Scorpio Governance Disgrace

About: Scorpio Bulkers Inc (SALT), STNG, Includes: DRYS
by: J Mintzmyer


Scorpio Bulkers (SALT) is a modern midsize dry bulk pureplay. Scorpio Tankers (STNG) is a modern product tanker pureplay.

SALT is well positioned in a recovering market and trades at attractive prices with promising fundamentals. Clean balance sheet, lots of liquidity.

STNG is extremely leveraged, market conditions are terrible. Medium-term market prospects are good, but the near-term is risky.

Both firms are marketed to investors as pureplays. Want bulk? Buy SALT. Want product? Buy STNG. Totally separate markets.

STNG is offering $300M in equity at record lows. SALT is offering to buy $100M. This is a total corporate governance disgrace for SALT. It might be clever, but it is absolutely wrong!

Overview - Industry Problems

The shipping sector is a tough place to invest. We've suffered through nearly a decade of downturn in the majority of sectors with only a couple years of respite in various areas. One of the primary drivers of weakness, besides obvious market challenges, is weak capital allocation and terrible corporate governance.

I've tried to highlight some of the bigger issues in the industry, including calling out past issues with Dry Ships (DRYS), a toxic offering and weird trading at Eagle Bulk (EGLE) (note: new management now in place), and some shady loan efforts by Navios Holdings (NM) and Navios Acquisition (NNA) a couple years ago. Most recently I've penned a report on corporate governance and I'm a huge proponent of veteran analyst Michael Webber's annual governance scorecard.

Recently it seemed as if we had reached a clear turning point. Firms have increasingly developed independent boards, reduced related-party setups, cut management fees and focused on pureplay allocations. Today marks a huge step backward for industry progress, as Scorpio essentially 'robs Peter to pay Paul,' by utilizing Scorpio Bulkers' (SALT) liquidity warchest to buy depressed Scropio Tankers (STNG) stock in a public offering.

The Offering: $300M @ $1.85/Sh

Scorpio Tankers has priced approximately $300M in equity at $1.85/sh, with Scorpio Bulkers subscribing for 54M shares and insider SSH buying 5.4M shares. This offering is near all-time lows for STNG and was priced under 60% NAV. Even after dilution, $1.85 is still around 65% NAV for them.

This is painful for STNG holders and questionably timed, but considering their massive leverage and current weak spot rates, it might just be an overly defensive posture. If STNG wants to make that decision, fine, but leave SALT funds out of it!

A Good Investment? Abuse Regardless

Is SALT buying STNG stock near record lows a good investment? That question misses the point entirely! Regardless of the potential outcomes here, investors have placed money with SALT because they desire a pureplay modern bulker company. If they wanted exposure to product tankers, these investors could always go out and buy STNG stock.

Scorpio Bulkers is set to ride improving rates and is likely to report record revenues in a few weeks. Scorpio Tankers on the other hand is struggling under an extremely levered balance sheet, hurt by a terribly timed acquisition. If STNG needed to raise equity, that's fine, but utilizing SALT's warchest to prop up the offering price is nothing short of an abuse of shareholders.

Does it make financial sense? SALT trades around 85% NAV while STNG trades close to 60% NAV. Dollar for dollar, SALT is likely making a bigger return buying STNG stock than SALT stock; however, that misses the point entirely. Investors didn't place money with SALT to be part of a general investment pool. Investors bought SALT as a dry bulk pureplay and management has now turned their money into a related-party hedge fund of sorts.

Unfortunate and Shameful

This offering is embarrassing for the entire sector. I hope other analysts will step up and reject similar actions and institutional investors will also make their voices clear.

I am long (thankfully fairly small) positions in both SALT and STNG. I hope Scorpio does the right thing and pulls back SALT's offer for shares. If STNG shares are such a great buy, then let insiders buy $100M of the offering (note: SSH, an insider firm, is currently subscribed for at least $10M). Leave SALT funds alone.

Do a repurchase, a dividend, or buy more bulks. We invested for a pureplay.

Disclosure: I am/we are long STNG, SALT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade STNG or SALT at any time. James Catlin and I collaborate on Value Investor's Edge.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.