Tanker owner Euronav cites encouraging start for the first quarter of 2017, but warns of negative factors pressuring the tanker market in February
Euronav NV reported its non-audited financial results for the three months ended 31 December 2016.
Paddy Rodgers, CEO of Euronav said: “Euronav had an active Q4 resulting in a letter of award for our FSO joint venture for a five-year contract, refinancing over USD 400 million of company debt on better terms and duration plus executing a sale and leaseback on four vessels. This has further bolstered our already strong balance sheet and gives us the flexibility to navigate the tanker sector cycle from a position of strength.
Tanker owner sentiment and behavior continues to be relatively brittle despite medium-term positive market fundamentals. Freight rates in what historically is the strongest quarter in any calendar year – Q4 – were subdued. Since November, however, record cargo volumes ahead of OPEC production cuts, caused by improving demand for crude, helped drive rates toward long-term Q4 averages in December. However, 2017 will, in our view, present a number of challenges: OPEC production cuts, peak delivery schedule of the order book, continued restricted access to finance and anemic owner confidence, which when combined, are all likely to produce a difficult rate environment for 2017”.
For the fourth quarter of 2016 the Company had a net profit of USD 50.0 million (fourth quarter 2015: USD 104.9 million) or USD 0.32 per share (fourth quarter 2015: USD 0.66 per share). Proportionate EBITDA (a non-IFRS measure) for the same period was USD 130.1 million (fourth quarter 2015: USD 182.4 million).
Euronav Tanker Fleet
On 3rd October 2016 Euronav signed two long-term time charter contracts of seven years each starting in 2018 with Valero Energy Inc. for Suezmax vessels with specialized Ice Class 1C capability. In order to fulfil these contracts, Euronav has ordered two high specification Ice Class Suezmax vessels from Hyundai Heavy Industries shipyard in South Korea. Delivery of these vessels is expected in early 2018 in good time for commencement of the charters.
On 13th October 2016 Euronav agreed with Hyundai Heavy Industries shipyard in South Korea to defer the delivery of the two VLCC ex-yard resale vessels, it recently purchased, to the first quarter of 2017. These vessels, previously expected to be delivered between October and November 2016, were delivered in January 2017.
On 27th October 2016 the VLCC KHK Vision (2007 – 305,749 dwt) which was time chartered in, was redelivered to its owner.
On 16th December 2016 Euronav signed a new USD 410 million senior secured amortizing revolving credit facility for the purpose of refinancing 11 vessels as well as Euronav’s general corporate purposes. The credit facility was used to refinance the USD 500 million senior secured credit facility dated 25 March 2014 and will mature on 31 January 2023 carrying a rate of LIBOR plus a margin of 2.25%.
On 22nd December 2016 together with joint venture partner International Seaways, Inc. (“INSW”), Euronav received a letter of award for a five-year contract for the service of its two FSO units. The existing contracts will remain in force until expiry in Q3. If negotiations and documentation are successfully concluded, the new contracts are expected to generate revenues for the joint venture in excess of USD 360 million over their full duration, excluding reimbursement for agreed operating expenses. The signing of final services contracts remains subject to an agreement on substantive business terms and no assurance can be given that such agreement will be reached.
On 22nd December 2016 Euronav entered into a five-year sale and leaseback agreement for four VLCC vessels with investment vehicles advised by Wafra Capital Partners Inc., a private equity partnership. The four VLCCs are the Nautilus (2006 – 307,284 dwt), Navarin (2007 – 307,284 dwt), Neptun (2007 – 307,284 dwt) and Nucleus (2007 – 307,284 dwt). The terms of the transaction include an aggregate sales price of USD 186 million, resulting in a capital gain of USD 36.5 million. The leaseback transaction is accounted for as an operating lease under IFRS and includes certain contingent elements linked to the fair market value of the vessels during and at the expiry of the charter period. As per our return to shareholders’ policy, this capital gain will not be eligible for dividend distribution. After repayment of the existing debt, the transaction generated in excess of USD 100 million free cash. Euronav has leased back the four vessels, which were built by Dalian Shipbuilding Industry Co., Ltd. (DSIC), under a five-year bareboat contract at an average rate of USD 22,000 per day per vessel and at the expiry of each contract the vessels will be redelivered to their new owners.
On 10th January 2017 the naming ceremony for the two VLCC resales, the Ardeche (2017 – 298,642 dwt) and the Aquitaine (2017 – 298,768 dwt) took place at the Hyundai Samho yard in Mokpo, South Korea. Euronav took delivery of these on 12 January and on 20 January respectively.
Return to Shareholders
Euronav’s return to shareholders’ policy is to distribute 80% of net income over the full financial year. Under Belgian corporate law the final full year dividend must be approved by the Annual General Meeting of Shareholders (AGM) on the basis of the fully audited results of the financial year. The AGM is scheduled on 11 May 2017.
As per our return to shareholders’ policy, any capital gains are not eligible for dividend distribution. Management is therefore pleased to announce that it intends to recommend to the Board of Directors, subject to final audited results being identical to the preliminary ones and absent material adverse circumstances, that the Board proposes for approval of the AGM a final full year dividend of USD 0.77 per share. Taking into account the interim dividend announced in August in the amount of USD 0.55 per share, the expected dividend payable after the AGM should be USD 0.22 per share. The total final USD 0.77 dividend per share complies with the 80% commitment when compared to underlying earnings for the full year 2016 of USD 0.96 per share (after stripping out capital gains).
Tanker Market
The tanker market finds itself at an interesting intersection as medium and longer-term positives (restricted financing driving limited contracting, increased environmental regulation taking effect from 2017, robust demand for crude) continue to build momentum but are likely to be overshadowed by a number of negative short-term factors driving the market during 2017 (OPEC production cuts, delivery of new vessels, limited scrapping, anemic owner sentiment). Euronav sees a number of short-term factors dominating during 2017 before focus on a positive medium-term market structure can develop.
In terms of short-term headwinds, firstly the OPEC-led production cuts will begin to impact during Q1 (mid to late January) and present a headwind for tanker markets until at least the summer months when long established seasonal trading patterns typically reduce demand. Secondly, 2017 will see the peak of the order book delivery schedule with at least 40 VLCC equivalents (VLCC & Suezmax vessels expressed as VLCC capacity) expected to enter the global fleet in the first half of 2017 alone. Owner sentiment and behavior has been weak in the face of similar vessel delivery albeit at lower levels during the second half of 2016 suggesting potential freight rate pressure during this delivery period.
Thirdly, older tonnage is likely to remain and act as disruptive capacity in 2017 as pressure to scrap is neutralized to some extent by an uncertainty over approved ballast water and sulphur cap systems and an ability to defer direct application of the new environmental regulations starting in September 2017, as covered in more detail below. Lastly, continued restrictive access to financing for ship owners and anemic owner confidence are likely to combine all of these factors to produce a challenging freight rate environment for 2017.
Medium-term drivers though remain positive. Demand for crude oil remains supportive with upward pressure on demand forecasts into 2017 as global GDP expectations are upgraded. Whilst the oil price has risen since OPEC announced production cuts, the resilience of the USA shale output and the return of disrupted supply (Nigeria, Libya) suggest that increased crude supply will respond quickly to higher prices and so prevent price-based demand destruction.
Increased regulation under the Ballast Water Management Convention coming into force in September 2017 and the Sulphur Oxides (SOx) Regulation from 2020 limiting the maximum sulphur content in fuel oil will help to increase pressure to scrap over time. There are 267 VLCCs in total (38% of current fleet) that will be at least 15 years old by 2020. This ageing profile will encourage a more rational medium-term behavior as owners will face increased regulatory costs over and above those from special surveys which are scheduled for every 30 months on vessels older than 15 years of age.
A combination of rationed capital from traditional sources and a higher cost of capital have substantially reduced contracting activity in the past 12 to 15 months. In VLCC orders, 2016 was the third lowest year on record. The majority of orders were also being industrial replacement rather than speculative. Shipyards are also severely restricted in their financial flexibility and are entering a phase of rationalization, albeit with one caveat – political pressure to address overcapacity has eased in recent months and requires monitoring.
Outlook
The Company remains consistent in its view expressed in recent communications that vessel supply in totality remains a manageable factor but that increased pockets of supply would periodically have a detrimental effect. The lack of contracting in the past 12 to 15 months encourages a positive medium-term view supported by consistent crude demand growth (IEA 2017-2020 forecast 1.2m bpd growth every year), increasing effect of environmental legislation toward 2020 and an adjustment to a rationed supply of capital for all.
Euronav management has taken affirmative action over the past six months in rejuvenating the fleet whilst simultaneously improving our capital ratios and access to liquidity. With the lowest leverage in the big tanker sector and access to over USD 600 million of liquidity Euronav is well positioned to navigate the cycle – to be strategically opportunistic whilst remaining exposed to any potential upside from an improved freight rate environment.
So far during the first quarter of 2017, the Euronav VLCC fleet operated in the Tankers International Pool has earned about 48,098 USD and 48% of the available days have been fixed. Euronav’s Suezmax fleet trading on the spot market has earned about 24,070 USD per day on average with 41.5 % of the available days fixed.
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Source: Euronav
