Scorpio Tankers: A Deep Dive into Market Trends and Financial Performance

The 2025 Capital Link Company Presentation Series commenced with Scorpio Tankers Inc. , a leading provider of marine transportation for petroleum products worldwide. Mr. Robert Bugbee , President of the company, Mr. Lars Dencker Nielsen , Chief Commercial Officer, and Mr. James Doyle, CFA , Head of Corporate Development and Investor Relations discussed Scorpio Tankers’ current operations and future growth potential and responded to investor questions.

To watch the full presentation, please visit the following link:

• Scorpio Tankers is the world’s largest product tanker owner, operating a modern, eco-fuel-efficient fleet.
• Strong financial performance: $2.2 billion debt reduction, $997 million returned to shareholders.
• Positive market outlook: Benefiting from shifting global refining capacities and increased ton-mile demand.
• Operating leverage: Significant cash flow potential tied to daily rate increases.
• Industry trends: Tightening supply driven by aging fleets and low newbuild order books.
• Recent Developments: Secured $200 million in new senior unsecured bonds in the Nordic market.

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Three Key Takeaways

Scorpio Tankers is the world's largest product tanker owner with a fleet of 99 product tankers averaging 8.8 years in age, according to Mr. Doyle. The company, listed on the New York Stock Exchange under the symbol STNG, boasted a market capitalization of $2.5 billion and daily trading liquidity of $50 million. Mr. Doyle talked of the company's focus on eco-fuel-efficient vessels, noting that their fleet was among the youngest and most modern in the industry.

He also outlined three key takeaways from the presentation:

1. Firstly, he discussed the significant operating leverage that Scorpio Tankers possessed at prevailing rates, noting that a $10,000 increase in daily rates could translate to an additional $361 million in cash flow.
2. Secondly, he presented an optimistic industry outlook, citing that over the past two and a half years, the company had benefited from a favourable rate environment, with ongoing shifts in global refining capacity expected to further boost exports and increase ton miles.
3. Finally, he highlighted the company's strong financial position, having reduced debt by $2.2 billion over the past seven quarters and returning $997 million to shareholders through dividends and share repurchases.

Fleet Competitiveness

Product tankers, distinct from crude tankers, transport refined products across global markets. More specifically, these vessels specialize in transporting petroleum products such as gasoline, diesel, jet fuel, and naphtha, which serves as feedstock for plastics. Each ship in the Scorpio Tankers fleet is equipped with an epoxy coating that allows for thorough cleaning between different cargoes, preventing contamination. This feature sets apart product tankers from crude oil tankers, which typically lack coated tanks. The fleet operated three types of vessels: Handymax, Medium Range (MR), and Long Range 2 (LR2), each designed for specific operational niches. The MR vessels were noted for their versatility, capable of accessing the largest number of ports, while the LR2 vessels were optimized for longer distances and greater economies of scale.

Mr. Doyle emphasized the importance of operating a modern fleet, as the average age of Scorpio Tankers' vessels was significantly lower than the global average of 14 years. This modernity translated into advantages such as increased customer acceptance, fuel savings, and lower emissions. He noted the challenges posed by aging vessels, which could lead to contamination issues due to deteriorating coatings.

Market Dynamics

Mr. Bugbee further highlighted the potential impact of sanctions on Iranian crude exports, which could drastically reduce supply if reinstated. He noted that a repeat of past restrictions could push Iranian exports down to just 10-15% of current levels. This would increase demand for refined products to fill the gap.

When it comes to the product tanker market, it has experienced a robust rate environment over the past two and a half years. Mr. Doyle explained that the strength of the product tanker market was driven by demand consistently outpacing supply, with geopolitical events exacerbating the situation. He acknowledged that while the markets were seasonal and volatility was expected, the floor in rates observed over the previous years reflected the underlying strength of product tanker fundamentals.

Additionally, Mr. Nielsen underscored the importance of seasonality and refinery maintenance, factors that have recently influenced product tanker rates. He explained that refinery maintenance in late 2024 temporarily reduced available cargoes, particularly in the Middle East, but these volumes have since returned to the market. He pointed out that the LR2 market is already seeing improving rates, with day-to-day increases in production volumes having a direct impact on spot market rates.

With maintenance largely behind them and cannibalization from crude tankers to normal, Scorpio Tankers was entering a seasonally strong period. Mr. Doyle highlighted that global distillate inventories were below their five-year average, and future consumption would be met through increased production and exports rather than inventory draws. Demand for refined products had remained robust, surpassing pre-pandemic levels, and was expected to continue growing.

Mr. Bugbee contrasted the current market with 2009, saying:

“The market today is fundamentally different from 2009. Back then, we had a massive order book, extended balance sheets, and very little hope of scrapping. Today, we have a much older fleet, almost no new orders, and companies with incredibly strong balance sheets. It’s a completely different environment, and that’s important to recognize.”

Looking ahead, Mr. Bugbee projected that a significant portion of the fleet could be scrapped over the next three to five years, further tightening supply and supporting higher rates.

Ton Mile Demand Increases

Ton mile demand was also a topic of interest, illustrating how an increase in cargo volumes was accompanied by longer distances travelled. Structural changes in global refining capacity had altered trade flows, further tightening supply. Mr. Doyle noted that 2 million barrels per day of refining capacity was expected to close, particularly in the U.S. and Europe, as older refineries faced substantial capital investment challenges to remain operational.

The average age of the product tanker fleet was presented as a critical factor in this situation. At 14 years, the fleet was approaching a point where a significant portion would soon be over 20 years old. The presentation highlighted that the order book for new vessels was relatively low, standing at 19% of the fleet, and primarily composed of LR2 vessels, which were essential for servicing both clean and dirty product trades. The implication was that as older vessels reached the end of their operational lives, the effective fleet growth for product tankers would be limited.

Mr. Doyle elaborated on the diminishing addressable market for aging vessels, emphasizing that trading patterns indicated a substantial decline in the capacity of older ships. The presentation included data showing that as vessels approached 20 years of age, their cargo carrying capacity significantly diminished with a decline of over 40% noted for vessels built in 2004.

He also briefly touched on the growth of seaborne exports and ton miles, which had outpaced fleet growth last year. Effective fleet growth was projected to be modest, with expectations of around 3% annually, factoring in the servicing of crude trades and mild scrapping.

Financial Performance and Strategy

Financial performance over the past seven quarters was also highlighted, showcasing the company's generation of $1.7 billion in adjusted EBITDA and $1.1 billion in adjusted net income. This financial success had facilitated a reduction in debt by $1 billion and the return of $120 million to shareholders through dividends and share repurchases. The management's approach to shareholder returns was characterized by a combination of deleveraging and opportunistic share repurchases.

The transformation of the company's capital structure over the past three years was a key focus, with an overall reduction in indebtedness of $2.2 billion achieved through refinancing expensive lease financing with traditional banks. The current low leverage position allowed Scorpio Tankers to withstand market contractions while still generating significant cash flow.

Additionally, Mr. Doyle provided insights into the company's debt management strategy, noting that the ongoing quarterly scheduled principal repayments were manageable at less than $20 million per quarter, with a daily cash breakeven of $12,500. This positioned the company favourably to sustain shareholder returns even in challenging rate environments.

Finally, when considering cash generation potential, one must take into consideration, the significant operating leverage the company has at various rate levels. With fixed rates for a portion of the fleet, projections indicated that at $25,000 per day, Scorpio Tankers could generate approximately $450 million in free cash flow annually, with greater potential at higher rate levels.

Recent Developments: Successful Bond Placement

Scorpio Tankers recently announced the successful placement of $200 million in new senior unsecured bonds in the Nordic bond market. The bonds, which mature in January 2030, carry a fixed 7.5% coupon rate, payable semi-annually. An application will be made for the bonds to be listed on the Oslo Stock Exchange.

The proceeds from the bond issuance will be used to refinance the company’s existing $70.6 million senior unsecured notes and for general corporate purposes, reinforcing Scorpio Tankers’ commitment to strengthening its balance sheet.

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