Euronav: COVID-19 restrictions continue to impact demand for crude oil

Euronav

Euronav reported its non-audited financial results for the fourth quarter ended 31 December 2020.

Hugo De Stoop, CEO of Euronav said: “The last quarter of 2020 and the present market conditions are amongst the most challenging in recent memory for crude tanker operators. COVID-19 restrictions continue to impact operations and more importantly the demand for crude oil. This has led OPEC+to extend production cuts. As a result, the market remains unbalanced with too many ships chasing too few cargoes. Whilst some encouraging signs are emerging, like the price of scrap steel driving the ship recycling activity, traction with crude consumption returning to more normalized pre-COVID-19levels is required to drive a return to stock and sector profitability. Despite these headwinds Euronav remains focused through cycleon long term value generation which validates additional buy back focus and vessel acquisitions whilst retaining balance sheet strength”.

For the fourth quarter of 2020, the Company had a net loss of USD 58.7 million or USD 0.29 per share (Q4 2019: a net gain of USD 154.2 million or USD 0.72 per share).

Proportionate EBITDA (a non-IFRS measure) for the same period was USD 49.8 million (Q4 2019: USD 267.5 million).With leverage at a level of 37%, the balance sheet at Euronav remains strong.

EURONAV TANKER FLEET

Sales

On 5 October 2020,the Suezmax Bastia (2005 –159,155 dwt) was sold for USD 20.5 million. A capital gain on the sale of approximately USD 0.7 million was recorded in in the joint venture company. The vessel has been delivered to her new owners. The vessel was acquired in November 2019 in a 50/50 joint venture and whilst the holding period was relatively short, the strong tanker market helped driving an exceptional return in excess of 50% on this investment.

Acquisition-VLCC

Euronav is taking delivery from the yard of the four VLCC vessels, purchased last February 2020,during Q1 2021. The first two, Delos(2021 –300,200dwt) and Diodorus (2021 –300,200 dwt) have been delivered in January. The next two vessels are due to enter the fleet in March.

Acquisition -Suezmax

As announced on 3February 2021,Euronav has entered into an agreement for the acquisition through resale of two eco-Suezmax newbuilding contracts. Currently completing construction at the Daehan shipyard in South Korea, these modern vessels are being acquired for an en-bloc price of USD 113million.The vessels are both due for delivery in January 2022.
These vessels are the latest generation of Suezmax Eco-type tankers. They will also be fitted with Exhaust Gas Scrubber technology and Ballast Water Treatment systems. The vessels have the structural notation to be LNG Ready. Euronav is working closely with the shipyard to also have astructural notation to be Ammonia Ready. This provides the option to switch toother fuels at a later stage.

Maintenance

On our existing fleet, we will take advantage of the current challenging freight rate background to accelerate a number of scheduled dry dockings. Around 27dry dockings have been scheduled to take place in 4Q20 and during 2021of which a majority during this winter season.

Fuel procurement status (update)

During 2019, Euronav purchased 420,000 metric tonnes of compliant fuel and stored it on its vessel, the Oceania(2003 -441,561 dwt),ahead of the new IMO 2020 fuel regulation. In view of the significant drop in oil and fuel oil price owing to COVID-19, the Company has actively managed its fuel position by procuring its fuel requirement from both the open market and its stored compliant fuel. The quantity onboard the Oceaniaon31stof December was approximately 135,000 metric tonnes of compliant fuel with a positive marked-to-market value in the amount of USD 2 million at this date. Despite the challenges, the overall project has been profitable. Euronav will look to integrate key features from this project in our fuel procurement strategy going forward.

FSO

Contracts extension for 10 years to 2032In November, Euronav announced that our joint venture with International Seaways signed a tenyear contract extension for the FSO Asia and the FSO Africa. This is a direct continuation of their current contractual service, that now runs until 21 July 2032 and 21 September 2032 respectively. The additional ten years are expected to generate revenues for the joint venture in excess of USD 645 million as from the respective extension dates.

CAPITAL ALLOCATION

Euronav remains committed to its target return to shareholders of 80% of quarterly net profits. It is important to stress that this return to shareholders is from net profits generated quarterly and therefore does not impact the company’s liquidity which will be augmented by the 20% of net income that is retained.

Additional share buy back to create further shareholder value Euronav announced today additional share repurchases up to USD 50 million as part of its return to shareholders policy. Further repurchases shall be deployed if, and when the company believes that there is value to be created for our shareholders in the long term, taking into account a variety of factors, including market conditions, share price disconnect with long term asset value, regulatory and legal requirements and other corporate considerations.

The Euronav share (at USD 8.10) trades at an equivalent price of a new build VLCC of USD 70million (source: Clarksons). By repurchasing shares the company is investing at a highly discounted price of USD 70million, compared to a latest quote for a modern VLCC of USD 88million (source: Clarksons), into the assets it knows best in the world: our own fleet.

Euronav believes this approach has the flexibility to manage the Company through the cycle, retaining sufficient capital for fleet renewal whilst simultaneously rewarding our shareholders. Euronav has mandated Clarksons Securities to act as an independent broker to coordinate and execute share repurchases on the exchanges of Euronext Brussels and/or the NYSE. Our returns to shareholders policy can be referenced (www.euronav.com/en/investors/company-news-reports/press-releases/2020/return-to-shareholders-guidance).

Cash dividend related to Q4

Euronav remains committed to distribute quarterly dividend sth rough out the cycle independently of the net income results and will distribute a fixed dividend of USD 12 cents on an annual basis or USD 3 cents per quarter.

TANKER MARKET& OUTLOOK

A strong and potent mixture of coalescing factors have kept freight rates under pressure since August and are likely to persist until at least second half of2021.Firstly,consumption of crude has largely been static since August (95millionbpd on EIA figures) with no seasonal uplift in demand largely due to COVID-19 restrictions impacting economic activity. Demand is therefore around 5-7millionbpd below normalized levels based on EIA data. Secondly, there has been additional unilateral export cuts from the OPEC+ members which has added further pressure to this dynamic. Thirdly, there continues to be an oversupply of vessels for the current level of cargoes available.

The global fleet age dynamic of the large crude tanker fleet however provides some medium-term direction with the asymmetry of the average age of both the VLCC and Suezmax fleet at their highest levels in 20 years, and the orderbook remaining capped at the lowest levels recorded in the last 20 years.

All the elements that should drive a number of ships to the recycling yards are present at the moment: (1) current economics of low freight rates, particularly for older tonnage; (2)emerging regulatory pressures in particular from banks providing finance to shipping;(3)recent IMO proposals on emissions caps and;(4) demands for increased ESG compliance from investors will continue to escalate in our view thus driving additional pressure on older tonnage.

Perhaps more importantly, higher steel prices have driven VLCC equivalent scrap values to seven-year highs above USD 18million (source: Clarksons) and this dynamic has already attracted three confirmed VLCC (and possible others) to the recycling yard in the first weeks of 2021.

The key driver to our markets however remains a return of consumption on a trajectory towards pre-COVID levels and onshore inventory which needs to reach five-year average levels. That will lead to a lifting of production cuts, in particular from OPEC+. The timing of this of course is reliant on the successful roll out of the COVID-19vaccine and associated timing of lockdown restrictions being eased. Whilst this timing remain un certain, the return of 5-7million bpd of crude consumption to be shipped would imply a requirement for circa 150 VLCCs.

For the moment, crude tanker markets remain tough, as reflected in the current challenging freight rates. Euronav’s management believes however ,that its balance sheet allows the company to simultaneously manage the cycle, but have the option to invest and take advantage of expansion opportunities should they arise.

So far during the first quarter of 2021, the Euronav VLCC fleet operated in the Tankers International Pool earned about USD 16,396per day, whilst 46% of the available days for the first quarter have already been fixed. Euronav’s Suezmax fleet trading on the spot market has earned about USD9,207per day on average with 54%of the available days for the first quarter already fixed.

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