Euronav Reports Strong Cash Flows After Locking In High VLCC Rates

Summary

• Euronav generated almost $100M in operating cash flow in Q4.
• The high charter rates continue into Q1 2019.
• The company has started to buy back shares.
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Introduction

Euronav (NYSE:EURN) remains one of my favorite oil shipping stocks, especially after the company positioned itself as a consolidator in what still is a relatively fragmented market. The recent acquisitions in the past several years were quite smart, and Euronav’s management seems to have a nose for finding and securing assets at attractive prices.

Data by YCharts

The past few years weren’t much fun for oil shipping companies, but as the charter rates got a nice boost in the fourth quarter of last year, Euronav should be able to carry some money to the bank in the current winter period, which is traditionally the best season for oil shipping companies.

The fourth quarter was good, and even much better than I expected in October

Euronav had been anticipating a turnaround on the oil shipping market for quite a while now, and the company is taking advantage of the strong daily charter rates, which are the highest in about two years fueled by a net reduction of VLCC vessels throughout 2018, a higher ton-mile ratio and a higher oil demand.

Source: Press release

The Q4 revenue more than doubled to just over $236M but due to the higher voyage expenses and commissions, interest payments and depreciation charges, Euronav was still barely able to book a net profit. Thanks to a one-time tax benefit, its net income was $97,000, compared to in excess of $19M in the fourth quarter last year.

Surprising? Yes and no. There were two one-time items that skewed the financial performance in both years. In Q4 of last year, Euronav reported a one-time $36.5M gain on an asset sale while it reported a $13.2M cost related to a bargain purchase in the most recent financial year. Adjusted for these results, Euronav would have reported a net loss of approximately $17M in Q4 2017, while it would have reported a net income of in excess of $13M in the most recent quarter (this was related to a lower income from a sublet office, the impairment of a few receivables and the impairment charge of $6M on two old vessels). These are just accounting details and that’s why I think it makes a lot more sense to have a look at the cash flow statements to filter out the non-cash expenses and income.

Unfortunately, Euronav hasn’t provided a separate update on how it exactly performed in the fourth quarter, so it took some calculation work to isolate the Q4 performance based on the full-year cash flow result and the cash flows from the first nine months of the year, which I discussed in this article.

The adjusted operating cash flow in the first nine months of the year was approximately $24M, and after looking at the full year results which show an adjusted operating cash flow of $115M, the Q4 cash flow result was about $91M which is about twice as much as what I was expecting in October.

Source: press release

The charter rates are now a bit lower, but Euronav should still be fine

Q4 really saved the year for Euronav. After generating virtually no money in the first nine months of the year, the charter rates for both VLCC and Suezmax vessels really picked up. In the fourth quarter, Euronav received almost $35,000 per day for VLCCs on the spot market, and almost $32,000/day on the time charters.

Source: Press release

A similar evolution was noticeable in the Suezmax segment, where Euronav generated over $20,500/day on the spot market and just over $40,000/day on a time charter basis. I’m positively surprised by the time charter rates for the Suezmaxs as they earned almost twice as much as in the same quarter last year.

The high charter rates are continuing as the VLCC fleet has earned $41,000/day (with 43% of the available days fixed so far) while the Suezmax vessels are earning $32,700/day with 36% of the days fixed. That’s good, and according to the most recent weekly overview provided by Compass Maritime, the 12-month rates for VLCCs and Suezmaxs remain stable at respectively $34,000/day and $24,500/day.

Source: Compass Maritime overview

That’s not great, but it should allow Euronav to continue to generate decent amounts of cash flow as it looks like the VLCC segment will earn a bit more in Q1 while the Suezmax vessels will probably make a bit less money.

Source: Company presentation

Investment thesis

Euronav is currently making good money, but there’s no reason to be over-excited just yet. The operating cash flow will have to be used to buy new vessels later (as the oil shipping sector is initially very capital heavy, with relatively low sustaining capex throughout the 20-year life cycle of the vessels.

So while generating in excess of $100M in operating cash flow is great, Euronav will need a few more of those quarters to reduce its net debt (approximately $1.55B as of the end of last year, which already includes the expected $42M proceeds from a vessel sale) in order to maintain flexibility on its balance sheet.

Euronav will pay its standard $0.12 dividend but has also commenced share buybacks and has repurchased 1.42M shares so far. The net debt will also have to be attended to as it’s now standing at approximately 6 times the full-year EBITDA. The Q4 EBITDA of in excess of $100M is promising and I’m expecting a similar result for the current quarter, but this doesn’t mean Euronav is flush with cash as it has plenty of options to spend the cash on. And share buybacks – while interesting for the shareholders – should not be the main priority.

Analyst’s Disclosure: I am/we are long EURN. 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.