Scorpio Tankers (STNG) stock has fallen from its highs, as seen below, but has been remarkably steady considering the broader market sell-off. The company has a lot going for her, including geopolitical conflicts in Ukraine and The Middle East, while recently beating earnings expectations for the fourth successive quarter. It also committed to further debt reduction, contributing to one of the strongest financial positions in the market. Under these circumstances, I think it’s undervalued, making me bullish on the stock.
Scorpio’s Narrow Earnings Beat
As mentioned above, Scorpio Tankers is in its fourth consecutive revenue beat, which makes for pleasant reading. The company is based in Monaco and has 106 vessels providing services for transporting refined petroleum products. Its fleet is, on average, 8.4 years old and 87% scrubber-fitted- scrubbers are used to remove harmful elements from exhaust gases. It recently reported a narrow earnings beat in the second quarter of 2024.
The company reported net income of $227.3 million and non-GAAP earnings per share (EPS) of $3.60, beating estimates by eight cents. In comparison, its adjusted net income for the same period in 2023 was $133.3 million, and EPS was $2.41.
This adjusted figure excludes a gain of $43.3 million from the sale of vessels and a $4.4 million write-off related to the amortization of deferred financing fees. On March 20, Scorpio announced the sale of STI Larvotto and STI Le Rocher for $36.15 million per vessel. Further, in June, the company said it was selling five of its older medium-range product tankers for a total of $179.1 million, although the sales were expected to happen in Q3.
While the earnings beat was narrow, it’s still incredibly positive to see four consecutive beats. Likewise, the sale of these older medium-range tankers leaves it with one of the youngest fleets in the industry.
Scorpio’s Strong Financial Position
Scorpio Tankers is committed to reducing its debt and repaid $399 million in the second quarter, reducing its daily cash breakeven point to just $12,500 per vessel. For context, the average daily time charter equivalent (TCE) revenue increased to $38,813 per vessel during the three months ended June 30. This is a great margin of safety.
As of July 29, the company said it has $279.5 million in unrestricted cash and cash equivalents and $288.2 million of availability under a revolving credit facility.
The company also expects to receive around $90 million in cash from the Scorpio pools for July. These pools consist of groups of vessels that Scorpio Tankers manages collectively to optimize operations and maximize revenue. By pooling their resources, the vessels can operate more efficiently and share the resulting profits, which are distributed among the participants based on their contributions to the pool.
All in all, Scorpio is in a very healthy place, boasting a low breakeven point and one of the youngest fleets in the industry. Collectively, this contributes to strong forward earnings projections.
Geopolitics, Global Events, And Scorpio’s Business
Another driving force behind Scorpio’s success is the growing geopolitics tensions, with global events dictating demand volume and the availability of supply. In recent years, events such as the pandemic, Russia’s war in Ukraine, and tensions in the Middle East, have had a very profound impact on market dynamics.
These three events had arguably been good for Scorpio’s business. The pandemic slowed shipbuilding, which limited supply and increased the value of existing fleets, reducing available capacity for future shipping.
This shortage has been compounded by sanctions on Russia, which have disrupted normal shipping routes, and conflict in the Middle East, with Houthi attacks on vessels transiting the Bab el-Mandeb causing tankers to take much longer routes.
Scorpio Is Up But Still Undervalued
Scorpio Tankers is currently trading at just 5.54x forward earnings, putting it among the cheapest stocks in the broader Energy sector. However, as this is a cyclical sector, the earnings forecast does show a reversal of fortunes in the coming years, with EPS falling 13.9% into 2025 and a further 9.3% into 2026.
It’s also worth noting Scorpio’s forward yield of 2.16%. That’s not overly impressive, but it certainly adds to the equation.
Is Scorpio Tankers Stock a Buy, According to Analysts?
On TipRanks, STNG comes in as a Strong Buy based on six Buys, one Hold, and zero Sell ratings assigned by analysts in the past three months. The average Scorpio Tankers stock price target is $92.57, implying 24.8% upside potential.
The Bottom Line on Scorpio Tankers
Scorpio Tankers is a quality tanker stock. It has proven to be very resilient, and the company’s management has demonstrated its strategic acumen in a volatile market. Moreover, Scorpio’s commitment to debt reduction, coupled with its modern and efficient fleet, positions it well to navigate ongoing disruptions in the global tanker segment.
Despite a cyclical sector outlook, Scorpio’s strong financial health, low breakeven point, and favorable market dynamics suggest it is well-prepared for future challenges. With a forward P/E ratio of just 5.54x and upside potential of 24.8%, Scorpio Tankers appears undervalued and poised for growth. It’s a compelling investment opportunity.
