AvigatorPhotographer On July 30th, Scorpio Tankers (NYSE:STNG) released its Q2-2024 earnings report, which slightly surpassed analysts’ expectations. Consequently, the stock rose by over 3% during the following trading hours, with trading volumes exceeding the average. In this article, I will provide an overview of the Q2-2024 results and explain why I believe Scorpio Tankers—one of the largest product tanker fleet companies in the world—remains a strong buy. Despite its significant market value increase in recent quarters, I see further investment potential in the stock due to favorable market conditions. Stock price Scorpio Tankers is currently trading at $77.1 per share, with a market cap of $3.8 billion. The stock has risen approximately 27% since the beginning of the year and has shown a robust 64% increase year-over-year. When I last wrote about Scorpio Tankers in November 2023, the stock was at $58.2 per share, marking a 32% gain since then. The 52-week low is $47.4 per share, recorded in July 2023, and the 52-week high is $82.5 per share, reached in June 2024. Currently, Scorpio Tankers is trading at an 8% discount from its 52-week high and a 63% premium from its 52-week low. Data by YChartsQ2-2024 results Revenues for Q2-2024 were $380 million, up 16% from $329 million of Q2-2023. The increase in revenues is explained by the increase in vessel charter day rates across all vessel classes, with the LR2 and MR vessels day rates that significantly increased year-on-year (LR2 and MR, together, represent 87% of Scorpio Tankers fleet). LR2 rates increased by 19%, from $39.5/day in Q2-2023 to $47.2/day in Q2-2024, while MR rates increased by 24% from $28.6/day to $35.6/day. Rates for Handymax vessels increased as well, but only by 4% y-o-y. Comparing Q2-2024 revenues with the previous quarter, one can see that figures are quite in line with just a 3% drop in revenues. As shown in the chart below, from Q1-2024 to Q2-2023, only MR day rates increased while LR2 rates and Handymax rates declined by 7% and 13% respectively, quarter-on-quarter. Scorpio TankersLooking at total operating expenses, the overall amount for Q2-2024 was $127 million versus $158 million of the previous year (-20% y-o-y). While most of the operating costs remained stable (vessel operating costs at $79 million, depreciation at $47 million) the main difference between Q2-2024 and Q2-2023 was represented by a net gain of $43 million on the sale of vessels that contributed to reduce total OpEx. Overall, net income for Q2-2024 was $227 million, about 48% higher than the $132 million recorded in Q2-2023. Cash flows and debt Cash flow from operations for the first half of the year was positive at $494 million, closely matching the $501 million from the previous year. Cash flow from investing activities was also positive at $84 million, primarily due to the divestment of some vessels ($108 million) and investments in drydock, scrubber, and ballast-related activities (-$23 million). Cash flow from financing was negative at -$709 million, reflecting a strong debt reduction policy. As of June 30th, 2024, total outstanding debt stands at $1 billion, with $225 million in cash, resulting in a net debt of $775 million. As shown in the chart below, Scorpio Tankers has successfully reduced its net debt from $2.9 billion at the end of 2021 to the current $712 million. This significant decrease, which the company expects to continue in the coming quarters, positively impacts the stock price. Indeed, a high net debt to equity ratio increases borrowing costs, leading to a higher WACC and a decline in share price. Currently, the net debt to equity ratio is 20%, aligning with peers such as Euronav NV (32%) and DHT Holdings (17%). Scorpio TankersShares repurchase program and dividends During 2024, Scorpio Tankers continued its 2023 Share Repurchase Program and bought back 1,397,966 shares at an average price of $78.16/share, equal to a total average purchase price of $109 million. A few days ago, on July 29th, 2024, Scorpio Tankers’ Board of Directors confirmed the program and increased it to repurchase shares for an aggregate value of $400 million. This value of $400 million resets the previous caps and represents the new limit for the buy-back program. Oil tanker market dynamics Scorpio Tankers’ stock has seen substantial gains in recent quarters due to disruptions in the oil tanker market, characterized by a mismatch between supply of and demand for oil tanker vessels. Despite these gains, I believe the ongoing imbalance in oil demand and supply will continue to support high oil tanker day rates. This environment allows companies like Scorpio Tankers to generate robust free cash flows. The Russian-Ukraine war has disrupted the oil flows around the world, with the EU that abandoned Russia as main supplier and turned towards other countries such as the US, Middle East, and some African countries. At the same time, the recent instability in the countries close to the Suez Channel has led oil tankers companies to play the safe route of circumnavigating the Cape of Good Hope in South Africa. The consequence of these two dynamics is that vessels have to navigate more miles making voyages longer than before and, therefore, reducing the number of available oil tankers at any given time. On the other hand, the number of new vessels that will sail the sea is at historical low levels since, during 2020 (due to Covid) most of oil tanker companies cancelled orders they had placed for new vessels and avoided expanding their fleet. After Covid, oil tanker companies again waited to place new orders due to strong inflation that led to an increase in capital expenditure for new tankers. As a result, according to Clarksons Shipping Intelligence, the number of newbuild orders in the four-year-period 2021-2024 (220 orders worldwide) is the second lowest ever. The conjunction of the two dynamics is such that demand for oil tankers is not met by supply, and this pushes vessels day rates at high levels never seen in the past. Scorpio TankersRisk for Scorpio Tankers Scorpio Tankers faces several risks, including environmental regulations, piracy, and naval accidents. While the latter two are typically covered by insurance, environmental regulations require closer attention. Different countries are developing their own CO2 emission standards, with varying levels of strictness. Fortunately, Scorpio Tankers’ fleet is relatively modern, with an average age of 8.4 years, and most vessels are equipped with scrubbers: these components clean exhaust gases and reduce concentrations of acid micropollutants such as nitrogen oxides, sulfur oxides, and chlorinated gases from fuel combustion. Conclusion I believe that Scorpio Tankers is worth a BUY recommendation. It is true that in the past quarters the stock increased its value by far, but the persistence of the demand/supply dislocation and the soundness of the company are enough to enable Scorpio Tankers to continue with its growth.
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