We recommend the purchase of shares of Euronav (EURN, traded in New York and Belgium) which is an
operator of VLCC and Suezmax crude carriers. There are a number of reasons why we think this is a good
trade and, as with any shipping investment, there are a similar number of reasons why the trade may
not work out. However, we think the market for crude is oversupplied and will remain so for the
remainder of the year. Storage for crude is filling up worldwide and we think that at some point
(probably mid-year) floating storage may become the last and only remaining depository for crude for
many market participants and, in addition, the contango trade will contribute to a meaningful use of
tanker capacity once short dated crude prices fall relative to longer dated deliveries. At this point, spot
rates for tankers will rise enormously and shipping companies with crude carriers will post exceptionally
strong earnings and their stock prices will rise. Euronav has the largest inventory of spot tonnage
available and as such is one of the best plays on this investment theme. The upside from the trade could
come from spot rates for VLCC rates hitting 2008 levels of around $100,000 per day. If this happens, and
granted, things have to go right, Euronav would post run rate EBITDA of $1.7 billion. With an enterprise
value of around $2.3 billion this would represent a multiple of 1.3x not including the impact of cash flow
from debt pay down. Euronav’s shares could easily triple or quadruple under these circumstances and
we like this optionality. If everything goes wrong then Euronav will trade down for sure - 50% perhaps.
However, the distribution of outcomes makes this an appealing trade at this time. That being said, one
could argue that now is not a bad time to be investing in crude carriers regardless of the potential for
EURN owns 26 VLCCs, 23 Suezmax tankers, 1 ULCC, and 2 FSOs. Currently, EURN has 86% of its fleet
chartered in the spot market. At $11.50 per share, EURN has an equity market capitalization of about
$1.8 billion and an enterprise value of about $2.8 billion. With VLCC spot rates of just under $40,000 per
day and Suezmax spot rates of just under $35,000 per day, below the current YTD level for the industry,
EURN should produce EBITDA of about $380 million, more or less the current consensus level. EURN
trades at 7.4x EBITDA. Comparables such as DHT, FRO, NAT, NNA and TNK all trade at similar levels and
offer a way to play the crude storage/shipping trade, but not in as pure a way as EURN given EURN’s
exclusive crude carrier focus and high exposure to spot rates.
For EURN, $380 million of EBITDA corresponds to net income of about $150 million for a PE of 12x.
However, because EURN doesn’t pay much in the way of taxes, free cash flow at these levels is about
$350 million before expansion (new vessel) capital expenditures. That’s a multiple of about 5.1x.
EURN publishes its sensitivity to spot rates in its presentations as shown in the following link:
Page 5 shows the Company’s sensitivity to spot rates. Note that at current spot rates, EURN would
report EBITDA of almost $500 million, quite a bit higher than current consensus. The far right column
shows what might happen if rates spike.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
1. Any increase in spot rates, especially if sustained.