Euronav - A Company That Could Profit From $10 A Barrel Oil

| About: Euronav (EURN)


Why is Euronav making so much money?

Tanker operators are a value investment.

The supply of oil is exceeding the demand, which will keep prices low.

Investors do not have to be afraid of $10 a barrel oil. There are actually some companies that stand to make a lot of money from the oil glut. Case in point: the tanker operator Euronav (NYSE: EURN), which has seen its profits and revenues soar in the last year.

Euronav saw its revenue increase by $405.83 million between September 2014 and September 2015. Euronav reported revenues of $352.97 million for third quarter 2014 and revenues of $758.8 million for third quarter 2015. That revenue increase gave Euronav an astonishing profit margin of 34.99% for the third quarter of 2015.

It also gave a big boost to Euronav's income, which increased by $306.33 million between third quarter 2014 and third quarter 2015. In September 2014 Euronav reported a dismal net income figure of -$65.13 million, but by September 2015 that number had grown to $241.5 million.

Euronav also saw its cash from operations increase from an anemic $14.78 million in December 2014 to $368.5 million on September 2015. That means Euronav's cash from operations grew by $353.72 million in just nine months. This company is growing fast, and it is generating a lot of cash in the process. Euronav's ability to capture that cash is still rather limited however; it reported a free cash flow of just $64.56 million on September 30, 2015.

Why Is Euronav Making So Much Money?

The reason Euronav is making so much is simple: It is in the business of shipping oil. More oil than ever is being produced, and that oil needs to get to market, which is where Euronav's fleet of around 52 tankers comes in.

World oil production and consumption are increasing, and those increases are driving up the demand for oil. The U.S. Energy Information Administration, or EIA, estimates that global inventories increased by 1.9 million barrels a day in 2015. The EIA estimated global oil production for fourth quarter 2015 at 95.95 million barrels a day and consumption at 94.28 million barrels a day for the same period.

The agency forecasts that world oil consumption will increase to 95.87 million barrels a day in fourth quarter 2016 and 97.31 barrels a day in fourth quarter 2017. The EIA also predicts that production will increase to 96.33 million barrels a day in fourth quarter 2016 and 97.31 million barrels a day in fourth quarter 2017.

This means that the supply of oil is exceeding the demand, which will keep prices low. Yet low prices will fuel more demand, which will drive more production. More importantly, producers like Saudi Arabia will have to pump more oil simply to pay the bills. This creates more business for tanker companies like Euronav, which is what is driving their massive revenue increases.

There is also the possibility the EIA's predictions might be low, because two major oil producers, the United States and Iran, are resuming oil exports. The U.S. is shipping oil, and Iran will soon start pumping again at full tilt now that the nuclear sanctions have been lifted. CNBC reported that Iran could produce and ship as much as 500,000 barrels per day. The U.S. lifted its oil export ban in December, and producers have also started oil sales to Europe and China. Recent news articles indicate that US oil producers are facing a massive drop in revenues which will force them to increase exports just to stay afloat.

Not surprisingly, this means more demand for oil tankers at a time when tanker operators' expenses are falling because fuel prices are going down. Oil tankers run on, you guessed it, oil.

Tanker Operators Are a Value Investment

This makes Euronav and tanker operators a definite value investment. These companies' cash flow is skyrocketing, yet they are still very cheap.

Euronav was trading at $10.09 a share on January 15, 2015. Euronav had a market capitalization of $1.606 billion and an enterprise value of $2.661 billion on the same day, meaning that it was undervalued.

Investors looking for a way to ride out falling oil prices should take a good look at tanker operators such as Euronav. These simple, low-cost companies are making a lot of money right now and will continue to do so as long as oil prices stay low.

There is no reason for shrewd value investors to be afraid of oil prices. Euronav's revenues show us that there are some good companies that are positioned to make a lot of money from cheap oil.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.