World events naturally have a considerable bearing on the stock market. For example, Russia’s invasion of Ukraine sent oil prices surging and oil companies ended up being net beneficiaries. For investors, it’s often about recognising these events, and finding the relevant stock before everyone else does.
Scorpio Tankers (NYSE:STNG) is a company benefitting from a series of global events that, in turn, have sent demand for their services soaring. Let’s take a closer look at why this is.
Pandemic hangover
Scorpio Tankers, as the name suggests, is a company providing tanker services for hydrocarbons products. It’s a major player in the sector with a market cap around $3.5bn and 112 wholly owned vessels. It also has a relatively young fleet, with an average vessel age of eight years.
So, what’s this pandemic hangover? Well, it’s impacting the whole industry. Tanker companies made a significant reduction in new vessel orders during the pandemic, reflecting lower demand but also uncertainty going forward. This also resulted in shipyards going bust or going dormant.
It’s also important to remember that these mammoth vessels can’t be built overnight. In fact, they can take up to four or five years to build. And with many shipyards out of action, new vessels can’t be fast-tracked.
The result is an industry with really tight supply, and one of the oldest global fleets in living memory. And the thing is, demand for hydrocarbon products is strong. As such, there’s a really big imbalance, and it may not be corrected for years.
In Q1 2024, average daily rates were recorded at $39,357. That’s up 20% from Q4 of 2023, but they could go much higher.
Exacerbating factors
We may be entering something of a super cycle in the tanker sector because of the aforementioned supply and demand imbalance. However, there are two additional factors that are aggravating supply constraints.
The first of these is the Houthi attacks on vessels transiting the Bab el-Mandeb strait. Because of safety concerns, many vessels are now rerouting, and that means going around the Cape of Good Hope. It’s a huge detour and it means there’s less available supply of tankers on the market.
The second is the drought in Panama, which has meant water levels dropping significantly on the canal. In fact, in January, only 18 vessels were crossing daily, down from 50 in normal conditions. In turn, tankers either wait their turn in the queue, or travel some thousands of miles more round Cape Horn.
The bottom line
Scorpio Tankers stock has surged over the past year, but that doesn’t mean the super-cycle is thoroughly priced in. In fact, at 5.8 times forward earnings, it certainly doesn’t look expensive. There could be some near-term pullback in the share price if disruption in Panama and around Yemen is reduced.
However, Scorpio Tankers is a company prospering in the current environment. The average share price target is around 14.5% higher than the current price. And that gives me confidence. It’s also got great momentum — often one of the best indicators of forward performance.
If my brokerage offered Scorpio, I’d add it to my portfolio.
