New York-listed Scorpio Tankers had barely seen the ink dry on a 40% increase in its shareholder dividend when equity analysts started asking about a predictable subject: when might the cash-rich shipowner start returning much more than that?
It is a question that has come up on other quarterly earnings calls like the one Scorpio hosted on Thursday, but this time there was a difference: Scorpio president Robert Bugbee was ready with a rough timetable and some specific conditions that might allow such largesse.
In summary, Scorpio would like to keep chopping its net debt to the point where it is around the scrap value of the fleet. Bugbee put that number at between $850m and $900m, which he said is about $400m in payments from now.
To put it in calendar terms, Bugbee offered that this could well happen no later than 31 March – and perhaps sooner if the owner either sells more of its older ships or benefits from what it expects will be a further lift in rates from a strong winter market.
“I think that’s pretty achievable,” Bugbee told the analysts.
Thursday’s announcement saw Scorpio hike its regularly quarterly dividend payment to $0.35 per share from the $0.25 it had paid the past two quarters. The distribution was a dime at the start of the year.
These are not huge numbers, but Scorpio has been prioritising two things above lusty dividend returns: slashing debt, largely through unwinding expensive lease financing on its fleet of 110 tankers, and buying back shares that both management and equity analysts believe are trading well below net asset value.
Scorpio has succeeded at both. The Monaco-based owner has reduced debt by $1.3bn since the start of 2022, while this year alone it has bought back 10m shares for $490m.
That opens the door to enhanced dividends, which other tanker owners such as Frontline, International Seaways, DHT Holdings and others, enjoying a revived tanker market, have used to reward investors, either through big regular payouts or smaller ones combined with “special” dividends.
Scorpio has had a big job in unwinding the leases, which had spread to the entire fleet in the depths of a weak products market. It has given notice to repurchase 76 vessels and has repaid the outstanding debt on 56 of them, or about half the fleet. Scorpio expects to repurchase 22 more in the current quarter.
Once Scorpio has net debt down to the range, Bugbee described that “it would be inarguable that the company has low leverage. We’re pretty damned conservative at that point”.
Plus there would be an added benefit: Scorpio’s fleet-wide financial breakeven, currently put at roughly $17,000 per day, would drop by between $4,000 and $4,500 per day, Bugbee said.
