Cobas AM: Nueva Gestora de Francisco García Paramés

• Scorpio Tankers (STNG -4.9%) drops deeper into the red after Deutsche Bank downgrades shares to Sell from Hold with a $13 price target, slashed from $17, citing "real liquidity concerns" and the company's "puzzling capital allocation decisions in light of what is clearly a hunt for additional liquidity."
• "Very simply, STNG is not generating enough cash flow to meet debt repayments," analyst Amit Mehrotra writes, noting Scorpio currently has $269M of cash, "but we must subtract from this $60M of minimum liquidity the company must hold as per its covenant, [which] implies pro forma cash $209M against $232M of necessary debt repayments" through Q1 2021.

Amit Mehrotra

I wanted to go back to the liquidity question because I guess something is being lost in translation to me because it sounds like you guys are super bullish about your liquidity market and the message you're sending is everything is fine here when -- based on my analysis, it just seems like that's totally false. I think you guys don't have enough liquidity. And I want you to give you the opportunity to correct me if I'm wrong. So first and foremost, Brian, the $360 million or $370 million of cash on the balance sheet that is pro forma for the additional levers, is that net of minimum liquidity covenants or not net of minimum liquidity covenants?
Brian Lee

It's not net. Minimum liquidity covenants is $60 million, and we don't subtract that out of the total cash.
Amit Mehrotra

Okay. But you got to keep it on the balance sheet. So that $360 million, $370 million is basically now $300 million to $310 million, okay? And against that $300 million to $310 million pro forma, you've got $600 million of debt repayments over the next 12 months. The question I have is where I could be wrong here, is there a way to restructure that $600 million of which a big chunk is in the second quarter of next year? Like what do you think the debt repayments over the next 12 months need to be or can be relative to what they are today, with just $600 million?
Brian Lee

It's on a normalized amortization, $70 million to $80 million a quarter, we call it $75 million, just under $300 million on a year. When facilities are coming due, we show it in that schedule. Facilities are coming due. It's part of that number that we say it's coming due over the period of time. So that's why you see an elevated number in there. And as we have seen from day 1 of this company, we've been able to refinance our debt when it comes due. So we have that [indiscernible].
Amit Mehrotra

So $75 million to $80 million is basically the number we should use. So the implication is that the net liquidity you have today, pro forma, $300 million is basically equivalent to the pro forma smooth out debt maturities over the next 12 months. So how do you have a lot of liquidity then? How do you have more liquidity than you need?
Brian Lee

We're going to assume that our vessels are going to earn some money along the way, right? So we know that a 1,000 [Technical Difficulty] does a lot of damage, right? Those $48 million of revenue, so times up by $10,000, by $15,000, it comes up to be a pretty good number.
Amit Mehrotra

I know, I know. but you've been assuming that for 3 years, and that hasn't really occurred on a sustainable basis. So the question I have is you plan out over the next 12 months, don't you have to plan that you don't earn $17,000 a day or $15,000 a day, hopefully, you do. And I really hope that everybody does in the market. But just given history, like from a planning perspective, don't you have to plan that you don't earn that much? So what's the plan B and plan C?
Robert Bugbee

I mean Amit. Yes. I appreciate. A lot has happened in the last 3 months since we last spoke, where you looked at the company. And the primary thing, as you've seen, we continue to increase liquidity with rates being fairly low. But we have other sources to doing it. We just simply believe for the reasons that we've set out that the market is not going to be $9,000, $10,000 a day all the way through until next May, we simply don't believe that is going to actually happen, okay? Now should we start to think that -- so we're changing. So the beginning of the year and last year, we continue to raise liquidity and we've gone through that we raised liquidity in October. There were no vaccinations even invented debt. November vaccinations came along. But we carried on raising liquidity. February, U.S. was nicely underway. But we didn't feel that we were out of the woods completely. Europe was a big question mark. So we carried on raising liquidity.

Now we're sitting in a point where we have more liquidity than any of those points. And we believe that the United States is in a much better place than it was in January. Europe is in a much better place than it was in February and March that we are seeing this. It's not just us making this up, Amit. This is OPEC is saying this, EIA is saying this, the oil companies are saying this, investors in other ways are saying this, the oil price is saying this.

We have reasonable pause to think that the market will be better going forward than at its worst point, in somewhere between the third and the fourth quarter last year. The market has been steadily improving already for 5, 6 months. There is a point where it's irresponsible as I believe, Jon Chappell, earlier, who -- he's a very cautious analyst. He's taken a cautious position on rates and the improvement of the tanker market. But we could easily agree that there wasn't a question of if there would be a recovery, it would be when there would be a recovery and what the actual use of proceeds would be.

It would be irresponsible right now for us to go and sell ships right at the breakout, just to put even more cash on the balance sheet. We fundamentally believe we're in a very open, honest way. You opened with quite a derogatory statement. You are being false. We don't believe we're being false. We think we're being very genuine to what we believe, and we believe that based not on something here in the air, but a lot of empirical third-party data is out there at the moment to support the fact that the market is improving and accelerating.

It's a really key thing that the MR market is already for a modern MR around $12,000, $13,000 a day. And Europe is not yet really coming out. And we haven't -- we're only just beginning to fight back from the refinery turnarounds?
Amit Mehrotra

Yes. I think the only difference, Robert, is that you have to be right for the capital structure of the company to be protected or the equity of the company to be protected. You have to be...
Robert Bugbee

Of course, of course Omar -- I mean Amit, of course, okay?
Amit Mehrotra

Omar is a lot smarter than I am. But Brian -- can I ask you...
Robert Bugbee

Omar just happens to show more interest than you. So I guess I remember his name more. But it's a -- of course, you have to be right. If the world goes to hell, I'll say openly, if the world goes to hell, STNG is not necessarily a company that I would want to at that point to have a whole bunch of equity in. But my God, if it just carries on the improvement that it is right now, if you take the midpoint of -- or even the lowest point of the IEA forecasters or the major banks forecasting to product tanker demand by the end of the day, Scorpio Tankers, especially with the product tanker leading is going to tear apart most of the other investments that you can make is absolutely the company you would want to be in, precisely because of it, multiple points of leverage.

First, the operating leverage that the company has to have any new ships. Secondly, the operating leverage that the company has of having those vessels all spot, no -- straight feed through. And thirdly, the financial operating leverage that the company has, that you have pointed out with regard to the gearing, it'd be absolutely to be the investment. If you don't believe in that, then there's no point in that world economy, there's no point in any one being in Scorpio Tankers, you should not put a hold. You shouldn't even put a hold on this, which you have. You should put an outright sell, outright sell.
Amit Mehrotra

Yes, I think that's a -- like, I think you're absolutely right. Like I think if everything goes really, really well, the stock is going to go higher, I agree with that...
Robert Bugbee

Yes. The fact is most people in the market is supporting that, the product market is strongly doing that with the refinery turn. That's why product market has done better, let's say, in the crude. The crude will come, I'm actually very constructive about the crude. I think we've seen a wonderful game being played. I support Euronav and DHT. I have no problem in those 2 companies. They've been playing a good game, has a strong balance sheet. They've been conservative about the outlook, whilst buying ships and buying back stock. The crude market will turn too at some point.
Amit Mehrotra

Can I just ask a quick housekeeping one, and then I'll just hop off. Brian, I guess Robert had made the comment that asset values have picked up. That's obviously very positive, both from an NAV perspective, but also from just a debt management perspective. So I was wondering, I mean, your net debt has been flat kind of roughly over the period, the last period versus today. And that's not going up, does that give you more room for additional leverage on the vessels if you needed? And if you could help us where that LTV is today in terms of how the banks look at or the appraisers look at it?
Brian Lee

Absolutely right. Value is going up. It's a very good point. It's something to keep in mind. If you're looking at our debt balance being, as you say, flat, net debt being flat there. It's a very good point. Values have gone up. So on a relative basis, it's been along that way. So we're not going to give asset values on all ships right now, but we are obviously in compliance with all of our loan-to-value and every other covenant out there. We have headroom in every single one of those. But we do have room, and we will -- if we need to, we will look to do it. But also as when vessels come up for refinancing, it's very important now that asset value is coming up, we could refine at an attractive rate whenever we want to.
Robert Bugbee

It is, it is -- and I would say the inconsistency that someone could have would be to have a buys on crude tankers without having a buy on STNG. That to me is inconsistent and fault.