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Scorpio tankers purchase of MR resale - Shipstrategy

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Scorpio tankers purchase of MR resale

SHIPINVEST4004 > Investment cases

Scorpio tankers bought two MRs (51,000 dwt) product tankers in April 2013 at a price of 36.5 mill USD each
Below are some reflections on the economics of this purchase


CASE: BASIC CONSERVATIVE
We assume:

Finance: 50 % / 5 % interest rate / 10 years repayment
OPEX: 6,700 USD/day. escalating at 2 % p.a.
Horizon of investment: 5 years
TC rate next 5 years: 14,000 USD/day
Wanted rate of return on equity 15 % (IRR modified method):
Major uncertainty is obviously tc earnings.
Current rates: 14,000 USD/day, but a very volatile spot market ranging between  4,000 - 45,000 USD/day in the period from 2004 to 2012

Comment: negative cashflow in most years.


CASE: UPSIDE POTENTIAL

60% finance 15 year amortization to scrap. – 5 % interest rate
Full ECo TC rate is 17500 per day.
Starting opex 6250 3% first 5 year inflation



Key question though is: What is  the “Wanted rate of return”.  I.e. what Internal Rate of Return is Scorpio looking for – or happy about ? Scorpio indicated in their web presentation in April that this investment might give a 30 - 35 % return on equity.

Scorpio never explained how this could be achieved.
We use the IRR on Equity – modified method for this calculation.

Q: On this basis, what price must Scorpio sell for at end of year 5 in order to get 15 % IRR (modified) ?
A: 38.7 mill USD (Up from acquisition price of 36.5 mill USD)

Q: What TC rate must Scorpio have over 5 years in order get IRR(Equity) = 15 %
A: 21,900 USD/day if we can assume residual price of 25 mill USD
A: 19,800 USD/day if we can assume residual price of 30 mill USD

Q; If Scorpio had 17,500 USD/day over five years, and could sell at the end of the fifth year for 30 mill USD, what would be the IRREQ ?
A: 8 %

 
 
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