Although we cannot rule out another dead cat bounce, this year’s winter market has been disappointing. As we predicted, VLCC spot rates peaked at $32k/d, and volatility created opportunities for the attentive investor. However, oil tanker spot rates have averaged $11.7k/d QTD vs our forecast of $13.4k/d, with lower net supply growth (0.3% q/q vs 1.0%) offset by even lower implied demand growth vs our forecast (4.8% vs 7.1%). We downgrade the sector from HOLD to SELL as we see further downside risk to share prices and asset values ahead of the inflection point in mid-‘18E.
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