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Trafigura's shipping investments - from steel to paper

Trader Trafigura has sold its tanker newbuilds in major deals with Scorpio Tankers and Frontline taking stakes in both shipowners, Barry Parker examines its shift from steel to paper investments in shipping.

Oil “traders” are meant to do just that - keep their balance sheets small while profiting on multiples turns of their inventory, betting on movements of commodity prices. Likewise, shipowners in fragmented bulk shipping markets are meant to grow their fleets - increasingly using their capital markets heft to negotiate deals that smaller rivals cannot.

So it is with this week’s announcement that Scorpio Tankers will be acquiring 19 tankers – comprising 15 MR product tankers and four LR, all scrubber fitted, worth an aggregate $803, from privately held Trafigura.

Scrubber mania

The trader has made out well on what some have termed “scrubber mania”, as market participants have come around to the view that scrubber fitted vessels will earn premium hires in their respective markets, coupled with expectations of buoyancy in product tanker markets due to large shifts in refinery programs and fuel blending in the buildup to, and aftermath of, 1 January 2020. A different form of a commodity trade, perhaps?

This is a deal only possible for an acquirer with a large (for listed maritime companies) balance sheet. The financial structure takes the form of Scorpio Tankers assuming financial leases with a present value of $668m. The $803m acquisition price is rounded out by an issuance of $135m of Scorpio Tankers equity, priced at $29 per share. The ship seller share buyers need to be believers as Scorpio Tankers  shares are still priced below Net Asset Value (estimated to be mid $30s per share) , but the valuation improvement during 2019, and the increased market optimism, has facilitated Scorpio Tanker’s ability to use its shares as a currency.

Shares for ships

In line with a number of recent deals, notably a quartet by Star Bulk, on the dry bulk side, where  investors backing shipowners could not exit through traditional portals, there is a  “shares for ships” component, albeit partial,  here.

A part of the payoff, Trafigura will acquire roughly $170m of Scorpio Tankers shares, including $35m through a private placement, in addition to the “paper for steel” mentioned above, leaving the seller with around 10% of Scorpio Tankers equity. About a month ago, Trafigura had sold 10 scrubber fitted newbuild suezmaxes to Frontline, also taking part of its payment in shares. In both of these cases, there is more “liquidity” in the shares of well capitalized listed owners, affirming the “capital markets benefit” of consolidation.

A positive view on Scorpio Tankers

The growth for Scorpio Tankers, with the added financial obligations, is not without costs. Deutsche Bank shipping equities analyst Amit Mehrotra, wrote in a briefing to clients, “we estimate, for example, that Scorpio Tanker's consolidated Loan To Value moves to 64% from 59%” and that “Cashflow breakeven will  likely increase“. But still Mehrotra took a positive view with a “Buy” recommendation on the tanker company, pointing out that “operating leverage” - an imprecise concept, but tied to a shipowner’s ability to meet the needs to world-class charterers - would also improve.

There are other positive signals here, with the Deutsche Bank analyst pointing out: “Trafigura will own 10% of Scorpio Tankers shares on a pro forma basis, which we also view as a positive.” He pointed to wording from Trafigura, in its announcement that: “it sees Scorpio Tankers as a place where we see significantly more value and upside potential in the period ahead”.

Jefferies analyst Randy Giveans, also positive on the deal, stressed the tie-ins with  IMO2020, which many knowledgeable market watchers think will be a stimulus for the product tanker segment. Giveans wrote: “Trafigura highlighted the positive supply fundamentals in the products tanker market and the expected demand growth spike related to IMO 2020 disruptions as part of the rationale of the deal. Even though no charters were signed, we believe Trafigura will continue to do business with Scorpio Tankers, specifically using these vessels to trade fuel.”

In the Trafigura suezmax deal, where 10 vessels were  offloaded to Frontline, the seller had agreed to take them back on charter.