When tanker giants Euronav and Frontline come together sometime next year to put the bow on a contentious merger, it will be a combination of shipowners who have won investors’ hearts on their own distinctive merits.
According to data from Deutsche Bank Securities, Euronav and Frontline rank first and third among all public shipowners in total return to investors over the past five years, having outperformed the S&P 500 index by 114% and 105%, respectively.
Those figures include reinvestment of shareholder dividends. Greek dry bulk owner Star Bulk Carriers notched second place in the rankings with a 109% outperformance.
The two European bellwethers arguably have taken different approaches to pleasing investors.
Euronav is known for its strong governance, fortress balance sheet and prudent approach to risk management, while Frontline derives a premium from the backing of swashbuckling shipping tycoon John Fredriksen, a lean overhead structure and aggressive dividends.
But all that aside, the two owners might be more similar than it first appears, according to Deutsche Bank analysts Amit Mehrotra and Chris Robertson.
The two researchers have been banging the drum for a longer-term view on shipowner performance with cash-flow multiples rather than net asset value (NAV) as the primary valuation tool.
“They aren’t that different on what matters — breakeven. And that is directly related to capital allocation decisions,” Mehrotra said of Euronav and Frontline, referring to the daily operating-plus-financing cost for a vessel before profits kick in.
Added Robertson: “We shouldn’t take for granted the cash breakeven number, because what matters is the decision-making behind all the individual components. The fact that Euronav and Frontline have very similar breakeven rates is very telling that the two companies are aligned where it matters: creating long-term value.”
As for the particulars, Deutsche Bank calculates Frontline’s breakeven on VLCCs at $23,700 per day and $19,800 per day for suezmaxes. Euronav comes in at $21,875 and $16,637, respectively.
Long-term trend rates for VLCCs are $33,000 and $29,000 for suezmaxes, Deutsche Bank said.
This puts Euronav’s breakeven 34% and 43% below the long-term averages, and Frontline 28% and 32% below for VLCCs and suezmaxes, respectively.
The surplus goes to free cash flow for shareholders, the metric the Deutsche Bank analysts are hammering home as their preferred measure of valuation.
“I think where we are having a disagreement with some of our peers is largely an investing time horizon issue,” Robertson told TradeWinds.
“NAV is often used for short-term six to 12-month price targets but ebbs and flows with asset values and rate sentiment. What we are suggesting is that there are shipping companies out there now with real operational size and scale, strong balance sheets, good capital allocation strategies, and market caps and trading liquidity necessary to attract larger, more long-term focused investors.”
For perspective, only seven of the 25 shipping companies evaluated by Deutsche Bank outperformed the S&P 500 over the past five years.
Winners and losers
The others are tanker owner DHT Holdings at 102%, Seaspan Corp parent Atlas Corp at 88%, Teekay Tankers at 43% and Global Ship Lease at 31%.
The bottom five in the table also contains some tanker names: Dynagas LNG Partners at -153%, GasLog Partners at -142%, suezmax owner Nordic American Tankers at -113%, Tsakos Energy Navigation at -100% and StealthGas at -97%.
Euronav’s performance appears to have been boosted significantly by the interest from Frontline, as the stock is up 99% year to date, against an 81% gain from Frontline.
Euronav and Frontline appear headed for a somewhat awkward combination either in the fourth quarter or in 2023 that may see votes fall short of the required 75% for a formal merger. This is largely because of opposition from the Saverys family, the largest holder at 20.8%.
But if more than 50% of shareholders approve the tender, the fleets will operate jointly in the surviving company known as Frontline under the leadership of Euronav CEO Hugo De Stoop.
Euronav would maintain its public listing but with limited liquidity for any shareholders who do not accept the Frontline tender offer.