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Scorpio Tankers shares surge past targets as Q1 results impress

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NYSE-listed Scorpio Tankers is in discussions to reduce its debt levels which would substantially lower its breakeven level and see it printing money.

Against the backdrop of the overall stock market working its way back to the highs of early April, following a three-week dip, Scorpio Tankers (NYSE - STNG) continued to move upward, blowing through analysts’ target prices of only a few weeks ago. The shares traded up to $77 (leading to an overall market capitalisation of just under $4 billion), contrasted with $46 per share one year ago, and levels of $63 per share at the beginning of 2024.

Analyst Chris Robertson, from Deutsche Bank, with a target price of $87 per share, noted the strong product tanker market in his post-call writeup, but also pointed to important financial actions at STNG. He wrote that ongoing discussions with lenders have the “potential to substantially lower the cash break-even level.”

Discussing a potential repayment of $223 million on STNG’s 2023 $1 billion credit facility, he said: “Importantly, the prepayment would result in a substantial decrease in the Company's total cash break-even level from ~$16,000/day currently to ~$12,500/day pro-forma the prepayment. We believe this would put STNG's break-even level below the long-term median trend rates and would enable the Company to prevent substantial cash burn in weak markets.”

Stifel analyst Ben Nolan, who put a target of $83 on STNG shares, wrote that: “The company has been productive in this elevated rate environment in the last several quarters by using cash flows to deleverage the balance sheet and provide generous shareholder returns.”

With these breakeven levels, STNG is printing money; the company revealed that it has booked 53% of its Q2 open LR2 days at $51,700 per day,  and a similar proportion of its open MR days at $38,000 per day. For Handymax tankers, nearly half of its open Q2 days are already locked in at $25,000 per day.  Stifel’s report noted that: “The company has seen a ramp up in the Handy market over the last few weeks which could provide some upside to that $25k”  

Robertson, from Deutsche Bank, emphasized that STNG is now re-visiting the topic of re-purchasing shares - an “investor-friendly” strategy if the stock prices drifted below the Net Asset Value (NAV)/share.  On this subject, Nolan, the Stifel analyst, wrote that: “We expect significant cash flow generation in 2024 and resiliency going forward should there be a downturn. While the company made no share repurchases this quarter, we suspect those cash flows will be deployed into resuming those buybacks.”

He explained further: “With no further vessel investments expected and leverage down to scrap value, we expect buybacks will ramp up again which should provide some upside to share price.”  STNG is also looking at increasing its dividend, which remained at $0.40 per share, as it has now lowered overall debt- with “net debt” at just over $800 million- a level in line with the estimated scrap value of its fleet.

One important component of reducing the debt levels has been the shift out of expensive lease finance, which STNG had used heavily to build up its fleet, and replacing it with less expensive conventional bank debt. Deutsche Bank’s Robertson pointed to the sharp decline in overall debt from around $3 billion to approximately $1.4 billion, but also to the proportions of lease finance, saying: “Bank facilities now make up ~82% of its outstanding indebtedness compared to just 18% a few years ago.”