When it comes to making a highly leveraged bet on a tanker market recovery, New York-listed Scorpio Tankers is a popular choice within the shipping analyst community.
The roster of researchers with "buy" ratings on the world's largest product tanker company reads like a Who's Who: Jonathan Chappell of Evercore ISI, Randy Giveans of Jefferies, Omar Nokta of Clarksons Securities, Ben Nolan of Stifel, Magnus Fyhr of HC Wainwright and more.
But then there is the case of Amit Mehrotra of Deutsche Bank. Mehrotra is not only sticking to the "sell" label he slapped on Scorpio in May, but now he is putting out a fresh alarm saying the owner could be heading for a dilutive equity raise.
Mehrotra is essentially telling clients to run from the stock before Scorpio carries out a follow-on shares issue that will cause the unit price to drop further.
It is worth noting that Scorpio management has given no indication it is considering an equity raise.
"To be sure, the recent weakness in STNG shares is not just related to fears around another Covid wave, but rather the implication that it has on STNG's fragile capital structure," Mehrotra wrote, citing Scorpio's ticker symbol on the New York Stock Exchange.
"We have maintained for a long time that the management of STNG's capital structure relies too heavily on two words: hope and debt. Hope that the market will turn around, and new debt to pay off old debt to extend the runway."
A volatile relationship
Mehrotra and Scorpio management, particularly president Robert Bugbee, have a history. And it has not always been a pleasant one, as the two sides have clashed since 2016 over Mehrotra's criticisms of corporate governance and related-party fees.
After a period of seeming rapprochement during which Deutsche Bank actually placed a "buy" rating on the stock, things have gone south again.
This included a tense earnings call last spring in which Mehrotra accused management of being "false" on liquidity assurances and Bugbee ripped the analyst's "derogatory" approach.
What is clear is that Scorpio's shares have been in sharp decline since closing at $18.29 on 12 November. They closed at $11.70 on 3 December, down about 36% over the period.
Tanker competitors such as Ardmore Shipping in clean products and crude tanker bellwether Euronav are also down over the period, with concerns over Opec+ production and the Omicron Covid-19 variant not helping. But their drops are a fraction of Scorpio's.
Mehrotra seizes on the recent weakness in his note. Deutsche had set Scorpio's target price 35% below the next lowest analyst number, yet the owner dipped 4% below that at closing on 2 November. Deutsche has now lowered the target to $10.50.
Scorpio has denied it is facing a liquidity issue as it generates cash on the balance sheet through bank refinancings, which take into account hitherto rising tanker values.
Scorpio has said it has a number of options before considering an equity raise, including selling ships and issuing bonds. But it also expects to benefit from rising freight rates as and when the market recovers.
Mehrotra challenged that concept in his note, saying that only earnings that exceed $7,000 to $8,000 per day are high enough to begin reducing debt after operating expenses.
Bookings are better than guidance
Scorpio declined to directly address Mehrotra's latest criticism. But Bugbee alluded to an 11 November guidance when reporting third-quarter earnings that revealed quarter-to-date bookings higher than the last.
"Market rates for all product tanker classes since our earnings are significantly higher than the average fourth-quarter guidance given in our earnings release," Bugbee said.
With more than half of operating days booked at that time, Scorpio was earning $13,750 per day on LR2s against $10,871 last quarter. LR1s were at $12,500 versus $10,015. MRs were at $10,500 against $10,320, while handymaxes had earned $8,700 compared with $7,457.
Mehrotra, however, remains locked in on the thesis that Scorpio will need to sell shares — probably sooner rather than later.
"In our view, the public market value of the company today looks still too high in the context of the likely equity funding needed to extend the runway," he writes.
"While we have been highlighting this for the past six months, this is only now starting to become clearer to market participants."
