By Barry Parker (gCaptain) –
Tanker market watchers have been eagerly awaiting product tanker giant Scorpio Tankers’ (NYSE: STNG) Q1 earnings report, with day traders and volatility players poised to pounce. While reported results were broadly in line with consensus estimates, the timing was far from ideal as US stock markets tumbled on recession fears and more concerns about US regional banks.
The stock price, which had surged above $60 a few times in February and March and mid-April, has struggled to stay in the upper $40s as many buyers backed down. Ed Finley-Richardson, a mainstay among Shiptwits (ie shipping companies on Twitter, some of whom are active as day traders), bemoaned the “lack of support” when someone offloaded a large amount – 30,000 shares.
Not so for leading shipping retailer J Mintzmyer, who strengthened positions. He tweeted, “Best buying opportunity in shipping today since at least last July… Back long STNG and added to a few others.” Another tweet suggested he was looking at call option spreads in May – a strategy that would gain value on a slight upward movement, but held back and evaluated the development of the share price.
Traditional analysts, followed by longer-term investors, remained bullish on STNG shares, with Deutsche Bank (Chris Robertson is the lead analyst for the name) stating: “The company reported 1Q23 average prices of $47,356/day for LR2s and $34,616/day for MRs. Looking ahead, Scorpio has already booked 39% of its LR2 open days at $53,000/day and 35% of its MR open days at $37,000/day.” As a prospect, analysts at tanker brokerage Poten & Partners have spot LR2s in clean Trades priced at $50,700/day (AG to FE) and MRs averaging $9,300/day on an Atlantic triangulation.
In addition to their views on the tanker markets and how STNG could benefit, the analysts also highlighted STNG’s shareholder-friendly strategies of paying dividends and buying back shares on downturns. Regarding the dividend, Deutsche Bank noted an increase in the quarterly payout, saying, “An annualized dividend of $0.25/share represents a yield of 1.9% based on the closing price of $51.39/ Shares on Monday, May 1st.” Regarding the payout, the analyst said, “We believe the company will continue to prioritize strengthening its balance sheet while strategically executing under its current $250 million security repurchase program buys back shares.”
STNG has also reduced debt by buying up leases using its cash holdings (where previously agreed purchase prices are currently well below the increased values of vessels). Jefferies analyst Omar Nokta opined, “Management remains focused on deleveraging, with net debt at $1.4 billion of $105.6 million. In addition, it has announced that it will exercise several additional purchase options for May and June, which should result in a further $297.1 million in debt reduction.” STNG has also arranged new loan facilities from traditional shipping banks that could be used to pay off leases ( Bank debt is cheaper than lease debt, even with higher interest costs).
Summarizing his views, Jefferies’ Nokta said: “We continue to favor Scorpio as a leader in the tanker sector with a high-end fleet, a strong balance sheet and a commitment to returning capital to shareholders.” He pointed to an estimated net asset value (NAV) in the mid-$60s – well above the current stock price. NAV (think the traditional book value concept — but adjust asset prices to reflect shipping’s selling and buying market) is a dynamic that many investors in shipping stocks use to assess whether to buy or sell shipping stocks. Other analysts look at cash flows; Evercore ISI’s Jon Chappell, also bullish on STNG, opined that: “It’s dangerous to extrapolate quarterly numbers, especially given the volatility of the market lately with LR2s rising higher and MRs fading somewhat, but, see you today, these spot rate estimates underpin a second quarter 23 cash flow result well in excess of current expectations.”
Putting all of this together, there’s a full steam ahead feeling. Hopefully the broader stock market will cooperate.