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Aegean Marine Weathers the Storm


What's exciting about the opportunity in front of Aegean Marine is that it is aiming to be the brand leader in bunker fuel worldwide.


Over the past week, frenzy in the bond markets has sent stocks in most sectors running for cover. But ocean shippers and energy providers have weathered the recent storm quite well, owing in large part to their superior fundamentals and undeniable cheapness.

One of my favorite stocks right now straddles the world of shipping and energy in a very low-tech but high-intensity way. It's a Greece-based company that trades on the New York Exchange called Aegean Marine Petroleum Network (ANW). I've been recommending and buying it for the past four months, and although it's moved up a bit since it is still a great buy for newcomers.

ANW is in the bunker fuel business, which simply means it delivers energy to seagoing vessels. Unlike most public bunkering companies, it is not just a broker. It believes that it has a competitive advantage by owning its own vessels, and procuring, transporting and marketing the fuel itself. Once the infrastructure is set up, ANW can beef up capacity easily, and swiftly capture new sales – much like a retailer can grow by adding square footage at malls. ANW operates service centers in Greece, Gibraltar, the UAE, Jamaica, and Singapore with a fleet of 14 refueling tankers and counting.

Global trade, supported primarily by the shipping industry, drives the bunker market. The global cargo fleet is poised to grow at 8% per year over the next four years, which gives bunkers a lot more thirsty tanks to fill. The current market size is estimated at a whopping 150 million tons of fuel a year, of which Aegean controls 1%. ANW's unique position as one of the few global brands in the business, along with recent favorable regulations, give it special appeal.

Normally regulations are something to worry about, but in the case of ANW they're a source of success. You see, in April 2001, the influential International Maritime Organization, a United Nations agency, adopted regulations that required tankers transporting crude oil and refined petroleum products to be constructed with double hulls that make environmentally devastating spills less likely. Most single-hull tankers, less than 25 years old, must be phased-out by the end of next year.

According to Lloyd's Marine Intelligence Unit, 90% of all bunkering tankers are single-hulls, of which two thirds will be over 25 years old by the end of 2008. Considering the fact that ANW's fleet is almost exclusively double-hulls, this opens up a lot of easily accessible market share.

To the UN it's a regulation, but from a practical standpoint, the new requirement is more like a guideline. The good news is that the European Union, Japan, and China intend to get with the program, and Singapore, the world's largest bunkering port, will disallow any new single-hull ships and phase-out those older than 25 years. Analysts at Johnson Rice & Co. expect ANW to focus on IMO-compliant markets where it has a pronounced competitive advantage.

The company is in the midst of expansion, both with its fleet and its service centers. ANW plans to acquire 34 double hull vessels by mid-2010, spending a cool $330 million. Like Genco Shipping (GNK), one of my other long-time favorites in ocean shipping, Aegean is cash-rich with relatively low debt. That's not all they have in common: Peter Georgiopoulos, the chairman of Aegean, is also the founder and chief executive of Genco, as well as a much larger shipping company, General Marine (GMR). He has a 10% stake in ANW, and has agreed to a three-year lock-up of his shares, a strong sign of his confidence in the company.

ANW will grow at around 30% annually over the next four years, yet its price/earnings multiple is just around 12. That's very cheap. It also pays a dividend that yields 2%, and should also grow. And furthermore, it could be a consolidator in a highly fractured industry.

To learn more about ANW's prospects, last week I spoke to president Nikolas Tavlarios, who's been at the company since September of last year.

He observed that the most important two initiatives at the company right now are its efforts to open five new service centers around the world and to add significantly to its bunker fueling fleet. Tavlarios won't say where the new service centers will be located, but you can bet they will likely be in high-traffic zones around the world, such as Africa, Latin America, Asia and Australia.

What's exciting about the opportunity in front of ANW is that it is aiming to be the brand leader in bunker fuel worldwide. Bunker fueling back in the 1960s and '70s used to be a role played by major integrated energy companies like Shell (RDS-A) and Chevron (CVX), but they exited the business because it tends to offer lower margins than exploring and refining. The industry then became a patchwork of mom-and-pop local dealers. Now ANW wants to be the leading brand worldwide. It wants to be the one that the owner of a big shipping fleet will trust first to deliver the right grade of the cleanest fuel at the right price at the right time in a safe fashion. Tavlarios says that it's been unusual in the past to have a fueling company that can be held accountable for its service and product, and ship owners will actually pay a slight premium for that.

ANW has been around since 1990, but mostly of its business was done in Greece. In 2001, it made the move to be a global player, and its initial public offering last year has given it the money to go forward with that expansion. It now has 31 ships on order at two yards in China, which gives it 20% of all new production. Each ship costs around $10 million, stretches 100 meters and weighs in at around 5,000 deadweight tons. They'll all be on the water under the ANW flag by the end of 2010.

It's more than just double-hulling that is important about the new boats, though. They also have faster pumping rates and segregated, coated tanks. This means ships will be fueled more quickly, and there is almost no chance of contamination between different grades of fuel.

Tavlarios noted that ANW's growth will come from its ability to grow the volume of fuel through an increased number of ships at an increased number of service centers. So as investors, I think we can count on occasional bumps up in the share price when announcements are made that a service center has been added or a ship goes on line. It buys fuel at wholesale and sells at retail, so there is really no spread to watch - as we do with refiners - to gauge an expanding profit margin. By the same token, the rise and fall of crude oil prices should also have little effect on ANW's prospects.

If you believe, as I do, that the global fleet of ships of all types -- oil tankers, dry bulk, containership and cruise lines -- will grow, then they will all consume more marine fuel, adding to ANW's success. I think this should be a great, long-term story. It has been trading at $13 to $19 since its IPO; I expect it to reach $24 in 12 months, 20X my 2009 earnings estimate. ANW is a buy on the current dip.
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