Scorpio Tankers has delivered, and then some, on analyst expectations of a monster second quarter, trimming $228m in debt from its balance sheet while easily beating Wall Street earnings projections.
But the world's largest product tanker owner also guided to dramatically reduced charter rates with about half of third-quarter bookings done, even as reported numbers appeared to be above financial break-even.
Management confirmed the profitable third-quarter start in an earnings call on Thursday, unveiling a slide that showed that this rates guidance is better than what it issued one year ago in all four vessel classes.
"The most comforting thing for us is a really good start to the third quarter," said president Robert Bugbee.
"Back in April, we really had to be concerned where we'd be at this point. But it's better than the third quarter last year. The company's been cash-positive so far in the third quarter."
The Emanuele Lauro-led company was able to reduce debt to $2.9bn at 5 August from $3.1bn at 31 March, in a measure closely watched by equity analysts who deem Scorpio's leverage to be deterring investment in the stock.
The analyst beating the drum loudest for debt reduction, Amit Mehrotra of Deutsche Bank, issued a lukewarm first take on the news, however.
Mehrotra acknowledged the debt reduction, "which is something that had not happened for a long while for [Scorpio] and is clearly positive for equity value and valuation".
However, he also lamented that the company had increased share count by beginning to use a so-called at-the-market (ATM) equity distribution programme, selling $2.5m in new stock.
Scorpio managing director David Morant admitted on the conference call that the ATM sale might have been a false step, noting that it had been done "in the teeth of the Covid-19 crisis with liquidity drying up in the general market".
But he added: "We reversed engines pretty quickly as the market was rebounding. If history repeats, it is not something we would do, although it's not a big number."
Scorpio Tankers also reached agreements to defer installation of scrubbers on 19 of its tankers until at least 2021. It has already installed the devices on 86 tankers.
The owner has been busy with its lenders as well. Based on negotiation of a new $225m facility with European lenders and expansion of a loan with ING, it has generated an additional $56m in liquidity after repayment of debt.
Scorpio reported net income of $144m, or $2.63 per share, topping Wall Street consensus estimates of $2.27. It was the best quarter in the company's decade-old history. The result also crushed year-ago figures, which were a loss of $29.7m, or $0.62 per share.
Analyst Ben Nolan of Stifel said in a client note that most of the beat came on the cost side, including on financial costs owing to a lower Libor rate.
There were other savings that will not be permanent, as Scorpio chief operating officer Cameron Mackey explained on the call.
"Take the obvious, nobody's flying," Mackey said. "Nobody could be repatriated from the vessels. A big chunk of the cost reduction is somewhat temporary. It's hard to get anything around the world, whether it's spare parts or people."
The result nearly tripled what had been a record first quarter for the company, which is based in Monaco and New York.
For the half, Scorpio had net income of $191m, or $3.49 per share. That reversed a $15m, or $0.31-per-share, loss for the first half of 2019.
Revenue for the quarter more than doubled year over year to $346m from $151m, and for the half it jumped to $600m from $347m.
Scorpio's LR2s earned average time charter equivalent rates of $47,100 for the quarter, followed by LR1s at $35,800, MRs at $21,800 and handymaxes at $17,700.
But with about half the bookings done for the third quarter, those numbers fell to $22,500 for LR2s, $22,000 for LR1s, $15,300 for MRs and $12,000 for handymaxes.
Commercial director Lars Dencker Nielsen told analysts that while the current period is traditionally the owner's weakest, the most recent bookings in some vessel classes are promising, including a resumption in enquiry about floating storage booking for LR2s.
"Those all start with a '2' — more than $20,000 a day," he said. "I'm encouraged by where the market is."
MRs also have proved fairly resilient, with low Asian bookings in the $10,000-per-day range being balanced by US Gulf fixtures as high as $20,000.
"Together, we're looking pretty OK," Nielsen said.
Scorpio's current cash position of $285.7m bodes well, according to Clarksons Platou Securities analyst Omar Nokta.
"We feel [Scorpio] is in a healthy position to easily meet remaining debt obligations for [the second half] and more importantly is well-suited for 2021 requirements," Nokta wrote.
