Scorpio Tankers (NYSE: STNG), the largest U.S.-listed owner of product carriers, has reported its first profitable quarter since the second quarter of 2016, as spot rates in its market have improved.
The company reported net income of $14.5 million for the first quarter of 2019, versus a net loss of $31.8 million in the same period last year. Earnings per share of $0.30 came in more than double analyst expectations for earnings of $0.14 per share.
Scorpio operates product tankers in four different size categories: Handymaxes (10,000-24,999 deadweight tons, or DWT); MRs (25,000-54,999 DWT); LR1s (55,000-79,999 DWT); and LR2s (80,000-119,999 DWT).
In all categories combined, it achieved an average rate per day of $18,570 in the first quarter of 2019, up 39 percent year-over-year. Improvements were weighted towards the larger vessel classes. Rates for Scorpio’s LR2s rose 60 percent, LR1s 77 percent, MRs 16 percent and Handymaxes 38 percent.
The company’s daily rates also improved in relation to the fourth quarter of 2018, when fleet-wide rates averaged $15,008 per day. However, rates in the second quarter of 2019 – a period when there is seasonal slowness and heavy refinery downtime – are trending negative.
Scorpio currently has 40-55 percent of its available revenue days for the second quarter already booked, depending on the vessel category. LR2s are at $16,500 day, down 28 percent from the first quarter, LR1s are at $15,750 per day (down 12 percent), MRs are at $15,000 per day (down 5 percent) and Handymaxes are at $13,000 per day (down 27 percent).
Another short-term headwind involves the company’s preparations for IMO 2020, the 0.5 percent cap on the sulfur content of fuel, which is effective on January 1, 2020. Scorpio Tankers is one of the companies that is embracing the ‘scrubber’ strategy to deal with the rule. It is installing scrubbers on many of its ships with plans to continue to burn heavy fuel oil (HFO) on those vessels after the deadline.
There is predicted to be a significant gap between the price of HFO and compliant low sulfur fuel oil after the IMO 2020 deadline. Companies like Scorpio Tankers that use scrubbers will be able to save significantly on their fuel bills.
In the spot market, the charterer pays to move the cargo with its price based on volume, measured in dollars per ton. The operator of the ship pays for fuel and other expenses. A ship operator with scrubbers and a lower fuel bill will be able to underbid a competing operator that needs to pay for compliant fuel.
The scrubber user should also be able to pocket an additional profit from the fuel savings, which would be used to pay back the cost of the scrubber installation over time, with that time frame dependent on how wide the spread is between HFO and compliant fuel.
The near-term challenge is that to install scrubbers and obtain the future competitive advantage, vessels must be temporarily taken out of the market and put into a drydock for the retrofitting, which curbs quarterly earnings as ships are taken out of service, or ‘off-hire.’
Scorpio Tankers is facing an escalating pace of drydockings and related off-hire days, which should culminate in the fourth quarter but extend into next year.
It has a total fleet of 109 vessels that it owns or operates under sale-and-leaseback arrangements. In the first quarter, five ships were taken out of service and went into drydock. Ten of its ships will go into drydock in the second quarter of this year, rising to 16 in the third quarter, 24 in the fourth, and 19 in full-year 2019.
As a result of drydockings, the company had 142 off-hire days in the first quarter. It will have 546 off-hire days in the second quarter, 625 in the third quarter and 728 in the fourth. It will have a total of 2,041 off-hire days for drydockings for the full year, decreasing to 1,005 days in full-year 2020.