How Virtually Eliminating Its Dividend Earned Scorpio Tankers An Upgrade From Morgan Stanley

Morgan Stanley upgraded Scorpio Tankers Inc. STNG to Overweight, citing the liquidity boost from the 92 percent dividend cut and high leverage to improving product tanker fundamentals.

“We view STNG's stock as highly attractive with favorable optionality to the product tanker recovery as global inventories fall while the orderbook is at all-time lows,” analyst Fotis Giannakoulis wrote in a note.

Giannakoulis expects charter rates to move higher, potentially bringing the sector back to profitability by year-end.

Further, the analyst noted the dividend cut saves the company over $80 million a year and additional financing boosted the liquidity that allows it to safely navigate the near-term weakness.

As a result, the analyst estimates Scorpio Tankers now needs to earn on average of about $15.5kpd (prior: $18kpd) to stay free cash flow positive.

“[W]ith its current $100m cash on hand and the ~$30m anticipated proceeds from a sale and leaseback, we see the risk of equity dilution meaningfully reduced,” Giannakoulis highlighted.

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On the sector front, the analyst hinted at the potential strengthening of MR tanker demand amid higher U.S. product exports and lower turnarounds.

Meanwhile, Giannakoulis says the historical low product tanker order book coupled with an expected drop in newbuild deliveries in the second half would tighten the market, resulting in profitable rates.

“As product tanker rates move closer to profitability, we expect the stock to trade at an NAV premium anticipating the appreciation in vessel values,” Giannakoulis added.

The analyst, who has a price target of $5.50, says the stock is trading below NAV after having lost 60 percent of its value in the last 15 months.

Shares of Scorpio Tankers climbed 8.33 percent to $4.29.