Clarksons
Upbeat on a tanker market recoveryIn our view, the main takeaway from Euronav's (Euronext/NYSE: EURN) 4Q21report was not the weak results, which was largely expected, but rather the upbeatmarket outlook from a management team that is usually conservative or balancedin their outlook. Secondly, and more importantly for earnings estimates, Euronavhas lowered their depreciation charge by $100m per year which all else equallifts EPS by around $0.50 per share. The company previously depreciated shipsdown to zero scrap value after 20 years, whereas now they are assuming a positivescrap value at $390/ton. This is more inline with standard practice among peers.In our view, the change should improve valuation metrics (such as P/E) and willlikely make Euronav screen better, all else being equal. Bigger picture, we see it asanother step in terms of improving valuation of the shares which the company hashighlighted earlier (see our review from October 10th titled "Taking steps to reducethe valuation discount", available upon request). In a related manner, the quarterly 3cents per share dividend will be paid via a repayment of reserve accounts to avoidwithholding tax. In our view, Euronav is a great play on the crude tanker marketbecause of its strong balance sheet and attractive valuation. We assess currentNAV at $11.50/share, increasing to $17/share if vessel values reach newbuild parityduring 2023. We reiterate our BUY rating.Earnings review: Adjusted 4Q21 EBITDA, excluding gains and associated J/Vincome, was $24m, up from $-1m in 3Q21 and slightly above interest expensesat $20m. VLCC spot earnings in the final quarter averaged $12,500/day and 1Q22bookings to date are at the same level. For the full year 2021, Euronav generatednegative $25m operating cash flow. By comparison, in 2020, Euronav reported$970m of positive operating cash flow which largely explains their strong balancesheet today. Euronav had $152m of cash at end of 2021 with $556m of undrawncredit facilities. We estimate current net LTV at 41%. For investors, this strongbalance sheet, and available liquidity, means that the tanker market can stay weakfor a prolonged time. Put differently, Euronav is in our view a compelling risk/rewardbet on a tanker market recovery.Valuation: Our NAV assessment of Euronav is $11.50/share. This indicates P/NAV 0.74x with implied average value of a brand new VLCC on the water of nomore than $79.50m vs. broker quotes of $97m and newbuild price of $114m. Ifsecondhand vessel values reach newbuild parity, which is the straight line froma newbuild price of $114m to scrap value of $25m after 25 years, the NAV couldjump to $17.10/share, all else being equal, calculated as the NAV by the end of2023 (i.e. with an older fleet).Tanker market outlook: Euronav, known to be conservative (or perhaps realistic)about the market outlook, appears to be bullish about the tanker market goingforward. Management said in the 4Q21 report that the recovery thesis is "intact andstrongly supported by fundamentals". These fundamentals include the orderbook/fleet ratio being at 25-year lows, an aged fleet (25% aged over 15 years) andincoming emissions regulations (e.g. EEXI in 2023) which means that vessel supply is "supportive" for a recovery. The catalyst for higher earnings is expected to comefrom increases in oil supply, consumption, and inventory restocking during 2022.