STNG - Scorpio Tankers: Skyrocketing Rates Lower Cash Breakeven Shares Trading Below NAV

2024-04-26 17:07:48 ET

Summary

• Skyrocketing rates due to ongoing geopolitical conflicts should propel STNG to beat consensus estimates.
• At current rates, STNG should generate significant cash flow for deleveraging, dividends, and share repurchases. We estimate STNG could reduce its share count by 13% to 18%, all things equal.
• The resolution of geopolitical conflicts will reduce rates. Moreover, supply growth will accelerate, as the order book as a percentage of total fleet has begun to pick up.
• However, as the market fleet is aging (13 years), we believe that scrapping activity will help offset future fleet growth.
• Shares are trading at 0.9x NAV and 4x FCF. STNG bull case is further strengthened by 1) young age fleet vs. the market and 2) 77% of the fleet is already scrubber-fitted.

Investment Thesis

The increasing product rates, driven by ongoing geopolitical tensions, weather disruptions, and dislocated refineries, could propel STNG to exceed consensus expectations. Given the current constrained supply environment and lower cash breakeven levels, STNG is poised to generate massive free cash flow, which could be allocated towards deleveraging, dividends, and share repurchases. However, we anticipate significant newbuilds, particularly LR2 tankers, to enter the market next year, potentially putting pressure on freight rates. Nonetheless, the potential for scrapping of aging fleets should help offset fleet growth.

Introduction

Scorpio Tankers ( STNG ) is a Marshall Islands tanker company specializing in the transportation of refined petroleum products. Established in 2009, STNG began its operations with just three Panamax tankers transferred from Simon Financial Limited, which was owned by the Lolli-Ghetti family's Scorpio Group. Shortly after its initial public offering in 2010, the company embarked on its Newbuilding program, contracting a total of 55 product tankers for over $2 billion in 2013. STNG initially planned to operate Very Large Crude Carrier ("VLCC") tankers. Ultimately, the company decided to sell seven VLCC that were under construction back in 2014, and it has since maintained its focus as a pure-play product tanker company....

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