Introduction to Oil Tanker Terminals and Storage

Oil terminals or oil batteries are part of the midstream oil and gas space. Storage terminals can hold crude oil, gas, natural gas liquids, petroleum products/refined products and even vegetable oil. They can be held by refineries to be produced later, for speculators looking to see price appreciation or by oil and gas companies or physical traders to be moved to another demand centre.

Usually, a good terminalling or oiltanking company will have storage at strategic locations on major trade routes or straddling major pipelines. As such, many oil and gas storage companies will be part of a larger logistics or midstream company due to the vertical efficiencies involved as well as the benefits of having broader market knowledge.

Major clusters and transport hubs will be saturated with oil tankers and other energy infrastructure – for example the Galena Park Terminal in Houston, Texas.

Oil Tank Terminals Companies and Stocks

Kinder Morgan, Enterprise and major pipeline companies will have dozens of storage terminals.

Physical commodity traders such as Vitol, Trafigura, Glencore and Mercuria will also have strategic oil batteries on their sea trading routes, along with other infrastructure and shipping required to move oil profitably.

However that does not mean that standalone storage companies do not exist.

Mergers, acquisitions and divestitures in this space usually revolve around entire corporates or carve outs of a business. For example, a major pipeline company can decide to divest a portfolio of storage terminal assets to another buyer, whether strategic (other midstream oil and gas companies) or financial (to private equity firms).

From a buildout perspective, oil tankers are good capex investments because they can be constructed for low build multiples (for example 2-3x the annual EBITDA of the project) while the EBITDA ends up getting the same multiple of the broader corporate 8-10x after it is derisked through construction.

Valuation of Oil Storage Businesses

As with most other midstream assets such as pipelines, these assets are known to be steady fee based or cost of service income. As such, they offer much more stable cash flow than and oil or gas producer.

This makes terminals much more palatable to private equity firms who can give banks comfort around the certainty of debt service.

If part of a broader midstream company with pipelines, the storage tanks are not usually broken out but instead the company trades at a corporate level multiple of EBITDA to solve for the Enterprise Value because the synergies involved in having a marketing division, terminals and pipelines working harmoniously are very real cash flow savings.

Given the stability of an oil terminals business, EV/EBITDA multiples can be 7-20x… this is actually a very unreliable range. However, expect multiples of similar quality to be higher than an oil and gas exploration and production company due to the lower volatility in cash flow. The higher end of these multiples (although 20x is extremely rare) can usually be attributed to a very safe and stable business as opposed to growth (unless there is something like 20 new terminals being built and going online in the next year).

In a normalized environment, expect 7-15x with the 7x having some sort of negative catalyst or overhang, such as a large holder of shares who may sell down. For a higher multiple, there is likely more land around the terminal area that has expansion options – likely only valid if it is a high demand oil hub.

However, certain aspects that are common to all energy infrastructure companies will determine the ultimate multiple.

As an extreme example, the highest valued oil storage company will be large (scale is a credit positive) with multiple tankers in multiple geographies that have long-dated contracts with extension options where the counterparties are creditworthy AAA rated oil and gas companies while all of the contracts are cost-of-service (or at least take-or-pay).

Storage Counterparty Credit Risk

You will notice that almost all companies that are discussing their terminals business will break out what % of revenue is attributable to investment grade customers or sub-investment grade customers that have secured letters of credit or guarantees from investment grade rated financiers, whether banks or other oil companies.

The higher the better because the more sure the cash flows are.

Oil storage companies will also mention that their largest customer will not exceed whatever % of total revenues or EBITDA. This is important because if their revenue has high customer concentration, losing their business or having them default can have dramatic consequences for expected EBITDA. If there is a large client identified, it would be best if they were creditworthy (for example Royal Dutch Shell).

Long-Term, Contracted Oil Storage Assets

Companies like to market that they have long-term contracts with reputable counterparties. This means that cash flows are stable at least until expiry. The longer out assets are contracted, the better the trading multiple (especially if the contracts have price step-ups or escalators to adjust for inflation – thereby making the investment inflation-protected).

The one time where this is not necessarily a good thing is if counterparties have locked in very cheap storage rents while the spot price of oil storage has gone way up (for example during times of contango). In this case, the closer the storage assets are to the contract expiring, the higher the stock should be valued because the cash flows post expiry will be much higher provided that they are recontracted.

In any other situation, oil terminal companies will look to recontract or get extension options long before contracts expire in order to keep the contract duration high and the cash flows visible.

Oil terminal utilization is also important. If an oil battery has 300kbbl of storage capacity but only 200k is contracted or used, revenues are a lot lower than they could be with a full storage. A good marketing team can fix this but sometimes it depends on the strategic location of the asset.

Oil product tankers usually contract from short term to up to 5 years (the futures curve is illiquid beyond a 5 year window). Gas storage can be 10-20 years, especially in today’s LNG heavy environment.  Chemical products are also 0-5 years.

Oil Terminaling Contract Mix

As per usual, the best or most fixed-income like contract is cost of service. This means that the terminals are guaranteed a certain rate of return on capital employed. There is practically no risk here except for default risk.

The next is take-or-pay – which means that they have sold off capacity that must be paid for whether it is utilized or not.

The next is fee-based. Whenever a customer uses the terminal, they have to pay. This is slightly riskier because now there is volume risk, but as terminals only rent the space but do not own the commodity, they are not taking commodity risk.

Even riskier still is being paid a percentage of the volume stored (percentage of proceeds). Now the terminal company takes on price and commodity risk. Some oil traders will have their own storage and actually take title to the crude that is being marketed.

Contango and Oil Storage

The oil futures curve is very important. For commodities, most finance students learn that there is a cost of carry associated with holding the physical asset. You have to store it somewhere and deliver it to sell it. As such, if we expect oil supply and demand to remain balanced (an obvious oversimplification), the curve should be slightly backwardated – which means that front end futures are more expensive than longer-dated futures.

If the oil futures curve is upward sloping or in contango, this suggests that supply demand factors will push the price higher later (this is not necessarily the actual prediction of future spot prices, but rather the result of contracting by oil companies, airlines, and other stakeholders who are looking to hedge as well as speculators).

If the contango is steep enough, oil traders can in theory lock in a riskless profit by purchasing the oil and storing it while locking in a higher price to sell it out at in the future. As long as storage and insurance costs are lower than this price difference, either the futures price will fall or the price of storage will be bid up.

As you may surmise, cash flows and therefore valuation will be higher during times when the futures curve is not backwardated.

Optimal Capital Structure for Oil Storage Companies

Given the more stable cash flows, storage companies will be able to support a larger debt load for the same EBITDA as an upstream producer.