Okeanis Eco Tankers: Bet On Crude Tanker Deficit; Youngest Fleet In Industry (NYSE:ECO)

Introduction

Okeanis Eco tankers (NYSE:ECO) is one of the most interesting companies in the tanker universe. It has a young fleet, 100% equipped with scrubbers. ECO’s capital structures reflect its excellent fleet – 173% total debt/equity and 64.5% total liabilities/total assets. The new fleet comes at a steep price. However, it pays off. ECO margins and returns are far superior to those of similar companies and majors like Frontline (FRO). More or less, all tanker companies pay dividends, although not all are equal. ECO distributes dividends with an impressive TTM yield of 17.39%. Compared to smaller crude oil tanker companies like Nordic American (NAT) and DHT Holdings (DHT), it trades at higher multiples. My verdict is a buy rating.

ECO fleet

ECO has the best fleet, given its age, and all ships are scrubber-equipped. The company has six Suezmax vessels and eight VLCCs. The average age is 4.6 years.

The table above shows the composition of the ECO fleet. The ships are predominantly built in Hyundai Heavy Industries shipyards. For reference, DHT Holdings (DHT) has 24 VLCCs, 100% equipped with scrubbers, with an average age of ten years; Nordic American Tankers (NAT) have 20 Suezmax vessels, at 12.6 years average age, without scrubbers. ECO’s new fleet is an excellent advantage at that point in the shipping cycle. The company is not pressed to renew its fleet, like NAT. So, it can play the cycle of shifting from time charters to voyage charters, reaping benefits from the rising TCE rates. The excess cash could be used to repay its debts, and once the cycle turns, ECO will have spare liquidity to weather the storm and purchase new vessels at better prices.

Where does ECO stand against the other tanker companies? The table below compares ECO with its direct competitors, DHT and NAT.

Besides them, I added crude oil tanker majors (FRO, EURN, TNK), crude + product tanker companies (TNP and INSW), and product tanker-only companies (STNG, OTCQX:HAFNF, TRMD). ECO has the youngest fleet, though it comes at a price of 123% P/NAV. NAT and DHT have concentrated fleets, too, though older, which is reflected in their valuations. The large crude oil companies command lower valuations due to their older fleets’ lower percentage of scrubber-fitted ships. FRO is an exception.

3Q23 and 4Q23 figures

3Q23 was a strong quarter for ECO. The chart below shows performance and financial highlights for 3Q23 and 9M23.

VLCC day rates increased from $28,900 in 3Q22 to $57,900 in 3Q23. However, Suezmax TCE dropped from $51,200 in 3Q22 to $35,200 in 3Q23. Looking at 9M23 vs 9M22, TCE growth was steeper – VLCC TCE increased by 166% and Suezmax TCE by 54%. Over the same period, fleet-wide OPEX increased by 10% while composite TCE increased by 104%. The change in revenue composition is worth mentioning. In 9M22, ECO employed 44% of ships under time charter, while in 9M23, 23%. This means the company increases its spot exposure while reducing its time charters. It is a smart move at the current stage of the shipping cycle.

3Q23, the company realized $48,900/day composite TCE, 26% higher than in 3Q22. Operating expenses per ship increased from $7,941/day to $9,350/day, or 17% YoY. As seen, the TCE grew at a higher rate than operating expenses, which resulted in increased adjusted EBITDA and EPS. In 3Q23, ECO delivered $45.5 million adjusted EBITDA, while in 3Q22, it delivered $37.4 million. The adjusted EPS increased from $0.59 to $0.63, respectively. The table below shows 3Q23 financial highlights.

9M23 performance followed the rising TCE rates. TCE Revenue grew by 115%, adjusted profit by 257%, and adjusted EPS by 240%.

In the last company presentation, ECO released preliminary figures for 4Q23.

4Q23 composite TCE is $45,300, $3,600 lower than 3Q23. VLCC rates are $45,200, and Suezmax rates are $45,500. Suezmax TCE grew by 28% QoQ, while VLCC TCE dropped by $12,700 or had a 21.9% decline QoQ. Compared to 4Q22, the fleet composite rates shrunk significantly from $63,800 4Q22 to $45,300 4Q23. 4Q23 time charter exposition is 11%, while spot is 89%. QoQ ECO increased its spot exposure.

ECO financials

Given ECO’s excellent fleet, higher leverage is expected. Over the last few years, the company has reduced its debts. Since the peak of 2019, total debt/equity dropped from 218% to 173% and long-term debt from 200% to 154%.

ECO maintains adequate liquidity levels – $76.5 million cash, LTM operating income of $226 million, and LTM operating cash flow of $205 million. On the other hand, LTM net interest expenses are $45 million. Total debt is $704 million (including lease agreements), while long-term debt is $626 million.

The table below shows ECO’s long-term debt obligations:

ECO finances its ship purchases with the following ship financiers: Ocean Yield, ABN AMRO, Credit Agricole, and Kexim Asia. The fleet composite interest rate is SOFR + 3.17%. Ocean Yield funding commands the highest rates. ECO financed two Suezmax ships (Milos and Polegios) and two VLCCs (Despotiko and Rhenia) with Ocean Yield. The rates are set at SOFR plus >5% premium. ABN AMRO financed two Suezmaxes (Kimolos and Folegandros) and one VLCC (Keros). The rates are SOFR + 1.9% premium.

On February 01, 2024, ECO announced an agreement for a $34.7 million senior secured credit facility provided by Kexim Asia Limited. The purpose of the facility is to purchase back the 2016-built Suezmax Milos. The transaction is expected to be completed in February. The terms of the facility are as follows: interest rate, SOFR + 1.75%, maturity in six years, quarterly installments of $0.725 million, and one balloon payment of $17.3 million at maturity.

In 1Q24, ECO amended its lease agreements for Nissos Kea and Nissos Nikouria. The new agreements come with lower interest rates at SOFR + 2.00% and extended maturities to 20230 for Kea and 2031 for Nikouria. The company executed a new sale and lease back agreement on Nissos Anafi. The $73.5 million of proceeds will used to repay its debt on Anafi.

The chart below compares ECO, DHT, and NAT margins and returns. I added FRO due to its qualitative similarities (young fleet and scrubbers) with ECO despite the larger fleet. All figures are LTM.

ECO is the undisputed leader in the group, including FRO. The company scores 66% Gross margin, 60.8% EBITDA Margin, and 43.7% ROE. NAT lags due to its older fleet and lack of scrubbers. FRO and DHT share second and third places, respectively. The DHT fleet is ten years old and is 100% equipped with scrubbers. ECO’s young fleet pays off.

ECO pays dividends with impressive yield at 17.39% TTM. NAT and DHT yields are in the 10-12% range. ECO TTM dividend rate is $4.95/share.

The dividends paid by ECO are related to free cash flow. The company strives to distribute nearly 100% of its free cash flow. The chart below shows ECO shareholders’ return policy.

In 3Q23, the company distributed $0.60 dividends per share. As seen on the right chart, the dividends are variable. Despite the lower 4Q23 TCE, I expect ECO to continue paying dividends with attractive yields.

Valuation

To value the ECO fleet, I used Fearnley’s regular report. The table below gives the latest estimates for tankers and bulkers second hand prices.

The list below shows my price estimates:

• 5Y old Suezmax $81 million
• 5Y old VLCC $105 million

Inputs for the ECO equation are:

• Fleet replacement value: $1,326 million
• Current assets: $142 million
• Total Liabilities: $736 million

ECO’s market capitalization is $900.8 million, while its net asset value is $732 million. Hence, ECO trades at 123% P/NAV. For reference, NAT trades at 88% P/NAV and DHT at 103%.

The following table compares ECO multiples with its ten years of history (the company’s IPO was in 2018), global energy stocks, and global broad equities.

Looking at Price to Book, ECO is expensive compared to its history, global energy, and broad equities. Conversely, measured with EV/Sales LTM and EV/EBITDA LTM, ECO falls in the bottom percentiles vs its past multiples.

Last but not least is to compare ECO with its prime competitors. To add more context, I added two tanker majors, FRO and EURN.

ECO trades at 3.56 EV/Sales, 5.85 EV/EBITDA, and 2.2 Price/Book. ECO commands higher multiples than DHT and NAT (except EV/EBITDA). However, FRO is the most expensive on the list. Despite FRO having a larger fleet, between FRO and ECO, there are similarities: younger fleets and 100% of the fleet are equipped with scrubbers. Those advantages come at a price.

Final thoughts

ECO is an exciting proposition with its young fleet, fully equipped with scrubbers. The tanker cycle is in the middle of its expansion phase, so the company is well-positioned to gain significant profits. What comes up then goes down, and this is valid for shipping. Sooner or later, the expansion will transform into contraction. Having a young fleet gives multiple advantages:

• Lower operating expenses for maintenance and repairs. In a few more years, the operating expenses will remain relatively low compared to financing expenses and voyage expenses.
• Longer residual life of the assets, so ECO is not pushed to add new vessels in the coming years.
• Since the company is not pressed to invest in new ships, it can repay its debts and keep liquidity for rainy days. First to ensure its survival and second, to acquire new vessels once the shipping cycle moves down and when ship prices decline significantly.
• Benefiting from the structural inflationary pressure. The rising inflation makes new vessels more expensive and pushes higher shipping company’s valuations. ECO is not pressed to renew its fleet so that it will benefit significantly from NAV revaluation.

Structural inflationary pressures will significantly impact the supply side of new tankers and the current tanker companies’ valuations. Adding to rising financing costs, higher steel price and higher wages, means we have rising price for newbuilds, hence increasing NAV. The higher order effect is a further decline of order books.

The equation is simple:

rising cost of financing + rising cost of labor + rising cost of steel -> rising price of new builds –> increasing NAV -> declining order book -> tighter supply side

Having new ships comes at a cost. ECO has higher debt levels compared to NAT and DHT. The interest rates might not come down as soon as the majority expects. It seems the FED postponed rate cuts for longer. The cost of financing may remain elevated, resulting in higher costs of servicing debts. ECO has 173% Total Debt/Equity and 64.5% Total Liabilities/Total Assets. The company maintains adequate liquidity, and I do not expect any issues servicing its debts.

ECO seems expensive, based on its current valuation. However, it is justified, given its fleet. Considering the inflationary pressure and its impact on shipping companies’ NAV, ECO no longer seems that expensive. I would give a strong buy if P/NAV were below 90%. At the current level, I would buy some shares and use the dips to add more size. I give ECO a buy rating.