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.
|Year||2008||2013||2013 (First Five Months)||2014 (First Five Months)|
|(Millions of Barrels)||62,840||143,176||57,654||65,905|
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.
|Operating Cash Flow||$76||$282||$489||$499|
|Free Cash Flow||$ (151)||$65||$349||$399|
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.
TaxesYour volunteer ventures could earn you some welcome tax deductions, along with the satisfaction of helping others.
RetirementA traditional IRA gives you complete control over your contributions, and offers a nice complement to an employer-provided savings plan.
RetirementFully funding someone’s life for three decades without work is tricky. The result is retirement has become, for many, a 30-year adventure.
RetirementThough dreamed of by many, for most, early retirement is not a viable option. Instead, consider a midlife career change.
TaxesCheating on your taxes is asking for trouble. You might get away with it, but you’re playing with fire and likely to get burned.
BudgetingIf you’re worried medical expenses could overwhelm you, there are some thing you can do to ease your concerns.
InsuranceMedicare is the United States’ health insurance program for those over age 65. Medicare has four parts, but you might not need them all.
InvestingThere are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
EconomicsAfter the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
RetirementExplain how to use an IRA account to buy investment property.
Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>
Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements ... Read Full Answer >>
Apple Pay is a mobile payment system created by Apple to reducing the number of times shoppers and buyers have to pay for ... Read Full Answer >>
he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>