New York-listed Scorpio Tankers is by any measure a popular choice of shipping equity analysts to have a strong 2022 ahead of an eventual rebound in the tanker market.
One financial website shows 13 separate bank researchers with a green “buy” indication on the Monaco and New York-based company, which is one of the world’s largest product tanker owners.
But then there is a 14th analyst, and his recommendation is a bright red “sell”.
The holdout is Amit Mehrotra of Deutsche Bank, a long-time Scorpio critic who increasingly finds himself on an island when it comes to his view of the Emanuele Lauro-led company.
Mehrotra has had his sell warning on Scorpio since May 2021, when he clashed with an old foil, Scorpio president Robert Bugbee, over what he saw as “false” assurances that the shipowner had sufficient liquidity to survive a market trough. Bugbee lashed back at the analyst’s “derogatory” approach.
For a time, Mehrotra gained an ally in scepticism when Bank of America analyst Ken Hoexter in August 2021 dropped Scorpio from “buy” to “sell” in one stroke, citing a delayed market recovery and noting the outfit’s 16th earnings loss in 20 quarters.
But that has changed. Hoexter, voted Institutional Investor’s top shipping analyst last year, upgraded Scorpio to “hold” in February and then quickly jumped to “buy” earlier this month, citing a quicker rebound in the product tanker market on lower inventories and Russia-Ukraine war disruption.
That left only Mehrotra holding anything but a “buy” rating, his $10.50 price target well below the group high of $30 by Liam Burke of B Riley Securities.
Scorpio sat around $17.50 at Streetwise’s deadline. The stock was up 37% year to date after it appeared to assuage the liquidity concerns, partly through the sale of its 11-unit LR1 tanker fleet to Hafnia in January.
The gain places Scorpio atop the nine tanker stocks covered by investment bank Jefferies, with Euronav next best at 16% and the group average 16%.
This comes as product tanker rates approached two-year highs this week, according to Clarksons Platou Securities.
With that background, it seemed appropriate to ask Mehrotra: “Any second thoughts about maintaining the sell rating?”
As if.
“Sell rating is exactly the right call when assessing the fundamental outlook for STNG,” Mehrotra told Streetwise, using Scorpio’s ticker symbol.
“This is because the company has not shown a sustainable ability to generate enough cash flow for debt holders, let alone equity holders. The buy ratings of all the others reflect the fact that after recent asset sales, STNG now has ‘cash to burn’. Having cash to burn is not a good investment case.”
Mehrotra said Scorpio’s $17,000 per day all-in cash break-even across the fleet is simply too high to sustainably provide profits and investor returns.
“Said another way, STNG simply has too much debt, which will make the company be in runway expansion mode perpetually. This is why the stock is down 85% since inception in 2010 and 62% [in the last five years],” he said.
Scorpio’s losses, share-price depreciation and high level of debt — near $3bn at last measure — are all a matter of record.
Yet analyst calls are about the future, and that is what the majority of researchers cite in pointing out Scorpio’s high spot-market leverage to a tanker recovery.
Scorpio’s stock has shown an ability to rocket up when rates cooperate. It moved from $15 in February 2019 to $40.45 in January 2020 during a market rally.
There is another question. As his view becomes more isolated, is Mehrotra making a bold and principled stand, or at least partly influenced by a rift with Scorpio management?
Some of his client notes have come across as highly personal.
In one, he questioned Bugbee’s practice of buying call options — essentially bets on future gains in share price — and possible “flipping” of positions without disclosure. Bugbee called the criticism “a preposterous accusation if not an inappropriate accusation”.
Then in February, Mehrotra wrote that he had been excluded from asking questions on an earnings call for the second straight quarter.
Bugbee declined Streetwise’s request for a comment on the Mehrotra relationship.
In any case, his real answer will come in Scorpio’s operating performance and share price from here.
