Business context and reporting period
Scorpio Tankers Inc. filed this Form 20-F annual report for the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter report. The company transports refined petroleum products worldwide using product tankers, with most vessels earning revenue through spot-oriented commercial pools. The audited consolidated financial statements are prepared under IFRS as issued by the IASB and presented in U.S. dollars.
Financial and operating performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Vessel revenue | $915.9 million | $704.3 million | +30% |
| Operating income | $245.3 million | $130.0 million | +$115.4 million |
| Net income (loss) | $94.1 million | ($48.5 million) | Improved $142.6 million |
| Basic earnings (loss) per share | $1.72 | ($0.97) | — |
| Operating cash flow | $419.4 million | $209.5 million | +100% |
| Investing cash flow | ($174.5 million) | ($207.0 million) | Lower outflow |
| Financing cash flow | ($259.7 million) | ($393.9 million) | Lower outflow |
| Cash and cash equivalents at year-end | $187.5 million | $202.3 million | Down $14.8 million |
- Calculated operating margin was approximately 26.8% and net margin approximately 10.3% in 2020; 2019 operating margin was approximately 18.5% and net margin was negative.
- Time-charter-equivalent (TCE) revenue, a non-IFRS measure, was $907.9 million, up 30%; consolidated daily TCE rose 18% to $19,655, while revenue days increased 10% to 46,192.
- Pool revenue was $902.8 million. LR2 and LR1 daily pool TCE rose 33% and 36%, respectively; MR rose 7%, and Handymax rose 1%.
- Vessel operating costs increased 13% to $333.7 million, reflecting more operating days and higher daily costs. Average operating cost was $6,734 per day, up 3%.
- Financial expenses fell 17% to $155.0 million, principally due to lower LIBOR and refinancing; this was partly offset by a higher average debt balance. The reported results include $16.8 million of impairment charges: $14.2 million on 13 MR vessels and $2.6 million of LR1 goodwill.
Balance sheet and liquidity
- At December 31, 2020, total assets were $5.159 billion, total liabilities $3.093 billion, and shareholders’ equity $2.066 billion.
- Cash was $187.5 million and restricted cash $5.3 million. Current assets of $242.2 million were below current liabilities of $406.2 million, a calculated working-capital deficit of approximately $164.0 million.
- Outstanding borrowings and lease obligations were approximately $3.087 billion at year-end, rising to approximately $3.146 billion by March 30, 2021. The company reported compliance with applicable financial covenants at December 31, 2020.
- Net cash interest paid in 2020 was $132.3 million. Management estimated that a 1 percentage-point increase in floating rates would increase annual interest expense by approximately $26.8 million.
- Dividends paid in 2020 totaled $23.3 million, or $0.40 per share. The board declared a further $0.10-per-share dividend in February 2021, paid in March.
Material changes versus the prior comparable period
- Revenue and earnings improved sharply year over year, but 2020’s results include exceptional tanker demand for floating storage and arbitrage during the first half; rates weakened as inventories unwound and oil demand remained subdued in the second half.
- Fleet expansion from the 2019 Trafigura transaction increased revenue days and operating costs. Four MR vessels under construction in that transaction were delivered during 2020.
- COVID-19-related travel restrictions increased crew travel, wages and logistical costs and caused operational delays, including crew-rotation and vessel-installation disruption.
- Cash from operations doubled year over year, while cash declined modestly. Investing outflows remained substantial, primarily for drydocking, scrubbers and ballast-water systems.
- The company repurchased $52.3 million face value of 2022 convertible notes for $46.7 million and repurchased 1.17 million common shares for $13.1 million in 2020.
Outlook, risks, contingencies and unusual items
- No formal quantitative earnings or rate guidance is provided. Management said it expected adequate financial resources for at least 12 months from the report date, while warning that prolonged weak markets could affect cash flow, covenants and access to financing.
- Management described COVID-19 as a source of continuing uncertainty: rates surged during the second quarter on floating-storage demand, then declined as inventories unwound. Subdued spot rates and volatile oil demand could weigh on 2021 results and vessel values.
- The fleet is substantially exposed to spot rates through related-party Scorpio Pools. Tanker oversupply, changing oil trade patterns, energy transition, fuel prices, pandemic-related operating disruption and counterparty performance are material risks.
- Debt and lease arrangements contain financial and operating covenants, collateral-value tests, cross-default provisions and restrictions that can limit dividends and other actions. Much of the financing is variable-rate and LIBOR-linked; LIBOR transition presents additional uncertainty.
- Environmental compliance requires significant investment. At March 30, 2021, 79 vessels had scrubbers installed; 121 of 131 vessels in the then-current owned, finance-leased or bareboat-chartered-in fleet had ballast-water treatment systems, with further installations and commitments outstanding. Anticipated scrubber savings depend partly on fuel-price spreads.
- After year-end, the company refinanced or repaid several maturities through new credit and sale-and-leaseback transactions. It also exchanged approximately $62.1 million of 2022 convertible notes for 2025 notes and issued $76.1 million of additional 2025 convertible notes; the resulting 2025 convertible-note balance was approximately $138.2 million.
- A March 2021 lawsuit alleges cargo worth $13.6 million was delivered to the wrong receiver. The company says it is indemnified by the charterer, but the outcome and any net impact cannot be estimated. Guarantees for a related-party bunker provider had a maximum aggregate amount of $16.0 million at year-end; no payments were made under them in 2020.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Vessel impairment testing was identified as a critical audit matter because it relies on significant assumptions about future freight rates, costs and discount rates.
Most important facts for investors to verify
- Whether recent and expected pool TCE rates support earnings and debt service after the second-half 2020 rate decline.
- Liquidity, upcoming debt maturities, refinancing terms, covenant headroom and exposure to vessel-value declines, including post-year-end transactions.
- The effect of variable interest rates and the LIBOR transition on future cash interest.
- Impairment assumptions and sensitivity: a 5% decrease in forecast charter rates was estimated to imply $161.0 million of vessel impairment across 71 vessels.
- Remaining scrubber and ballast-water installation costs, financing needs and realized fuel savings.
- Related-party pool, commercial-management and technical-management arrangements, including receivables and working-capital contributions to Scorpio Pools.
- The outcome and insurance or charterer-indemnity coverage for the cargo lawsuit, and any exposure under the bunker-provider guarantees.