KSP - SSW, BBEP, and ATSG All Rolled into 1

[Myth465]

Now would be a good time to seriously look at KSP. I have mentioned it in other threads, but today most of the material risks are gone. Still leveraged but increased utilization should allow them to restart the div sooner rather than later. They thought $.45 a quarter was possible.

 

I have been killed in it, but believe I will do well overtime. My loss your gain.

 

They operate in the Jones Act, and Charter Barges. They sold off because they got overlevedged and had a very crappy quarter, they also cut their dividend and had covenant issues. They cut the div right after raising capital. the street hates them. Also very large insider sells over the last few weeks. Appleseed owns 10% and they appear to be a smart value fund.

 

The covenant issues have been resolved today and utilization has gone up due to refining utilization. They are also benefiting from the spill and have chartered single hull barges to help.

 

Many places in Louisiana have tied barges together to fight the spill and their is millions of gallons of oily water sitting in the Gulf. I bought at $9, then $7, then $5, then bought options at $5 and $7.50. Now is the time to get in. Many of the risks are gone.

 

There is a very good writeup on VIC. Let me know if you all have any questions.

 

The $5 Dec options should be safe. I look to exercise them, and hold the common to collect the dividend once its restarted. The $7.50 options look great if you are a gambling man.

 

From todays press release ---

 

Additionally, President and CEO Timothy J. Casey stated, "As we mentioned in our last conference call, EBITDA in our June 2010 quarter will exceed the inordinately low number we reported in our March 2010 quarter. In addition to the normal seasonal rebound, owing to the oil spill in the Gulf of Mexico, we believe that approximately two dozen coastwise tank barges, as well as a number of inland tank barges and ocean-going tankers have been chartered. While this employment has to be viewed as temporary, it is likely that many units will be employed until the spill is cleaned up. Accordingly, we expect the market to tighten during this process and there is some evidence this is already happening. K-Sea has chartered out five single-hull barges and three double-hull barges along with eight tugboats to assist with the clean-up effort."

[Josh4580]

liquidation value over $8, I also bought in starting at that level and am down here at $5, but adding more.  Myth we also seem to cross paths on stocks

[Myth465]

Great minds think alike I hope, or we both like the same value traps. LOL. I am just happy my thesis is playing out. First time Yahoo message boards were useful. I got the tip from an article about hated stocks, it was in there cause of the dividend cut. Someone on Yahoo pointed out that barges were being used to stop the gulf leak and that millions of gallons of oil water was sitting in barges in the gulf, that plus increases in refinery utilization caused me to buy over the last 2 - 3 weeks. Dont let the 25% up scare you. It dived 20% over the last 3 - 4 days. I missed the first 10% and bought after but got caught by the second drop. It dropped because they provided no details on the covenant.

 

I feel pretty good about this one, though my timing could have been better. I found it at $10. Today I bought alot of December $5 contracts today. Hopefully I can hit break-even. If it hits $8 I will be a happy man. If they stick to the $1.90 in div after they sort out the debt issue, I will be a happier man.

 

I think the next 2 quarters will be decent, and am hoping for a reinstatement of the Dividend in December though looking at my luck and their financials it will likely happen in March or June next year. The sponsor though probably wants their IDRs.

[UhuruPeak]

Myth,

 

Nice job once again, the stock is already up 15% this morning and over 20% from your first note yesterday.  I guess I'll just sit and watch: my only complaint to you is that you didn't give us enough time to look into it closely, lol.

 

 

Congrats,

UhuruPeak

[ERICOPOLY]

Thanks for sharing.

 

[Myth465]

Sorry about the lateness. I have mentioned it once or twice in another thread, but didnt want to post too much because I was taking a beating in it. I plan to open up a thread to discuss special situations because I believe we can make some serious money buying crippled stocks (or even better options / leaps) after the catalyst has hit or once the material risks are gone.

 

I hold quite a few options and hope to exercise them in December should the stock hold up. If we can get $2 in dividends on a $6 stock in an MLP structure then we should all do quite well.

 

Here is the VIC writeup.

 

http://docs.google.com/fileview?id=0B89aDBuS41jGNTAzMTViYzAtOTZkOC00ZWQyLTg1MmMtNTJhM2UyMDA2YTFh&hl=en

 

 

My thoughts on the stock are listed below.

 

Investment Thesis

 

○ I am hoping that the downturn in utilization is temporary and that KSP can properly renegotiate it's covenants. These two bits of news should stabilize the stock price.

 

Risk Analysis

 

○ Risks which may cause Permanent Impairment of Capital.

 

1) An Equity Offering (Due to Options).

2) Continued weakness in earnings / utilization.

 

 

Potential Catalysts / Upside Potential.

 

○ Value is its own catalyst but, its nice to have others.

 

1) Positive Covenant News.

2) Better Quarterly Results.

3) Economic / Refinery Utilization Recovery.

 

-------------------------------------

 

Buffet's 4 Filters

 

We make quick decisions because we have filters before we get to the point of making a decision.

 

Filter #1 – Can we understand the business?

 

○ Yes, this is another commodity business. It s a shipping business which operates under the Jones Act.

 

Filter #2 – Does the business have a durable competitive advantage?

 

○ The company operates under the Jones Act which provides some measure of protection. The company also has access to the capital markets which some of its smaller competitors lack. Its still in a commodity business though and is primarily a price taker. The one positive thing is once single hull ships are gone the market should tighten quite a bit. Hopefully KSP's equity and BS can hold up till then.

 

Filter #3 – Does it have management I can trust?

 

○ Management thus far has not been very good. They have been very effective at growing the company, but have recently hit a rough patch. They raised money at $25, and at $19 and then promptly cut the dividend and had to renegotiate covenants. These recent moves have created a lack of trust in KSP, which is probably deserved. I am hoping that their burn is my gain, but I may be burned as well.

 

Filter #4 – Does the price make sense?

 

○  In 2009 KSP paid out about $3.02 in distributions and traded as high as $31.75. In 2008 KSP traded at $45. Now KSP trades for $4.74 or $90 million dollars. 

 

KSP currently has debt covenant issues and had utilization sink into the 71% range from 84% in Q1, CY. Rates appear to have held up and the fall seems to be a serious of unfortunate events. They are scrapping their single hulls vessels, see utilization picking up, have new ships coming online, and are renegotiating their covenants. If they can get through this rough patch without issuing shares then the investment will workout.

 

The VIC write-up has estimated distributable cash flow to be $25 Million for 2010 and $43 Million for 2011. This leaves plenty of room to pay down debt and pay distributions. If CF hit $43 million and we put a multiple of 6 on that due to the debt we get a total equity value of $240 million vs. a market cap of $90 million. One could also simply hold the shares and collect the dividend.

 

The price seems to make sense, especially considering the options. If KSP's Management is correct (that Q1 was a series of bad events) then the stock should rebound / recover. If Management is incorrect then the options expire worthless and I take my losses. I will continue to watch the stock and may buy more on good news.

[vinod1]

Great work Myth. Thanks for sharing the idea.

 

I am too slow in doing the DD on this and it ran away. Have a few questions:

 

1. The liquidation value is heavily dependent upon estimated prices for Double Hulled barge fleet. Even a 10% cut in the estimate puts the BV closer to $6. I assume there would be some additional liquidation costs (employee termination, etc) that reduce the actual realizable value on these barges. How likely is a liquidation scenario?

 

2. Do you have a rough estimate of the utilization rate or EBITDA for next couple of quarters based on the new barges coming online and deployment of some barges for Oil spill?

 

Thanks

 

Vinod

[Myth465]

Honestly I really dont put much stock in the liquidation valuation. KSP operates in the Jones Act and the ships which operate in those markets are very expensive (I have heard up to 2-3 times more then non Jones Act ships). Also  1 competitor just went through a reorg and I think another one just filed as well. The assets in my opinion dont have a large market and my thesis has always been that the company is worth more to the banks alive then dead. Everyone in the market was hurting, and companies were removing tonnage by retiring the single hulls early to bring supply and demand back in order. For me its a pure EBITDA / Cash Flow play.

 

Here is a Presentation from K Seas website - http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzYyMTQyfENoaWxkSUQ9MzU1NzU2fFR5cGU9MQ==&t=1

 

As you can see on Page 2 and 3, KSP was growing EBITDA, Fleet Capacity, and Distributions at a fast clip for the last 10 years. The growth has been through new builds and acquisitions, and piled on debt. KSP's sponsor really wants those IDRs (They kick in at 55 cents) and KSP worked hard to increase distributions. KSP was paying out $3 in dividends and hit $46 per share in stock price 2007

 

The market is tight for Jones Act Barges so rates went up as well. KSP is driven by Refining Utilization. When the bottom fell out of the economy, utilization also went in the tank. KSP typically had long term contracts, but refiners stopped signing contracts and started doing month to month. They also opted not to renew contracts at all which crashed utilization. Rates went down, utilization went down, and cash flow went down. It all hit bottom last quarter when KSP had to cut their DIV. They had seasonal issues, one time charges, record low refining utilization, and no visibility due to the contracts. The lack of cash flow also would eventually trigger a covenant.

 

They decided to sell all single hulls and many were worried about them raising capital due to the covenant. They had already raised twice and with no yield the market reacted fairly hard. I thought most of the bad news was out at $9 or so, but the quarter didnt go as planned.

 

----

 

Fast forward to BP. The spill hit, refining utilization improved, and things look decent. The spill is useful for 2 reasons. 1 it provides relief work for pretty much any sort of ship in the Gulf (KSP has put a few ships and tugs to work due to it), but more importantly it tightens the market and provides visibility. With ships moving towards the Gulf and refining utilization at highs, refiners are forced to sign contracts or be stuck without ships. The Jones Act only has so many approved ships so this should help out quite a bit.

 

The new barges will be very profitable. Similar to SSW, contracts were entered into during the boom period. I dont have exact numbers on either. Management was in the process of selling the single hull ships. I was hoping they passed on that and could contract them out. The ships were written down to zero and everyone was phasing them out due to the weakness in the Jones Act barge market. My guess it is better then the sale price and pure profit due to the lack of depreciation. If the barges are holding oily water, or tied together to block oil they may actually have no operating costs to them.

 

----

 

I hold a decent number of $5 and $7.50 contacts. I hope to exercise a chunk of them. I think Management has learned that debt cuts both ways and will look to be a bit more prudent going forward. Rates are down 15% from highs, but look quite good vs 2003 (page 4). The company had EBITDA of $80 million in 2008 and 2009, though a good chunk of that will go towards interest and debt payments.

 

The assets are long lived and if you look at page 7 a significant number of the Jones Act assets (Single Hull Ships) will be pushed out by 2015. When those are forced out supply will not be able to meet demand and growth via new builds or rate increases will resume. I want to exercise my shares and ride things up.

 

----

 

The biggest risk now is Repel of the Jones Act which has been in the news due to the spill.

I think its a useful law from a Military / Defense perspective, but it does drive up costs. The Senator from Hawaii hates it (rightfully so, it probably hurts them most), but who knows where the political winds will blow.

 

 

 

[vinod1]

Thanks Myth. Going to dig into this in a little more detail.

 

Vinod

[Cardboard]

"Tax-exempt entities and foreign persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

 

        Investment in common units by tax-exempt entities, such as individual retirement accounts (known as IRAs) and other retirement plans, and non-U.S. persons, raises issues unique to them. For example, virtually all of our income allocated to organizations exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a foreign person, you should consult your tax advisor before investing in our common units."

 

Sounds like a good opportunity Myth, but I wanted to point out to non-U.S. investors the kind of taxation issues that these Limited Partnerships represent. It also has restrictions for U.S. holders.

 

Cardboard

 

 

[ERICOPOLY]

I have a question about MLP taxation.

 

First, some background as I understand it:

1)  Let's say you buy at $6 today and hold the stock for 3 years.

2)  Assume that each year they pay $2 distribution -- each year this reduces your cost basis by $2  

3)  You are not taxed on the distribution during those 3 years.  Instead, you pay tax according to reported "net income" per Schedule K

4)  During the 4th year (and every successive year) you will be fully reporting the distribution as ordinary taxable income because your cost basis cannot go below zero.

5)  When you sell your shares you have to report $6 of regular income in that year -- this is the deferred taxation on your depreciated cost basis

 

 

My question is this:

 

In years 4+, do you have to pay tax on net income per Schedule K IN ADDITION TO the $2 distribution?  Or is it just the $2 distribution that you pay tax on at this point, as it's assumed that the distribution incorporates the taxable income?  I'm confused.

 

 

 

 

[Myth465]

I think its an interesting play which may work out quickly which is why I went with the options. I dont think its a long term holding through, but wouldnt want to sell at $10 given a $2 yield within a few quarters. So I bought the Dec options and hope to exercise them should we get $8 - $10. I would stay in until it moved back up to about a 10% yield. At that point you can sell, hopefully get $20 and then buy SSW or FUR.

 

I think you are right on MLP taxation. This confirms it. My hope is that Management is greedy and puts back in the div asap.

 

http://www.investopedia.com/articles/basics/07/ml_partnerships.asp

[Myth465]

Here is info related to holding MLPS in Roth accounts.

 

http://www.mhinvest.com/supportArticles/MLP-IRA.pdf

[ERICOPOLY]

This has got to be nothing but good news for KSP:

 

http://www.reuters.com/article/idUSN1413039220100714

 

The Energy Information Administration said that refinery utilization rose 0.7 percentage point to 90.5 percent of capacity in the week to July 9, the highest level since the week to Jan. 4, 2008, when the rate was at 91.3 percent.

[Myth465]

Yes im not sure whats driving the sell off. The only down issue is the accident that they had a few days ago.

 

I hope we dip below $5 and Feb Contracts come out, prior to earnings release. Management should have plenty of visibility with utilization this high. I dont see how they arent getting any interest in long term contracts.

[alertmeipp]

would the sell off comes because the BP spill seems to be contained now?

 

[Myth465]

That thesis actually has some merit.

We may get a pullback, which in my opinion would be a good thing.  ;D

[Myth465]

Looks like we have dilution of $85 million. The question is, is it at $5, $10, $15, or $20. At $15 and above it seems ok, but below that is quite painful. I need more details, but am not sure how to view this. I am guessing Appleseed may be lending them the cash, since they own 10% or so.

 

I hope its 10% yield at with a convert at $15 - $20. They would be giving up alot but a new shareholder would do well. Anyone who bought at $20 would be pissed. Those with a basis of $5 would be fairly happy. I would hope for them to take the cash, pay down debt, and pay a dividend of 20 - 40 cents to allow for the share price to recover. I hoped they would have gotten a waiver, and then pay a dividend of 45 cents, and then sell shares at $15 - $20 which would be about the same.

 

Hopefully we dont get raped on the terms. The stock should take a dive tomorrow. Interesting times.

 

http://biz.yahoo.com/bw/100830/20100830006512.html?.v=1

[mloub]

This is interesting news for sure. As you mentioned Myth, the terms of the Conv. Preferreds will be key.

 

I doubt the new investor will be Appleseed directly - their AUM are only $133million. The Appleseed Fund Manager is Perkin, Singer, Strauss Asset Management and they manage $500million in total, so they are unlikely to be the investor either.

 

I guess we'll just have to wait and see. If the new Preferreds are convertible at $5 (resulting in a diluted share count of 36 million), the K-Sea General partner can forget about getting incentive distributions going forward which are only triggered when the fund distributes $2/share/Year to Limited Partners.

 

Here is to hoping they agreed to a deal where they pay a fat dividend to the preferred (10-13%), but demanded a high conversion price ($15 or higher).

 

Regardless of conversion price, the shares are worth >$5, IMHO. The new equity issue almost completely eliminates the risk of Bankruptcy, and even with the worse case dilution, if the company generates greater than $18 million in FCF it could easily support a $0.50 annual dividend yield.

 

That being said, the whole current structure of this company as a MLP incentivizes management to behave badly over the long-term. Their incentive is to distribute greater than $2/share/year at any cost so that they trigger their incentive distributions, and doing so is what destroyed the balance sheet and left them so vulnerable to a downturn in what is a notoriously cyclical industry. It is a terrible structure, but the fact that management's hands are now tied works in an investor's favor so long as they realize this is a cigarette butt in its current form.

 

M.

 

[alertmeipp]

IMO, seldom we will see convert price ~30% above the market price, especially when the lender is on ur throat.

[Myth465]

This is interesting news for sure. As you mentioned Myth, the terms of the Conv. Preferreds will be key.

 

I doubt the new investor will be Appleseed directly - their AUM are only $133million. The Appleseed Fund Manager is Perkin, Singer, Strauss Asset Management and they manage $500million in total, so they are unlikely to be the investor either.

 

Here is to hoping they agreed to a deal where they pay a fat dividend to the preferred (10-13%), but demanded a high conversion price ($15 or higher).

 

Regardless of conversion price, the shares are worth >$5, IMHO. The new equity issue almost completely eliminates the risk of Bankruptcy, and even with the worse case dilution, if the company generates greater than $18 million in FCF it could easily support a $0.50 annual dividend yield.

 

That being said, the whole current structure of this company as a MLP incentivizes management to behave badly over the long-term. Their incentive is to distribute greater than $2/share/year at any cost so that they trigger their incentive distributions, and doing so is what destroyed the balance sheet and left them so vulnerable to a downturn in what is a notoriously cyclical industry. It is a terrible structure, but the fact that management's hands are now tied works in an investor's favor so long as they realize this is a cigarette butt in its current form.

 

You are probably right, I wonder who is the buyer. Should be interesting to get the details.

 

Thats the one benefit in all of this. INMO, the hands of Management (probably a good thing, man were they aggressive with growth) will be tied and they have the highest incentives to get the best deal possible. I would be happy with $10. Hell I would take $7.50 with a dividend of 20 cents in December.  Especially with the high watermark of $2 for incentive divs. I wonder if they can amend their comp structure, and the IDR / Div split.

 

MLPs hurt in the long term, but help in situations like this inmo. If you can get in after a collapse you can do quite well. BBEP worked out well., but they were able to avoid dilution I am hoping this one does as well. The only issue for me is the options create a time element.

[alertmeipp]

Anyone buying KSP at this level?

Or are you waiting for the convert term to be released first?

 

What's the worst case scenario? The negotiation breaks down and KSP going under?

 

 

[Myth465]

Im fully in but plan on waiting to do anything.

 

I was hoping for $10 dilution, but will take $5 now lol. Management has really mishandled this. They could have probably raised capital at $6 when the stock rallied, or $9 a month or 2 ago. Now we are at the mercy of a hedge fund manager, because the covenant adjustment is contingent on a deal. Its at least $85 million and our market cap is close to or below that, what if they issue $135 million at $5 - $6. It seems pretty dumb but at this point I cant take anything off the table.

 

Shareholders have been bag holders at $20, $10, and now $5 - at this point the only person guaranteed to make money is the hedge fund buying in. If I were an unscrupulous hedge fund manager, I would string them along until about tomorrow then make them issue equity at 30% more than that price. The market will continue to knock 3% - 6% off a day inmo until we hear something.

 

The stock could have been worth as much as $20 if they were able to get through this rough patch without dilution so I think there would have still been value with dilution, but if we get too low of a conversion then the margin of safety is eventually killed.

[Myth465]

Speak of the devil.

 

http://finance.yahoo.com/news/KSea-Transportation-Partners-bw-2333166268.html?x=0&.v=1

 

Upon a quick 3 minute scan it looks like they got 5 pounds of flesh and there is not much value left, high rate, payment in kind, low convert price. Management will probably end up staying for giving such a sweetheart deal.

[alertmeipp]

the terms are pretty bad.

I think the short-term upside is pretty much gone.

 

What's the rate on current loan? 13.5 is surprisingly high for me.

 

Well, better luck next time.