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Scorpio Tankers impresses stock analysts

Scorpio Tankers Scorpio_Tankers.png
Shipping investors are closely watching the Q2 earnings reports for the US-listed tanker names as the market eases from its 2022 boom.

Mirroring the pullback in hires during 2023, compared to second half of 2022 as re-arranging of trades brought inefficiencies galore, the prices of the stocks have also eased.

In the refined products sector, Scorpio Tankers (NYSE: STNG), controlling 113 vessels, is a widely followed bellwether. With excess cash flow during last year’s market boom, STNG set the standard among peer companies for financial optimisation; in particular, buyouts were executed on numerous leases with assets, now on the balance sheet, financed with more attractively priced bank debt.

Now halfway into 2023, STNG is continuing to strengthen its balance sheet- positioning it to lean into any potential upward waves. The stock-watchers are impressed.

Equity analyst Greg Lewis, from brokerage BTIG, looks for the stock, presently priced at around $50 per share, down from a high of $62 in mid-February, to move higher after the normal summer lull in rates. In a report following STNG’s Q2 report, Lewis emphasises the powerful campaign to reduce financing costs, writing: “STNG closed on a ~$1.0B facility in July, half of which consists of a revolver that can facilitate the repurchase of more vessels on sale leaseback financing, reducing all-in borrowing costs. Fully drawn, management expects the facility to finance 45 existing tankers. So far in 2023, STNG has entered agreements to repurchase 26 vessels (~17 MRs, ~9 LR2s), unlocking ~$1.3B in vessel value and increasing financial flexibility.”

Lewis, a veteran of the energy markets, has put a target of $75 on the shares.

Analyst Chris Robertson at Deutsche Bank, historically cautious on STNG share pricing, has a much more modest target, $55, on STNG shares. In his report, he also notes the importance of deleveraging, and highlights two “shareholder-friendly” measures, dividend payments, and share repurchases. Deutsche Bank notes: “In addition to the quarterly dividend [$0.25/share, same as Q1 dividen]> the Company repurchased 5.9 million shares from April through July at an average price of $48.00/share. It has $213.2 million remaining under its latest $250 milion securities repurchase program. We believe the Company will continue to prioritize strengthening its balance sheet, opportunistically repurchasing shares.”

In explaining its price target, Deutsche Bank explains: “We have applied a discount to our Net Asset Value analysis to reflect ongoing macroeconomic uncertainty and demand risk, which continues to overhang the market.”

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At Stifel, analyst Ben Nolan has put a target of $73 on the shares. In his report, he emphasizes that: “Scorpio continues to make solid money and use that capital to de-lever and return capital to shareholders, primarily through share buybacks. The company bought back ~10% of the stock in the quarter and has reduced shares outstanding by ~18% since 2Q22.”

Jon Chappell at Evercore ISI is also very bullish on STNG shares- with a target at $76 over a one-year horizon. He looks at the interplay of financial moves, and the hires and TCEs for the company’s MR / LR/ Handymax tankers, telling clients: “Even amid the slightly tempered, but still near-record, earnings backdrop we forecast for the remainder of this year and next, we forecast the leverage ratio to drop to 25% in the next 9 months, and although we do not project repurchases, STNG would have the liquidity required to replicate the 1H23 buyback pace in 2H.”

 After pointing to the likelihood of continued share buy-backs, in the absence of an upside breakout on vessel hires, Evercore ISI adds that: “Meanwhile, at the first hint of a seasonal spot rate increase, we would expect fund flows to return to the equity with the highest operating leverage and largest beta in the tanker space.”