That is what happened this week in the relatively obscure world of marine fuel, when OW Bunkers, a leading player in the market, announced that it had been the victim of fraud by senior management at the company’s Singapore office.
This isn’t the first misfortune to befall OW either. On Thursday of last week the company stated that hedging losses previously estimated at around $25 million could end up being as much as $150 million by the time the position is unwound. When these two things are combined the total losses will likely exceed the capital of the company, resulting in probable bankruptcy. This is terrible news for OW and its employees and has left many customers scrambling to acquire fuel, but of course it is potentially good news for competitors.
Companies such as Aegean Marine stand to benefit from the effective removal of a competitor, but before jumping in potential investors have to ask themselves one very important question…could ANW potentially face the same problems? It became clear in 2008 as banks collapsed that sometimes problems such as the hedging losses suffered by OW can be indicative of an industry wide problem rather than being specific to one company. In this case, however, it seems that is unlikely as Aegean have a completely different approach and hedging strategy from their competitor.
In fact, they really don’t hedge at all, as they have little or no long term exposure to price fluctuations. Whereas OW was primarily a broker of the bunker fuel, Aegean is more of a physical supplier with most fuel being sold within a few days of purchase, making trading, hedging and the associated risks unnecessary. Of course, this doesn’t mean that they couldn’t be the victim of fraud. Almost any company could, but it would indicate that the thing that started OW’s problems, falling oil prices, is not likely to have such a dramatic effect on ANW.
As a company that focuses on the transportation and supply of an oil product, ANW operates more like a retailer than what many think of when they think of a company in the oil business. They will make a margin whatever the price of the product and while that may be a little smaller in times of low oil prices, the relationship is not linear. The prospect of operating without a major competitor should more than make up for any further falls in oil and the current levels were fully priced into the stock when the bad news about OW began to surface.
Despite the pop that that news caused, however, ANW still looks cheap. The stock has a forward P/E of under 9 and, prior to OW’s demise, the analysts’ consensus for the next 12 months’ growth stood at 13 percent. That is decent, if not spectacular growth but, of course, it could now be significantly higher.
In general, investors should be cautious when problems emerge in one company in an industry. Not only banks in 2008 but also the recent recall problems of GM that led to others by almost all auto manufacturers would both re-enforce that view. In this case, though, Aegean’s business model is differentiated enough from that of OW to make a repeat of the same problems unlikely. Given that and a low valuation, buying ANW in expectation of the company benefitting from the misfortune of others looks like a decent bet.