Euronav (EURN, Financial) has had a rough 2016 as the stock has declined by 48%. Even after the deep correction, there are several reasons to remain cautious on this owner and operator of oil tankers.
The broader tanker industry has witnessed challenging times this year. For example, Teekay Tankers (TNK, Financial) stock has declined by 69% for the year to date and DHT Holdings (DHT, Financial) has also slumped by 55%. Considering other players in the industry, Euronav's stock performance has been relatively better.
When oil tanker stocks were surging higher in 2015, the key factor was spot rates trending higher. However, spot rates moderated in the beginning of 2016 and the downtrend has sustained. This is the single most important factor for depression among oil tanker stocks.
Just to put things into perspective, Euronav reported an average very large crude catcher (VLCC) spot rate of $27,100 for the third quarter as compared to $52,368 for the third quarter of 2015. For Suezmax tankers, the average spot rate for the third quarter was $19,045 as compared to the 2015 spot rate of $40,048. With a sharp decline in spot rates, the EBITDA and cash flow has also slumped. It is important to mention here that Euronav (as well as other tanker companies) had high exposure to the spot market and limited exposure to time charter rates.
There are several factors that have impacted spot rates that will explain why investors should remain cautious on Euronav for the foreseeable future. The first point is that the scrapping of tankers has been limited in the industry and the second point is there have been significant new tanker deliveries coming in the second half of 2016. While new orders for tankers has declined, the tanker supply remains on the higher side and is likely to impact spot rates in the coming quarters.
Another factor is that spot rates surged when oil was trending lower, as the demand for strategic reserves was swelling. However, with oil inching higher and with expectations of production cuts in the foreseeable future, I expect the demand for strategic reserves to decline on a relative basis. With these two factors in consideration, I believe that investors can remain in the sidelines even after the stock has witnessed meaningful correction.
Despite advising caution, Euronav still has robust fundamentals and the stock can become interesting in the next few quarters as the markets discount the concerns of oversupply. I am suggesting a three to six month wait because there will be further clarity on the supply side, hence providing stability on spot rates.
Coming to the company’s liquidity and fundamentals, Euronav has $111 million in cash and $299 million in available facility as of the third quarter. Further, with debt-to-capitalization of 40% and loan-to-value of 48%, Euronav has strong financial flexibility in challenging times.
From a debt servicing perspective, Euronav reported EBITDA of $69 million for the third quarter, which was a depressed quarter. Considering annualized EBITDA of $280 million, the EBITDA interest coverage ratio is likely to remain well over 2.0x even in current market conditions. Therefore, I do not see debt servicing as a concern and with the current liquidity buffer, the company is well positioned to navigate the challenging times.
The global economy has been weak, which has translated into sluggish oil production growth. Once demand picks up in emerging markets in Â Asia, Africa and Latin America, I expect the tanker industry to recover. Further, I expect more long-term contracts that will ensure more revenue and cash flow stability than spot market operations. Overall, investors need to remain cautiously optimistic on Euronav as the next three to six months might present a good buying opportunity.
Disclosure: No positions in the stocks discussed.
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