Originally set up as a well-timed asset play in early 2014, the company managed to divest a small portion of its fleet before the cycle turned to recession in 2016. Thus, the focus has shifted to operations ahead of the next cyclical upturn, which we expect to materialize from 2019E. With further fall in asset prices ahead and the consistent share illiquidity factored in, we initiate coverage of Tanker Investments with a SELL recommendation and target price of NOK 33 (-25%).
The company was originally set up as an asset play in early 2014, and sought to unhand assets as the cycle matured. After the sale of its VLCCs in 2015, and as asset values have fallen some 30% since the peak that same year, the company has changed strategy and aims at operating its 10 Suezmaxes and 8 Aframaxes (of which two are LR2s) through the trough. Except for two Suezmaxes and two Aframaxes currently on 1y timecharters at USD 17-19.5k/d, the fleet is trading in the spot market.
TIL retains a positive cash balance on our estimates (USD 4m in 4Q18), but liquidity could become a concern if our base case were to undershoot. We estimate a cash break-even close to USD 19k/d in 2017, with some USD 6k/d consisting of debt amortization. However, the company has support in its strong balance sheet, with a current net LTV at ~59% as of now and ~64% by end-‘17E assuming asset prices fall another 10%.
Valuation: The company has historically been trading at a discount to NAV of approximately 20-30%, partly due to the illiquidity of the share. We estimate underlying values of NOK 55/sh based on a weighted average of current/future NAV and mid-cycle multiples in 2019E, but apply a 40% discount to reach our NOK 33 target price. This discount reflects the historical discount to NAV which is likely to increase as we approach the cyclical trough.
Market overview: After enjoying a brief peak in 2015, oil tanker earnings were soon subdued again as overly eager owners contracted too many ships in the cyclical expansion, resulting in a rapidly increasing net fleet growth from 1Q16. The elevated supply growth persists, with a net fleet growth of 2.0% in 1Q17 alone. We forecast net fleet growth of 7% in 2017E, 4% in ‘18E and 2% in ‘19E. Although supply growth in 2019E implies a pivotal point in the cycle, recent increase in contracting (annualized YTD 5% of the fleet, 336% above same period 2016) could hamper a potential recovery in 2019.
We forecast a low but steady demand growth of 3% in 2017E, 4% in ‘18E and 5% in ‘19E. Although implied demand growth in 2016E was negative, US crude oil imports on a tonne-mile basis increased some 18% and has continued the trend YTD. However, we expect the tonne-mile growth to abate or even reverse going forward as consumption growth is muted while recent increase in the rig count will likely increase domestic production (see graphs below). Looking to China, crude oil imports on a tonne-mile basis increased around 14% in 2016E, but we expect the growth to subside somewhat as leading indicators point to a cooling of the Chinese economy.
In sum, we expect utilization to fall 3%p to 82% in 2017E, down another 1%p in ‘18E before the recovery starts in ‘19E with utilization rising 2%p to 83%. Given the forward-looking nature of share and asset prices, and the historical significant relationship between the two; we forecast 3Q17E-2Q18E to represent the share price trough. More specifically, we expect that increasing earnings will lead to rising asset and share prices from 2H18E, and believe just prior or just after the next winter season (circa Oct’17-Feb’18) to be an opportune moment to BUY, all else equal.