Scorpio Tankers Inc. — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; the supplied figures do not provide a clear standalone Q4 result. Financial statements are prepared under IFRS as issued by the IASB and presented in U.S. dollars.
Business context and reporting period
Scorpio Tankers provides worldwide seaborne transportation of refined petroleum products. In 2017, the company completed its acquisition of Navig8 Product Tankers Inc. (NPTI), adding 27 tankers—12 LR1s and 15 LR2s—through a combination of share consideration and assumed debt. At year-end, the fleet included 107 owned or finance-leased vessels, 19 time- or bareboat-chartered-in vessels, and two vessels under construction.
Financial and operating performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Vessel revenue | $512.7 million | $522.7 million |
| Operating income (loss) | $(44.9) million | $76.7 million |
| Net income (loss) | $(158.2) million | $(24.9) million |
| Basic loss per share | $(0.73) | $(0.15) |
| Operating cash flow | $41.8 million | $178.5 million |
| Investing cash flow | $(159.9) million | $31.3 million |
| Financing cash flow | $204.7 million | $(310.9) million |
| Cash and cash equivalents at year-end | $186.5 million | $99.9 million |
| Debt and finance lease liabilities, net carrying value | $2.767 billion | $1.883 billion |
| Shareholders’ equity | $1.685 billion | $1.315 billion |
Time-charter-equivalent (TCE) revenue, a non-IFRS measure, was $505.0 million, down 3%; average daily TCE fell 17% to $13,146. Vessel operating costs were $231.2 million, up 24% as operating days increased; operating cost per day was nearly flat at $6,559. Financial expenses rose 12% to $116.2 million. The company declared dividends of $0.04 per share in 2017, compared with $0.50 in 2016.
At December 31, 2017, current assets were $279.4 million and current liabilities were $209.1 million, implying working capital of approximately $70.3 million. Gross debt and lease obligations shown in the debt schedule were $2.839 billion before unamortized financing fees and other carrying-value adjustments. In March 2018, reported aggregate debt was $2.815 billion. Management stated that cash, operating cash flows, and available credit were expected to meet liquidity needs for the next 12 months.
Material changes versus comparable periods
- Revenue declined 2% from 2016, principally reflecting weaker product-tanker markets. Pool revenue fell 5%, and pool TCE rates declined across vessel classes amid increased newbuilding supply and high product inventories.
- The net loss widened by $133.3 million. The year included $36.1 million of NPTI merger costs, $23.3 million of net vessel-sale losses, and $116.2 million of financial expenses. The merger also generated a $5.4 million bargain-purchase gain.
- Operating cash flow fell $136.7 million to $41.8 million, reflecting weaker operating performance, merger cash costs, higher cash interest, and working-capital outflows.
- Debt and finance lease liabilities increased substantially following the assumption of approximately $907.4 million of NPTI debt and related financing obligations. The company also issued 84.5 million shares in public offerings and approximately 55 million shares as merger consideration; year-end common shares outstanding rose to 326.5 million from 174.6 million.
- Management reported no vessel impairment charge for 2017. However, estimated charter-free market values for certain vessels were below carrying values by an aggregate approximately $338.3 million; value-in-use testing did not indicate impairment under the company’s assumptions.
Outlook, risks, contingencies, and unusual items
- Management described product-tanker market conditions as challenging, with new vessel deliveries pressuring rates. It noted signs of market correction toward late 2017 but did not provide quantitative earnings or rate guidance. Industry risks include spot-rate volatility, vessel oversupply, and dependence on spot-oriented pools.
- In 2017, the company amended applicable secured-facility minimum interest-coverage covenants from 2.50:1 to greater than 1.50:1 for specified quarters. In February and March 2018, the reduced threshold was extended through December 31, 2018. The company reported covenant compliance at year-end.
- Interest-rate exposure is material: the filing estimates that a one-percentage-point increase in floating rates would increase annual interest expense by $22.7 million. Most debt is secured by vessels and includes financial, collateral, and cross-default covenants.
- Environmental compliance may require substantial capital spending. At year-end, 52 of 109 owned or finance-leased vessels had ballast-water treatment systems installed; the company estimated remaining system costs could be material. IMO sulfur limits effective in 2020 also create fuel-cost and compliance uncertainty.
- Related-party exposure is significant: Scorpio-affiliated companies manage the pools, vessels, and administrative services. The filing discloses pool revenues, management fees, and balances due from related pools. The company also warns of potential conflicts of interest.
- For 2018, IFRS 15 changed spot-voyage revenue recognition; management estimated that applying it to 2017 would have reduced both revenue and voyage expenses by $0.2 million. The filing states that future effects depend on spot-voyage activity.
- The auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2017. The company reported no legal proceeding expected to have a material effect on its financial position, results, or liquidity.
Most important facts for investors to verify
- Whether spot TCE rates and vessel utilization recover enough to support cash generation and debt service.
- Debt maturities, refinancing needs, restricted cash, and compliance with interest-coverage and vessel-value covenants, including the reduced covenant threshold through 2018.
- Whether the NPTI acquisition delivers expected operating benefits and whether integration or transaction costs create further pressure.
- The valuation assumptions underlying vessel impairment tests, especially forecast charter rates and discount rates, given the disclosed market-value shortfall.
- Future dilution, dividend capacity, and related-party pool and management arrangements, including collectability of amounts due from pools.
- Capital and operating costs needed for ballast-water treatment and low-sulfur fuel compliance.