scorpio tankers

Scorpio Dominates in Biggest Wager on Tankers Since ’08

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October 22, 2013

scorpio tankersOct. 22 (Bloomberg) — Scorpio Tankers Inc. is leading the biggest construction boom for vessels hauling diesel and oil products since the recession five years ago with plans to have 54 refined-fuel carriers built.

The Monaco-based company, founded in 2009 by an investor whose family has owned ships for six decades, ordered more vessels than any other operator in a year when spending of $4.4 billion on new capacity is already the most since 2008, according to data from Clarkson Plc, the biggest shipbroker. Almost all of Scorpio’s carriers will be launched next year.

The spending shows that shipping of fuels is recovering even as earnings plunge to an all-time low across the merchant fleet. Demand for tankers is rising as the U.S. exports unprecedented amounts of oil products and Middle East refineries expand capacity at a record pace. Owners are betting the shipments will mean longer-than-normal voyages to Europe, where declining profits are causing refineries to close.

“Shifting refinery capacity to Saudi Arabia and the Middle East and increased oil-product exports from the U.S. has led to increased demand for oil-product tankers,” Scorpio President Robert Bugbee said by phone yesterday. “We clearly have first- mover advantage.”

Clarkson Measure

Daily rates for the ships averaged $13,284 this year, 24 percent more than in 2012 and the most since 2008, according to a Clarkson measure of earnings across all types of product tankers. Rates peaked at $49,273 in January 2006, spurring a surge in orders for new vessels just before the global recession. Returns fell as low as $3,491 by April 2009.

Earnings for Large-Range-2 tankers, each hauling as much as 115,000 metric tons of cargo, will average $18,000 a day next year, or 10 percent more than in 2013, according to the average of four analyst estimates compiled by Bloomberg.

Shipping companies ordered $1.67 billion of LR tankers in the past two years and 207 smaller Medium-Range vessels valued at $6.8 billion, data from London-based Clarkson show. Their $4.4 billion of investment this year is the highest since the recession that began in 2008.

Scorpio was formed in 2009 by Chairman and Chief Executive Officer Emanuele Lauro, whose grandfather Glauco Lolli-Ghetti married into an Italian shipping family in the early 1950s, its website shows. The company’s investment program exceeds $3 billion, Bugbee said.

More Refineries

“Scorpio is positioning itself to become the largest oil- product tanker owner,” said Eirik Haavaldsen, an analyst at Oslo-based Pareto Securities AS whose recommendations on the shares of shipping companies returned 20 percent in the past year. “They were very early in setting out to do this. Refining infrastructure is moving to the Middle East and other crude- producing regions, and more refineries are coming.”

Shares of Scorpio rose 59 percent to $11.28 this year in New York and will advance another 5.4 percent to $11.89 in 12 months, according to the average of 12 analyst estimates. The six-company Bloomberg Tanker Index climbed 29 percent in 2013.

Scorpio has ordered about six times more new tankers than Frontline 2012 Ltd., which is controlled by billionaire John Fredriksen and has the second-largest construction program, according to Clarkson. Shares of Frontline 2012, based in Hamilton, Bermuda, climbed 56 percent this year to 42 kroner in Oslo and will gain another 46 percent to 61.46 kroner in a year, the average of five predictions shows.

Maersk Investments

A.P. Moeller-Maersk A/S, the largest shipping line by market value, said Oct. 15 it was considering investing in new MR tankers, in part because of rising Persian Gulf exports. Wilbur Ross, the billionaire who spent $900 million with other investors to buy 30 product tankers in 2011, said in August of this year shipping markets should start improving late in 2014, with the biggest gains related to trade in oil and gas from new reserves such as those found in shale formations.

Europe may present the biggest threat to the anticipated rally in rates because it buys 32 percent of the 20 million barrels a day of oil products shipped annually. The 17-nation euro area’s economy will shrink 0.3 percent this year after a 0.7 percent contraction in 2012, according to the mean of 56 economist estimates compiled by Bloomberg.

The continent consumed less gasoline every year since 1999, according to data from BP Plc. Demand for diesel and other middle distillates slumped 2.3 percent in 2012 to the lowest level since 2003, the data show.

Global Growth

World economic growth next year will be weaker than previously expected, the International Monetary Fund said Oct. 8, reducing its forecast to 3.6 percent from 3.8 percent. That may curtail gains in fuel consumption, in turn slowing the easing in the glut of shipping capacity. The supply of product tankers expanded faster than demand in seven of the past eight years, Clarkson data show.

“As an investor, you want both profit on your operations and return on your assets, which is not the case in the product market yet,” Klaus Rud Sejling, chief commercial officer of Maersk’s tanker unit, wrote in an Oct. 15 e-mail. “Demand in the MR market will develop positively, and this rhymes with the fact that this market is now doing relatively well. There is an ongoing shift in refinery capacity.”

Scorpio ordered 46 product carriers this year, the most of any owner, according to Clarkson. It will report net income of $21 million for this year after losing $26.5 million in 2012, according to the mean of six analyst estimates.

Fredriksen Spending

Frontline 2012 is amassing a fleet of 60 product tankers, gas carriers, and coal and iron-ore transporters. It will report profit of 432.5 million kroner this year, from 8.1 million kroner in 2012, according to the average of six estimates. The orders for fuel tankers represent Fredriksen’s largest-ever investment in the industry, according to Arctic Securities ASA in Oslo.

U.S. refineries are exporting the most refined products in at least two decades as the country extracts the most crude oil since 1992. The government prohibits the overseas sale of most types of crude, spurring shipments of fuels instead. Refiners sent an average of 2.97 million barrels a day abroad this year, the most since at least 1993, Energy Department data show.

Middle East refineries will increase their combined capacity by 530,000 barrels a day this year, a 6.4 percent expansion that is the most in data going back to 1994, according to Pareto Securities AS, an investment bank in Oslo.

Shipments to Europe will extend voyages for tankers because they will replace traditional trade routes. A journey from Latvia to France, a benchmark route for European rates, is 1,300 miles. The same cargo from Saudi Arabia would have to travel 6,200 miles and from the U.S. Gulf of Mexico about 5,600 miles.

“People are investing in product tankers because of this change in trading patterns, which is starting to finally bear fruit,” said Nigel Prentis, the head of consulting at Hartland Shipping Services Ltd., a London-based shipbroker. “Oil trading has been turned on its head.”

– Rob Sheridan, Copyright 2013 Bloomberg.

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