STNG - Scorpio Tankers: Good Q2 Results And Potential For Further Growth

2023-08-12 21:46:08 ET

Summary

• Scorpio Tankers is one of the largest product tanker operators, with a modern fleet and a focus on sustainability.
• Q2-2023 results showed a strong FCF generation supported by high TC day rates.
• The company has implemented a share repurchase program and is expected to benefit from high tanker rates and increasing demand for refined products.
• Share price could increase by 45%.

About 10 days ago, Scorpio Tankers Inc. (NYSE:STNG), one of the largest product tanker operators in the world, released its Q2-2023 results showing strong figures. In this article, I will provide an analysis of the Q2-2023 earnings and I will explain why I believe Scorpio Tankers is a good BUY opportunity.

If you are interested in tanker companies, I also cover Teekay Tankers and International Seaways .

About Scorpio Tankers

Founded in 2009, Scorpio Tankers is one of the leaders in the worldwide marine transportation of refined oil products. Based in Monaco and listed on the NYSE, Scorpio Tankers has a modern fleet of 112 vessels with an average age of 7.5 years. Particularly, the fleet is composed of 14 Handymax, 59 MR and 39 LR2. In addition, 87 Scorpio Tankers’ vessels are equipped with the scrubber mechanism that is needed to eliminate sulfur and nitrogen oxides from the exhaust gases, thus making the fleet more sustainable from an environmental point of view.

Stock price

The stock is currently trading at $49.9/share, equivalent to a market cap of $2.59 B, and is up 18.6% year-on-year while, since the beginning of the year, Scorpio Tankers lost about 7%. The 52-week minimum was touched on October 5 ^th , 2022, at $39.1/share while the 52-week maximum was recorded in the early months of this year at $63.2/share (February 16 ^th , 2023).

Q2-2023 results

Scorpio Tankers generated revenues of $329 M in Q2-2023, down 19% from the $405 M generated in the same quarter of the previous year. The reduction in revenues can be explained by time charter equivalent (TCE) rates that were 11% lower year-on-year (from $36k/day in Q2-2022 to $32.1k/day in Q2-2023) and by the reduction in the average number of operating vessels (from 120 in Q2-2022 to 112 in Q2-2023). As can be seen from the chart below, rates dropped among the MR class vessels (-18%) and Handymax (-36%) while LR2 was the only class that saw an increase in TCE day rates, from $36k/day to $39.5k/day.

Total operating expenditure decreased by 10% (or $17 M) year-on-year to $158 M. The largest cost items were vessel operating costs ($79 M, up 3% y-o-y due to inflationary pressure) and depreciation ($51 M, stable y-o-y). G&A increased 19% to $27 M mostly due to a rise in the amortization plan of restricted stock awards.

Since revenues decreased more than costs, EBIT was down 26% to $171 M. During Q2-2023, Scorpio Tankers reported a net income of $132 M, down 31% year-on-year.

Cash flow from operations for the first six months of the year was positive at $501 M, while cash flow from investing was negative at -$12 M due to investments carried out in vessel equipment such as scrubbers and ballast water treatment systems. Cash flow from financing was negative at -$552 M since the company carried out some initiatives to restructure its capital and reduce its debt exposure. In particular, there was a repurchase of common stock for a total of $399 M, repayment of debt of $260 M followed by new debt issuance ($391 M) at a lower interest rate. The purpose of this refinancing is to reduce Scorpio’s cost of debt, freeing up capital for other value-added initiatives. At the end of Q2-2023, Scorpio Tankers’ net debt is $1.4 B, about $100 M less than the $1.5 B of the previous quarter.

Shares repurchase program

As mentioned above, Scorpio Tankers carried out a significant share repurchase program that started in July 2022 and, so far, led to the repurchase of 12.5 M shares worth $582 M. The reason behind this share repurchase program is that Scorpio’s management believes that the company is trading at a discount to its NAV and therefore it prefers buying back shares rather than paying out dividends.

Refined product tanker market

The refined product tanker market was disrupted at the beginning of 2022 with the first rumors about a possible Russian-Ukrainian conflict. Since then, day rates for oil and refined product tankers rallied to levels never seen before due to sanctions imposed on Russian oil that completely changed the oil distribution dynamics around the world. Since Q1-2022, high TCE rates have supported strong FCF generation for most of the tanker companies, including Scorpio Tankers, and I believe that the FCF bonanza is far from over.

Even though rates are gradually declining, they are still at incredibly high levels as can be seen from the picture below.

From my point of view, rates will remain at a higher level than those of Q1-2022, thus ensuring a bright future for refined product tanker companies, for different reasons.

First of all, daily demand for refined products in H2-2023 is expected to exceed 2022 demand by about 2 or 3 Mbbl/day reaching 70.6 Mbbl/d in Q4-2023. Demand growth will be mostly supported by China's recovery after COVID lockdowns and by the EU which needs to replace refined products that it had been sourcing from Russia. In addition, global inventories of refined products are at low levels (see picture below) leading to an increased demand for seaborne refined products from countries with higher inventories to countries with lower levels. However, the availability of tankers is currently limited and even in the future it will not increase too much since order books for new-built vessels are at historically minimum levels. In order words, while demand for tankers is increasing, supply is scarce. These dynamics are likely to support high tanker rates for the next quarters.

Risks

One of the main risks to which Scorpio Tankers is exposed is represented by oil (and refined products) demand trends. As of today, IEA forecasts an increase in oil demand for the next years (which would be good for tanker companies), however, as the COVID pandemic has taught us, even the most unexpected event could become reality. Despite the likelihood of a disruptive event of a magnitude like COVID is low, it cannot be completely excluded.

The other relevant risk I see for Scorpio is associated with potential environmental issues, either due to stricter regulations on CO2 emissions or due to potential refined product leaks with consequent environmental damages and costs to incur.

However, as mentioned at the beginning, Scorpio’s vessels have an average age of 7.5 years and are quite modern thus limiting the risk of incidents and CO2 emissions.

Target Price

Scorpio Tankers is currently covered by 11 equity research analysts. Ten of them have provided a buy (2) or strong buy (8) rating while only one has issued a hold recommendation. The average target price forecast from analysts is $72/share, which would imply a 45% upside versus the current stock price.

Conclusion

I believe that Scorpio Tankers is an interesting buy opportunity since it operates in an industry that is benefiting from favorable dynamics. Within the industry, Scorpio distinguishes itself from peers for having a large and modern fleet that will allow the company to minimize capital expenditure in the next years. From a financial point of view, Scorpio Tankers is a robust company and management has been working to reduce the leverage and improve the balance sheet. At the current price of $49.9/share, Scorpio Tankers is a buy.

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