Euronav NV (EURN, Financial), an oil tanker company, has seen a 34% correction in the past year. This correction is primarily due to crude oil tanker rates declining and oil market challenges.
The weakness in the stock, however, is temporary and the company is expected to provide good long-term opportunities.
Company overview
Euronav, along with its subsidiaries, owns, operates and manages a fleet of vessels for the transportation and storage of crude oil and petroleum products worldwide. The company operates through two segments: tankers and floating and storage and offloading (FSO) operations.
The company currently has a total fleet of 55 vessels, of which 21 are Suezmax, 29 are VLCC, one V – plus and two FSO, with an average age of eight years.Â
Euronav operates its fleet in both the spot and the term-contract market. Most of the company’s VLCC and 1 V-Plus tankers are operated in the international pool and majority of the Suezmax fleet is fixed on long term. The fleet is managed through wholly-owned subsidiaries Euronav Ship Management SAS, Euronav SAS and Euronav Ship Management (Hellas).
In order to grow its business, the company has acquired 25 VLCCs in the last 30 months and returned more than 80% of the annualized profit and loss to shareholders in the last two years. All the vessels are well positioned to generate strong cash flow and contribute to debt payment.
Analysis of fourth-quarter 2016 results
In fourth-quarter 2016, the company witnessed a decline in revenue due to an unfavorable spot-rate environment in the third and fourth quarters. The VLCC and Suezmax tankers witnessed more than 50% decline in their spot rates.
One of the factors impacting spot rates is OPEC's decision to cut down on production, resulting in a relative decline in demand for tankers. Further, several new tankers became operational in the second half of 2016. This has resulted in some demand-supply mismatch, translating into lower spot rates.
Considering the market will gradually stabilize based on increasing oil demand, I believe the outlook for Euronav is positive and the company will generate good returns.
As discussed, the income statement has been hit due to conditions of the global economy and the oil market. Despite these conditions, the company has managed to maintain a strong balance sheet and cash flow statement. Euronav has total debt of $966 million as of Dec. 31, 2016, which is well below the company’s imposed limits of 45% marked to market. The sale and leaseback for four middle-aged VLCCs has given the balance sheet further flexibility and improved the company’s liquidity position.
Total liquidity of $597 million is also strong with cash and cash equivalents of $240 million, $297 million in undrawn secured revolving credit and a $60 million credit line. The company has loan repayments of $119 million in the next year and a capital expenditure obligation of $212 million, which can be easily met by the available liquidity. The company plans to fund half of its capital expenditures through a loan of $190 million, providing further flexibility of available cash for dividends and creating shareholder wealth.
Even in difficult times, Euronav has decent fundamentals, which presents a good buying opportunity in a stock that has corrected sharply. Going forward, I expect gradual improvements in spot rates, which will positively impact liquidity and fundamentals.
Economic impact on Euronav
Euronav has a number of vessels lined up for delivery in fiscal 2017, with a majority of them being delivered in the first half. The graph below shows the delivery of VLCCs over the last two years and its comparison with the equivalent rate of the same.
The oversupply in challenging market conditions should be a matter of concern for Euronav and competitors like Teekay Tankers (TNK, Financial) and Nordic American Tankers (NAT, Financial) as it would have considerable impact on the spot rate. The company might face some headwinds in the short term due to OPEC’s production cut. The delivery of 40 additional vessels in 2017 will lead to an oversupply.
According to the International Energy Agency, the demand for oil is expected to increase by1.3 barrels per day in fiscal 2017. This will eventually result in an increase in the oil supply. Limited financing availability will lead to restricted contracting availability, leading to more disciplined market conditions that would positively impact the tanker market in the long run.
Valuation
Euronav is currently trading at an EV/EBITDA ratio of 5.1, which is considerably attractive compared to Tsakos Energy’s (TNP, Financial) EV/EBITDA ratio of 8.0 and Nordic American Tankers' EV/EBITDA ratio of 7.0. With a current price-earnings ratio of 4.8, the stock is trading below the industry average. Moreover, with new vessels to be delivered in 2017 and market conditions expected to gradually stabilize, I believe the stock is worth accumulating.
Conclusion
Euronav is currently facing several challenges in terms of decreasing spot rates and oil production cuts. These are expected to be short-term headwinds, however, and with the oil supply likely to increase, the demand for tankers will be restored. Considering Euronav has a strong liquidity and debt profile with new vessels lined up for delivery, the company is positioning itself well to outperform in the long run.
Disclosure: No position in the stocks discussed.
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