Euronav NV (EURN, Financial), which owns, operates, and manages a fleet of vessels for the transportation and storage of crude oil and petroleum products worldwide, was listed on the NYSE on January 23, 2015. In this short span of time, the stock has moved higher by 25.7%. However, the rally is not over for the stock and this article will discuss why Euronav still has upside from current levels.
Company Overview
Euronav is an independent tanker company with 27 VLCC vessels with an average age of 6 years, 23 Suezmax vessels with an average age of 10 years, 1 VPLUS vessel with an average age of 12 years, and 2 FSOs with an average of 12 years.
As of July 2015, Euronav had 75% of vessels in the spot market and 25% vessels in the fixed market, and I will discuss the importance of this point later in the article. For the first quarter of 2015, Euronav reported revenue of $205 million and an EBITDA of $131 million, representing a 93% and 185% growth on a year-on-year basis.
The Spot Market Boom
The oil tanker market has seen positive momentum due to decline in oil prices. The rationale behind this is that countries (China, in particular) have been storing strategic oil reserves at a lower price. This has created demand for oil tankers and this demand will sustain as long as oil prices remain low.
I feel that oil prices will not move strongly on the upside in the coming days as the Iran nuclear deal is being finalized. Commodity consumers will continue to take advantage of this and the demand for oil tankers will remain high.
Therefore, companies with high spot market exposure will benefit as spot market rates have jumped in the last few quarters. Euronav has 75% exposure to spot market rates and this will mean higher revenue and EBITDA in the future.
The breakeven rate (including debt service) for VLCC and Suezmax tankers is $27,000 and $22,000, respectively, and both spot rates are above $50,000 per day. From this point, it is clear that a majority of the company’s vessels are positioned for high EBITDA margin.
Acquisition Of New Vessels
On June 16, Euronav announced the acquisition of 4 VLCC fleet for a cost of $384 million. Euronav also has the option to acquire four more fleet for a cost of $392 million. The first confirmed VLCC will be delivered in September 2015, and January, March and May 2016.
With the addition of new VLCC carriers expected in 2015 as well as 2016, I expect that the company’s revenue and EBITDA growth will continue in 2016. If tanker markets remain strong, I also expect Euronav to acquire the four vessels under option. Therefore, the company’s growth strategy is aggressive.
Strong Financial Position
Euronav will be funding the vessel acquisition through debt, and the company has a debt of $1.1 billion as of March 2015. Since the EBITDA is likely to remain strong on high exposure to spot markets, further debt is not a concern. Further, a debt of $1.1 million means that Euronav has a debt to capitalization of 38%, giving the company strong financial flexibility for aggressive growth.
Euronav also has cash of $162 million as of March 2015 and the operating cash flow on an annualized basis can be in the range of $250 to $320 million. This will support the liquidity position and the company’s growth plan for 2015 and 2016.
Therefore, Euronav has a strong financial position backed by low debt to capitalization, low leverage, decent cash position and strong operating cash flows.
Final Words
Euronav stock has done exceedingly well since listing in 2015, and the company’s first quarterly results have also been exceptional after listing in the exchange. Considering strong momentum in the spot market for oil tankers, I expect quarterly results to remain healthy in the foreseeable future.
Euronav also has an aggressive growth outlook and this will support stock upside even in the coming days. If the company exercises the option for four more VLCC, the stock earnings will be revised and the stock will be re-rated.
Since this is a relatively new listing in the stock exchange, the stock has not caught investor attention, but I expect the company to attract investments if the strong outlook for crude oil market sustains. Investors can therefore consider fresh exposure to Euronav at current levels.
