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Industry Note No. 20 - The Art of Valuation - In the Mood for Crude pdf

In the first part of our two part series on asset forecasting, we discussed how regression analysis may be helpful in predicting tanker values. In this note, we present another valuation methodology commonly referred to as discounted cash flow (DCF). This methodology uses a discount rate (cost of capital) to determine the present value of future cash flows. The future cash flows are calculated on an unlevered basis using EBITDA due to its capital structure neutrality. Our methodology assumes a hold-to-maturity approach (sold for recycling) which increases our final cash flow by the historical, long-term average residual value. The results of this DCF analysis indicates an attractive implied valuation for second-hand Suezmax, Aframax and Panamax crude tankers as well as LR2 and LR1 product vessels. VLCCs appear to be fairly valued at today’s prices while MR2 tankers may be overvalued based on our analysis. The following discusses how we reach this conclusion.