SCORPIO TANKERS 6.75 NT 2020 SBNA
April 12, 2017 - 6:50pm EST by
ele2996
2017 2018
Price: 24.18 EPS 0 0
Shares Out. (in M): 2 P/E 0 0
Market Cap (in $M): 50 P/FCF 0 0
Net Debt (in $M): 1,994 EBIT 0 0
TEV ($): 2,674 TEV/EBIT 0 0

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Description

     Scorpio Tankers (STNG) has been written up 3 times on VIC - on 5/13/13 by eal820, on 7/10/15 by hao777, and by gandalf on 11/9/16. All of the reviews are worth reading. In short, STNG is a shipping company which transports "clean" products such as chemicals, vegetable oil, fuel, and the like. It is a relatively specialized market which has shown good demand growth over the last 5 years. Unfortunately, the supply of new ships has outstripped demand, and day rates have suffered. But, good news is on the horizon, as gandlaf and others have pointed out. First, orders for new ships are almost nonexistent, so new supply will not be coming into the market. Second, regulations have been put in place to reduce the amount of sulfur that ships release into the atmosphere from 3.5 parts to 0.5 parts. Ships can either use more costly, cleaner fuels or continue to burn bunker fuel after installing scrubbers. In either case, there will be an expense, and older ships are likely to be scrapped earlier than otherwise. Third, regulations have been put in place to ensure that ballast water is cleaned of foreign materials before discharge. This will also be another capital expense and, again, older ships will head for the scrap yard a little earlier. All in all, the future looks brighter than the immediate past. However, I am uncertain as to when this brighter future will arrive, so I am recommending an investment in STNG's 6.75% preferred shares which become due and payable on 5/15/2020. Their current yield is 6.98%, their yield to maturity is 8.4% and, if they are called early on 7/1/2019, their yield-to-call will be 9%.

     STNG owns currently owns 78 vessels, charters 17 others, and has 17 more on order for delivery over the next approximately 12 months. As the company has rapidly expanded its fleets over the last few years, the average age of their fleet is around 2 years. They have about the youngest product tanker fleet afloat and are in excellent shape to make money when day rates rise. However, the new ship construction program has caused the company to take on a fair amount of debt. As of 3/24/17 their balance sheet looked like this:

$1,545mil - secured debt - amortizing with maturities generally in 2021

$50mil - 8.25% senior notes (trading as a preferred SBBC) due 6/1/2019 - these were sold on 3/30/2017 to refinance 7.5% notes due 10/15/17

$348.5mil - 2.375% senior cv debs due 7/1/19 - These were issued in 2014 and the proceeds from this issue were used to redeem stock at ~$9.00 - convertible at $10.21

$50mil - 6.75% senior notes (trading as preferred SBNA)

$1,993.4mil - total debt

$680mil - common equity represented by 161mil shares at $4.22

     The liability schedule is as follows:

2017 - $357mil

2018-2019 - $617mil

2020 -2021 - $925mil

Thereafter - $53mil

Against these liabilities STNG owns a fleet of 87 almost new product tankers with a cost of $3,230mil and stockholders book equity of $1,315mil. 

     In 2015 when day rates were higher, STNG had operating cash flow of $392mil. In 2016, with lower day rates, operating cash flow was $179mil. It is a levered business. There is lots of refinancing to be done. 97.5% of the liability structure comes due in 4 years. If STNG's stock does not rise enough to trigger the conversion of the 2.375% converts, there will be an exchange offer for them and, I believe, the 8.25% preferreds and the 6.75% preferreds (SBNA).

     I have owned the common stock. I do not own it now. It can work great. The SBNA will just work pretty well and with a lot less volatility and risk.

     The owner/operators of the business are from a well known and highly respected shipping family. They are as good a group of operators as anyone in the business.

 

 

      

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Day rates decline further or just stay low.

The market spooks and causes the prices of the security to trade sharply lower.

 

 

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