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Scorpio Tankers finds ‘a pot of gold at the end of the Red Sea’

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Diversions from transiting the Red Sea to avoid Houthi attacks have significantly strengthened ton mile demand to the benefit of investors listed product tanker owners.

Consider Torm (Nasdaq: TRMD), where shares had moved from $27 in mid-December up towards $36 in late January, or early 2023’s darling Ardmore Shipping (NYSE: ASC), where shares have moved up above $16 per share nearing the highs set, a year ago, in Feb 2023 of $18 per share. Meanwhile Oslo-listed Hafnia has seen dramatic gains from Summer, 2023 lows around NOK 50, to recent prices near NOK 80.

Indeed, some investors in Scorpio Tankers (NYSE: STNG) have referred to it as “The gift that keeps on giving.” Compared to its mid 2023 nadir at $41 per share, its price has surged up to $73 per share at end January. With STNG now announcing its Q4 2023 results, the analysts have weighed in.

Analyst Ben Nolan, from Stifel, described Scorpio Tankers as “finding a pot of gold at the end of the Red Sea”, and put a target of $80 per share on his “Buy” recommendation.

On the financial front, the hefty Q4 earnings, where MR’s averaged $32,000 per day and LR-2’s were booking $38,000 per day have enabled STNG to “de-leverage” - paying down indebtedness by opting out of more expensive vessel leases - and also to pay increased quarterly dividends to shareholders which now stand at $0.40 per share.

Concerning the outlook for supply and demand in the impacted sector, Nolan writes: “Given the attacks in the Red Sea, ton mile demand has lengthened materially as ships avoid the region and travel around the Cape of Good Hope. Depending on where the ships are going, routes have elongated by 30-70%, tightening supply upwards of 5%. LR2s have benefited the most, although we expect it to trickle down to the smaller vessel sizes the longer the disruption occurs.” He opines that: “as long as oil demand continues to grow and Russian sanctions remain in place, we expect the rates to stay elevated.”

Other analysts are in agreement on Scorpio Tanker’s strong prospects. Greg Lewis, who covers shipping (and offshore) at BTIG, has also put an $80 target on the company’s shares.  He cites a positive outlook for the current quarter (2024 Q1), noting that: “STNG has booked ~59% of MR days at ~$35,000 and ~68% of LR2 days at ~$57,000 for Q1, which points to Q1 consensus going higher.”

He points to composite Atlantic and Pacific MR hires, excluding scrubbers, in excess of $40,000 per day  and average non- scrubber spot LR2 rates that calculate back to $67,000 per day as drivers for the likely stronger performance in the present quarter.  

Jon Chappell, from Evercore ISI, talks about the company’s “the immense cash pile that is building or the optionality of how to use that cash,” while noting that Scorpio Tankers has not telegraphed longer term plans for special dividends, as other listed shipping equities have paid out in times of extraordinary strength,or increasing authorisations for share buybacks,  another “shareholder friendly” tool.

Management’s coyness, or, perhaps, simple uncertainty about their longer-term thinking, does not really matter; Chappell has put a $91 per share target on STNG shares; “The optionality is immense,” he wrote.