Scorpio Tankers: Bulls, Bears, and ‘Shiptwits’

By Barry Parker (gCaptain) –

Tanker market watchers eagerly awaited the Q1 earnings report from product tanker behemoth Scorpio Tankers (NYSE: STNG), with day traders and volatility players ready to pounce. While the reported results were very much in line with consensus estimates, the timing was less than optimal, coming as the U.S. equity markets cratered on recession fears and further worries about U.S. regional banks.

The share price, which had reached above $60 a few times during February and March, and again in mid-April, was struggling to hold in the upper $40s as many buyers backed away. Ed Finley-Richardson, a mainstay among the Shiptwits (i.e. shipping folks on Twitter, some of whom are active as day traders), lamented the “lack of support” as someone unloaded a large lot—30,000 shares.

Not so for leading shipping trader J Mintzmyer, who was stepping up his positions. He wrote on Twitter: “Best buying opportunity in shipping today since at least last July… Back long STNG and added to a few others.” Another tweet indicated that he was looking at May call option spreads—a strategy that would gain in value on a modest upward move but was holding off and evaluating the development of the share price.

Traditional analysts, followed by longer-term investors, continued to be bullish (optimistic) on STNG shares, with Deutsche Bank (Chris Robertson is the lead analyst on this name) noting that: “The company reported average 1Q23 rates of $47,356/day for LR2s, and $34,616/day for MRs. Looking ahead, Scorpio has already booked 39% of its open LR2 days at $53,000/day and 35% of its open MR days at $37,000/day.” For perspective, analysts at tanker brokers Poten & Partners pegged spot LR2s in clean trades at $50,700/day (AG to FE) and MRs at an average of $9,300/day on an Atlantic triangulation.

In addition to their views on the tanker markets and how STNG could benefit, analysts also emphasized STNG’s shareholder-friendly strategies of paying out dividends and buying back shares on price dips. Discussing the dividend, Deutsche Bank pointed to a raise in the quarterly payout, saying: “On an annualized basis, the $0.25/share dividend represents a 1.9% yield based on Monday, May 1, closing price of $51.39/share.” Regarding the payout, the analyst said: “We believe the company will continue to prioritize strengthening the balance sheet while strategically repurchasing shares under its current $250 MM securities repurchase program.”

STNG has also been deleveraging through buying out leases using its cash hoard (where previously agreed-upon purchase prices are currently well below the elevated values of vessels). Jefferies analyst Omar Nokta opined that: “Management continues to focus on deleveraging with net debt down to $1.4 billion and its net Loan to Value at a very solid 25%.” Deutsche Bank commented: “The company has exercised several purchase options for its vessels over the past few months, resulting in debt reduction of $105.6 MM. In addition, it has given notice to exercise several more purchase options for May and June, which should result in further debt reduction of $297.1 MM.” STNG has also been arranging for new loan facilities from traditional shipping banks, which could be used to pay out leases (bank debt, even with increased interest costs, is cheaper than lease debt).

Summing up his views, Nokta, from Jefferies, said: “We continue to favor Scorpio as a top play in the tanker sector with a high-end fleet, strong balance sheet and commitment to return capital to shareholders.” He pointed to an estimated Net Asset Value (NAV) in the mid $60s- well above the present share price. The NAV (think of the traditional book value concept – but adjust the asset prices to reflect shipping’s Sale & Purchase market) is a dynamic that many investors in shipping shares use to evaluate whether to buy or sell shipping shares. Other analysts look to cash flows; Evercore ISI’s Jon Chappell, also bullish on STNG, took the view that: “It is dangerous to extrapolate quarter-to-date figures, especially given the volatility of the market of late, with LR2s moving higher and MRs fading a bit, but, to date, these spot rate estimates underwrite a 2Q23 cash flow outcome that is well above current expectations.”

Putting all this together, there is a sentiment of full steam ahead. Hopefully, the broader stock market will cooperate.

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