Description

Thesis Summary

AKPS was written up as a long by BJG in January 2014, and was well-covered.  My objective is to publish a succinct update on the long thesis of this unique stock that is trading more than 30% below liquidation value and has 3.5x upside to my base case (and 5x to my blue sky case).

AKPS is a Norwegian-listed US company with two businesses: a shipyard and a shipping portfolio.  It owns one of only two large-scale commercial shipyards in the US.  It also owns interests in up to eight Jones Act tankers.

On a liquidation value, the stock is worth 210 NOK.  This simply takes AKPS’s net cash, present values the shipyard’s existing backlog (with no terminal value) and assumes a sale of the company’s shipping interests based on recent sales prices for older vessels with inferior charter contracts.  My base case valuation for the business is 470 NOK, which I’ll get into below. 

I believe this opportunity exists because AKPS is a company that operates entirely in the US yet trades in Norway, making it an orphan stock.  It has no sell-side coverage and is thinly traded, with most incremental trading done by Norwegian retail investors, where the local stock market has been volatile, the currency has been weak and the economy is heavily dependent on energy. 

There’s also a strong alignment of incentives as the Executive Chairman (and former CEO) is son of the ultimate controlling shareholder, Norwegian billionaire Kjell Rokke.

Description

As mentioned, AKPS is both a shipyard and ship owner.  For an in-depth description of AKPS, I refer you to BJG’s thorough write-up.  For now I will just provide a basic overview.

AKPS operates one of two commercial shipyards in the US capable of building tankers and containerships (the other being NASSCO, owned by General Dynamics).  Its shipping business comes via ownership in two entities: one is a 50/50 JV with Crowley Maritime, one of the largest technical managers of Jones Act vessels; the second is a 54% stake in Philly Tankers, a recently established entity owned by AKPS, its sister company American Shipping (ticker: AMSC NO) and Apollo.  The JV with Crowley is building four tankers, all of which have commenced construction with deliveries running from 4Q15 to 4Q16.  Philly Tankers has firm orders to build two tankers, with construction likely commencing later in 2015 for delivery in late 2016/early 2017; Philly Tankers also has options for two additional tankers (for a total of four boats), which the company expects to exercise (these boats would be delivered in 2H17).

Thesis

Given the above behavioral and technical dynamics of AKPS, I believe it trades well below its intrinsic value.  I value the company under both Stress Case (ie, liquidation value) and Base Case scenarios.

For the Stress Case scenario, the shipyard is valued based on the NPV of its existing backlog, assuming no terminal value.  The shipping business is valued using tanker values in-line with what Genesis Energy (ticker: GEL) paid for an (older) Jones Act tanker in November 2014; in this scenario, I don’t assume the additional two newbuild options are exercised by Philly Tankers.

For the Base Case scenario, the shipyard is valued both on its existing backlog, and a terminal value (with a 6x terminal EBITDA multiple).  The shipping business is valued by using a $70,000 dayrate on the vessels, a 25-year vessel life and zero residual value (all of which are pretty conservative assumptions); in this scenario, I do assume the additional two newbuild options are exercised by Philly Tankers.  All six vessels newbuild vessels have firm charter contracts. We know with the Crowley JV that the dayrate is $70,000 and the average charter term is six years.  With the two Philly Tanker boats, we don’t definitively know what the terms are, but in February 2015, it was reported that another Jones Act tanker being delivered in 2016 had entered into a three-year charter with dayrates between $70-75k over; given the savviness of the Philly Tankers owners, and the fact that they announced their charter two weeks after the aforementioned one, I think it’s safe to assume that their charter terms are at least as good.

Just for fun, under a blue sky case, where after seven years dayrates move to $100,000, AKPS would be worth 700 NOK/share, 5x above current prices.  While $100k may seem crazy, I’d point out that Exxon chartered a Jones Act tanker last year at a $110,000 dayrate (albeit for six months).  Additionally, according to Kinder Morgan, moving crude by rail is three-times more expensive than by Jones Act tankers, and with a significantly worse safety record (there have been three derailments in North American in just the past two months).

To unlock this value, both the company and its controlling shareholder have each said they are exploring strategic alternatives for AKPS (and its sister company, AMSC, has made a similar announcement).  I think this could entail the sale of all or parts of the company.  KMI has recently said they are still interested in Jones Act acquisitions; GEL just did a secondary which gives them $500-800mm of dry powder (depending on leverage and whether the greenshoe is exercised) that could be used for future vessel purchases.  Additionally, I believe we’re likely to see other midstream companies enter the Jones Act space through vessel acquisitions.  Finally, there is also the potential for a “mega merger” of several Jones Act participants, including AKPS, AMSC, Philly Tankers and Overseas Shipholding Group, which would create a larger, more liquid, US-listed vehicle (though my sense is that this is the company’s less preferred route for monetization).  In the meantime, AKPS has a history of tendering for stock, having done so twice in 2014.

From a trading standpoint, it’s worth point out that liquidity is actually better than it looks – but at a price.  Bidding 5%, 10% or so above market prices should bring about disproportionately better liquidity…yes, nobody wants to do this, but given the opportunity here, I think one should avoid being penny wise, pound foolish.  But this is just my suggestion. 

Risks

·         Crude oil export ban is lifted / watered down

·         Jones Act repeal

BJG covered these risks extensively.  All I will add is to say that the crude export ban risk is more of a marginal risk (ie, would hurt valuation by lowering future dayrate expectations), whereas a repeal of the Jones Act is more of an existential risk (ie, the value of the business is very materially impaired if there’s a full repeal).  If you have some real reason to be worried about a full Jones Act repeal, then don’t invest in AKPS.  It’s that simple.  However, Kinder Morgan, which has already invested over $1bn in Jones Act vessels, said as recently as March 2015 at an investor conference that they are looking to continue buying Jones Act tankers; I don’t pretend to have better lobbying resources nor political insight than KMI or NASSCO’s parent, GD.  Additionally, Senator McCain, who has been the only real opponent of the Jones Act in Washington, floated in early 2015 the idea of softening (not fully repealing) the Jones Act via an amendment to an unrelated bill, yet the idea never even made it out of committee discussions.

Catalyst

·         Delivery of owned tankers and the resultant cash flows (beginning 4Q15)

·         Announcements related to the company’s and/or its controlling shareholder’s strategic review

·         Sale of all or parts of the company

·         Additional tenders for stock by the company

·         OSG IPO should bring increased investor focus / interest in Jones Act assets given its size ($1.3bn implied market cap today)