Scorpio Tankers Inc. (NYSE:STNG
) is a pure play operator of "eco-friendly" product tankers, ships that carry refined oil products such as gasoline, diesel and naptha. Founded by an old line shipping family and led by a seasoned successful operator, Scorpio is aggressively capitalizing on a depressed market for new builds to assemble the largest fleet of technologically advanced, low cost product tankers. All at a time when transportation rates are depressed and global trade routes are changing for the better, which should drive utilization and asset values much higher in time. Scorpio now has 13 tankers in operation and is investing over $2.1 billion to purchase 55 new eco vessels and are scheduled to be delivered by the end of 2014. We think Scorpio will earn strong returns on the investment because operating expenses of the new boats will be less, fuel usage will be lower and we expect rates to rise, maybe significantly, from today's depressed levels. Our base case is for cash flow to grow to $375 million when the fleet is in place (or more if rates are higher as we suspect), and the stock could more than double from our purchase at a conservative multiple of those earnings. Though we usually don't favor investing in cyclical businesses, in this case, we think the timing is right, we like the verve with which Scorpio is attacking the opportunity, and we trust management to maximize shareholder value at the right time as they did with their last company.
From Baron Funds’ second quarter 2013 commentary