Scorpio Tankers (NYSE:STNG) shares have gained 76.4% over the past 12 months. It’s been an exceptionally good start to the year for Scorpio and the tanker industry. The company has been in a prime position to benefit from a supply and demand imbalance within the tanker industry, sending spot rates for its young and fuel-efficient fleet upwards. With several factors continuing to exacerbate the market imbalance, plus the stock’s attractive valuation, I remain bullish on Scorpio.
Pick the best stocks and maximize your portfolio:
- Discover top-rated stocks from highly ranked analysts with Analyst Top Stocks!
- Easily identify outperforming stocks and invest smarter with Top Smart Score Stocks
Scorpio Tankers Impresses in Q1
Scorpio Tankers stock pushed higher after its Q1 earnings on May 9. The tanker stock reported non-GAAP earnings per share (EPS) of $3.97, beating estimates by $0.34. Revenue came in at $391.3 million, beating estimates by $10.3 million. Scorpio’s average daily time charter equivalent revenue — the effective leasing costs of its vessels — increased to $39,660 per vessel from $37,500 per vessel in the prior-year period.
In its earnings call, management noted that the company had also successfully paid down more debt. The company’s debt net position currently sits at $811 million as of the most recent report. This figure is roughly in line with the scrap value of its fleet. Coupled with an average age of 8.2 years — that’s relatively young in the tanker game — Scorpio’s net debt position looks very strong.
Scorpio is expected to pay down more debt, with an unscheduled debt repayment of $223.6 million expected in June. This early payment “would result in a substantial decrease in the company’s total cash breakeven level from ~$16,000/day currently to ~$12,500/day,” Deutsche Bank’s (NYSE:DB) Chris Robertson said in a note.
This will, in turn, make Scorpio Tankers more resilient and profitable. Robertson added that this “would put STNG’s breakeven level below the long-term median trend rates and would enable the company to prevent substantial cash burn in weak markets.”
Geopolitics Impacting Scorpio Tankers
Experts have long warned that there will be a shortage of tankers globally. According to Bloomberg, just two new supertankers will join the global fleet in 2024. That’s the fewest additions in almost four decades and is around 90% below the annual average since 2000.
Naturally, this supply and demand imbalance is a positive for well-prepared tanker companies like Scorpio. However, this imbalance has been exacerbated by Houthi attacks on vessels transiting the Red Sea and low water levels on the Panama Canal.
According to investment firm Jefferies, around 90% of normal Red Sea capacity is being rerouted around South Africa. According to J Mintzmyer, the founder of Value Investor’s Edge, rerouting vessels around South Africa instead of going through the Suez Canal and the Red Sea adds 40% to Asia-to-Europe routes and between 60% and 70% to Asia-Mediterranean trades.
Of course, this all means that the same number of vessels has to spend more time at sea. In turn, there’s less available supply, pushing prices up. While it wasn’t mentioned during the earnings call, low water levels in the Panama Canal have caused reduced transit rates during the first few months of the year. This has led to rerouting or delays as vessels queue to cross the isthmus.
James Doyle, Head of Business Development & IR at Scorpio Tanker, highlighted the impact of these factors on spot rates: “Today, spot rates for MRs (Medium Range) are almost $40,000 per day and $50,000 for LR2s. While LR2s have captured headlines because of their higher volatility and impact from disruptions in the Red Sea, MR rates have shown remarkable consistency and served as a clear indicator of the robust underlying global demand for refined products.”
This underscores the significant positive effect that the current market conditions have on Scorpio Tankers, demonstrating the company’s strong position in a challenging environment.
Is Scorpio Tankers Stock Undervalued?
Scorpio Tankers stock is currently trading at 6.5x forward earnings. Clearly, that’s not expensive when compared with index averages, but it’s important to recognize that cyclical stocks like Scorpio Tankers tend to trade with lower multiples. The tanker industry experiences boom and bust cycles. Thus, price-to-earnings (P/E) multiples tend to be lower. The current P/E, however, is cheaper than the average for maritime transports (8.1x).
Is Scorpio Tankers a Buy, According to Analysts?
On TipRanks, STNG comes in as a Strong Buy based on four Buys and one Hold rating assigned by analysts in the past three months. The average Scorpio Tanker stock price target is $88.20, implying 7.9% upside potential.
The Bottom Line on Scorpio Tankers
Scorpio Tankers is a well-positioned tanker company that is reaping the benefits of supply and demand imbalances in the sector. With its young and fuel-efficient fleet, the company has seen leasing rates for its vessels push much higher in a tight market. Moreover, with debt falling in line with the company’s scrap asset value, Scorpio looks like a relatively low-risk investment compared to several of its peers. Given the current environment, I expect Scorpio to continue surging.
