Scorpio Makes A Move From Bulker To Bunker

| About: Scorpio Bulkers (SALT)
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Summary

Dry bulk shipping rates continue to suffer.

Dirty and clean tanker rates have been strong.

Scorpio moves to reduce its order book and modify contracts to shift towards wet shipping.

In the most recent week, I have commented on the dire straights for dry bulk shipping and have pointed out the quiet strengthening we have seen in the tanker markets. The big point being that until we see a major contraction in dry bulk new builds and the scrapping of older ships, investors interested in seaborne shipping should look to tankers rather than bulkers. Recent events indicate that industry management sees a similar outlook and some are now beginning to take action.

Specifically, I am referring to the companies of Scorpio Group, Scorpio Bulkers (NYSE:SALT) and Scorpio Tankers (NYSE:STNG). But the companies have a lot of ground to cover to rebalance the group from being overly concentrated in dry bulk. Currently, Scorpio Bulkers has 79 new build contracts, mostly Capesize and Kamsarmax to be delivered between now and the third quarter of 2016. Comparatively, Scorpio Tankers has 24 newbuild contracts for midsize tankers to be delivered between now and the third quarter of 2016. However, concurrent announcements from earlier this month suggest the group has recognized the group's imbalance and is shifting.

Earlier this month, Scorpio Tankers Inc. released an announcement summarizing an agreement to purchase four newbuilding contracts, options to purchase two additional newbuilding contracts, a sale of three of its older vessels, and the receipt of six newbuilding vessels. The interesting part is that the newbuild contracts were purchased from Scorpio Bulkers.

The Company reached an agreement with Scorpio Bulkers Inc., a related party, to purchase newbuilding contracts for four LR2 product tankers to be constructed at shipyards in Korea and options, which expire on May 31, 2015, to purchase two additional LR2 newbuilding contracts. The purchase price for each of the four LR2 newbuilding contracts is $51.0 million with scheduled vessel deliveries in the first three quarters of 2016. The purchase price for the two option contracts is fixed at $52.5 million for each contract with scheduled vessel deliveries in the fourth quarter of 2016.

The company also announced that the independent members of the Board of Directors had unanimously approved the transaction with Scorpio Bulkers Inc.

Two days later, Scorpio Bulkers announced that it had entered into an agreement to sell a Kamsarmax newbuilding dry bulk vessel. The vessel is currently under construction at Tsuneishi Group (Zhoushan) Shipbuilding Inc., and was expected to be delivered in the third quarter of 2015. The announced sale price was for approximately $30.7 million.

So, Scorpio Group has tanked some beginning steps to alter contracts and shift newbuilds from Scorpio Bulkers to Scorpio Tankers. At the same time, Scorpio Bulkers has demonstrated that it is willing to further reduce the company's order book, even though the resale markets continue to see dropping prices. One of the brokers at Intermodal in Shanghai said:

Any new deal surfacing the market is at significantly lower level compared to the previous last done. In this respect, some Owners are accepting these new discounted levels, accepting the new asset level reality, whereas others prefer to withdraw their ships or chose to wait, hoping to find more eager Buyers who can pay their aiming levels.

This may just be a beginning in a multi-quarter process as ship-owners begin to shift assets, restructure the business model, and write down assets. Meanwhile, individual investors should consider studying the bulkers for the eventual bottoming and look to the tankers for moderating growth.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.