There is no doubt that 2015 has been one of the best years since 2008 for oil tanker companies, and all the companies in this sector have reported strong revenue growth coupled with strong cash flows. Toward the end of 2015 and into 2016, these oil tanker companies witnessed stock price correction. This is a good opportunity to buy some quality names in the sector.
Coming first to the reason for correction in oil tanker companies – The spot rates have been the key revenue driver in 2015, and toward the beginning of 2016 spot rates declined from peak levels of 2015. This is the reason for oil tanker stocks declining. There are reasons behind the correction in spot rates, and it relates to the supply of VLCC and Suezmax tankers in 2016.
For 2016, Euronav January presentation indicates that 45 VLCC tankers and 27 Suezmax tankers are scheduled for delivery. As these tankers increase the supply, the spot rates are likely to moderate. However, there are two factors that are likely to partially offset the increase in tanker supply. First, there will be scrapping of oil tankers and second, the demand for oil tankers will increase as oil prices remain low and as there is need for strategic storage capacity for oil.
Spot rates will moderate in 2016 as compared to 2015, but spot rates will remain well above the break-even rates for VLCC and Suezmax tankers. Therefore, oil tanker companies will continue to enjoy strong EBITDA margin and cash flow through 2016.
Coming to Euronav, the company reported strong 4Q15 numbers with revenue of $226 million as compared to $145 million in 4Q14. During the same period, the company reported EBITDA of $161 million as compared to EBITDA of $68 million for 4Q14. With the company having 80% exposure to spot markets and with day rates sustaining at strong levels in 1Q16, strong results for the quarter can be expected.
The reason for expecting strong results for 1Q16 is the fact that the delivery of VLCCs in 2016 is largely skewed toward the second half of the year. While spot rates might remain volatile, the real impact of the supply factor will be seen after June.
Another factor that will provide medium- to long-term stability to day rates is the fact that crude exports ban was lifted from the U.S. in December 2015. Due to lack of loading infrastructure, the impact on incremental ton-miles will not be immediate, but this opens up long haul tanker market potential for the long term.
From a balance sheet perspective, Euronav had debt of $1.05 billion as of December 2015. Considering the company’s FY15 EBITDA of $562 million, the company’s leverage is less than 2, and this implies strong fundamentals. Further, even if EBITDA moderates in 2016, the company’s leverage will still remain well under control. On The EBITDA interest coverage front, Euronav had cash interest outflow of $51 million for FY15 and this implies EBITDA interest coverage of 11.0. Clearly, the company’s credit metrics are robust and likely to remain strong through 2016.
In conclusion, the tanker supply side factors might impact spot rates (primarily in the second half of 2016), but the overall market fundamentals for oil tanker companies remains strong and is likely to remain strong as long as oil prices remain sideways to lower. With 20% correction in the stock in YTD16, it’s a good opportunity to consider exposure to this quality name.
Disclosure: No positions in the stock.