Description

Overview

American shipping is a company that makes no sense on a stand-alone basis and its logical acquirer just emerged from Chapter 11 a few weeks ago. 

 Background

AMSC is a very simple company operationally. It owns 10 mid range US Flag product tankers that that are chartered to a US company on an evergreen renewal basis. AMSC charters out its boats on bareboat charters, analogous to a triple-net lease, which is why AMSC has only THREE employees.  Because AMSC is headquarted in Norway (it trades on the Oslo exchange under AMSC NO) it can’t directly manage Jones Act vessels.

AMSC’s only customer is OSG, a $3 billion enterprise value US based company that emerged from bankruptcy in August of this year and does not yet trade on an exchange. OSG filed its S-1 on August 21.

OSG in turn re-charters the AMSC tankers to oil majors on 3-5 year charters. OSG pays AMSC $88m annual in bareboat charter expenses and shares 50% of profits after deducting operating expenses and a $4,000k/day profit layer for OSG as well as dry-dock provisions. The 2013 profit share is:

Net TC Revenue – OSG: $191

Bare Boat Charter: (83)

Profit Layer: (15)

Other Opex: (74)

Drydock: (6)

Profit to share: $13

The $83m vs contractual $88m annual payment is due to a timing difference as OSG is able to defer a portion of charter payments and accrue it as an interest bearing payable. An additional wrinkle in the profit-share schedule is that AMSC is only entitled to collect its portion of the profit after its share of profit is used to pay off an OSG credit that is accruing at 9.5%. The amount of the liability is $26m as of the end of 2013. AMSC has excess cash and will pay off the balance as soon as it is contractually able to prepay at the end of 2015.

Fleet:  (source: AMSC presentation and OSG MORs)

1. Houston: $47k/day (option period begins 2014) 
2. Long Beach:  $47k/day (option begins 2014)
3. LA: $47k/day (option begins 2014)
4. NY: $47k/day (option begins 2015)
5. Texas City: $65k/day (ends 2015)
6. Boston: $53k/day (option begins 2018)
7. Nikiski: $53k/day (option begins 2017)
8. Martinez: $58k/day (option begins 2018)
9. Anacortes: $65k/day (ends 2016)
10. Tampa: $65k/day (ends 2024) as shuttle

AMSC does not provide option detail but it is my understanding that options allow charters to extend 1-3 years and includes a some price adjustment but not necessarily to market. The oldest of the vessels were delivered in 2007.

Valuation

Current Enterprise Value is $1.1 billion. Newbuild vessel cost is approximately $125m.

Current asset value is difficult to accurately determine as the market is not very liquid. One recent data point: in late July Alterna Capital partners was in purported to be marketing its tanker for $150m.

At the average day rate of AMSC’s fleet of $52k/day it trades at 13x EBITDA. Current market day rates are $70k + which would imply 9.7x for ASMC. On a consolidated basis (assuming OSG owned the ships outright) at market rates, the fleet would trade at 7x.

As a comp, in January 2014, Kinder Morgan purchased 5 used vessels and 4 newbuilds that will be chartered out at $68k/day upon delivery in 2015 and 2016. The purchase equates to 8.5x 2017 EBITDA.

Company has additional value from NOLs of $387m in US and $72m in Norway as of end of 2013

Opportunity

The interesting element of the story is that the fleet is a great candidate for an MLP. Shipping MLP comps trade at an average of ~7%. Assuming the current capital structure and an 8% yield on distributable cash flow, $700+ million of additional equity value would be created from a consolidated MLP. OSG and AMSC would have to determine how to allocate that value creation. 50%/50% split would equate to 37NOK/share or a 78% premium to today’s levels. This would be an accretive transaction for OSG and would be a vehicle for it to drop in other assets.

TCE Rate 70k

Total Revenue: $250m

Less: Other OpEx: $78

Less: Drydock: $9

Less: G&A: 3

EBITDA: $161

Less: Interest: $60

Less: Ballast Water: $7

Distributable cash flow: $94

Equity Value: $1,180

Debt @ 5x: $798

Cash: $140

Enterprise Value: $1,840

Current EV: $1,120

Risks

Jones market disruption if administration allows oil exports

Catalyst