| 2023 | 2024 | ||||||
| Price: | 48.00 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 2 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 120 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 120 | TEV/EBIT | 0 | 0 | |||
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- Ft. Knox baby
- Ft Knox - we get it. Now stop pls.
- ADAMS RESOURCES & ENERGY INC AE 03/21/2022
- Adams Resources and Energy AE 10/28/2008
- BETA
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Description
Adams Resources & Energy, Inc. (AE)
Summary
We focus on smaller companies with “Ft. Knox” balance sheets and large & sustainable free cash flow yields and we are typically seeking a double-digit FCF yield or higher on an unleveraged basis. The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation through share buybacks, debt reductions, dividends, or accretive acquisitions. Obviously, it is important we have a management team that cares about shareholder value. We focus on small-cap stocks because there is a much better chance to find an attractive investment opportunity which is underfollowed or undiscovered.
AE is a transportation and logistics company serving the energy and chemical sectors. AE was founded in 1947 by the late Bud Adams, legendary owner of the Houston Oilers and Tennessee Titans. The Company operates in four lines of business: (1) crude oil marketing, transportation, and storage (“GulfMark Energy”); (2) long haul trucking of chemicals and dry bulk materials (“Service Transport Company or STC”); (3) pipeline transportation and storage of crude oil (“VEX Pipeline Terminals”); and (4) third-party crude oil transportation logistics and off-spec hydrocarbon recycling and repurposing (“Firebird Bulk Carriers & Phoenix Oil”). AE pays a meaningful dividend and is well positioned for further diversification and strategic growth opportunities.
AE purchases crude oil and arranges sales and deliveries to refiners and other customers primarily onshore in Texas, Oklahoma, North Dakota, Michigan, Wyoming, and Louisiana. The Company owns and operates a fleet of 201 tractor-trailer rigs with a weighted average age of about 3.4 years and maintains approximately 180 pipeline inventory locations or injection stations. The Company also transports liquid chemicals, pressurized gasses, asphalt, and dry bulk for hire basis in the United States, and into Canada and Mexico. AE was started in 1947 and is headquartered in Houston, Texas.
AE was previously written up by mitc567 on VIC in March 2022 which is an excellent writeup and we highly recommend reading it. While AE’s share price has increased since, we believe AE may be even more undervalued today, given several events that have occurred since the writeup: (1) AE has posted excellent results and cash generation since the original writeup; (2) AE completed a highly accretive acquisition of Firebird Bulk Carriers and Phoenix Oil for about $40m in cash in August 2022; (3) AE repurchased 44% of its total shares outstanding from the founding Adams family entity (KSA Industries) for $36 per share or about $70m in total in November 2022; and (4), despite the recent acquisition and the large share repurchase, AE currently has close to zero net debt for a “Ft. Knox” balance sheet. The repurchase of such a large block of shares on a percentage basis rarely occurs among public companies and has the potential to drive strong per share value as the business and cash flows grow over a much smaller base of shares.
AE carries a permanent oil inventory, typically 250k to 400k barrels, as part of its ongoing business and this inventory is marked to market quarterly based on accounting rules, but this generally does not have a long-term cash flow impact on the business. AE gives an adjusted cash flow number which excludes this mark to market and is basically an adjusted EBITDA number that we believe is a better indicator of long-term business performance. We have included a chart which reconciles adjusted cash flow to net earnings.
AE was poorly managed for many years and run like a private company with the Adams family control. The current management team, led by current CEO Kevin Roycraft, was brought on in 2018 to turn around operations and the company has since been building adjusted cash flow meaningfully despite the pandemic. AE has completed several very successful strategic tuck-in acquisitions under the new management team.
After the repurchase transaction in November 2022, AE has 2.5m shares outstanding trading at about $48 per share for a market cap of about $120m. AE has LTM adjusted EBITDA of about
$35m and is trading at about 3.5x LTM adjusted EBITDA. We believe AE can achieve adjusted EBITDA of $50m or more in 2023 so AE would be trading at 2.5x our estimated 2023 adjusted EBITDA. AE has a highly cash-generative business model and can sustainably generate $15m to $20m of free cash flow per year for an unleveraged free cash flow yield of about 12% plus.
We believe AE can achieve adjusted EBITDA of $50m plus for 2023. 2023 will include a full year benefit from the acquisition of Firebird and Phoenix Oil for $40m in August 2022, which should add close to $10m in incremental adjusted EBITDA, and additional customer connections to VEX Pipeline, which should improve profitability in 2023. AE also should benefit from normal growth in its GulfMark and Service Transport segments, both of which have an increasingly strong competitive position due to acquisitions and actions taken by the new management team over the past few years. We believe AE could trade for a modest 6x adjusted EBITDA multiple, with zero net debt at year end 2023, for a market cap of about $300m or $120 per share, which compares to its current $48 per share. Further, we believe AE could represent an attractive purchase to a strategic or financial purchaser.
Business Description
AE has four basis business segments, each of which are briefly discussed below:
GulfMark Energy
GulfMark is focused on marketing, transporting, and storing crude oil and providing value to upstream and downstream markets and refining companies. GulfMark provides a competitive advantage by owning and/or leasing approximately 200 tractors and utilizing six crude oil storage facilities across the Gulf Coast. Importantly, GulfMark does not take oil price risk in its transactions but earns a spread off current oil prices. GulfMark purchases crude oil and gas from independent producers primarily in the Gulf Coast area who do not have access to pipelines and need truck transport to a pipeline, which GulfMark provides. GulfMark locks in crude oil sale prices with refiners who purchase the crude oil and gas. These smaller oil and gas producers are not connected to pipelines and use transport companies like GulfMark to get their products to market. GulfMark has long term relationships with these producers and works off a margin that covers its transport cost plus a profit. We believe reliability of services is very important to these smaller independent operators. GulfMark also provides various other value-added services to independent producers, such as distributing royalty payments and has long term relationships with these independents.
With GulfMark, AE basically makes a spread off on the barrels of oil purchased and the chart included shows the trend in barrel per day marketed by the company. Barrels per day marketed and GulfMark’s spread are key performance indicators for the GulfMark Energy segment.
GulfMark Asset Holdings currently has the ability to store approximately 889,000 barrels of crude oil in multiple basins onshore and at dock facilities across the Gulf Coast. GulfMark operates approximately 200 tractor trailers which allows operators to receive prompt service with optimal pricing. GulfMark can barge oil across the Gulf Coast to maximize value.
GulfMark delivers to an extensive network of truck unloading locations across its operating areas.
Service Transport Company
Service Transport Company (STC) hauls liquid chemicals, LPG, dry bulk and asphalt. STC operates over 350 active tractors and over 837 tank trailers with 20 terminals across the U.S. In 2018, Kevin Roycraft was brought in to turn around STC. Roycraft executed an impressive turnaround at Service Transport. In 2018, STC’s largest customer (BASF) was over 70% of total revenues and STC had only 5 terminal locations. With two strategic acquisitions, EH Transport in May 2019 and CTL Transport in June 2020, Roycraft increased STC’s network of terminals to 20 terminals today. He also modernized its trucking fleet, improved its safety record, and sharply reduced driver turnover. The customer mix was also substantially increased and diversified, such that BASF today is only about 22% of total STC revenues and most of the largest chemical companies in the world are customers of STC. With a larger network of terminals, STC was able to reduce empty backhaul trips which generated no revenue and this has been a major factor in STC’s improved profitability since 2018. STC’s profitability has increased significantly, as indicated in the chart below. Roycraft became CEO of AE in early 2020 due in large part to the impressive turnaround at STC.
The chart below demonstrates the significant improvement of adjusted cash flow starting in 2018 when the new management team joined the company and turned around underperforming business. AE was undermanaged prior to the new management team and was run like a private company dominated by the Adams Family ownership.
VEX Pipeline
In October 2020, AE purchased the VEX Pipeline, which is a 56-mile, 12-inch regulated pipeline with a capacity of about 90k barrels per day. Also included were a truck terminal at Cuero, Texas and a truck and barge terminal at Port of Victoria, both with storage tanks. VEX was built by Devon Energy for about $250m cost and AE purchased VEX for about $20m. AE’s plan is to add third party connections to VEX to improve its profitability. VEX has incurred modest annual losses to date while AE has owned it. AE is working on a connection for VEX to Max Midstream pipeline, expected to be completed in Q1 of 2023 which would add significant addition customer revenue to VEX. AE is also working on additional customer additions to VEX, which is currently operating at about 10% of capacity.
Firebird and Phoenix
In August 2022, AE completed the purchase of Firebird Bulk Carriers, Inc. (“Firebird”) and Phoenix Oil, Inc. (“Phoenix”) for an aggregate purchase price of approximately $39.7m, consisting of approximately $35.8 million in cash, $2.0 million for working capital, $1.5 million of AE common stock and an expected earnout provision valued at $2.6m. Firebird Bulk Carriers adds more than 100 tractors hauling crude oil, as a for-hire carrier, overlapping GulfMark’s private fleet area of operation. This acquisition is immediately accretive to earnings and cash flow. Management expects this acquisition will increase annual adjusted cash flow by more than 30% of 2021’s adjusted cash flow.
Firebird Bulk Carriers is a for-hire crude oil transportation company, focusing on the safe transportation of customer products. Firebird has 5 Texas locations and a maintenance facility overlapping GulfMark areas of operation.
Phoenix Oil is a service company specializing in the repurposing of contaminated crude oil emulsions as well as off-specification industrial fuels. With an advanced laboratory, sophisticated technology, and access to an expansive fleet of trucks, Phoenix can provide a solution for any company needing help managing off-specification fuels or oils. Phoenix delivers AE a new line of revenue by providing off-spec hydrocarbon recycling, repurposing, and reselling.
Highly Cash-Generative Business Model
AE has a highly cash-generative business model which is not capital intensive. The Company generated cumulative cash from operations of about $120m over the past 4 years - equal to AE’s current enterprise value of $120m - for an average of about $30m per year. Maintenance capital expenditures are about $15m per year, which results in annual free cash flow of about $15m per year at current levels.
Large Share Repurchase Drives Shareholder Value
In November 2022, AE repurchased 1.9m shares or about 44% of fully diluted shares outstanding, from the Adams Family entity (KSA Industries). Bud Adams had founded the company in 1947 but the family had not been involved in the company for many years. AE repurchased these shares at $36 per share for a total of about $70m. The repurchase of such a large block of shares on a percentage basis rarely occurs among public companies and has the potential to drive strong per share value as the business and cash flows grow over a much smaller base of shares. We believe this transaction could super-charge AE shareholder returns over the next few years. Further, AE was able complete this transaction and retain a zero net debt balance sheet.
Attractive Absolute Valuation
The Company trades at a very low multiple of about LTM 3.5x adjusted EBITDA. We expect adjusted EBITDA to grow significantly over the next few years. We expect adjusted EBITDA of about $40m for 2022 and $50m+ in 2023. This growth is driven by the Firebird and Phoenix acquisition in August 2022 and additional customer additions to the VEX Pipeline to improve its profitability as well as normal growth from Gulf Mark and Service Transport segments.
Strong Growth in Adjusted EBITDA Expected in 2023
We believe AE will achieve substantial growth in adjusted EBITDA in 2023. In addition to growth in its core GulfMark and Service Transport business lines, we expect AE’s acquisition of Phoenix Oil and Firebird Bulk Carriers to contribute an incremental $10m in adjusted EBITDA.
Further, we expect AE’s VEX Pipeline, which has generated moderate losses since acquisition in October 2022, to contribute a modest amount to adjusted EBITDA as incremental customers and pipelines are connected.
Strong and Resilient Business Model
AE has a resilient business model which has performed well in some difficult environments, such as during the Covid pandemic and amid incredibly depressed oil and gas prices in early 2020. Despite these challenges, AE generated strong profitability during 2020. Despite its energy industry involvement, AE is primarily a transport and logistics company that operates off a “spread” from crude energy prices. We believe this makes AE less sensitive to volatile oil and gas prices, and AE has grown adjusted EBITDA steadily, from about $19m in 2018, when the new management team was brought in, to LTM adjusted EBITDA of about $35m, despite volatile crude oil prices ranging from $20 per barrel to $90 per barrel over that same period.
Impressive Turnaround at Service Transport
AE was undermanaged under prior to 2018 and was run like a private company dominated by the Adams Family ownership. In 2018, Kevin Roycraft was brought in to turn around Service Transport, the chemical bulk hauling business. Roycraft executed an impressive turnaround at Service Transport. In 2017, STC’s largest customer (BASF) was over 70% of total revenues and STC had only 5 terminal locations. With two strategic acquisitions, Roycraft increased STC’s network of terminals to 20 terminals today, and modernized its trucking fleet, and increased its safety record, and sharply reduced driver turnover. The customer mix was also substantially increased and diversified, such that BASF today is only about 22% of total STC revenues and most of the largest chemical companies in the world are customers of STC. With a larger network of terminals, STC was able to reduce empty backhaul trips which generated no revenue. STC’s profitability has increased significantly. Roycraft became CEO of AE in early 2020 as a result of the turnaround at STC. The strongly improving trend on driver turnover is displayed in the chart below.
Steady Growth in Adjusted EBITDA under New Management Team
Since Kevin Roycraft joined AE in 2018, initially to turn around STC and then becoming CEO of AE in early 2020, AE has shown steady growth in adjusted EBITDA. AE was poorly managed prior to Roycraft and he has overseen an impressive improvement in STC’s business and network of terminals and improved operations at GulfMark, which are AE’s two key business segments. These strategic actions have led to a steady improvement in adjusted EBITDA for AE, despite a volatile economic and energy industry environment. Adjusted EBITDA has increased from about $18m in 2018 to close to $35m on an LTM basis as of September 2022. We expect further improvement in 2023 and 2024.
Long-Standing Customer Relationships at GulfMark
AE has well-established relationships with customers in each of its core businesses. Gulfmark has worked with smaller oil and gas producers who lack access to a major pipeline to transport their oil and gas for decades and has strong and long-standing relationships.
Blue Chip Customer Base at Service Transport.
Service Transport works with a diverse group of major chemical companies including the largest chemical companies in the world. Dow and BASF are its two largest customers. Other major chemical companies who are STC customers include Arkema, Huntsman, Univar, Covestro, Chevron Phillips, Total, Rohm, Solvay, Evonik, Flint Hills, and Stephan. STC has a diverse customer base with the largest chemical companies in the world.
“Ft. Knox” Balance Sheet
AE has a strong, “Ft. Knox” balance sheet. Even after repurchasing 44% of total shares outstanding in November 2022 from the founding Adams family partnership and paying about
$40m to purchase Firebird Bulk Carriers and Phoenix Oil, AE still has close to a net zero debt position, with about $25m in cash and $25m in debt, and a $60m unused credit line.
We expect AE’s balance sheet to continue to improve over the next several quarters, as management digests both the Firebird and Phoenix acquisition and the VEX Pipeline acquisitions and ensures that these are performing as expected. Consequently, we expect AE’s net cash position to build over the next several quarters as the strong free cash flow of the businesses are used to further strengthen the balance sheet.
Conclusion
At today’s price of about $48 per share, AE’s stock is substantially undervalued. After the share repurchase of the Adams Family shares in November 2022, AE has about 2.5m shares outstanding. AE has a market cap of about $120m. AE has about $25m of debt outstanding and about $25m of cash for net debt of close to zero. AE has an enterprise value of about $120m.
We expect AE to generate close to $40m of adjusted EBITDA in 2022 and $50m plus in 2023. AE is trading at 3x 2022 adjusted EBITDA and 2.5x 2023 estimated adjusted EBITDA.
AE has momentum in each of its core business segments – GulfMark Energy, Service Transport, and VEX Pipeline. CEO Kevin Roycraft is impressive and is laser-focused on converting AE into a resilient, stable, cash-generative business with an increasing focus on businesses more predictable and less volatile.
We believe AE can achieve adjusted EBITDA of $50m plus in 2023 and trade for a modest 6x multiple. Based on zero net debt at year end 2023, we believe AE could have a market cap of about $300m. Based on 2.5m shares outstanding, AE would have a share price of about $120 versus the current price of about $48 per share. Further, AE could represent an attractive acquisition to a strategic or financial purchaser.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
See above.
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