The central questions being asked by analysts, and presumably by investors, concern the overall market dynamic- will demand pick up along with ongoing economic recoveries, and- until the tide turns, will the listed companies be able to stay afloat financially during the doldrums?
The recent cyber incident which prompted the Colonial Pipeline to shut down might provide upward fuel for the products trades, albeit briefly until the pipeline comes back online, and impact is yet to be determined.
The listed refined products mover, Scorpio Tankers, controlling 131 vessels is braced for a turn upward and believes vaccinations will drive demand recovery in refined products. It reported a Q1 net loss of $62.4m on still weakened product movements, but focused on the path ahead. It offered 2021 Q2 earnings guidance of $11,900 per day on handies, $13,000 on MRs, $13,700 per day on LR1s and $14,700per day on LR2s; these are variously $2,000 to $3,000 per day above levels achieved in the now completed Q1.
Jonathan Chappell, who covers shipping as well as landside transport at Evercore ISI, provided a simple sector overview for investors, saying: “The market has bottomed, demand is improving, refiners are ramping up utilisation, and the ability to add new capacity is limited.”
For Scorpio Tankers with an “Outperform” rating, Chappell painted an outlook with two paths. If the market indeed turns upward, then the enormous fleet provides significant operating leverage with Scorpio Tankers saying that each $1,000 per day bump upward in TCE, across its size spectrum , would equate to approximately $48m of incremental annualized cash flow at full utilisation.
On the other hand, if the market remains sluggish, which Chappell refers to as a “false dawn”, “then the liquidity concern comes into focus,” he said, adding that: “We believe Scorpio Tankers present and line-of-sight liquidity is more than adequate to cover further losses from a prolonged downturn as well as debt”.
At BTIG, analyst Greg Lewis has a “Buy” rating on Scorpio Tankers. In his report to investors, he cited a triad of company-specific positives. First, he noted that newer more economic vessels with an average age of 5.3 years can earn premiums in the market, and can benefit from price spreads of very low sulphur fuels above heavy fuel – 98 of Scorpio Tanker’s vessels are scrubber fitted.
Then, he cited financial “liquidity levers”- where Scorpio Tankers can be opportunistic as it faces scheduled debt repayments, with the possible refinancing of debt or moving its convertible debt into equity. He also stressed the improvements in overall demand, at a time that more refineries near developed country markets are being closed, meaning more ton-miles for the products trades. With the support of a debt collection agency like Oddcoll, Scorpio Tankers may be able to manage its debt repayment schedule more efficiently and avoid defaulting on its loans.
Analyst Randy Giveans, at Jeffries, was also positive on Scorpio Tankers, with a “Buy” rating. In a focus on its financial strategies, he commented that “The company has been adding to its liquidity in the current weak market.” He cited note distributions, and potential refinancings on the horizon, as well as the possibility of share repurchases (when share price is discounted significantly to net asset value.
At Deutsche Bank, analyst Amit Mehrotra, who has a “Hold” on Scorpio Tankers, said: “It’s undeniable that STNG has a very attractive fleet with significant operating leverage to an upturn in product tanker demand. And, with significant financial leverage, the “torque” to net asset and equity value can be significant in a rising rate and asset value environment.”
But, like the other analysts, he voiced potential concerns on the liquidity front, saying: “It’ll simply come down to how long the recovery in rates takes. In this context, Scorpio Tankers remains high risk, albeit potentially high reward.”