In the broad energy sector, there have been more losers than gainers.
Oil and gas exploration stocks, onshore and offshore drilling companies and offshore helicopter service providers, among others, have been beaten down in the carnage since the second half of 2014. However, companies in the oil tanker segment have been surging as a result of significant increase in tanker rates since 2014. As oil prices declined, countries have rushed to create strategic oil reserves and this has created strong demand for tankers in the spot market.
This article discusses the medium-term prospects for Euronav (EURN, Financial), a crude oil tanker storage company. The article discusses why spot rates will remain robust and the other factors that will keep the tanker market robust. At least for the next 12 to 14 months, Euronav is a good investment as the company provides prospects of capital appreciation as well as robust dividends.
Since I have mentioned the spot rate factor as the key stock upside and dividend trigger, I will elaborate on that point first. As of September, Euronav had 80% of its fleet in the spot market, and this makes it even more important to discuss the spot rate current trend and outlook.
For 3Q15, the average spot rate for VLCC was $52,368 per day as compared to $24,661 per day in 3Q14. Similarly, the Suezmax spot rate was $40,048 as compared to $21,737. Clearly, spot rates have surged in the last 12 months, and this has boosted the company’s revenue and EBITDA. It is also important to note that for 4Q15, 46% of the VLCC has been booked at $65,000 per day and 61% of the Suezmax tankers have been booked at $34,600 per day. Therefore, 4Q15 results are likely to remain robust.
As long as oil prices remain low, the demand for tankers will sustain (for strategic reserves), and this will keep spot rates healthy. I must mention here that a net of 39 VLCC tankers and 25 Suezmax tankers are likely to be added to the markets in 2016. This can have some negative impact on spot rates with strategic reserves-driven demand and the increasing number of refineries in Asia being the offsetting factors.
However, it is important to note that the break even for VLCC (including debt service) is $27,000. Some moderation in day rates will still keep the EBITDA margin robust. Similarly for Suezmax tankers, the break even (including debt service) is $22,000.
It is also important to note that in 2008, Euronav had 43% fleet in spot market and 57% on fixed charter contracts. The point I am trying to make is that the company can swiftly change its fleet allocation strategy based on market conditions.
Coming to the dividends, Euronav paid 62 cents in dividends in September in addition to a 25-cent dividend paid in May. Even if a final dividend of another 25 cents is considered, Euronav will have a total payout of $1.12, translating into dividend yield of 8.1% at current stock price of $13.8 per share. This dividend payout is sustainable, and with delivery of four more VLCCs in 2016, the dividend payout can be higher than 2015. With spot market rates likely to remain attractive, Euronav is certainly an interesting dividend stock to consider at least for the next 12 to 14 months.
From a balance sheet perspective, Euronav has total debt of $1.2 billion, but I don’t see that as a concern considering the fact that the company generated $402 million in EBITDA for the first nine months of 2015. This translates into an annualized EBITDA of $536 million and implies smooth debt servicing and robust financial flexibility.
Euronav is an interesting stock pick considering the current industry outlook and the company’s dividend payout. Investors are likely to gain through capital appreciation besides a healthy dividend payout.
Disclosure: No positions in the stock
