Scorpio Tankers (NYSE:STNG) is based in Monaco, and specializes in providing seaborne transportation of refined petroleum products across the globe through its fleet of 135 wholly owned, chartered-in tankers.
Scorpio Tanker owns the most extensive product tanker fleet in the world, which it has continuously expanded. It is also the most modern product tanker fleet in the industry, featuring an average age as low as 5.6 years.
Due to Scorpio's industry-beating scale, the company has been able to set up a commercial pool chartering strategy, outperforming its industry peers during favorable market environments. I am bullish on the stock.
In the first half of last year, for instance, Scorpio saw a massive surge in its average fleet TCE (Time Charter Equivalent). At the time, the logistical hurdles resulting from COVID-19 for the big oil players led to a surge in the need for product tankers to be utilized as floating storage.
Hence, due to Scorpio's substantial exposure to spot rates, the company had achieved an all-time high net income of $143.9 million in Q2 2020. Rates have since normalized, which has resulted in net losses during the past few quarters, following Scoprio's drydocking expenses, and the installment of eco-friendly scrubbers to its fleet.
However, this is normal for the industry as per its cyclicality. Below, there are three major catalysts which should boost the company's profitability going forward. (See STNG stock charts on TipRanks)
Future Catalysts
These days, there is a poor interest to make significant investments in new tankers due to cash flow deficiencies in the space. As a result, the industry experiences insufficient newbuilding orders, and an already soft order book.
The order book as a percentage of product tankers' total fleet continues to be near historic lows. The slower the global tanker fleet's growth rate amid growing industry demand, the stronger the pricing potential for the largest player in the industry.
As mentioned, Scorpio owns the world's most extensive and modern product tanker fleet. It is also the leading owner in the MR and LR2 product tanker types. Therefore, Scorpio is well-positioned to lock in a growing market share moving forward.
In conjunction with the current state of the global fleet order book, Scorpio's advantage becomes even stronger. Further, Scorpio has invested heavily in its ECO fleet (scrubbers) which should draw more charterers compared to its peers as environmental regulations across the globe tighten.
Scorpio's modern, fuel-efficient fleet is set to gain momentum given its lower GHG emissions. Therefore, Scorpio should cement its position as the dominant company in the field of refined chemical seaborne transportation.
As the world gradually comes out of the ongoing pandemic, the energy sector's recovery should accelerate. For this reason, Scorpio is likely to experience increasing rates going forward.
As well, following an expanding number of vaccinations globally, personal mobility should also improve, which in turn should grow the consumption of gasoline, jet, and diesel fuel.
Overall, Scorpio's business model is very cyclical, and the energy sector is likely the least attractive place to allocate capital these days. Still, the company seems extremely well-positioned to profit significantly during favorable times, as it did when the opportunity arose last year.
Wall Street’s Take
Turning to Wall Street, Scorpio Tankers has a Moderate Buy consensus rating, based on five Buys, one Hold, and two Sells assigned in the past three months. At $21.88, the average STNG price target implies 46.5% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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