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Will Crude Oil Tanker Industry Valuation Rise or Fall in May?

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Jun. 6 2016, Updated 11:09 a.m. ET

Valuation ratio for the shipping industry 

Shipping companies are cyclical and volatile in nature. These capital-intensive companies are similar to upstream companies (XOP) with high levels of depreciation and amortization. They have varying degrees of financial leverage. As a result, they’re better valued and compared using EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples.

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The industry’s EV-EBITDA multiple

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

On May 22, 2015, the average forward EV-EBITDA multiple was 6.30x, and the median multiple was 5.58x. In comparison, an average of 6.55x and a median of 5.90x was recorded a month ago. The lowest EV-EBITDA multiple for the crude oil industry in the past year was 5x, and the maximum was 8.05x.

Falling and low valuation multiples are followed by a rise in stock prices. Lower valuation multiples suggest that Market participants are cautious or believe the recent fall in tanker rates from the start of the year will persist. However, this can also be viewed as an opportunity if investors who believe the Market is overly pessimistic.

Changes in EBITDA

As we saw in the first part of this series, stock prices fell for all crude oil tanker companies in May. This was the main reason that valuations contracted. Negative sentiment in the Market was despite the fact that analysts increased their 2016 EBITDA estimates for most of the companies. In the past month, analysts increased their 2016 EBITDA estimate for Nordic American Tankers by 1.2% to $200 million, from $198 million. Similarly, Euronav’s 2016 EBITDA estimate increased by 1.6% to $512 million, from $504 million.

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