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Market observer with legal background and interest in financial services, physical commodities trading, shipping and irrational exuberance. Values entrepreneurship and good governance, may also use some behavioral investment/contrarian criteria.
  • Some Thoughts on Euronav 7 comments
    Sep 5, 2011 10:07 AM | about stocks: EONVF.PK, EONVY.PK, FRO, OSGIQ.PK, TNP, NNA
    This is a small summary of Euronav SA. a tanker company principally traded in Euronext Brussels even if it is also listed in the U.S. pink sheets. There is no liquidity in the pink sheets and this note is not  really directed to U.S. investors unless they maintain Euro accounts.

    I developed an interest in Euronav by chance, when looking, more as an academic exercise than anything else, at the depreciation policies of listed tanker owners: http://seekingalpha.com/instablog/927562-adjusted-return/190576-depreciation-policies-for-some-listed-tanker-companies-euronav-an-outlier I found that Euronav uses a very conservative - or extreme - depreciation policy that reduces reported income.

    This post is more intended to lay down my personal thoughts on this name rather than present an investment rationale or draft an SA article. I intend to update it as long as I am invested in the company. It is necessarily elliptic.

    Euronav - a Small Summary
     
    Euronav was spun off from Compagnie Maritime Belge (CMB) in 2004 and since then has never actually sold stock to raise funds (only a now underwater convertible in 2009).

    Its main shareholders are two strong, traditional shipping families, the Saverys of Belgium, who also control CMB (and also gas carrier company Exmar) and Peter G. Livanos of Ceres Hellenic, who in 2005 contributed a 16-strong fleet to Euronav consisting mainly of Suezmaxes.

    The Saverys are members of the very tightly knit Belgian business elite, a fact reflected in the composition of the boards of their companies. Peter G. Livanos is part of the “old-money”, conservative, inter-married Greek shipowning community living in London, Lausanne or Monaco, who would rather ski naked down a Gstaad ski slope than open his companies' books to public investors. His other interests include DryLog, focused on dry-bulk shipping, and GasLog, a fast-growing LNG carrier owner.


    Euronav was a founding member of the Tankers International VLCC pool together with OSG while most of its Suezmaxes are put on long term charters. Euronav fully or partly owns 39 vessels, including two giant Floating Storage and Offtake units and five newbuildings on order. The average age of its VLCCs and Suezmaxes is below 9 and 7 years respectively - a young fleet. A summary of the company can be found at http://www.euronav.com/Documents/IR/Presentations/110429%20KBC%20Investor%20presentation%20Hugo.pdf. 
    It has made good profits during the boom 2004-2008 years, distributing good dividends even with a low payout policy out of income, not cashflows (an income reduced by extreme depreciation). But the point is to see what their position is in an oversupplied tanker market.

    Thoughts Going Forward

    Over the last couple of months Euronav has been trading at some 50% of a book equity standing above $1b at end June 2011, equity which has been kept honest by extreme depreciation. The 50% share price drop since the beginning of the year is comparable with the drop in OSG shares and less pronounced than Frontline's.

    After booking a gain of some $22m in Q1 from the sale of the 1999-built Pacific Lagoon, Euronav's H1 loss was limited to around $5m. Shareholders' equity therefore remains relatively unchanged at around $1,073m while its market value hovers around $420m. Net debt at 20 June 2011 was around $1,200m. 

    Euronav paid down $150m of debt, finance lease and derivative liabilities in H1 while also taking a $83m depreciation charge. Cash-flows after debt service was $38m. Due to cash being used to settle derivatives during H1 and reducing interest costs and charter-in commitments, operating cash-flows are likely to remain at least stable despite the deteriorating rate environment. Coupled with some $100m cash on the balance sheet Euronav can service exisiting debt and make scheduled repayments of $75m in H2 without having to sell vessels in the current depressed environment. The majority of the outstanding debt has been already refinanced. The FSOs still service their own debt and Euronav has a net $500m charter revenue backlog and a young fleet.  Directors even decided to take an almost 50% decrease in their 2011 remuneration.

    Current debt service and covenants are not an issue. There are however two challenges: a) possible impairments and b) newbuilding commitments.

    Conservative accounting policies do not necessarily imply that a company makes conservative business decisions.  Euronav started with a low-cost legacy VLCC fleet from CMB but has ordered or bought expensive high-specification vessels during the boom years of 2005-2008. Its stated policy to use Belgian, French and Greek flag and serve high-end counterparties (Total and Valero are major customers) necessarily means that it orders expensive high-spec vessels, all from Korean shipyards. 

    Many of its Suezmaxes were ordered or acquired at around $80m-$90m each. Among its VLCCs, TI Hellas was acquired for $140m and TI Topaz for 137.5m. VLCCs Olympia and Antarctica both cost $120m but they are both on lucrative, very long- term charters with Total. Due to the extreme, ultra-conservative depreciation policy, the book values of such vessels are going down fast. But perhaps not fast enough. If rates and asset prices remain depressed, Euronav may need to take an impairment charge at year-end. I factor in an impairmentm which I place at a ball-park figure of $250m - note that at the same time the older VLCCs are carried below market values.

    However, the main issue are the newbuildings. In H1 Euronav took delivery of a new joint-venture Suezmax, ordered at $90m, so $45m in Euronav's book. There are another two joint venture Suezmaxes to be delivered, at similar cost. (Note here that the joint venture party, JM Maritime Investments, is linked to major shareholder Peter G. Livanos and some middle-Eastern nobility, living between Switzerland and New York). Euronav has another two wholly-owned Suezmaxes on order at similar prices and a $159m VLCC, due in H1 2012. All vessels have been ordered at Samsung Heavy.

    Taking delivery of these vessels is simply throwing money down the drain. While Euronav has managed to push deliveries back, they need to utilize their good relationship with Samsung and restructure the newbuilding contracts. Most of Euronav's Suezmaxes have been built by Samsung anyway and major shareholder Peter G. Livanos has [eight?] LNG carriers on order there. They should be able to make something happen.

    In sum, even in deteriorating conditions, Euronav's main challenge is newbuilding deliveries. In an extreme – perhaps impossible – scenario Euronav could forfeit the $161m it has already paid Samsung. Coupled with a $250m impairment charge and a $40m-$80m loss in H2 (let's be generous here), equity goes down to $600m. That is still almost 50% more than current stock market value. And this is a going concern!

    The risk is acceptable.

    Let's see how the market develops. Genmar is already the obvious victim of the downturn and bad timing. OSG, Euronav's TI pool partner, has been making even worse acquisitiion and general business decisions than Euronav and the market sees through a fake book value. Frontline is simply overleveraged - its latest reincarnation was specifically designed to take advantage of the spot markets. Navios is a newcomer who finally bought the Fred Cheng vessels (more than two years in the S&P market) and cares more for its banks than for investors. Teekay Tankers and NAT grow by equity raises. Knightsbridge Tankers probably will do the same to grow. Tsakos Energy Navigation appears operationally well-managed and, of course, is a traditional name, but it seems that management fees are not what they should be - but together with Scorpio Tankers, they would be my next crude/clean choices. In general the choice is not huge anyway. Teekay Corp is the most stable company in the sector, propped up helpfully by its various listed affiliates.

     
     
     
     
    Themes: Shipping, Tankers Stocks: EONVF.PK, EONVY.PK, FRO, OSGIQ.PK, TNP, NNA
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  •  
    OSG came up with a quite upbeat presentation at a recent Jefferies conference: phx.corporate-ir.net/E... where it calculates its NAV at $40 per share.

    Among other things, it values its 50% stake in the FSO joint venture with Euronav at $178m NET, as I understand it, on the basis of discounted cash flows after debt service (OSG uses the equity method to account for the JV, so the JV assets/debt don't show in OSG's accounts - in contrast to Euronav that I believe consolidates its part of the JV.) Does OSG's valuation mean that Euronav's 50% stake is worth another $178m, or 40% of Euronav's current stock market value?

    I'm not sure. OSG uses some mightily optimistic assumptions throughout its presentation e.g. charter renewals at similar rates, refinancings etc. Still, an interesting data point for Euronav.

    PS. Looking at Genmar's presentation at the same conference, phx.corporate-ir.net/E... it appears they are going down. With 20 days to go it looks like their Q3 will be horrendous (as for all tanker companies, but Genmar's long-term charters have been expiring just now). They should be planning a reverse split in order to allow substantial continuation of the at-the-market equity offering. In a couple of years Oaktree will take the company over. Shows what mistimed acquisitions can do.
    9 Sep 2011, 07:46 AM Reply Like
  •  
    Euronav presented to a KBC London conference last week: http://bit.ly/mQocEs

    It is their standard presentation but here are a couple of general/specific comments:

    Break-even/opex rates (slide 8): $34,000/$10,200 for VLCCs, $24,500/$8,800 for Suezmaxes. In contrast to some other owners Euronav includes depreciation in its break-even rates. Due to its extremely conservative assumptions, depreciation for the tanker fleet amounts, very roughly, to an incredible $13,000 non-cash cost per vessel per day, so cash break even could be, again very very roughly, $20,000 (VLCCs) and $12,000 (Suezmaxes). Bearing in mind that they slow-steam their VLCCs and earn at least above opex and that the majority of the Suezmaxes earn close to $30,000 pd each, Euronav can pay its bills comfortably (more on cash later). For the moment at least.

    Slide 29 - they have been picking up on the desperate suggestion of Frontline Management's Jens Jensen about scrapping all double hull VLCCs over 15 years old - slide 29 (hopeless - and there were also only 21 further newbuildings in 1997/1998).

    Slides 30/31 - Suezmax fleet growth. Check 2012 - grim picture.

    (Permanent) Floating storage Slides 41-44 - The two FSOs with OSG are now profitable. Euronav desperately wants to sell its remaining ULCC for conversion and perhaps a couple of its older VLCCs. Other than the ULCC, it is difficult to see why anyone would prefer Euronav's vessels for conversion over remaining single-hull or older double-hull VLCCs.

    Euronav will present its one-page-and-a-half Q3 results on Oct 18 (investors will not have a meaningful view of the business until the publication of the annual report in spring 2012). There will be a loss. But they have been redelivering charter-in vessels, paying back debt, and some $400m in interest swaps have expired (or a minimum $16m cash cost per year). The euro is down. Cash will be more than enough. And despite conditions being much worse than Q2, I would hazard a guess that their loss will similar to Q2 $23m one. Their problem remains the newbuildings.

    Misc.: Nordic American Tankers (NAT) is borrowing to pay Q2 dividends, will have a Q3 loss of more than $0.30 per share and now promises a $0.30 per share Q3 dividend. And look at 2012 Suezmax deliveries. NAT's share price (as the price of TNK, VLCCF, NMM) relies on the dividend/return of capital and the ability to issue shares at above increasing valuations. They can't go back on this model and a continuing downturn will kill the business (NMM may prove a particularly spectacular kaboom at some point).
    8 Oct 2011, 10:45 AM Reply Like
  •  
    A Q3 $40m loss for Euronav with much reduced EBITDA: http://bit.ly/oFAAPq. Bigger loss than hoped for recently, in-line with the upper loss range in the original post above. Cash break-even since depreciation is $42m. Q4 looks more of the same so ending 2011 book equity at ca. $1b (with potentially up to $400m additional impairments). No word on the newbuildings. Probably gap down tomorrow.
    18 Oct 2011, 02:12 PM Reply Like
  •  
    Frontline reported Q3 earnings today http://bit.ly/rsIbkd. While the high losses were expected, the frank warning that under current market conditions the company will run out of cash early next year dropped the stock about 40%, to around $3. Nothing anyone couldn't have deduced beforehand but the fickleness and knee-jerk reactions of the markets still don't stop to amaze (the same market that continues to hold TBSI even if the poor company has come out TWICE to say that its equity is worthless).

    The stock was already traders' paradise and unfortunately it will become more so. With VLCC tanker rates improving slightly and news of any restructuring quite a bit out in the future (but with Frontline's banks eager to participate), more wild swings are to be expected. It is too bad that it appears that JF will be walking away with the company, after having first milked it. Anyway, investors should have listened to him back in spring. http://bit.ly/tojFAM

    Frontline's warning also scared OSG investors, with the stock down 20% at some point. While I don't like OSG's very optimistic spin in press releases and presentations and of course it has huge charter-in obligations and bloated book values, I believe that there is definitely room to play a bounce there. I opened a small trading position at $10.36, very short term.

    Meanwhile, on the other side of town, Euronav fell in sympathy some 10%. (and I am about 50% down in unrealized losses). I am quite frustrated here since the stock had been on a nice run-up since its recent historical lows. Euro area issues don't help obviously and Euronav's quarterly reports are not very detailed either, so its Q3 results kept people somewhat in the dark. However, I still believe that they can solve their newbuilding issues, described in the post above, and that next year's reduced interest, swap and charter-in obligations will increase cash available to cover debt repayments (and perhaps cheap charter-ins), so they can ride this out without any rights issue.

    Ah, and Genmar filed for Ch11 earlier in November.
    22 Nov 2011, 12:29 PM Reply Like
  •  
    Both OSG and Euronav are on a run today on little news. Perhaps it is the fabulous "Iran shuts Hormuz straits" SciFi scenario coupled with good recent product tanker and Suezmax markets. What is encouraging is the decoupling with the price movements of Frontline, which is now in run-off mode.

    This allows me to close the OSG short-term position mentioned above - the bounce has been good enough. They have a nicely diversified fleet but I've chosen my horse in the sector. And I believe they have telegraphed that they will take yet more write-downs. This will void a number of slides in their ridiculously optimistic presentations.

    Euronav reports Q4 and full year preliminary results on January 17. Looking for a loss but relatively good news (well, income can't be lower than Q3 anyway + newbuilding restructuring and lower finance/derivative costs + no bank issues). I continued to invest here (big, big mistake to fall in love with a set of accounts) but could be wrong so if the run-up continues I'll protect my position somewhat.

    I continue to play the product tankers through Scorpio Tankers and I bought DHT a couple of weeks back on the off-chance OSG will buy them out in 2012 since OSG is paying them quite a bit for charters anyway. That's extremely speculative.
    9 Jan 2012, 12:38 PM Reply Like
  •  
    A bit more than a year after this post Euronav remains just above water while most of its peers (except TK) have essentially wiped out their shareholders.

    GNK has gone bankrupt and OSG is teetering on the brink (even if I thought it would be next year after an initial debt extension). FRO's fleet has become irrelevant. The NAT ponzi scheme is unravelling, TNK is not far behind. TNP is suffering from its high debt and is going the spin-off MLP way. NNA has zero equity left and will pay to receive waivers on all its credit agreements.

    The losses will continue with a probable huge impairment at the end of this year. However, Euronav's sale of a 1999 VLCC at $35m still producing a $7m book gain (http://bit.ly/RWicEJ) shows how extreme depreciation is in the best interest of shareholders. Euronav will slowly sell or convert all its VLCCs, remaining an owner of young Suezmax vessels, which even if expensive are written down very quickly. I still think that the equity is mispriced.

    Btw, DHT has gone through a series of recapitalizations destroying huge chunks of investors' money but finally cut the suckers' dividend and brought down vessels' useful life to 20 years. Signs of rationality. Good entry today.

    Keep to good accounting.
    24 Oct 2012, 05:13 PM Reply Like
  •  
    More than two years ago John Fredriksen said “get out of (crude) tankers”. Since then, the sector crisis has led Genmar and OSG to bankruptcy, Frontline emasculated and facing a final and perhaps lethal restructuring before summer and smaller players such as DHT, TNK and NAT obliviously issuing shares to pay imaginary dividends, making any meaningful recovery on a per share basis impossible. (At least DHT and TNK have stopped doing so, making them more attractive for new investors – NAT continues in its ponzi ways.) Tsakos seems renegotiating with its banks, and poised to jump on the MLP bandwagon: they remain an interesting idea.

    But what about this blog? Compared to the initial post, Euronav did cancel their two Suezmax newbuildings (at a cost of some $57m) but did take deliver of the VLCC Alsace, paying a whopping $160m. The company continues its extreme depreciation policy – now also adopted by DHT – and did not take impairments. It avoided until now to dilute shareholders. However, Euronav did restructure its convertible bond, meaning that a bunch of new shares (25% of the current total) are now going to be available at a EUR5.65 strike price.

    The one deal anchoring Euronav is its FSO operation (FSO Asia and FSO Africa in joint venture with OSG, chartered to Maersk Oil at Qatar's Al Shaheen field). With an annual revenue of some $65m over the next five years (Euronav share), and annual cash flow from operations of about $40-45m, the segment should earn about $25m annually. In the meantime Maersk Oil, will be investing $1.6b in further developing Al Shaheen and has options on extending the charters to 2020. The outstanding debt on the FSOs is $123m, easily refinanced or increased.

    The crude spot market rates barely cover opex and the oversupply seems to continue. The Tankers International VLCC pool is losing vessels and market share. DNB said some time ago that Euronav is going to run out of cash this year. The stock is now below EUR3.30 for a total market cap of around $210m. Equity is still stated at $860m.

    Offshore operations will support Euronav. Old VLCC are carried at very low book values and will be sold off, leaving the company as an offshore and Suezmax operator.

    I had brought my cost basis at around EUR5 just before the convertible bond restructuring. The recent action in OSGIQ was a great get out of jail free card (and more, even if I closed out everything at $3.62) so I will shift the some that windfall to Euronav over the following couple of months.

    I think this year's victim will be Frontline.
    13 Apr, 12:28 PM Reply Like
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