There's a Tiger in the Tank(ers)

06/17/2013 6:30 am EST

Focus: ENERGY

Peter Staas

Managing Editor, Capitalist Times and Energy & Income Advisor

Rising LPG exports are enriching the fortunes of midstream providers and shippers, says Peter Staas of Energy & Income Advisor.

Enterprise Products Partners (EPD) and Targa Resources Partners (NGLS) remain our favorite plays on growing US LPG exports, but investors shouldn't overlook opportunities in marine transport.

It's a niche market that accounts for about 3% of the global tanker fleet based on deadweight tons. Recent months have brought a flurry of deal-making to this segment.

Regional operators Epic Shipping and Pantheon in early 2013 merged to form Epic Pantheon International Gas Shipping, a Singapore-headquartered company with a combined fleet of 22 midsize tankers, each of which can transport between 3,200 and 7,200 billion cubic meters of LPG. This transaction included a sizable capital infusion from a private-equity outfit, giving the shipper ample firepower to upgrade and expand its fleet via new orders and acquisitions.

Meanwhile, famed deep-value investor Wilbur Ross' Navigator Holdings (NVIGF), in late 2012, announced an agreement to purchase AP Moller Maersk's (AMKBF) fleet of 11 handy-size LPG carriers for a reported $450 million. Including this pending acquisition and its order book, Navigator has amassed a fleet of 28 handy-size LPG tankers-roughly 20% of the global fleet.

Norway-based Avance Gas, a 50-50 joint venture between Stolt Nielsen (Oslo: SNI) and Sungas Holdings, last year more than doubled the size of its LPG fleet to eight vessels, and plans to grow at a similar rate in 2013 before launching an IPO.

Famed Norwegian shipping magnate John Fredriksen aptly summarized the factors underpinning the sanguine outlook for LPG carriers in a press release announcing Frontline 2012's (Oslo: FRNT) order of two carriers from China's Jiangnan Shipyard: "The high growth in LPG production, combined with a low new-building order book and historic low new building prices for fuel-efficient tonnage, creates a unique opportunity to enter this market."

Supply growth historically has driven the global LPG trade, with the international petrochemical complex eager to absorb new supplies and reduce its reliance on naphtha and other high-priced oil derivatives as feedstock.

Recent developments in China, already the world's largest residential-commercial consumer of LPG, underscore the petrochemical industry's robust demand for additional volumes.

Chinese chemical companies have invested heavily in expanding their propane dehydrogenation (PDH) capacity to meet rapidly growing domestic demand for propylene, the building block for innumerable plastics and synthetic materials. Not only do these PDH facilities have much higher propylene yields than refineries or naphtha crackers, but their profit margins are also far superior because of the lower-cost feedstock.

However, the success of these projects in part hinges on the availability of seaborne LPG cargos. This massive build-out began in anticipation of an upsurge in LPG supplies from the Middle East, an outlook that's been hampered by project delays and other complications.

The emergence of the US as a viable source of incremental supply growth is a boon for these projects and the global petrochemical industry in general.

Meanwhile, supply-demand conditions in the market for LPG tankers have improved significantly since the financial crisis and Great Recession reduced production and consumption of seaborne propane and butane. Day rates in this segment of the shipping market stabilized in 2011 and continued to improve in 2012 for most vessel classes.

The relative strength of the market for LPG carriers reflects the low level of new vessel orders, especially in the handy-size and midsize fleets, where the number of scrapped vessels has kept pace with new additions. However, a recent uptick in Very Large carrier orders suggests that this segment of the market could be oversupplied in the near term.

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