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Some Thoughts on Euronav

|Includes: EURN, Euronav NV (EURN), FRO, NNA, OSGB, TNP
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: 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
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.