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StealthGas Analysis



September 16, 2013 – Comments (0) | RELATED TICKERS: GASS

Board: Value Hounds

Author: Hohum777

[Note: The Post of the Day will be on hiatus until September 23rd. Please check the archives for posts you may have missed until then.]

Stealth Gas (GASS) is a specialized tanker company. Most of its vessels operate in the Liquefied
Petroleum Gas (LPG) sector, but their vessels have an even narrower focus. The LPG tankers can be grouped into 5 major sizes:

1. Very Large Gas Carriers (VLGCs) 60,000 Cubic Meters (CBM) and above
2. Large Gas Carriers (LGCs) 40,000 - 60,000 CBM
3. Medium Gas Carriers (MGCs) 20,000 - 40,000 CBM
4. Small Gas Carriers (SGC) 5,000 - 20,000 CBM
5. Coasters (coastal carriers) < 5,000 CBM (mostly coastal trade)
Stealth Gas operates 36 LPG vessels currently, each vessel carrying < 8000 CBM. The company also owns an Aframax crude tanker and 3 Medium Range (MR2) product tankers.

I went digging, but even general data on LPG fleets is hard to come by. I know the bigger LPG fleet owners are BW Gas- about 40 vessels, mostly VLGCs, and Petredec- 40-45 vessels, mixed sizes, about half chartered-in.

One shipping broker, Intermodal, provided some fleet data indicating a fleet of around 1251 LPG
vessels with a majority (over 80%) of the vessels in the SGC-or-smaller (4 or 5 above). The last
two GASS earnings call transcripts seem to indicate their particular niche, say 3,000 - 8,000 CBM,
consists of around 240-250 vessels. So GASS owns about 15% of the fleet in that sub-niche.

Relying again on Intermodal's number, they suggest 418 of 1023 (or 40.9%) of SGCs are over 20 years old, and 462 of 1251 (36.9%) of the overall LPG fleet is > 20 years old. From that angle, GASS is in pretty decent shape as only 5 of 36 LPG vessels (or 13.9%) are over 20 years old. The company
completed a transaction in the first half of 2013, acquiring three used vessels and two LPG newbuilds
(~$44M for the operating vessels and ~$25 for each newbuild). The company also has four newbuilds
of its own, so six newbuilds in total. Financing for these four newbuilds has already been

The company had a slightly dilutive share offering during the first half of Q1 2013. At the time
of the offering, the CEO suggested the new investors were getting a deal, paying around $10/sh for
a company that was worth around $12.50/sh. The share count went from 20.8M => 32.3M share. I figure some of the proceeds went to cover some of the costs of the transactions mentioned above.

For shipping ideas, I typically start with the fleet, or trying to place a value on a company
fleet. Again, the lack of data became a slight challenge. I went digging back 2-3 months and
found a few transactions:

2007 built 7800 CBM $27M
2007 built & 2006 built 4000 CBM & 5000 CBM $27M
2006 built 5000 CBM $11M
2000 built 8500 CBM $16M

That plus the GASS annual report allowed me to calculate a value for the fleet. I ended up with
a fleet value of around $585M (GASS Q2 reported $664M). Toss in other numbers from their Balance
Sheet, I end up with a NAV of around $11.85/sh

GASS CEO Harry Vafias has been in charge since the company IPO in 2005. Given that he is currently
35 or 36, that means he took charge at a pretty early age. I went digging a little more and
find the tie-in with Stealth Maritime. That's a shipping entity managed by Harry's father, and
one that manages the technical side of all the vessels in the GASS fleet. Harry Vafias also spent
a few years at a major shipping broker. The Vafias family purchased about 5% of the shares in
the latest offering, and the family had a 21% stake prior (mostly via an entity controlled by
Harry Vafias). So there's Vafias involvement on the equity, management and operating side of GASS.

The energy boom in the US has opened up a new LPG market. Unlike crude oil or Liquefied Natural
Gas (LNG), LPG export has no major restrictions or licensing requirements. Unlike LNG, US facilities
are not as dependent on new infrastructure for production. Facilities already produce LPG, and
can expand as needed knowing the product has an available overseas customer e.g. Japan, India, S.Korea, etc., and exports will likely ramp up when the new Panama Canal opens in 2015. In addition, I think the largest LPG producer, Saudi Arabia, has started using more LPG internally, so LPG exports
might decrease over time, and thus increase LPG tonne-miles.

All that said, GASS is not a direct beneficiary of the LPG long haul routes. I think they will
be a beneficiary of increased LPG production and exports. In their latest earnings call, GASS
management mentioned that some Caribbean ports are too small for larger LPG vessels. The LPG shipping company I mentioned a little earlier, Petredec, initially focused its operations in the Caribbean, prior to expanding. They have exclusive supplier rights for certain locations, and utilize
some GASS vessels. Actually, GASS' largest customer is Petredec (I think, 12-13% of their revenue).

From March - late July 2013, GASS shares were trading above $10/sh most of that period. Their
Q2 earnings release on Aug 20th must have spooked one or more existing shareholders, as there
was a major sell-off on that day ( 2M shares vs 200k daily (3 month avg)). Revenue dipped
slightly in Q2 2013. However, GASS management suggested this revenue dip was the result of
two older vessels coming off charters, and Q2-Q3 being the slower season for the LPG market.
Seems plausible, they only had four vessels operating in the spot market the prior quarter,
and the number jumped to six in Q2.

About a week later, based on a rougher analysis than the above, I decided to nibble on GASS.
The GASS strategy of utilizing a majority of vessels on time charters suggests their revenue
will not spike suddenly. OTOH, the company does employ derivatives, so there could be some bounces there. Per the 2012 20F (annual report), only three of their vessel financing facilities come
due in 2014, involving about $41M of principal borrowed, and a balloon of about $33M. Weighing
that with over $110M in cash at the end of Q2, I think GASS will have no issue refinancing that
debt. I am puzzled by one thing. The newbuilding installments only shows a marginal increase
between Q4 2012 and Q2 2013. The fleet additions in May 2013 included paying $12.5M on already-paid installments. Then again, current liabilities did go up by about $12M, so maybe it is already factored in.

I figured I got a price discount to, at least, all those that purchased shares in the latest secondary.
New vessels delivering in 2014 & 2015 should provide some growth over the next two years. One
other issue that might tweak margins and/or revenue slightly- the mix of bareboat charters vs time-charters. I would have to dig into the 20F's and see if GASS has broken out their revenue types in prior years. Not so comfortable with this sector as there is less data, and fewer data sources for comparison purposes.

Anyway, that's the GASS story.


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