The global bulk liquids storage and infrastructure industry sits in the middle of a very active merger and acquisition market and there is no sign of this slowing, given underlying business drivers and the intentions of key transaction players.
Energy is vital to the economy but an investor is largely driven by upstream ‘mining’ activities in oil and coal. However, these come with significant exploration and commodity price risks – risks that financial investors are not willing to take.
Energy transportation infrastructure is one of the most attractive areas for investors, who are looking to capitalise on the resilience of this sector without taking any risk on the underlying energy commodities, namely coal, oil and gas.
Liquid storage terminals play on the movement of the largest energy commodity – oil – as well as other bulk liquid cargoes including chemicals and bio fuels. The scale of opportunity, oil price movements and the converging interests of the players involved have resulted in multiple M&A transactions and many more will follow.
To understand where the transactions are coming from and what will continue to drive them, it is important to understand each interested party’s dynamics.
Historically oil storage and transmission assets have been owned by integrated oil and gas majors and downstream oil refiners. In the more recent past, driven by the need to clean up balance sheets, release capital in a declining oil price environment and downward pressure on refining margins, the oil strategics have been coming to market with assets to sell. BP coming to markets to sell its interest in the Amsterdam oil terminal is a case in point.
INDEPENDENT OIL TERMINAL PLAYERS
Vopak, the leader among independent oil terminals players, control 10%
of global market share. Three others – Oiltanking, NuStar and Magellan
Midstream are the only ones with any near level of global scale. The
need to consolidate as an industry and the need to respond to change in
global trade patterns will continue to throw transaction opportunities. LBC
Terminals is currently in the market to sell part of their European assets
and Vopak, who have been an active seller of terminals in the market, are
a key drivers of this trend.
TRADING HOUSES INFRASTRUCTURE INVESTMENTS
Almost all the major oil traders (Glencore, Gunvor, Trafigura, Vitol, Mercuria and Noble) and some regional/smaller oil traders (BrightOil, BB Energy, Concord, Galana and Hin Leong) have invested in and run oil logistics assets including storage terminals. Ownership of logistics assets did provide superior control through the supply chain and leverage to extract margins which would otherwise get lost in the trade.
In the more recent past, traders’ balance sheets have gone through severe strains resulting from commodity price declines, which limits
their ability to raise capital beyond a level without capital releases from existing assets. These factors may lead traders to come to market to monetise some of their logistics assets, especially if it can be done through sale and leaseback arrangements where operational control can be retained post sale. Glencore coming to market is a case in point and more will follow.
ATTRACTIVENESS TO INFRASTRUCTURE INVESTORS
For infrastructure funds, oil storage and port terminal assets offer an attractive business model incorporating infrastructure characteristics that investors prefer.
Storage businesses generate the bulk of their revenues from storage fees derived from leasing space in tanks. These contracts vary in length and complexity, often depending on the client. Contracts are often take-or-pay, which means the client pays even if they don’t use a tank. This provides a level of guaranteed income.
Terminal businesses charge fees for moving product from tanks to transport points – be it barges, transmission pipelines and rail or road networks. These ‘through-put’ fees alongside other services such as heating, mixing and blending of products provide investors with additional sources of revenues. In addition, on the back of oil storage, these enterprises have become larger liquid businesses encompassing chemicals, vegetable oils and even food additives. This ‘de-risks’ the business by reducing its reliance on oil-based products such as crude, aviation fuel, diesel or kerosene.
SHORT-TERM, TACTICAL CONTANGO ECONOMICS
In the very recent past the oversupply of crude and the contango in the forward curve have offered handsome rewards to anyone with capacity to stash oil. These market fundamentals have spurred the immediate rush to invest in new oil storage assets or acquire existing ones.
Success in the sector in part comes from buying storage terminals in the right strategic locations. Across the globe there are four key liquid storage hubs – Houston, the ARA region, the straits of Homuraz/Fujairah and the straits of Singapore. The closer the storage facilities are to suppliers’ markets or required transport networks the better. Investors’ affinity for OECD markets has meant there has been greater deal activity in Europe. Going forward one can expect Australia, Singapore and Houston to catch up before we see a lot of financial investor activity in the Middle East region. The recent bid process and aggressive pricing for the sale of a minority stake in Universal Terminals in Singapore could be an early indicator of this trend.
Universal Terminals is Singapore’s largest independent oil storage provider, with a capacity of 2.33 million m3 across 78 tanks. The ARA region is a strong gateway for Europe – a region which has seen a lot of transaction activity. iCON Infrastructure’s most recent investment, Service Terminal Rotterdam, was made in this region. Antin’s Infrastructure’s PISTO-owned Le Havre oil terminal on France’s northwest coast, is another example of a strategic location as it is the key entry point for oil products (crude and refined) in northern France. The asset has immediate access to the TRAPIL pipeline (also partially owned by Pisto), which links the business to a number of France’s major airports and cities, including Paris.
THE CUSTOMER IS KING
Customer base is another key concern for infrastructure investors seeking stable returns from these assets. Contract renewals are one of the major risks of the business. The more revenue locked over the long-term the better. Antin’s PISTO also stores for the SAGESS – the French State’s strategic oil reserve –which contributes to stable long-term revenues of the company. Macquarie’s TanQuid counts the German equivalent, the EBV, as one of its customers, according to sources. Whilst it’s not known what type of contracts will be available at Vopak’s UK storage terminals, which it recently divested, fellow seller BP has said it would look to enter a long-term capacity agreement with a potential buyer, which should offer infrastructure investors some comfort regarding revenue security.
OPERATIONAL RISKS AND SAFETY LINKED COSTS
Storage assets are not without their operational risks. Health and safety requirements have tightened since incidents such as the Buncefield fire. Costs attached to health and safety requirements – such as the Netherland’s PGS 29 legislation, which outlines how liquids can and can’t be stored, have also been increasing. Owners of storage assets have little scope for passing these costs on because the assets are not generally regulated, with new requirements – now occurring on more periodic cycles – likely to eat into potential returns.
INVESTOR ECONOMICS WILL DRIVE TRANSACTIONS
Investors have had success investing in liquid storage and transmission assets – 3i’s 15.4% internal rate of return (IRR) from its investment in Oiltanking subsidiaries in Malta, Singapore and Amsterdam since 2007 – is a case in point.
The oil storage business will continue to attract infrastructure investors’ attention over the next few years. By investing in these assets, infrastructure investors – whilst not taking direct commodity exposure – are indirectly taking a view on the market for the products they store.
But with established customers, strategic locations and long-term contracts in place, these assets have shown that they can deliver mid-teen IRRs for investors willing to take the risk. Beyond standalone economics – investors also have an eye on building a network of these assets. This will deliver benefits of being able to deploy larger quantum’s of capital in high-return generating assets. Macquarie seems particularly keen on this play and is not afraid of paying rich premiums – 18x enterprise value EBITDA on the Universal Terminals transaction.
On another live transaction – the sale of the Portuguese, Spanish and French assets – Macquarie again seems to be the front runner. The successful outcome on the LBC transaction could trigger many other marginal independent storage providers to follow suit.
FOR MORE INFORMATION
This article was written by Rahul Saikia, investment banker at Pricewaterhousecooper’s corporate finance team. Rahul.firstname.lastname@example.org