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Euronav Looks Attractive Amid Challenges

Near-term headwinds present a long-term buying opportunity

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May 15, 2017
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Companies in the oil tanker industry have seen mixed fortunes in the last two to three years. At one point, spot rates were surging and cash flows were swelling for companies like Euronav NV (

EURN, Financial) and Teekay Tankers (TNK, Financial). With an oversupply in the tanker market, however, spot rates dropped and stocks declined across the industry.

While day rates have not seen meaningful recovery after the steep correction, the oil tanker industry has seen rates stabilize, which is reflected in the stock price performance of companies in the sector. For instance, Euronav has been sideways year to date as market participants wait for further developments in terms of day rates and potential growth opportunities.

This sideways movement for Euronav is a good accumulation opportunity as the company has strong growth potential.

Increasing ton miles

Ton miles are gradually increasing for the oil tanker market, which will increase demand for tankers and also help boost the number of long-term contracts, which are vital for clear revenue visibility.

To put things in perspective, the average distance from Latin America to China is 11,500 miles, which takes an average of 44 days to travel. With large demand likely to come from China and India in the coming years and with major exports from Latin America, I see strong demand for oil tankers.

Further, it is also important to note per capita consumption of oil is low in countries like India and China. With steady economic growth, I expect increasing oil demand from these two countries will boost growth in the tanker industry.

Overall, there are short-term challenges for the oil tanker industry in the form of oversupply and production cuts from OPEC. The long-term outlook for the industry, however, is positive and Euronav is likely to benefit.

Fundamentals remain strong

In the last few quarters, spot rates for tankers have seen a sharp decline, impacting the stock price for Euronav and other players in the industry. Even at current tanker rates, however, the company is well positioned to report decent numbers, which will help fundamentals sustain.

To put things in perspective, average VLCC rates (spot rates) declined to $40,528 for first-quarter 2017 compared to $60,638 in first-quarter 2016. For the same period, the Suezmax rates declined to $23,957 from $38,386. Even with the rate decline, however, the company reported operating cash flow of $75 million. This translates into an annualized cash flow of $300 million.

Another important point to note is spot rates declined in first-quarter 2017 as compared to first-quarter 2016, but time charter rates for VLCC increased marginally over the same period. As companies find a finer balance between spot and time charter markets, I expect volatility in earnings to decline.

It is also worth mentioning Euronav had cash of $144 million, an undrawn credit facility of $411 million and an unsecured credit line of $60 million as of March 2017. With a total liquidity buffer of $620 million, the company is fully financed for the next 12 to 24 months.

Looking further into the company’s fundamental health, Euronav had long-term debt of $914 million as of March 2017. For the same period, the company reported vessel value of $2.5 billion. This implies loan-to-value of 36% and gives Euronav high financial flexibility.

Conclusion

Euronav has been acquiring tankers and steadily expanding its fleet. While there are near-term headwinds for the industry, I see this as a good opportunity for long-term investors to consider exposure to the stock.

Further, Euronav has an attractive breakeven cost per tanker, which will ensure cash flows remain decent even in current market conditions. As day rates firm up, I expect robust cash flows and higher dividends.

Disclosure: No positions in the stocks discussed.

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