A few years ago, Scorpio Tankers, Inc. (STNG) caught my attention in a tanker industry presentation. After conducting my due diligence and following this company’s operation and performance for a year or so, I took a small initial position in Scorpio Tankers due to (a) a very aggressive rapid expansion of its fleet of newly built modern product tankers, (b) substantial growth in revenues annually and quarterly, (c) increasing dividends and (d) significant improvements in fundamental financials since 2013.
PRODUCT TANKER SECTOR
For comparison purposes, my post looks at only three types of tankers - crude, product and chemical.
• Crude tankers are “upstream” in the petroleum supply chain, moving large quantities of unrefined crude oil from its point of extraction to refineries; crude oil tankers also carry diesel oil or residual fuel oil “dirty” products.
• Product tankers, generally much smaller in size, are “downstream”, designed to move refined products (gasoline, jet fuel, kerosene, naphtha and gas oil) from refineries to points near consuming markets. Scorpio Tankers fits in here with only a product tanker fleet.
• Chemical tankers, also in general smaller in size (up to ~60,000 dwt) have a large number of tanks and special coating that allow them to carry organic / inorganic chemicals, vegetable oils and other special cargos to end users. Chemical tankers of IMO III grade are also able to carry refined petroleum products and are considered part of the product tanker fleet.
Here’s a global snapshot of the product, crude and chemical tanker fleet in 2013:
TANKERS PRODUCT CRUDE CHEMICAL/ TOTAL OTHER NUMBER OF VESSELS 2,257 1,996 3,222 7,475 % of Total 30% 27% 43% 100% CAPACITY million dwt 111.3 346.1 50.5 507.9 % of Total 22% 68% 10% 100% AVERAGE AGE Years 8.0 8.1 8.2 8.1
dwt: deadweight ton
Source: Jeffries LLC Crude, Product and Specialty Tankers, 6/19/2013
A product tanker is designed for the carriage of refined petroleum products whose cargo tanks are usually coated with epoxy based paint to facilitate the cleaning of the tanker between the carriage of different cargoes and to prevent product contamination and hull corrosion. A product tanker typically has multiple cargo tanks capable of handling different cargoes simultaneously. The vessel may have equipment designed for the loading and unloading of cargoes with a high viscosity. The Scorpio Tankers fleet has included the following 5 sizes of product tankers:
• Handymax: 25,000 dwt to 40,000 dwt
• Medium Range (MR): 40,000 dwt to 55,000 dwt
• Long Range 1 (LR1): 55,000 dwt to 80,000 dwt
• Long Range 2 (LR2): 80,000 dwt to 120,000 dwt
• Panamax: 55,000 dwt to 85,000 dwt with the maximum length, breadth and draft capable of passing fully loaded through the Panama Canal.
Global trade routes of product tankers have substantially expanded as shown in 1986 versus 2012 worldwide route maps on pages 16 and 17 in the following Jeffries LLC presentation:
In 1986, trading activity was fairly limited geographically with most of the supply originating in the Middle East. By 2012, market and trading sophistication had evolved, and the market had more than quadrupled from 716 spot fixtures in year 1986 to 3,227 spot fixtures in year 2012. New sources of supply, increased participants and variation in product specifications resulted in this trade picture.
In 2013, the ownership distribution in the product tanker sector, similar to the crude tanker sector, was highly fragmented with the top 25 owners owning only 34.2% of the total capacity.
Ownership Distribution by dwt
• Top 10 Owners: 20.2%
• Net 15 Owners: 14.0%
• Rest of Owners: 65.8%
No single owner owned more than 2.8% of the total capacity.
Top 5 Ownership Distribution by dwt
Rest of Owners: 87.7%
SCORPIO TANKERS BUSINESS DESCRIPTION
Scorpio Tankers Inc. owns and/or operates a fleet of modern product tankers. The company is incorporated in the Republic of the Marshall Islands (located in the central Pacific Ocean) and has principal executive offices in Monaco and New York.
Since its April 2010 IPO, Scorpio Tankers has aggressively increased its fleet from 11 company-owned product tankers to 76 today with 8 newbuildings under construction as shown in the following table.
PRODUCT HANDY MR LR1 LR2 PANA- TOTAL TOTAL DWT Change TANKERS MAX MAX NO. DWT YoY OWNED To Date 15 45 0 16 0 76 4,669,129 2014 15 39 2 11 0 67 3,954,972 241% 2013 1 15 2 1 1 20 1,159,491 30% 2012 1 7 4 1 1 14 888,520 34% 2011 2 2 4 1 1 10 664,403 -11% 2010 4 2 4 0 1 11 744,657 TIME CHARTERED-IN To Date 5 4 4 4 0 17 1,107,434 2014 7 3 5 5 0 20 1,309,962 (31%) 2013 8 7 5 8 0 28 1,887,748 17% 2012 7 7 3 7 0 24 1,609,390 178% 2011 6 5 0 1 0 12 579,069 202% 2010 3 0 1 0 0 4 191,495 NEWBUILDINGS under construction To Date 0 1 0 7 0 8 821,993 2014 0 6 0 7 0 13 1,081,993 -68% 2013 14 29 0 12 0 55 3,408,000 41% 2012 8 23 0 8 0 39 2,412,000 480% 2011 0 8 0 0 0 8 416,000 2010 0 0 0 0 0 0 0
While increasing its fleet of newly built company-owned product tankers, STNG operated time chartered-in vessels from 4 in 2010 to a peak of 28 in 2013 that is now on a downward trend.
Since 2010, after looking at and delving in some areas of interest, Scorpio Tankers has evolved into a pure play product tanker company today. For example, in December 2013, STNG had ordered 7 Very Large Crude Carriers (VLCCs) for construction in 2015 and 2016, but shortly thereafter decided to sell the 7 shipbuilding contracts for a gain of $51.4 million. The sale of the VLCC contracts in 2014 and the fleet of Very Large Gas Carriers (VLGCs) in 2013 demonstrates the company’s ability to capitalize on opportunities and realize gains whenever available.
Today, Scorpio Tankers has one of the largest and youngest product tanker fleets afloat with an average age of just 1.1 years compared with the 9.4 average age of the world tanker fleet. Scorpio Tankers has a significant competitive advantage over other competing tanker companies because its younger ships benefit from greater efficiency, reducing operating and maintenance costs, thus increasing profits. In addition, its new vessels are favored by customers because of the commercial and technical flexibility these vessels provide.
Here’s Scorpio Tankers’ chartering strategy:
We intend to employ a chartering strategy to capture upside opportunities in the spot market while using fixed-rate time charters to reduce downside risks. Through our participation in tanker pools managed by the Scorpio Group, we believe that the utilization and economic returns of our vessels will be enhanced.
Generally, we operate our vessels in commercial pools on time charters or in the spot market.
To increase vessel utilization and thereby revenues, we participate in commercial pools with other shipowners of similar modern, well-maintained vessels. As of March 30, 2015, 57 of the vessels in our Operating Fleet operate in one of the Scorpio Group Pools. By operating a large number of vessels as an integrated transportation system, commercial pools offer customers greater flexibility and a higher level of service while achieving scheduling efficiencies. Pools employ experienced commercial managers and operators who have close working relationships with customers and brokers, while technical management is performed by each shipowner. Pools negotiate charters with customers primarily in the spot market. The size and scope of these pools enable them to enhance utilization rates for pool vessels by securing backhaul voyages and contracts of affreightment, or COAs, thus generating higher effective TCE revenues than otherwise might be obtainable in the spot market.
Time charters give us a fixed and stable cash flow for a known period of time. Time charters also mitigate in part the seasonality of the spot market business, which is generally weaker in the second and third quarters of the year. In the future, we may opportunistically look to enter our vessels into time charter contracts. We may also enter into time charter contracts with profit sharing agreements, which enable us to benefit if the spot market increases. As of the date of this annual report, four of the vessels in our Operating Fleet are operating under long-term time charters (with initial terms of one year or greater).
A spot market voyage charter is generally a contract to carry a specific cargo from a load port to a discharge port for an agreed freight per ton of cargo or a specified total amount. Under spot market voyage charters, we pay voyage expenses such as port, canal and bunker costs. Spot charter rates are volatile and fluctuate on a seasonal and year-to-year basis. Fluctuations derive from imbalances in the availability of cargoes for shipment and the number of vessels available at any given time to transport these cargoes. Vessels operating in the spot market generate revenue that is less predictable, but may enable us to capture increased profit margins during periods of improvements in tanker rates.
STNG CORPORATE FINANCIALS
Maritime tanker companies are cyclical businesses that require vigilance by investors. Currently, the 2014-2015 collapse in crude oil prices has resulted in a corresponding drop in the price of fuel consumed by Scorpio Tankers vessels that, in turn, has enhanced corporate margins and the profitability of voyages. Also, cheaper oil has stimulated economic activity and greater demand for down-stream petroleum products (especially gasoline) that, in turn, has increased demand for product tankers to deliver these products from refiners to end users. For product tankers, Q2-2015 was the best quarter since the end of the tanker super-cycle in 2008. Each of the main segments, MRs, LR1s and LR2s averaged around $25,000/day, despite a steady influx of new tonnage. Some market pundits indicate that product tanker rates could find additional support from longer-haul voyages and less triangulation options, and rates for Q3 are off to a good start. At least for now, the good times are back as shown in the following financials for Scorpio Tankers, but investors need to keep in mind that this situation one day may not be sustainable as refining runs begin to decline globally and product tankers start to feel the pinch.
Market Cap: 1.69 B
52-wk high: 11.64
9/2/15 Price: 9.27
52-wk low: 6.48
P/E (ttm): 16.26
FWD P/E: 7.92
P/B (mrq): 1.07
P/S (ttm): 2.7
EV/EBITDA (ttm): 13.06
As shown in the following table, STNG has realized phenomenal YoY growth in annual revenue, i.e., 112%, 41%, 80% and 65% for FY 2011, 2012, 2013 and 2014, respectively. The $ 349.2 miiiion total revenue for two quarters into FY 2015 has already surpassed the $342.8 million total FY 2014 revenue and most likely FY 2015 total revenue will double the previous FY total.
REVENUE Q1-MAR Q2-JUN Q3-SEP Q4-DEC YEAR (million $) TTM 557.8 FY 2015 160.7 188.5 Change YoY 109% 228% FY 2014 76.7 57.4 82.9 125.7 342.8 Change YoY 109% 228% 44% 136% 65% FY 2013 44.9 51.5 57.8 53.4 208 Change YoY 55% 91% 105% 77% 80% FY 2012 28.9 27.0 28.1 30.1 115.4 Change YoY 70% 29% 31% 33% 41% FY 2011 17.0 21.0 21.5 22.6 82.1 Change YoY 176% 189% 61% 88% 112% FY 2010 6.2 7.3 13.4 12.0 38.8
Net income and EPS
The following table shows that since Q3 FY 2013, STNG has realized strong quarterly net income growth, i.e., $0.5 M, $40.7 M and $57.6 M for the next 3 quarters, respectively. The $98.3 M total net income for two quarters into FY 2015 has already almost doubled the $52.1 M total for FY 2014.
NET INCOME Q1-MAR Q2-JUN Q3-SEP Q4-DEC YEAR (million $) TTM 97.6 FY 2015 40.7 57.6 (24%) FY 2014 53.3 (0.6) (1.2) 0.5 52.1 Change YoY 707% (114%) (274%) (91%) 206% FY 2013 6.6 4.0 0.7 5.8 17.0 FY 2012 (5.1) (4.0) (12.5) (4.9) 26.5) FY 2011 (1.4) (2.7) (6.9) (71.7) (82.7) FY 2010 1.2 0.4 (1.6) (2.7) (2.8)
The following table shows that along with intensive financial focus on a massive expansion of its corporate-owned fleet, Scorpio Tankers began to report significant earnings for FY 2013. The $0.57 total EPS for two quarters into FY 2015 have almost doubled the $0.30 total for FY 2014, and a 7/29/15 Credit Suisse report estimates a FY end total of $1.30.
EPS Q1-MAR Q2-JUN Q3-SEP Q4-DEC YEAR (diluted) TTM 0.57 FY 2015 0.25 0.32 FY 2014 0.28 0.00 (0.01) 0.01 0.30 Change YoY 173% FY 2013 0.08 0.03 0.00 0.03 0.11 FY 2012 (0.14) (0.10) (0.30) (0.11) (0.64) FY 2011 (0.06) (0.10) (0.22) (2.21) (2.88) FY 2010 0.21 0.02 (0.09) (0.13) (0.18)
Margins, ROIC, Cash Flow and Debt
Gross, operating and profit margins for STNG continue to improve and show strong growth.
MARGINS GROSS OPERATING PROFIT TTM 54% 28% 18% 2014 34% 21% 15% 2013 23% 9% 8% 2012 17% (15%) (23%) 2011 26% (92%) (101%) 2010 45% 3% (7%)
Although the ROIC-WACC spread is negative today, estimates for 2015 and 2016 provided by a 7/9/2015 Credit Suisse equity research report indicate significant increases for ROIC that would create positive value for shareholders.
ROIC WACC EVA 09/02/15 6.3% 12.0% (5.8%) 2016 Est. 18.6% 2015 Est. 10.0% 2014 3.4% 2013 1.8% 2012 (4.0%) 2011 (20.6%) 2010 0.5%
A large portion of annual capital expenditures was for the acquisition of new vessels and payments for vessels under construction.
CASH FLOW Total CF from Captial Operatiing Activities Expenditiures FCF (million $) (million $) (million $) FY 2014 93.9 -1,403.2 -1,309.3 FY 2013 -5.7 -767.4 -773.1 FY 2012 -1.9 -191.5 -193.4 FY 2011 -12.5 -122.6 -135.0 FY 2010 4.9 -245.5 -240.6
Given its growth-oriented focus to rapidly expand its company-owned fleet, Scorpio Tankers managed exceptionally well to keep its debt/equity ratio under 55% from 2010 to 2013. For FY 2014 and currently, Scorpio Tanker is managing a debt/equity ratio of 135%. Total debt to total capitalization is 51% which is manageable, and the company has a current ratio of 1.46 that indicates acceptable liquidity.
Cash (mrq) 226.86 M Total Debt (mrq) 1.92 B Debt/Equity (mrq) 136.3% Current ratio (mrq) 1.46 Debt/Equity MRQ 136% FY 2014 135% FY 2013 12% FY 2012 34% FY 2011 51% FY 2010 54%
Scorpio Tankers has executed public offerings with the intent to use the net proceeds for general corporate purposes and working capital, which included the acquisition of additional new vessels. Two recent offerings include the following:
• On 10/28/2014, Scorpio Tankers Inc. announced a $45.0 million public offering of senior unsecured notes that would mature on 10/27/2017. The Notes would bear interest at a rate of 7.50% per year, payable in arrears on the 15th day of January, April, July and October of each year, commencing on January 15, 2015.
• On 4/30/2015, Scorpio Tankers Inc. announced an underwritten public offering of 15 million of its common shares, par value $0.01 per share, at $9.30 per share. The Company granted the underwriters a 30-day option to purchase up to 2,250,000 additional Common Shares. Substantially all of the net proceeds of the Offering would be used to fund a portion of the acquisition costs of additional modern product tankers, which may include three LR2 product tankers that the Company currently has options to purchase from an unaffiliated third party. Any net proceeds of the Offering not used for vessel acquisitions would be used for general corporate purposes.
A major selling point for tanker companies is a dividend payout. After its IPO in 2010, Scorpio Tankers paid no dividends during its initial rapid growth period. However, in June 2013, Scorpio Tankers paid its first dividend that, thereafter, has increased almost every quarter to realize an attractive current forward yield of 5.29%.
25 JUN 2013 $0.025 25 SEP 2013 0.035 18 DEC 2013 0.07 26 MAR 2014 0.08 12 JUN 2014 0.09 10 SEP 2014 0.10 12 DEC 2014 0.12 30 MAR 2015 0.125 04 SEP 2015 0.125
[Note: dividends paid on STNG common shares to a United States holder who is an individual, trust or estate (a “United States Non-Corporate Holder”) will generally be treated as “qualified dividend income.”]
Stock Buyback Programs
In July 2014, the Board of Directors approved a new stock buyback program with authorization to purchase up to $150 million of shares of common stock. As of December 31, 2014, the remaining authorization under this program was $75.2 million.
From January 1, 2015 through March 30, 2015, the company acquired an aggregate of 746,639 of its common shares that are being held as treasury shares at an average price of $7.91 per share. The company had $69.3 million remaining under its stock buyback program as of March 30, 2015.
On May 27, 2015, the Board of Directors authorized a new securities buyback program to purchase up to an aggregate of $250 million of the Company’s common stock and bonds, which currently consist of its (a) Convertible Senior Notes Due 2019, which were issued in June 2014, (b) Unsecured Senior Notes Due 2020 (NYSE: SBNA), which were issued in May 2014, and (c) Unsecured Senior Notes Due 2017 (NYSE: SBNB), which were issued in October 2014. This program replaces the Company’s stock buyback program that was previously announced in July 2014 and was terminated in conjunction with this new repurchase program. Subsequently, in August 2015, the company has purchased (a) 1,716,155 of its common shares in the open market at an average price of $10.48 per share and (b) 1,850,000 of its common shares in the open market at an average price of $9.49 per share, leaving $210.0 million remaining under its securities buyback program.
Substantial annual increases in share-based compensation are a major concern because they become a big drag on free cash flow and a serious adverse move away from value creation.
FY Share-Based Compensation 2014 $ 23.553 M 2013 10.274 M 2012 3.368 M 2011 3.189 M 2010 0.922 M
STNG CORPORATE GOVERNANCE
Since its IPO in 2010, Scorpio Tankers’ remarkable rapid growth and financial performance to date are clearly attributable to a highly competent savvy corporate governance team under the leadership of founder Emanuele A. Lauro, who took the helm as Chairman and CEO at the very young age of 31. In 2013, Mr. Lauro made what was called a “stratospheric debut” in the No. 2 position on the Lloyd’s List of One Hundred Most Influential People in the Shipping Industry in recognition of ongoing success of the Scorpio Group. The following year, Mr. Lauro appeared again on the elite 100 list in the No. 9 position.
Emanuele Lauro is related to Glauco Lolli-Ghetti, who founded Scorpio Ship Management in the 1970s and ran the family business until his passing in 2006. Emanuele Lauro joined Scorpio Ship Management in 2003 and became Managing Director in 2004, focusing on broadening the market presence of the company. He entered new markets and formed companies that were part of the new Scorpio Group. By 2008, the Group was engaged in pooling, commercial management, dry bulk logistics and private equity, among other activities, and its managed fleet numbered approximately 60 vessels.
Mr. Lauro’s long held belief was to return to ship owning when asset values were attractive, and this opportunity presented itself in 2010, when he launched Scorpio Tankers, Inc. via an IPO that raised capital for the initial investment in modern product tankers.
Scorpio Tankers, Inc. launched and focused on a rapid growth-oriented course that is now at the threshold of creating excellent value for shareholders. Margins, ROIC, EVA, cash flow, dividends, revenue, net income and earnings are all on the rise with substantial increases and improvements. To date, corporate leadership has clearly demonstrated prudent. savvy and timely financial planning, decision-making and execution and excellent overall management and operations for the company in the highly fragmented, highly competitive product tanker sector.
As always conduct your own due diligence.
For those interested, here are the company websites for easy access to 20-F annual reports
and easier access to quarterly reports via corporate press releases.