Understanding Scorpio Tankers (part 1)

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Significant portions of this article are from one of my posts on The Motley Fool message boards.

Among tanker companies, Scorpio Tankers (NYSE: STNG) is a fairly recent publicly traded player, having only started trading publicly about 34 months ago.  I have reviewed a number of tanker or shipping companies in the past, but this represents my first time digging into Scorpio. 

I hadn't really paid that much attention to the company in the past, but a number of related events in the December 2012 to January 2013 timeframe caught my attention, and so I went digging.  As I dug into the company, I couldn't help notice some similarities with other tanker companies, including Nordic American Tankers (NYSE: NAT), Overseas Shipping Group (OTC: OSGIQ), and Frontline 2012.

Scorpio Tankers became a public traded entity in April 2010 with an initial public offering of 12.5 million shares at $13 per share.  With an overallotment of shares it was probably closer to 13 million shares.  At the time, the company owned a total of three vessels (NAT also started with three vessels). 

The company had an existing credit facility and used the IPO proceeds to pay off the original credit facility, and start a new credit facility -- the 2010 credit facility.  This new facility has payback terms of $4.1 million per quarter, with a balloon payment of $76 million  in June 2015.  This "share offering to pay off credit facility" is a tactic Nordic has employed over the years.  The majority of Scorpio Tankers' vessels operate in tanker pools, or operate in the spot market.  This is another characteristic the company shares with Nordic's fleet.

Scorpio Tankers then started acquiring additional used vessels -- three in June 2010, two in July 2010, and one in August 2010. In November 2010, the company had another offering, with the CEO's family also participating. The company raised $53 million and acquired another vessel.

Scorpio created a separate credit facility for STI Spirit, a 2008 build product tanker (a Long Range (LR2) vessel).  The STI Spirit credit facility is a 7-year, 28-installment loan facility that matures in 2018. 

Somewhere along the way Scorpio got involved in the vessel charter-in business. Since the vessels involved are product tankers, the company I thought they kinda imitated here was Overseas Shipping Group, the now-bankrupt largest US-based tanker company.  Since Scorpio Tankers only has charter-in product tankers, I suppose I could have used Danish tanker owner Torm A/S (NASDAQ: TRMD). Interestingly, Torm A/S is also going through a difficult time as it negotiates with banks, creditors and charter-in associates on a reasonable strategy to survive.  Just a theory on my part, but the difficulties encountered by OSG and Torm A/S might have something to do with Scorpio Tankers' strategy shift, one that seems to have started developing in mid-2011.

In May 2011, Scorpio had another share offering, raising around $68 million, and purchasing two more second-hand vessels. In June 2011, the company placed an order for five newbuild Medium Range (MR) product tankers with options for additional vessels. Until then, the company had been content to own second-hand or used vessels. Newbuild (NB) vessels represented a shift in strategy. 

The company added two credit facilities, the 2011 credit facility and the newbuild credit facility. The first was a $150 million facility that allowed the company to finance up to 50% of the cost of a new vessel. The second was a $92 million credit facility that allowed the company to borrow up to $23 million per vessel, or 61% of contracted price after the company paid the first 39%. [Sotto voce of Scorpio management] "Hey! we need to raise more capital!" Yet another offering in December 2011 -- 7 million shares @ $5.50 per share this time.

Perhaps Scorpio Tankers management realized they couldn't keep coming back to the capital markets without showing some progress in managing the capital that had previously been raised by the company.  Or perhaps it was a refining of strategy.  In 2012, the company started selling off vessels in its existing fleet -- one vessel exited in March, two in April, one in August and one in September. In the case of the latter two, STI Diamond and STI Coral, these were vessels the company owned for less than two years, sold after 15 and 16 months, respectively!  The total loss on the last two vessels was about $6 million.  I should add the company implemented a token buyback (a trivial gesture, in my opinion) repurchasing about 83,000 shares.

All of the above data was gathered from skimming through the company's 2011 20F (annual report) and reading the Q3 2012 earnings release. Per Oct. 29, 2012 the Scorpio Tanker fleet consisted of 12 owned vessels, 15 charter-in vessels and five newbuilds.

Between the Q3 earnings report and the end of the year, the company added a few more vessels to its fleet via the charter-in route.

Recall in the initial paragraph, I suggested multiple events drew my attention to Scorpio Tankers.  Well, in December 2012, the company had yet another share offering and went on a vessel ordering spree. The newbuild orders bumped up from 5 to 12 MR vessels. The company wasn't done either.  In January, the company had yet another share offering -- 30.6 million shares at $7.50 per share and the newbuild fleet became 16 MR tankers and four Handymax ice-class tankers. The share count went from 41.2 million (end of Q3 2012) to over 93 million in February 2013.

I look at this assembling of a newbuild fleet, and the competitor that comes to mind is Frontline 2012 (FRNT on the Norwegian OTC list).  Here, I am just referring to fleet build-out part.  At this time Frontline 2012 is the private equity (thus far) entity that John Fredriksen is assembling as his future shipping bet.  In part 2, I will delve more into this comparison and other aspects to examine Scorpio Tankers' likely strategy.

Chris Mascarenhas owns shares in Frontline (FRO), a company that has interests in Frontline 2012. He does not own shares in any other company mention in the article above. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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