Scorpio Tankers Inc. (NYSE:STNG) presents an interesting value opportunity. On one hand the company is undervalued and churning out profits in an industry that is generally losing money, plagued by overcapacity, low day-charter rates and vicious competition, (it has been known for a customer that sees a port full of empty tankers to bid the ship owner down). On the other hand, the company is aggressively building its fleet, buying up as much as 60% of the global manufacturing capacity to build suezmax long range tankers up to 2016 and recently placing an order for 4 LNG tankers, which are currently in demand and have seen their day charter rates almost double since the beginning of the year.
Scorpio Tankers In A Strong Position
Looking at the company’s finances, Scorpio Tankers Inc. (NYSE:STNG) seems to be in a relatively strong position. At the end of the first quarter, the company was sitting on $411 million of cash, easily covering its total debt position of $174 million. Additionally, the company’s current ratio stood at just under 21 times. However, the majority of this financial strength came from a secondary issue, which increased the free float by 51%. Still, before the issue the company had a solid balance sheet with a similar amount of debt but a cash pile of only $87 million. Scorpio Tankers also reported its first quarterly profit since 2009, in the first quarter of this year.
Continued from part one... Q1 hedge fund letters, conference, scoops etc Abrams and his team want to understand the fundamental economics of every opportunity because, "It is easy to tell what has been, and it is easy to tell what is today, but the biggest deal for the investor is to . . . SORRY! Read More
The company’s strong balance sheet and the fact that it is making a profit while its peers lose money gives me confidence in the company’s management. Indeed, it would appear that ordering a host of new tankers to be delivered over the next few years is a wise choice.
The tanker market has been plagued by overcapacity during the past few years after a boom in tanker orders back in 2007/2008, when credit was cheap and oil was expensive. This overcapacity depressed day-rates and as a result many operators are now losing cash at an alarming rate. However, according to research by several shipping companies the tanker market could be starting to gain steam again.
Increase In Demand Of Oil Supply
The number of miles that oil has to travel before reaching its final destination is rising as the oil boom in the US causes supplies, which would usually head to the US, from regions such as Latin America and Nigeria, to find buyers in emerging markets such as India and China. This is increasing demand for longer range, cheaper, more fuel efficient ships like the ones Scorpio Tankers Inc. (NYSE:STNG) has on order. Additionally, there is an increasing demand for shorter range clean tankers (for the transportation of refined products, such as petroleum and chemicals; dirty tankers transport the crude), which is putting pressure on tanker owners to ‘clean up’ dirty medium range tankers that are unwanted on the longer dirty routes. Indeed, this need for the transportation of refined products from a ‘central’ refinery is growing as the European refinery market consolidates.
It is projected that the ‘clean up’ of dirty medium range tankers and the rising demand for longer range dirty tankers will push day rates higher, which is what Scorpio Tankers Inc. (NYSE:STNG) is aiming to benefit from. Furthermore, the number of operational tankers is also set to slow rapidly over the next few years as owners scrap their vessels rather than face high maintenance costs will continuing to make a loss.
Beneficial Trend In Market For Scorpio Tankers
Scorpio Tankers Inc. (NYSE:STNG) is in the right place to benefit from this trend in the market. Moreover, the company is well-capitalized, experienced, and profitable and currently trades at a discount to its net asset value of $13.80 per share – offering a margin of safety for investors.
All in all, Scorpio Tankers Inc. (NYSE:STNG) offers a good value play on a depressed market that could be in the process of turning around.