US investment bank Jefferies believes investors are undervaluing Scorpio Tankers because of an "overly-bearish" view of the product tanker sector.
Fresh from hosting virtual client meetings with Scorpio's management, Jefferies analysts drew the conclusion the market is heavily discounting the shipowner due to doubts over future rates and liquidity.
The New York-listed stock is trading 45% below the company's net asset value, the investment bank believes.
"We believe the market continues to heavily discount the shares based on underlying market fears related to Covid-19, while not pricing in the year-on-year strength in products tanker rates and the recent efforts by the company to pay down debt, repurchase convertibles, and repurchase common shares," Jefferies analysts Randy Giveans, Christopher Robertson and Chadd Tribo said in a note to clients.
Rates up on last year
"We believe [Scorpio Tankers] will continue to execute on its strategy to extend debt maturities, further improving its liquidity position, and will directly benefit from increased Middle East refinery capacity additions and an improving products tanker market due to its large and modern fleet."
Product tanker rates have been on the rise and are more than 25% higher than this time last year, despite lower demand.
Monaco- and New York-headquartered Scorpio has guided for third quarter rates well above those seen in the same period last year.
There has been year-on-year improvement in rates in each of the last eight quarters, Jefferies said.
The investment bank added that Scorpio's rates so far in the third quarter are well above recent broker averages, "showing the premium rates Scorpio Tankers earns due to its eco fleet and scrubber premiums".
"Management believes products tanker rates will see a vast improvement in the coming weeks as refined products inventories have been drawn substantially (from 104m barrels in May to 34m barrels currently), US Gulf refinery utilisation ramps back up, and new refining capacity in the Middle East comes online," the analysts added.
Debt reduced
Earlier this month, Scorpio said it had bought back 1.17m common shares at an average price of $11.18 each and repurchased $52.3m of convertible notes due in 2022 for $46.7m between July and early September.
The board has approved more buybacks worth up to $250m.
The company's bosses believes these actions should be seen as a vote of confidence in Scorpio's liquidity and should alleviate some of the balance sheet concerns.
Scorpio has also noted that newbuilding ordering has been muted this year, especially in the MR segment, and that deliveries will slow in the fourth quarter as owners push deliveries into 2021.
The product tanker orderbook-to-fleet ratio remains at a multi-decade low of less than 7%, Jefferies said.
Ageing fleet
And 25% of the global fleet is already above 15 years of age (increasing to 45% by 2023), the age at which vessels generally are no longer able to trade on premium routes.
"Regulatory changes, economic uncertainty, and limited access to capital continue to keep a lid on newbuild ordering, as owners are unclear about what engine technologies will be sufficient to meet IMO 2030 and IMO 2050 decarbonisation and greenhouse gas reduction regulations," the analysts said.
Scorpio has continued its consolidation efforts in the clean products sector with the addition of four tankers from the chartered fleet of Mercantile & Maritime Trading this month.
The entry of four handysize vessels from the Singapore-based trader and tanker operator brings the Scorpio Handy Tanker Pool to 40 ships.
