STNG

Business Context and Reporting Period

Company: Scorpio Tankers Inc.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2013
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Scorpio Tankers provides seaborne transportation of refined petroleum products and crude oil. As of the report date, the company operated a fleet of 21 wholly-owned tankers and 31 time-chartered-in tankers. The company is in a significant growth phase, with contracts for 55 newbuilding product tankers expected to be delivered in 2014 and 2015.

Key Financial Metrics

Operational Metrics:
- Average Daily Time Charter Equivalent (TCE): $14,369 (2013) vs. $12,960 (2012).
- Average Owned Vessels: 15.94 (2013) vs. 10.81 (2012).
- Average Time Chartered-In Vessels: 22.85 (2013) vs. 9.18 (2012).

Material Changes vs. Prior Period

• Revenue Growth: Vessel revenue increased 80% to $207.6 million, driven by fleet expansion (both owned and chartered-in) and improved TCE rates.
• Profitability Turnaround: The company returned to profitability with a net income of $17.0 million, compared to a net loss of $26.5 million in 2012. This was aided by a $41.4 million gain on the sale of VLGC contracts to Dorian LPG Ltd.
• Expense Increases: Charterhire expenses surged 164% to $115.5 million due to a significant increase in time-chartered-in vessels. General and administrative expenses rose 124% to $25.8 million, largely due to restricted stock amortization.
• Asset Base Expansion: Total assets nearly tripled to $1.65 billion, primarily due to $649.5 million in vessels under construction and a $210 million investment in Dorian LPG Ltd.
• Write-downs: The company recorded a $21.2 million write-down for four vessels designated as "held for sale" (Senatore, Noemi, Venice, and STI Spirit).

Guidance, Outlook, and Risks

Management Commentary & Outlook:
Management expects continued growth through the delivery of 55 newbuilding vessels in 2014 and 2015. The company has secured significant financing, including new K-Sure and KEXIM credit facilities totaling nearly $900 million, to fund these deliveries. Dividends were declared quarterly in 2013 and early 2014, with the most recent being $0.08 per share.

Key Risks and Contingencies:
- Market Cyclicality: The tanker industry is highly cyclical; revenue is heavily dependent on spot market rates and pool performance, which are volatile. - Financing and Covenants: The company relies on debt financing for fleet expansion. A decline in vessel values could trigger loan-to-value covenant breaches, potentially leading to debt acceleration. - Related Party Transactions: The company relies on affiliates (Scorpio Group) for commercial and technical management, creating potential conflicts of interest. - Regulatory and Environmental: Compliance with IMO, MARPOL, and U.S. regulations (e.g., ballast water, emissions) requires significant capital expenditure and operational adjustments. - Geopolitical Risks: Operations are exposed to piracy, war risks, and sanctions (e.g., Iran), which could disrupt trade routes or increase insurance costs.

Important Facts for Investor Verification

• Newbuilding Commitments: Verify the status and delivery schedules of the 55 newbuilding vessels and the remaining $1.4 billion in yard payments required.
• Debt Covenants: Confirm compliance with loan-to-value ratios and liquidity covenants across multiple credit facilities (2010, 2011, 2013, K-Sure, KEXIM).
• Vessel Sales: Monitor the closing of sales for the four vessels designated as "held for sale" (Senatore, Noemi, Venice, STI Spirit) and the associated debt repayments.
• Dorian LPG Investment: Assess the performance and valuation of the 26% stake in Dorian LPG Ltd., which contributed significantly to 2013 earnings.
• Related Party Fees: Review the fees paid to Scorpio Group affiliates for management services to ensure they remain at arm's length.