This Shipper Steps on the Gas

04/09/2013 10:30 am EST

Focus: ENERGY

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

After a long lull, this owner of LPG tankers is ready for expansion, writes Elliott Gue of Energy & Income Advisor.

Greece-based ship owner StealthGas (GASS) boasts the world’s largest fleet of handy-sized liquid petroleum gas (LPG) tankers, a class of vessel that can transport cargos of between 3,000 and 8,000 billion cubic meters, usually for local distribution in areas that lack pipeline capacity.

About two-thirds of the company’s ships operate in Asia, where demand for seaborne LPG volumes increased by 12% in 2012, driven by emerging markets such as China. The remaining one-third operates in Europe.

Although the Continent’s economic slowdown has constrained consumption in the residential-commercial segment, robust demand among petrochemical users has ensured that day-rates have remained relatively stable.

Overall, StealthGas enjoyed a 10% to 20% rise in day rates, depending on the duration of the contract and the age of the vessel.

The time charters on nine of StealthGas’ ships expire in 2013, providing ample exposure to improving day-rates. Fixtures in this niche market tend to last three to four years. At present, the company’s contracts represent about $75 million worth of revenue in 2013 and $48 million in 2014.

Management also has its eyes on picking up business in North America, though the opportunity for handy-size vessels differs from the longer routes sailed by midsize and very large gas carriers. Its fully pressurized units would be well-equipped to deliver smaller LPG cargos to Caribbean ports.

In recent years, StealthGas has replaced a number of the older vessels in its fleet with new deliveries, reducing the average age of its fleet to about ten years—well below the industry average of 16 years.

The company has four new vessels slated for delivery in 2014 and 2015, while management has indicated that additional orders or acquisitions in the secondary market could be in the cards. Improving day rates in the handy-size market and fleet growth should continue to lift StealthGas’ earnings in the next few years.

More important, management has indicated that the company will likely initiate a dividend once the company firms up its expansion plans. A regular dividend would be a major upside catalyst for the stock.

Shares of StealthGas rate a buy for aggressive investors who can stomach the volatility that comes with a small-cap name which lacks research coverage from the major investment banks.

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