  Can it happen in LPG?  The expansion of Panama Canal will allow VLGC's out of East/Gulf coast to call on Asian port as well in a couple of years.  While handysized LPG carriers are special today, how long will they stay special against the perceived overcapacity of VLGC's before people figure out how to arbitrage that?

 

3) It does still bother me that Wilbur Ross has been selling a bit.

 

US natural gas is a game changer, but it seems to me there's a reason that gas is a local market, not an international market like crude oil.  Is the better plays found in a US onshore gas user, like the fertilizer plants or gas powered electricity plants? 

 

[Travis Wiedower]

Great questions.

 

1. You are absolutely right. I struggled in my blog post with trying not to make it too long (failed there) but also providing enough details on the many dynamics in play so a reader can understand it from a high level (while not getting into the minutiae). I just reread it and I do think I glossed over some things that you’ve astutely challenged. Marcus Hook and Morgan’s Point will be exporting ethane but there also will be plenty of ethane/ethylene supply not being shipped. In addition, I probably over-emphasized the US in my write-up. In reality there is a lot of capacity coming online that will need to be shipped in the Middle East and Australia just to name two of the biggest (that same conference call you reference goes through several of the international examples). I’m going to ask management for more insights into the Gulf Coast ethane/ethylene dynamics, hopefully we can drill down on it more. Even with the naphtha/ethane spread narrowing it is still plenty profitable to ship overseas and I expect ethane’s price to recover over the next couple years which I touch on in the blog post.

 

2. I cannot for the life of me find the chart I had that breaks out the age profile of the VLGC fleet but I believe it has a decent portion that is over 25 years old. So first off I expect many of these to be retired especially as newbuilds ramp up the next couple years. VLGC will certainly take long distance routes away but I don’t get the impression Navigator does a ton of these anyway. Their prime routes are US to Europe/South America, within Europe/Middle East, etc. Navigator already does a little VLGC-to-port work by the way.

 

3. As “they” always say, “there are a million reasons to sell and only one reason to buy” (which I think is kind of a dumb platitude but whatever). Of course I don’t like him selling either but unless the selling ramps up I’m not overly worried.

[Travis Wiedower]

Forgot one comment: You mention Australian exports being uneconomic at $40 oil. Yes, if we have a sustained low oil/gas environment this investment will probably not turn out well. If you think oil is dropping back to $45 and staying there, definitely avoid Navigator  :D

[HJ]

40 is probably too low for a long term sustainable oil price, but it could dangle around where we are for a while. 

 

The article below was written when front month oil is in the low 50's.

 

http://analysis.petchem-update.com/engineering-and-construction/future-us-ethane-crackers-amidst-oil-crisis-2015-outlook

 

"Paul Victor, acting CFO of Sasol, an energy and chemicals group leading the development of an ethane cracker in Louisiana worth $8.9 billion, has recently admitted that the company would not be able to achieve the 10.4% rate of return they were looking for if the price of oil remains below $80/bl."

 

10.4% doesn't sound like a lot of margin for error for something as big as this, and we can certainly be under 80 for quite a while.  Not a statement that inspires a lot of confidence.  In the latest conference call, question was asked about contracting status on 3 of the 4 speculatively built ethane capable carriers.  The answer was more or less expected "guys need time to get over the initial oil price shock, contracts will be singed by the time they are delivered".  Is he answering the question straight or is he just being promotional?

 

For a highly cyclical, highly fragmented industry, is 1.3 x book obviously cheap?  Here's a quote from Wilbur Ross that I found in "Dynasties of the Sea":  "There are always naysayers, but historically, the name of the game in marine transport has not come from operating the vessels.  It has come from buying the vessels in bad times and selling them in good times.  They're more like a portfolio of assets than a business".  Are we closer to good times or bad times?

[farbelow]

Hello Two Coins and Travis,

 

Thank you both for the well layed-out idea. A key part of the valuation would be the capital that needs to be invested to get to 2017. I must be missing something, but I cannot find this in your valuations or in the NVGS accounts.

 

My quick take on the capital required would be: their return on capital invested in vessels has been between 8 and 10% over the last two years. Let's be optimistic and take 10%. If I take the middle version of Two Coin's base case (ebit 190,295), this would imply a required investment of 190,295/10% = 1,903 M in vessels in 2017. According to NVGS' last quarter accounts they have 1,145 M invested in vessels (and have 131M invested in vessels under construction. So, an extra 1,903 - 1,145-131 = 627M would have to be invested to get to 2017. This would be a material amount for a 1B market cap company and would effect the valuation.

 

Or am I overlooking something?

[muscleman]

I am puzzled by the calculation of FCF. Unlike a bridge or cable or railroad, D&A seems real to me for ships just like cars. Your 2017 projection has 144 m net income and 74 m D&A, and you said FCF is 214 M. Can you please explain why?

It seems to me that if D&A is based on 25 year depreciation then it should be real.

[Packer16]

I think at a minimum you need to include the amortization of debt principle over the remaining life of the ships as the asset is depreciating in value each year for your FCF calculation.  These guys have short-term charters so pricing can get ugly if others decide to get into the market or demand declines quickly (lets say due to delay of LNG capacity).  Also PDVSA is 10% of 2014 revenues (not the most creditworthy of clients).

 

Compare this to SSW.  Long term charters with fixed payments by mostly AA/AAA clients and if you adjust the FCF as described above has a higher FCF yield.  They also own the management company.  I always look to SSW as the gold standard and anything less stable has to have better FCF yield.

 

Packer

[Travis Wiedower]

I am puzzled by the calculation of FCF. Unlike a bridge or cable or railroad, D&A seems real to me for ships just like cars. Your 2017 projection has 144 m net income and 74 m D&A, and you said FCF is 214 M. Can you please explain why?

It seems to me that if D&A is based on 25 year depreciation then it should be real.

 

Maybe I didn't explain the bottom section of the valuation chart well enough. The numbers you are referring to ($144M net income, $214M FCF, etc) are strictly 2017 numbers. 2017 is a year that will have exactly one drydocking so their drydock expense will be very low (roughly $650k). For the numbers below that (titled Run-rate) I took the total drydocking expenses from 2017-2026 and averaged them together. As you can see, actual drydocking expenses (which is the maintenance required to keep ships in working order) are significantly less than D&A. Their 10-K breaks out the drydocking expenses and the time frame of when these need to be done. Combine these numbers with their ships (and specifically their ages) and you can easily calculate expected drydock expenses in future years.

[Travis Wiedower]

Hello Two Coins and Travis,

 

Thank you both for the well layed-out idea. A key part of the valuation would be the capital that needs to be invested to get to 2017. I must be missing something, but I cannot find this in your valuations or in the NVGS accounts.

 

My quick take on the capital required would be: their return on capital invested in vessels has been between 8 and 10% over the last two years. Let's be optimistic and take 10%. If I take the middle version of Two Coin's base case (ebit 190,295), this would imply a required investment of 190,295/10% = 1,903 M in vessels in 2017. According to NVGS' last quarter accounts they have 1,145 M invested in vessels (and have 131M invested in vessels under construction. So, an extra 1,903 - 1,145-131 = 627M would have to be invested to get to 2017. This would be a material amount for a 1B market cap company and would effect the valuation.

 

Or am I overlooking something?

 

$130M is not the right number--just the four large 2016 ships and two smaller 2017 ships cost a total of $415M. These ships haven't been funded to begin construction so I assume that's why they're not included. The number you're most likely looking for is under contractual obligations for vessels under construction ($512M).

[farbelow]

Thank you, Travis,  for clarifying. I think I see now what your approach is. If I am understanding you correctly, you are taking free cash flow to equity holder, FCFE, excluding repayment of principal. And then taking a multiple of this FCFE to get to the share price estimate for 2017.

 

According to contractual obligations in last quarter NVGS needs to invest another 512M in vessels under construction to get to 2017. Your valuation implicitly assumes this required investment is financed by debt, resulting in a similar debt ratio in 2017 as is currently the case.

[Travis Wiedower]

farbelow,

 

Only the six ships I referenced above ($415M) haven't yet been financed with debt, but yes you are basically correct.

[Travis Wiedower]

For a highly cyclical, highly fragmented industry, is 1.3 x book obviously cheap?  Here's a quote from Wilbur Ross that I found in "Dynasties of the Sea":  "There are always naysayers, but historically, the name of the game in marine transport has not come from operating the vessels.  It has come from buying the vessels in bad times and selling them in good times.  They're more like a portfolio of assets than a business".  Are we closer to good times or bad times?

 

Finally got around to reading Dynasties of the Sea--kinda hit and miss so far but I've enjoyed it. I also can't imagine anyone thinking we're closer to good times than bad right now. But the real reason I came back to this comment is I didn't realize how much the Wilbur Ross chapter discusses Navigator. It's pretty interesting to read some of his comments about why he was initially attracted to the company. He did a much better job than I did summarizing Navigator's competitive advantage:

 

"When you have more vessels, you have the ability to have them in different places at different points in time. With triangulation and getting the first call, you have a much better shot at being able to play the logistics in such a way that you get very high utilization. So scale is something that really matters in terms of what kind of profit model you can have."

[RadMan24]

The technical aspect of it plays a huge role, often underrated...just look at their competitor returns. This company is not a regular shipping company. With respect to the handy-size segment, a competitor with 8 ships ordered has had some delays from the shipyard, and many ships on order are to replace an aging fleet, with the rest to pick up an increase in demand. The large gas carriers could be a risk, but even Iran exporting LPGs could be a huge boost to the business, and those are long freights (boosting rates). The company also has four 35,000 cm ethylene capable ships coming online in 2016 and 2017...those are going to be money makers. I like this business, the capital allocation, and track record thus far. The return on capital has been held down because of the number of ships being constructed. By 2018, that return should be higher. But the market will have revalued the company by then. If anything, lower oil prices are helping out with lower bunker fuel prices in the spot market. Not to mention the bank rates the company is being extended...low cost financing in this market!?, yet the equity value of the company is discounting its future significantly.

[Guest MarkS]

I have no position in any  marine shipping companies. But it does look like a decent time to start nibbling.  Since you guys seem very knowledgeable, I was hoping you would give me some feedback. I was looking ar GASS but NVGS looks like a better play. What do you guys think about BW LPG?  Here is their Q2 presentation:

 

http://www.bwlpg.com/Investor-Centre/Q3-2014-Financial-Results/Q1-2015-Financial-Report-and-Presentation.

 

Their fleet consists of very large tankers - which strike me as better for shipping from the US to Asia.  They have a better balance sheet, growth and profitability.

 

Any interest  comparing the two companies?

 

Thanks

Mark

[Travis Wiedower]

First off, look closely at GASS management before even considering an investment in them. This letter to their board from a large shareholder sums it up pretty nicely: http://www.prnewswire.com/news-releases/hillson-financial-management-urges-stealthgas-inc-to-take-immediate-steps-to-improve-performance-and-enhance-shareholder-value-300028183.html

 

I don't have anything bad to say about BW LPG. They have the largest VLGC fleet in the world so they benefit from some of the same scale advantages that NVGS does. More ships means you're more likely to be able to service a client when they call. BW may or may not be cheaper in terms of valuation than NVGS, but a big reason I like NVGS is the dynamics of handysize ships vs VLGCs. BW has fantastic utilization right now so it's easy to think they're fine, but I originally asked myself which type of fleet I'd want if things turn south? And that's a fleet with a lot of flexibility as that'll handle a downturn much better. I chose handysize over VLGC more than I chose NVGS over BW.

 

Navigator's fleet has fully refrigerated, semi-refrigerated and ethane-capable ships. I don't have the number here but I think they can carry like 15 different products? That's compared to a large gas carrier that only carries a handful. Handysize can also go in more ports; currently there are only four US ports that can takes VLGCs (this number is expanding though). Finally, VLGC charter rates are wayyyy more volatile than handysize. It amazes me how stable Navigator's charter rates have been over the years. I gave some specific numbers comparing charter rates in my NVGS blog post which I linked above.

 

Bottom line, I suspect both companies will be great investments over the next few years. This industry is expanding big time and as long as management isn't screwing you (GASS), you'll probably do just fine. BW may even have more upside, it is just my personal opinion that NVGS is a safer bet.

[Guest MarkS]

Thanks Travis.  Clearly NVGS is a better choice than GASS.  I came to that conclusion yesterday.  At the risk of being greedy, have you looked at Dynagas?  They have a unique niche - most of their ships are ice rated, which allows them to service Northern European and Russian oil and gas companies. Their ce capability also allows for a shorter trip to Asia.  Sorry to bug you! But I'm trying to get my head around the various options.

Thanks

Mark

[Travis Wiedower]

Never heard of Dynagas, sounds interesting though so I'll take a look. This forum's purpose is to ask questions and discuss! One of the main reasons I post here and blog about my investments is to have people challenge my ideas. Questions like yours force me to clarify my investment thesis which is always a positive.

[HJ]

Earnings routine is off schedule.  They usually give an earnings date in the middle of the month after quarter closes, and announces earnings the first week of the month after that.  Not a conspiracy theorist, but wondering what's going on...

[Travis Wiedower]

Earnings routine is off schedule.  They usually give an earnings date in the middle of the month after quarter closes, and announces earnings the first week of the month after that.  Not a conspiracy theorist, but wondering what's going on...

 

Definitely odd. I see one source says they're releasing tonight and another says November 11th. IB hasn't notified me of an earnings release yet.

[Guest notorious546]

http://www.barrons.com/articles/barrons-2016-roundtable-part-3-12-stocks-that-could-outperform-1454131664

 

My next pick is Navigator Holdings [NVGS]. The stock is trading for $12 a share. The company has 55 million shares outstanding and about $500 million of debt. It operates a fleet of 29 semi-refrigerated handysize ships [handysize vessels are of moderate size, with a capacity between 15,000 and 35,000 DWT, or deadweight tonnage], designed to carry cargo ranging from liquefied petroleum gases, or LPGs, such as propane and butane to ethane, ethylene, and ammonia. Compared with a large gas carrier, which is three times the size, a handysize ship is more flexible in terms of the cargo it can carry and the ports it can serve.

 

In addition to the high degree of technical competence required to handle its various cargos, Navigator has excellent operational and commercial capabilities, which allow it to run at more than 95% utilization and quickly adapt to changing circumstances. It has a great management team, with significant ownership of around 2.5 million shares, and discipline regarding capital allocation.

 

What drives the business?

 

Witmer: Navigator’s business is supply- driven. The more butane, propane, and such that needs to be moved over water, the more demand there is for its services. Drivers of supply are natural-gas drilling, which in turn is driven by U.S. gas fracking [hydraulic fracturing] and the global buildup of liquefied natural gas, and increased shipping of ethane and ethylene. The U.S. has access to extremely cheap ethane, which is used to produce ethylene. As the U.S. increases its supply of ethylene, and as the plants and ports required to move it come on-stream in the next few years, the opportunities for Navigator will continue to improve. Inexplicably, the stock trades with the price of oil. When oil was $80 a barrel, Navigator was generating about $1.60 a share in after-tax free cash flow and trading in the $20s. Since then, oil has fallen by more than 50%, and Navigator’s after-tax free cash flow has increased by more than 25%, to over $2 a share, and the stock is down, not up.

 

How do things look for the company next year?

 

Witmer: Navigator recently disclosed that it has already contracted a significant portion of its capacity for 2016 at rates higher than those in 2015. Navigator has nine ships ordered that will be delivered over the next year and a half. With those at current day rates, after-tax free cash flow could be about $3 a share. Even if shipping rates decline 20%, the company would still earn about $1.65, with all 38 ships. Based on announced export capacity expansions, we believe the supply of seaborne LPG, as well as ethane and ethylene, should keep the industry at a healthy utilization rate. We consider Navigator a real bargain, and have a price target of at least $25 a share.

 

Black: In the short term, the company will have negative free cash flow because it is spending $44 million per ship on new ships. Once they get to that steady state in a year and a half or so, they will generate free cash.

 

Witmer: They don’t have negative free cash from operations. It is because they are growing the fleet. To calculate maintenance capital spending, we take the replacement cost of the entire fleet, less scrap value, and divide by the average life of the ship. In 2016, we charge them for $30 million of capital spending when actual spending for anything beside new ships is $5 million.

 

Black: To me, that is operational.

 

Gabelli: I don’t see it as operational.

 

Black: As Warren Buffett said, the tooth fairy doesn’t pay for capital expenditures.

 

Gabelli: The stock is cheap. Buy it.

 

Black: I already own it.

 

Gabelli: Buy more.

 

Witmer: I’m going to stop here.

 

That sounds like a wise decision. Thanks, Meryl–and everyone.

[matoel]

any interest at current levels <$7?  the whole shipping sector has gotten hammered