EURONAV NV

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A leading international oil tanker shipping company, specializing in crude oil and refined product transportation globally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: EuroNav NV (EURN), based in Antwerp, Belgium, is a prominent player in the global oil tanker shipping industry. The company operates a large fleet of Very Large Crude Carriers (VLCCs), Suezmaxes, and other tanker types, primarily involved in the transportation of crude oil and refined products. The business model is straightforward: owning and chartering vessels to meet the global demand for maritime transport. The company’s operational expertise allows them to leverage their ships in various trade routes, optimizing for profitability and efficiency.

  • Revenue Distribution: The company’s revenues are derived primarily from time charters (ships leased for fixed periods) and voyages (where ships are hired to transport specific cargoes between specific locations). Revenue generation is largely influenced by prevailing freight rates in the tanker market, the number of ships employed, and the utilization rates for its fleet. The company engages in contracts with leading oil companies and traders. For 2023, the revenues were split roughly 68% time charter, 22% voyage, and 10% bareboat revenue.
  • Industry Trends: The oil tanker shipping industry is inherently cyclical, with freight rates fluctuating based on supply and demand for vessels, oil consumption, and global economic conditions. This creates a boom-and-bust scenario. It has been a challenging and volatile year with increasing inflation and uncertainty about recession. Moreover, the industry is subject to geopolitical factors that can quickly alter trade patterns and shipping routes. Environmental regulation is another critical trend, which is forcing new strategies by ship owners such as adopting greener technologies and alternative fuels and more environmentally conscious operational procedures. In the longer term, the industry is expected to experience increased demand due to the fact that there will be growing global energy needs, though the rise of green energy will reduce this in time.
  • Margins: Operating margins fluctuate based on freight rates, bunker fuel costs, and vessel utilization rates. The company does not use an efficient hedging program for bunker prices, so their costs are directly correlated to the bunker prices, making them vulnerable. Since they are a highly leveraged business, rising rates can make them profitable, conversely, falling rates can make their margins suffer. As per the past results, the company generates a significant portion of its revenue from time charters, thereby making the business model predictable. The company has also a focus on reducing costs and improving fuel efficiency to achieve a higher profitability.
  • Competitive Landscape: The shipping industry is highly competitive with many players. Competition is driven by vessel availability, charter rates, and operating costs. Some players benefit from stronger operational efficiencies and lower leverage. EuroNav competes with other large tanker operators, including those that are publicly traded or privately held.
  • What Makes the Company Different? EuroNav stands out from most competitors in the business in the amount of operating leverage they possess as well as their trading style, which takes advantage of high shipping rates. Also, they have the second-largest fleet in the industry, with 45 VLLCs, 27 Suezmaxes, and 2 FSOs, and are also expanding their fleet via new builds. Due to this, they can be more profitable in boom times, however, they are more vulnerable to bear markets. This strategy can lead to both high volatility and potentially higher reward. Also, they are very conscious about their environmental impact and aims to be one of the most environmentally friendly company in the industry.

Financial Analysis: EURN’s financials are subject to market volatility and are best understood in the context of the current and future market. The company’s revenues, profitability, and cash flows tend to be cyclical.

  • Revenues: In 2022, revenues were $701.7 million, increasing by approximately $300 million from 2021. This was due to the rising demand in shipping after the pandemic slowdown. The company did also had a very high amount of spot voyage revenue (which depends on demand and volatility in the market), which made profits more variable compared to the time charter revenue. The company’s revenues in 2023 increased to approximately $950 million. Again, high freight rates led to increases in revenue.
  • Profitability: For 2022, net income was $142 million. The high increase in earnings was due to increased rates. In 2023, the net loss was at $110 million, mainly caused by lower freight rates, higher operating expenses, and high impairments. The cost of sales are mainly affected by bunker fuel prices, ship and maintenance costs, and personnel costs.
  • Cash Flow: As of December 31, 2023, cash and cash equivalents stood at $307 million. The positive cash flows from operations were offset by investments and acquisition of vessels. In the coming years, the company’s cash flows will be driven by the strength of the global economy, which is very hard to predict, since both the global economy and geopolitical events affect their cash flow.
  • Debt & Capital Structure: EuroNav is highly leveraged, the ratio of net debt to total capital being 47.9% as of Dec 2023. This level of high leverage increases volatility but also leads to potential for higher returns. The long-term debt stood at $1,028 million in 2023.
  • Capital Allocation: The company is actively seeking to modernize its fleet, increasing the fleet capacity, and making its fleet more environmentally friendly. However, this strategy of aggressive expansion and modernization comes at a great expense.

Recent Concerns / Controversies: The company had an accounting error in Q4 2022 related to a deferred tax asset adjustment of about $40 million. However, the company immediately issued a correction. More notably, the company has been faced by increased volatility in the shipping market due to geopolitical events and a potential recession. This has reduced their revenue and profits.

Moat Rating: 2/5 EuroNav possesses a narrow moat but is not very reliable. The company has a solid industry position, operating a big fleet with long operating history. This gives it an operational edge over some competitors. But, the shipping industry is very competitive, with numerous players, thereby reducing any competitive advantages and preventing pricing power. Moreover, the company is heavily leveraged. The company does have intangible assets with some recognition in its brand, which does slightly help their moat, giving it 2 rating.

Risks to the Moat and Resilience:

  1. Cyclicality of the Industry: This is probably the biggest threat. The volatility in freight rates can quickly change from high-profitability to low-profitability, affecting the company’s income and profits.
  2. Geopolitical Events: Political and economic situations can significantly affect shipping routes, trade patterns, and ultimately the profits of the company.
  3. Environmental Regulations: The shipping industry is under pressure to reduce emissions and comply with different and stringent standards. Failure to follow these rules could result in penalties and loss of reputation.
  4. High Leverage: High debt levels expose the company to financial distress if profitability falters. Since it is a cyclical business, the company is particularly vulnerable in a downturn.
  5. High Competition: Low barriers to entry mean that new competitors can enter the market or existing companies may try to gain market share, leading to price pressures.
  6. Technological Disruption: New propulsion methods, and ship designs, that the company does not invest in, could mean it may fall behind technologically compared to the competition.

Despite all those threats, the company is fairly resilient because the long-term demand for shipping is unlikely to disappear.

Understandability: 3 / 5 The business of oil tanker shipping is easy to grasp, involving transporting oil in large vessels. The basic economics of the business are rather simple to understand (supply and demand for shipping services, prices being influenced by the aforementioned, plus the costs of operating). However, there are some additional things that should be taken into account to calculate and predict profitability, such as the effect of spot contracts, time charters, and bunker fuel prices. The company’s financials also include a lot of jargon, such as fleet utilization rates, time charter equivalent, and the weighted average cost of capital.

Balance Sheet Health: 4/5 EURN has a stable-looking balance sheet that has enough current assets to cover current liabilities and with a moderate, but not too dangerous debt. They have total cash of 307 million as of end of 2023, and can easily obtain cash if they need more due to long standing relationships with several banks. However, debt as a percentage of total assets is high, which makes it vulnerable to downturns. Overall a 4 is a fair valuation for the current balance sheet health.