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Crude Tanker Industry’s Valuation Falls: What Does It Mean?

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The tanker industry’s valuation multiple

The crude (DBO) tanker industry’s valuation multiple, or industry EV-to-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-to-EBITDA because crude tanker companies are cyclical and volatile in nature. These companies have high levels of depreciation and amortization with varying degrees of financial leverage. It’s better to value and compare them using EV-to-EBITDA.

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Industry EV-to-EBITDA

We’ve calculated the industry forward EV-to-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-to-EBITDA multiple on February 26, 2016, was 5.83x, and the median multiple was 4.99x. These figures were lower than the average and median multiples recorded exactly one month before. On January 26, 2016, the average and the median multiples were 6.57x and 6.6x, respectively. The lowest EV-to-EBITDA for the crude industry in the past year has been 5x.

Falling and low valuation multiples are followed by a rise in stock prices. Investors interested in looking at the relative valuation of crude tanker companies can refer to Comparing Crude Tanker Companies’ Valuation Multiples.

Lower valuation multiples suggest market participants are cautious or believe that a recent fall in tanker rates is irrecoverable. However, this can also be viewed as an opportunity if investors believe the market is overly pessimistic.

Valuation multiples have contracted mainly due to pessimistic sentiments of market participants, which resulted in a major sell-off. Frontline’s (FRO) stock price was down by 39% for the above-mentioned period, whereas its EBITDA was revised upward by 5.9% by Wall Street analysts. NAT and EURN were also down by 6% and 28%, respectively, and their EBITDAs were revised downward by 3% and 1.5%, respectively. DHT’s stock price was also down by 39%, although its EBITDA was not revised by Wall Street analysts.

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