Wednesday, 26 October 2016

Tank terminals – an attractive investment opportunity - 26/10/2016

Tank terminals – an attractive investment opportunity

Tank terminals have made consistently strong returns over the last few years. Throughout the financial crisis, and huge range of oil prices, the oil storage companies have performed well compared to other sectors. Still today there are plenty of trading and marketing companies looking for storage capacity. Whilst a part of this demand is supported by the present contango market structure (where the higher future value of oil allows traders to buy now and sell later for profit), the majority of demand is driven by the ever increasing demand for oil and the supply chain bottlenecks that require more storage. 

This resilient and consistent performance across the financial and commodity market cycles is attracting financial investors looking for alternative sources of yield,

Changing investor landscape
Tank terminal investments were, until recently, the territory of industry players or private equity. Increasingly, they face fierce competition from pension and infrastructure funds. 

Behind this development is their quest for yield. There is no way a pension fund or insurance company can meet its return mandates by buying German bonds (as the yield are close to zero). They will shift more of their capital allocations out of, for example sovereign debt, and seek higher yielding (and hence riskier) investment opportunities in infrastructure. Typical core infrastructure investments like (air)ports, gas pipelines or toll roads are very competitive, resulting in lower yields for the investors. Now many identify European tank terminals as a sound alternative.

In the larger transactions for dividend yielding storage assets, I have not seen any traditional industry players and hardly any private equity firms among the final bidders. Infrastructure funds, and especially pension funds, have lower return expectations, which are driving up valuations. 

Private equity firms have become more creative to meet their return requirements. Some have hired management teams from the storage industry to acquire and develop storage terminals for them, taking over the role of storage operators in this respect. Examples of this include, Zenith (backed by Walburg Pincus), GPS (backed by Blue Water Energy) and HES (backed by Carlyle/Riverstone). There are several other financial investors considering the same. 

Where does this leave the traditional storage operators? Vopak, for example, has been focusing on divesting some of its smaller assets in Scandinavia (Vopak Sweden sold to Inter Terminals) and the UK (sold to Greenergy/Macquarie). Oiltanking sold its US business to Enterprise and has cash to spend. It recently acquired Vopak Finland and Antwerp Gas Terminal for undisclosed numbers. At what point will these operators cash in their future earnings now?

Future trend
Overall I foresee this trend to continue: pension funds and infrastructure funds shall focus on the larger mature assets, while private equity perhaps has to take more risk by focusing on growing smaller assets, greenfield projects or opportunities in emerging markets.

Obviously, the real world is not that black and white, and future will tell what will happen. It is however fair to say the M&A activity in the sector will continue for some years. 

Concentration in the sector is generally low with the top 10 storage companies owning only 16% of the total (non-US) storage capacity. 

What is the Opportunity for existing storage companies?
So how can you as an owner of one of more tank terminals benefit from these developments? How can you compete with these big investors if you like to grow your business by acquiring additional terminal capacity? Even for the smaller acquisitions you will face fierce competition.

Especially if you are limited in bank financing, it is worth considering a dialogue with some of these investors. You could consider an outside investor as a shareholder in your project, acquisition target or even at holding level of your company. The partnership of investment muscle and operational experience will be the route to mutual value creation
How to position your storage company.

What is important is how to position as a company. Do you have a clear idea of how you perform as a business in the eye of an investor? What are they key levers that you can use to increase your attractiveness and value? And most importantly, how do you select the correct partner that provides most value to your company and your targeted acquisition or project? The answer to that question starts with a thorough assessment of your business that will help you to understand better what your terminal’s key value drivers are and how to position your company. That may sound straightforward, but financial investors look at the world through a different set of eyes.

How much an investor will pay for your shares and how much control they will want over your company depends heavily on the size of the business, the growth opportunities and the historical performance of your company. And last but not least your own wishes in this respect. 

In-Energy has experience in oil terminal management and has worked with numerous financial investors. We understand what these investors are looking for, and more importantly, we know what you need to do to achieve best value for your company whether you want to exit fully or are looking for a partner to support growth. If you are interested to learn more, please contact me personally at +31611361442.

Frank Schreurs is one of 16 world-leading experts speaking at Tank Storage Germany, which takes place on 16 & 17 November at The Hamburg Messe. 

Aimed at senior level storage professionals and investors, the conference will cover a wide range of topics relating to the German storage market. These include market outlook and analysis, local regulations, terminal cost and efficiency methods, finance and investments and terminal development projects. The Tank Storage Germany conference programme is now available to view at www.tankstoragegermany.com. Visit the website to see the line-up of industry expert speakers and topics and to book your place. 

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