Oil Tanker Sector Upgraded to HOLD (SELL): Trade on Volatility as Recovery Looms

From being ready to write off the upcoming winter season a very short time ago and looking to mid-2018 for any meaningful recovery in share prices, the recent surge in scrapping has left us with a newfound cautious optimism. Using VLCC spot rates as a benchmark, we see average rates of USD 23k/d in 4Q17E with peaks towards USD 32k/d. We see opportunities for the attentive investor in the short term, but believe shares could revert to current levels or below by mid-‘18E, representing the cyclical inflection point. Also taking into account that most share prices have fallen close to our targets; we upgrade the oil tanker sector to HOLD (from SELL) and believe volatility to be key to monetary success for investors over the next six months. 

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Teekay Tankers (SELL, USD 0.7): Challenging liquidity position ahead of the cyclical trough. TP revised down from 1.2

The company recently announced the acquisition of Tanker Investments in an all-share deal on a NAV-for-NAV basis, leaving TNK’s old shareholders with ~68% of the NewCo. The two companies form a natural fit as TNK owns 11% of TIL and already provides technical and commercial management of TIL’s fleet. We do minor downwards adjustments to our fundamental forecast for oil tankers, and believe any seasonal increase in share prices in 2H17 will be temporary. We reiterate our SELL recommendation and downgrade our target price to USD 0.7/sh (from 1.2)

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LNG sector update: Improving fundamentals

After more than two years of abysmal earnings, we now expect the worst is finally behind us. Although the recent increase in newbuilding contracting as a cause for concern, we remain confident in medium term improvements in earnings, vessel values and share prices. We reiterate our BUY recommendation on the LNG Carrier segment and highlight Flex LNG and GasLog as our top picks.

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LPG-US: Initiation (Neutral, TP 6.9)

Dorian LPG has a fleet of 22 modern Very Large Gas Carriers (VLGC) with four on long time charters and the rest by large exposed to the current lackluster spot market. Recent corporate actions highlights the continued necessity of shoring up the balance sheet and ensuring liquidity as we await the cyclical upturn, which we pencil in from 2018E. Although we are positive on the sector outlook, we initiate coverage with a Neutral recommendation and a target price of USD 6.9 (-9%) due to the relatively high cash and P&L break-even levels. Dorian LPG is in our view priced ahead of peers Avance Gas (BUY, TP 28) and BW LPG (BUY, TP 37) in terms of both NAV and earning multiples.

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BWLPG-NO: Initiation (BUY, TP 37)

BW LPG controls a massive fleet of 51 Very Large Gas Carriers (VLGC) fully delivered in addition to four LGCs. The company has a history that exceeds most of its peers in addition to a differentiating industrial approach to LPG shipping, which is highly benefitial in the current depressed part of the cycle, but limits the upside in a boom. Having already swallowed recent entrant Aurora LPG, BW LPG remains key consolidator in an industry currently trading far below steel values. We initiate coverage with a BUY recommendation and NOK 37 target price (+23%) ahead of improving fundamentals.

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Dry Bulk: Sector Upgraded to BUY

As we argued in our Dry Bulk: Sector Update in early April, share prices had moved too far too fast, disconnecting from the underlying fundamentals of the early expansionary phase of the cycle. We highlighted that the risk was skewed to the downside ahead of 2Q17E, and we issued three SELL recommendations and four Neutral. Since then, share prices have fallen some 30% before recovering somewhat in recent days, hitting or undershooting our target prices. Although share prices could fall even lower in the coming months, a period which is usually marked by a lull in activity ahead of an active Autumn market, we now find the risk/reward highly attractive. We upgrade the dry bulk sector to BUY (Neutral) and assign a BUY rating to nine of the 11 companies we cover.

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AVANCE-NO: Initiation (BUY, TP 28)

Avance Gas has a fleet of 14 Very Large Gas Carriers (VLGC) mainly constructed in China and South Korea. Despite the full spot rate exposure in an abysmal market, the company will retain a robust liquidity position on our estimates ahead of improving fundamentals. Trading at a 18% discount to steel values at the current trough, we see Avance as a prime target for M&A. We initiate coverage with a BUY recommendation and target price of USD 28/sh (+36%).

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Tanker consolidation continues with TNK acquiring TIL

Teekay Tankers today announced the acquisition of Tanker Investments in an all-share deal which values TIL at a 21% premium to last close and which reflects a NAV-for-NAV transaction on our estimates. TIL’s shareholder will end up with 38% of NewCo vs a NAV contribution of ~39% and TNK’s shareholder with the remaining 62% with a NAV contribution of ~61%. We view the transaction as positive for both companies as TIL releases some of the massive discount to NAV which has been inherent in the share price since inception in 2014, and TNK which strengthens the balance sheet and alleviates some of our concerns around the liquidity situation through the trough. The two companies also forms a natural fit as TNK owns 11.3% of TIL and already provides technical and commercial management of TIL’s fleet. We reiterate our SELL recommendation on TNK but raise our target price to USD 1.2/sh (USD 1.1) to reflect the decreased liquidity challenge.

Deal highlights:

  • “Each TIL common share will receive 3.30 Teekay Tankers Class A common shares
    representing a 21% premium to TIL’s closing share price on May 31, 2017, and a 29% premium based on TNK’s 30-day volume weighted average price (VWAP)”
  • “Creates the world’s largest publicly-traded mid-sized conventional tanker company
    with combined total assets of $2.4 billion”
  • “Upon completion of the merger, Tanker Investments’ shareholders (other than Teekay Tankers and Teekay Corporation) will own approximately 30% of the combined entity, consisting of 62 conventional tankers, including three in-chartered vessels (30 Suezmax tankers, 22 Aframax tankers, 9 LR2 Product tankers and one 50 percent-owned VLCC tanker).”

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ESV acquires ATW to create an undervalued rig behemoth

In line with our expectations expressed in our initiation of Ensco (BUY, TP 17), the company takes on the role as consolidator in the current trough. Today, ESV announced the acquisition of Atwood Oceanics (BUY, TP 19) in an all-share deal that values ATW at a 33% premium to last close and leaves ATW shareholders with around 31% of the NewCo. Although we believe the offer to be a bit fresh at an EV/EBITDA ‘17E of 8.3x (vs peers at 7.0x), P/NAV of 1.18 and EV/GAV of 1.05, we see a good fit between the fleets and organizational synergies. Overall, we believe the offer is most beneficial for Atwood’s shareholders, but also expect valuation release for Ensco shareholders as the USD 10.72/sh acquisition price is far below our USD 19/sh pre-deal target price for Atwood. We estimate a pro-forma fair value USD 14.2/sh and reiterate our BUY recommendation.

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DHT-US: Initiation (SELL, TP 4.0)

After an aggressive M&A attempt by Frontline that by some accounts is still ongoing but from a financial standpoint appears dead, the company acquired BW’s fleet of VLCCs through a combination of new shares and cash, and has emerged as one of the largest listed crude tanker companies with 30 VLCCs and 2 Aframaxes on a fully delivered basis. Although we expect the company to continue scaling down its dividends, we believe DHT has enough cash to maintain a yield of some 3-4% through the trough given its low cash break-even vs peers and recently secured USD 383m in new debt. If our earnings base case were to undershoot significantly, the company can further ease the strain on cash through the abolition of dividends and/or increasing leverage on its balance sheet (net LTV peak at 67% in 3q18E). Despite being our top-pick in the crude tanker sector, we initiate coverage of DHT with a SELL recommendation and target price of USD 4.0 (-6%) given the lackluster short-term outlook for the sector.

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