Deutsche Bank has slashed its estimates for Euronav and Scorpio Tankers on the back of the weaker freight rate environment.

“We have become increasingly cautious on the prospects for tanker equities heading into the second quarter results season,” says analyst Amit Mehrotra.

“Most at risk of misses, in our view, are Euronav and Scorpio Tankers, while Ardmore Shipping appears best positioned heading into the print relative to expectations.

“We also think second quarter results will serve as a catalyst to bring down earnings expectations across the board, based on weak rate trends quarter-to-date.”

Mehrotra believes consensus estimates for Euronav will move closer to Deutsche Bank's unchanged model when second quarter results are released.

“This translates to a 15% reduction in 2016 earnings per share (EPS) consensus, and 10% reduction in 2017," he predicts.

“We see potential for an even greater downward revision, based on recent rate trends which we believe have about a two month lag effect on Euronav results.

“For example Euronav’s third quarter EPS consensus of 29c appears about 20c too high to us if we extrapolate current rate trends.”

Mehrotra says that while he is keeping his estimates intact for now given significant volatility in spot rates, these potential developments will likely continue to “weigh on Euronav shares”.

“The good news is we think it can serve as a good buying opportunity to the extent that Euronav shares dip below our Street-low $8.50 price target,” he says.

“Underlying this view is our conviction that crude tanker rates will remain well-above breakeven levels for the foreseeable future, allowing Euronav to generate surplus cash flow and pay decent dividends.”

Positive on medium term product tanker fundamentals

In the product tanker space Deutsche Bank is cutting its second quarter estimates for Scorpio Tankers from 16 US cents to just 4 US cents per share.

“We have also moderated our second half 2016 and 2017 expectations, which has the effect of lowering our 2016 and 2017 EPS estimates to 42c, from 83c, and $1.00, from $1.16, respectively,” says Mehrotra.

“Our estimates incorporate lower product tanker rate assumptions, which we view as conservative in the outer periods but nonetheless are more representative of the recent downward trend.”

Despite the downward revisions, Mehrotra continues to rate Scorpio Tankers shares a buy and says any further weakness represents a buying opportunity.

Underlying this view are several positive investment points, he says, including the shares trade at just 4.4x his revised 2017 EPS estimate and a 11.5% dividend yield which he views as “sustainable and secure”.

On top of this Mehrotra says the shares are priced as a 35% discount to net asset value, which incorporates realistic asset value assumptions and $300m remaining capex commitments.

Mehrotra says he remains comfortable with our Ardmore’s second quarter EPS estimate of 20 US cents, which is 25% above consensus.

“We believe Street expectations are not fully appreciating earnings from Ardmore’s chemical tanker assets and time charter contracts, which have the effect muting the volatility/weakness seen in the spot market,” he argues.

“Some of this will be offset by a slight uptick in average share count, but we don’t expect this to be nearly enough to counter the aforementioned positive factors.

“We also expect the company to show good progress on debt pay down in the quarter, following the sale of two tankers for $38.5m in gross proceeds.

“This will be more-than-offset later this year, however, from the company’s recent accretive acquisition of six MR tankers.”