Euronav Braces for Write-Down amid Compliant Fuel Price Drop

Belgian tanker shipping company Euronav had prepared well in advance for the implementation of the IMO sulphur cap having bought significant amounts of compliant fuels as it worked to hedge from fuel price volatility come January 1, 2020.

To remind, back in September 2019, the company purchased a total of 420,000 metric tons of compliant fuel oil and marine gasoil which was stored on its giant tanker Oceania.

Furthermore, the company secured a USD 100 million revolving loan to bankroll the compliant fuel inventory.

The Belgian shipowner had sufficient fuel to cover more than half of its compliant fuel requirements for calendar 2020, ensuring a smooth transition to the new regulations.

Nevertheless, as the latest turn of events has prompted compliant fuel prices to drop, Euronav’s IMO 2020 compliance strategy is likely to hit some hurdles.

The VLSFO prices, standing at around USD 60 per metric ton, are well below the acquisition cost which was thought to be fairly competitive at USD 447 per metric ton last year.

As such, Euronav expects its low sulphur fuel which has not been consumed yet to lead to a write-down in the first quarter of 2020. The value of the write-down is yet to be confirmed.

“The purchase of this compliant fuel provided protection for Euronav in Q4 2019 and Q1 2020 during periods of very high fuel spreads and Euronav is currently using cheaper feedstock from buying LSFO in the open market,” the company said.

Commenting on the market outlook, Euronav believes it is still too early to quantify the impact due to the Covid-19 outbreak on the company’s results.

“A combination of rapidly increasing crude supply and a buoyant market for crude storage is underpinning a very robust tanker freight market and strong cash generation presently. Management is however cognisant that there is currently a substantial reduction in crude demand due to the worldwide impact of the Covid19 outbreak and more specifically to the policies to restrict the movement of people. As a consequence, a significant portion of the oil currently produced and transported is destined to crude inventories,” Euronav said.

“The build-up of these inventories could in the future impact the demand for the oil transportation sector and in particular the tanker markets. At the same time, a lower crude price environment is beneficial for the shipping companies in general as it leads to lower fuel costs.”

The tanker company reported a net profit for 2019 of USD 112 million, USD 7 million lower than the preliminary results reported on 30 January of USD 119 million.

This difference is mainly due to the reversal of the capital gain on the sale and lease back of the 3 VLCCs (USD 9.3 million) originally recognized in full at year-end 2019 but which needs to be spread over the lease term.