​​​​​​We're now more than a half decade into the shale revolution, which has completely changed the energy industry and the U.S. economy.

The surging production of crude oil and natural gas equates to huge profits for drillers and energy service providers, a boost in tax receipts for Uncle Sam and a taming effect on our country's onerous trade deficits. The good news: output in shale regions keeps on rising, which may eventually enable the U.S to become a net exporter of crude oil.

But not quite yet.

The U.S. still maintains a multi-decade restriction against the export of crude oil and policy makers have also been applying the brakes on plans to make a massive push into natural gas exports. However, crude oil export restrictions don't apply to refined energy products, such as diesel and gasoline. And the numbers bear out a growing niche: Back in 2008, our nation exported roughly 63 million barrels of gasoline. Fast forward to 2013, and that figure exceeded 140 million barrels, according to the Energy Information Administration.

Surging Gasoline Exports
Year 2008 2013 2013 (First Five Months) 2014 (First Five Months)
(Millions of Barrels) 62,840 143,176 57,654 65,905
Source: EIA

Through the first five months of 2014, gasoline exports are up another 14%. For the companies that send such liquids abroad in massive tankers, that has led to rising demand and firm lease rates. And these firms may soon get even busier, now that the Obama Administration has given the green light for condensate exports. Condensates are lightly-processed crude oil that is an intermediate process before refining into gasoline, diesel and other distillates.

In light of the opening, some energy firms appear poised to massively boost their export capabilities. Earlier this summer, the Commerce Department issued condensate export permits to Pioneer Natural Resources (NYSE:PXD) and Enterprise Product Partners (NYSE:EPD). Other companies, such as Phillips 66 (NYSE:PSX), are also contemplating massive investments to enhance export capabilities.

As this export opportunity expands, virtually all of the shipping companies may benefit. My favorite: Scorpio Tankers (Nasdaq:STNG). The company is on the cusp of a boom in dividends and buybacks, which should create a magnet for investors.

Optimizing the capital structure

Scorpio's growth mirrors the boom in gasoline exports. Sales had not yet reached $30 million in 2009, but surpassed $200 million in 2013. Analysts see that figure hitting $600 million by next year.

The higher revenue will be the result of a growth strategy put in place several years ago, when the company ordered a fleet of new ships. Scorpio's fleet of roughly 30 tankers is expected to more than double in size in fairly short order. Over the next 18 months, 43 new, fuel-efficient ships will come into service, according to analysts at Clarkson Capital, who see 45% upside to their $14 price target.

But such growth comes at a cost: Scorpio has spent heavily to acquire its fleet of tankers. This has led to negative free cash flow for three straight years.

That's about to change. Operating cash flow is now robust enough to support the fleet expansion, leaving excess cash flow to fund dividends and buybacks.

Scorpio's Surging Free Cash Flow ($mill.)
2014E 2015E 2016E 2017E
Operating Cash Flow $76 $282 $489 $499
Capital Spending $227 $217 $140 $100
Free Cash Flow $ (151) $65 $349 $399
Source: Clarkson Capital Markets

On the dividend front, Scorpio Tankers issued its first ever dividend last year of $0.21 a share. Since then, the quarterly payout has since been hiked to a dime, equating to a $0.40 annualized payout, or a 4.2% yield. That means STNG is doling out roughly $70 million from its cash flow to support the dividend.

Management is even more committed to buybacks. It announced a $150 million share buyback program in June 2014. Right now, the company has around 180 million shares outstanding. If the buyback is completed at current prices, roughly 16 million shares would be retired.

But as you can see from the cash flow forecasts noted above, STNG is in a position to launch more buybacks after the current program is completed. To put the numbers in context, the $400 million in annual projected free cash flow is equivalent to more than 20% of the company's market value.

Indeed, free cash flow—at maturity—is how you should look at this business model. It's wise to assume that by 2017, the bulk of the tanker fleet expansion will have taken place. The company may expand the fleet further, but by a smaller percentage basis compared to the existing fleet.

As a result, $300 million in annual free cash flow in subsequent years looks to be a conservative target. In effect, investors can buy a company worth $1.8 billion today, which is capable of generating a 17% free cash flow return annually. How such returns are allocated between dividends and buybacks remains an open question. But one way or another, this is a very impressive Total Yield play.

Risks to Consider: There are numerous moving parts to the energy export picture, including a possible diminishment in our nation's output as energy wells deplete, more restrictive legislation towards carbon-based fuels and a rapid increase in the global fleet of gasoline-consuming vehicles.

Action to Take--> As our nation's output of oil and gas continues to grow, new investment opportunities begin to emerge. Right now, it is the export opportunity that is coming into focus. If the U.S. lifts its ban on crude oil exports, than entire group of tanker stocks would move nicely higher. For now, Scorpio Tankers appears to be a solid investment, simply based on its build-and-then-harvest approach to its tanker fleet.

P.S.-- Due to its promising growth structure Scorpio Tankers appears poised to offer investors generous dividends in upcoming years. Did you know, however, that certain companies use two other "payment methods" to reward shareholders -- in addition to dividends? Click here for all the details, including the name of a top pick.


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