Why Shares of Scorpio Tankers Have Jumped 68% in the First Half of 2019

To the delight of investors, this leader in the tanker industry has delivered strong results this year. And changes to shipping suggest the run may not be over yet.

Scott Levine
Scott Levine
Jul 9, 2019 at 11:05AM
Industrials

What happened

Rebounding from their 42% plunge in 2018, shares of Scorpio Tankers (NYSE:STNG) have risen 68% through the first six months of 2019, according to data from S&P Global Market Intelligence. Besides reports of a strong performance in 2018, the rise in oil prices and a wave of bullish sentiment from Wall Street helped to drive shares higher.

So what

Thanks to notable gains on both the top and bottom lines, investors celebrated Scorpio Tankers' Q4 earnings report. While revenue climbed 14% year over year to $585 million, the standout was toward the bottom, where the company reported EBITDA of $136 million, an eye-popping 92% gain over what it reported in 2018, according to Morningstar. Management further stoked investors' enthusiasm on the conference call when it said the momentum the company gained in the fourth quarter "has persisted into the first quarter of 2019 and shows signs of enduring through the year."

A tanker ship.

Image source: Getty Images.

The good news on the 2018 performance, moreover, extended to the cash flow statement. Besides generating operational cash flow of $58 million, a 38% increase over 2017, free cash flow climbed out of the red, growing from negative $222 million in 2018 to positive $5 million in 2018. 

Wall Street's approval provided additional lift for the stock. Emphasizing an already bullish outlook that gave the company a buy rating and $25 price target, an analyst at B. Riley FBR added Scorpio Tankers in April to the firm's alpha generator list, according to Thefly.com. At the time, shares were trading at about $21.

Further validation from the Street came in May when Noah Parquette, an analyst at J.P. Morgan, upgraded the stock to overweight from neutral, raising his price target to $34 from $29. And the first half of the year ended on a positive note thanks to an analyst at Jeffries. According to Thefly.com, the analyst characterized the stock as a very attractive play on the "tanker supercycle" and maintained his buy rating and $40 price target. Shareholders reacted strongly, driving shares up nearly 8%.

Now what

In the second half of 2019, investors should pay close attention to how the company fares as the shipping industry prepares for the implementation of IMO 2020 -- a regulation requiring a 0.5% global sulfur cap for marine fuels. On the Q1 2019 conference call, CEO Emanuele Lauro discussed the opportunity for the company presented by the new regulation, stating that it is "perfectly positioned to benefit from the unique market development we believe is now up on us." According to Lauro, the "one-time expansion in the size of the market for seaborne refinery product is unique in recent memory." With an opportunity like this, the stock's climb through the first half of 2019 may not be over.