Euronav has a large fleet of crude tankers, consisting of 32 VLCCs, 23 Suezmaxes and a 50% ownership in two FSOs on long term charters. The company enjoys a large liquidity reserve and could play to role as consolidator in the current trough, as the company has done in earlier cycles. Despite being one of the best run companies in the industry and currently priced at P/NAV 0.96, we expect continued low earnings and further falling asset prices to weigh on the share price. We initiate coverage with a SELL recommendation and target price of USD 6.2/sh (-21%).
Valuation: We calculate a current NAV of USD 8.1/sh, but see downside due to continued falling asset prices. Our target price of USD 6.2/sh is based on a weighted average of current/future NAV and mid-cycle multiples in 2019E.
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.