Scorpio Tankers gets into LPG sector

JULY 3, 2012 — “We are excited about our entry into LPG which we have long considered an extension of the product market,” said Scorpio Tankers Inc. (NYSE: STNG) CEO and chairman of the board Emanuele Lauro as the company announced agreements covering construction of minimum of five and up to ten Very Large Gas Carriers (“VLGC”) for approximately $74 million each. The shipbuilders are Hyundai Samho Heavy Industries and Daewoo Shipbuilding and Marine Engineering and the orders replace a previously announced agreement to construct four LR2 tankers at Korea’s Samsung Heavy Industries.

The VLGCs are 84,000 cu.m LPG tankers. Two of the first five vessels will deliver in the second quarter of 2015, one in the third quarter, and two in the fourth quarter.

Scorpio also says that it has taken delivery of its ninth newbuilding MR product tanker, STI Le Rocher, agreed to time charter-in a 2013 built LR2 product tanker and declared options on two existing time chartered-in vessels.

“With common customers, shipbuilders, and trade lanes, and offsetting seasonal swings, the product tanker and LPG markets are highly complementary,” said Mr. Lauro. “Most importantly, LPG, as with refined products, is competitively priced in the global marketplace and winning new, distant customers, and this is reflected by accelerating export volumes out of the U.S. Gulf.

“We are pleased with our agreements with two of the most reputable builders of VLGC vessels. These orders replace a previously announced order for four LR2 vessels, and the structure of the LPG market presents an array of opportunities for us to build value with our shareholders.”

ANALYST LIKES MOVE
Investment banker and research firm Cowen & Company liked the move by Scorpio. Sam Margolin, Director, Cowen and Company, says the move by Scorpio into VLGC diversifies the company’s fleet, “while continuing to play closely on the U.S. shale theme and Middle East downstream expansion.” Margolin points out that VLGC rates have recently record highs—about $63,000/day from about $49,000/day a year ago (VLGC rates are highly seasonal and averaged about $27,000/day full year 2012).

“Given the positive thematic trends and a relatively light fleet/orderbook (orderbook through 2015 is about 12% of the current fleet and about 15% of the current fleet is 20 years or older),” says Margolin, “we view the order favorably. A $40,000/day rate would yield a rather strong unlevered return of 15%, and assuming 60% debt financing, Scorpio should not be in need of additional equity to finance the first five VLGCs (and may not be in need of equity for the second five assuming 60% debt and late-2015/2016 deliveries).”

Adds Margolin, “In addition, the extension of the LR2 charter-in options reflects confidence in near-term product tanker fundamentals and the charter-out of the STI Le Rocher MR newbuild at $19,000/day counter-seasonally indicates the ability of Scorpio’s newbuilds to earn strong returns via the eco-advantage and triangulation of the Atlantic market.”

Cowen and Company maintains an Outperform rating and $11 price target on STNG. It’s price as of July 2 was $9.03 per share.