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Scorpio Tankers Inc. (NYSE:STNG)

Q4 2013 Earnings Conference Call

February 24, 2014 11:00 a.m. ET

Executives

Brian Lee - CFO

Cameron Mackey - COO

Robert Bugbee - President

Analysts

Jon Chappell - Evercore Partners

Gregory Lewis - Credit Suisse

Frode Mørkedal - RS Platou

Omar Nokta - Global Hunter Securities

Matthias Detjen - Morgan Stanley

Eirik Haavaldsen - Pareto Securities

Operator

Hello, and welcome to the Scorpio Tankers' Incorporated Fourth Quarter 2013 Conference Call. (Operator Instructions) I would now like to turn the conference over to Brian Lee, Chief Financial Officer. Please go ahead sir.

Brian Lee

Thank you. Thanks everyone for joining us today. On the call with me are Robert Bugbee, President; Cameron Mackey, Chief Operating Officer.

The information discussed on this call is based on information as of today, February 24, 2014, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the forward-looking statement disclosures in earnings press release that we issued today as well as Scorpio Tankers’ SEC filings, which are available at scorpiotankers.com.

Call participants are advised that the audio of this conference call is being broadcast live on the web and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. Slides to this call can be found in the Investor Relations section on our website under Corporate Presentations.

I’ll now turn the call over to Robert Bugbee.

Robert Bugbee

Good morning ladies and gentlemen. First of all, I would like to apologize that our Chairman Emanuele Lauro won’t be on the call today, he’s got caught up in some travel issues at the airport.

So anyway I am just going to briefly just go through a couple of things on the fourth quarter. The fourth quarter in terms of net income was – some 3 things have negatively contributed to this: G&A, OpEx and revenue. Firstly, G&A probably was a little bit heavy on a forward run rate. We had some transaction costs in there related to deals that we were doing. We had a increase in non-cash restricted stock and we also had 2 million -- $2.2 million, $2.3 million of bonus that hadn’t been accrued for earlier the year.

In terms of OpEx, I think that is higher than the normal rate firstly due to seasonal factors related around billing. Secondly, some prepayments that we took advantage of and also some expenses that aren’t related necessarily to the fleet in the water but the pre-expenses related to the number of deliveries that we have going forward this year and we were booking them against our normal OpEx.

Then finally, revenue. Revenue was adversely affected not just because the fourth quarter itself was weaker due to the refinery turnaround, delays in refineries but also because we did a little bit of repositioning in terms of shifting the Handy and the LR1 fleet more towards the dirty product trade which we anticipate to be stronger and taking them away from the clean trade.

The actual fourth quarter itself in terms of markets was weaker than frankly we expected. We were pleasantly surprised about how strong the third quarter was. Now we’re analyzing this and we think that this could actually become a factor going forward as we have so much expected improvement and strength from US Gulf exports particularly in the second quarter, third quarter and is resuming now as the severe cold weather goes away. So we could see those refinery turnarounds go deeper into the end of that third quarter, early fourth quarter and this could remain a factor going forward.

However we view it - as management we view that we’re expected to make a return on your total capital, so we were pleased in the fourth quarter in two areas. One was, we’re very pleased with the progress of our Dorian shareholding, and we were pleased in our VLCC investments in which we took $90 million of your money to put down payments on 7 VLCCs and on a mark-to-market basis that would be an approximately $50 million gain now within 3 months.

So in terms of your overall position, in the fourth quarter we were down in net income part, we can explain that. But in overall concept, we made money, we increased value which is also in relation to our confidence of the forward market going forward. We were happy to increase the dividend in the quarter.

In Q1, we have seen as we’ve stated an improvement across all our sectors, particularly in the Handys and LR1s trading in dirty, that decision has really paid off. And if we are looking at various reports, we would think that the market fully – analysts haven’t fully appreciated still the strength or the importance of the palm oil trade and the vegetable oil trade related to particularly the newbuilding ECO design.

At this stage, I am going to briefly pass the call over to Cameron Mackey who is going to go over a couple of things, our delivery schedule and some of the developments that we do this year. So Cam, if you take that away?

Cameron Mackey

Thank you very much, Robert. Just going through the materials which have been posted on our website. Very simply, you can see the development of our newbuilding fleet that is expected to hit the water, the majority within 2014. We've done quite a bit of work in anticipation of these deliveries. Notably we’ve done a lot of business with shipyards where we’re extremely confident that the deliveries will be on schedule or ahead of schedule and we maintain that expectation.

On the second slide, you can see some information about the view or the analysis of various bunker fuel prices for ships with regulations coming into place in the next 12 months. We anticipate our advantage by being a spot player and having the most fuel-efficient assets to now increase because of the spread and the requirement to use more expensive fuel, more of the time.

Then on the last slide, you see some information on various trade groups and development of the spot market. I think it’s important to note that since fourth quarter where we’ve had or experienced some delays or hiccups in various refining volumes, now we see those volumes starting to increase and that’s really a trend both towards solving various demand spikes that come up by virtue of the winter months and the extremely cold temperatures, or expanding in the emerging markets consistent with what we’ve seen in previous quarters.

Robert Bugbee

I’d like to add a couple of things to this graph. We think this graph is a key graph to understanding the – particularly the MR market, and the key source that we look to, to monitor developments in the market. If we look at the right hand side of this graph, we can see that – the effect of what was happening in the first quarter with the cold weather resulting in a drawdown of U.S. Gulf fixtures, the decline of fixtures and the corresponding rate. Then immediately as the markets start to look through into what eventually is going to become spring whether it’s in February or March, we start seeing that cargo volumes start to increase, particularly the cargo volume to South America, and South America is really important, because of the huge distance it requires in terms of ton mile demand. And so we have seen a very, very quick response to this. The market drove up from last week, continue to drive up through the week despite it being a very unusual week, that was IP week in London, which normally means most of the players are socializing as opposed to working. So we can see that effect of what happens when South America and US Gulf start to export.

And we can see what happened last year. It’s very similar. The first period was weaker and then we’re expecting this to ramp up. At the same time, the last 10 days or so we’ve seen Asian markets start to improve across the board in all sizes, LR2s, LR1ss as well as the MRs. And we feel very confident in the long term that things remain intact, that there is more demand coming and then there is supply.

And with that, just like to turn it over now to questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll now go to Jon Chappell with Evercore.

Jon Chappell - Evercore Partners

Robert, want to follow up on some of the comments you made at the end of the presentation there. As it relates to the first quarter you talked about the LR1s, some of the Handys trading in the Dirty segment and the impact of the repositioning you had there. How is the rest of the fleet positioned given what you mentioned with the Eastern Hemisphere starting to improve and then also this kind of shift from TC2 strength to TC14 strength?

Robert Bugbee

Well, I think LR2s are predominantly positioned in one way or another – for those to fund new refineries that are coming up in the Middle East and expansion from India. So they are in east trade and we have been seeing daily improvement now over the last 2 to 3 weeks. The MRs – particularly with the quality of the fleet that we have, the MRs haven’t really been exclusively trading in product anyway in the first quarter. You have seen ourselves make various announcements that we’ve had vessels in palm oil. We’ve had vessels in vegetable oils too. Right now they are positioned as much as we can for what we think the improvement will be in the US Gulf. So we’re not sort of trading in so much in Europe. We are not trading then so much in the East. We’re really trying to hammer down on what we see honked up and where the actual play is going to be. Very significant movement there, I mean if you look at a conventional MR, just two weeks ago, US Gulf [inaudible] is probably paying about 450, has been paying 600, 650 per one of the top line ships, you’ve even managed to cross 700. That’s equating to a pretty strong 17, 18 number and all of the last week’s fixtures in the – with our eco-ships coming up in the low 20s or mid-20s, as a result of not just their fuel efficiency, but their ability to actually carry cargos and do voyages that are preferential to the customer. So there has been a pretty big swing just in two weeks.

We’re going to play in that market. We are confident to that long-term trend that we believe is intact. We are confident that we’re going to have the same dynamic as we had last year, that you have increasing US Gulf exports and as we expected, once this cold weather has come away from its severe position, you’ve automatically seen the relief and the ability for the US Gulf start to re-export again.

And obviously the Handys and the LR1s that are being positioned almost exclusively, almost exclusively so 90% to 95% of the two pools of Handys and LR1s have been and remain in the fuel oil or dirty trades and that is a huge step-jump in terms of earnings for 4Q, the first Q and is also a big step-jump from whether or not you’ve been trading in clean or you’ve been trading in dirty. I mean, we don’t really want to give at this stage exact guidance but you’ve virtually got a doubling in – at least a doubling in TC rates between Handys and Panamaxes 1Q to 4Q. We would not expect that to continue through the quarter because as we said, it is getting warmer. So we would expect to see the Handies come off, the LR1s come off and those MRs really drive forward now into the rest of the year with business coming in 4Q.

Jon Chappell - Evercore Partners

Just really quickly without giving us any numbers, Emanuele said in the press release you’re going to be profitable in the first quarter. Just looking for how much of the first quarter you’ve already booked to try to gain kind of confidence and what’s in the bag when you talk about profitability for 1Q?

Robert Bugbee

At this stage, in terms of pretty visible accounting, so you have a 90% certainty of your accounting, you would have booked – you have that through to today date itself. So that’s whatever it is, 60%, 63% of the quarter. We obviously have voyages that we are fixing, as I indicated last week that are in that balancing 30%, 35%. So you probably have a 87% certainty over about 70%, 75% of the quarter right now.

Jon Chappell - Evercore Partners

Got it. All right. Just two for Brian, on the G&A, Robert kind of hashed out some of the issues in the fourth quarter. What’s kind of the clean run rate we should look at including the non-cash restricted stock amortization starting first quarter?

Brian Lee

$9.5 million to $10 million.

Jon Chappell - Evercore Partners

And then the second one, obviously huge CapEx budget, you raised a lot of equity last year, raised some, or sealed some financing, what’s your comfort level in the financing ability for the remainder of the 45 ships this year and what’s the pro forma balance sheet looked like once you raise the financing and taken delivery of the ships?

Brian Lee

Well we have raised for all the product carriers we have raised financing for. We haven’t done it yet on the VLCCs, but we’re going to look forward to deciding what we’re going to do on that, move forward again in ’14 if we keep those the way they are and when we are full delivery of everything, we’ve talked about moderate leverage, so debt to cap around 50%.

Operator

And we’ll now go to Gregory Lewis with Credit Suisse.

Gregory Lewis - Credit Suisse

Robert, just touching on Jonathan's question about the repositionings, is that something that -- as we stand today, the fleet, you're kind of comfortable in the mix and we shouldn't really expect that to impact Q1, or do we think that sort of spilled into Q1 as well as it started maybe a little bit in late Q4?

Robert Bugbee

Well, I think you’re going to have a positive in Q1 because, as I was trying to say that we’ve already basically positioned or set the Handy and the Panamax fleet for those dirty trades by the time we entered Q1. So the cost there was to your revenue to Q4. So your positioning is clean now to Q1. As we’re going forward you have the deliveries of these ships coming forward, you’ll see, let’s say, the increased exposure in terms of those newer vessels and we will leave the other vessels where they are.

Gregory Lewis - Credit Suisse

Okay, great. And then just I guess following up on the fleet, when I think about some of the asset sales that you did in the first quarter, clearly at least one of those was a Chinese-built vessel. Could you sort of walk us through the dynamics of whether it's fuel efficiency or operating costs which made that vessel less attractive in the sale and purchase market? Clearly there was a discount --

Robert Bugbee

So first of all, we made a clear statement for some time now that we actually really believe the environmental regulations are going to matter in 2015. So we made a clear statement that we will be getting out of our conventional older tonnage as we go through this year. And you’ve seen us already make announcements for the sale of two of the LR1s and now the sale of STI Spirit, the Chinese LR2. I think and quite confidently say that we really, really should not have come out of our original thesis in terms of the management of buying Chinese tankers, and it starts and really ends there, that the ship was built in China. It doesn’t matter the New Times is a top yard, they just were not really capable of building decent product tankers. We’ve expected others on charter. And therefore you’re going to face a steep discount to a normal Korean or top quality Korean or top Japanese vessel. And that said in many ways – on commercial side, we were very happy with the price we got. It could have been a lot and that said, you have to take the lick and good night, we’re glad it’s over. Getting rid of it ironically is actually accretive to earnings.

Gregory Lewis - Credit Suisse

Yeah. I was looking at that and just to quantify -- and I know that every vessel is different and every price matters, but I mean would you think a 10% to 15% discount is a fair way to think about Chinese vessels -- and not even Chinese vessels today, but maybe from that vintage, from five or six years ago?

Robert Bugbee

It could be, they could be 10 to 30 because at least ocean spirit sort of works. I think the way you should look at it is we have two vessels, Noemi and the Senatore that are Japanese built and even though these vessels are smaller, they are almost certainly going to fetch when we sell them at higher price than what STI Spirit was sold for

Operator

And we now go to Frode Mørkedal with RS Platou.

Frode Mørkedal - RS Platou

Hi guys. Just one quick question. I know you like the eco ships but I know you don’t want to buy non eco ships. But there’s a lot of competitors out there, who also have eco ships. Are there any ones that you find attractive enough to buy?

Robert Bugbee

That’s a good question. I think that we’ll start with – no, we’re definitely not going to buy any non eco ships. We also have stated very quickly, very very time and time again, we are not there to pay over $40 million for a MR and we’re not really there to take delivery of product tankers after June 30, 2015. Now there are competitors that have been funded to have deliveries of vessels after this date, whatever they are, whether they are LR2s or the MRs. And I think by the -- so the answer really is no. It’s not a question of whether fleets are of quality, that’s not just outside of our bag [ph], in our business scope. We have pretty well -- we are going to be distributing capital back to shareholders rather through buybacks or through dividends as soon as we can. We’re trying to indicate that in raising the dividends constantly. I think it doesn’t take too much of work on analysis, analysts to realize that we’re going to be throwing up significant EBITDA. Once these new vessels deliver, as Cameron has pointed out that delivery is on schedule and we are agonistic with regard to in our other non-core investments outside of the product market. But we are a big company. We’ve made our play, it was very important for us to be one of the first movers, to purchase ships in the lower end. So we have the lowest breakeven, the highest stability to redistribute cash back to shareholders and acquiring a competitor with later deliveries at a higher price than we come forward is not in our business plans.

Operator

And we will now go to Omar Nokta with Global Hunter Securities.

Omar Nokta - Global Hunter Securities

Thank you. Good morning. Just wanted to ask, just about the Handies again. Are there any restrictions you face in repositioning those or reconstituting them into the dirty trade due to them being a part of your charter in-fleet? As in, are the owners of those vessels fine with them going from clean into dirty?

Robert Bugbee

Well, I am not -- not so much because primarily that’s accepted largely as a dirty trade. I think that going forward we stated that we fill those dirty trades whether it’s crude oil or whatever have bottomed, we think a real hidden investment that we have is in the old handy sized new eco-ships that we have been delivering now, coming forward all going to be in position from next winter because this is a market that is really -- it’s impossible to trade those ships effectively without touching the environmental sensitive areas like Canada and Europe and especially with the high [ph] class features in addition. So that’s we would view that.

Omar Nokta - Global Hunter Securities

Got it. All right. And then Robert, just on the VLCCs, I think last quarter you had mentioned that to really be in that business you have to have scale. How do you see the VLCC shaking out here, you've got seven on order. Can you just give us an update on your thinking with those ships?

Robert Bugbee

Well, I think the first thinking is -- the absolute play itself is going forward well. It’s going forward better than we were expected. We’ve always set asset values we thought for newbuildings will cross the 100 by the end of January which they have. But more importantly you’re starting to continue to see a better general fundamental in supply and demand which as you’ve seen has resulted in more favorable spot rate pricing. We think that there are companies out there that are forming quietly -- have the capability of moving for size. And rather like we said on the LPG, I mean we’re genuinely agnostic to this trade. It is all about creating the best value -- value proposition to our shareholders.

Omar Nokta - Global Hunter Securities

Okay, and so just – that’s a good answer, thank you and then just –

Robert Bugbee

Also I would just -- without going into much detail, Brian indicated that we have not yet or have not gone to put finance on these vessels either.

Omar Nokta - Global Hunter Securities

So just transitioning that to the thinking on Dorian, that 26% stake that's worth over $230 million, is it still the intention for Dorian to lift here in the U.S. at some point within the next –

Robert Bugbee

I think if everybody doesn’t mind – at this particular date, we, for various reasons, do not want to comment on Dorian at all.

Operator

And we will now go to Matthias Detjen with Morgan Stanley.

Matthias Detjen - Morgan Stanley

Hello, guys. So thank you for the update and most of my questions have been asked. I wanted to follow-up on the VLCC fleet. You're saying you are pretty agnostic to it and I was wondering, are you looking to grow the fleet or do you think that, that was one-off opportunity which you took or do you think that there might be possibilities of expanding that exposure?

Robert Bugbee

Well I think that there are only two ways we can really grow the VLCC fleet. You could either acquire vessels that are in water, all of those are non-eco. So we’re not going to do that. And the second would be to put in new orders which are way down the road. I mean now our orders are predominantly in ’15 and the others that you have to put in now are in ‘17 and they are 8%, 9%, 10% higher in costs than the orders that we have put in. And so I don't see that we will -- 98.9% chance that we will not be increasing that fleet.

Operator

(Operator Instructions) And we will now go to Eirik Haavaldsen with Pareto Securities.

Eirik Haavaldsen - Pareto Securities

On your LR2s, are you – I mean when you look at your performance on those, can you give any clarifications as to the eco savings on those when you take delivery of the newbuilds?

Cameron Mackey

Hi, Eirik, I think where we guided in the past is somewhere in excess of 10 tons a day. We think it will experience at least that but it would be a little bit premature for us to give our guidance simply because we need to get these ships on the water and run them in. But we’re extremely confident but we just – as the same way as we did on our MRs, we don't want to put numbers out there unless we are 100% confident. So we will let them come.

Robert Bugbee

I think Eirik, a couple of things I would add to that. I mean LR2s that we have are pretty special in that they are being built at Hyundai and Daewoo. And these are phenomenal yards. And the second aspect is that they gain, just the same as the vessels that we are having delivered this year will actually have a higher spread in fuel savings than that we’ve already said to the market. I mean we’ve already said on our existing MRs in the water, we are confident with a sort of $3500 a day spread on the fuel efficiency in the MRs as well, that’s just going to widen as the ‘14s start getting delivered and ‘15s get delivered and you then add the low sulfur fuel coming in ’15. When it comes to the LR2s, as Cameron is indicating, you’ve really got the best of the best yards there are anywhere dealing with a fairly simple ship like an LR2 when they used to pretty sophisticated drilling stuff et cetera. So as Cameron says, we don’t want to put much more number out there but we are really excited to get them.

Eirik Haavaldsen - Pareto Securities

But I mean given the success you had trading LR1s dirty, do you all anticipate doing sort of switching back and forth for the LR2s and there are some interesting [indiscernible] so there is some interesting – opportunities there as well?

Robert Bugbee

Yes, may be. But I think that – position where – we believe that the story is very much intact, that I know that some people looking wow, we could get 5% -- as much as 5% year on year supply growth in products. But our historical context as management is coming from 2002, ’03, ’04, ’05, ’06, ’07 where you count it away at fleet growth around about 10%, with some years even being higher than that, and yet the market virtually just increased every single year. And on that particulars what we are seeing is we are the big shift in the distribution of products across the world and the opening of these refineries in the Middle East et cetera or on the expansion of trade from the places like US Gulf. So we are fundamentally building the ships for the clean petroleum market. Now obviously they have the added benefits that hey, it’s like free option [ph] as the Aframax market is going like crazy and crude oil market is huge. Well, you can always take an LR2 and put it into that market. But we would not anticipate that on our model at the moment.

Operator

And it appears that we have no further questions at this time. I will now turn the conference back over to the speakers for any additional or closing remarks.

Robert Bugbee

Great, thank you. I would just say one added thing here is that it hasn’t come through [indiscernible] in the cool, management is really focused at this stage in staying and executing, taking delivery of these vessels and most importantly, getting to a point where we have significant EBITDA and we can really focus on distribution of earnings to shareholders as opposed to just building a company for fun. And so we are away from the actual adding ships for growth for growth stake and now we are into, let’s run the company and let’s do the best for shareholders in terms of creating value from the various different degrees of freedom and levers that we can pull. Thank you very much everybody.

Operator

Ladies and gentlemen this concludes today's conference. We thank you for your participation.

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