The word "crash" is often associated with catastrophic outcomes, whether we are talking about an airplane, stock markets or commodity prices. However, when it comes to capital markets, a severe decline in prices might present lucrative opportunities for prudent investors. Some companies, on the other hand, benefit from these events due to the very nature of their business operations. Euronav EV (EURN, Financial) is one such company that is looking at eye-popping earnings growth numbers in the next few quarters thanks to the oil crash. An investment in the stock will likely provide stellar returns within the next year.
A top-down view of the opportunity
The oil price war between Saudi Arabia and Russia led to a massive influx of oil from both these producers to the global market. To make things worse, the demand for oil declined sharply as a result of the global lockdown. The combination of these two developments has resulted in an oil glut, and storage space is running out at alarming rates. For instance, Bloomberg reported on April 21 that more than 40 ships carrying oil are stranded in waters from Long Beach to San Francisco Bay as onshore storage facilities have run out of room. This is generally bad news for energy investors as oil prices tend to decline when there are no storage facilities available. But for tanker companies engaged in the ocean transportation of oil, this is a great opportunity to grow earnings as the ships become the obvious choice to store oil.
Euronav is poised to benefit from two fronts
Headquartered in Belgium, Euronav operates in many important regions, including the United States, Singapore, South Africa and Mexico, and is the largest independent tanker company in the world. According to company filings, Euronav owns 70 ships, including 42 supertankers that can carry 2 million barrels of oil each. In addition to managing its own fleet, the company cooperates with other established ship management organizations as well to cater to the demand in the energy market. According to company filings, Euronav serves the storage and transportation requirements of all the leading oil companies such as Exxon Mobil Corp. (XOM, Financial), Royal Dutch Shell (RDS.A, Financial) and ConocoPhillips (COP, Financial). These partnerships have been at the center of Euronav’s success.
The company, undoubtedly, is poised to benefit from the recent developments in the energy market. As long as the imbalances between supply and demand persist, Euronav will be able to charge unusually high rates from energy companies for using its vessels for storage purposes. The decline in manufacturing activities resulting from the global lockdown will likely be a factor for at least another couple months as well, which paints a very positive picture for Euronav.
Most of the ships owned by Euronav operate on a spot price basis, meaning the company negotiates the prices on a case-by-case basis. According to The New York Times, the cost per day to store oil at tankers operated by the company has risen to as much as $300,000, a massive increase from the $25,000 a day charged by Euronav in February. Both VLCC (very large crude carriers) and Suezmax vessels operated by the company charge a base rate of $25,000 per day. According to the latest data published by Euronav, an increase of $5,000 per day in the rent will lead to an increase of $112 million in net revenue and earnings before interest, taxes, depreciation and amortization.
Source: Company presentation
The unprecedented growth in rates charged by Euronav means the company is poised to report eye-popping revenue growth in the coming quarters. This is just one half of the story.
For now, the company is happily charging higher rates from energy companies. In the coming months, Euronav will see growth from another front as well. When business activities return to normal, industrial giants such as China and India will order large shipments of oil, and Euronav, as the largest tanker company, will be busy transporting stored oil to every corner of the world. As countries attempt to restore manufacturing activities, demand for oil will remain at elevated levels for a few months, leading to growth opportunities for the company.
Shares of Euronav have weathered the market crash better than some of the largest companies in the world. According to data from GuruFocus, the stock has appreciated 18% in the last 30 days, which coincides with the spike in rates charged by the company for the use of its ships to store oil. However, shares were still trading at a forward earnings multiple of just 4.5 on April 24, which is below the sector median of 9.17, according to data from Eikon. This suggests massive leeway for capital gains in the coming months. The dividend yield, on the other hand, is above 5%, which is an attractive return in this ultra-low interest-rate environment.
Recent comments by insiders confirm the thesis for Euronav
Many institutional investors have already identified this opportunity, and the New York Times contacted Euronav CEO Hugo de Stoop for his comments about the surge in demand for tankers. Summarizing the situation, Hugo said:
“We are one of the few industries making money in this period. The current market for vessels is totally and completely unusual. At some point, you are going to have to work through the hangover. In the meantime, we will enjoy this extraordinary period of time from an earnings point of view.”
The message is loud and clear. The absurd conditions in the energy markets have transformed into a massive opportunity for tankers to make record amounts of money.
Takeaway: Euronav is poised to deliver attractive returns in the next 12 months
These are unprecedented times, and some of the trends that we experience today might not prove to be long-term in nature. This is true for the spike in costs for storing oil for later deliveries. For investors, however, the best course of action is to identify and act on these types of contrarian opportunities.
Euronav is set to benefit from two fronts. First, the shortage limitations for crude oil will lead to robust demand for the company’s ships as these become an obvious choice for oil majors to store inventoru. Second, the eventual revival of economic growth will lead to a surge in demand for oil, and the company will be transporting stored oil to all parts of the world. These two positive developments will help Euronav beat the earnings estimates by handsome margins in the coming quarters, and year-over-year growth numbers will look very attractive once corporate earnings are released. This should help boost the share price of the company, delivering stellar returns to investors who act on this opportunity.
Disclosure: I do not own shares of any companies mentioned in this article.
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