Frontline’s 1Q16 report, released on May 31st, was well ahead of market expectations from a successful chartering strategy. The good results enabled the company to offer 20% annualized dividend yield with declared DPS of USD 0.40 while the rest of the USD 0.57 adjusted 1Q16 EPS strengthens the company’s balance sheet and provides room for future fleet growth. The guidance for 2Q16 with avg. rates of USD 52k for VLCCs (83% covered) and USD 27k for Suezmaxes (90% covered) was in line with estimates. The consensus EBITDA of USD 390m for both 2016 and 2017 are below our USD 533m and USD 661m ests which probably mostly comes from deviation in VLCC ests that are 60% of EBITDA.
Oil demand growth strong enough to absorb VLCC newbuilds
IEA’ annual oil demand growth forecast until 2020 of 1.2m bpd provides scope for oil tanker demand growth independent of where production and consumption will increase. On the Supply side 46 VLCCs are to be delivered in the rest of 2016 on top of 17 already delivered this year, 39 in 2017 and 21 in 2018. During the period of 2016-2018, 33 VLCCs reach its 20-year threshold that now makes them scrapping candidates. We maintain our VLCC USD 60,000 day rates estimate intact. The outlook for Suezmax tankers is lowered to USD 30k (from USD 38k) because of the decline in Nigeria’s oil production from 2.2m bpd to 1.1m bpd. The new Suexmax tanker pool with Euronav and Diamond S will be helpful in reducing the downside.
Tanker values reflect difficult financing environment for energy assets
Frontline, DHT Holdings and Euronav have experienced significant share price slumps YTD. This is a result of decreased vessel values and a drop in P/NAV from 1.2x to 0.8-0.9x. While asset values have slumped and the market pricing has turned more cautious, the main weakness for oil tankers has been related to the Suezmax segment. The company says it will soon take advantage of the weakness to make acquisitions. We find Frontline’s valuation attractive at EV/EBITDA below 5x and dividend capacity at nearly 25% of the share price annually.
Recommendation: BUY TP NOK 125
We reiterate a BUY recommendation with a TP of NOK 125 per share which is down from NOK 175. The main reason for the lower target price is weaker than expected Suezmax market following decreased Nigerian Oil production.
Source: Norne Research