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Evermore Global Advisors View on Scorpio Tankers and Constellium SE

Evermore Global Advisors, LLC is a Summit, New Jersey-based investment management firm. It was co-founded by David Marcus and Eric LeGoff in 2009. Recently, Evermore Global Advisors released its Q1 2020 Investor Letter – a copy of which can be downloaded here. In the letter, the Evermore Global Value Fund posted a -30.66% return for the quarter underperforming its main benchmark indexes.

In the said letter, David Marcus highlighted a few stocks and Scorpio Tankers Inc (NYSE:STNG) is one of them. Scorpio Tankers operates as a shipping company. Year-to-date, STNG stock lost 36.0% and on April 23rd it had a closing price of $25.18. Its market cap is of $1.48 billion. Here is what David Marcus said:

“Scorpio Tankers Inc. (Ticker: STNG), one of the world’s largest product tanker operators, was the second largest detractor to Fund performance in the first quarter. Shares of Scorpio Tankers underperformed largely due to the COVID-19 crisis and fears related to a global slowdown in trade. As we got closer to the end of the quarter, we saw the beginning of a fight between Saudi Arabia and Russia regarding cuts to oil production. With no agreement in place, both countries decided to fight each other and announced substantial production increases to incredible levels. While not openly stated, we believe the objective was to destroy the U.S. shale industry by pushing the price of oil to such distressed levels where it would be clearly uneconomical for U.S. competitors to produce. The global shutdown to thwart the spread of COVID-19 then caused the price of oil to implode. With record levels of oil being produced, the demand for oil rapidly waning and limited onshore storage capacity filling up quickly, there was no place to store the excess oil. The only viable solution was to charter oil tankers for floating storage, which led to tanker rates surging to unprecedented levels. For the crude tankers (i.e. Frontline, which the Fund also owns), charter rates for very large crude carrier vessels increased substantially from around $20,000 per day to over $300,000 per day virtually overnight before backing off a bit. Charter rates are now still over $150,000 per day. In the near term, we believe Scorpio Tankers will continue to benefit from the current situation, as the recent OPEC+ deal to reduce production by 10 million barrels per day will not be enough to offset the current oversupply. The bottom line is that, in spite of the COVID-19 pandemic, the tanker industry continues to benefit from a record 20-year low order book for new vessels, favorable International Maritime Organization regulatory changes, Saudi Arabia/Russia conflicts that are collectively creating a situation that is extremely compelling and unique for the industry.”

In Q4 2019, the number of bullish hedge fund positions on STNG stock increased by about 32% from the previous quarter (see the chart here).

Evermore Global Advisors comments on Constellium SE

In the said letter, David Marcus also highlighted Constellium SE (NYSE:CSTM) stock. Here is what David Marcus said:

“Constellium SE (Ticker: CSTM US), a downstream producer of value-added aluminum serving the packaging, automotive, and aerospace markets, was the third-largest detractor from Fund performance in the quarter, with shares falling by a whopping 69% during the period. Make no mistake, the market is spooked by Constellium’s leverage, which stood at 3.9x earnings before interest, taxes, depreciation and amortization (“EBITDA”) at year-end 2019. But it is important to note the company has no debt maturities until mid-2021 (€200 million) and not again until 2024, with essentially no restrictive debt covenants. The company maintains it has significant liquidity (more than €515 million) and highlights the stability of its defensive can sheet business (used for beverage cans), while pointing out that when business slows down in automotive and aerospace end markets, it unlocks cash from working capital as existing raw material inventories are worked down. As disclosed in a press release dated March 19, 2020, the stay-at-home directive from Emmanuel Macron has forced Constellium to reduce or suspend activities at certain of its plants. But in the same release, the company stressed its flexibility on capital spending and ability to reduce operating expenses, while noting its liquidity picture actually improved in Q1 2020 from year-end 2019. In our conversations with the company, we learned that the French government will be significantly contributing to worker payroll, and that shutdowns/startups of its plants are generally not very costly endeavors. And, we further believe that, if necessary, Constellium would have ample access to the secured debt market, even in times like these.

Zeroing in on Constellium’s aerospace business (which represented 20-25% of 2019 adjusted EBITDA), in 2019, we estimate the company had about 2-3% revenue exposure to Boeing, and about 8-9% to Airbus. In fact, Airbus could be the beneficiary of some of the company-specific issues Boeing currently faces, which would be a net positive for Constellium. We are obviously aware of the sharp contraction in the outlook for all businesses tied to commercial aviation and are monitoring this fluid situation carefully. For now, we are of the mindset that the long-term positive trajectory of air travel globally will eventually return, but acknowledge we have no ability to forecast when this might be with precision.”

In Q4 2019, the number of bullish hedge fund positions on CSTM stock increased by about 6% from the previous quarter (see the chart here).

Disclosure: None. This article is originally published at Insider Monkey.

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