Scorpio Tankers Inc. (STNG) Is Bullish on the Tanker Market, But Is it Right?

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Scorpio Tankers Inc. (NYSE:STNG), led by shipping veteran Robert Bugee, is looking to become the biggest force in the tanker market after buying much of the global capacity for tanker production for the next few years.

Scorpio Tankers Inc. (NYSE:STNG)

The company currently owns 15 vessels and operates an additional 25, which are chartered. Scorpio Tankers Inc. (NYSE:STNG) also has 54 new vessels on order and holds about 60% of the worldwide contracts to build LR2 longer range tankers and 25% of worldwide contracts to build medium range tankers. The company believes that by ordering a fleet of similar, longer range vessels, it will be able to achieve better economies of scale.

The global tanker market has been suffering from chronic oversupply problems during the past few years, and although the market is starting to pick up again, part of the reason for its pick up is a reduction in the number of ships being produced. Scorpio Tankers Inc. (NYSE:STNG)’s management believes that demand for oil and refined product transportation will pick up rapidly over the next few years as demand in Asia and Latin America grows.

However, the rest of the industry is not so sure and the CEO of Nordic American Tanker Ltd (NYSE:NAT) has clearly stated that a rise in shipping rates will only happen if there is a significant reduction in ship capacity. Some orders left over from 2007/2008, when the market was at its peak, are only just starting to be delivered and ship production was in-line to begin tapering off next year, but with Scorpio Tankers Inc. (NYSE:STNG)’s extra bullish bet, this could be about to change.

Can Scorpio support the extra ships?

It would appear that Scorpio can afford to take on the extra debt that it needs to be able to fund the ships. The company increased its borrowing by 23% from Q4 2012 to Q1 2013, but still managed to reduce its debt to equity level while increasing its net cash position (this was done by issuing additional equity).

Scorpio Tankers Inc. (NYSE:STNG) is also in one of the best positions financially out of all the tanker companies on the market. Unlike Nordic American Tanker Ltd (NYSE:NAT), which has a negative view on the tanker market in the short-term, Scorpio made a small Q1 2013 profit, the first time since 2009! Meanwhile, Nordic American Tanker Ltd (NYSE:NAT) incurred a huge $32 million loss on revenue of only $17.3 million.

Company Cash Debt Debt to Equity Q1 2013 Debt to Equity Q4 2012
Scorpio $400 $175 20% 34%
Nordic American $23.6 $250 32% 31%
Teekay $172 $1,873 290% 270%

Figures in $U.S. millions

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