Friday, July 21, 2017

Euronavigating the Treacherous Waters

Euronav (EURN) is the largest public company in the crude oil shipping business. The industry has taken a hit over the last two years amid overcapacity, but Euronav is a terrific operator that has remained profitable through this period. Nevertheless, it trades at a massive discount to book value and a P/E of just 6.

The company's chartering strategy employs a mix of short and long-term contracts with its customers, exposing it to some risk of spot rates while at the same locking itself into some contracts lasting a few years.

Because of the commodity nature of the shipping industry, however, I would take only a small position in this stock, as part of a larger basket of cheap but levered firms that don't completely control their destinies. While I believe the odds in this case are in favour of the investor, some event outside of the company's control (e.g. war, e.g. over-ordering by competitors) could put the whole industry at risk and "sink" everybody, particularly as every participant uses some form of leverage to finance operations (just like in the banking/insurance industries).

The main idea here is that overcapacity leads to bad pricing (which is where we are now) which leads to lack of new ships over the long term, which eventually leads to recovering prices. The fact that Euronav can stay profitable even during the bad times bodes well for the future. Buying the companies that are the least risky during times of overcapacity can lead to outsized gains.

Disclosure: Author has a long position in shares of EURN


jefke said...

Hi, maybe a noobie question, but why would a levered company and bad times with an unsure outlook keep paying out a big dividend like EURN?

Is there a 'good' reason to do this I don't know about, or just some kind of laziness/ keep some dividend happy shareholders happy?

Saj Karsan said...

I agree with you that the dividend is more suited to better times. Maybe it gets cut if things get worse.

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