Scorpio transforms to ECO vessels
Scorpio Tankers (STNG) has a first mover advantage in the ECO-based newbuilding program because it was a pioneer in the industry. The new program provides scale to Scorpio in key pools because there would be no restriction on where the vessels can trade. As the first company to order and also stop ordering these vessels, STNG would have the largest independent ECO newbuilding fleet.
As a result of growing environmental regulations across the world, and most of the regions being converted to ECA, these vessels are highly preferred by customers. Scorpio’s product tankers are likely to deliver in 2014–2015, while new vessel orders would be available post 2016.
In most of the coasts including western Norway, North America, and the U.S., ECO ships are highly preferred. Scorpio’s newbuildings program is designed to meet the future environmental regulations today.
There are also benefits that will boost the company’s financials.
- Revenue benefits—MRs greater than $3,000 per day—due to greater fuel efficiency PLUS
- Cost benefits—lower operating expenses, estimated at $500–$750 per day
- Intangible benefits—charterer preferences for a greener vessel
- Higher residual value—non-ECO vessels will drop faster in value during the next cycle downturn
By the end of November, 2016, STNG is estimated to own a fleet of 75 product tankers with an average age of 2.2 years at delivery. These vessels would be fuel efficient (or ECO) and are expected to have the lowest breakeven rates in the industry compared to its peers—Navios Maritime Acquisition (NNA), Capital Product Tankers LP (CPLP), and Tsakos Energy Navigation Ltd. (TNP). The Guggenheim Shipping ETF (SEA) tracks the shipping companies.
STNG not only focuses on the vessel expansion plans, but also strives to maintain a modern and prudent fleet size. As part of its efforts to maintain a modern fuel efficient fleet, STNG recently sold three of its older vessels—two 2004 LR1 product tankers for $44 million and one 2008 LR2 product tanker for $30.2 million.
As of June, 2014, Scorpio Tankers operated a fleet of 24 wholly owned tankers with an average age of 2.5 years. Also, the company chartered-in an additional 26 vessels. Besides the current fleet, Scorpio Tankers has contracts for 50 new product tankers, which are expected to be delivered in 2014 and 2015.
We’ll discuss how Scorpio’s financials are affected by the company’s corporate structure and chartering strategies in the next section in this series.