EURONAV EURN
March 16, 2015 - 11:56am EST by
lindsay790
2015 2016
Price: 11.50 EPS 0 0
Shares Out. (in M): 159 P/E 0 0
Market Cap (in $M): 1,830 P/FCF 0 0
Net Debt (in $M): 961 EBIT 0 0
TEV ($): 2,792 TEV/EBIT 0 0

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  • Shipping
  • energy transportation
  • Energy
  • Oil and Gas

Description

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
floating storage.
 
The Company
 
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:
 
http://investors.euronav.com/~/media/Files/E/Euronav-
IR/presentations/2015/DNB%20conference%20March%202015.pdf
 
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.
 
 
 
Factors That Make The Trade Appealing
 
Lack of Storage - There has been a lot of chatter about the possibility of crude storage filling up. The
following article quantifies storage levels at various points in the world:
 
http://www.wsj.com/articles/oil-glut-sparks-latest-dilemma-where-to-put-it-all-
1425577673?KEYWORDS=crude+storage
 
So, if storage gets full to capacity what happens? Storage on tankers starts to occur? Obviously this
would be very good for tanker rates. What if the impact is a drop in short dated crude prices without
storage necessarily “filling up”? This would be supportive of the contango trade where traders buy crude
on the spot market, store it for 6 months to a year on a tanker, and then deliver it having already sold
the futures contract at a higher level. This is also good for tanker rates. The last time the contango trade
persisted for any length of time in 2008 some 10% of tanker capacity was used for storage. High
spot rates also persisted for a while at the time.
 
Vessel Supply Remains Limited Compared to Demand Net vessel supply is expected to be around the
1% level for the next two years. Combined with increased ton miles and a limited order book relative to
historical levels, low vessel supply should help maintain rates, or at least mean that they have limited
downside.
 
Structural Changes in the Industry Mean Increased Ton Miles Some factors contributing to this include:
 
1. Even with all the shale production, US refineries are continuing to import heavy crude owing to
feedstock requirements. Light crude imports are lower. Those light crude imports are being
redirected from West Africa to Asia resulting in increased ton miles.
 
2. Middle Eastern refinery expansion is resulting in fewer exports from the region which is causing
crude to be redirected from Atlantic markets to Asia more ton miles.
 
3. Demand from China and India and other non-OECD markets owning to refinery expansion and
stocking is also increasing ton miles.
 
Factors That Could Make The Trade Go Wrong
 
Ship Owners Overbuild This is entirely possible and the industry has shown a complete lack of
discipline in the past. However, given the time required to build new vessels, supply will take a while to
arrive.
 
Ship Owners Start Steaming Faster This is another distinct possibility that would effectively increase
vessel supply. Ship owners say that they will maintain discipline, but if the economics of steaming faster
start to make sense for one operator and others start to follow suit any “discipline” may be short lived.
 
 
 

 

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.

Catalyst

1. Any increase in spot rates, especially if sustained.
 
 
2. Any signs that crude storage is filling up, steepening of the crude futures curve, and indications
that the contango storage trade is being exploited.
3. For EURN in particular, re-initiation of a dividend or other capital returns to shareholders.

 

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    Description

    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
    floating storage.
     
    The Company
     
    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:
     
    http://investors.euronav.com/~/media/Files/E/Euronav-
    IR/presentations/2015/DNB%20conference%20March%202015.pdf
     
    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.
     
     
     
    Factors That Make The Trade Appealing
     
    Lack of Storage - There has been a lot of chatter about the possibility of crude storage filling up. The
    following article quantifies storage levels at various points in the world:
     
    http://www.wsj.com/articles/oil-glut-sparks-latest-dilemma-where-to-put-it-all-
    1425577673?KEYWORDS=crude+storage
     
    So, if storage gets full to capacity what happens? Storage on tankers starts to occur? Obviously this
    would be very good for tanker rates. What if the impact is a drop in short dated crude prices without
    storage necessarily “filling up”? This would be supportive of the contango trade where traders buy crude
    on the spot market, store it for 6 months to a year on a tanker, and then deliver it having already sold
    the futures contract at a higher level. This is also good for tanker rates. The last time the contango trade
    persisted for any length of time in 2008 some 10% of tanker capacity was used for storage. High
    spot rates also persisted for a while at the time.
     
    Vessel Supply Remains Limited Compared to Demand Net vessel supply is expected to be around the
    1% level for the next two years. Combined with increased ton miles and a limited order book relative to
    historical levels, low vessel supply should help maintain rates, or at least mean that they have limited
    downside.
     
    Structural Changes in the Industry Mean Increased Ton Miles Some factors contributing to this include:
     
    1. Even with all the shale production, US refineries are continuing to import heavy crude owing to
    feedstock requirements. Light crude imports are lower. Those light crude imports are being
    redirected from West Africa to Asia resulting in increased ton miles.
     
    2. Middle Eastern refinery expansion is resulting in fewer exports from the region which is causing
    crude to be redirected from Atlantic markets to Asia more ton miles.
     
    3. Demand from China and India and other non-OECD markets owning to refinery expansion and
    stocking is also increasing ton miles.
     
    Factors That Could Make The Trade Go Wrong
     
    Ship Owners Overbuild This is entirely possible and the industry has shown a complete lack of
    discipline in the past. However, given the time required to build new vessels, supply will take a while to
    arrive.
     
    Ship Owners Start Steaming Faster This is another distinct possibility that would effectively increase
    vessel supply. Ship owners say that they will maintain discipline, but if the economics of steaming faster
    start to make sense for one operator and others start to follow suit any “discipline” may be short lived.
     
     
     

     

    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.

    Catalyst

    1. Any increase in spot rates, especially if sustained.
     
     
    2. Any signs that crude storage is filling up, steepening of the crude futures curve, and indications
    that the contango storage trade is being exploited.
    3. For EURN in particular, re-initiation of a dividend or other capital returns to shareholders.

     

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