Scorpio Bulkers plans to keep its multimillion-dollar stake in Scorpio Tankers for some time, given the potential upside in the company and product tanker sector, executives say.
The comments come amid renewed scrutiny from analysts about the inter-company investment entered into last year during an equity issue, which also saw billionaire shipowner Idan Ofer buy into the world's largest product tanker company.
The New York-listed bulker owner spent $100m for 10.9% of its sister company in October 2018 with a positive outlook on the product tanker market up to IMO 2020.
"We think STNG's got a long way to go," president Robert Bugbee said today during a first-quarter earnings call.
He said the company plans to earn some money off the tanker player's stock before offloading any of it.
"We think the product market is coming along very well and, in some senses, is ahead of expectations," he said.
Scorpio Tankers' stock reached $26.26 in late-afternoon trading, up from $18.70 at the beginning of the year.
Scorpio Bulkers estimates Scorpio Tankers' net asset value to be around $40, not $25 or $26, based partly on a recent deep turnaround in the refinery market, Bugbee said.
"We think that STNG is in a fantastic place for the next two to three years," he said.
He said Scorpio Bulkers may sell the Scorpio Tankers' shares at $60, $70 or $80 but it is just to early to tell.
"We just believe that $25 is right at the first steps of a fantastic potential move in the product market and Scorpio Tankers," he said.
While Scorpio Bulkers paid $100m for its stake in Scorpio Tankers, the shares today are worth $136m, according to Ben Nolan of Stifel.
"Though at this point the investment has borne fruit, management seems hesitant to lock in returns because they expect product tanker market is nearing an inflection point due to the impending IMO 2020 sulfur regulations and believe the valuation can move meaningfully higher," Nolan said.
"Still in our view, taking a little off the table to pay the bills is not an unreasonable idea."
'Weird'
Deutsche Bank analyst Amit Mehrotra questioned the investment, saying it diminishes Scorpio Bulkers' role and identity as a bulker owner.
"This is a conference call for a dry bulk company yet we've spent more time talking about the product tanker market than the dry bulk market," he said.
"Isn't that weird to you?"
Mehrotra suggested that Scorpio Bulkers was sacrificing its own financial performance on a positive outlook on a "clearly bigger and better" Scorpio Tankers.
"When you meet with investors, how do you pitch Scorpio Bulkers? Do you pitch it as a dry bulk company with an option on a product tanker company?" he said.
Bugbee pointed out that most billionaires in shipping hold diversified portfolios with the sole intent of making money.
"They see nothing wrong with making money first and that's what we're doing here," he said.
The debate come during a conference call following a stronger than expected first quarter performance from Scorpio Bulkers, which sent its stock up by 14 on a day which saw climbs in commodity based stocks, according to Jonathan Chappell of Evercore ISI.
"We believe the bottom in the dry bulk downturn is over and that the first quarter of 2019 will mark Scorpio Bulker’s earnings trough," he said.
