SCORPIO TANKERS INC STNG
July 10, 2015 - 1:54pm EST by
hao777
2015 2016
Price: 10.18 EPS .95 1.16
Shares Out. (in M): 207 P/E 10.7 8.8
Market Cap (in $M): 2,107 P/FCF na 7.7
Net Debt (in $M): 1,687 EBIT 249 315
TEV ($): 3,794 TEV/EBIT 15.2 12.0

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Description

Thesis & Variant View

·         STNG is a product tanker company owning the largest and most modern fleet in the industry

·         The company is poised to materially beat Q2 estimates based on the current rate environment

o   Guidance for Q2 is only provided in the form of voyages fixed for the period ahead

§  For the LR2s: approximately $29,000 per day for 48% of the days

§  For the LR1s: approximately $24,000 per day for 48% of the days

§  For the MRs: approximately $23,000 per day for 35% of the days

 

§  For the Handymaxes: approximately $20,000 per day for 37% of the days

o   Current rates (actually, as of a few days ago) for STNG’s main routes – which are counter-seasonally strong – are:

§  LR2: $34,781 (Arabian Gulf to Far East)

§  LR1: $30,000 (Arabian Gulf to Far East)

§  MR: ~$22,000

§  Handymax: ~$17,000

 

o   Based on market rate assumptions continuing through the end of the quarter, I project EBITDA in the quarter of $107.4mm (cons $91mm) and EPS of 31c (cons 26c)

 

§  If we assume strength continues and assuming 2016 average rates of $30,000 for LR2s and $21,000 for Handymax/MRs, EBITDA would be $458mm (cons $381mm) and EPS would be $1.16 (cons 1.08)

·         Why are rates strong? Product tanker supply peaks this year and starts to decline as we exit 2016 (actually turning negative in 2017) based on the current order book and assumptions regarding scrapping. Supply growth has not yet declined – we expect to see that next year in STNG’s relevant classes, the LR2s (Aframax) and MRs (Handymax) – so the driver of current rate strength is clearly demand (see below).

o   The combination of new refineries being built in India and the Middle East, and closures on the East Coast of the US and the EU have resulted in significant growth in ton-mile demand (see below for a graphic depiction of the historical growth in seaborne products trade, and I have attempted further below in the “Demand” table to project future demand).

 

o   The cross-over of supply/demand is being transitorily exacerbated to the positive by lower crude pricing, which has encouraged refiners globally to run at high utilization levels, thus producing significant amounts of refined products. A small additional positive factor may also be the US government’s decision to allow condensate exports out of the Gulf of Mexico.

 

  Aframax     Size range (dwt) 80,000 120,000          
                         
  Delivery date 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
                         
  Fleet size at beginning of Year                 -                  -                  -                  -                  -                  -              27.9             31.2             34.1             35.4  
  Fleet deliveries YTD                 -                  -                  -                  -                  -                  -                1.2                 -                  -                  -   
  Planned deliveries for the remainder of Year                 -                  -                  -                  -                  -                  -                3.4               3.4               1.1                 -   
  Slippage from previous Year                 -                  -                  -                  -                  -                  -                  -                0.8               0.8               0.3  
                         
  Cancellations (% of deliveries)                 -                  -                  -                  -                  -                  -  5.0% 5.0% 5.0% 5.0%  
  Cancellation (m. dwt)                 -                  -                  -                  -                  -                  -              (0.2)             (0.2)             (0.1)                 -   
                         
  Slippage (% of deliveries)                 -                  -                  -                  -                  -                  -  25.0% 25.0% 25.0% 25.0%  
  Slippage (m. dwt)                 -                  -                  -                  -                  -                  -              (0.8)             (0.8)             (0.3)                 -   
                         
  Scrapping (% of fleet)                 -                  -                  -                  -                  -                  -  1.0% 1.0% 1.0% 1.0%  
  Scrapping (m. dwt)                 -                  -                  -                  -                  -                  -              (0.3)             (0.3)             (0.3)             (0.4)  
                         
  Fleet size at end of period (m. dwt) 22.3 25.0 26.0 26.5 26.9 27.9 31.2 34.1 35.4 35.4  
                         
  Growth 19.3% 11.9% 3.9% 2.0% 1.7% 3.7% 11.9% 9.3% 3.8% -0.2%  

 

Handymax/size

    Size range (dwt) 10,000 60,000          
                       
Delivery date 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
                       
Fleet size at beginning of Year                 -                  -                  -                  -                  -                  -              79.7             83.8             87.5             88.6  
Fleet deliveries YTD                 -                  -                  -                  -                  -                  -                1.8                 -                  -                  -   
Planned deliveries for the remainder of Year                 -                  -                  -                  -                  -                  -                4.9               4.8               1.1               0.1  
Slippage from previous Year                 -                  -                  -                  -                  -                  -                  -                1.2               1.2               0.3  
                       
Cancellations (% of deliveries)                 -                  -                  -                  -                  -                  -  5.0% 5.0% 5.0% 5.0%  
Cancellation (m. dwt)                 -                  -                  -                  -                  -                  -              (0.2)             (0.2)             (0.1)             (0.0)  
                       
Slippage (% of deliveries)                 -                  -                  -                  -                  -                  -  25.0% 25.0% 25.0% 25.0%  
Slippage (m. dwt)                 -                  -                  -                  -                  -                  -              (1.2)             (1.2)             (0.3)             (0.0)  
                       
Scrapping (% of fleet)                 -                  -                  -                  -                  -                  -  1.5% 1.0% 1.0% 1.0%  
Scrapping (m. dwt)                 -                  -                  -                  -                  -                  -              (1.2)             (0.8)             (0.9)             (0.9)  
                       
Fleet size at end of period (m. dwt) 68.8 70.6 72.4 73.7 76.0 79.7 83.8 87.5 88.6 88.1  
                       
Growth 8.3% 2.7% 2.5% 1.7% 3.1% 5.0% 5.1% 4.4% 1.2% -0.6%  
  0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 5.1% 4.4% 1.2% -0.6%  
  8.3% 2.7% 2.5% 1.7% 3.1% 5.0% 0.0% 0.0% 0.0% 0.0%  
                       
Total Tanker Fleet                      
                       
Delivery date 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
                       
Fleet size at beginning of Year                 -                  -                  -                  -                  -                  -            131.5           138.7           146.3           149.5  
Fleet deliveries YTD                 -                  -                  -                  -                  -                  -                3.1                 -                  -                  -   
Planned deliveries for the remainder of Year                 -                  -                  -                  -                  -                  -                8.4               9.9               3.1               0.1  
Slippage from previous Year                 -                  -                  -                  -                  -                  -                  -                2.1               2.5               0.8  
                       
Cancellations (% of deliveries)                 -                  -                  -                  -                  -                  -  5.0% 5.0% 5.0% 5.0%  
Cancellation (m. dwt)                 -                  -                  -                  -                  -                  -              (0.4)             (0.5)             (0.2)             (0.0)  
                       
Slippage (% of deliveries)                 -                  -                  -                  -                  -                  -  25.0% 25.0% 25.0% 25.0%  
Slippage (m. dwt)                 -                  -                  -                  -                  -                  -              (2.1)             (2.5)             (0.8)             (0.0)  
                       
Scrapping (% of fleet)                 -                  -                  -                  -                  -                  -  1.3% 1.0% 1.0% 1.0%  
Scrapping (m. dwt)                 -                  -                  -                  -                  -                  -              (1.7)             (1.4)             (1.5)             (1.5)  
                       
Fleet size at end of period (m. dwt) 110.5 116.6 121.0 123.3 126.5 131.5 138.7 146.3 149.5 148.9  
                       
Growth 11.1% 5.5% 3.8% 1.9% 2.6% 3.9% 5.5% 5.5% 2.2% -0.4%  

 

Simple supply/demand balance                    
  2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
                     
Speed 12.0 11.5 11.5 11.5 11.5 11.0 10.5 10.5 10.5 10.5
Speed * 24 * 365 * dwt 11,617 11,745 12,192 12,419 12,744 12,667 12,760 13,459 13,751 13,695
                     
Ton-miles 2,501 2,625 2,711 2,745 2,839 2,921 3,049 3,213 3,385 3,538
    4.99% 3.27% 1.26% 3.42% 2.88% 4.37% 5.40% 5.36% 4.50%
                     
Tons 833 888 914 923 961 974 1,008 1,053 1,101 1,150
    6.60% 2.98% 0.91% 4.13% 1.38% 3.50% 4.50% 4.50% 4.50%
                     
Average distance 3,002 2,957 2,965 2,975 2,955 2,999 3,024 3,050 3,075 3,075

Event Path

·         STNG should be subject to two rounds of positive earnings revisions: first, as analysts preview the quarter and mark to market, Q2 (and 2015) numbers should go higher, followed by further (potential) positive Q3 revisions as STNG reveals what percentage of their capacity they have fixed for the quarter.

·         The company is also likely in the market purchasing shares – on May 29, the company announced a new $250mm securities buyback program (covering the Company's common stock and bonds, which currently consist of its (i) Convertible Senior Notes Due 2019, which were issued in June 2014, (ii) Unsecured Senior Notes Due 2020, which were issued in May 2014, and (iii) Unsecured Senior Notes Due 2017 (NYSE: SBNB), which were issued in October 2014). Our understanding is they included the other debt instruments since their focus is the equity-like convertible, in addition to their actual shares.

 

o   This announcement confused investors as it came 1 month after they issued 15mm shares at $9.30 (they made the offering announcement when the stock was at $10). According to a conversation we had with the company, they justified the earlier share issuance based on the need for capital for their subsequent May 11 acquisition of 4 LR2 tankers for $60mm each. In management’s view, this was a highly opportunistic purchase and they needed immediate funding for it.  

 

Valuation

·         On consensus, STNG trades at 10.3x 2015 EPS, 9.7x EBITDA. Bloomberg has not updated figures yet for the new balance sheet.

·         On our figures, looking out to 2016, STNG trades at 8.8x EPS and 8.3x EBITDA, taking no account of the FCF they will generate next year. That FCF implies a yield today of 13.8%.

 

·         NAV provides some downside support ($8.65):

        Value ($mm)
Balance Sheet - 2015E       Current Median Mean High Low
Vessels, net       $3,051 $3,098 $3,392 $5,146 $2,411
Working capital                         195                   195                   195                   195                    195
Long-term debt                    (1,624)              (1,624)              (1,624)              (1,624)               (1,624)
Dorian LPG stake                         153                   153                   153                   153                    153
Vessel deposits                           82                     82                     82                     82                      82
Charter NPV                              -                        -                        -                        -                        -
  Net Asset Value       $1,857 $1,904 $2,198 $3,952 $1,217
  Diluted shares       212 212 212 212 212
  NAV/share       $8.77 $8.99 $10.38 $18.66 $5.75
  Price/NAV       1.18x 1.15x 0.99x 0.55x 1.79x
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

 STNG should be subject to two rounds of positive earnings revisions: first, as analysts preview the quarter and mark to market, Q2 (and 2015) numbers should go higher, followed by further (potential) positive Q3 revisions as STNG reveals what percentage of their capacity they have fixed for the quarter.

 

·         The company is also likely in the market purchasing shares – on May 29, the company announced a new $250mm securities buyback program (covering the Company's common stock and bonds, which currently consist of its (i) Convertible Senior Notes Due 2019, which were issued in June 2014, (ii) Unsecured Senior Notes Due 2020, which were issued in May 2014, and (iii) Unsecured Senior Notes Due 2017 (NYSE: SBNB), which were issued in October 2014). Our understanding is they included the other debt instruments since their focus is the equity-like convertible, in addition to their actual shares.

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