Kinder Morgan Announces Acquisition of Jones Act Shipping Tankers

Kinder Morgan Energy Partners, (NYSE: KMP) today announced it has entered into a definitive agreement to acquire American Petroleum Tankers (APT) and State Class Tankers (SCT) from affiliates of The Blackstone Group and Cerberus Capital Management for $962 million in cash. APT and SCT are engaged in the marine transportation of crude oil, condensate and refined products in the United States domestic trade, commonly referred to as the Jones Act trade.

APT’s fleet consists of five medium range Jones Act qualified product tankers, each with 330,000 barrels of cargo capacity. With an average vessel age of approximately four years, the APT fleet is one of the youngest in the industry. Each of APT’s vessels is operating pursuant to long term time charters with high quality counterparties, including major integrated oil companies, major refiners and the U.S. Navy. These time charters have an average remaining term of approximately four years, with renewal options to extend the initial terms by an average of two years. APT’s vessels are operated by Crowley Maritime Corporation, which was founded in 1892 and is a leading operator and technical manager in the U.S. product tanker industry.

SCT has commissioned the construction of four medium range Jones Act qualified product tankers, each with 330,000 barrels of cargo capacity. The vessels are scheduled to be delivered in 2015 and 2016 and are being constructed by General Dynamics’ NASSCO shipyard. Upon delivery, the SCT vessels will be operated pursuant to long-term time charters with a major integrated oil company. Each of the time charters has an initial term of five years, with renewal options to extend the initial term by up to three years. Kinder Morgan will invest approximately $214 million to complete the construction of the SCT vessels.

“This is a strategic and complementary extension of our existing crude oil and refined products transportation business,” said John Schlosser, president of KMP’s Terminals segment. “Product demand is growing and sources of supply continue to change, in part due to the increased shale activity. As a result, there is more demand for waterborne transportation to move these products. We are purchasing tankers that provide stable fee based cash flow through multi-year contracts with major credit worthy oil producers.”

“Blackstone and Cerberus are pleased to have founded and built American Petroleum Tankers into a market leading Jones Act tanker company,” said Sean Klimczak, Senior Managing Director at Blackstone. “We have enjoyed our partnership with APT’s management team and wish them continued success with Kinder Morgan in this next phase of APT’s growth.”

The transaction, which is subject to standard regulatory approvals, is expected to close in the first quarter of 2014, at which time it will be immediately accretive to cash available to KMP unitholders. APT currently generates about $55 million of annual EBITDA. After completion of construction of the four SCT vessels, KMP expects combined annual EBITDA of approximately $140 million, which is an EBITDA multiple of 8.4 times. The general partner of KMP, Kinder Morgan, Inc. (NYSE: KMI), has agreed to waive its incentive distribution amounts of $16 million in 2014 and $19 million in 2015 and $6 million in 2016 to facilitate the transaction.

Kinder Morgan Energy Partners, L.P. (NYSE: KMP) is a leading pipeline transportation and energy storage company and one of the largest publicly traded pipeline limited partnerships in America. It owns an interest in or operates more than 54,000 miles of pipelines and 180 terminals. The general partner of KMP is owned by Kinder Morgan, Inc. (NYSE: KMI). Kinder Morgan is the largest midstream and the fourth largest energy company in North America with a combined enterprise value of approximately $105 billion. It owns an interest in or operates more than 82,000 miles of pipelines and 180 terminals. Its pipelines transport natural gas, gasoline, crude oil, CO2 and other products, and its terminals store petroleum products and chemicals and handle such products as ethanol, coal, petroleum coke and steel. KMI owns the general partner interests of KMP and El Paso Pipeline Partners, L.P. (NYSE: EPB), along with limited partner interests in KMP and EPB and shares in Kinder Morgan Management, LLC (NYSE: KMR). For more information please visit www.kindermorgan.com.

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Crude Oil Trades Near Three Days Highs on U.S. Economic Outlook

Crude oil traded near the highest close in three days before reports that may show a strengthening of the economy in the U.S., the world’s biggest crude consumer. Futures were little changed in New York after rising 0.2 percent last week. Consumer purchases that account for about 70 percent of the U.S. economy probably climbed by the most since the end of 2010, according to a Bloomberg News survey before an April 27 Commerce Department report. Iraq halted crude exports from northern fields because of a technical fault at a pipeline network in neighboring Turkey, the Oil Ministry said.

Crude for June delivery was at $103.77 a barrel, down 11 cents, in electronic trading on the New York Mercantile Exchange at 9:40 a.m. Sydney time. The contract rose 1.1 percent to $103.88 on April 20, the highest close since April 17. Front month prices are 5 percent higher this year. Brent oil for June settlement was at $118.63 a barrel, down 13 cents, on the London based ICE Futures Europe exchange. The European benchmark contract’s front month premium to West Texas Intermediate was at $14.85, from $14.88 on April 20.

Iraq’s crude exports stopped at 7:45 p.m. on April 21, the ministry said in a statement on the website of the official National Media Center yesterday. The nation normally exports 450,000 to 500,000 barrels a day from northern fields through Turkey. It ships most of its oil from the south on tankers sailing from the Persian Gulf.

U.S. consumer spending may have risen 2.3 percent last quarter, according to the Bloomberg survey. That would follow a 2.1 percent gain in the prior period. Gross domestic product rose at a 2.5 percent annual rate after advancing 3 percent in the previous three months, according to the median forecast in a separate Bloomberg survey before the Commerce Department’s April 27 release.

Posted courtesy of Bloomberg News

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EIA: The Strait of Hormuz is the World's Most Important oil Transit Choke Point

The Strait of Hormuz (shown in the oval on the map), which is located between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. Hormuz is the world's most important oil choke point due to its daily oil flow of almost 17 million barrels per day (bbl/d) in 2011, up from between 15.5-16.0 million bbl/d in 2009-2010. Flows through the Strait in 2011 were roughly 35% of all seaborne traded oil, or almost 20% of oil traded worldwide.

On average, 14 crude oil tankers per day passed through the Strait in 2011, with a corresponding amount of empty tankers entering to pick up new cargos. More than 85% of these crude oil exports went to Asian markets, with Japan, India, South Korea, and China representing the largest destinations.
At its narrowest point, the Strait is 21 miles wide, but the width of the shipping lane in either direction is only two miles, separated by a two mile buffer zone. The Strait is deep and wide enough to handle the world's largest crude oil tankers, with about two-thirds of oil shipments carried by tankers in excess of 150,000 deadweight tons.

Several alternatives are potentially available to move oil from the Persian Gulf region without transiting Hormuz, but they are limited in capacity, in many cases are not currently operating or operable, and generally engender higher transport costs and logistical challenges.

• Alternate routes include the 745-mile Petroline, also known as the East-West Pipeline, across Saudi Arabia from Abqaiq to the Red Sea. The East-West Pipeline has a nameplate capacity of about 5 million bbl/d, with current movements estimated at about 2 million bbl/d.
• The Abqaiq-Yanbu natural gas liquids pipeline, which runs parallel to the Petroline to the Red Sea, has a 290,000-bbl/d capacity.
• Additional oil could also be pumped north via the Iraq-Turkey pipeline to the port of Ceyhan on the Mediterranean Sea, but volumes have been limited by the closure of the Strategic Pipeline linking north and south Iraq.
• The United Arab Emirates is also completing the 1.5 million bbl/d Abu Dhabi Crude Oil Pipeline that will cross the emirate of Abu Dhabi and end at the port of Fujairah just south of the Strait.
• Other alternate routes could include the deactivated 1.65-million bbl/d Iraqi Pipeline across Saudi Arabia (IPSA) and the deactivated 0.5 million-bbl/d Tapline to Lebanon.

EIA's World Oil Transit Chokepoints analysis brief contains additional information about other chokepoints, and the Middle East & North Africa overview contains additional information about countries in the region.

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Goldman: Oil Will Get Expensive Now That The Tankers Are Done Hoarding It

Goldman's David Greely is making a near-term bullish case for oil. His optimism is driven by A) The strong U.S. ISM Manufacturing data we had two days back, B) the fact that renewed Nigerian violence threatens supply, and C) the reduction in overhang caused by oil hoarded at sea in tankers (floating storage).

While the relationship appears far from perfect, he argues that U.S. oil demand tends to track ISM Manufacturing Index readings:

Most interestingly for short-term traders, Falling floating storage implies a tighter market, since less supply is basically out there ready to be sold into the market.

David Greely @ Goldman: [emphasis added] The area where the improvement in near-term fundamentals has been most pronounced in recent weeks is in the amount of oil in floating storage. The use of tankers to store excess supplies of crude oil and gasoil over the past year has been emblematic of the weakness in supply demand fundamentals during the recession, and the unloading of these tankers has been broadly viewed as a necessary precursor to a cleanup over the overall oil market.

Consequently, reports that anywhere from 0 to 50 million barrels of the total oil in floating storage has been recently unloaded have suggested a potential turn around in oil market fundamentals.



Follow guest blogger Vince Fernando at twitter @vincefernando


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Traders Ditching Oil Hoarded At Sea As Market Tightens

The amount of oil held in tankers at sea has halved from its April 2009 peak of 90 million barrels according to ship broker ICAP. Given that much of this oil was held in order to arbitrage current vs. future oil prices, a reduction in floating storage implies a tightening of the oil market.

WSJ: ICAP said there were currently 21 trading VLCCs offshore with some 43 million barrels of crude. Seven of these are expected to discharge in February and one more in March. So far, it appeared those discharged cargoes wouldn't be replaced by new ones.

"I haven't seen any fixtures for VLCC storage in the last two weeks," said Simon Newman, ICAP's senior tanker analyst. "That would imply that storage looks set to fall in the short term."

Assuming there are no new fixtures, the amount of crude in storage could sink to 27 million barrels by March, the lowest level since the current contango play began in late 2008.

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Tanker Glut Signals 25% Freight Decline as 26 Miles of Ships Meet Demand

A 26 mile long line of idled oil tankers, enough to blockade the English Channel, may signal a 25 percent slump in freight rates next year. The ships will unload 26 percent of the crude and oil products they are storing in six months, adding to vessel supply and pushing rates for supertankers down to an average of $30,000 a day next year, compared with $40,212 now, according to the median estimate in a Bloomberg News survey of 15 analysts, traders and shipbrokers. That’s below what Frontline Ltd., the biggest operator of the ships, says it needs to break even.

Traders booked a record number of ships for storage this year, seeking to profit from longer dated energy futures trading at a premium to contracts for immediate delivery, according to SSY Consultancy & Research Ltd., a unit of the world’s second largest shipbroker. Ships taken out of that trade would return to compete for cargoes just as deliveries from shipyards’ largest ever order book swell the global fleet.

“The tanker market has been defying gravity,” said Martin Stopford, a London based director at Clarkson Plc, the world’s largest shipbroker. Stopford has covered shipping since 1971. More than half of the ships are in European waters, with the rest spread out across Asia, the U.S. and West Africa. Lined up end to end, they would stretch for about 26 miles.....Read the entire article.

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Barron's Ranks Energy Companies, OPEC Holds Quotas, Tanker Cancellations

"OPEC Holds Production Quotas Steady, Predicting Demand Recovery"
OPEC decided to keep production quotas unchanged a meeting today in Vienna, banking on a recovery in oil demand toward the end of the year. The Organization of Petroleum Exporting Countries, responsible for 40 percent of global crude supply, agreed to maintain production quotas at 24.845 million barrels a day, Saudi Oil Minister Ali al-Naimi said. It’s the second time this year the 12-member group has met without revising that total. “The market is oversupplied, it’s true,” OPEC Secretary General Abdalla el-Badri told at a press conference afterwards, saying the group decided against cutting.....Complete Story

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Barron's newspaper recently released its 2009 Barron's 500 company rankings that had a reasonable representation of energy companies. At about the same time, Fortune magazine published its rankings of the top 500 companies. The two rankings are based on different measures of financial performance. The sharp reversal of fortunes for energy commodities and the stock market during the second half of 2008 had contributed to energy companies not ranking as highly for the latest year, but still demonstrating better.....Complete Story

"Frontline Says Third of Oil Tanker Orders at Risk"
Frontline Ltd., the world’s largest operator of supertankers, said it was the first publicly traded shipping line to cancel contracts for new oil carriers and predicted a third of all orders will be delayed or canceled. The Hamilton, Bermuda-based company said today it canceled $556 million of orders for two supertankers and four suezmaxes, out of a total of 18 contracts. Similar moves by other shipping lines may “emerge in the next few weeks,” Jens Martin Jensen, chief executive officer of its management unit, said by phone. The annulments show other owners “might be able to do something” to.....Complete Story