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.
Peer overview: We estimate an average peer P/NAV of 1.0 with a range from 0.5 (GNRT) to 1.6 (NAT). EV/EBITDA peer avg. in 2018E is 18x, and we are currently 32% below consensus on realized TCE rates for the year we believe to represent the trough. Further, we forecast peer avg. EV/EBITDA of 10x in ‘19E and 6x in ‘20E, and FCF yields to range 20% to 50% towards the latter part of this decade.
Key investment opportunities: Although it is challenging to find supportive valuation in most of our coverage, Gener8 Maritime (BUY, TP 5.7) stands out as an undervalued M&A target. The share price rallied after Frontline’s (SELL, TP 3.8) acquisition interest became official, but has since underperformed. We would carefully watch for seasonally improvements in the tanker spot market, and use GNRT as an undervalued proxy for exposure.
Source: Gersemi Research, Bloomberg, company data
Disclaimer: The publisher currently has no investments in the companies covered in this report. More disclaimers at the end of the attached document