Scorpio Tankers Scores a Homerun as Product Tankers Hit It Out of The Park

By Barry Parker (gCaptain) –

Tanker stocks have been among the biggest gainers this year, propelled by the recovery in demand following the pandemic, the slowing of post-2020 inventory drawdowns (good for tankers as stockpiles need replenishing), and, starting at end February, shifting cargo flows due to the ongoing situation in Ukraine.

One standout has been Scorpio Tankers (NYSE: STNG), a leader in the transport of refined products with a controlled fleet (meaning owned, leased and chartered in) 113 tankers, made up of 39 LR2’s, 60 MRs, 14 Handymax.

Investors waiting eagerly for STNG’s Q3 earnings report were not disappointed. Actually, it was the opposite with a big earnings “beat”, where reported earnings exceeded the already highly optimistic consensus forecasts. Since the beginning of 2022, when STNG shares were trading at $13, the stock has literally been a “four bagger”, as in up 400%.

Following its Q3 announcement, it was trading at $53/share. A comparison with 2021 shows how dramatically the tides have shifted. Q3 2022 showed net income $264.8 million, which works back to $4.29/share (if possible earnings dilutions from share conversions are considered); Q3 in 2021 showed a similarly adjusted net loss of $76.1 million, translating to a loss of $1.39/share. The gains are indicative of improved “time charter equivalent” (TCE) levels; with LR2’s making $48.1K/day (versus year ago $10.9K), the MR’s yielding $41.1K/day (versus $10.3k/day in Q3 2021), and the Handies earning $46.2K/day (versus $7.4K/day).

Pricing of stocks in the marketplace reflects far more than the here and now. Analyst Greg Lewis at the brokerage BTIG nicely summed up the grounds for optimism. In a note to investors, he wrote that: “Looking ahead to Q4, STNG has already booked ~42% of its MR spot days at ~$43k and ~55% of its LR2 spot days at ~$58k, which points to Q4 operating cash flow of about $298M. Bottom line we expect STNG to continue to generate strong cash flows, which will continue to provide ample capacity to continue to deleverage the balance sheet and buy back stock over the next few quarters.”

The “deleveraging” refers to repayments of debt; in Q3, where some $2.4 billion of debt (not adjusted for cash) was still outstanding on its balance sheet. On the equity portion of the balance sheet, stock buybacks, a shrewd move if the share price dips below Net Asset Value (NAV), besides providing cash to shareholders, will lower the outstanding share count, and therefore increase the all-important earnings per share (EPS). $250 million was recently authorized for buybacks.

It gets better. STNG has also been exercising purchase options attached to various leases and longer term charters. Option traders know that selling “calls” is dangerous in rising market, following the huge market surge, STNG is effectively able to buy vessels from option writers (leasing companies selling vessels) at discounts to current asset prices- while, at the same time, reducing debt.

STNG’s report also revealed that, in Q3, it had exercised, or given notice to exercise, purchase options on 10 vessels leased in from Chinese lessors, leading to a debt reduction, all told, of $150 million. While we are only one month into Q4, STNG announced plans for eight more ship purchases from lessors, which will bring about debt reductions of an additional $141 million.

Analysts Chris Robertson and Amit Mehrotra from Deutsche Bank said that STNG was on track to have paid off $1 Billion of debt in 2022, which is important in lowering the daily breakeven vessel costs for the inevitable lulls in the market (when the crowds stop cheering) at some point out in the future.

STNG shares rose 7.47% on the day to close at $51.52.