Enterprise Products Partners and Focus list holding Targa Resources Partners remain our favorite plays on growing US LPG exports, but investors shouldn’t overlook opportunities in marine transport, a niche market that accounts for about 3 percent of the global tanker fleet based on deadweight tons.
Recent months have brought a flurry of deal-making to this segment, as operators seek to consolidate this corner of the shipping market and add exposure to its improving supply-demand outlook.
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 that 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 in late 2012 announced an agreement to purchase AP Moller Maersk’s (Copenhagen: MAERSK-A, MAERSK-B; OTC: AMKBF) fleet of 11 handy-size LPG carriers for a reported USD450 million. Including this pending acquisition and its order book, Navigator has amassed a fleet of 28 handy-size LPG tankers–roughly 20 percent of the global fleet. The company recently secured two 10-year fixtures on two of its ice-class vessels with Russia-based petrochemical outfit Sibur Holdings, making good on its stated plan of inking longer-term contracts in anticipation of an eventual initial public offering (IPO).
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. Much of this growth will likely come from new orders, as South Korean shipyards are charging about USD70 million for a VLGC.
What’s driving the sudden upsurge of investment in LPG carriers?
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 VLGCs 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.”
As Fredriksen’s comment indicates, the relative health of any shipping industry hinges on intersecting supply-demand conditions in the market for the vessels themselves and the market for the commodity being transported.
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.
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Elliott and Roger on Mar. 30, 2017
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