UBS Expects A Scorpio Tankers Inflection Point In 2018

Scorpio Tankers Inc. (NYSE: STNG) could benefit from a looming supply-demand inflection point for product tankers in 2018, leading UBS to raise its outlook on the company. 

The Analyst

UBS analyst Spiro Dounis upgraded shares of Scorpio Tankers from Neutral to Buy and increased its price target from $4.50 to $5.50, suggesting 60 percent upside from current levels.

The Thesis

Fundamental signals are pointing in a positive direction ahead of a demand-supply inflection point in 2018, as product tanker demand is expected to grow 3 percent — outpacing the supply growth at 2.8 percent, Dounis said in a Monday note. (See Dounis' track record here.) 

The product orderbook, at 7 percent of the fleet, is the lowest it's been since Dounis began tracking the data, he said. 

"We see oversupply risk as very low due to shipyard capacity reductions and a substantial amount of capital and lending that has left the shipping sector," the analyst said.

The inflection point will drive freight rates back toward average levels, Dounis said. Additionally, Dounis sees double-digit vessel value increases as accompanying higher rates, based on the historical relationship between value and rates.

The Price Action

After being up over 6 percent in pre-market trading, Scorpio Tankers shares have seen some moderation in sentiment. At last check, the stock was trading nearly flat.

The shares have tanked 24 percent in the year-to-date period.

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