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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TNK-US: Initiation (SELL, TP 1.1)

Teekay Tankers has a fleet of 41 fully owned Suezmaxes and Aframax/LR2s, a 50/50 owned VLCC  in  addition to a handful of chartered in vessels. Despite the recently announced divestment of a 1999-built Aframax at USD 7.5m (vs our generic value at USD 9.7m) and the sale/lease-back of four modern Suezmaxes, we see a significant liquidity challenge through the trough. Assuming an abolition of dividends (5.8% yield annualized on last close) and given the Net-Loan-To-Value of ~77%, we expect further fleet divestment to have limited impact. Given our forecast of continued sliding asset prices, we look to a debt moratorium or further sale/lease-backs for a sustainable solution to take the company through the trough without diluting existing shareholders. We initiate coverage with a SELL recommendation and target price of USD 1.1/sh (-49%).

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NAT-US: Initiation (SELL, TP 4.8)

Nordic American Tankers has a fleet of  33 Suezmaxes (incl. three newbuldings) and a 23% ownership in Nordic American Offshore worth USD 15m (USD 0.15/sh). The company is currently priced at a P/NAV of 1.8 (peer avg of 0.9) and a dividend yield of 11% (peer avg 2%), which we see as challenging amidst continued falling asset prices and earnings as the cyclical trough develops. We initiate coverage with a SELL recommendation and target price of USD 4.8/sh (-32%).

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EURN-US: Initiation (SELL, TP 6.2)

Euronav has a large fleet of crude tankers, consisting of 32 VLCCs, 23 Suezmaxes and a 50% ownership in two FSOs on long term charters. The company enjoys a large liquidity reserve and could play to role as consolidator in the current trough, as the company has done in earlier cycles. Despite being one of the best run companies in the industry and currently priced at P/NAV 0.96, we expect continued low earnings and further falling asset prices to weigh on the share price. We initiate coverage with a SELL recommendation and target price of USD 6.2/sh (-21%).

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ALNG-NO: Getting ready to ride the cycle (BUY, TP 5.6 [6.9])

The company today announced a restructuring and recapitalization of the balance sheet by deferring charter hire payments to Teeky LNG Partners and a private equity placement of USD ~25m through a book building process. As we touched upon in our initiation in late April, today’s announced pro-rata equity issuance is a positive surprise, although at a heavy discount to last close. The restructuring/ refinancing also alleviates the challenging liquidity position we forecast, with the low cash point now at USD 6m in 4Q19E (-17m in 2Q19E previously). Although issuing equity at P/NAV ~0.25 is highly dilutive to our per share valuation, shareholders’ interests are well covered by the pro-rata participation and subsequent offering. Add the positive effects of increased market cap., share liquidity and reduced balance sheet risk, we reiterate our BUY recommendation, but lower our TP to NOK 5.6 (6.9) due to the dilution .

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FRO-US: Initiation (SELL, TP 3.2)

Representing the backbone of Mr Fredriksen’s oil tanker investments and spanning two decades, Frontline is still going strong after several transformational years from the verge of bankruptcy in early 2015 to the current sturdy fleet growth and pursuit of M&A possibilities. Although adding a 25% premium to underlying values, we still see significant downside to the share price given the lackluster outlook for oil tankers. We initiate coverage with a SELL rating and  target price of USD  3.2 (-51%).

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GNRT-US: Initiation (SELL, TP 3.8)

Gener8 Maritime emerged in 2015 as the result of the merger between General Maritime and Navig8 Crude Tankers. The company has a fleet of 38 oil tankers trading spot, consisting of 23 VLCCs, 10 Suezmaxes and five Aframaxes/Panamaxes. GNRT is highly leveraged and in a tight liquidity position on our base case. This, in combination with an asset value elasticity of NAV at 3x leaves us with a pessimistic view on the share price ahead of the cyclical trough. We initiate coverage of Gener8 Maritime with a SELL recommendation and target price of USD  3.8 (-29%).

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TIL-NO: Initiation (SELL, TP 33)

Originally set up as a well-timed asset play in early 2014, the company managed to divest a small portion of its fleet before the cycle turned to recession in 2016. Thus, the focus has shifted to operations ahead of the next cyclical upturn, which we expect to materialize from 2019E. With further fall in asset prices ahead and the consistent share illiquidity factored in, we initiate coverage of Tanker Investments with a SELL recommendation and target price of NOK 33 (-25%).

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FLNG-NO: Acquires two MEGI NBs (BUY, TP 17 [unch])

Flex LNG announced earlier this week the purchase of two MEGI LNGC newbuildings from Geveran (Mr. Fredriksen) at USD 180m apiece, which we view as attractive vs our generic valuation at USD 194m and as we see significant upside in asset prices over the next few years. The payment structure is 20% on completion of […]

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