Euronav (EURN, Financial) owns, operates and manages a fleet of vessels that are involved in the storage of crude oil and petroleum products. Euronav's owned and operated fleet consists of 53 double-hulled vessels: one V-Plus, two FSO vessels (both owned in 50%-50% joint venture), 27 VLCCs (of which one is in 50%-50% joint venture) and 23 Suezmax (of which four are in 50%-50% joint venture).
For 1H15, Euronav reported revenue of $421 million, representing an increase of 106% compared to 1H14. For the same period, the company reported EBITDA of $274 million, representing an increase of 299% as compared to 1H14. This article discusses why strong growth will sustain Euronav, making it an attractive investment.
The first point to note is that Euronav has vessels in the spot market, and this is the key reason for robust results. For 1H15, the average VLCC spot rate was $53,370 per day as compared to time a charter rate of $41,705. Even for Suezmax vessels, the average spot rate for 1H15 was $42,364 as compared to time a charter rate of $37.954 per day. Therefore, a strong spot rate is the revenue and EBITDA driver for Euronav, and strong spot rates will remain as long as oil prices remain weak. The reason is storage of oil in tankers and increased demand for oil transportation for storage as strategic reserves when prices are low.
While the above factor ensures that the company’s revenue and EBITDA will remain robust in 2H15, the acquisition of new vessels ensures that revenue and EBITDA growth will be strong in 2016. On June 16, Euronav announced the acquisition of four VLCCs that are slated for delivery in September. As these vessels are deployed in the attractive spot markets, the company’s revenue will trend higher from 4Q15 onwards. In addition to these four VLCCs, Euronav has the option to acquire four more vessels, and I believe that Euronav will exercise this option considering the company’s aggressive growth strategy at a time when the markets are attractive.
From a balance sheet perspective, Euronav does have $1.2 billion in debt, but I don’t see that as a concern considering the point that the annualized EBITDA for 2015 is likely to be $550 million and the EBITDA for 2016 can be well in excess of $600 million. Therefore, debt servicing will be smooth, and strong operating cash flows will ensure that the new vessel acquisition is funded partially through internal cash flows as well. I don’t see prospects of further equity dilution even with aggressive growth plans, and this is yet another positive point.
Considering the factors discussed, it is not surprising to see Euronav trend higher by 17% in YTD15. The upside is not over, and the company has stated that the 3Q15 VLCC spot rate is above $60,000 per day, which is higher than the 1H15 spot rate of $53,370 per day. Therefore, strong financial performance will continue, and this will take the stock higher. In 4Q15, Euronav’s earnings will get an additional boost from four new VLCCs.
The Energy Information Administration expects oil prices to average $59 per barrel in 2016 and if this holds true, oil will witness only a marginal recovery in the coming year. This will ensure continued demand for tankers and even if spot rates stagnate at current levels, Euronav will deliver strong results and cash flow.
Therefore, the rally for the stock is far from over. Investors can consider exposure to the stock at current levels with a 1-2 year investment horizon.