Business Monday

World Fuel a quiet giant in global logistics

Mersey Spirit, one of the bunker vessels operated by World Fuel.
Mersey Spirit, one of the bunker vessels operated by World Fuel.

It’s a safe bet that few other Fortune 500 companies keep a lower profile than World Fuel Services Corp. Even after the 31-year-old company traded in its drab cluster of wood-paneled Miami Springs offices for modern headquarters in Doral, it chose a relatively plain building easily overlooked. The company’s logo at the entry to the Doral Costa Office Park looks like a postage stamp.

The low-rise headquarters on Northwest 41st Street belies World Fuel’s lofty status in corporate America as No. 71 on the 2014 Fortune 500 list, beating out a flock of better-known Florida companies including Publix Super Markets (104th), AutoNation (162nd) and Office Depot (248th). World Fuel has about 4,000 employees including 650 in Doral.

An international middleman in the sale of fuel in the aviation, marine and land transportation industries, World Fuel rode into the Fortune 100 on a surging wave of trade in the globalizing world economy and rising oil prices. As the name suggests, World Fuel sells fuel and related products, including lubricants. But its product line also includes associated services, including credit and risk management.

“We operate in this rich crossroads of energy, logistics, transportation and industrial growth,” said Michael J. Kasbar, president, chief executive officer and board chairman of World Fuel.

Fuel-dependent customers with operations throughout the world are drawn to the administrative convenience of consolidating fuel purchases with a single source, a competitive advantage for far-flung World Fuel. “We have 4,000 people in 154 [office] locations around the world that are all connected with one system that understand their local markets,” Kasbar said.

Orion Jet Center, a fixed-base operator at Opa-locka Executive Airport that sold more than 5 million gallons of aircraft fuel last year, started buying its inventory from World Fuel last year after dumping World Fuel competitor AvFuel, said Eric Greenwald, president of Orion. From the menu of services that World Fuel offers, Orion selected credit card-processing. World Fuel also engages in contract sales, which obligate customers to buy fuel from World Fuel throughout the contract period. Greenwald said these contract sales drive new customers to Orion Jet Center and other fixed-base operators that get their fuel inventory from World Fuel, “so they act as a marketing agent for us.”

“Their reach is incredible … They’re kind of a quiet juggernaut in the background. Not a lot of people know much about them,” said Bradford Boyd, president of Anova Marine Insurance Services. The broker of cargo and liability insurance is based in Doral and has some clients that also are World Fuel customers. “[World Fuel does] have a reputation of being a very well-organized and very efficient operation,” Boyd said.

World Fuel is “a longtime partner of ours at the Miami airport … a very critical partner,” said Thomas Doherty, general manager of Allied Aviation Fueling of Miami Inc., which manages the fueling facility at Miami International Airport. World Fuel is one of two major providers of jet fuel for the MIA fueling facility. “They have an excellent staff that works diligently … to go through any issues that may be occurring in the pipeline chain.”

Commercial refueling is far more complicated than gassing up the family car at a random station during a road trip. “Oil, like politics — to paraphrase Tip O'Neill — is local,” Kasbar said in an interview at World Fuel’s Doral headquarters. Variability from one refueling outpost to another is common “not only in the price but the availability, the quality, the delivery: the logistics to get to that ship, truck or plane.” Similarly, on the supplier side of World Fuel’s business, “most oil companies are local, not global, so we provide them with a distribution platform” built on local market expertise, Kasbar said.

Kasbar calls World Fuel an “asset-light” company because it primarily contracts with third parties for fuel delivery and storage. On the aviation side of its business, World Fuel sells fuel and related products and services to major airlines, smaller air passenger carriers, cargo carriers, fixed-base operators, corporate fleet owners, private aircraft owners, military fleets and to the United States and foreign governments.

On the marine side of its business, World Fuel sells fuel, lubricants and other products and services to shipping companies with international container and tanker fleets, commercial cruise lines such as Carnival Corp., yacht operators, and to the United States and foreign governments. In the land segment of its business, World Fuel sells products including fuel and lubricants as well as services. In all segments of its business, World Fuel offers transaction management services to customers.

Geopolitical risk is one of the everyday hazards that World Fuel manages on its own behalf and on behalf of customers. “Our stock in trade is being able to help manage change ... so, any type of change is fundamentally good for us, and we thrive on it, whether it’s new sources of supply, new regulations, changing prices, geopolitics, anything,” Kasbar said. “That is essentially what we do. We're basically one big risk-management company.” World Fuel has more than 300 subsidiaries around the world, in locations ranging from the United Kingdom and Kyrgyzstan to the United Arab Emirates and Hong Kong.

Higher oil prices have helped hoist World Fuel to the ranks of the nation's biggest revenue generators. The company’s “cost of revenue,” or fuel procurement, has consumed at least 97 cents of every revenue dollar in the past five years. The 3 cents is gross profit before tax and charges, so net income, or earnings, or the proverbial bottom line, is actually less.

Despite its relative obscurity locally, World Fuel is well known in its industry as a reliable counterparty in agreements to buy and supply fuel. Its financial transparency as a publicly traded company also distinguishes World Fuel from many of its private rivals in commercial fuel distribution. Commercial fuel distribution is a competitive and fragmented industry with operators around the world, including oil producers that sell directly to customers and smaller companies specializing in a particular territory or type of fuel.

Unlike most of its competitors, World Fuel is publicly held, a New York Stock Exchange company, making its financial condition far more transparent than that of competitors — a competitive edge for the Doral-based company. Some of World Fuel’s bigger competitors include three privately held companies: UK-based BP Marine Limited, Mercury Air Group of Torrance, California, and Texas-based Sun Coast Resources.

If executing agreements to buy and supply fuel seems easy, keep in mind the mammoth volume of daily transactions at World Fuel. Its revenue last year totaled $43.3 billion, or an average of $118.6 million a day. World Fuel probably sells more than a billion gallons of fuel a month. The company does not routinely reveal the number of gallons of fuel it buys or sells in filings with the Securities and Exchange Commission (SEC), but in July 2013, the company did disclose in an earnings announcement that its quarterly volume of fuel sales had exceeded 4 billion gallons for the first time.

Wall Street has a generally positive view of World Fuel's growth prospects. The company's stock recently has traded near its peak price levels in the last year. The Miami Herald interviewed two analysts covering World Fuel, one with a neutral "hold" rating on the stock, the other with a bullish "overweight" rating. The stock got a boost this year from the financial troubles of marine fuel competitor OW Bunker, which declared bankruptcy. The effect will likely be short-lived, said Jonathan Chappell, a stock analyst with investment firm Evercore Partners who has covered World Fuel for a decade. He has rated its stock as a “hold.”

“The stock has just gone from the high $30s to the mid-$50s in a very short period of time,” Chappell said in a March 13 interview. Nevertheless, “it’s a great company, a great balance sheet, great business model, great management team … They are very well positioned in the market to continue to grow.” The stock closed last week at $57.50.

Jack Atkins, a stock analyst at investment firm Stephens, agrees, giving the stock an “overweight” rating, his company’s equivalent to “buy.” Recent oil price volatility bodes well for World Fuel, Atkins said, because historically, “their margins expand pretty significantly during periods of high volatility.”

He predicts OW Bunker’s decline will continue to boost World Fuel. OW Bunker transported about 30 million metric tons of marine fuel last year, compared to about 24 million metric tons transported by World Fuel, he said, so OW Bunker's demise “is creating a lot of opportunity throughout 2015 to take market share.”

And even when fuel prices drop to relatively low levels, as they have in the past year, World Fuel’s profits can grow. That’s because its success is tied to volatility in fuel prices, not any particular price. For its customers, “planning becomes a little more difficult, and they need someone to help them figure out their strategies,” Kasbar said. “Over the last few years, the price has been incredibly stable. All of that has changed. Now you have the introduction of volatility.”

It’s a strategy born out of experience. The benchmark price of a barrel of West Texas Intermediate (WTI) crude oil ranged between $20 and $50 during the first 22 years of World Fuel's history, from 1984 to 2006. After the benchmark price peaked at $143.04 in June 2008, WTI crude zigzagged in the $80-$110 range from 2010 through 2013 before dropping below $50 early this year.

Consider what happened the last time oil prices plunged. World Fuel experienced a rare annual revenue decline in 2009 as an international financial crisis reverberated, the global economy slowed and oil prices tumbled from the record levels of 2008. World Fuel's revenue plunged 39 percent in 2009 to $11.3 billion from $18.5 billion in 2008. But the company’s gross profit dropped only 5 percent, to $375 million from $395 million, and its gross profit margin, or gross profit as a percentage of revenue, actually increased in 2009 to 3.3 percent from 2.1 percent in 2008.

Its business model essentially works like this: Fuel-price volatility usually means more World Fuel sales of hedging services and other types of price-risk management assistance to complement fuel sales, which can translate to gross profit margin expansion, even when fuel prices drop, as was the case in 2009. For World Fuel, volatility has value. Its business model is designed to be more profitable when customers start fretting about fuel price volatility and how to protect their profitability.

Adding to the company’s profits are sales of services ancillary to the core fuel business. “We’re providing solutions to both the sellers and consumers of energy products as well as a lot of services: technical services, financial services, transaction processing services, back office services,” Kasbar said. “So it is not only the fuel itself, it’s a lot of services.”

For example, World Fuel, which invests in financial hedges to reduce its vulnerability to fuel price changes, offers outsourced hedging to customers as a risk-management tool. World Fuel also provides financial services to customers, including credit for fuel purchases and a so-called “fleet cards” that air and ground carriers can use to buy fuel from a network of dealers. “It’s like a charge card, but it’s a closed system, so we are the bank” for each transaction, Kasbar said. “It is between the merchant [the supplier], the customer and ourselves. We settle the transaction ourselves and we provide the technology solution for them to swipe and obtain discount fuel at locations around the world.”

World Fuel increasingly is providing customers with outsourced information-technology support. “The thing we’re doing more of now is technology and software,” Kasbar said. “Most companies want to have their pain taken away in the back office. So business processes outsourcing is a big part of what we do. We'll consolidate invoices and deal with transaction management and payment processing.”

World Fuel’s profit margin has averaged about 1.8 percent in recent years. But revenue growth has been solid, so even the thin margins have produced fatter gross profits: $813 million last year, up from $752 million in 2013 and $673 million in 2012. Indeed, in the multi-billion-dollar world where World Fuel operates, "it's about playing defense. Defense wins ball games," Kasbar said. "If we don't lose money, maybe we'll make some money."

Kasbar said he foresees ample additional growth in all three of World Fuel's business segments: aviation, marine and land transportation: "We have a large runway in all of our businesses." For example, "if you look at the future of global trade, something like 80 percent is transported on water, ocean cargo. So that's not going to go away."

Neither is the inherently hazardous nature of handling petroleum and petroleum-based fuel. World Fuel makes risk management a corporate priority. Still, the global company faces a world of risks and business disputes that few domestic companies would ever encounter. In one unusual disclosure in an SEC filing, for example, World Fuel said it recovered $1 million in 2001 to settle litigation that the company had initiated following "a theft of product off the coast of Nigeria."

In December 2011, World Fuel settled a long-running lawsuit with customer Brendan Airways, which operated as USA 3000, over claims of fuel overcharges. Brendan sought $4.5 million in damages plus interest and attorney's fees. Terms of the settlement were confidential.

Among ongoing cases, Cathay Pacific Airways Limited has filed a writ in the High Court of the Republic of Singapore against a World Fuel subsidiary, alleging that it supplied contaminated fuel that caused the emergency landing of a Cathay aircraft in April 2010. Cathay claimed $34 million of damages. World Fuel is defending against the claim and believes it has enough insurance to cover its liability, if any.

Currently, World Fuel is one of multiple defendants in a class-action lawsuit related to a deadly train derailment in the summer of 2013. The fiery accident in Lac-Mégantic, Quebec, killed 47 people and involved a train carrying crude oil that was owned by World Fuel. The class action in Quebec Superior Court claims negligence on the part of World Fuel. In addition, the Quebec Minister for Sustainable Development, Environment, Wildlife and Parks ordered World Fuel and the railway that operated the derailed train to fully remediate the environmental impact of the oil spill.

Kasbar wouldn’t comment, saying only that World Fuel had not retained outside legal counsel to defend against claims arising from the accident, leaving the task to the company’s legal department.

To analyst Atkins, no news in the train derailment case is good news, so far, for World Fuel: “If they thought their potential liability was going to be higher than their insurance coverage, they would have had to have taken a charge by now.” In addition, “they have not taken any specific charges for the environmental cleanup.”

World Fuel remains “a solid counterparty with their customers and their suppliers, in a market where it’s hard to find a solid counterparty,” Atkins said.

Said Evercore’s Chappell, “The biggest issue with that wasn’t the liability but the potential for companies to stop doing business with [World Fuel]. But that didn’t happen at all. That was the biggest risk ... But there has been no disruption of the business.”

By the numbers

Here are some figures relating to World Fuel Services:

$43.3

billion

2014 revenue

$42.5

billion

2014 cost of fuel sold

$17.2

billion

2014 revenue of World Fuel's aviation segment

$13.8

billion

2014 revenue of marine segment

$12.2

billion

2014 revenue of land segment

$319

million

2014 employee compensation and benefits

$221

million

2014 net income

8,000

number of World Fuel service locations around the world, including airports and seaports

4,041

total number of World Fuel employees as of Feb. 5

650

number of World Fuel employees in Doral

200+

number of countries and territories where World Fuel does business

154

total number of World Fuel office locations

31 years

number of years since World Fuel was founded

2

number of years World Fuel's annual revenue has declined since 2000

MIKE SEEMUTH

Sources: World Fuel filings with the Securities and Exchange Commission and responses to interview questions

World Fuel Services Corp.

Headquarters location: 9800 NW 41st St., Doral.

What it does: Fuel distribution to aviation, marine

and land transportation carriers.

Worldwide employment (as of Feb. 5): 4,041.

Miami employment: 650.

2014 revenue: $43.3 billion.

Executives: President, chief executive officer and

board chairman: Michael Kasbar; executive vice

president and chief financial officer: Ira Birns.

Largest shareholders listed in 2014 proxy

statement: FMR LLC (13.6 percent), Ruane, Cunniff

& Goldfarb Inc. (9.1 percent), Clifton Park Capital

Management LLC (7.7 percent), Blackrock Inc.

(6 percent) and The Vanguard Group (5.4 percent).

World Fuel stock’s closing-price range in the year

ended March 30: $35.01 - $58.50.

Website: www.wfscorp.com.

Phone: 305-428-8000.

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