CHUNYIP WONG
Navigator Holdings Ltd (NYSE:NVGS) is a leading liquified petroleum gas (“LPG”) and natural gas liquids (“NGL”) shipping firm, with a fleet of 54 vessels focused on the mid-size LPG and ethylene markets. Navigator also owns 50% of an ethylene export terminal in a joint-venture partnership with Enterprise Products Partners (EPD). NVGS is on the growth trajectory, but most of the recent additions have been behind the scenes. Over the past year, Navigator has established a significant strategy to promote the ongoing growth in US NGL exports, and they have assembled a team of powerful financial backers and well-positioned U.S. executives to get this done!
NVGS currently has about 77.3M shares outstanding for a market capitalization of roughly $820M. I expect this will be a multi-billion dollar firm within the next couple years. This brief update will highlight recent company progress and five upcoming catalysts ranging from expected updates within the next few weeks (potentially days) to ongoing growth to 2025 and beyond.
NVGS Emerging as a Top Pick
Navigator Holdings has been recently added as a top pick at Value Investor’s Edge and this company is especially enticing as share prices have pulled back by more than 30% this summer even as game-changing catalysts are potentially within just a few weeks of realization (perhaps even just a few days for some events). Current financial performance, (Q2-22 report) has been fairly uneventful so far, but the reason this company is attractive as a strong buy today is because of their prime position to be the US LPG and NGL (primarily ethylene, butane, and propylene) export terminal partner of choice for major US midstream firms like Enterprise Products Partners, Energy Transfer (ET), Kinder Morgan (KMI), and Plains All American (PAA).
There is a massive global imbalance between NGL availability in the US and surging demand across the EU and most of Asia. This is in addition to an already blossoming LPG trade, spurred on by enormous demand growth in China and India, and which might increase even further if ammonia is considered as a prime candidate for next generation marine fuels. Just look at a multi-year chart of major LPG shippers: Dorian LPG (LPG), Avance Gas (Oslo: AGAS), and BW LPG (Oslo: BWLPG), and the trend is clear!
Keep in mind also that Dorian LPG (a previous top idea at Value Investor’s Edge and long-term core member of our models) has also paid out $5.50 in dividends over the past five quarters alone! This stock traded as cheap as the mid-$7s in the summer of 2020 and has now returned over 200% in two years. NVGS could be one of the biggest shipping export growth stories of the 2020s and the company is just in its first or second inning at this juncture.
There are four major catalysts for NVGS, all of which are likely to be achieved by mid-2023, and at least two of which are highly likely within the next few weeks! Finally, there is a fifth catalyst (ammonia and CO2 carriers), which could keep NVGS at the forefront of the industry for the next decade and beyond.
Significant Upcoming Catalysts
1. Ethylene Terminal Expansion: Within Weeks (Days?)
NVGS has been operating an ethylene export terminal in a joint-venture with EPD over the past two years. Although this venture has been highly successful commercially (94% offtake fixed on long-term take-or-pay) and very successful operationally (operating without any major issues, hitting 110%+ of nameplate capacity), it only began to hit its stride amidst the major COVID impacts and a long-expected expansion was initially delayed due to energy market uncertainty.
EPD has recently announced that they plan to bolster their ethylene exports by 50%+ by end-2023, a timeline which would require NVGS to begin construction within weeks, with a FID likely announced within days. We figured NVGS might announce this expansion with about 50% odds during the Q2 results in mid-August, but it seems they are awaiting final term sheets before formalizing the announcement. EPD is also considering upsizing this project via an additional export train, which could more than double their eventual export capacity, with likely start-up targeted for 2025. Since both EPD and NVGS have agreed to exclusively work with each other on anything involving ethylene, Navigator will be a huge beneficiary of this growth.
Based on our estimates for the economics of the expansion initiative, we believe this could add between $3-$4/sh in net value to NVGS, with FID potentially announced within weeks (days?), and the first phase of expanded terminal operations feasibly beginning by December 2023.
2. Formal Shareholder Return Program: Expected within Weeks
NVGS has plugged along for years as a midsized LPG and NGL shipping play, but their fleet lacked sufficient scale and the previous management never made any efforts to bolster their public relations (“PR”) nor investor relations (“IR”). This was a private equity backed initiative funded by Wilbur Ross, but he was unable to stay as closely involved after joining the Trump Administration due to legal requirements, and this one unfortunately fell by the wayside.
This has changed! New management is in control, backed by the powerful BW Group in Europe, which is arguably the second most sophisticated investment group in shipping in the world, behind only the multi-billion Fredriksen Group (i.e. Frontline (FRO), Golden Ocean (GOGL), FLEX LNG (FLNG), and SFL Corp. (SFL). BW Group took control in early-2021, then immediately grew the fleet to significant scale via a stock-for-stock merger with Ultragas.
A new CEO, Mads Peter Zacho, has just recently taken the reigns, and NVGS hired Randy Giveans away from Jefferies (where he was a VP of Research and Lead Shipping Analyst for roughly a decade) to run the IR department and coordinate future export projects. Randy is based in Houston and his new office is just down the hall from several major US MLP firms, where he has extensive connections as a prior analyst and local banking member.
NVGS has lacked a formal shareholder returns policy, but this is about to change. Management suggested an update is coming during 2H-22, which likely means they will announce a new plan alongside Q3 earnings in early- to mid-November at the latest. Expect a mixture of a repurchase program if shares remain grossly undervalued (the NAV of the shipping business alone is about $16/sh!), and a pledge to pay substantial dividends once the terminals are online as well as from eventual surplus shipping earnings.
Although a policy alone doesn’t necessarily add fundamental value to NVGS shares, I believe this will dramatically increase investor interest and significantly improve share liquidity. A repurchase could quickly build value and drive shares above $15-$16/sh within just a couple months.
3. Additional Terminal Development Agreements (Mid-2023)
In addition to the major projects involving ethylene, NVGS is also pursuing partnerships for additional NGL exports, including butane, propylene, ammonia, and ethane, all of which are expected to see major demand from Asia over the coming decades along with increased flows to Europe. Potential partners could include Energy Transfer, Kinder Morgan, Plains All American, other smaller operators, or more work with EPD.
Each one of these potential terminal deals could add between $2-$5 to NVGS share valuations, depending on the eventual scale and associated economics.
4. Squeeze in NGL Shipping Rates (Likely by mid-2023)
NVGS has spent most of the past 5-6 years in ‘no man’s land’ with moderate to weak midsize LPG shipping rates, caused primarily by a substantial overhang from larger LPG shipping vessels (“VLGCs”). This overhang subsided starting in 2019 and the midsize business has slowly strengthened since then. The current market balance is fairly tight, but Europe has outbid Asia for a lot of the recent cargoes, which has led to a temporary decline in ton miles due to the shorter trade route. I expect this to revert by mid-2023 as more export capacity comes online in the West and Asian demand is expected to surge, especially for ethane and ethylene.
The shipping NAV and existing terminal alone is already worth around $16/sh. If shipping rates tighten and we start to see even a moderate squeeze in availability, this alone could drive NAV north of $20/sh, before adding any value for the aforementioned terminal projects.
5. Future Growth in Ammonia and CO2 Transport (2024-2025+)
Further afield, and admittedly less concrete at this juncture, but NVGS is a leading candidate to pioneer the development of ammonia carriers (gas carrier design approved last fall) and CO2 transport vessels (joint venture established last November). These designs could come increasingly in demand by 2024-2025, leading into a potential frenzy of demand as the shipping industry struggles to meet expected draconian CO2 emission targets by 2030. NVGS is well ahead of the curve in this arena. We are ascribing $0 value to these endeavors at this juncture, but this is a phenomenal potential future growth sector and is perfectly positioned to fit ESG investment themes.
Fair Value Estimate: $16 Now, Potential for mid-$20s
I expect NVGS will initially continue to trade along similar trajectories as energy and shipping sectors; however, the expected repurchase program should strengthen shares, the ethylene expansion will add interest, and overall refinancing and updated shareholder returns policies will build a loyal base for the coming years.
I believe NVGS is worth about $16.00 now (about 51% upside), which is roughly equivalent to the existing shipping business NAV. However, if Navigator is able to successfully expand its ethylene terminal and add additional terminal projects (i.e. propylene, butadiene, ammonia) over the next year or two, then mid-$20s should be easily achievable.
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