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Aegean Marine Petroleum On The Move Dated : 19-10-2007

Quite possibly the greatest bull market going right now is not in oil or gold but in marine shipping. While crude oil futures have not quite doubled this year, and gold, despite all the excited chatter, is only up about 25%, the Baltic Dry Index – which measures the price of chartering boats to ship iron ore and coal across the ocean – has actually tripled.
By now you probably know something about the reasons that dry-bulk rates have risen, as well as the tremendous moves in leading ship charter firms like Genco Shipping & Trading (GNK), DryShips (DRYS), Diana Shipping (DSX) and Excel Maritime (EXM), all of which I have recommended for two years, along with newcomer Paragon Shipping (PRGN). These are all companies that started off the year with low valuations due to a perception that they were up-and-down cyclical stocks, and they have all advanced rapidly along with charter rates because their low-expense business structures allow most of the windfall revenue to go virtually straight to the bottom line.
Back in early June and last month, I updated you on one of my favorite side plays on this trend, which is marine fuel and lubricants provider Aegean Marine Petroleum Network (ANW), after it announced that it would launch a new service station in West Africa. But now I want to tell you about its latest move, which is the purchase of a Belgian-based ocean fueling concern called Bunkers at Sea.
In some ways I wish that the news had not pushed ANW shares up so far so fast, because in my experience parabolic advances typically lead to parabolic declines. But you need to know that the ascent happened because there is just a lot of power in ANW's very straightforward business plan: To become the dominant provider of marine fuel worldwide at a time when the market is very strong, highly fractured and undergoing a fundamental structural change that plays to its strengths.
To get a little more color on the Bunkers at Sea deal and where it fits in that plan, earlier this week I talked to company president E. Nikolas Tavlarios. He's pretty cool -- young, personable, knowledgeable, no hype. He formerly worked for oil tanker company General Maritime (GMR), so he really knows the fuel logistics business from the inside out.
Financial competence and shareholder friendliness show up in the way that companies pay for their deals. I was impressed that Tavlarios financed the Bunkers at Sea deal entirely within ANW's current cash-flow structure. He didn't issue new shares that diluted current holders, or take on any long-term debt. He declined to comment on specifics for competitive purposes.
So, why did he do the deal? Tavlarios explained that Bunkers at Sea is a niche provider in northern Europe -- primarily the Rotterdam area -- that's been in operation for ten years. He said that it's "very credible" and "fit beautifully" into the ANW culture with a great reputation for high-quality service. It had a lot of customers that are already ANW customers elsewhere in the world, and others that could become customers in the ANW "network" in the future. So there's definitely some synergy already here between the two companies.
But Bunkers at Sea has a different angle of attack on the marine fueling biz than ANW. Rather than fuel up its customers at port, Bunkers at Sea literally fuels them on the open ocean. The benefits, according to Tavlarios, is that the customers -- mostly container-ships, oil tankers, cruise ships, dry-bulk ships and fishing trawlers -- save time by not having to wait their turn in line or suffer other logistics delays. Bunkers at Sea has done well, providing 325,000 metric tons of fuel last year -- which is a lot. It currently has two ships, and ANW is sending up a third to join the open-ocean fueling fleet.
As you know, this foray into Europe follows ANW's move into West Africa earlier this year, which looks like a smart move already, as it's an area that's highly trafficked by oil tankers, off-shore oil platform service ships and deep-water fishing fleets. There is no other permanent bunker fuel provider in the area, so ANW will be the first. Most of the West African fleet was fueling up in Gibraltar before going south, or in South Africa before rolling north. The new service center will have floating storage and three tankers, and it will go live by the end of December. ANW's other ports of service are in Jamaica, Singapore, Gibraltar, Piraeus (near Athens) and Fujairah in the United Arab Emirates.
ANW has three new double-hulled ships coming this month and two more coming by the end of 2007. After that, it has 27 more double-hulled ships on order and plans to have them on the water by the end of 2010. That means the ANW fleet will be two and a half times bigger in three years than it is today, totaling 48 modern, efficient ships. Remember that a young fleet is a key competitive advantage, as the average age of the world's bunker fuel ships is 30.
And don't forget that the new International Maritime Organization rules demanding that single-hulled bunkering ships be removed from service in major ports will kick in during 2008, so many of ANW's mom and pop rivals will have to sell out or exit the business soon. This is a perfect situation for ANW's margin expansion, which is one of the key things that I always look for in a business. If there are 130 bunkering ships in Singapore, and only 90 are double-hulled, then not only is its capacity utilization rate going to go straight up, said Tavlarios, "but you will also get upward pricing pressure."
ANW shares have moved up a lot in recent weeks, so expect some turbulence and retrenchment before too long. Shares have advanced along the nine-day exponential moving average, which is now at $42.50. A move below this level would be a short-term sell signal. But if you bought the stock after I first recommended it in the spring and wish to ensure a big profit, a protective stop at $39 would be prudent. While this is not some fly-by-night outfit whose shares are rising on a hope and a prayer, it's still a stock -- and you can bet that it can move down just as fast as it has moved up. For longer-term focused clients with tolerance for volatility, the stock is still relatively cheap based on forecasts for 2008 and 2009 earnings. I am still buying ANW on dips for my late 2008 target of $90.
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