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Crude Tanker Industry EV/EBITDA Falls—Why and What Does It Mean?

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Tanker industry valuation multiple

The crude tanker industry valuation multiple, or industry EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization), has contracted over the past week and is still at one of its lowest levels.

We use EV/EBITDA because crude tanker companies are cyclical and volatile in nature. These companies are similar to upstream companies (XOP) in that they have high levels of depreciation and amortization with varying degrees of financial leverage. They’re better valued and compared using EV/EBITDA.

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Industry EV/EBITDA multiple

We’ve calculated the industry forward EV/EBITDA by considering only pure play companies such as Frontline (FRO), Nordic American Tankers (NAT), DHT Holdings (DHT), and Euronav (EURN).

The average forward EV/EBITDA multiple on October 19, 2015, was 5.97x, and the median multiple was 5.56x. These were lower than the previous week’s average and median multiples of 6.16x and 5.73x, respectively. Falling and especially low valuation multiples are followed by a rise in stock prices. Investors interested in seeing how valuation multiples have changed over the years can read “Crude Tanker Industry: Will the EV/EBITDA Continue to Fall?” Also, those interested in looking at relative valuation of crude tanker companies can refer to “Comparing Crude Tanker Companies’ Valuation Multiples.”

Lower valuation multiples suggest market participants are cautious, or they believe the rise in tanker rates is not sustainable for a longer period of time. However, this can also be viewed as an opportunity if investors believe the market is overly pessimistic or cautious about the crude tanker industry’s prospects against what analysts are forecasting.

Changes in analyst estimates

In the last week, analysts have raised their 2015 EBITDA estimates for Euronav and DHT Holdings by 2% and 1%, respectively. EBITDA estimates over the past week remained constant for Nordic American Tankers and Frontline. Also, for all companies mentioned in this series, the 2016 EBITDA estimates are almost the same as in the previous week.

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