Wells Fargo: Kinder Morgan may sell interest in Jones Act fleet

In a research note, analyst Michael Webber of Wells Fargo cited both internal company sources and the Oil Price Information Service, who say Kinder Morgan may sell a half interest in the 16-ship fleet.    Wells Fargo reports that Kinder Morgan may be looking to sell a 50 percent stake in American Petroleum Tankers (APT), one of the largest operators of tankers in the domestic or “Jones Act” trade in the United States.
   In a research note, analyst Michael Webber of Wells Fargo cited both “our channels” – i.e. internal company sources – and the Oil Price Information Service, who said Kinder Morgan may sell a half interest in the 16-ship fleet. APT has eight medium range tankers in operation today and another eight on order from Philly Shipyard in Philadelphia and General Dynamic’s Shipyard in San Diego.
   Richard Wheatley, a company spokesman, said Kinder Morgan does not comment on market rumors, and added that the firm is “not in the market to sell individual ships or groups of ships. As we have discussed publicly since our January analyst day presentation in Houston, Kinder Morgan is open to joint ventures when they make economic sense for projects in our backlog.”
   In December 2015, APT took delivery of the first of five medium-range Jones Act tankers being built at General Dynamics’ NASSCO shipyard in San Diego.
   The company said upon its delivery, the tanker, Lone Star State, was “immediately placed on long-term time charter with a major integrated oil company.”
   The remaining four tankers are slated for delivery between early 2016 and mid-2017 and are also supported by long-term time charters with major shippers, Kinder Morgan said. All of the tankers will be 50,000-deadweight-ton, LNG conversion-ready product carriers, with a 330,000-barrel cargo capacity. The second tanker NASSCO is building for APT, Magnolia State, is scheduled to be christened April 23 in San Diego.
   On Aug. 10, 2015, Kinder Morgan executed a $568 million agreement with Philly Tankers LLC to take assignment of contracts for the construction of four new 50,000-deadweight-ton, Tier II tankers. Those four ships, scheduled to be delivered between November 2016 and November 2017, are being built at Philly Shipyard in Phiadelphia, which laid the keel for the first vessel in January.
   Webber said if an interest in APT is sold by Kinder Morgan, the deal “could be the first major valuation data point for larger, Jones Act coastal assets since the lifting of the U.S. crude export ban in December 2015, which we believe should increasingly disrupt crude trade flows from the U.S. Gulf to the Mid Atlantic.”
   “Given incremental weakness and creeping residual value risk, we expect values to slide,” he said, with an implied value of about $1.96 billion near the tankers cost basis of $1.93 billion.
   “We believe US crude exports are a strong negative for the Jones Act coastal business, particularly the US Gulf-U.S. East Coast trade,” Webber wrote. He said the cost of exporting crude oil to Europe in a larger Aframax tanker (80,000-120,000 dwt) at $2 to $3 per barrel looks more attractive to moving crude in a coastal tanker at $3 to $4 per barrel.
   He noted there was no requirement that a portion of U.S. crude oil exports be moved on Jones Act ships as some supporters of U.S.-flag shipping had wanted.
   Webber wrote that, according to press reports, Kinder Morgan “has contacted 10-15 private equity firms – aiming to raise cash and hedge its risk,” but that Kinder Morgan would reportedly continue to operate the fleet.
   “While we think certain operators could make sense as buyers, we believe most are focused on other areas of the business,” he wrote, pointing to Kirby Corporation, the leading operator of tank barges. Others, said Webber “are capital constrained, or could simply get priced out by financial buyers (as we’ve seen with other leasing spaces like intermodal containers and aircraft).”