Scorpio Tankers(STNG) - 2022 Q2 - Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations Information on the Company The company operates a modern fleet of 113 product tankers primarily employed in spot market-oriented pools - As of October 3, 2022, the company's operating fleet consists of 113 product tankers with a weighted average age of 6.7 years[13] - The majority of the company's vessels operate in pools managed by the related party Scorpio Commercial Management S.A.M. (SCM)[18] Operating Fleet Composition as of October 3, 2022 | Vessel Type | Count | | :--- | :--- | | LR2 | 39 | | MR | 60 | | Handymax | 14 | | Total | 113 | Recent Developments The company declared a quarterly dividend, sold tankers, repurchased shares, and exercised purchase options on 15 leased vessels - Declared a quarterly cash dividend of $0.10 per common share in July 2022[19] - Sold the MR tanker STI Benicia in July 2022 and the LR2 tanker STI Nautilus in August 2022[20] - Repurchased a total of 2,690,881 common shares at an average price around $38[21] - Exercised purchase options on six MR product tankers in August 2022, repaying $95.0 million in lease obligations[23] - Gave notice to exercise options on an additional nine vessels, which is expected to reduce debt by $160.8 million[24] - Entered into three-year time charter-out agreements for three LR2 product tankers at daily rates between $30,380 and $32,750[25][26][27] Business Overview The company generates revenue from charters and pools, with all vessels managed by related parties SCM and SSM - Primary revenue sources are voyage charters, time/bareboat charters, and commercial pools, which offer flexibility and scheduling efficiencies[29][34] - Vessels are commercially managed by SCM and technically managed by SSM, both related parties controlled by the Lolli-Ghetti family, under a master agreement[32] - Administrative services, including accounting, legal, and IT, are provided by another related party, Scorpio Services Holding Limited (SSH)[37] Important Financial and Operational Terms and Concepts The company's performance is evaluated using key metrics like Time Charter Equivalent (TCE) revenue, which more than doubled in H1 2022 - TCE revenue is a key non-IFRS performance measure used to compare period-to-period performance irrespective of charter type mix[46] - Total expenditures for drydock, scrubbers, and Ballast Water Treatment Systems (BWTS) decreased to $22.8 million in H1 2022 from $27.3 million in H1 2021[48] Average Daily Performance (Six Months Ended June 30) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Fleet TCE per revenue day | $25,444 | $11,552 | | Fleet Vessel operating costs per day | $7,173 | $6,848 | | LR2 TCE per revenue day | $25,287 | $11,949 | | MR TCE per revenue day | $25,583 | $11,871 | | Handymax TCE per revenue day | $29,119 | $9,286 | Factors Affecting Results Financial performance is influenced by the cyclical tanker market, seasonality, and significant fees paid to related parties - The tanker industry is cyclical, with profitability volatility driven by changes in vessel supply and demand for petroleum products[56] - Tanker markets exhibit seasonality, typically stronger in the winter quarters (Q1, Q4) and weaker in the summer quarters (Q2, Q3)[56] - Expenses are significantly affected by fees paid to related parties SCM (commercial management), SSM (technical management), and SSH (administrative services)[57] Results of Operations The company reported a net income of $106.7 million in H1 2022, a significant turnaround driven by a 112% increase in vessel revenue Comparison of Six Months Ended June 30, 2022 and 2021 - Vessel revenue surged 112% due to a structural improvement in the product tanker market, with consolidated TCE revenue per day increasing to $25,444[62][63] - Vessel operating costs decreased slightly by 1% to $161.8 million, mainly due to a smaller fleet size, though daily operating costs rose 5%[74][75] - A loss of $69.2 million was recorded on the sale of 18 vessels during the period[83] - Financial expenses increased by 12% to $78.7 million, primarily due to higher LIBOR rates[84][88] Consolidated Results of Operations (in thousands of U.S. dollars) | Line Item | H1 2022 | H1 2021 | | :--- | :--- | :--- | | Vessel revenue | $579,120 | $273,607 | | Vessel operating costs | ($161,755) | ($163,900) | | Loss on sales of vessels | ($69,218) | $0 | | Financial expenses | ($78,710) | ($69,973) | | Net income / (loss) | $106,683 | ($115,176) | TCE Revenue by Segment (in thousands of U.S. dollars) | Segment | H1 2022 | H1 2021 | | :--- | :--- | :--- | | MR | $289,382 | $136,202 | | LR2 | $188,986 | $88,278 | | Handymax | $88,508 | $25,783 | | LR1 | $11,169 | $23,344 | Liquidity and Capital Resources The company's cash balance increased to $359.5 million, with management believing liquidity is adequate for the next twelve months - The company's cash balance increased to $359.5 million as of June 30, 2022, from $230.4 million at December 31, 2021[96] - Management believes the company has adequate financial resources to meet its commitments for at least the next twelve months[93] - Market volatility is expected to continue due to the ongoing impacts of the COVID-19 pandemic and the military conflict in Ukraine[94][95] Cash Flows - Cash flow from operations increased significantly to $139.8 million, primarily due to a $305.5 million increase in vessel revenue[101][102] - Investing activities generated a net inflow of $518.6 million, driven by $541.2 million in net proceeds from the sale of 16 vessels[107][109] - Financing activities resulted in a net outflow of $529.3 million, reflecting significant debt and lease repayments[111] Summary of Cash Flows (in thousands of U.S. dollars) | Activity | H1 2022 | H1 2021 | | :--- | :--- | :--- | | Net cash from Operating activities | $139,802 | $25,922 | | Net cash from Investing activities | $518,648 | ($27,308) | | Net cash from Financing activities | ($529,337) | $96,104 | Long-Term Debt Obligations and Credit Arrangements - The company was in compliance with all debt covenants as of June 30, 2022[114] - Subsequent to the period end, the company repaid $95.0 million on the China Huarong Lease Financing after exercising purchase options on six MR tankers[117] Total Outstanding Indebtedness (in thousands of U.S. dollars) | Date | Amount Outstanding | | :--- | :--- | | June 30, 2022 | $2,652,424 | | September 30, 2022 | $2,478,815 | Capital Expenditures - As of June 30, 2022, the company has future payment commitments of $15.1 million for the purchase of scrubbers and BWTS[120] Capital Expenditure Activity (H1 2022) | Category | Costs Incurred (in thousands) | | :--- | :--- | | Drydock | $8,710 | | Ballast Water Treatment Systems (BWTS) | $2,388 | | Scrubbers | $14,057 | Material Cash Requirements - Total material cash requirements amount to over $3.3 billion, primarily consisting of payments on credit facilities, leases, and notes[121] Future Material Cash Requirements as of June 30, 2022 (in thousands) | Period | Amount | | :--- | :--- | | Less than 1 year | $574,225 | | 1 to 3 years | $1,124,296 | | 3 to 5 years | $806,588 | | More than 5 years | $820,229 | Quantitative and Qualitative Disclosures about Market Risk The company is exposed to interest rate, spot market, foreign exchange, and inflation risks, with specific sensitivities quantified - Interest Rate Risk: A one-percentage point increase in the floating interest rate would increase annual interest expense by $22.9 million[127] - Spot Market Rate Risk: A $1,000 per day change in spot rates would have altered operating income by $21.7 million for the first six months of 2022[128] - Foreign Exchange Risk: The company incurs some expenses in currencies other than the U.S. dollar, creating exposure to currency fluctuations[129] - Inflation Risk: High inflation has impacted vessel operating costs and voyage expenses, posing a risk to future operating costs[132] Unaudited Condensed Consolidated Financial Statements Unaudited Condensed Consolidated Balance Sheets Total assets decreased to $4.61 billion while shareholders' equity increased to $1.94 billion as of June 30, 2022 Consolidated Balance Sheet Summary (in thousands of U.S. dollars) | Account | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $4,609,643 | $5,013,969 | | Cash and cash equivalents | $359,528 | $230,415 | | Vessels and drydock, net | $3,144,735 | $3,842,071 | | Total Liabilities | $2,668,881 | $3,177,041 | | Current portion of long-term debt | $69,272 | $235,278 | | Long-term bank debt and bonds | $474,056 | $666,409 | | Sale and leaseback liability (Current & LT) | $1,546,432 | $1,639,991 | | Total Shareholders' Equity | $1,940,762 | $1,836,928 | Unaudited Condensed Consolidated Statements of Income or Loss The company reported a net income of $106.7 million, or $1.84 diluted EPS, for H1 2022, a reversal from a net loss in H1 2021 Income Statement Summary (in thousands of U.S. dollars, except per share data) | Metric | H1 2022 | H1 2021 | | :--- | :--- | :--- | | Vessel revenue | $579,120 | $273,607 | | Total operating expenses | ($396,385) | ($313,612) | | Operating income / (loss) | $182,735 | ($40,005) | | Net income / (loss) | $106,683 | ($115,176) | | Basic EPS | $1.92 | ($2.12) | | Diluted EPS | $1.84 | ($2.12) | Notes to the Unaudited Condensed Consolidated Financial Statements The notes detail vessel sales, debt obligations, extensive related-party transactions, and significant subsequent events Note 4: Assets Held for Sale and Vessels - During H1 2022, the company entered into agreements to sell 18 vessels (3 LR2s, 12 LR1s, 3 MRs)[161] - The sale of 16 of these vessels closed within the period for an aggregate price of $558.2 million, resulting in a total loss of $63.8 million[163] - As of June 30, 2022, two vessels remained classified as held for sale[164][165] Note 11: Debt - In May 2022, the company repaid the outstanding $69.7 million principal balance of its Convertible Notes Due 2022 upon maturity[203] - In May 2022, the company repurchased $10.8 million face value of its Convertible Notes Due 2025 in the open market for $12.6 million[204] Debt and Lease Obligations as of June 30, 2022 (Carrying Value, in thousands) | Category | Amount | | :--- | :--- | | Secured Credit Facilities | $283,736 | | Sale and Leaseback Financing | $1,534,228 | | IFRS 16 - Lease Liabilities | $523,589 | | Unsecured Senior & Convertible Notes | $267,926 | | Total | $2,609,479 | Note 12: Common Shares - The Board of Directors authorized a $250 million securities repurchase program, with $237.5 million remaining available as of June 30, 2022[211][212] - The company paid two quarterly cash dividends of $0.10 per share during the first half of 2022[210] - As of June 30, 2022, there were 59,415,013 common shares outstanding[214] Note 13: Related Party Transactions - As of June 30, 2022, the company had accounts receivable of $193.9 million due from the related-party Scorpio Pools[219] - Termination fees of $2.7 million were paid to SCM and SSM during H1 2022 as a result of vessel sales[223] Transactions with Related Parties (H1 2022, in thousands) | Transaction Type | Amount | | :--- | :--- | | Pool revenue | $491,793 | | Vessel operating costs (to SSM) | ($16,618) | | Administrative expenses (to SSH) | ($6,665) | | Purchases of bunkers | ($10,793) | Note 21: Subsequent Events - In July, September, and October 2022, the company repurchased an aggregate of 1,397,220 common shares in the open market[266] - In August 2022, the company exercised purchase options on six MR tankers, repaying a $95.0 million lease obligation[268] - In September 2022, the company gave notice to exercise purchase options on an additional nine vessels, expected to result in a debt reduction of $160.8 million[269]