Equity Spotlight: TransMontaigne, Inc. (AMEX: TMG)
(note: Guest Opinions do not necessarily reflect the opinions of KWR Intl.)

Pending Restructuring Play in the Energy Sector to Unlock Shareholder Value

by Mark Reiner, The Doctor's Investment Fund, LLC

NEW YORK (KWR) TransMontaigne Inc. (AMEX: TMG) is a refined petroleum products distribution and supply company, whose principal activities consist of three business segments. These include: 1) terminal, pipeline and tug and barge operations, 2) supply, distribution and marketing and 3) supply chain management services.

Background:

TMG has assembled an asset infrastructure, using common carrier pipelines to distribute refined petroleum products. TMG also provides integrated terminal, transportation, storage, supply, distribution and marketing services to refiners, wholesalers, distributors, marketers and industrial and commercial end users.

TMG owns and operates terminal infrastructure utilizing pipelines, tankers, barges, rail cars and trucks to company owned or third party facilities. At company owned terminals, TMG provides throughput, storage, injection and distribution related services to distributors, marketers, retail gasoline station operators and industrial and commercial end-users. TMG operates 55 terminals with an aggregate capacity of approximately 21.4 million barrels.

In the supply, distribution and marketing segment, TMG purchases refined product primarily from refineries along the Gulf Coast and schedules them for delivery to company-owned terminals, as well as terminals owned by third parties, in the Gulf Coast, Midwest and East Coast regions of the United States. TMG then sells this product primarily through rack spot, contract and bulk sales to cruise ship operators, commercial and industrial end-users, independent retailers, distributors, marketers, government entities and other wholesalers of refined petroleum products.

The supply, distribution and marketing operations and their terminal, pipeline and barge operations have synergistic characteristics in that they each utilize and benefit from each other. This creates opportunities to achieve additional value that could not be realized if each segment were operated independently.

Due to recent historical price volatility associated with energy prices, many companies and governmental agencies have opted to outsource their energy purchasing function. These end users need to focus on their core competencies and to reduce price volatility. This trend is creating a growth business in the energy supply management/logistics sector. TMG offers services that include fuel supply, monitoring, excise tax administration, and price management solutions. This allows customers to obtain fuel supply management functions from a single source. TMG is the only significant independent fuel supply chain management services provider in the U.S. offering this extensive suite of services.

Catalyst: This past July, TMG hired UBS to assist the company in evaluating strategic alternatives to enhance shareholder value As a result, TMG announced on September 22nd, that its Board had authorized management to pursue the formation of a new Master Limited Partnership (MLP) to hold their qualifying assets. TMG would be the General Partner of the new MLP. It is anticipated that the new MLP initially would own certain TMG terminal, pipeline and tug and barge businesses while TMG would retain the distribution and marketing business.

In a press release at that time, the company stated "It became obvious to the Board that the existing MLPs that participated in the Company's evaluation of its strategic alternatives were unwilling to share with TMG's shareholders the economic benefits that an acquisition of TMG's extensive terminaling network would have provided to their MLP unit holders and their respective general partners. Consequently, forming our own MLP allows our current shareholders to share in both of those economic benefits.”

Given that the regulatory approval process for a transaction of this kind can take up to about six months, TMG’s GP/MLP transaction is likely to materialize during the first half of 05, once it receives necessary regulatory approvals., To date, there has been no further company announcements or guidance, however, in recent conversations with the firm, it was noted that. the transaction is moving along, as per their public announcement.

There are several alternatives as to how the transaction may occur. Options include an IPO for the MLP, a spin-off of to TMG shareholders, or possibly a hybrid of the two. TMG shareholders may become owners in the General Partner, which should retain a large percentage of the new MLP, as per previous transactions in this sector. Based upon previous cases, it might be expected that the total valuation of these new holdings will trade higher than the current security. A new public issue of the MLP should also bring attention of this company to the investment community.

There are a number of precedent GP/MLP structures in the public market. Some examples include Holly Corp/ Holly Partners, Crosstex Energy/Crosstex Energy, LP and Kaneb Services/ Kaneb Partners, L.P. These deals were structured in a unique fashion, as the GP retained a majority interest in the MLP. The GP’s sole source of income is the cash flow from the distributions of the MLP plus incentive distribution rights, which entitle the GP to a higher percentage of future cash flows from the MLP, once certain hurdles are attained. This structure motivates the GP, to make accretive acquisitions for the MLP, with the goal of increasing the terminal value of the MLP’s cash flow.

Management of TMG has proved adept at accretive acquisitions. The company expanded in 2003, with the acquisition of facilities in Florida and Virginia. Both of these transactions have proved accretive to date. Management credited these acquisitions for the increase in net operating margins for fiscal year 2004.
There are approximately 30 natural resource/ energy related MLPs that are publicly traded. MLPs appear to be more complex and daunting to investors. These structures are in essence just corporate-type entities that are taxed at the unit holder level, thus avoiding double taxation. Historically, MLPs are operations that were spun out of major corporations to reduce debt or to reallocate assets to faster growth areas. MLPs are usually steady, high-cash flow businesses that do not require large amounts of capital spending to sustain competitiveness within their businesses.

TMG’s new structure is likely to help to attract a new group of income-oriented shareholders, while strengthening its balance sheet. It will also enable TMG to arbitrage the differences between public markets pricing versus the private market for energy facility transactions. In addition, it will be able to generate additional cash flows from these potential transactions. Private market deals in this industry are currently transpiring at 7 times cash flow, while the average energy MLP is trading at 14 times cash flow. Based on these metrics, management will have the flexibility to exploit this discrepancy and facilitate more accretive deals going forward. Approximately 25% of TMG’s equity is owned by management, creating an incentive to enhance current value and increase current income for shareholders.

An additional catalyst is the recently signed product agreement with Morgan Stanley Capital Group (MSCG). In the Sept 22nd press release, the Board of Directors announced their authorization to management to procure long-term supply agreements from one or more major refined petroleum product suppliers. A long-term supply agreement would eliminate the need for the Company to manage the commodity price risks associated with its sizable inventory positions. This would stabilize the Company's marketing and distribution margins.

In November, TMG signed a 7-year, product supply agreement with MSCG. Under the terms of the agreement, MSCG will be the exclusive supplier of gasoline and distillate to TMG terminals connected to the Colonial and Plantation Pipelines and its Florida waterborne terminals at market-based rates. MSCG will begin supplying certain TMG terminals in January 2005 with complete implementation expected in February. The supply agreement expires on December 31, 2011, subject to provisions for early termination. In connection with this agreement, TMG issued warrants allowing MSCG to purchase 5,500,000 shares of TMG common stock at an exercise price equal to $6.60 per share, subject to adjustments in accordance with the terms and conditions of the warrant certificate.

This transaction should prove beneficial to TMG for a number of reasons. The agreement will strengthen TMG’s balance sheet, as less working capital will be deployed in procuring and carrying a volatile commodity, This should lead to more consistent earnings and cash flow streams. TMG has an extensive risk management operation, however, lost money on hedging over the last three years, as there is no perfect correlation between the cash petroleum and futures market for energy products. In addition, the equity relationship with MSCG should provide an incentive for MSCG to bring potential acquisitions and deal flow to TMG in the future.

This transaction is also likely to help TMG attain higher margins, which should lead to a higher multiple for their share price. Below is a breakdown of gross margins for the firm’s two main segments for the last three years:

Supply, Distribution and Marketing:

			2004	2003	2002
	Gross Sales		11,215,351	8,241,001	6,001,170
Cost of products sold			(11,060,105	(8,072,877	(5,875,791
		Net margin before other direct costs and expenses	155,246	168,124	125,379
Other direct costs and exoenses
	Net losses on risk management activities		(54,739)	(84,146)	(56,826)
	Change in unrealized gains (losses) on derivative contracts		(25,323)	(21,460)	194
	Lower of cost or market write-downs on base operating inventory volumes		(5,334)	(12,435)	N.A.
		Net operating margins	$69,850	$50,083	$68,747

Terminals, Tugs, Barges and Pipelines:

		2004		2003		2002
Throughput fees	$	32,019	$	30,359	$	26,544
Storage fees		36,036		25,979		18,053
Additive injection fees, net		7,908		7,921		6,611
Pipeline transportation fees		7,073		5,758		6,492
Tugs and barges		11,667		4,335		N.A.
Management fees and cost reimbursements		4,975		4,461		4,899
Other		9,562		8,154		5,686
Revenue		109,240		86,967		68,285
Less direct operating costs and expenses		(53,966)		(39,175)		(32,567)
Net operating margins	$	55,274	$	47,792	$	35,718

Within this data, one can see that the margins in the infrastructure business are consistent and fall with in the context of a traditional MLP.

As a result of the proposed transaction, the securities that are issued to current TMG shareholders, via the new structure are likely to trade at a premium to the current market value of TMG. Today, the unknown variable is the exact structure of the new entity, as per the prorating of GP or MLP to the current TMG shareholder.

Finally, this deal is likely to create more investor and institutional awareness of this $11 billion dollar company -- which to date -- has been largely unrecognized and undervalued by the market. This is evidenced by its meager EV/EBITDA ratio of 6.43, whereas its peer group is trading at much higher multiples.

This company profile is not intended as investment advice or as an offer or solicitation with respect to the purchase or sale of this or any other security.  While believed to be accurate, it should not be construed as offering a guarantee as to the accuracy or completeness of the information contained herein and should be checked independently by the reader before it is used to make any business or investment decision. All opinions and estimates included are subject to change without notice and the author as well as KWR International, Inc. staff, consultants and other newsletter contributors to the KWR International may or may not have a long or short position in any security or option mentioned in this newsletter.