Scorpio Tankers Inc. (STNG)

[geodan]

Wow STNG picked in SeekingAlphaArticle as top gainer

http://seekingalpha.com/article/4029722-2-oil-related-stocks-50minus-90-percent-upside link has charts

Great report.

The first idea is Scorpio Tankers, which owns the largest modern tanker fleet in the world and faces positive macro momentum over the next three years. STNG has performed poorly in the stock market over the past year, down nearly 50%, but price action has recently turned the corner as product tanker rates have also started to lift. Shares currently trade at $4.39 and the firm offers an 11.4% fixed-rate dividend. Around three weeks ago, on 16 November, STNG insiders bought shares at $4.45, notable since this was their first major open market purchase.



My personal price target is $6.50, representing upside of 48% from current share pricing. If product tanker rates surge in 2017-2018, this price target could move far higher, but I am basing the current level on a mixture of NAV (i.e. tangible book) and a very conservative multiple (5x) to normalized cash flow potential.

Investors who wish to see more information on the bullish case for this stock should view the November 2016 Corporate Presentation. Slide 12 highlights its global leading positions:



Not only does STNG have the world's largest fleets, but it also has the world's most modern assets and the largest product tanker spot market trading enterprise. This unrivaled scale and modernity is especially important as the industry faces two pivotal catalysts in 2017 and 2020: Ballast Water Treatment ("BWT") and Low Sulfur Emissions requirements. Slide 6 highlights how STNG's assets are markedly better than their non-eco counterparts.



Fellow Seeking Alpha author James Catlin has covered both the Ballast Water catalyst and the IMO emissions mandate in several exclusive reports which are now available for free public access. I recommend reading both of these reports as well as subsequent comments for a look into how these initiatives potentially establish STNG on the cusp of a bullish super cycle in rates as forward product transport demand is likely to easily outpace net global fleet growth, especially in the MR and Handy segments.

Scorpio Tankers has massive cash flow potential even in years with middling/average rate performance. During 2015, STNG had a smaller owned fleet and pulled in a total of $392M in operating cash flow, a massive amount compared to the current market capitalization of just $766M. Over the past 9 months, rates have been fairly weak due to a temporary global fleet dislocation, and STNG has still managed to pull in $152M of cash. The current share pricing represents around 4x P/CF on a fairly weak year and under 2x P/CF for an above-average performance.

Considering its globally supreme fleet, beneficial macro tailwinds, and cash flow potential - a price target of $6.50/sh appears almost laughably small. The current pricing of $4.39 is almost indefensible, especially as STNG traded far higher in 2012-2014 when the market rates were weaker, forward prospects were more questionable, and STNG faced enormous orderbook liabilities. This is a classic case of broad market pessimism, but of course there are a few risk factors.

STNG Risk Factors

Despite what I believe is large upside potential, an investment in STNG is certainly speculative and includes a few risk factors, the primary of which are heavy exposure to spot markets, fairly high financial leverage, and unproven macro benefits.

STNG has all but five of its vessels exposed to the spot markets, which are prone to wild fluctuations. The spot market is exactly where STNG wants to be if rates continue to lift, but it also means there is far less downside protection if rates transition to a prolonged slump. The one bullish caveat is that Scorpio's fleet tends to outperform the global benchmark by at least $2k/day (yearly average) due to its modern and efficient assets. Whatever spot rates are available, STNG has a history of clear outperformance (ref: slide 11).

STNG's financial leverage is fairly high due to its rapid expansion pace. Over the past three years, it has deployed over $2.5B into its fleet and it currently has $1.9B in long-term debt and $273M in remaining obligations to deliver the final 10 vessels through Q1-18. This risk is partially offset by STNG's ability to generate massive cash flow even with marginal spot rates, but is still a significant concern for investors.

The final risk is the unproven macro benefits. Although there's significant potential for a supercycle in product rates over the next few years, this is also based on a number of bullish assumptions including high global refinery utilization, continuing global trade activity, and higher scrapping due to the ballast water treatment requirements. If these macro events fail to occur, market rates could be similar to the trough period from 2011-2014.