Gener8
Maritime Inc. is a leading U.S.-based provider of international seaborne crude
oil transportation services. The company is a result of the merger between
General Maritime Corporation and Navig8 Crude Tankers Inc. It IPO'd in June
2015 @ $14 a share. It has a fleet of 45 tankers, including 33 vessels
currently on water & 12 more coming on stream over the next 9 months. Its current on the water fleet consists of 16 VLCCs, 11 Suezmax vessels, 4 Aframax vessels, and 2 Panamax
vessels, with 12 new VLCC's to be delivered in the next 6-9 months.
Note – forecast P/E and forecast EV/EBITDA based on projected financials post stabilisation of full fleet towards end of FY17 / beginning of FY18.
Investment case
At current price, Gener8 Maritime is a buy. Although it is
very difficult to predict intrinsic value due to the highly uncertain nature of
the business – tanker spot rates, oil demand/supply equation, and new tanker
order book are the 3 key variables which drive value & remain uncertain –
at current price, I believe that the risk is largely priced in and offers a
decent upside potential.
My buy thesis is built on the following narrative:
·
Come the end of 2017, post-delivery of all its new
ECO VLCC’s, Gener8 will have a modern high quality fleet of crude tankers with
an average age of 5 years and with significant growth potential in EBITDA, free cash flow
and earnings. From 2017 onwards, the company is likely to initiate substantial
return of capital to shareholders via dividends and share buybacks.
·
Oil supply equation will continue to remain favourable
for the industry - the Saudis will continue current policy of defending market
share as well as rapid Iraqi and Irani expansion will continue to ramp up exports
from the Middle East. In general, increased supply is good for the crude
transporters like Gener8.
·
The supply glut will continue to keep oil
prices low – consensus forecast from all major institutions (World Bank, IMF, EIU)
are for oil to trade at ~$60 per barrel to 2020, and continue to be at current
levels of ~$50 per barrel in the medium term. In general, low prices are good
for the crude transporters as they should support worldwide demand for oil.
·
I acknowledge that significant imports from the Chinese since the oilprice fall as part of their policy to increase their strategic petroleumreserves has been a massive boost to the oil tanker industry and
Chinese demand is a big unknown. But at current and projected prices of ~$50 -
~$60 per barrel, based on my research, I believe that the Chinese will continue
to buy. In addition, India has huge infrastructure spend plans and has recently
entered buying agreements with Iran as it ramps up supply. Furthermore, the
economic recovery in Europe is at early stages, and favourable outcomes from
Brexit, Greek negotiations, Italian banking crisis, could provide an added fillip.
·
In addition to natural demand, congestion at
key land based storage chokepoints continues the need for “forced” storage at
discharge ports, adding to the length of voyages & revenue for super tankers.
Further, oil price contango (current low spot prices compared to projected
forward prices is increasing demand to buy and store) continues to promote demand
for storage.
·
One area of risk is the tanker order book, and
whether there is a risk of oversupply of tankers in the market, pushing down
rates. Highly favourable conditions over the last few years – with new build
prices falling due to fall in steel prices, sever distress and excess capacity
in the shipbuilders – resulted in a flurry of orders to mid 2015. This was
expected to continue given the current favourable trend for the crude carriers.
However, surprisingly, the order book as a percentage of on-the-water fleet
remains near all-time lows at 2.2% and 4.0% fleet growth for 2015 and 2016,
respectively (data from Company presentation). New orders have more or less
ceased in 2016 and the VLCC fleet is ageing, providing Gener8 with a
considerable advantage owing to its young/modern fleet.
Gener8’s investor group
consists of Oaktree (16%), BlueMountain (10%), Avenue (9%), Aurora (8%) and
Monarch (7%) all of who own over 5% of the company and are likely to ensure
focus on return of capital via dividends/buy backs as soon as the new fleet has
stabilized and revenue and cash flow has ramped up. In addition, Gener8 has a
solid management team who are highly regarded, with substantial industry
experience and with alignment of interest with shareholders.
Valuation
As discussed at the very beginning, it
is difficult to value this business due to the highly uncertain nature of the key
variables – particularly tanker spot rates – which
drive value. In addition, a number of additional assumptions need to be made
such as fleet utilization (e.g. number of days in a year a tanker will operate),
bunker fuel rates and operating costs. The difficulty of predicting revenues
can be gauged by the fact that tanker spot rates spiked to over $100k towards
end of 2015 and early 2016, before coming down to ~$60k a day towards latter
part of Q1 2016.
For my base
case valuation, I have made the following assumptions:
·
long-run 10 year industry
average tanker rates for VLCC’s of $41.2k (which below recent spot rate trend),
keeping Suezmaz, Aframax, and Panamax rates constant at of $37k, $27.5k, $22.5k
respectively;
·
assuming
all vessels, including new builds are delivered and deployed at spot rates
(consistent with current trend); and
·
operating
expenses based on Q1 2016 cost structure with a 1.5% growth in expenses annually
(consistent with recent trends).
Based on the above assumptions, I get projected
EBITDA for base case and optimistic case of $400m and $425m respective on the fully
stabilised Fleet by end of FY17 / beginning of FY18. Assuming the company
continues to trade at its current EV/EBITDA multiple of just over 6
(peers currently trade at ~7x), I get a forecast EV of $2.4bln - $2.6bln. My
forecast net debt is just over $1.5bln ($1.7bln of total borrowings including
additional borrowings on remaining instalments for new builds, and $200m of
cash), giving an equity value of between $900m - $1bln, or per share value of
$11 - $13 based on 83.68m of shares outstanding. At the current share price of
$7.05, this equates to a return of 56% - 82%.
If one
assumes a multiple of 7x, the value per share goes up to ~$15 - ~$17.5 a share for
a return of between 118% - 150%; I believe this to be too optimistic but not unlikely.
My forecast
EPS on a fully stabilised fleet comes to $2.8 - $3 per share, equating to a forward
P/E of just over 2. I expect the company to payout most of its earnings as
dividends or for share buyback.
In addition,
a good margin of safety is provided by the following factors –
·
book value per share of $17 (current
share price equates to 60% discount to book) for modern fleet with an average
age of 5 years; and,
·
based on conservative assumptions,
I get a total value for the fleet of $2.47bln, equating to a net of debt value
of $940m, or $11.4 per share.
Other
factors worth noting
·
The
company’s new VLCC’s (21 of the 28 VLCC fleet) deliver substantial fuel savings
compared to older/existing fleet. The savings per vessel per day could average
$6,300, assuming a bunker fuel price of $350 per ton, and provide the company with
a competitive edge compared to peers. In addition, large oil major customers
are likely to favour quality vessels/safety which should give the company edge
given global fleet age and mix.
·
Majority
of tanker owners also own other offshore assets and dry bulk carriers and are
currently experiencing difficult conditions in their other businesses due to
the fall in oil price and distress in offshore assets. Therefore, they are
unlikely place significant new orders or have the ability to find the financing
to do so. Gener8 has no such issues as it has no other exposure, and financing
for its new build is fully secured from existing facility.
·
Finally,
the company has said that it may sell down some of its older Panamax and
Aframax fleet if a suitable offer/price is available. Currently, the company
sees no need to do so give the arbitrage between high tanker rates and
relatively lower asset values. But any sell down could be a net positive for
the net debt position with relatively low impact to earnings. Approximately
$1.5 of my $11 per share value for my base case is backed by the Panamax and
Aframax fleet. Majority of the upside comes from the VLCC fleet, followed by
Suezmax.
