Scorpio Tankers – Positioning For Further Product Tanker Growth And Corporate Strategy

Capital Link’s President Nicolas Bornozis interviewed Mr. Robert Bugbee, President of Scorpio Tankers STNG, as part of Capital Link’s “Trending News Podcast Series,” on August 3, 2023. The interview touched on the company’s recently announced Q2 2023 results, but largely pertained to STNG’s corporate strategy, development, and product tanker sector outlook.

Interview Highlights

• STNG generated over $235 million of EBITDA during Q2 2023 due to strong rates on spot market
• Highly efficient, modern eco fleet of 112 ships with an average age of 7.5 years
• 91% on spot capturing product market strength 
• STNG has worked toward deleveraging the company, fostering a strong balance sheet
• The company believes that its stock is trading well below NAV, so will continue its large-scale share buyback program
• Increasing to quarterly dividend a topic to consider at the proper time
• Product Tanker sector outlook remains highly positive due to tight supply and demand balance, as well as approaching fall and winter seasons

Q2 2023 Results Propelled By Strong Market, Dynamic Corporate Strategy

Bolstered both by a very strong market and an effective corporate strategy, Scorpio Tankers recorded a solid performance during the second quarter of 2023. Rates have been high due to a number of factors, particularly increased fuel demand due to surges in summer travel, and larger journeys due to shifting export and import patterns due to the war in Ukraine and subsequent sanctions on Russian oil and products. In terms of Scorpio’s success this quarter, Mr. Bugbee attributes much of the company’s gains to the fact that its fleet, which is one of the largest of its kind at 112 ships, is very modern and efficient at an average age of just 7.5 years.

As over 91% of Scorpio’s fleet is in the spot market, the company was able to capitalize on the robust market and end the quarter with over $680 million in liquidity. Scorpio’s President highlighted its ability to generate cash flow as the cornerstone of Scorpio’s success this quarter—the substantial liquidity produced by taking advantage of the market’s strength, coupled with the fleet’s low capex, as its ships are quite young and efficient, and the company’s blank orderbook, contribute to its strong profitability and balance sheet.

Scorpio’s significant efforts to deleverage have also had a substantial impact on its results. As Mr. Bugbee noted, Scorpio was quite leveraged before the company began paying down its large leases and debts. Since deleveraging, Scorpio has recently put together a large credit facility on flexible terms that enables the company to manage its balance sheet with less rigidity.

Bugbee: Product Tanker Sector Could Be Poised For Further Boost

Currently, the product tanker sector seems to be set for further growth—there is a very low orderbook and a surge in demand, all while fall and winter are approaching, which usually prove to be a seasonally strong period for the market.  

Despite the strong fundamentals for product tankers outlined above, it is a market that is marked by anxiety and uncertainty. During an interview with Capital Link in May, Mr. Bugbee stated that the only thing to fear about the sector’s performance was “fear itself,” a sentiment that still resonates now more than ever, he insisted.

Scorpio’s President noted that there was a lot of anxiety surrounding the strength of the market “for no reason whatsoever” at the time, as the supply fundamentals were tight, and demand was high for the weak season, indicating that an upturn in the market was soon to come. He argued that this fear is still present amongst those watching the market carefully, despite its current strength.

As winter is still months away, some anxiety regarding the sector’s performance may creep back in, but Mr. Bugbee urged for “courage,” as “we’re not seeing a reduction in the use of petroleum products, we’re actually seeing an acceleration and the world’s going to have to move these products.” He also stressed that, in the case that Europe is not prepared for winter fuel needs, that products are likely going to come to the region from the Middle East or China, drastically increasing ton-miles. Furthermore, if the US experiences a reduced export capacity, and must source oil from China and the Middle East, rates will boost even further.

As is often the case when a market is performing particularly well, as the product tanker sector is currently, there has been a slight uptick in newbuildings in the sector, provoking concern that it may impact the tight supply and demand balance. While acknowledging this increase, although the fact remains that the orderbook is still very low, Mr. Bugbee noted that shipyards are highly congested and, for the most part, are unable to deliver new ships before late 2026.

By the time that many of these new ships will be delivered, the global product tanker fleet will be quite old, and a large portion of the vessels may be obsolete or scrapped. Thus, it would be very difficult, Scorpio’s President argued, to imagine a situation in the future in which the existing fleet and the newbuildings would outweigh demand.

Share Buyback Program To Continue, More Beneficial Than Dividend

Flush with the abundant cash flow raised from the strong product tanker market, Scorpio has used a portion of its liquidity to repurchase its own shares. Since July of last year, the company has bought back 12.5 million shares for a total of $582.4 million, equating to about 19% of the total shares. As long as the company maintains its strong balance sheet and significant liquidity, the Scorpio President stated, the company would continue repurchasing its shares, which he believes are trading well below the company’s net asset value (NAV). “To the extent that [these factors] continue, our allocation of capital will be between debt repayment and stock repurchase…we have no interest in adding to the fleet, there’s no need to,” Mr. Bugbee stated.

Currently, Scorpio Tankers offers a quarterly dividend of $0.25 per share. While Mr. Bugbee admitted that it is “tempting” to pursue the “instant gratification” of providing a special dividend right now, as the company is actively deleveraging and taking in a substantial amount of liquidity, he stressed that such a strategy is not advantageous to shareholders or to the company itself. Rather, everyone would benefit in the long term, he argued, if the company were to reinvest the cashflow at “the massive discount” currently at play. A potential increase in quarterly dividend is a topic to be considered at the proper time.

Considering the company’s solid performance this past quarter, as well as the strength of the sector outlook ahead, it may come as a surprise that Scorpio’s shares are trading at such a large discount. When asked about this disparity in terms of the stock price and his belief regarding the company’s NAV, Mr. Bugbee opined that fears regarding the demand and production of oil have caused the gap between the stock price and what he believes is the company’s true NAV.

Opportunistic Investment In Hafnia & Ardmore By Private Side

When asked why the private side of Scorpio bought shares in Hafnia and Ardmore rather than invest in Scorpio Tankers, Mr. Bugbee mentioned that this was an opportunistic investment timed to take advantage of the expected product tanker market strength. When this investment was made, insiders could not transact in Scorpio’s public shares as the company was close to earnings.

This article is for information purposes only and does not constitute investment advice.