On the heels of a follow-on equity offering in which the New York-quoted products tanker operator raised $235m, the analyst told clients that the company will likely use some of the cash to indulge in newbuilding options.
“Given Scorpio's track record since its March 2010 IPO, we believe a use of proceeds for the recent equity raise will be unveiled in the very near term,” he added before reiterating an overweight rating and price target of $10.00 per share.
Chappell noted the company has 14 outstanding options to build eco ships at top South Korean shipyards. If it decided to build the entire lot, the analyst believes the total cost would be approximately $525m.
“Scorpio just recently expanded its presence in the larger product tanker market, through the order of two LR2 carriers, and this may represent a market that Scorpio could aspire to penetrate further,” he added.
“We believe that Scorpio will act quickly to identify a use of proceeds for the new capital and will then work to secure another financing facility for up to 60% of its new capital commitments.”
As of today, Chappell is confident that Scorpio will be net cash positive at the end of this year and forecast a net debt-to-capital ratio of only 34% upon completion of a newbuilding programme that includes 28 firm orders.