Edgar Filing: Scorpio Tankers Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)


o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
OR
o	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report _________________

Commission file number

SCORPIO TANKERS INC.

(Exact name of Registrant as specified in its charter)

(Translation of Registrant’s name into English)

Republic of The Marshall Islands

(Jurisdiction of incorporation or organization)

9, Boulevard Charles III Monaco 98000

(Address of principal executive offices)

Mr. Emanuele Lauro,

+377-9898-5716

9, Boulevard Charles III Monaco 98000

(Name, Telephone Number and Address of Company Contact Person)


Securities registered or to be registered pursuant to section 12(b) of the Act.

Title of each class	Name of each exchange on which registered
Common Stock, par value of $0.01 per share	New York Stock Exchange


Securities registered or to be registered pursuant to section 12(g) of the Act.
NONE
(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

NONE

(Title of class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2012, there were 63,827,846 outstanding common shares with a par value $0.01 per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

Yes x No o

If this report is an annual or transitional report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP o

International Financial Reporting Standards as issued by the International Accounting Standards Board x

Other o

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o 18 o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Cautionary Statement Regarding Forward-Looking Statements

Matters discussed in this report may constitute forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their business. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts. We desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation. The words “believe,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” “plan,” “potential,” “may,” “should,” “expect,” “pending” and similar expressions identify forward-looking statements.

The forward-looking statements in this report are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, our management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections.

In addition to these important factors, other important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include the failure of counterparties to fully perform their contracts with us, the strength of world economies and currencies, general market conditions, including fluctuations in charter rates and vessel values, changes in demand for tanker vessel capacity, changes in our operating expenses, including bunker prices, drydocking and insurance costs, the market for our vessels, availability of financing and refinancing, charter counterparty performance, ability to obtain financing and comply with covenants in such financing arrangements, changes in governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents or political events, vessels breakdowns and instances of off-hires and other factors described from time to time in the reports we file with the SEC. We caution readers of this report not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to update or revise any forward-looking statements. These forward looking statements are not guarantees of our future performance, and actual results and future developments may vary materially from those projected in the forward looking statements. Please see our Risk Factors in Item 3.D of this annual report for a more complete discussion of these and other risks and uncertainties.

(i)


		TABLE OF CONTENTS

			Page

PART I			1

	ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	1
	ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	1
	ITEM 3.	KEY INFORMATION	1
	ITEM 4.	INFORMATION ON THE COMPANY	20
	ITEM 4A.	UNRESOLVED STAFF COMMENTS	40
	ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	41
	ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	77
	ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	83
	ITEM 8.	FINANCIAL INFORMATION	87
	ITEM 9.	THE OFFER AND LISTING	88
	ITEM 10.	ADDITIONAL INFORMATION	89
	ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS	98
	ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	99

PART II			99

	ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	99
	ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	99
	ITEM 15.	CONTROLS AND PROCEDURES	99
	ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	101
	ITEM 16B.	CODE OF ETHICS	101
	ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	101
	ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	102
	ITEM 16E.	PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	102
	ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	102
	ITEM 16G.	CORPORATE GOVERNANCE	102
	ITEM 16H.	MINE SAFETY DISCLOSURE	103

PART III			103

	ITEM 17.	FINANCIAL STATEMENTS	103
	ITEM 18.	FINANCIAL STATEMENTS	103
	ITEM 19.	EXHIBITS	103

(ii)

PART I.


ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.


ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.


ITEM 3.	KEY INFORMATION

Unless the context otherwise requires, when used in this annual report, the terms “Scorpio Tankers,” the “Company,” “we,” “our” and “us” refer to Scorpio Tankers Inc. and its subsidiaries. “Scorpio Tankers Inc.” refers only to Scorpio Tankers Inc. and not its subsidiaries. Unless otherwise indicated, all references to “dollars,” “US dollars” and “$” in this annual report are to the lawful currency of the United States. We use the term deadweight tons, or dwt, expressed in metric tons, each of which is equivalent to 1,000 kilograms, in describing the size of tankers.


A.	Selected Financial Data

The following tables set forth our selected consolidated financial data and other operating data as of and for the years ended December 31, 2012, 2011, 2010, 2009 and 2008. The selected data is derived from our audited consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Our audited consolidated financial statements for the years ended December 31, 2012, 2011 and 2010 and our consolidated balance sheets as of December 31, 2012 and 2011, together with the notes thereto, are presented herein. Our audited consolidated financial statements for the years ended December 31, 2009 and 2008 and our consolidated balance sheets as of December 31, 2010, 2009 and 2008, and the notes thereto, are not included herein.

We began our operations in October 2009, when Liberty Holding Company Ltd., or Liberty, a wholly-owned subsidiary of Simon Financial Limited, or Simon, a company owned and controlled by the Lolli-Ghetti family, of which our founder, Chairman and Chief Executive Officer, Mr. Emanuele Lauro, is a member, transferred to us three vessel owning and operating subsidiary companies. Prior to October 1, 2009, our historical consolidated financial statements were prepared on a carve-out basis from the financial statements of Liberty. These carve-out financial statements include all assets, liabilities and results of operations of the three vessel-owning subsidiaries owned by us, formerly subsidiaries of Liberty, for the periods presented. For the periods presented, certain of the expenses incurred by these subsidiaries for commercial, technical and administrative management services were under management agreements with other entities owned and controlled by the Lolli-Ghetti family, which we refer to collectively as the Scorpio Group, consisting of: (i) Scorpio Ship Management S.A.M., or SSM; and Scorpio Commercial Management S.A.M., or SCM; which provide us and third parties with technical and commercial management services, respectively; (ii) Liberty, which provided us with administrative services until March 13, 2012 when the administrative services agreement was assigned to Scorpio Services Holding Limited, or SSH, a company owned by the Lolli-Ghetti family; and (iii) other affiliated entities. Since agreements with related parties are by definition not at arms length, the expenses incurred under these agreements may have been different than the historical costs incurred if the subsidiaries had operated as unaffiliated entities during prior periods. Our estimates of any differences between historical expenses and the expenses that may have been incurred had the subsidiaries been stand-alone entities have been disclosed in the notes to our historical consolidated financial statements for those relevant years which are not presented herein.


	For the year ended December 31,
*In thousands of US dollars except per share and share data*	2012			2011			2010			2009			2008
Consolidated income statement data
Revenue:
Vessel revenue	$	115,381		$	82,110		$	38,798		$	27,619		$	39,274
Operating expenses:
Vessel operating costs		(30,353	)		(31,370	)		(18,440	)		(8,562	)		(8,623	)
Voyage expenses		(21,744	)		(6,881	)		(2,542	)		—			—
Charterhire		(43,701	)		(22,750	)		(276	)		(3,073	)		(6,722	)
Impairment ⁽¹⁾		—			(66,611	)		—			(4,512	)		—
Depreciation		(14,818	)		(18,460	)		(10,179	)		(6,835	)		(6,984	)
Loss from sale of vessels		(10,404	)		—			—			—			—
General and administrative expenses		(11,536	)		(11,637	)		(6,200	)		(417	)		(600	)
Total operating expenses		(132,556	)		(157,708	)		(37,637	)		(23,399	)		(22,930	)
Operating (loss) / income		(17,175	)		(75,599	)		1,161			4,220			16,344
Other income and expense:
Financial expenses		(8,512	)		(7,060	)		(3,231	)		(699	)		(1,711	)
Earnings from profit or loss sharing agreements		443			—			—			—			—
Realized loss on derivative financial instruments		—			—			(280	)		(808	)		(406	)
Unrealized (loss) / gain on derivative financial instruments		(1,231	)		—			—			956			(2,058	)
Financial income		35			51			37			5			35
Other expense, net		(97	)		(119	)		(509	)		(256	)		(19	)
Total other income and expense		(9,362	)		(7,128	)		(3,983	)		(802	)		(4,158	)
Net (loss)/income	$	(26,537	)	$	(82,727	)	$	(2,822	)	$	3,418		$	12,186
(Loss)/earnings per common share ⁽²⁾:
Basic and diluted (loss)/earnings per share	$	(0.64	)	$	(2.88	)	$	(0.18	)	$	0.61		$	2.18
Basic and diluted weighted average shares outstanding		41,413,339			28,704,876			15,600,813			5,589,147			5,589,147


	As of December 31,
*In thousands of US dollars*	2012		2011		2010		2009		2008
Balance sheet data
Cash and cash equivalents	$	87,165	$	36,833	$	68,187	$	444	$	3,608
Vessels and drydock		395,412		322,458		333,425		99,594		109,260
Vessels under construction		50,251		60,333		—		—		—
Total assets		573,280		448,230		412,268		104,423		117,112
Current and non-current bank loans		142,459		145,568		143,188		36,200		43,400
Shareholder payable⁽³⁾		—		—		—		—		22,028
Related party payable ⁽³⁾		—		—		—		—		27,406
Shareholders’ equity		414,790		286,853		264,783		61,329		20,299


	For the year ended December 31,
*In thousands of US dollars*	2012			2011			2010			2009			2008
Cash flow data
Net cash inflow/(outflow)
Operating activities	$	(1,928	)	$	(12,452	)	$	4,907		$	9,306		$	24,838
Investing activities		(90,155	)		(122,573	)		(245,595	)		—			—
Financing activities		142,415			103,671			308,431			(12,469	)		(22,384	)


	(1)	In the years ended December 31, 2011 and December 31, 2009, we recorded an impairment charge of $66.6 million for our 12 owned vessels and $4.5 million for two of our owned vessels, respectively. See Item 5. “Operating and Financial Review and Prospects.”

	(2)	Basic earnings per share is calculated by dividing the net (loss)/income attributable to equity holders of the parent by the weighted average number of common shares outstanding assuming, for the period prior to October 1, 2009, when our historical consolidated financial statements were prepared on a carve-out basis, that the reorganization described above was effective during the period. Diluted earnings per share are calculated by adjusting the net (loss)/income attributable to equity holders of the parent and the weighted average number of common shares used for calculating basic earnings per share for the effects of all potentially dilutive shares. Such potentially dilutive common shares are excluded when the effect would be to increase earnings per share or reduce a loss per share.

	(3)	On November 18, 2009, the shareholder payable and the related party payable balances, as of that date, were converted to equity as a capital contribution.

The following table sets forth our other operating data. This data should be read in conjunction with Item 5. “Operating and Financial Review and Prospects.”


	For the year ended December 31,
	2012		2011		2010		2009		2008
Average Daily Results
Time charter equivalent (TCE) per day⁽¹⁾	$	12,960	$	12,898	$	16,213	$	23,423	$	29,889
Vessel operating costs per day⁽²⁾		7,605		7,581		8,166	$	7,819	$	7,875

Aframax/LR2
TCE per revenue day - pool	$	10,201	$	14,849	$	12,460	$	—	$	—
TCE per revenue day - time charters		—		15,457		—		—		—
Vessel operating costs per day⁽²⁾		8,436		6,960		8,293		—		—

Panamax/LR1
TCE per revenue day - pool	$	14,242	$	12,876	$	15,213	$	21,425	$	36,049
TCE per revenue day - spot		15,147		—		2,839		—		—
TCE per revenue day - time charters		—		23,962		22,729	$	24,825	$	24,992
Vessel operating costs per day⁽²⁾		7,714		7,891		8,189		7,819		7,875

MR
TCE per revenue day - pool	$	11,811	$	—	$	—	$	—	$	—
TCE per revenue day - spot		12,541		12,092		—		—		—
Vessel operating costs per day⁽²⁾		6,770		6,748		—		—		—

Handymax
TCE per revenue day - pool	$	13,166	$	11,343	$	9,965	$	—	$	—
TCE per revenue day - spot		11,201		—		8,077		—		—
Vessel operating costs per day⁽²⁾		7,594		7,619		8,107		—		—

Fleet data
Average number of owned vessels		10.81		11.29		6.19		3.00		3.00
Average number of time chartered-in vessels		9.18		4.95		0.06		0.33		0.59

Drydock
Expenditures for drydock (in thousands of US dollars)	$	2,869	$	2,624	$	974	$	1,681	$	—


	(1)	Freight rates are commonly measured in the shipping industry in terms of time charter equivalent per revenue day. Vessels in the pool and on time charter do not have voyage expenses; therefore, the revenue for pool vessels and time charter vessels is the same as their TCE revenue. Please see “Important financial and operational terms and concepts” section below for a discussion of TCE revenue, revenue days and voyage expenses.
	(2)	Vessel operating costs per day represent vessel operating costs, as such term is defined in the “Important financial and operational terms and concepts” section below, divided by the number of days the vessel is owned during the period.
	(3)	For a definition of items listed under “Fleet Data,” please see the section of this annual report entitled Item 5. “Operating and Financial Review and Prospects.”

B.	Capitalization and indebtedness

	Not applicable.

C.	Reasons for the offer and use of proceeds

	Not applicable.

D.	Risk Factors

The following risks relate principally to the industry in which we operate and our business in general. Other risks relate principally to the securities market and ownership of our common stock. The occurrence of any of the events described in this section could significantly and negatively affect our business, financial condition, operating results or cash available for dividends or the trading price of our common stock.

RISKS RELATED TO OUR INDUSTRY

If the tanker industry, which historically has been cyclical, continues to be depressed in the future, our earnings and available cash flow may be adversely affected.

The tanker industry is both cyclical and volatile in terms of charter rates and profitability. A worsening of the current global economic conditions may adversely affect our ability to charter or recharter our vessels or to sell them on the expiration or termination of their charters and the rates payable in respect of our vessels currently operating in tanker pools, or any renewal or replacement charters that we enter into may not be sufficient to allow us to operate our vessels profitably. Fluctuations in charter rates and vessel values result from changes in the supply and demand for tanker capacity and changes in the supply and demand for oil and oil products. The factors affecting the supply and demand for tankers are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable.

The factors that influence demand for tanker capacity include:


	•	supply and demand for energy resources and oil and petroleum products;

	•	regional availability of refining capacity and inventories;

	•	global and regional economic and political conditions, including armed conflicts, terrorist activities, and strikes;


	•	the distance oil and oil products are to be moved by sea;

	•	changes in seaborne and other transportation patterns;

	•	environmental and other legal and regulatory developments;

	•	weather and natural disasters;

	•	competition from alternative sources of energy; and

	•	international sanctions, embargoes, import and export restrictions, nationalizations and wars.

The factors that influence the supply of tanker capacity include:


	•	supply and demand for energy resources and oil and petroleum products;

	•	the number of newbuilding deliveries;

	•	the scrapping rate of older vessels;

	•	conversion of tankers to other uses;

	•	the number of vessels that are out of service;

	•	environmental concerns and regulations; and

	•	port or canal congestion.

We are dependent on spot-oriented pools and spot charters and any decrease in spot charter rates in the future may adversely affect our earnings.

As of the date of this annual report, all of our vessels are employed in either the spot market or in spot market-oriented tanker pools, such as the Scorpio LR2 Pool, Scorpio Panamax Tanker Pool the Scorpio MR Pool, or the Scorpio Handymax Tanker Pool, which we refer to collectively as the Scorpio Group Pools, exposing us to fluctuations in spot market charter rates. The spot charter market may fluctuate significantly based upon tanker and oil supply and demand. The successful operation of our vessels in the competitive spot charter market, including within the Scorpio Group Pools, depends on, among other things, obtaining profitable spot charters and minimizing, to the extent possible, time spent waiting for charters and time spent traveling unladen to pick up cargo. The spot market is very volatile, and, in the past, there have been periods when spot charter rates have declined below the operating cost of vessels. If future spot charter rates decline, then we may be unable to operate our vessels trading in the spot market profitably, meet our obligations, including payments on indebtedness, or pay dividends in the future. Furthermore, as charter rates for spot charters are fixed for a single voyage which may last up to several weeks, during periods in which spot charter rates are rising, we will generally experience delays in realizing the benefits from such increases.

Our ability to renew expiring charters or obtain new charters will depend on the prevailing market conditions at the time. If we are not able to obtain new charters in direct continuation with existing charters, or if new charters are entered into at charter rates substantially below the existing charter rates or on terms otherwise less favorable compared to existing charter terms, our revenues and profitability could be adversely affected.

An over-supply of tanker capacity may lead to a reduction in charter rates, vessel values, and profitability.

The market supply of tankers is affected by a number of factors, such as supply and demand for energy resources, including oil and petroleum products, supply and demand for seaborne transportation of such energy resources, and the current and expected purchase orders for newbuildings. If the capacity of new tankers delivered exceeds the capacity of tankers being scrapped and converted to non-trading tankers, tanker capacity will increase. According to Drewry Shipping Consultants Ltd., or Drewry, as of the end of January 2013, the newbuilding order book, which extends to 2016, equaled approximately 12.4% of the existing world tanker fleet and the order book may increase further in proportion to the existing fleet. If the supply of tanker capacity increases and if the demand for tanker capacity decreases or does not increase correspondingly, charter rates could materially decline. A reduction in charter rates and the value of our vessels may have a material adverse effect on our results of operations and available cash.

Acts of piracy on ocean-going vessels could adversely affect our business.

Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Indian Ocean and in the Gulf of Aden. Although the frequency of sea piracy worldwide decreased during 2012 to its lowest level since 2009, sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia and increasingly in the Gulf of Guinea, with drybulk vessels and tankers particularly vulnerable to such attacks. If these piracy attacks result in regions in which our vessels are deployed being characterized by insurers as “war risk” zones by insurers or Joint War Committee “war and strikes” listed areas, premiums payable for such coverage could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs which may be incurred to the extent we employ onboard security guards, could increase in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material adverse impact on our business, results of operations, cash flows and financial condition and may result in loss of revenues, increased costs and decreased cash flows to our customers, which could impair their ability to make payments to us under our charters.

The current state of the global financial markets and current economic conditions may adversely impact our ability to obtain additional financing on acceptable terms and otherwise negatively impact our business.

Global financial markets and economic conditions have been, and continue to be, volatile. In recent years, operating businesses in the global economy have faced tightening credit, weakening demand for goods and services, deteriorating international liquidity conditions, and declining markets. There has been a general decline in the willingness of banks and other financial institutions to extend credit, particularly in the shipping industry, due to the historically volatile asset values of vessels. As the shipping industry is highly dependent on the availability of credit to finance and expand operations, it has been negatively affected by this decline.

Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has increased as many lenders have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at all or on terms similar to current debt and reduced, and in some cases ceased, to provide funding to borrowers. . We will need to secure additional debt or equity financing or both in addition to our 2013 Credit Facility (defined later) to fully fund the remaining balance of our obligations under our Newbuilding Program (defined later). Due to these factors, additional financing may not be available if needed and to the extent required, on acceptable terms or at all. If additional financing is not available when needed, or is available only on unfavorable terms, we may be unable to expand or meet our obligations as they come due or we may be unable to enhance our existing business, complete additional vessel acquisitions or otherwise take advantage of business opportunities as they arise.

If economic conditions throughout the world do not improve, it will impede our operations.

Negative trends in the global economy that emerged in 2008 continue to adversely affect global economic conditions. In addition, the world economy continues to face a number of new challenges, including uncertainty related to the continuing discussions in the United States regarding the U.S. federal debt ceiling, mandatory reductions in federal spending, along with widespread skepticism about the implementation of any resulting agreements, continuing turmoil and hostilities in the Middle East, North Africa and other geographic areas and countries and continuing economic weakness in the European Union. There has historically been a strong link between the development of the world economy and demand for energy, including oil and gas. An extended period of deterioration in the outlook for the world economy could reduce the overall demand for oil and gas and for our services. Such changes could adversely affect our results of operations and cash flows.

The economies of the United States, the European Union and other parts of the world continue to experience relatively slow growth or remain in recession and exhibit weak economic trends. The credit markets in the United States and Europe have experienced significant contraction, de-leveraging and reduced liquidity, and the U.S. federal government and state governments and European authorities continue to implement a broad variety of governmental action and/or new regulation of the financial markets. Global financial markets and economic conditions have been, and continue to be, severely disrupted and volatile. Since 2008, lending by financial institutions worldwide remain at very low levels compared to the period preceding 2008.

We face risks attendant to changes in economic environments, changes in interest rates, and instability in the banking and securities markets around the world, among other factors. We cannot predict how long the current market conditions will last. However, these recent and developing economic and governmental factors, together with the concurrent decline in charter rates and vessel values, may have a material adverse effect on our results of operations and may cause the price of our common stock to decline.

Changes in fuel, or bunkers, prices may adversely affect profits.

Fuel, or bunkers, is typically the largest expense in our shipping operations for our vessels and changes in the price of fuel may adversely affect our profitability. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the Organization of the Petroleum Exporting Countries, or OPEC, and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns. Further, fuel may become much more expensive in the future, which may reduce the profitability.

We are subject to complex laws and regulations, including environmental laws and regulations that can adversely affect our business, results of operations, cash flows and financial condition, and our available cash.

Our operations are subject to numerous laws and regulations in the form of international conventions and treaties, national, state and local laws and national and international regulations in force in the jurisdictions in which our vessels operate or are registered, which can significantly affect the ownership and operation of our vessels. These requirements include, but are not limited to, the U.S. Oil Pollution Act of 1990, or OPA, the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, the U.S. Clean Air Act, U.S. Clean Water Act and the U.S. Marine Transportation Security Act of 2002, European Union Regulation, and regulations of the International Maritime Organization, or the IMO, including the International Convention for the Prevention of Pollution from Ships of 1975, the International Convention for the Prevention of Marine Pollution of 1973, the IMO International Convention for the Safety of Life at Sea of 1974, the International Convention on Load Lines of 1966, and the International Ship and Port Facility Security Code. Compliance with such laws and regulations, where applicable, may require installation of costly equipment or operational changes and may affect the resale value or useful lives of our vessels. We may also incur additional costs in order to comply with other existing and future regulatory obligations, including, but not limited to, costs relating to air emissions including greenhouse gases, the management of ballast waters, maintenance and inspection, development and implementation of emergency procedures and insurance coverage or other financial assurance of our ability to address pollution incidents. The 2010 Deepwater Horizon oil spill in the Gulf of Mexico may also result in additional regulatory initiatives or statutes or changes to existing laws that may affect our operations or require us to incur additional expenses to comply with such regulatory initiatives, statutes or laws.

These costs could have a material adverse effect on our business, results of operations, cash flows and financial condition and our available cash. A failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations. Environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. Under OPA, for example, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil within the 200-nautical mile exclusive economic zone around the United States (unless the spill results solely from the act or omission of a third party, an act of God or an act of war). An oil spill could result in significant liability, including fines, penalties, criminal liability and remediation costs for natural resource damages under other international and U.S. federal, state and local laws, as well as third-party damages, including punitive damages, and could harm our reputation with current or potential charterers of our tankers. We are required to satisfy insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other pollution incidents. Although we have arranged insurance to cover certain environmental risks, there can be no assurance that such insurance will be sufficient to cover all such risks or that any claims will not have a material adverse effect on our business, results of operations, cash flows and financial condition and available cash.

If we fail to comply with international safety regulations, we may be subject to increased liability, which may adversely affect our insurance coverage and may result in a denial of access to, or detention in, certain ports.

The operation of our vessels is affected by the requirements set forth in the IMO’s International Management Code for the Safe Operation of Ships and Pollution Prevention, or the ISM Code, promulgated by the IMO under the International Convention for the Safety of Life at Sea of 1974, or SOLAS. The ISM Code requires the party with operational control of a vessel to develop and maintain an extensive “Safety Management System” that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. If we fail to comply with the ISM Code, we may be subject to increased liability, may invalidate existing insurance or decrease available insurance coverage for our affected vessels and such failure may result in a denial of access to, or detention in, certain ports.

Adverse market conditions could cause us to breach covenants in our credit facilities and adversely affect our operating results.

The market values of tankers have generally experienced high volatility. The market prices for tankers declined significantly from historically high levels reached in early 2008 and remain at relatively low levels. You should expect the market value of our vessels to fluctuate depending on general economic and market conditions affecting the shipping industry and prevailing charterhire rates, competition from other tanker companies and other modes of transportation, types, sizes and ages of vessels, applicable governmental regulations and the cost of newbuildings. We believe that the current aggregate market value of our vessels will be in excess of loan to value amounts required under our credit facilities. Our 2010 Revolving Credit Facility (defined later) and 2011 Credit Facility (defined later) each require that the fair market value of the vessels pledged as collateral never be less than 150% of the aggregate principal amount outstanding. Our Newbuilding Credit Facility (defined later) requires 140% (120% if the vessel is subject to acceptable long term employment) of the aggregate principal amount outstanding plus a pro rata amount of any allocable swap exposure. Our STI Spirit Credit Facility (defined later) requires that the charter-free market value of the STI Spirit be no less than 140% of the then outstanding loan balance and we made prepayments of $0.8 million in June 2012, and $1.3 million in December 2012 in order to stay in compliance with this covenant which will be applied to our next four quarterly payments.

In addition, each of our 2010 Revolving Credit Facility, 2011 Credit Facility and STI Spirit Credit Facility required us to maintain a ratio of EBITDA to interest expense of no less than 1.25 to 1.00 commencing with the fourth fiscal quarter of 2011 through the fourth quarter of 2012, at which time it increased to 1.50 to 1.00 for the first quarter of 2013, 1.75 to 1.00 for the second quarter of 2013, and 2.00 to 1.00 at all times thereafter. Our Newbuilding Credit Facility required us to maintain a ratio of EBITDA to interest expense of not less than 2.00 to 1.00 through the fourth quarter of 2012 and 2.50 to 1.00 at all times thereafter. Such ratio in all our credit facilities shall be calculated quarterly on a trailing four quarter basis. We expect to be subject to similar financial covenants under our 2013 Credit Facility.

A decrease in vessel values or a failure to meet these ratios could cause us to breach certain covenants in our existing credit facilities and future financing agreements that we may enter into from time to time. If we breach such covenants and are unable to remedy the relevant breach or obtain a waiver, our lenders could accelerate our debt and foreclose on our owned vessels. Additionally, if we sell one or more of our vessels at a time when vessel prices have fallen, the sale price may be less than the vessel’s carrying value on our consolidated financial statements, resulting in a loss on sale or an impairment loss being recognized, ultimately leading to a reduction in earnings. For the year ended December 31, 2011, we evaluated the recoverable amount of our vessels, and we recognized a total impairment loss of $66.6 million for all of our owned vessels. For the year ended December 31, 2012, we did not recognize an impairment loss, however we did record a $4.5 million total loss from disposal on the sales of the STI Conqueror, STI Gladiator and STI Matador and a $5.9 million total loss from disposal on the sales of the STI Diamond and STI Coral. See “—Risks related to our indebtedness” and Item 5.B. “Liquidity and Capital Resources - Long-Term Debt Obligations and Credit Arrangements” for a more comprehensive discussion of our current credit facilities and the related risks.

If our vessels suffer damage due to the inherent operational risks of the tanker industry, we may experience unexpected drydocking costs and delays or total loss of our vessels, which may adversely affect our business and financial condition.

The operation of an ocean-going vessel carries inherent risks. Our vessels and their cargoes will be at risk of being damaged or lost because of events such as marine disasters, bad weather, and other acts of God, business interruptions caused by mechanical failures, grounding, fire, explosions and collisions, human error, war, terrorism, piracy and other circumstances or events. Changing economic, regulatory and political conditions in some countries, including political and military conflicts, have from time to time resulted in attacks on vessels, mining of waterways, piracy, terrorism, labor strikes and boycotts. These hazards may result in death or injury to persons, loss of revenues or property, the payment of ransoms, environmental damage, higher insurance rates, damage to our customer relationships, and market disruptions, delay or rerouting, which may also subject us to litigation. In addition, the operation of tankers has unique operational risks associated with the transportation of oil. An oil spill may cause significant environmental damage, and the associated costs could exceed the insurance coverage available to us. Compared to other types of vessels, tankers are exposed to a higher risk of damage and loss by fire, whether ignited by a terrorist attack, collision, or other cause, due to the high flammability and high volume of the oil transported in tankers.

If our vessels suffer damage, they may need to be repaired at a drydocking facility. The costs of drydock repairs are unpredictable and may be substantial. We may have to pay drydocking costs that our insurance does not cover in full. The loss of revenues while these vessels are being repaired and repositioned, as well as the actual cost of these repairs, may adversely affect our business and financial condition. In addition, space at drydocking facilities is sometimes limited and not all drydocking facilities are conveniently located. We may be unable to find space at a suitable drydocking facility or our vessels may be forced to travel to a drydocking facility that is not conveniently located to our vessels’ positions. The loss of earnings while these vessels are forced to wait for space or to travel to more distant drydocking facilities may adversely affect our business and financial condition. Further, the total loss of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator. If we are unable to adequately maintain or safeguard our vessels, we may be unable to prevent any such damage, costs, or loss which could negatively impact our business, financial condition, results of operations and available cash.

We operate our vessels worldwide and as a result, our vessels are exposed to international risks which may reduce revenue or increase expenses.

The international shipping industry is an inherently risky business involving global operations. Our vessels and their cargoes will be at risk of being damaged or lost because of events such as marine disasters, bad weather, and other acts of God, business interruptions caused by mechanical failures, grounding, fire, explosions and collisions, human error, war, terrorism, piracy and other circumstances or events. In addition, changing economic, regulatory and political conditions in some countries, including political and military conflicts, have from time to time resulted in attacks on vessels, mining of waterways, piracy, terrorism, labor strikes and boycotts. These sorts of events could interfere with shipping routes and result in market disruptions which may reduce our revenue or increase our expenses.

International shipping is subject to various security and customs inspection and related procedures in countries of origin and destination and trans-shipment points. Inspection procedures can result in the seizure of the cargo and/or our vessels, delays in the loading, offloading or delivery and the levying of customs duties, fines or other penalties against us. It is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Furthermore, changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo uneconomical or impractical. Any such changes or developments may have a material adverse effect on our business, results of operations, cash flows, financial condition and available cash.

Political instability, terrorist or other attacks, war or international hostilities can affect the tanker industry, which may adversely affect our business.

We conduct most of our operations outside of the United States, and our business, results of operations, cash flows, financial condition and available cash may be adversely affected by the effects of political instability, terrorist or other attacks, war or international hostilities. Continuing conflicts and recent developments in the Middle East, including Egypt, and North Africa, including Libya, and the presence of the United States and other armed forces in Iraq and Afghanistan may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further world economic instability and uncertainty in global financial markets. As a result of the above, insurers have increased premiums and reduced or restricted coverage for losses caused by terrorist acts generally. Future terrorist attacks could result in increased volatility of the financial markets and negatively impact the U.S. and global economy. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us or at all.

In the past, political instability has also resulted in attacks on vessels, such as the attack on the M/T Limburg, a very large crude carrier not related to us, in October 2002, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea and the Gulf of Aden off the coast of Somalia. Any of these occurrences could have a material adverse impact on our business, financial condition, results of operations and available cash.

If our vessels call on ports located in countries that are subject to sanctions and embargos imposed by the U.S. or other governments that could adversely affect our reputation and the market for our common stock.

Although no vessels owned or operated by us have called on ports located in countries subject to sanctions and embargoes imposed by the U.S. government and other authorities or countries identified by the U.S. government or other authorities as state sponsors of terrorism, such as Cuba, Iran, Sudan, and Syria, in the future, our vessels may call on ports in these countries from time to time on charterers’ instructions. Sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time. In 2010, the U.S. enacted the Comprehensive Iran Sanctions Accountability and Divestment Act, or “CISADA”, which expanded the scope of the Iran Sanctions Act. Among other things, CISADA expands the application of the prohibitions of companies, such as ours, and introduces limits on the ability of companies and persons to do business or trade with Iran when such activities relate to the investment, supply or export of refined petroleum or petroleum products.

In 2012, President Obama signed Executive Order 13608 which prohibits foreign persons from violating or attempting to violate, or causing a violation of any sanctions in effect against Iran or facilitating any deceptive transactions for or on behalf of any person subject to U.S. sanctions. Any persons found to be in violation of Executive Order 13608 will be deemed a foreign sanctions evader and will be banned from all contacts with the United States, including conducting business in US dollars. Also in 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012, or the Iran Threat Reduction Act, which created new sanctions and strengthened existing sanctions. Among other things, the Iran Threat Reduction Act intensifies existing sanctions regarding the provision of goods, services, infrastructure or technology to Iran’s petroleum or petrochemical sector. The Iran Threat Reduction Act also includes a provision requiring the President of the United States to impose five or more sanctions from Section 6(a) of the Iran Sanctions Act, as amended, on a person the President determines is a controlling beneficial owner of, or otherwise owns, operates, or controls or insures a vessel that was used to transport crude oil from Iran to another country and (1) if the person is a controlling beneficial owner of the vessel, the person had actual knowledge the vessel was so used or (2) if the person otherwise owns, operates, or controls, or insures the vessel, the person knew or should have known the vessel was so used. Such a person could be subject to a variety of sanctions, including exclusion from U.S. capital markets, exclusion from financial transactions subject to U.S. jurisdiction, and exclusion of that person’s vessels from U.S. ports for up to two years.

Although we believe that we have been in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that could severely impact our ability to access U.S. capital markets and conduct our business, and could result in some investors deciding, or being required, to divest their interest, or not to invest, in us. In addition, certain institutional investors may have investment policies or restrictions that prevent them from holding securities of companies that have contracts with countries identified by the U.S. government as state sponsors of terrorism. The determination by these investors not to invest in, or to divest from, our common stock may adversely affect the price at which our common stock trades. Additionally, some investors may decide to divest their interest, or not to invest, in our company simply because we do business with companies that do business in sanctioned countries. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. In addition, our reputation and the market for our securities may be adversely affected if we engage in certain other activities, such as entering into charters with individuals or entities in countries subject to U.S. sanctions and embargo laws that are not controlled by the governments of those countries, or engaging in operations associated with those countries pursuant to contracts with third parties that are unrelated to those countries or entities controlled by their governments. Investor perception of the value of our common stock may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.

The smuggling of drugs or other contraband onto our vessels may lead to governmental claims against us.

We expect that our vessels will call in ports where smugglers attempt to hide drugs and other contraband on vessels, with or without the knowledge of crew members. To the extent our vessels are found with contraband, whether inside or attached to the hull of our vessel and whether with or without the knowledge of any of our crew, we may face governmental or other regulatory claims which could have an adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.

Maritime claimants could arrest our vessels, which would have a negative effect on our cash flows.

Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting or attaching a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt our business or require us to pay large sums of money to have the arrest lifted, which would have a negative effect on our cash flows.

In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel which is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against one vessel in our fleet for claims relating to another of our ships.

Governments could requisition our vessels during a period of war or emergency, which may negatively impact our business, financial condition, results of operations and available cash.

A government could requisition one or more of our vessels for title or hire. Requisition for title occurs when a government takes control of a vessel and becomes the owner. Also, a government could requisition our vessels for hire. Requisition for hire occurs when a government takes control of a vessel and effectively becomes the charterer at dictated charter rates. Generally, requisitions occur during a period of war or emergency. Government requisition of one or more of our vessels may negatively impact our business, financial condition, results of operations and available cash.

Technological innovation could reduce our charterhire income and the value of our vessels.

The charterhire rates and the value and operational life of a vessel are determined by a number of factors including the vessel’s efficiency, operational flexibility and physical life. Efficiency includes speed, fuel economy and the ability to load and discharge cargo quickly. Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through canals and straits. The length of a vessel’s physical life is related to its original design and construction, its maintenance and the impact of the stress of operations. If new tankers are built that are more efficient or more flexible or have longer physical lives than our vessels, competition from these more technologically advanced vessels could adversely affect the amount of charterhire payments we receive for our vessels and the resale value of our vessels could significantly decrease. As a result, our available cash could be adversely affected.

If labor interruptions are not resolved in a timely manner, they could have a material adverse effect on our business, results of operations, cash flows, financial condition and available cash.

We, indirectly through SSM, employ masters, officers and crews to man our vessels. If not resolved in a timely and cost-effective manner, industrial action or other labor unrest could prevent or hinder our operations from being carried out as we expect and could have a material adverse effect on our business, results of operations, cash flows, financial condition and available cash.

RISKS RELATED TO OUR BUSINESS

Newbuilding projects are subject to risks that could cause delays, cost overruns or cancellation of our newbuilding contracts.

We have entered into contracts with Hyundai Mipo Dockyard Co. Ltd., or HMD, SPP Shipbuilding Co., Ltd., or SPP, Hyundai Samho Heavy Industries Co. Ltd., or HSHI and Daewoo Shipbuilding & Marine Engineering Co., Ltd., or DSME for the construction of 33 newbuilding vessels with expected delivery between April 2013 and December 2014. As of the date of this annual report, we have made total yard payments in the amount of $124.7 million and we have remaining yard installments in the amount of $1,101.5 million before we take possession of all of these vessels.

The delivery of such vessels or vessels that we may acquire in the future could be delayed, not completed or cancelled, which would delay or eliminate our expected receipt of revenues from the employment of such vessels. In addition, the yards or a seller could fail to deliver vessels to us as agreed, or we could cancel a purchase contract because such yard or seller has not met its obligations.

If the delivery of any vessel is materially delayed or cancelled, especially if we have committed the vessel to a charter for which we become responsible for substantial liquidated damages to the customer as a result of the delay or cancellation, our business, financial condition and results of operations could be adversely affected.

In addition, in the event HMD, SPP, HSHI and DSME do not perform under their contracts and we are unable to enforce certain refund guarantees with third party banks for any reason, we may lose all or part of our investment, which would have a material adverse effect on our results of operations, financial condition and cash flows.

Obligations associated with being a public company require significant company resources and management attention.

In April 2010, we became subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the other rules and regulations of the SEC, including the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley. Section 404 of Sarbanes-Oxley requires that we evaluate and determine the effectiveness of our internal controls over financial reporting. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We will need to dedicate a significant amount of time and resources to ensure compliance with these regulatory requirements.

We will continue to evaluate areas such as corporate governance, corporate control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We will make changes in any of these and other areas, including our internal control over financial reporting, which we believe are necessary. However, these and other measures we may take may not be sufficient to allow us to satisfy our obligations as a public company on a timely and reliable basis. In addition, compliance with reporting and other requirements applicable to public companies will create additional costs for us and will require the time and attention of management. Our limited management resources may exacerbate the difficulties in complying with these reporting and other requirements while focusing on executing our business strategy. Our incremental general and administrative expenses as a publicly traded corporation will include costs associated with annual reports to shareholders, tax returns, investor relations, registrar and transfer agent’s fees, incremental director and officer liability insurance costs and director compensation. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs or the degree of impact that our management’s attention to these matters will have on our business.

We may have difficulty managing our planned growth properly.

One of our principal strategies is to continue to grow by expanding our operations and adding to our fleet. Our future growth will primarily depend upon a number of factors, some of which may not be within our control. These factors include our ability to:


	•	identify suitable tankers and/or shipping companies for acquisitions at attractive prices;

	•	obtain required financing for our existing and new operations;

	•	identify businesses engaged in managing, operating or owning tankers for acquisitions or joint ventures;

	•	integrate any acquired tankers or businesses successfully with our existing operations, including obtaining any approvals and qualifications necessary to operate vessels that we acquire;

	•	hire, train and retain qualified personnel and crew to manage and operate our growing business and fleet;

	•	identify additional new markets;

	•	enhance our customer base; and

	•	improve our operating, financial and accounting systems and controls.

Our failure to effectively identify, purchase, develop and integrate any tankers or businesses could adversely affect our business, financial condition and results of operations. The number of employees that perform services for us and our current operating and financial systems may not be adequate as we implement our plan to expand the size of our fleet, and we may not be able to effectively hire more employees or adequately improve those systems. Finally, acquisitions may require additional equity issuances or debt issuances (with amortization payments), both of which could lower our available cash. If any such events occur, our financial condition may be adversely affected.

Growing any business by acquisition presents numerous risks such as undisclosed liabilities and obligations, difficulty in obtaining additional qualified personnel and managing relationships with customers and suppliers and integrating newly acquired operations into existing infrastructures. The expansion of our fleet may impose significant additional responsibilities on our management and staff, and the management and staff of our commercial and technical managers, and may necessitate that we, and they, increase the number of personnel. We cannot give any assurance that we will be successful in executing our growth plans or that we will not incur significant expenses and losses in connection with our future growth.

If we purchase and operate secondhand vessels, we will be exposed to increased operating costs which could adversely affect our earnings and, as our fleet ages, the risks associated with older vessels could adversely affect our ability to obtain profitable charters.

Our current business strategy includes additional growth through the acquisition of new and secondhand vessels. While we typically inspect secondhand vessels prior to purchase, this does not provide us with the same knowledge about their condition that we would have had if these vessels had been built for and operated exclusively by us. Generally, we do not receive the benefit of warranties from the builders for the secondhand vessels that we acquire.

In general, the costs to maintain a vessel in good operating condition increase with the age of the vessel. Older vessels are typically less fuel-efficient than more recently constructed vessels due to improvements in engine technology. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.

Governmental regulations, safety or other equipment standards related to the age of vessels may require expenditures for alterations, or the addition of new equipment, to our vessels and may restrict the type of activities in which the vessels may engage. As our vessels age, market conditions may not justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.

An increase in operating costs would decrease earnings and available cash.

Under time charter-out agreements, the charterer is responsible for voyage costs and the owner is responsible for the vessel operating costs. The same applies to time-charter-in agreements. With the exception of certain vessels on short-term time charter-out agreements, we currently have no vessels on long-term time charter-out agreements (greater than one year) and 21 vessels on time-charter-in agreements. When our owned vessels are employed under one of the Scorpio Group Pools, the pool is responsible for voyage expenses and we are responsible for vessel costs. As of the date of this annual report, we have 12 of our owned vessels and 15 of our time-chartered-in vessels employed through the Scorpio Group Pools. When our vessels operate in the spot market, we are responsible for both voyage expenses and vessel operating costs. As of the date of this annual report, four of the vessels in our Operating Fleet (defined later) operate in the spot market. Our vessel operating costs include the costs of crew, fuel (for spot chartered vessels), provisions, deck and engine stores, insurance and maintenance and repairs, which depend on a variety of factors, many of which are beyond our control. Further, if our vessels suffer damage, they may need to be repaired at a drydocking facility. The costs of drydocking repairs are unpredictable and can be substantial. Increases in any of these expenses would decrease earnings and available cash.

Declines in charter rates and other market deterioration could cause us to incur impairment charges.

We evaluate the carrying amounts of our vessels to determine if events have occurred that would require an impairment of their carrying amounts. The recoverable amount of vessels is reviewed based on events and changes in circumstances that would indicate that the carrying amount of the assets might not be recovered. The review for potential impairment indicators and projection of future cash flows related to the vessels is complex and requires us to make various estimates including future freight rates, earnings from the vessels and discount rates. All of these items have been historically volatile.

We evaluate the recoverable amount as the higher of fair value less costs to sell and value in use. If the recoverable amount is less than the carrying amount of the vessel, the vessel is deemed impaired. The carrying values of our vessels may not represent their fair market value at any point in time because the new market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. For the year ended December 31, 2011, charter rates in the oil and petroleum products charter market declined along with second hand vessel values. Due to these indicators of potential impairment, in the year ended December 31, 2011, we evaluated the recoverable amount of our vessels, and we recognized a total impairment loss of $66.6 million for all of our owned vessels. For the year ended December 31, 2012, we did not recognize an impairment loss, however, we cannot assure you that there will be not be further impairments in future years. Any additional impairment charges incurred as a result of further declines in charter rates could negatively affect our business, financial condition, operating results or the trading price of our common shares.

If we are unable to operate our vessels profitably, we may be unsuccessful in competing in the highly competitive international tanker market, which would negatively affect our financial condition and our ability to expand our business.

The operation of tanker vessels and transportation of crude and petroleum products is extremely competitive, in an industry that is capital intensive and highly fragmented. The recent global financial crisis may reduce the demand for transportation of oil and oil products which could lead to increased competition. Competition arises primarily from other tanker owners, including major oil companies as well as independent tanker companies, some of whom have substantially greater resources than we do. Competition for the transportation of oil and oil products can be intense and depends on price, location, size, age, condition and the acceptability of the tanker and its operators to the charterers. We will have to compete with other tanker owners, including major oil companies as well as independent tanker companies.

Our market share may decrease in the future. We may not be able to compete profitably as we expand our business into new geographic regions or provide new services. New markets may require different skills, knowledge or strategies than we use in our current markets, and the competitors in those new markets may have greater financial strength and capital resources than we do.

If we do not set aside funds and are unable to borrow or raise funds for vessel replacement, at the end of a vessel’s useful life our revenue will decline, which would adversely affect our business, results of operations, financial condition, and available cash.

If we do not set aside funds and are unable to borrow or raise funds for vessel replacement, we will be unable to replace the vessels in our fleet upon the expiration of their remaining useful lives, which we expect to occur between 2026 to 2038, depending on the vessel. Our cash flows and income are dependent on the revenues earned by the chartering of our vessels. If we are unable to replace the vessels in our fleet upon the expiration of their useful lives, our business, results of operations, financial condition, and available cash per share would be adversely affected. Any funds set aside for vessel replacement will reduce available cash.

Our ability to obtain additional financing may be dependent on the performance of our then existing charters and the creditworthiness of our charterers.

The actual or perceived credit quality of our charterers, and any defaults by them, may materially affect our ability to obtain the additional capital resources that we will require to purchase additional vessels or may significantly increase our costs of obtaining such capital. Our inability to obtain additional financing at all or at a higher than anticipated cost may materially affect our results of operation and our ability to implement our business strategy.

United States tax authorities could treat us as a “passive foreign investment company,” which could have adverse United States federal income tax consequences to United States shareholders.

A foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for United States federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income” or (2) at least 50% of the average value of the corporation’s assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” United States shareholders of a PFIC are subject to a disadvantageous United States federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.

Based on our current and proposed method of operation, we do not believe that we will be a PFIC with respect to any taxable year. In this regard, we intend to treat the gross income we derive or are deemed to derive from our time chartering activities as services income, rather than rental income. Accordingly, our income from our time and voyage chartering activities should not constitute “passive income,” and the assets that we own and operate in connection with the production of that income should not constitute assets that produce or are held for the production of “passive income.”

There is substantial legal authority supporting this position, consisting of case law and United States Internal Revenue Service, or IRS, pronouncements concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes. However, it should be noted that there is also authority that characterizes time charter income as rental income rather than services income for other tax purposes. Accordingly, no assurance can be given that the IRS or a court of law will accept this position, and there is a risk that the IRS or a court of law could determine that we are a PFIC. Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if the nature and extent of our operations change.

If the IRS were to find that we are or have been a PFIC for any taxable year, our United States shareholders would face adverse United States federal income tax consequences and incur certain information reporting obligations. Under the PFIC rules, unless those shareholders make an election available under the United States Internal Revenue Code of 1986, as amended, or the Code (which election could itself have adverse consequences for such shareholders), such shareholders would be subject to United States federal income tax at the then prevailing rates on ordinary income plus interest, in respect of excess distributions and upon any gain from the disposition of their common shares, as if the excess distribution or gain had been recognized ratably over the shareholder’s holding period of the common shares. See “Taxation—Passive Foreign Investment Company Status and Significant Tax Consequences” for a more comprehensive discussion of the United States federal income tax consequences to United States shareholders if we are treated as a PFIC.

We may have to pay tax on United States source shipping income, which would reduce our earnings.

Under the Code, 50% of the gross shipping income of a corporation that owns or charters vessels, as we and our subsidiaries do, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States may be subject to a 4% United States federal income tax without allowance for deductions, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the regulations promulgated thereunder by the United States Department of the Treasury.

We and our subsidiaries intend to take the position that we qualify for this statutory tax exemption for United States federal income tax return reporting purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption and thereby become subject to United States federal income tax on our United States source shipping income. For example, we may no longer qualify for exemption under Section 883 of the Code for a particular taxable year if shareholders with a five percent or greater interest in our common shares, or “5% Shareholders,” owned, in the aggregate, 50% or more of our outstanding common shares for more than half the days during the taxable year, and there does not exist sufficient 5% Shareholders that are qualified shareholders for purposes of Section 883 of the Code to preclude nonqualified 5% Shareholders from owning 50% or more of our common shares for more than half the number of days during such taxable year or we are unable to satisfy certain substantiation requirements with regard to our 5% Shareholders. Due to the factual nature of the issues involved, there can be no assurances on the tax-exempt status of us or any of our subsidiaries.

If we or our subsidiaries were not entitled to exemption under Section 883 of the Code for any taxable year, we or our subsidiaries could be subject for such year to an effective 2% United States federal income tax on the shipping income we or they derive during such year which is attributable to the transport of cargoes to or from the United States. The imposition of this taxation would have a negative effect on our business and would decrease our earnings available for distribution to our shareholders.

We will be required to make additional capital expenditures to expand the number of vessels in our fleet and to maintain all our vessels, which will be dependent on additional financing.

Our business strategy is based in part upon the expansion of our fleet through the purchase of additional vessels. If we are unable to fulfill our obligations under any memorandum of agreement for future vessel acquisitions, the sellers of such vessels may be permitted to terminate such contracts and we may forfeit all or a portion of the down payments we already made under such contracts, and we may be sued for any outstanding balance.

In addition, we will incur significant maintenance costs for our existing and any newly-acquired vessels. A newbuilding vessel must be drydocked within five years of its delivery from a shipyard, and vessels are typically drydocked every 30 months thereafter, not including any unexpected repairs. We estimate the cost to drydock a vessel to be between $500,000 and $1,000,000, depending on the size and condition of the vessel and the location of drydocking.

We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law and, as a result, shareholders may have fewer rights and protections under Marshall Islands law than under a typical jurisdiction in the United States.

Our corporate affairs are governed by our articles of incorporation and bylaws and by the Marshall Islands Business Corporations Act, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of The Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Republic of The Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain United States jurisdictions. Shareholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, our public shareholders may have more difficulty in protecting their interests in the face of actions by management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction.

It may be difficult to serve process on or enforce a United States judgment against us, our officers and our directors because we are a foreign corporation.

We are a corporation formed in the Republic of The Marshall Islands, and some of our directors and officers and certain of the experts named in this offering are located outside the United States. In addition, a substantial portion of our assets and the assets of our directors, officers and experts are located outside of the United States. As a result, you may have difficulty serving legal process within the United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or any of these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws. Furthermore, there is substantial doubt that the courts of the Republic of The Marshall Islands or of the non-U.S. jurisdictions in which our offices are located would enter judgments in original actions brought in those courts predicated on U.S. federal or state securities laws.

RISKS RELATED TO OUR RELATIONSHIP WITH SCORPIO GROUP AND ITS AFFILIATES

We are dependent on our managers and their ability to hire and retain key personnel, and there may be conflicts of interest between us and our managers that may not be resolved in our favor.

Our success depends to a significant extent upon the abilities and efforts of our technical manager, SSM, our commercial manager, SCM, and our management team. Our success will depend upon our and our managers’ ability to hire and retain key members of our management team. The loss of any of these individuals could adversely affect our business prospects and financial condition.

Difficulty in hiring and retaining personnel could adversely affect our results of operations. We do not maintain “key man” life insurance on any of our officers.

Our technical and commercial managers are affiliates of Scorpio Group, which is owned and controlled by the Lolli-Ghetti family, of which our founder, Chairman and Chief Executive Officer, Mr. Emanuele Lauro, is a member. Conflicts of interest may arise between us, on the one hand, and our commercial and technical managers, on the other hand. As a result of these conflicts, our commercial and technical managers, who have limited contractual duties, may favor their own or their owner’s interests over our interests. These conflicts may have unfavorable results for us.

Our founder, Chairman and Chief Executive Officer has affiliations with our commercial and technical managers which may create conflicts of interest.

Emanuele Lauro, our founder, Chairman and Chief Executive Officer, is a member of the Lolli-Ghetti family which owns and controls our commercial and technical managers. These responsibilities and relationships could create conflicts of interest between us, on the one hand, and our commercial and technical managers, on the other hand. These conflicts may arise in connection with the chartering, purchase, sale and operations of the vessels in our fleet versus vessels managed by other companies affiliated with our commercial or technical managers. Our commercial and technical managers may give preferential treatment to vessels that are time chartered-in by related parties because our founder, Chairman and Chief Executive Officer and members of his family may receive greater economic benefits. In particular, as of the date of this annual report, our commercial and technical managers provide commercial and technical management services to approximately 59 and 8 vessels respectively, other than the vessels in our fleet, that are owned or operated by entities affiliated with Mr. Lauro, and such entities may acquire additional vessels that will compete with our vessels in the future. Such conflicts may have an adverse effect on our results of operations.

Our Chief Executive Officer and President do not devote all of their time to our business, which may hinder our ability to operate successfully.

Messrs. Lauro and Bugbee, our Chief Executive Officer and President, respectively, participate in business activities not associated with us. As a result, Messrs. Lauro and Bugbee may devote less time to us than if they were not engaged in other business activities and may owe fiduciary duties to the shareholders of both us as well as shareholders of other companies which they may be affiliated, including other Scorpio Group companies. This may create conflicts of interest in matters involving or affecting us and our customers and it is not certain that any of these conflicts of interest will be resolved in our favor. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our commercial and technical managers are each privately held companies and there is little or no publicly available information about them.

SCM is our commercial manager and SSM is our technical manager. SCM’s and SSM’s ability to render management services will depend in part on their own financial strength. Circumstances beyond our control could impair our commercial manager’s or technical manager’s financial strength, and because each is a privately held company, information about the financial strength of our commercial manager and technical manager is not available. As a result, we and our shareholders might have little advance warning of financial or other problems affecting our commercial manager or technical manager even though their financial or other problems could have a material adverse effect on us.

We are subject to certain risks with respect to our counterparties on contracts, and failure of such counterparties to meet their obligations could cause us to suffer losses or negatively impact our results of operations and cash flows.

We have entered into, and may enter in the future, various contracts, including, charter agreements and credit facilities. Such agreements subject us to counterparty risks. The ability of each of our counterparties to perform its obligations under a contract with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the maritime and offshore industries, the overall financial condition of the counterparty, charter rates received for specific types of vessels, and various expenses. For example, the combination of a reduction of cash flow resulting from declines in world trade, a reduction in borrowing bases under reserve-based credit facilities and the lack of availability of debt or equity financing may result in a significant reduction in the ability of our charterers to make charter payments to us. In addition, in depressed market conditions, our charterers and customers may no longer need a vessel that is currently under charter or contract or may be able to obtain a comparable vessel at lower rates. As a result, charterers and customers may seek to renegotiate the terms of their existing charter agreements or avoid their obligations under those contracts. Should a counterparty fail to honor its obligations under agreements with us, we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The failure of our charterers to meet their obligations under our charter agreements, on which we depend for our revenues, could cause us to suffer losses or otherwise adversely affect our business.

As of the date of this annual report, we do not employ any vessels under a long-term time charter agreement but we may enter into such agreements in the future. The ability and willingness of each of our counterparties to perform their obligations under a time charter, spot voyage or other agreement with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the tanker shipping industry and the overall financial condition of the counterparties. Charterers are sensitive to the commodity markets and may be impacted by market forces affecting commodities such oil. In addition, in depressed market conditions, there have been reports of charterers renegotiating their charters or defaulting on their obligations under charters. Our customers may fail to pay charterhire or attempt to renegotiate charter rates. Should a counterparty fail to honor its obligations under agreements with us, it may be difficult to secure substitute employment for such vessel, and any new charter arrangements we secure in the spot market or on time charters may be at lower rates given currently decreased tanker charter rate levels. When we employ a vessel in the spot charter market, we generally place such vessel in a tanker pool managed by our commercial manager that pertains to that vessel’s size class. If our charterers fail to meet their obligations to us or attempt to renegotiate our charter agreements, we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows, as well as our ability to pay dividends, if any, in the future, and compliance with covenants in our credit facilities.

Our insurance may not be adequate to cover our losses that may result from our operations due to the inherent operational risks of the tanker industry.

We carry insurance to protect us against most of the accident-related risks involved in the conduct of our business, including marine hull and machinery insurance, protection and indemnity insurance, which include pollution risks, crew insurance and war risk insurance. However, we may not be adequately insured to cover losses from our operational risks, which could have a material adverse effect on us. Additionally, our insurers may refuse to pay particular claims and our insurance may be voidable by the insurers if we take, or fail to take, certain action, such as failing to maintain certification of our vessels with applicable maritime regulatory organizations. Any significant uninsured or under-insured loss or liability could have a material adverse effect on our business, results of operations, cash flows and financial condition and our available cash. In addition, we may not be able to obtain adequate insurance coverage at reasonable rates in the future during adverse insurance market conditions.

Changes in the insurance markets attributable to terrorist attacks may also make certain types of insurance more difficult for us to obtain due to increased premiums or reduced or restricted coverage for losses caused by terrorist acts generally.

Because we obtain some of our insurance through protection and indemnity associations, which result in significant expenses to us, we may be required to make additional premium payments.

We may be subject to increased premium payments, or calls, in amounts based on our claim records, the claim records of our managers, as well as the claim records of other members of the protection and indemnity associations through which we receive insurance coverage for tort liability, including pollution-related liability. In addition, our protection and indemnity associations may not have enough resources to cover claims made against them. Our payment of these calls could result in significant expense to us, which could have a material adverse effect on our business, results of operations, cash flows, financial condition and available cash.

RISKS RELATED TO OUR INDEBTEDNESS

Servicing our current or future indebtedness limits funds available for other purposes and if we cannot service our debt, we may lose our vessels.

Borrowing under our credit facilities requires us to dedicate a part of our cash flow from operations to paying interest on our indebtedness. These payments limit funds available for working capital, capital expenditures and other purposes, including further equity or debt financing in the future. Amounts borrowed under our credit facilities bear interest at variable rates. Increases in prevailing rates could increase the amounts that we would have to pay to our lenders, even though the outstanding principal amount remains the same, and our net income and cash flows would decrease. We expect our earnings and cash flow to vary from year to year due to the cyclical nature of the tanker industry. If we do not generate or reserve enough cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as:


	•	seeking to raise additional capital;

	•	refinancing or restructuring our debt;

	•	selling tankers; or

	•	reducing or delaying capital investments.

However, these alternative financing plans, if necessary, may not be sufficient to allow us to meet our debt obligations. If we are unable to meet our debt obligations or if some other default occurs under our credit facilities, our lenders could elect to declare that debt, together with accrued interest and fees, to be immediately due and payable and proceed against the collateral vessels securing that debt even though the majority of the proceeds used to purchase the collateral vessels did not come from our credit facilities.

Our credit facilities contain restrictive covenants which limit the amount of cash that we may use for other corporate activities, which could negatively affect our growth and cause our financial performance to suffer.

Our credit facilities impose operating and financial restrictions on us. These restrictions limit our ability, or the ability of our subsidiaries party thereto to:


	•	pay dividends and make capital expenditures if we do not repay amounts drawn under our credit facilities or if there is another default under our credit facilities;

	•	incur additional indebtedness, including the issuance of guarantees;

	•	create liens on our assets;

	•	change the flag, class or management of our vessels or terminate or materially amend the management agreement relating to each vessel;

	•	sell our vessels;

	•	merge or consolidate with, or transfer all or substantially all our assets to, another person; or

	•	enter into a new line of business.

Therefore, we will need to seek permission from our lenders in order to engage in some corporate actions. Our lenders’ interests may be different from ours and we may not be able to obtain our lenders’ permission when needed. This may limit our ability to pay dividends to you if we determine to do so in the future, finance our future operations or capital requirements, make acquisitions or pursue business opportunities.

If the recent volatility in LIBOR rates continues, it will affect the interest rate under our existing credit facilities or future credit facilities which could affect our profitability, earnings and cash flow.

Amounts borrowed under our credit facilities are tied to LIBOR rates. LIBOR rates have recently been volatile, with the spread between those rates and prime lending rates widening significantly at times. These conditions are the result of the recent disruptions in the international credit markets. Because the interest rates borne by amounts that we may drawdown under our existing credit facilities or future credit facilities fluctuate with changes in the LIBOR rates, if this volatility were to continue, it would affect the amount of interest payable on amounts that we were to draw down from our existing credit facilities or future credit facilities, which in turn, would have an adverse effect on our profitability, earnings and cash flow.


ITEM 4.		INFORMATION ON THE COMPANY

A.	History and Development of the Company

Scorpio Tankers Inc. was incorporated in the Republic of the Marshall Islands pursuant to the Marshall Islands Business Corporations Act on July 1, 2009. Our principal executive offices are located at 9, Boulevard Charles III, Monaco 98000 and our telephone number at that location is +377-9798-5716.We provide seaborne transportation of refined petroleum products and crude oil worldwide. We began our operations in October 2009 with three vessel owning and operating subsidiary companies. In April 2010, we completed our initial public offering of 12,500,000 shares of common stock at a public offering price of $13.00 per share and commenced trading on the New York Stock Exchange, or NYSE, under the symbol “STNG”. We have since expanded our fleet and as of the date of this annual report, our fleet consists of 14 wholly owned tankers (one LR2 tanker, four LR1 tankers, one Handymax tanker, seven MR tankers, and one post-Panamax tanker) with a weighted average age of approximately 4.4 years compared to a weighted average age of approximately 9.1 years for the global fleet (according to Drewry) and time charter-in and operate 21 tankers (six Handymax tankers, seven MR tankers, three LR1 tankers and five LR2 tankers, including four vessels we expect to be delivered to us by April 2013), which we refer to collectively as our Operating Fleet. Additionally, we currently have contracts for the construction of 33 newbuilding vessels (19 MR tankers, six Handymax ice class 1-A tankers and eight LR2 tankers), of which, one is expected to be delivered to us in April 2013 and the remaining 32 within 2014.

Fleet development

Newbuilding vessels

Since June 2011, we have entered into contracts for the construction of 40 fuel efficient newbuilding product tankers with shipyards, including HMD, HSHI, SPP and DSME, which we refer to as our Newbuilding Program. As of the date of this annual report, seven of the vessels in our Newbuilding Program have been delivered to us. We currently have contracts for the construction of 33 vessels, consisting of 11 MR tankers with HMD for an aggregate purchase price of $368.6 million, eight MR product tankers with SPP for an aggregate purchase price of $267.0 million, six Handymax ice class-1A tankers with HMD for an aggregate purchase price of $187.5 million, six LR2 product tankers with HSHI for an aggregate purchase price of $303.0 million and two LR2 product tankers with DSME for an aggregate purchase price of $100.0 million. One vessel in our Newbuilding Program is expected to be delivered to us by April 2013 and the remaining 32 within 2014. We also have fixed-price options to construct additional newbuilding product tankers at these yards.

As of March 28, 2013, we have paid $124.7 million of installment payments related to these newbuilding product tankers, and are committed to make additional installment payments of $1,101.5 million. We will need to secure additional debt or equity financing or both in addition to our 2013 Credit Facility to fully fund the remaining balance of our obligations under our newbuilding program.

Owned vessels

We currently have 14 wholly-owned vessels and contracts for the construction of 33 additional vessels.

We sold three Handymax vessels in 2012, STI Conqueror for $21.0 million in March 2012, STI Matador for $16.2 million in April 2012, and STI Gladiator for $16.2 million in May 2012 and recorded a $4.5 million loss from disposal in connection with the sales of these vessels. We also completed the sales of two MR product tankers, STI Diamond and STI Coral in August 2012 and September 2012, respectively, for $25.25 million each and recorded a $5.9 million loss from disposal in connection with the sales of these vessels.

In 2012, we took delivery of the first five vessels in our Newbuilding Program, STI Amber, STI Topaz STI Ruby, STI Garnet and STI Onyx, and in January 2013 and March 2013, we took delivery of the sixth and seventh vessels in our Newbuilding Program, STI Sapphire and STI Emerald, respectively.

Time chartered-in vessels

During 2012, we time chartered-in 21 vessels (six Handymax tankers, eight MR tankers, three LR1 tankers and four LR2 tankers), compared to 11 vessels in 2011. We currently have 21 vessels on time charter-in agreements as of the date of this annual report (six Handymax tankers, seven MR tankers, three LR1 tankers and five LR2 tankers, including four vessels we expect to be delivered to us by April 2013).

Please see our fleet list under Item 4.B. “Business Overview” for further information regarding our time chartered-in vessels.

Recent Developments

In January 2013, we reached an agreement with HMD for the construction of two additional MR product tankers for approximately $32.5 million each. These vessels will be delivered in May and June 2014.

In January 2013, we took delivery of the sixth vessel under our newbuilding program, STI Sapphire. Upon delivery, the vessel began a time charter for up to 80 days at $20,750 per day. The vessel was partially financed under our 2011 Credit Facility.

In February 2013, we closed on the sale 30,672,000 shares of common stock in a registered direct placement of common shares at an offering price of $7.50 per share. We received net proceeds of $222.1 million, after deducting placement agents’ discounts and offering expenses.

In February 2013, we reached an agreement with SPP for the construction of four MR product tankers for approximately $32.5 million each, two of which are the exercise of options from a previous contract. The vessels are expected to be delivered in the third and fourth quarters of 2014, respectively.

In February 2013, we exercised options with HMD for the construction of four MR product tankers for $33.0 million each and six Handymax ice class-1A tankers for approximately $31.3 million each. Two of the MR product tankers are expected to be delivered in the second quarter of 2014, with the third and fourth MR product tankers expected to be delivered in the third and fourth quarter of 2014, respectively. The six Handymax vessels are expected to be delivered in the third quarter of 2014.

In February 2013, we signed a commitment letter for a $267.0 million credit facility, or the 2013 Credit Facility, with Nordea Bank Finland plc, acting through its New York branch, ABN AMRO Bank N.V, and Skandinaviska Enskilda Banken AB.

In March 2013, we closed on the sale of 29,012,000 shares of common stock in a registered direct placement of common shares at an offering price of $8.10 per share. We received net proceeds of $226.7 million, after deducting placement agents’ discounts and offering expenses.

In March 2013, we reached an agreement with HSHI for the construction of six 114,000 dwt LR2 product tankers for approximately $50.5 million each. These vessels are expected to be delivered to us within 2014.

In March 2013, we reached an agreement with DSME for the construction of two 114,000 dwt LR2 product tankers for approximately $50.0 million each. These vessels are expected to be delivered to us within 2014.

In March 2013, we took delivery of the seventh vessel under our newbuilding program, STI Emerald. Upon delivery, the vessel began a time charter for up to 80 days at $19,500 per day. The vessel was partially financed under our 2011 Credit Facility.

In March 2013, we agreed to time charter-in two LR2 product tankers (one 115,756 dwt, 2011 built, and one 115,592 dwt, 2010 built) each for one year at $16,125 per day with expected deliveries by the middle of April 2013. We also agreed to time charter-in a Handymax product tanker, ice-class 1B, (37,217 dwt, 2004 built) for one year at approximately $12,700 per day. We have an option to extend the charter for an additional year at $14,000 per day. This vessel is expected to be delivered by the middle of April 2013.


B.	Business Overview

We provide seaborne transportation of refined petroleum products and crude oil worldwide. We began our operations in October 2009 with three vessel-owning and operating subsidiary companies. In April 2010, we completed our initial public offering of 12,500,000 shares of common stock at a public offering price of $13.00 per share and commenced trading on the NYSE under the symbol “STNG.” We have since expanded our fleet, and as of the date of this annual report, our fleet consists of 14 wholly owned tankers (one LR2 tanker, four LR1 tankers, one Handymax tanker, seven MR tankers, and one post-Panamax tanker) with a weighted average age of approximately 4.4 years and 21 time chartered-in tankers (five LR2 tankers, three LR1 tankers, seven MR tankers and six Handymax tankers), which we refer to collectively as our Operating Fleet. Additionally, we currently have contracts for 33 newbuilding vessels (six Handymax ice class 1-A tankers, 19 MR tankers and eight LR2 tankers), of which one MR is expected to be delivered by April 2013 and the remaining 32 within 2014.

The following table sets forth certain information regarding our fleet as of the date of this annual report:


	Vessel Name	Year Built	DWT		Ice Class	Employment	Vessel type
	Owned vessels

1	STI Highlander	2007		37,145	1A	SHTP (1)	Handymax

2	STI Amber	2012		52,000	—	SMRP(4)	MR

3	STI Topaz	2012		52,000	—	SMRP(4)	MR

4	STI Ruby	2012		52,000	—	SMRP(4)	MR

5	STI Garnet	2012		52,000	—	SMRP(4)	MR

6	STI Onyx	2012		52,000	—	SMRP(4)	MR

7	STI Sapphire	2013		52,000	—	Spot	MR

8	STI Emerald	2013		52,000	—	Spot	MR

9	Noemi	2004		72,515	—	SPTP (2)	LR1

10	Senatore	2004		72,514	—	SPTP (2)	LR1

11	STI Harmony	2007		73,919	1A	SPTP (2)	LR1

12	STI Heritage	2008		73,919	1A	SPTP (2)	LR1

13	Venice	2001		81,408	1C	SPTP (2)	Post-Panamax

14	STI Spirit	2008		113,100	—	SLR2P (3)	LR2

	Total owned DWT			888,520


								Time Charter Info
	Time Chartered-In vessels							Daily
	Vessel Name	Year Built	DWT		Ice Class	Employment	Vessel type	Base Rate		Expiry (5)
15	Freja Polaris	2004		37,217	1B	SHTP (1)	Handymax	$	12,700	10-Apr-14	(6)

16	Kraslava	2007		37,258	1B	SHTP (1)	Handymax	$	12,070	18-Jul-13	(7)

17	Krisjanis Valdemars	2007		37,266	1B	SHTP (1)	Handymax	$	12,000	14-Jun-13	(8)

18	Histria Azure	2007		40,394	—	SHTP (1)	Handymax	$	12,000	04-Apr-14	(9)

19	Histria Coral	2006		40,426	—	SHTP (1)	Handymax	$	13,000	17-Jul-13	(10)

20	Histria Perla	2005		40,471	—	SHTP (1)	Handymax	$	13,000	15-Jul-13	(10)

21	STX Ace 6	2007		46,161	—	SMRP(4)	MR	$	14,150	17-May-14	(11)

22	Targale	2007		49,999	—	SMRP(4)	MR	$	14,500	17-May-14	(12)

23	Ugale	2007		49,999	1B	SMRP(4)	MR	$	14,000	15-Jan-14	(13)

24	Nave Orion	2013		49,999	—	Spot	MR	$	14,300	25-Mar-15	(14)

25	Freja Lupus	2012		50,385	—	SMRP(4)	MR	$	14,760	26-Apr-14	(15)

26	Gan-Trust	2013		51,561	—	SMRP(4)	MR	$	16,250	06-Jan-16	(16)

27	Usma	2007		52,684	1B	SMRP(4)	MR	$	13,500	03-Jan-14	(17)

28	SN Federica	2003		72,344	—	Spot	LR1	$	11,250	28-Feb-15	(18)

29	Hellespont Promise	2007		73,669	—	SPTP (2)	LR1	$	12,500	16-Dec-13	(19)

30	FPMC P Eagle	2009		73,800	—	SPTP (2)	LR1	$	12,800	09-Sep-13	(20)

31	FPMC P Hero	2011		99,995	—	SLR2P (3)	LR2	$	14,750	19-Oct-13	(21)

32	FPMC P Ideal	2012		99,993	—	SLR2P (3)	LR2	$	14,750	09-Jul-13	(21)

33	Fair Seas	2008		115,406	—	SLR2P (3)	LR2	$	16,000	27-Jul-13	(22)

34	Pink Stars	2010		115,592	—	SLR2P (3)	LR2	$	16,125	01-Apr-14	(23)

35	Orange Stars	2011		115,756	—	SLR2P (3)	LR2	$	16,125	01-Apr-14	(23)

	Total time chartered-in DWT			1,350,375


	Newbuildings currently under construction
	Vessel Name	DWT		Ice Class	Vessel type
36	Hull 2451		38,000	1A	Handymax	(24)
37	Hull 2452		38,000	1A	Handymax	(24)
38	Hull 2453		38,000	1A	Handymax	(24)
39	Hull 2454		38,000	1A	Handymax	(24)
40	Hull 2462		38,000	1A	Handymax	(24)
41	Hull 2463		38,000	1A	Handymax	(24)
42	Hull 2369		52,000		MR	(24)
43	Hull 2389		52,000		MR	(24)
44	Hull 2390		52,000		MR	(24)
45	Hull 2391		52,000		MR	(24)
46	Hull 2392		52,000		MR	(24)
47	Hull 2449		52,000		MR	(24)
48	Hull 2450		52,000		MR	(24)
49	Hull 2458		52,000		MR	(24)
50	Hull 2459		52,000		MR	(24)
51	Hull 2460		52,000		MR	(24)
52	Hull 2461		52,000		MR	(24)
53	Hull S1138		52,000		MR	(25)
54	Hull S1139		52,000		MR	(25)
55	Hull S1140		52,000		MR	(25)
56	Hull S1141		52,000		MR	(25)
57	Hull S1142		52,000		MR	(25)
58	Hull S1143		52,000		MR	(25)
59	Hull S1144		52,000		MR	(25)
60	Hull S1145		52,000		MR	(25)
61	Hull S703		114,000		LR2	(26)
62	Hull S704		114,000		LR2	(26)
63	Hull S705		114,000		LR2	(26)
64	Hull S706		114,000		LR2	(26)
65	Hull S709		114,000		LR2	(26)
66	Hull S710		114,000		LR2	(26)
67	LR2 #1		114,000		LR2	(27)
68	LR2 #2		114,000		LR2	(27)

	Total newbuilding DWT		2,128,000


	Total DWT		4,366,895


(1)	This vessel operates in or is expected to operate in the Scorpio Handymax Tanker Pool (SHTP). SHTP is operated by Scorpio Commercial Management (SCM). SHTP and SCM are related parties to the Company.

(2)	This vessel operates in or is expected to operate in the Scorpio Panamax Tanker Pool (SPTP). SPTP is operated by SCM. SPTP is a related party to the Company.

(3)	This vessel operates in or is expected to operate in the Scorpio LR2 Pool (SLR2P). SLR2P is operated by SCM. SLR2P is a related party to the Company.

(4)	This vessel operates in or is expected to operate in the Scorpio MR Pool (SMRP). SMRP is operated by SCM. SMRP is a related party to the Company.

(5)	Redelivery from the charterer is plus or minus 30 days from the expiry date.

(6)	We have an option to extend the charter for an additional year at $14,000 per day. This vessel is expected to be delivered in April 2013.

(7)	We have an option to extend the charter for an additional year at $13,070 per day.

(8)	We have an option to extend the charter for an additional year at $13,000 per day. The agreement also contains a 50% profit and loss sharing provision whereby we split all of the vessel’s profits and losses above or below the daily base rate with the vessel’s owner.


(9)	In April 2013, the daily base rate will increase to $12,600 per day for one year thereafter. We have an option to extend the term of the charter for an additional year at $13,550 per day.

(10)	Represents the average rate for the two year duration of the agreement. The rate for the first year is $12,750 per day and the rate for the second year is $13,250 per day. We have an option to extend the charter for an additional year at $14,500 per day.

(11)	We have an option to extend the charter for an additional year at $15,150 per day.

(12)	We have options to extend the charter for up to three consecutive one year periods at $14,850 per day, $15,200 per day and $16,200 per day, respectively.

(13)	We have an option to extend the charter for an additional year at $15,000 per day.

(14)	We have an option to extend the charter for an additional year at $15,700 per day.

(15)	We have an option to extend the charter for an additional year at $16,000 per day.

(16)	The daily base rate represents the average rate for the three year duration of the agreement. The rate for the first year is $15,750 per day, the rate for the second year is $16,250 per day, and the rate for the third year is $16,750 per day. We have options to extend the charter for up to two consecutive one year periods at $17,500 per day and $18,000 per day, respectively.

(17)	We have an option to extend the charter for an additional year at $14,500 per day.

(18)	We have an option to extend the charter for an additional year at $12,500 per day. We have also entered into an agreement with the owner whereby we split all of the vessel’s profits above the daily base rate.

(19)	We have an option to extend the charter for an additional six months at $14,250 per day.

(20)	We have options to extend the charter for up to two consecutive one year periods at $13,400 per day and $14,400 per day, respectively. We have also entered into an agreement with a third party whereby we split all of the vessel’s profits and losses above or below the daily base rate.

(21)	We have options to extend the charters for three consecutive six month periods at $15,000 per day, $15,250 per day, and $15,500 per day respectively. FPMC P Hero is expected to be delivered in April 2013 and FPMC P Ideal was delivered in January 2013.

(22)	We have options to extend the charter for three consecutive six month periods at $16,250 per day, $16,500 per day, and $16,750 per day respectively.

(23)	These vessels are expected to be delivered in April 2013.

(24)	These Newbuilding vessels are being constructed at HMD (Hyundai Mipo Dockyard Co., Ltd. of South Korea). One vessel is expected to be delivered in April 2013, and the remaining 16 vessels are expected to be delivered by the end of 2014.

(25)	These Newbuilding vessels are being constructed at SPP (SPP Shipbuilding Co., Ltd. of South Korea). These eight vessels are expected to be delivered during the second, third and fourth quarters of 2014.

(26)	These Newbuilding vessels are being constructed at HSHI (Hyundai Samho Heavy Industries Co., Ltd.). These six vessels are expected to be delivered in the third and fourth quarters of 2014.

(27)	These Newbuilding vessels are being constructed at DSME (Daewoo Shipbuilding and Marine Engineering Co., Ltd.). These two vessels are expected to be delivered in the fourth quarter of 2014.

Chartering strategy

Generally, we operate our vessels in commercial pools on time charters or in the spot market.

Commercial Pools

To increase vessel utilization and thereby revenues, we participate in commercial pools with other shipowners of similar modern, well-maintained vessels. As of the date of this annual report, 27 of the vessels in our Operating Fleet operate in one of the Scorpio Group Pools. By operating a large number of vessels as an integrated transportation system, commercial pools offer customers greater flexibility and a higher level of service while achieving scheduling efficiencies. Pools employ experienced commercial managers and operators who have close working relationships with customers and brokers, while technical management is performed by each shipowner. Pools negotiate charters with customers primarily in the spot market. The size and scope of these pools enable them to enhance utilization rates for pool vessels by securing backhaul voyages and contracts of affreightment, or COAs, thus generating higher effective TCE revenues than otherwise might be obtainable in the spot market.

Time Charters

Time charters give us a fixed and stable cash flow for a known period of time. Time charters also mitigate in part the seasonality of the spot market business, which is generally weaker in the second and third quarters of the year. In the future, we may opportunistically look to enter our vessels into time charter contracts. We may also enter into time charter contracts with profit sharing agreements, which enable us to benefit if the spot market increases. As of the date of this annual report, none of the vessels in our Operating Fleet operate under long-term time charters (greater than one year).

Spot Market

A spot market voyage charter is generally a contract to carry a specific cargo from a load port to a discharge port for an agreed freight per ton of cargo or a specified total amount. Under spot market voyage charters, we pay voyage expenses such as port, canal and bunker costs. Spot charter rates are volatile and fluctuate on a seasonal and year-to-year basis. Fluctuations derive from imbalances in the availability of cargoes for shipment and the number of vessels available at any given time to transport these cargoes. Vessels operating in the spot market generate revenue that is less predictable, but may enable us to capture increased profit margins during periods of improvements in tanker rates. As of the date of this annual report, four of the vessels in our Operating Fleet, STI Sapphire, STI Emerald, Nave Orion, and SN Federica, operate in the spot market.

Management of our fleet

Commercial and Technical Management

Our vessels are commercially managed by Scorpio Commercial Management S.A.M., or SCM and technically managed by Scorpio Ship Management S.A.M., or SSM, pursuant to a Master Agreement (which may be terminated upon a two year notice). SCM and SSM are related parties of ours. We expect that additional vessels that we may acquire in the future will also be managed under the Master Agreement or on substantially similar terms.

SCM’s services include securing employment, in the spot market and on time charters, for our vessels. SCM also manages the Scorpio Group Pools. For commercial management of our vessels that do not operate in any of the Scorpio Group Pools, we pay SCM a fee of $250 per vessel per day for each Panamax, LR1 and LR2 vessel and $300 per vessel per day for each Handymax and MR vessels, plus 1.25% commission on gross revenues per charter fixture. Effective January 1, 2013, all participants in the Scorpio Group Pools collectively pay SCM a pool management fee of $250 per vessel per day with respect to our LR2 vessels, $300 per vessel per day with respect to each of our Panamax vessels and $325 per vessel per day with respect to each of our Handymax and MR vessels, plus 1.50% commission on gross revenues per charter fixture. These are the same fees that SCM charges other vessels in these pools, including third party owned vessels.

SSM’s services include day-to-day vessel operation, performing general maintenance, monitoring regulatory and classification society compliance, customer vetting procedures, supervising the maintenance and general efficiency of vessels, arranging the hiring of qualified officers and crew, arranging and supervising drydocking and repairs, purchasing supplies, spare parts and new equipment for vessels, appointing supervisors and technical consultants and providing technical support. We currently pay SSM $548 per vessel per day to provide technical management services for each of our vessels. This fee is lower than that charged to third parties by SSM.

Administrative Services Agreement

We have an Administrative Services Agreement with Scorpio Services Holding Limited, or SSH, or our Administrator, for the provision of administrative staff and office space, and administrative services, including accounting, legal compliance, financial and information technology services. SSH is a related party of ours. Liberty, a company affiliated with us, acted as our Administrator until March 13, 2012 when the Administrative Services Agreement was novated to SSH. The effective date of the novation was November 9, 2009, the date that we first entered into the agreement with Liberty. We reimburse our current Administrator for the reasonable direct or indirect expenses it incurs in providing us with the administrative services described above. Our Administrator also arranges vessel sales and purchases for us. The services provided to us by our Administrator may be sub-contracted to other entities within the Scorpio Group.

We pay our Administrator a fee for arranging vessel purchases and sales for us, equal to 1% of the gross purchase or sale price, payable upon the consummation of any such purchase or sale. For the years ended December 31, 2012 and 2011, we paid our Administrator $2.4 million and $0.7 million in fees, respectively, relating to vessel acquisitions and sales. We believe this 1% fee on purchases and sales is customary in the tanker industry.

Further, pursuant to our administrative services agreement, our Administrator, on behalf of itself and other members of the Scorpio Group, has agreed that it will not directly own product or crude tankers ranging in size from 35,000 dwt to 200,000 dwt.

Our administrative services agreement, whose effective commencement began in December 2009, was automatically renewed on December 31, 2012 for an additional term of two years.

The International Oil Tanker Shipping Industry

All the information and data presented in this section, including the analysis of the oil tanker shipping industry, has been provided by Drewry Shipping Consultants Ltd., or Drewry. The statistical and graphical information contained herein is drawn from Drewry’s database and other sources. According to Drewry: (i) certain information in Drewry’s database is derived from estimates or subjective judgments; (ii) the information in the databases of other maritime data collection agencies may differ from the information in Drewry’s database; and (iii) while Drewry has taken reasonable care in the compilation of the statistical and graphical information and believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures.

Oil Tanker Demand

Demand for crude oil and refined petroleum products is affected by a number of factors including general economic conditions (such as increases and decreases in industrial production), oil prices, environmental concerns, weather conditions, and competition from alternative energy sources.

The world economy grew continuously from 2000 to 2008, but growth came to a halt in 2009 when the world went into a global economic recession. Since 2009, the world economy has returned to a state of growth, with a 3.1% increase in global GDP in 2012, generated largely by China and India.

World oil consumption has followed a similar pattern. From 2000 to 2007, world oil consumption grew considerably, but receded in 2008 and 2009 due to global economic downturn. World oil consumption has since recovered, with consumption rising to 89.7 million bpd in 2012. Since 2000, world oil consumption has grown at a compound annual growth rate, or CAGR, of approximately 1.4%.

World Oil Consumption: 1990 – 2012(1)
(Million Barrels Per Day)

(LINE GRAPH)

(1) Provisional
Source: Drewry Maritime Research

Oil consumption is either static or declining in most of the developed world, but is increasing in most of the developing world. In recent years, Asia, particularly China, has been the main generator of additional demand for oil.

Traditional sources, such as oil from the Middle East, have largely fulfilled this demand. From 2000 to 2012, Chinese oil consumption grew by a CAGR of 5.9%, reaching 9.54 million barrels per day. Notably, oil consumption on a per capita basis is still low in countries such as China and India as compared to the United States and Western Europe.

Seasonal trends also affect world oil consumption and, consequently, oil tanker demand. While trends in consumption do vary with season, peaks in tanker demand frequently precede seasonal consumption peaks due to anticipated consumer demand by refiners and suppliers. Seasonal peaks in oil demand can be broadly classified into two categories: increased demand prior to winter in the Northern Hemisphere, during which heating oil consumption increases, and increased demand for gasoline prior to the summer driving season in the United States.

Production trends have generally followed oil consumption patterns, though changes in oil inventories also play a part in determining production levels.

Production and exports from the Middle East, particularly countries that are members of the Organization of the Petroleum Exporting Countries, or OPEC, have historically had a significant impact on the demand for tanker capacity, and, consequently, on tanker charter hire rates, due to the relatively long distances between the Middle East and typical destination ports. Oil exports from short-haul regions, such as Latin America and the North Sea, are significantly closer to ports used by the primary consumers of such exports, which results in shorter average voyage length as compared to oil exports from the Middle East. Therefore, production in short-haul regions has historically increased the demand for vessels in the Handy, Panamax and Aframax market segments, but has had less of an impact on the demand for larger vessels.

Oil Refinery Capacity

Oil refineries also vary greatly in the quantity, variety and specification of products that they produce, and it is common for tankers to take products into and out of the same refinery. This global multi-directional trade pattern enables owners and operators of product tankers to engage in charters of triangulation, thereby maximizing revenue.

Changes in refinery throughput are somewhat driven by changes in the location of refinery capacity. Capacity increases are taking place mostly in the developing world, especially in Asia, and this is leading to changes in voyage patterns and longer voyages.

In response to growing domestic demand, Chinese refinery throughput has grown at the fastest rate of any global region in the last decade, ahead of the Middle East and other emerging economies. By contrast, refinery throughput in North America has actually declined in the last decade.

The shift in global refinery capacity from the developed to the developing world is likely to continue as refinery development plans are heavily focused on areas such as Asia and the Middle East, with relatively little capacity additions planned for North America and Europe.

World Oil Trades

World oil trades are naturally the result of geographical imbalances between areas of oil consumption and production, although in some sectors, such as refined petroleum products, arbitrage can have an impact on trade flows.

The volume of crude oil moved by sea each year also reflects underlying changes in world oil consumption and production. Seaborne trade in crude oil in 2012 is provisionally estimated at 2.1 billion tons, while refined petroleum products movement is provisionally estimated at 910 million tons.

Demand for oil tankers is primarily determined by the volume of crude oil and refined petroleum products transported and the distances over which they are transported. Tanker demand is generally expressed in ton miles, which are calculated as the number of metric tons of oil carried multiplied by the miles over which the oil is carried.

The transportation of crude oil is typically unidirectional as most oil is transported from a few areas of production to many regions of consumption, where it is refined into petroleum products. Conversely, the transportation of refined petroleum products and associated cargoes is multidirectional as there are several areas of both production and consumption.

In terms of ton miles, geographical changes in the pattern of trade have had a positive impact on tanker demand despite only modest growth in the volume of oil moved by sea since 2000. From 2000 to 2012, ton mile demand in the tanker sector grew at a CAGR of 2.6%, whereas the overall increase in trade over the same period was equivalent to a CAGR of 2.2%.

As a result of changes in patterns of trade, the average loaded voyage haul length of refined product trades has risen from a recent market low of 2,283 miles in 2000 to 2,800 miles in 2012, equivalent to a CAGR of 1.7%.

Oil Tanker Supply

The world oil tanker fleet is generally divided into five major types of vessel classifications based on vessel carrying capacity. Additionally, the tanker fleet is divided between crude tankers that carry dirty products, such as crude oil or residual fuel oil, and product tankers that carry clean products, such as refined petroleum products, including gasoline, jet fuel, kerosene, naphtha and gas oil.

While product tankers can carry dirty products, they generally do not switch between clean and dirty cargoes because a vessel’s tank must be cleaned prior to loading a different cargo type. Product tankers do not form a distinct vessel classification, but are identified on the basis of various factors, including technical and trading histories.

A number of tankers also have the capability to carry chemicals as well as refined petroleum products. These ships are sometimes referred to as product/chemical tankers and may switch between the carriage of chemicals or refined petroleum products depending on market conditions and employment opportunities.

The supply of tankers is measured in deadweight tons, or dwt. The supply of tanker capacity is determined by the age and size of the existing global fleet, the number of vessels on order and the number of ships removed from the fleet by scrapping and international regulations. Other factors which can affect the short-term supply of tankers include the number of combined carriers (which are vessels capable of trading wet and dry cargoes) trading in the oil market and the number of tankers in storage, dry-docked, awaiting repairs or otherwise out of commission.

There are eight main fleet categories within the oil tanker fleet: Small, Handy, Handymax (which include MR product tankers), Panamax (which include LR1 product tankers), Aframax (which include LR2 product tankers), Suezmax, Very Large Crude Carrier, or VLCC, and Ultra Large Crude Carrier, or ULCC.

The oil tanker fleet at the end of January 2013 consisted of 3,166 vessels with a combined capacity of 413.4 million dwt.

Oil Tanker Fleet – January 31, 2013


Sector	Deadweight Tons (dwt)	Number of Vessels		% of Fleet		Capacity (million dwt)		% of Fleet

Small	10-29,999		228		7.2		4.1		1.0
Handy	30-41,999		152		4.8		5.6		1.4
Handymax	42-54,999		407		12.9		19.2		4.6
Panamax	55-79,999		397		12.5		28.5		6.9
Aframax	80-119,999		902		28.5		96.6		23.4
Suezmax	120-199,999		470		14.8		72.7		17.6
VLCC	200-320,000		574		18.1		174.9		42.3
ULCC	320,000+		36		1.1		11.8		2.9
			3,166		100.0		413.4		100.0

Source: Drewry Maritime Research

Between the end of 2000 and January 2013 the size of the total tanker fleet grew by 54%, with increases in fleet size taking place across all sectors.

The Product Tanker Fleet

The product tanker fleet as of January 31, 2013 comprises 1,239 ships of 70.9 million dwt.

World Product⁽¹⁾ Tanker Fleet January 31, 2013


Sector	Deadweight Tons (dwt)		Number of Vessels		% of Fleet		Capacity (million dwt )		% of Fleet
Small		10-29,999		209		16.9		3.7		5.2
Handy (MR1)		30-41,999		135		10.9		5		7.1
Handymax (MR2)		42-54,999		403		32.5		18.9		26.7
Panamax (LR1)		55-79,999		293		23.6		21.3		30.0
Aframax (LR2)		80,000+		199		16.1		22		31.0
				1,239		100.0		70.9		100.0

(1) Excludes chemical tankers

Source: Drewry Maritime Research

The supply of the smallest product tanker category fleet (tankers with 10,000-29,999 dwt) has declined in favor of larger ships that are more suited to long-haul routes.

World Product Tanker Fleet: Age Profile, January 31, 2013

(LINE GRAPH)

Left Hand Scale = Million Dwt; Right Hand Scale = No of Ships

Source: Drewry Maritime Research

Oil Tanker Orderbook

As of January 31, 2013, the oil tanker orderbook amounted to 362 tankers of 51.3 million dwt, equivalent to 12.4% of the current fleet. At its peak in 2008, the orderbook to existing fleet ratio was just over 40%. The decrease to its current level is due to deliveries from the orderbook outpacing new orders being placed. The current total tanker orderbook, including crude tankers and product tankers, and the schedule of deliveries are shown below.

The Total Tanker Fleet & Orderbook: January 31, 2013


Size	Existing Fleet		2013		2014		2015		2016+		Total		% Existing Fleet
	No.	Dwt	No.	Dwt	No.	Dwt	No.	Dwt	No.	Dwt	No.	Dwt	No	Dwt

10-29,999	228	4.1	7	0.1	0	0.0	0	0.0	0	0.0	7	0.1	3.1%	2.4%
30-41,999	152	5.6	7	0.2	2	0.1	0	0.0	0	0.0	9	0.3	5.9%	5.4%
42-54,999	407	19.2	58	2.9	28	1.4	8	0.4	5	0.2	99	4.9	24.3%	25.5%
55-79,999	397	28.5	18	1.3	6	0.4	0	0.0	4	0.3	28	2.0	7.1%	7.0%
80-119,999	902	96.6	29	3.2	21	2.3	7	0.8	0	0.0	57	6.3	6.3%	6.5%
120-199,999	470	72.7	67	10.4	10	1.5	6	1.0	1	0.2	84	13.1	17.9%	18.0%
200,000-319,999	574	174.9	23	7.2	13	4.0	2	0.6	0	0.0	38	11.8	6.6%	6.7%
320,000+	36	11.8	33	10.6	7	2.2	0	0.0	0	0.0	40	12.8	111.1%	108.5%
Total	3,166	413.4	242	35.9	87	11.9	23	2.8	10	0.7	362	51.3	11.4%	12.4%

Source: Drewry Maritime Research

Product Tanker Orderbook

As of January 31, 2013, the product tanker orderbook amounted to 145 ships of 8.3 million dwt, equivalent to 11.7% of the current fleet.

World Product Tanker Orderbook, January 31, 2013


	Scheduled Deliveries
Size (’000 dwt)	Existing Fleet*		2013		2014		2015		2016+		Total Orderbook		% of Fleet
	No.	Dwt	No.	Dwt	No.	Dwt	No.	Dwt	No.	Dwt	No.	Dwt	No	Dwt
10-29,999	209	3.7	6	0.1	0	0.0	0	0.0	0	0.0	6	0.1	2.9	2.7
30-41,999	135	5.0	6	0.2	2	0.1	0	0.0	0	0.0	8	0.3	5.9	6.0
42-54,999	403	18.9	54	2.7	28	1.4	8	0.4	5	0.2	95	4.7	23.6	24.9
55-79,999	293	21.3	13	0.9	5	0.4	0	0.0	4	0.3	22	1.6	7.5	7.5
80,000+	199	22.0	8	0.9	6	0.7	0	0.0	0	0.0	14	1.6	7.0	7.3
Total	1,239	70.9	87	4.8	41	2.6	8	0.4	9	0.5	145	8.3	11.7	11.7

Source: Drewry Maritime Research

The Product Tanker Freight Market

Tanker charter hire rates and vessel values for all tankers are influenced by supply and demand for tanker capacity. However, the product tanker segment is generally less volatile than other crude market segments because these vessels mainly transport refined petroleum products that are not subject to the same degree of volatility as the crude oil market. Time charter rates are also less volatile than spot rates because chartered vessels are fixed for a longer period of time. In the spot market, rates will reflect the immediate underlying conditions in vessel supply and demand and are thus prone to more volatility. Recent trends in rates in the time charter equivalent of spot rates and time charter rates are shown in the tables below.

Tanker charter hire rates and vessel values for all tankers are strongly influenced by supply and demand for tanker capacity. Small changes in tanker utilization have historically led to relatively large fluctuations in tanker charter rates for VLCCs, more moderate price volatility in the Suezmax, Aframax and Panamax markets and less volatility in the Handy market compared to the tanker market as a whole.

From 2005 to 2008, time charter rates for all sizes of oil tankers rose steeply, reflecting additional demand for tanker capacity generated by increased demand for oil and seaborne movements. This led to a much tighter balance between vessel demand and supply, and freight rates consequently rose. However, as the world economy weakened in the second half of 2008, demand for oil also fell, negatively impacting tanker demand and freight rates. Rates resultantly declined in 2009, recovered briefly in 2010, but remained weak for all of 2011 and 2012, especially for larger sized oil tankers.

Oil Tanker One Year Time Charter Rates: 2000-2013
(US$/Day Period Averages)


Size Range	30,000 Dwt	40-45,000 Dwt	60,000 Dwt	95-105,000 Dwt	150,000 Dwt	280,000 Dwt
Age	5 Yr	5 Yr	10 Yr	5 Yr	5 Yr	5 Yr
2000	12,454	13,958	14,854	18,854	27,042	35,250
2001	15,583	17,563	19,708	23,125	30,500	37,958
2002	11,417	13,288	15,292	16,896	17,750	23,458
2003	13,267	14,846	14,163	19,146	26,104	33,604
2004	15,629	19,029	18,813	29,500	37,875	53,875
2005	18,854	25,271	21,833	34,771	42,292	60,125
2006	21,417	26,792	23,225	35,150	42,667	55,992
2007	22,200	25,250	22,292	33,413	43,042	53,333
2008	21,438	23,092	19,704	34,708	46,917	74,663
2009	13,675	14,850	13,675	19,663	27,825	38,533
2010	11,038	12,388	11,738	18,571	25,967	36,083
2011	12,300	13,633	10,275	15,208	19,700	24,642
2012	12,013	13,325	9,808	13,588	17,504	20,996
Jan 2013	12,500	13,750	10,750	13,500	16,750	21,500

Source: Drewry Maritime Research

Environmental and Other Regulations

Government laws and regulations significantly affect the ownership and operation of our vessels. We are subject to various international conventions, laws and regulations in force in the countries in which our vessels may operate or are registered. Compliance with such laws, regulations and other requirements entails significant expense, including vessel modification and implementation costs.

A variety of government, quasi-governmental and private organizations subject our vessels to both scheduled and unscheduled inspections. These organizations include the local port authorities, national authorities, harbor masters or equivalent entities, classification societies, relevant flag state (country of registry) and charterers, particularly terminal operators and oil companies. Some of these entities require us to obtain permits, licenses, certificates and approvals for the operation of our vessels. Our failure to maintain necessary permits, licenses, certificates or approvals could require us to incur substantial costs or temporarily suspend operation of one or more of the vessels in our fleet, or lead to the invalidation or reduction of our insurance coverage.

We believe that the heightened levels of environmental and quality concerns among insurance underwriters, regulators and charterers have led to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the industry. Increasing environmental concerns have created a demand for tankers that conform to stricter environmental standards. We are required to maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance with applicable local, national and international environmental laws and regulations. We believe that the operation of our vessels is in substantial compliance with applicable environmental laws and regulations and that our vessels have all material permits, licenses, certificates or other authorizations necessary for the conduct of our operations; however, because such laws and regulations are frequently changed and may impose increasingly strict requirements, we cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of our vessels. In addition, a future serious marine incident that results in significant oil pollution or otherwise causes significant adverse environmental impact, such as the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, could result in additional legislation or regulation that could negatively affect our profitability.

International Maritime Organization

The International Maritime Organization, or the IMO, is the United Nations agency for maritime safety and the prevention of pollution by ships. The IMO has adopted several international conventions that regulate the international shipping industry, including but not limited to the International Convention on Civil Liability for Oil Pollution Damage of 1969, generally referred to as CLC, the International Convention on Civil Liability for Bunker Oil Pollution Damage, and the International Convention for the Prevention of Pollution from Ships of 1973, or the MARPOL Convention. The MARPOL Convention is broken into six Annexes, each of which establishes environmental standards relating to different sources of pollution: Annex I relates to oil leakage or spilling; Annexes II and III relate to harmful substances carried, in bulk, in liquid or packaged form, respectively; Annexes IV and V relate to sewage and garbage management, respectively; and Annex VI, adopted by the IMO in September of 1997, relates to air emissions.

Air Emissions

In September of 1997, the IMO adopted Annex VI to MARPOL to address air pollution. Effective May 2005, Annex VI sets limits on nitrogen oxide emissions from ships whose diesel engines were constructed (or underwent major conversions) on or after January 1, 2000. It also prohibits “deliberate emissions” of “ozone depleting substances,” defined to include certain halons and chlorofluorocarbons. “Deliberate emissions” are not limited to times when the ship is at sea; they can for example include discharges occurring in the course of the ship’s repair and maintenance. Emissions of “volatile organic compounds” from certain tankers, and the shipboard incineration (from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated biphenyls (PCBs)) are also prohibited. Annex VI also includes a global cap on the sulfur content of fuel oil (see below).

The amended Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive reduction of the amount of sulfur contained in any fuel oil used on board ships. As of January 1, 2012, the amended Annex VI requires that fuel oil contain no more than 3.50% sulfur. By January 1, 2020, sulfur content must not exceed 0.50%, subject to a feasibility review to be completed no later than 2018.

Sulfur content standards are even stricter within certain Emission Control Areas ( or ECAs). As of July 1, 2010, ships operating within an ECA were not permitted to use fuel with sulfur content in excess of 1.0% (from 1.50%), which will be further reduced to 0.10% on January 1, 2015. Amended Annex VI establishes procedures for designating new ECAs. Currently, the Baltic Sea and the North Sea have been so designated. On August 1, 2012, certain coastal areas of North America were designated ECAs as will, the United States Caribbean Sea, effective January 1, 2014. If other ECAs are approved by the IMO or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are adopted by the EPA or the states where we operate, compliance with these regulations could entail significant capital expenditures or otherwise increase the costs of our operations.

As of January 1, 2013, MARPOL made mandatory certain measures relating to energy efficiency for new ships. It makes the Energy Efficiency Design Index (EEDI) apply to all new ships, and the Ship Energy Efficiency Management Plan (SEEMP) apply to all ships.

Amended Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on their date of installation. The U.S. Environmental Protection Agency promulgated equivalent (and in some senses stricter) emissions standards in late 2009. As a result of these designations or similar future designations, we may be required to incur additional operating or other costs.

Safety Management System Requirements

The IMO also adopted the International Convention for the Safety of Life at Sea, or SOLAS, and the International Convention on Load Lines, or LL, which impose a variety of standards that regulate the design and operational features of ships. The IMO periodically revises the SOLAS and LL standards. The Convention on Limitation for Maritime Claims (LLMC) was recently amended and the amendments are expected to go into effect on June 8, 2015. The amendments alter the limits of liability for a loss of life or personal injury claim and a property claim against ship owners.

Our operations are also subject to environmental standards and requirements contained in the International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention, or ISM Code, promulgated by the IMO under Chapter IX of SOLAS. The ISM Code requires the owner of a vessel, or any person who has taken responsibility for operation of a vessel, to develop an extensive safety management system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. We rely upon the safety management system that has been developed for our vessels for compliance with the ISM Code.

The ISM Code requires that vessel operators also obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel’s management with code requirements for a safety management system. No vessel can obtain a certificate unless its manager has been awarded a document of compliance, issued by each flag state, under the ISM Code. We have obtained documents of compliance for its offices and safety management certificates for all of our vessels for which the certificates are required by the ISM Code. These documents of compliance and safety management certificates are renewed as required.

Noncompliance with the ISM Code and other IMO regulations may subject the shipowner or bareboat charterer to increased liability, may lead to decreases in, or invalidation of, available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports.

Pollution Control and Liability Requirements

IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters of the signatory nations to such conventions. For example, many countries have ratified and follow the liability plan adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage of 1969, as amended by different Protocol in 1976, 1984, and 1992, and amended in 2000, or the CLC. Under the CLC and depending on whether the country in which the damage results is a party to the 1992 Protocol to the CLC, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain exceptions. The 1992 Protocol changed certain limits on liability, expressed using the International Monetary Fund currency unit of Special Drawing Rights. The limits on liability have since been amended so that compensation limits on liability were raised. The right to limit liability is forfeited under the CLC where the spill is caused by the shipowner’s actual fault and under the 1992 Protocol where the spill is caused by the shipowner’s intentional or reckless act or omission where the shipowner knew pollution damage would probably result. The CLC requires ships covered by it to maintain insurance covering the liability of the owner in a sum equivalent to an owner’s liability for a single incident. We believe that our protection and indemnity insurance will cover the liability under the plan adopted by the IMO.

The IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, to impose strict liability on shipowners for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The Bunker Convention requires registered owners of ships over 1,000 gross tons to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). With respect to non-ratifying states, liability for spills or releases of oil carried as fuel in ship’s bunkers typically is determined by the national or other domestic laws in the jurisdiction where the events or damages occur.

In addition, the IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or the BWM Convention, in February 2004. The BWM Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements to be replaced in time with mandatory concentration limits. The BWM Convention will not become effective until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping. To date, there has not been sufficient adoption of this standard for it to take force. However, Panama may adopt this standard in the relatively near future, which would be sufficient for it to take force. Upon entry into force of the BWM Convention, mid-ocean ballast exchange would be mandatory. Vessels would be required to be equipped with a ballast water treatment system that meets mandatory concentration limits not later than the first intermediate or renewal survey, whichever occurs first, after the anniversary date of delivery of the vessel in 2014, for vessels with ballast water capacity of 1500-5000 cubic meters, or after such date in 2016, for vessels with ballast water capacity of greater than 5000 cubic meters. If mid-ocean ballast exchange or ballast water treatment requirements become mandatory, the cost of compliance could increase for ocean carriers. Although we do not believe that the costs of compliance with a mandatory mid-ocean ballast exchange would be material, it is difficult to predict the overall impact of such a requirement on our operations.

The IMO continues to review and introduce new regulations. It is impossible to predict what additional regulations, if any, may be passed by the IMO and what effect, if any, such regulations might have on our operations.

U.S. Regulations

The U.S. Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA affects all “owners and operators” whose vessels trade in the United States, its territories and possessions or whose vessels operate in U.S. waters, which includes the U.S. territorial sea and its 200 nautical mile exclusive economic zone. The United States has also enacted the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous substances other than oil, whether on land or at sea. OPA and CERCLA both define “owner and operator” in the case of a vessel as any person owning, operating or chartering by demise, the vessel. Accordingly, both OPA and CERCLA impact our operations.

Under OPA, vessel owners and operators are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. OPA defines these other damages broadly to include:


	•	injury to, destruction or loss of, or loss of use of, natural resources and related assessment costs;

	•	injury to, or economic losses resulting from, the destruction of real and personal property;

	•	net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property, or natural resources;

	•	loss of subsistence use of natural resources that are injured, destroyed or lost;

	•	lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and

	•	net cost of increased or additional public services necessitated by removal activities following a discharge of oil, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources.

OPA contains statutory caps on liability and damages; such caps do not apply to direct cleanup costs. Effective July 31, 2009, the U.S. Coast Guard adjusted the limits of OPA liability to the greater of $2,000 per gross ton or $17.088 million for any double-hull tanker that is over 3,000 gross tons (subject to periodic adjustment for inflation), and our fleet is entirely composed of vessels of this size class. These limits of liability do not apply if an incident was proximately caused by the violation of an applicable U.S. federal safety, construction or operating regulation by a responsible party (or its agent, employee or a person acting pursuant to a contractual relationship), or a responsible party’s gross negligence or willful misconduct. The limitation on liability similarly does not apply if the responsible party fails or refuses to (i) report the incident where the responsibility party knows or has reason to know of the incident; (ii) reasonably cooperate and assist as requested in connection with oil removal activities; or (iii) without sufficient cause, comply with an order issued under the Federal Water Pollution Act (Section 311 (c), (e)) or the Intervention on the High Seas Act.

CERCLA contains a similar liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well as damage for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing same, and health assessments or health effects studies. There is no liability if the discharge of a hazardous substance results solely from the act or omission of a third party, an act of God or an act of war. Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million for vessels carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000 for any other vessel. These limits do not apply (rendering the responsible person liable for the total cost of response and damages) if the release or threat of release of a hazardous substance resulted from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations. The limitation on liability also does not apply if the responsible person fails or refused to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is subject to OPA.

OPA and CERCLA both require owners and operators of vessels to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular responsible person may be subject. Vessel owners and operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification as a self-insurer or a guarantee. We have provided such evidence and received certificates of financial responsibility from the U.S. Coast Guard’s for each of our vessels as required to have one.

OPA permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, provided they accept, at a minimum, the levels of liability established under OPA. Some states have enacted legislation providing for unlimited liability for discharge of pollutants within their waters, however, in some cases, states which have enacted this type of legislation have not yet issued implementing regulations defining tanker owners’ responsibilities under these laws.

The 2010 Deepwater Horizon oil spill in the Gulf of Mexico may also result in additional regulatory initiatives or statutes, including the raising of liability caps under OPA. For example, on August 15, 2012, the U.S. Bureau of Safety and Environmental Enforcement (BSEE) issued a final drilling safety rule for offshore oil and gas operations that strengthens the requirements for safety equipment, well control systems, and blowout prevention practices. Compliance with any new requirements of OPA may substantially impact our cost of operations or require us to incur additional expenses to comply with any new regulatory initiatives or statutes.

Through our P&I Club membership, we expect to maintain pollution liability coverage insurance in the amount of $1 billion per incident for each of our vessels. If the damages from a catastrophic spill were to exceed our insurance coverage, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The U.S. Clean Water Act, or CWA, prohibits the discharge of oil, hazardous substances and ballast water in U.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA and CERCLA. Furthermore, many U.S. states that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be more stringent than U.S. federal law.

The United States Environmental Protection Agency, or EPA, has enacted rules requiring a permit regulating ballast water discharges and other discharges incidental to the normal operation of certain vessels within United States waters under the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels, or VGP. For a new vessel delivered to an owner or operator after September 19, 2009 to be covered by the VGP, the owner must submit a Notice of Intent, or NOI, at least 30 days before the vessel operates in United States waters. The EPA has proposed a draft 2013 VGP to replace the current VGP upon its expiration on December 19, 2013. The VGP focuses on authorizing discharges incidental to operations of commercial vessels and the new VGP is expected to contain numeric ballast water discharge limits for most vessels to reduce the risk of invasive species in US waters, more stringent requirements for exhaust gas scrubbers and the use of environmentally acceptable lubricants.

U.S. Coast Guard regulations adopted and proposed for adoption under the U.S. National Invasive Species Act, or NISA, impose mandatory ballast water management practices for all vessels equipped with ballast water tanks entering U.S. waters, which could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures, and/or otherwise restrict our vessels from entering U.S. waters. In 2009, the Coast Guard proposed new ballast water management standards and practices, including limits regarding ballast water releases. As of June 21, 2012, the U.S. Coast Guard implemented revised regulations on ballast water management by establishing standards on the allowable concentration of living organisms in ballast water discharged from ships into U.S. waters. The revised ballast water standards are consistent with those adopted by the IMO in 2004.

Compliance with the EPA and the U.S. Coast Guard regulations could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, and/or otherwise restrict our vessels from entering U.S. waters.

European Union Regulations

In October 2009, the European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and the discharges individually or in the aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal penalties. Member States were required to enact laws or regulations to comply with the directive by the end of 2010. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims.

Greenhouse Gas Regulation

Currently, the emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in 2005 and pursuant to which adopting countries have been required to implement national programs to reduce greenhouse gas emissions. On January 1, 2013, two new sets of mandatory requirements to address greenhouse gas emissions from ships which were adopted by MEPC in July 2011, entered into force. Currently operating ships will be required to develop Ship Energy Efficiency Management Plans, and minimum energy efficiency levels per capacity mile will apply to new ships. These requirements could cause us to incur additional compliance costs. The IMO is also planning to implement market-based mechanisms to reduce greenhouse gas emissions from ships at an upcoming MEPC session. The European Union has indicated that it intends to propose an expansion of the existing European Union emissions trading scheme to include emissions of greenhouse gases from marine vessels, and in January 2012 the European Commission launched a public consultation on possible measures to reduce greenhouse gas emissions from ships. In the United States, the EPA has issued a finding that greenhouse gases endanger the public health and safety and has adopted regulations to limit greenhouse gas emissions from certain mobile sources and large stationary sources. Although the mobile source emissions regulations do not apply to greenhouse gas emissions from vessels, such regulation of vessels is foreseeable, and the EPA has in recent years received petitions from the California Attorney General and various environmental groups seeking such regulation. Any passage of climate control legislation or other regulatory initiatives by the IMO, European Union, the U.S. or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases could require us to make significant financial expenditures which we cannot predict with certainty at this time.

International Labour Organization

The International Labour Organization (ILO) is a specialized agency of the UN with headquarters in Geneva, Switzerland. The ILO has adopted the Maritime Labor Convention 2006 (MLC 2006). A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance will be required to ensure compliance with the MLC 2006 for all ships above 500 gross tons in international trade. The MLC 2006 will enter into force one year after 30 countries with a minimum of 33% of the world’s tonnage have ratified it. On August 20, 2012, the required number of countries was met and MLC 2006 is expected to come into force on August 20, 2013. MLC 2006 will require us to develop new procedures to ensure full compliance with its requirements.

Vessel Security Regulations

Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the U.S. Maritime Transportation Security Act of 2002, or the MTSA, came into effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. The regulations also impose requirements on certain ports and facilities, some of which are regulated by the U.S. Environmental Protection Agency (EPA).

Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new Chapter V became effective in July 2004 and imposes various detailed security obligations on vessels and port authorities, and mandates compliance with the ISPS Code. The ISPS Code is designed to enhance the security of ports and ships against terrorism. Amendments to SOLAS Chapter VII, made mandatory in 2004, apply to vessels transporting dangerous goods and require those vessels be in compliance with the International Maritime Dangerous Goods Code (“IMDG Code”).

To trade internationally, a vessel must attain an International Ship Security Certificate, or ISSC, from a recognized security organization approved by the vessel’s flag state. Among the various requirements are:


	•	on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related information from among similarly equipped ships and shore stations, including information on a ship’s identity, position, course, speed and navigational status;

	•	on-board installation of ship security alert systems, which do not sound on the vessel but only alert the authorities on shore;

	•	the development of vessel security plans;

	•	ship identification number to be permanently marked on a vessel’s hull;

	•	a continuous synopsis record kept onboard showing a vessel’s history, including the name of the ship, the state whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship’s identification number, the port at which the ship is registered and the name of the registered owner(s) and their registered address; and

	•	compliance with flag state security certification requirements.

Ships operating without a valid certificate, may be detained at port until it obtains an ISSC, or it may be expelled from port, or refused entry at port.

The U.S. Coast Guard regulations, intended to align with international maritime security standards, exempt from MTSA vessel security measures non-U.S. vessels provided that such vessels have on board a valid ISSC that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. We have implemented the various security measures addressed by MTSA, SOLAS and the ISPS Code, and our fleet is in compliance with applicable security requirements.

Inspection by classification societies

Every seagoing vessel must be “classed” by a classification society. The classification society certifies that the vessel is ‘‘in class,’’ signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel’s country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.

The classification society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.

For maintenance of the class, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment classed are required to be performed as follows:


	•	Annual Surveys. For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant, and where applicable for special equipment classed, within three months before or after each anniversary date of the date of commencement of the class period indicated in the certificate.

	•	Intermediate Surveys. Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years after commissioning and each class renewal. Intermediate surveys are to be carried out at or between the occasion of the second or third annual survey.

	•	Class Renewal Surveys. Class renewal surveys, also known as special surveys, are carried out for the ship’s hull, machinery, including the electrical plant, and for any special equipment classed, at the intervals indicated by the character of classification for the hull. At the special survey, the vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals. The classification society may grant a one-year grace period for completion of the special survey. Substantial amounts of money may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period was granted, a vessel owner has the option of arranging with the classification society for the vessel’s hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle.

At an owner’s application, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class. This process is referred to as continuous class renewal.

All areas subject to survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five years.

Most vessels are also dry-docked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections. If any defects are found, the classification surveyor will issue a ‘‘recommendation’’ which must be rectified by the ship owner within prescribed time limits.

Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in-class” by a classification society which is a member of the International Association of Classification Societies (IACS). The IACS issued draft harmonized Common Structure Rules that align with IMO goal standards, for industry review in 2012 and it expects them to be adopted in Winter 2013. All our vessels are certified as being “in-class” by American Bureau of Shipping. All new and secondhand vessels that we purchase must be certified prior to their delivery under our standard purchase contracts and memoranda of agreement. If the vessel is not certified on the scheduled date of closing, we have no obligation to take delivery of the vessel.

In addition to the classification inspections, many of our customers regularly inspect our vessels as a precondition to chartering them for voyages. We believe that our well-maintained, high-quality vessels provide us with a competitive advantage in the current environment of increasing regulation and customer emphasis on quality.

Risk of Loss and Liability Insurance

General

The operation of any cargo vessel includes risks such as mechanical failure, collision, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade. OPA, which in certain circumstances imposes virtually unlimited liability upon owners, operators and demise charterers of any vessel trading in the United States exclusive economic zone for certain oil pollution accidents in the United States, has made liability insurance more expensive for vessel-owners and operators trading in the United States market. While we believe that our present insurance coverage is adequate, not all risks can be insured against, and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates.

Marine and War Risks Insurance

We have in force marine and war risks insurance for all of our vessels. Our marine hull and machinery insurance covers risks of particular average and actual or constructive total loss from collision, fire, grounding, engine breakdown and other insured named perils up to an agreed amount per vessel. Our war risks insurance covers the risks of particular average and actual or constructive total loss from confiscation, seizure, capture, vandalism, sabotage, and other war-related named perils. We have also arranged coverage for increased value for each vessel. Under this increased value coverage, in the event of total loss of a vessel, we will be able to recover amounts in excess of those recoverable under the hull and machinery policy in order to compensate for additional costs associated with replacement of the loss of the vessel. Each vessel is covered up to at least its fair market value at the time of the insurance attachment and subject to a fixed deductible per each single accident or occurrence, but excluding actual or constructive total loss.

Protection and Indemnity Insurance

Protection and indemnity insurance is provided by mutual protection and indemnity associations, or P&I Associations, and covers our third party liabilities in connection with our shipping activities. This includes third-party liability and other related expenses resulting from injury or death of crew, passengers and other third parties, loss or damage to cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances, and salvage, towing and other related costs, including wreck removal. Protection and indemnity insurance is a form of mutual indemnity insurance, extended by mutual protection and indemnity associations, or “clubs.” Subject to the “capping” discussed below, our coverage, except for pollution, is unlimited.

As a member of a P&I Club that is a member of the International Group of P&I Clubs, or the International Group, we carry protection and indemnity insurance coverage for pollution of $1 billion per vessel per incident. The P&I Clubs that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. Although the P&I Clubs compete with each other for business, they have found it beneficial to pool their larger risks under the auspices of the International Group. This pooling is regulated by a contractual agreement which defines the risks that are to be pooled and exactly how these risks are to be shared by the participating P&I Clubs. We are subject to calls payable to the associations based on its claim records as well as the claim records of all other members of the individual associations and members of the pool of P&I Clubs comprising the International Group.


C.	Organizational Structure

Please see Exhibit 8.1 to this annual report for a list of our current subsidiaries.


D.	Property, Plant and Equipment

For a description of our fleet, see Item 4.A. – “History and Development of the Company” and Item 4.B. “Business Overview – Our Fleet.”


ITEM 4A.	UNRESOLVED STAFF COMMENTS

None.


ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS


A.	Operating Results

The following presentation of management’s discussion and analysis of results of operations and financial condition should be read in conjunction with our consolidated financial statements, accompanying notes thereto and other financial information appearing in Item 18. “Financial Statements.” You should also carefully read the following discussion with the sections of this annual report entitled “Risk Factors,” “The International Tanker Industry,” and “Cautionary Statement Regarding Forward-Looking Statements.” Our consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 have been prepared in accordance with IFRS as issued by the IASB. The consolidated financial statements are presented in US dollars ($) unless otherwise indicated. Any amounts converted from another non-U.S. currency to US dollars in this annual report are at the rate applicable at the relevant date, or the average rate during the applicable period.

We anticipate additional opportunities to expand our fleet through acquisitions of tankers, and we believe that recent downward pressure on tanker values will present attractive investment opportunities to ship operators that have the necessary capital resources. We may purchase secondhand vessels that meet our specifications or newbuilding vessels, either directly from shipyards or from the current owners with shipyard contracts. The timing of these acquisitions will depend on our ability to identify suitable vessels on attractive purchase terms. Since our initial public offering in April 2010, we have expanded our fleet from three tankers to 14 wholly-owned tankers and 21 time chartered-in tankers, and we have contracts for the construction of 33 additional newbuilding vessels.

We generate revenues by charging customers for the transportation of their refined oil and other petroleum products using our vessels. Historically, these services generally have been provided under the following basic types of contractual relationships:


•	Voyage charters, which are charters for short intervals that are priced on current, or “spot,” market rates.

•	Time charters, which are chartered to customers for a fixed period of time at rates that are generally fixed, but may contain a variable component based on inflation, interest rates, or current market rates.

•	Commercial Pools, whereby we participate with other shipowners to operate a large number of vessels as an integrated transportation system, which offers customers greater flexibility and a higher level of service while achieving scheduling efficiencies. Pools negotiate charters primarily in the spot market. The size and scope of these pools enable them to enhance utilization rates for pool vessels by securing backhaul voyages and contracts of affreightment (described below), thus generating higher effective time charter equivalent, or TCE, revenues than otherwise might be obtainable in the spot market.

•	For all types of vessels in contractual relationships, we are responsible for crewing and other vessel operating costs for our owned vessels and the charterhire expense for vessels that we time charter-in.

The table below illustrates the primary distinctions among these different employment arrangements:


	Voyage Charter	Time Charter	Commercial Pool
Typical contract length	Single voyage	One year or more	Varies
Hire rate basis⁽¹⁾	Varies	Daily	Varies
Voyage expenses⁽²⁾	We pay	Customer pays	Pool pays
Vessel operating costs for owned vessels⁽³⁾	We pay	We pay	We pay
Charterhire expense for vessels chartered-in⁽³⁾	We pay	We pay	We pay
Off-hire ⁽⁴⁾	Customer does not pay	Customer does not pay	Pool does not pay


	(1)	“Hire rate” refers to the basic payment from the charterer for the use of the vessel.

	(2)	“Voyage expenses” refers to expenses incurred due to a vessel’s traveling from a loading port to a discharging port, such as fuel (bunker) cost, port expenses, agent’s fees, canal dues and extra war risk insurance, as well as commissions.

	(3)	Defined below under “—Important Financial and Operational Terms and Concepts.”

	(4)	“Off-hire” refers to the time a vessel is not available for service due primarily to scheduled and unscheduled repairs or drydockings. For time chartered-in vessels, we do not pay the charterhire expense when the vessel is off-hire.

As of the date of this annual report, all of our owned and time chartered-in vessels were operating in the Scorpio Group Pools except STI Sapphire, Gan-Trust and SN Federica, which were operating in the spot market.

IMPORTANT FINANCIAL AND OPERATIONAL TERMS AND CONCEPTS

We use a variety of financial and operational terms and concepts. These include the following:

Vessel revenues. Vessel revenues primarily include revenues from time charters, pool revenues and voyage charters (in the spot market). Vessel revenues are affected by hire rates and the number of days a vessel operates. Vessel revenues are also affected by the mix of business between vessels on time charter, vessels in pools and vessels operating on voyage charter. Revenues from vessels in pools and on voyage charter are more volatile, as they are typically tied to prevailing market rates.

Voyage charters. Voyage charters or spot voyages are charters under which the customer pays a transportation charge for the movement of a specific cargo between two or more specified ports. We pay all of the voyage expenses.

Voyage expenses. Voyage expenses primarily include bunkers, port charges, canal tolls, cargo handling operations and brokerage commissions paid by us under voyage charters. These expenses are subtracted from voyage charter revenues to calculate time charter equivalent revenues.

Vessel operating costs. For our owned vessels, we are responsible for vessel operating costs, which include crewing, repairs and maintenance, insurance, stores, lube oils, communication expenses, and technical management fees. The two largest components of our vessel operating costs are crews, and repairs and maintenance. Expenses for repairs and maintenance tend to fluctuate from period to period because most repairs and maintenance typically occur during periodic drydocking. Please read “Drydocking” below. We expect these expenses to increase as our fleet matures and to the extent that it expands.

Additionally, these costs include technical management fees that we paid to SSM, which is controlled by the Lolli-Ghetti family. Pursuant to our Master Agreement, SSM provides us with technical services, and we provide them with the ability to subcontract technical management of our vessels with our approval.

Charterhire. Charterhire is the amount we pay the owner for time chartered-in vessels. The amount is usually for a fixed period of time at rates that are generally fixed, but may contain a variable component based on inflation, interest rates, or current market rates. The vessel’s owner is responsible for crewing and other vessel operating costs.

Drydocking. We periodically drydock each of our owned vessels for inspection, repairs and maintenance and any modifications to comply with industry certification or governmental requirements. Generally, each vessel is drydocked every 30 months to 60 months. We capitalize a substantial portion of the costs incurred during drydocking and amortize those costs on a straight-line basis from the completion of a drydocking to the estimated completion of the next drydocking. We immediately expense costs for routine repairs and maintenance performed during drydocking that do not improve or extend the useful lives of the assets. The number of drydockings undertaken in a given period and the nature of the work performed determine the level of drydocking expenditures.

Depreciation. Depreciation expense typically consists of:


	•	charges related to the depreciation of the historical cost of our owned vessels (less an estimated residual value) over the estimated useful lives of the vessels; and

	•	charges related to the amortization of drydocking expenditures over the estimated number of years to the next scheduled drydocking.

Time charter equivalent (TCE) revenue or rates. We report time charter equivalent, or TCE revenues, a non-IFRS measure, because (i) we believe it provides additional meaningful information in conjunction with voyage revenues and voyage expenses, the most directly comparable IFRS measure, (ii) it assists our management in making decisions regarding the deployment and use of our vessels and in evaluating their financial performance, (iii) it is a standard shipping industry performance measure used primarily to compare period-to-period changes in a shipping company’s performance irrespective of changes in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed between the periods, and (iv) we believe that it presents useful information to investors. TCE revenue is vessel revenue less voyage expenses, including bunkers and port charges. The TCE rate achieved on a given voyage is expressed in US dollars/day and is generally calculated by taking TCE revenue and dividing that figure by the number of revenue days in the period. For a reconciliation of TCE revenue, deduct voyage expenses from revenue on our Statement of Profit or Loss.

Revenue days. Revenue days are the total number of calendar days our vessels were in our possession during a period, less the total number of off-hire days during the period associated with major repairs or drydockings. Consequently, revenue days represent the total number of days available for the vessel to earn revenue. Idle days, which are days when a vessel is available to earn revenue, yet is not employed, are included in revenue days. We use revenue days to show changes in net vessel revenues between periods.

Average number of vessels. Historical average number of owned vessels consists of the average number of vessels that were in our possession during a period. We use average number of vessels primarily to highlight changes in vessel operating costs and depreciation and amortization.

Contract of affreightment. A contract of affreightment, or COA, relates to the carriage of specific quantities of cargo with multiple voyages over the same route and over a specific period of time which usually spans a number of years. A COA does not designate the specific vessels or voyage schedules that will transport the cargo, thereby providing both the charterer and shipowner greater operating flexibility than with voyage charters alone. The charterer has the flexibility to determine the individual voyage scheduling at a future date while the shipowner may use different vessels to perform these individual voyages. As a result, COAs are mostly entered into by large fleet operators, such as pools or shipowners with large fleets of the same vessel type. We pay the voyage expenses while the freight rate normally is agreed on a per cargo ton basis.

Commercial pools. To increase vessel utilization and revenues, we participate in commercial pools with other shipowners and operators of similar modern, well-maintained vessels. By operating a large number of vessels as an integrated transportation system, commercial pools offer customers greater flexibility and a higher level of service while achieving scheduling efficiencies. Pools employ experienced commercial charterers and operators who have close working relationships with customers and brokers, while technical management is performed by each shipowner. Pools negotiate charters with customers primarily in the spot market. The size and scope of these pools enable them to enhance utilization rates for pool vessels by securing backhaul voyages and COAs, thus generating higher effective TCE revenues than otherwise might be obtainable in the spot market while providing a higher level of service offerings to customers.

Operating days. Operating days are the total number of available days in a period with respect to the owned vessels, before deducting available days due to off-hire days and days in drydock. Operating days is a measurement that is only applicable to our owned vessels, not our chartered-in vessels.

ITEMS YOU SHOULD CONSIDER WHEN EVALUATING OUR RESULTS

You should consider the following factors when evaluating our historical financial performance and assessing our future prospects:

Our vessel revenues are affected by cyclicality in the tanker markets. The cyclical nature of the tanker industry causes significant increases or decreases in the revenue we earn from our vessels, particularly those vessels we trade in the spot market. We employ a chartering strategy to capture upside opportunities in the spot market while using fixed-rate time charters to reduce downside risks, depending on SCM’s outlook for freight rates, oil tanker market conditions and global economic conditions. Historically, the tanker industry has been cyclical, experiencing volatility in profitability due to changes in the supply of, and demand for, tanker capacity. The supply of tanker capacity is influenced by the number and size of new vessels built, vessels scrapped, converted and lost, the number of vessels that are out of service, and regulations that may effectively cause early obsolescence of tonnage. The demand for tanker capacity is influenced by, among other factors:


•	global and regional economic and political conditions;

•	increases and decreases in production of and demand for crude oil and petroleum products;

•	increases and decreases in OPEC oil production quotas;

•	the distance crude oil and petroleum products need to be transported by sea; and

•	developments in international trade and changes in seaborne and other transportation patterns.

Tanker rates also fluctuate based on seasonal variations in demand. Tanker markets are typically stronger in the winter months as a result of increased oil consumption in the northern hemisphere but weaker in the summer months as a result of lower oil consumption in the northern hemisphere and refinery maintenance that is typically conducted in the summer months. In addition, unpredictable weather patterns during the winter months in the northern hemisphere tend to disrupt vessel routing and scheduling. The oil price volatility resulting from these factors has historically led to increased oil trading activities in the winter months. As a result, revenues generated by our vessels have historically been weaker during the quarters ended June 30 and September 30, and stronger in the quarters ended March 31 and December 31.

Our general and administrative expenses were affected by the fees we pay SCM and SSH for commercial management and administrative services respectively, and costs incurred from being a public company. SCM and SSH, companies controlled by the Lolli-Ghetti family of which our founder, Chairman and Chief Executive Officer is a member, provide commercial and administrative management services to us, respectively. We pay fees under our Master Agreement with SCM, which are identical to what SCM charges to its pool participants, including third-party owned vessels. We reimburse our Administrator for the reasonable direct or indirect expenses it incurs in providing us with the administrative services described above. We also pay our Administrator a fee for arranging vessel purchases and sales for us equal to 1% of the gross purchase or sale price, payable upon the consummation of any such purchase or sale. We believe this 1% fee on purchases and sales is customary in the tanker industry. In addition, we continue to incur general and administrative expenses related to our being a publicly traded company, including, among other things, costs associated with reports to shareholders, filings with the U.S. Securities Exchange Commission, investor relations, New York Stock Exchange fees and tax compliance expenses.

RESULTS OF OPERATIONS

The following tables separately present our operating results for the years ended December 31, 2012, 2011 and 2010.

Results of Operations for the Year ended December 31, 2012 Compared to the Year Ended December 31, 2011


	For the year ended December 31,						Change			Percentage Change
*In thousands of US dollars*	2012			2011			Change			Percentage Change
Vessel revenue	$	115,381		$	82,110		$	33,271			41	%
Vessel operating costs		(30,353	)		(31,370	)		1,017			3	%
Voyage expenses		(21,744	)		(6,881	)		(14,863	)		(216	%)
Charterhire		(43,701	)		(22,750	)		(20,951	)		(92	%)
Impairment		—			(66,611	)		66,611			100	%
Depreciation		(14,818	)		(18,460	)		3,642			20	%
Loss from sale of vessels		(10,404	)		—			(10,404	)		N/A
General and administrative expenses		(11,536	)		(11,637	)		101			1	%
Financial expenses		(8,512	)		(7,060	)		(1,452	)		(21	%)
Earnings from profit or loss sharing agreements		443			—			443			N/A
Unrealized loss on derivative financial instruments		(1,231	)		—			(1,231	)		N/A
Financial income		35			51			(16	)		(31	%)
Other expenses, net		(97	)		(119	)		22			18	%
Net loss	$	(26,537	)	$	(82,727	)	$	56,190			68	%

Net Loss. Net loss for the year ended December 31, 2012 was $26.5 million, compared to a net loss of $82.7 million for the year ended December 31, 2011. The differences between the two periods are discussed below.

Vessel revenue. Revenue for the year ended December 31, 2012 was $115.4 million, an increase of $33.3 million, or 41% from revenue of $82.1 million for the year ended December 31, 2011. The following table summarizes our revenue:


	For the year ended December 31,							Percentage Change
*In thousands of US dollars*	2012		2011		Change			Percentage Change

Owned vessels
Time charter revenue		—	$	9,626	$	(9,626	)		(100	%)
Pool revenue		38,522		39,522		(1,000	)		(3	%)
Voyage revenue		26,668		12,287		14,381			117	%
Time chartered-in vessels
Pool revenue		33,740		20,675		13,065			63	%
Voyage revenue		16,451		—		16,451			N/A
	$	115,381	$	82,110	$	33,271			41	%

Owned vessels – Time charter revenue. We did not time charter-out any owned vessels for the year ended December 31, 2012. For the year ended December 31, 2011, Noemi and STI Spirit were employed on time charters for a total of 427 days.

Owned vessels – Pool revenue. Pool revenue for owned vessels for the year ended December 31, 2012 was $38.5 million, a decrease of $1.0 million or 3% from $39.5 million for the year ended December 31, 2011. We had 2,851 revenue days of owned vessels in the pools during the year ended December 31, 2012 compared to 3,149 during the year ended December 31, 2011. This decrease in revenue days was primarily driven by the sales of STI Conqueror, STI Matador, and STI Gladiator during March, April and May 2012 resulting in 911 less pool days partially offset by (i) the entrance in the Scorpio MR Pool by our first five newbuilding vessels during the fourth quarter of 2012 for a total of 176 additional days, (ii) Noemi, which was on time charter for the majority of 2011 and operated in the pool during the year ended December 31, 2012 (net increase of 355 days), and (iii) an increase in TCE earnings from our owned vessels operating in the pools to $13,510 per day for the year ended December 31, 2012 from $12,550 per day for the year ended December 31, 2011.

Owned vessels – Voyage revenue. Voyage revenue for owned vessels for the year ended December 31, 2012 was $26.7 million, an increase of $14.4 million, or 117% from $12.3 million during the year ended December 31, 2011. The increase was primarily the result of an increase in the number of days that our vessels operated in the spot market for the year ended December 31, 2012 and 2011 to 1,015 days from 450 days, respectively. Additionally, TCE earnings from our owned vessels operating in the spot market increased to $13,220 per day in 2012 from $12,092 per day in 2011. Our first five newbuilding vessels operated in the spot market immediately after delivery from the yards for a total of 414 days. Furthermore, STI Conqueror, STI Matador, STI Gladiator, STI Coral and STI Diamond all operated in the spot market during 2012 prior to their sales. While STI Coral and STI Diamond were the only vessels operating in the spot market during 2011.

Time chartered-in vessels – Pool revenue. Pool revenue for time chartered-in vessels for the year ended December 31, 2012 was $33.7 million, an increase of $13.1 million, or 63% from $20.7 million during the year ended December 31, 2011. The increase was primarily the result of an increase in the number of days that our time chartered-in vessels operated in the pools for the years ended December 31, 2012 and 2011 to 2,662 days from 1,806 days, respectively. Additionally, TCE earnings from our time chartered-in vessels operating in the pools increased to $12,656 per day for the year ended December 31, 2012 from $11,448 per day for the year ended December 31, 2011.

Time chartered-in vessels – Voyage revenue. Voyage revenue for our time chartered-in vessels for the year ended December 31, 2012 was $16.5 million. During the year ended December 31, 2012, time chartered-in vessels operated 698 days in the spot market. There were no time chartered-in vessels operating in the spot market during the year ended December 31, 2011.

Vessel operating costs. Vessel operating costs for the year ended December 31, 2012 were $30.4 million, a decrease of $1.0 million or 3%, from $31.4 million during the year ended December 31, 2011. We had 3,957 operating days during 2012 compared to 4,121 operating days during 2011. The decrease was primarily the result of the sales of STI Conqueror, STI Gladiator and STI Matador in 2012 which resulted in a decrease of 789 operating days for these vessels during the year ended December 31, 2012 versus the same period of the prior year. This decrease was partially offset by an increase of 612 operating days resulting from the delivery of our first five newbuilding vessels during the third quarter of 2012. Overall operating costs per day were consistent at $7,605 per day for the year ended December 31, 2012 compared to $7,581 per day for the year ended December 31, 2011.

Voyage expenses. Voyage expenses for the year ended December 31, 2012 were $21.7 million, an increase of $14.9 million, or 216%, from $6.9 million during the year ended December 31, 2011. The increase was primarily due to an increase in the number of days vessels operated in the spot market. There were 1,712 spot voyage days (owned and time chartered-in) during the year ended December 31, 2012 as compared to 450 days during year ended December 31, 2011.

Charterhire. Charterhire expense for the year ended December 31, 2012 was $43.7 million, an increase of $21.0 million, or 92%, from $22.8 million during the year ended December 31, 2011. The increase was the result of additional time chartered-in vessels in 2012 compared with 2011; the average number of chartered-in vessels increased to 9.18 from 4.95 during the years ended December 31, 2012 and 2011, respectively.

Impairment. In the year ended December 31, 2011, we recognized an impairment loss of $66.6 million for our 12 owned vessels. This impairment loss was triggered by reductions in vessel values, and represented the difference between the carrying value and recoverable amount, being fair value less cost to sell. No impairment was recognized in the year ended December 31, 2012.

Impairment methodology

The carrying values of our vessels may not represent their fair market value at any point in time since the market prices of second-hand vessels fluctuate with changes in charter rates and the cost of constructing new vessels. At each reporting period end date, we review the carrying amounts of our vessels to determine whether there is any indication that those vessels may have suffered an impairment loss. In this regard, fluctuations in market values below carrying values are considered to represent an impairment triggering event that necessitates performance of a full impairment review.

Impairment losses are calculated as the excess of a vessel’s carrying amount over its recoverable amount. Under IFRS, the recoverable amount is the higher of an asset’s (i) fair value less costs to sell and (ii) value in use. Fair value less costs to sell is defined by IFRS as “the amount obtainable from the sale of an asset or cash-generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal”. When we calculate value in use, we discount the expected future cash flows to be generated by our vessels to their net present value.

Our impairment evaluation is performed on an individual vessel basis when there are indications of impairments. First, we assess the fair value less the cost to sell our vessels taking into consideration vessel valuations from leading, independent and internationally recognized ship brokers. We then compare that estimate of market values (less an estimate of selling costs) to each vessel’s carrying value and, if the carrying value exceeds the vessel’s market value, an indicator of impairment exists. The indicator of impairment prompts us to perform a calculation of the potentially impaired vessel’s value in use, in order to appropriately determine the ‘higher of’ the two values.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. In developing estimates of future cash flows, we make assumptions about future charter rates, vessel operating expenses, the estimated remaining useful lives of the vessels and the discount rate. These assumptions are based on historical trends as well as future expectations. Although management believes that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective. Reasonable changes in the assumptions for the discount rate or future charter rates could lead to a value in use for some of our vessels that is equal to or less than the carrying amount for such vessels. All of the aforementioned assumptions have been highly volatile in both the current market and historically. Given the current and historical volatility in market prices for similar vessels and recent downward pressure on charter rates, the fair value less estimated costs to sell in the current year reflected potential indicators of impairment for all of our owned vessels.

For the year ended December 31, 2012, we performed an assessment as described above. At that date, the carrying amounts of our vessels were greater than the basic, meaning charter free, market value for all of our owned vessels. In line with our policy we performed a value in use calculation where we estimated each vessels’ future cash flows based on a combination of the latest forecast time charter rates for the next three years (obtained from a third party service provider), a growth rate of 3.0% in freight rates for each period thereafter, and our best estimate of vessel operating expenses and drydock costs, which also assume a growth rate of 3.0% in each succeeding year. These cash flows were then discounted to their present value, using a discount rate of 7.9%, based on our current borrowing rates adjusted for certain credit risks. The value in use calculations were greater than the fair value less estimated costs to sell in all instances. As a result of this testing, no impairment charge was recorded.

For the year ended December 31, 2011, the value in use calculations for all vessels were less than both the fair value less estimated costs to sell and carrying amounts of the vessels. As a result of this testing, we recorded an impairment loss of $66.6 million to adjust the carrying amounts of our vessels to reflect fair value less estimated costs to sell.

Illustrative comparison of excess of carrying amounts over estimated charter-free market value of certain vessels

During the past few years, the market values of vessels have experienced particular volatility, with substantial declines in many vessel classes. As a result, the charter-free market value, or basic market value, of certain of our vessels may have declined below the carrying amounts of those vessels. After undergoing the impairment analysis using value in use to determine the recoverable amount as discussed above, we have concluded that at December 31, 2012, the value in use for our vessels was higher than their carrying values and consequently, no impairment is required.

The table set forth below indicates the carrying amount of each of our vessels as of December 31, 2012 and December 31, 2011 and the aggregate difference between the carrying amount and the market value represented by such vessels (see footnote 1 to the table set forth below). This aggregate difference represents the approximate analysis of the amount by which we believe we would record a loss if we sold those vessels, in the current environment, on industry standard terms, in cash transactions and to a willing buyer where we are not under any compulsion to sell, and where the buyer is not under any compulsion to buy. For purposes of this calculation, we have assumed that the vessels would be sold at a price that reflects our estimate of their basic market values. However, we are not holding our vessels for sale.

Our estimate of basic market value assumes that our vessels are all in good and seaworthy condition without need for repair and if inspected would be certified in class without notations of any kind. Our estimates are based on information available from various industry sources, including:


	•	reports by industry analysts and data providers that focus on our industry and related dynamics affecting vessel values;

	•	news and industry reports of similar vessel sales;

	•	news and industry reports of sales of vessels that are not similar to our vessels where we have made certain adjustments in an attempt to derive information that can be used as part of our estimates;

	•	approximate market values for our vessels or similar vessels that we have received from shipbrokers, whether solicited or unsolicited, or that shipbrokers have generally disseminated;

	•	offers that we may have received from potential purchasers of our vessels; and

	•	vessel sale prices and values of which we are aware through both formal and informal communications with shipowners, shipbrokers, industry analysts and various other shipping industry participants and observers.

As we obtain information from various industry and other sources, our estimates of basic market value are inherently uncertain. In addition, vessel values and revenues are highly volatile; as such, our estimates may not be indicative of the current or future basic market value of our vessels or prices that we could achieve if we were to sell them.


	*In millions of US dollars*			Carrying value as at,
	Vessel Name	Year Built		December 31, 2012 ⁽¹⁾			December 31, 2011 ⁽²⁾
1	STI Highlander		2007	$	23.1		$	24.4
2	STI Gladiator		2003		N/A	⁽³⁾		17.8
3	STI Matador		2003		N/A	⁽³⁾		18.3
4	STI Conqueror		2005		N/A	⁽³⁾		20.5
5	STI Coral		2008		N/A	⁽³⁾		28.3
6	STI Diamond		2008		N/A	⁽³⁾		28.3
7	Noemi		2004		27.0			28.4
8	Senatore		2004		27.1			28.4
9	STI Harmony		2007		33.6			35.3
10	STI Heritage		2008		35.9			35.9
11	Venice		2001		17.7			19.7
12	STI Spirit		2008		37.4			37.7
13	STI Amber		2012		38.6			N/A	⁽⁴⁾
14	STI Topaz		2012		38.7			N/A	⁽⁴⁾
15	STI Ruby		2012		38.7			N/A	⁽⁴⁾
16	STI Garnet		2012		38.8			N/A	⁽⁴⁾
17	STI Onyx		2012		38.8			N/A	⁽⁴⁾

	Total			$	395.4		$	322.5


(1)	As of December 31, 2012, the basic charter-free market value is lower than each vessel’s carrying value. We believe that the aggregate carrying value of these vessels exceeds their aggregate basic charter-free market value by approximately $64.2 million.

(2)	Given that each of our vessels was impaired at December 31, 2011 based on fair value less costs to sell, the carrying amounts noted above are representative of fair value less estimated costs to sell as of December 31, 2011.

(3)	These vessels were sold during the year ended December 31, 2012.

(4)	These vessels were acquired during the year ended December 31, 2012.

The impairment test that we conduct is most sensitive to variances in the discount rate and future time charter rates. Based on the sensitivity analysis performed for December 31, 2012, a 1.0% increase in the discount rate would result in an aggregate impairment of $6.4 million. Alternatively, a 5% decrease in forecasted time charter rates would result in an aggregate impairment of $8.0 million.

We refer you to the discussion herein under Item 3.D. “Risk Factors — Risks Related to our Industry,” including the risk factor entitled “Adverse market conditions could cause us to breach covenants in our credit facilities and adversely affect our operating results.”

Depreciation. Depreciation expense for the year ended December 31, 2012 was $14.8 million, a decrease of $3.6 million or 20%, from $18.5 million during the year ended December 31, 2011. The decrease was a result of (i) a $66.6 million impairment charge recorded at December 31, 2011 which decreased the depreciable basis of our vessels and (ii) a decrease in the number of owned vessels to 10.81 from 11.29 which was driven by the sales of STI Conqueror in March 2012, STI Matador in April 2012, STI Gladiator in May 2012, STI Diamond in August 2012 and STI Coral in September 2012, partially offset by the delivery of our first five newbuilding vessels between July 2012 and September 2012.

Loss from sale of vessels. Loss from sale of vessels for the year ended December 31, 2012 was $10.4 million. This loss is related to the sales of STI Conqueror, STI Matador, STI Gladiator, STI Coral, and STI Diamond during the year ended December 31, 2012 and includes $0.2 million in relating to a loss on the interest rate swaps used to hedge the interest payments on the borrowings on these vessels.

General and administrative expenses. General and administrative expenses for the year ended December 31, 2012 were $11.5 million, a decrease of $0.1 million, or 1%, from the year ended December 31, 2011. These costs remained relatively stable as there were no significant changes in our overhead structure on a period over period basis.

Financial expenses. Financial expenses for the year ended December 31, 2012 were $8.5 million, an increase of $1.5 million, or 21%, from $7.1 million during the year ended December 31, 2011. The increase for the year ended December 31, 2012 was primarily driven by a $3.0 million write-off of deferred financing fees relating to our 2011 Credit Facility offset by a decrease in interest expense of $1.7 million which was driven by an increase in capitalized interest expense of $2.6 million for the year ended December 31, 2012 related to our vessels under construction.

Financial expenses for the year ended December 31, 2012 consisted of interest expense of $3.3 million, commitment fees of $1.0 million on the undrawn portions of the 2010 Revolving Credit Facility and 2011 Credit Facility, deferred financing fee amortization of $1.1 million, write-off of deferred financing fees of $3.0 million and other costs of $0.1 million.

Financial expenses for the year ended December 31, 2011 consisted of interest expense of $5.0 million, commitment fees of $1.1 million on the undrawn portion of the 2010 Revolving Credit Facility and 2011 Credit Facility and deferred financing fee amortization of $1.0 million.

Earnings from profit or loss sharing agreements. Earnings from profit or loss sharing agreements consist of realized earnings from profit and loss sharing agreements with third parties relating to a time chartered-in vessel. There were no similar agreements for the comparative period.

Unrealized loss on derivative financial instruments. Unrealized loss on derivative financial instruments consists of (i) the impact of the reclassification of $1.0 million from other comprehensive income to the statement of profit or loss relating to the de-designation of the hedge relationship on our interest rate swaps relating to the 2010 Revolving Credit Facility (See Note 12 to the consolidated financial statements) and (ii) the change in the fair value of profit and loss sharing agreements on time chartered-in vessels with third parties of $0.2 million.

The following is a discussion of our operating results by operating segment:

Aframax/LR2 segment

The following table summarizes vessel operations for our Aframax/LR2 segment.


*Aframax/LR2 segment*	For the year ended December 31,									Percentage
*In thousands of US dollars except per day and fleet data*	2012			2011			Change			Change
Vessel revenue	$	4,541		$	6,484		$	(1,943	)		(30	%)
Vessel operating costs		(3,304	)		(2,547	)		(757	)		(30	%)
Voyage expenses		(25	)		—			(25	)		N/A
Charterhire		(1,287	)		(839	)		(448	)		(53	%)
Impairment		—			(12,459	)		12,459			100	%
Depreciation		(1,735	)		(2,074	)		339			16	%
General and administrative expenses		(100	)		(136	)		36			26	%
Financial expenses		(1,086	)		(841	)		(245	)		(29	%)
Other expenses, net		(11	)		(134	)		123			92	%
Segment loss	$	(3,007	)	$	(12,546	)	$	9,539			76	%

Time charter revenue per day	$	—		$	15,457		$	(15,457	)		(100	%)
Pool revenue per day		10,201			14,849			(4,648	)		(31	%)
Operating costs per day		8,436			6,960			(1,476	)		(21	%)

Time charter revenue days		—			72			(72	)		(100	%)
Pool revenue days		443			361			82			23	%
Operating days		366			365			1			0	%

Average number of owned vessels		1.00			1.00			—			0	%
Average number of time chartered-in vessels		0.29			0.19			0.10			53	%

Vessel Revenue. Vessel revenue for the year ended December 31, 2012 was $4.5 million, a decrease of $1.9 million or 30% from the year ended December 31, 2011. There were two vessels operating in this segment during both periods, STI Spirit and Khawr Aladid. The decrease in revenue is due to a decrease in pool revenue per day to $10,201 per day from $14,849 per day. This was primarily driven by STI Spirit, which in June 2012 needed repairs and a subsequent positioning voyage which negatively affected the vessel’s earnings.

Vessel operating costs. Vessel operating costs for the year ended December 31, 2012 were $3.3 million, an increase of $0.8 million, or 30%, from the year ended December 31, 2011. On a daily basis, vessel operating costs for the year ended December 31, 2012 increased $1,476 per day, or 21% from the year ended December 31, 2011. This was a result of unplanned repairs on STI Spirit during the year ended December 31, 2012.

Charterhire. Charterhire expense for the year ended December 31, 2012 was $1.3 million, an increase of $0.5 million, or 53%, from the year ended December 31, 2011. This increase was driven by the time chartered-in vessel, Khawr Aladid, which was delivered on October 24, 2011, on a six month arrangement that expired in April 2012.

Depreciation. Depreciation expense for the year ended December 31, 2012 was $1.7 million, a decrease of $0.3 million, or 16%, from the year ended December 31, 2011. This was a result of an impairment charge that was recorded in December 2011 which reduced the depreciable basis of STI Spirit in 2012.

Financial expense. Financial expense for the year ended December 31, 2012 was $1.1 million, an increase of $0.2 million or 29% from the year ended December 31, 2011. Financial expense for the Aframax/LR1 segment represents interest for the STI Spirit Credit Facility, which was signed and drawn in March 2011; therefore, the year ended December 31, 2012 represents a full year of interest expense as opposed to approximately nine months of interest expense during year ended December 31, 2011.

Other expenses, net. Other expenses, net for the year ended December 31, 2012 decreased $0.1 million or 92% from the year ended December 31, 2011. This decrease was driven by the write-off of the fair value of vessel purchase options that were acquired with STI Spirit in September 2011.

Panamax/LR1 segment

The following table summarizes vessel operations for our Panamax/LR1 segment.


*Panamax/LR1 segment*	For the year ended December 31,									Percentage
*In thousands of US dollars except per day and fleet data*	2012			2011			Change			Change
Vessel revenue	$	28,602		$	31,101		$	(2,499	)		(8	%)
Vessel operating costs		(14,137	)		(14,428	)		291			2	%
Voyage expenses		(999	)		(13	)		(986	)		(7585	%)
Charterhire		(1,629	)		(4,554	)		2,925			64	%
Impairment		—			(28,616	)		28,616			100	%
Depreciation		(7,352	)		(9,279	)		1,927			21	%
General and administrative expenses		(495	)		(692	)		197			28	%
Earnings from profit or loss sharing agreements		443			—			443			N/A
Unrealized loss on derivative financial instruments		(184	)		—			(184	)		N/A
Other expenses, net		—			23			(23	)		100	%
Segment profit / (loss)	$	4,249		$	(26,458	)	$	30,707			116	%

Time charter revenue per day	$	—		$	23,962		$	(23,962	)		(100	%)
Pool revenue per day		14,242			12,876			1,366			11	%
Voyage revenue per day		15,147			—			15,147			N/A
Operating costs per day		7,714			7,891			177			2	%

Time charter revenue days		—			355			(355	)		(100	%)
Pool revenue days		1,888			1,754			134			8	%
Voyage revenue days		48			—			48			N/A
Operating days		1,830			1,825			(5	)		0	%

Average number of owned vessels		5.00			5.00			—			0	%
Average number of time chartered-in vessels		0.35			0.91			(0.56	)		(62	%)

Vessel Revenue. Vessel revenue for the year ended December 31, 2012 was $28.6 million, a decrease of $2.5 million or 8% from the year ended December 31, 2011. The decrease in revenue was the result of (i) a decrease in the number of revenue days to 1,936 for the year ended December 31, 2012 compared to 2,109 days during the year ended December 31, 2011 and (ii) a decrease in overall revenue per day to $14,264 for the year ended December 31, 2012 from $14,743 for the year ended December 31, 2011. This was driven by a reduction in the average number of time chartered-in vessels to 0.35 from 0.91 for the years ended December 31, 2012 and 2011, respectively. This reduction is due to the redelivery of the time chartered-in vessel, BW Zambesi in November 2011 following its 10 month time charter-in agreement offset partially by the delivery of the time chartered-in vessels, FPMC P Eagle and Hellespont Promise in September and December 2012, respectively.

Noemi was time chartered-out during the year ended December 31, 2011 at a rate of $24,500 per day and was redelivered in December 2011. The effect of the decrease on overall pool revenue resulting from the expiration of this charter was offset by an increase of pool revenue per day to $14,242 per day during the year ended December 31, 2012 from $12,876 per day during the year ended December 31, 2011.

Vessel operating costs. Vessel operating costs for the year ended December 31, 2012 were $14.1 million, a decrease of $0.3 million, or 2%, from the year ended December 31, 2011. Vessel operating costs per day for the year ended December 31, 2012 decreased $177 per day, or 2% from the year December 31, 2011. These costs remained relatively stable as there were no changes in our owned Panamax/LR1 fleet on a period over period basis.

Voyage expenses. Voyage expenses for the year ended December 31, 2012 were $1.0 million, an increase of $1.0 million from the year ended December 31, 2011. This increase was the result of time chartered-in vessel, FPMC P Eagle, which operated in the spot market for 48 days during the year ended December 31, 2012. No vessels operated in the spot market for the year ended December 31, 2011.

Charterhire. Charterhire expense for the year ended December 31, 2012 was $1.6 million, a decrease of $2.9 million or 64% from the year ended December 31, 2011. This decrease was the result of the redelivery of time chartered-in vessel, BW Zambesi in November 2011 from its 10 month time charter-in agreement. This was partially offset by the delivery of the time chartered-in vessels, FPMC P Eagle and Hellespont Promise in September and December 2012, respectively.

Depreciation. Depreciation expense for the year ended December 31, 2012 was $7.4 million, a decrease of $1.9 million, or 21%, from the year ended December 31, 2011. This was a result of an impairment charge recorded in December 2011, which reduced the depreciable basis of all owned vessels in the Panamax / LR1 Segment.

General and administrative expenses. General and administrative expenses for the year ended December 31, 2012 were $0.5 million, a decrease of $0.2 million or 28%, from the year ended December 31, 2011. General and administrative expenses for the Panamax / LR1 segment primarily consist of administrative fees.

Earnings from profit or loss sharing agreements Earnings from profit or loss sharing agreements consist of realized earnings from profit and loss sharing agreements with third parties relating to time chartered-in vessels. We had two such agreements in place during the year ended December 31, 2012, one with our time chartered-in vessel, FPMC P Eagle and the other relating to a vessel for which the Company neither owns nor time charters-in (i.e. the vessel is chartered-in by an unrelated third party.) There were no similar agreements for the comparative period.

Unrealized loss on derivative financial instruments. Unrealized loss on derivative financial instruments consists of a $0.2 million change in the fair value of our profit and loss sharing agreements with third parties. For a description of these agreements, please see Item 5.B. “Liquidity and Capital Resources – Profit or loss sharing agreements.” There were no similar agreements for the comparative period.

MR segment

The following table summarizes vessel operations for our MR segment.


*MR segment*	For the year ended December 31,									Percentage
*In thousands of US dollars except per day and fleet data*	2012			2011			Change			Change
Vessel revenue	$	46,857		$	12,287		$	34,570			281	%
Vessel operating costs		(7,484	)		(3,178	)		(4,306	)		(135	%)
Voyage expenses		(17,979	)		(6,842	)		(11,137	)		(163	%)
Charterhire		(17,593	)		—			(17,593	)		N/A
Impairment		—			(12,573	)		12,573			100	%
Depreciation		(4,015	)		(2,038	)		(1,977	)		(97	%)
Loss from sale of vessels		(5,879	)		—			(5,879	)		N/A
General and administrative expenses		(398	)		(314	)		(84	)		(27	%)
Financial income		6			—			6			N/A
Other expenses, net		(51	)		—			(51	)		N/A
Segment loss	$	(6,536	)	$	(12,658	)	$	6,122			48	%

Pool revenue per day	$	11,811		$	—		$	11,811			N/A
Voyage revenue per day		12,541			12,092			449			4	%
Operating costs per day		6,770			6,748			(22	)		0	%

Pool revenue days		809			—			809			N/A
Voyage revenue days		1,541			450			1,091			242	%
Operating days		1,089			471			618			131	%

Average number of owned vessels		2.97			1.29			1.68			130	%
Average number of time chartered-in vessels		3.51			—			3.51			N/A

Vessel Revenue. Vessel revenue for the year ended December 31, 2012 was $46.9 million, an increase of $34.6 million or 281% from the year ended December 31, 2011. Vessel revenue less voyage expenses, or TCE revenue, was $28.9 million, an increase of $23.4 million, or 430% from $5.4 million for the year ended December 31, 2011. The change in revenue was the result of an increase in revenue days to 2,350 for the year ended December 31, 2012 from 450 during the year ended December 31, 2011. During the year ended December 31, 2011, only STI Diamond and STI Coral were operating in this segment as these vessels were acquired in May 2011. Revenue days increased during the year ended December 31, 2012 as a result of the delivery of the first five Newbuilding vessels in the third quarter of 2012 (STI Amber, STI Topaz, STI Ruby, STI Garnet, and STI Onyx) and the delivery of six time chartered-in vessels (Pacific Duchess, Freja Lupus, STX Ace 6, Targale, Endeavour, and Valle Bianca). The increase in revenue was also driven by an increase in voyage revenue per day to $12,541 during the year ended December 31, 2012 from $12,092 during the year ended December 31, 2011.

Vessel operating costs. Vessel operating costs for the year ended December 31, 2012 were $7.5 million, an increase of $4.3 million, or 135%, from the year ended December 31, 2011. The increase was driven by an increase in the number of operating days to 1,089 from 471 days during the year ended December 31, 2012. This increase was the result of the delivery of our first five newbuilding vessels during the third quarter of 2012.

Voyage expenses. Voyage expenses for the year ended December 31, 2012 were $18.0 million, an increase of $11.1 million or 163% from the year ended December 31, 2011. The increase was primarily driven by STI Coral, STI Diamond, Pacific Duchess, Freja Lupus, STX Ace 6, Targale, Endeavour, Valle Bianca and the first five newbuilding vessels operating in the spot market for a total of 1,541 days during the year ended December 31, 2012 compared to only STI Coral and STI Diamond operating in the spot market for 450 days during the year ended December 31, 2011.

Charterhire. Charterhire expense for the year ended December 31, 2012 was $17.6 million, which was the result of time chartering-in Pacific Duchess, Freja Lupus, STX Ace 6, Targale, Endeavour and Valle Bianca during the year ended December 31, 2012. There were no vessels chartered-in during the year ended December 31, 2011.

Depreciation. Depreciation expense for the year ended December 31, 2012 was $4.0 million, an increase of $2.0 million, or 97%, from the year ended December 31, 2011. The increase was driven by an increase in the average number of owned MR vessels to 2.97 for the year ended December 31, 2012 from 1.29 for the year ended December 31, 2011, which was the result of the delivery of the first five newbuilding vessels during the third quarter of 2012. The increase was partially offset by a decrease of depreciation expense which was driven by an impairment charge recorded in December 2011 that reduced the depreciable basis of STI Diamond and STI Coral.

Loss from sale of vessels. Loss from sale of vessels for the year ended December 31, 2012 was $5.9 million. This was a result of the sales of STI Diamond and STI Coral for $25.25 million each in August and September 2012, respectively.

General and administrative expenses. General and administrative expenses for the year ended December 31, 2012 were $0.4 million, an increase of $0.1 million, or 27%, from the year ended December 31, 2011. General and administrative expenses for the MR segment primarily consist of administrative fees. The increase was the result of an increase in the average number of owned vessels to 2.97 during the year ended December 31, 2012 from 1.29 during the year ended December 31, 2011.

Handymax segment

The following table summarizes vessel operations for our Handymax segment:


*Handymax segment*	For the year ended December 31,									Percentage
*In thousands of US dollars except per day and fleet data*	2012			2011			Change			Change
Vessel revenue	$	35,381		$	32,238		$	3,143			10	%
Vessel operating costs		(5,428	)		(11,217	)		5,789			52	%
Voyage expenses		(2,741	)		(26	)		(2,715	)		(10442	%)
Charterhire		(23,192	)		(17,357	)		(5,835	)		(34	%)
Impairment		—			(12,962	)		12,962			100	%
Depreciation		(1,716	)		(5,069	)		3,353			66	%
Loss from sale of vessels		(4,525	)		—			(4,525	)		N/A
General and administrative expenses		(195	)		(762	)		567			74	%
Segment loss	$	(2,416	)	$	(15,155	)	$	12,739			84	%

Pool revenue per day	$	13,166		$	11,343		$	1,823			16	%
Voyage revenue per day		11,201			—			11,201			N/A
Operating costs per day		7,594			7,619			25			0	%

Pool revenue days		2,374			2,840			(466	)		(16	%)
Voyage revenue days		124			—			124			N/A
Operating days		673			1,460			787			54	%

Average number of owned vessels		1.84			4.00			(2.16	)		(54	%)
Average number of time chartered-in vessels		5.03			3.85			1.18			31	%

Vessel Revenue. Vessel revenue for the year ended December 31, 2012 was $35.4 million, an increase of $3.1 million or 10% from the year ended December 31, 2011. The increase is driven by 124 voyage revenue days in 2012 compared to no voyage revenue days in 2011 (though certain nominal voyage expenses were incurred).

Vessel revenue less voyage expenses, or TCE revenue, was $32.6 million for the year ended December 31, 2012, an increase of $0.4 million, or 1.3% from $32.2 million for the year ended December 31, 2011. The Handymax segment had 2,498 revenue days for the year ended December 31, 2012 and 2,840 revenue days for the year ended December 31, 2011. This decrease was driven by the sales of STI Conqueror, STI Matador and STI Gladiator in March, April and May of 2012, respectively, and was partially offset by an increase in the number of vessels time chartered-in for the year ended December 31, 2012. The average number of vessels (owned and time chartered-in) was 6.87 for the year ended December 31, 2012 and 7.85 for the year ended December 31, 2011.

The decrease in revenue days was offset by an increase in pool revenue per day to $13,166 for the year ended December 31, 2012 from $11,343 per day for the year ended December 31, 2011.

Vessel operating costs. Vessel operating costs for the year ended December 31, 2012 were $5.4 million, a decrease of $5.8 million, or 52%, from the year ended December 31, 2011. The decrease was driven by a decrease in the number of operating days to 673 during the year ended December 31, 2012 from 1,460 during the year ended December 31, 2011 which was due to the sales of STI Conqueror, STI Matador, and STI Gladiator in March, April and May of 2012, respectively.

Voyage expenses. Voyage expenses for the year ended December 31, 2012 were $2.7 million, increasing $2.7 million from the year ended December 31, 2011. This was a result of STI Conqueror, STI Matador, and STI Gladiator operating in the spot market for 124 days during the year ended December 31, 2012 prior to their sales. There were nominal voyage expenses incurred for the year ended December 31, 2011.

Charterhire. Charterhire expense for the year ended December 31, 2012 was $23.2 million, an increase of $5.8 million or 34% from the year ended December 31, 2011. This was the result of an increase in the number of days of chartered-in vessels to 1,840 during the year ended December 31, 2012 from 1,404 days during the year ended December 31, 2011. The increase was primarily driven by Histria Perla and Histria Coral; their time charters began in July 2011. These vessels therefore operated for partial periods during the year ended December 31, 2011 as compared to the full year during the year ended December 31, 2012. The average number of time chartered-in vessels increased to 5.03 for the year ended December 31, 2012 as compared to 3.85 for the year ended December 31, 2011.

Depreciation. Depreciation expense for the year ended December 31, 2012 was $1.7 million, a decrease of $3.4 million, or 66%, from the year ended December 31, 2011. This was due to the sales of STI Conqueror, STI Matador, and STI Gladiator which ceased being depreciated and were written down to their disposal values in February 2012, the date which they were considered held for sale. In addition, we recorded an impairment charge in December 2011 which decreased the depreciable basis of the owned vessels in this segment.

Loss from sales of vessels. Loss from sales of vessels for the year ended December 31, 2012 was $4.5 million which was the result of the sales of STI Conqueror, STI Matador, and STI Gladiator in March, April, and May 2012, respectively.

General and administrative expenses. General and administrative expenses for the year ended December 31, 2012 were $0.2 million, a decrease of $0.6 million, or 74% from the year ended December 31, 2011. General and administrative expenses for the Handymax segment primarily consist of administrative fees. The decrease in administrative fees was driven by decrease in the average number of owned vessels to 1.84 for the year ended December 31, 2012 from 4.00 for the year ended December 31, 2011 resulting from the sales of STI Conqueror, STI Matador and STI Gladiator during the year ended December 31, 2012.

Results of Operations for the Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

Net Loss. For the year ended December 31, 2011, we incurred a net loss of $82.7 million, compared to a net loss of $2.8 million for the year ended December 31, 2010. The differences between the two periods are discussed below.


	For the year ended December 31,									Percentage
*In thousands of US dollars*	2011			2010			Change			Change
Vessel revenue	$	82,110		$	38,798		$	43,312			112	%
Vessel operating costs		(31,370	)		(18,440	)		(12,929	)		(70	%)
Voyage expenses		(6,881	)		(2,542	)		(4,339	)		(171	%)
Charterhire		(22,750	)		(276	)		(22,475	)		(8157	%)
Impairment		(66,611	)		—			(66,611	)		N/A
Depreciation		(18,460	)		(10,179	)		(8,281	)		(81	%)
General and administrative expenses		(11,637	)		(6,200	)		(5,437	)		(88	%)
Financial expenses		(7,060	)		(3,231	)		(3,829	)		(119	%)
Realized loss on derivative financial instruments		—			(280	)		280			N/A
Financial income		51			37			14			40	%
Other expense, net		(119	)		(509	)		390			77	%
Net loss	$	(82,727	)	$	(2,822	)	$	(79,904	)		2831	%

Vessel revenue. Vessel revenue was $82.1 million for the year ended December 31, 2011, an increase of $43.3 million, or 112%, from vessel revenue of $38.8 million for the year ended December 31, 2010. The following table summarizes our revenue:


	For the year ended December 31,							Percentage
*In thousands of US dollars*	2011		2010		Change			Change
Owned vessels
Time charter revenue	$	9,626	$	19,417	$	(9,791	)		(50	%)
Pool revenue		39,522		15,180		24,342			160	%
Voyage revenue		12,287		3,916		8,371			214	%
Time chartered-in vessels
Pool revenue		20,675		285		20,390			7163	%

Total	$	82,110	$	38,798	$	43,312			112	%

The decrease in time charter revenue of $9.8 million, or 50%, was the result of a decrease in the overall number of days of vessels on time charter to 427 in 2011 compared to 854 in 2010. This decrease was the result of the expiration of time charter contracts on the Senatore (expired August 2010), STI Harmony (expired September 2010), and STI Heritage (expired November 2010). Noemi was employed on a time charter for both periods that began in 2007 and expired in December 2011, and STI Spirit was employed on a short term time charter for 72 days during 2011.

The increase in pool revenue for owned vessels of $24.3 million, or 160%, was primarily the result of an increase in the number of pool revenue days to 3,149 in 2011 from 1,185 in 2010. This increase was attributable to growth of the fleet as our average number of owned vessels was 11.29 for the year ended December 31, 2011, compared to 6.19 for the year ended December 31, 2010.

The increase in voyage revenue of $8.4 million, or 214%, is a result of an increase in the number of days that our vessels operated in the spot market to 450 days in 2011 compared to 177 in 2010, in addition to an increase in TCE to $12,092 per day in 2011 from $7,774 per day in 2010. During 2011, STI Coral and STI Diamond operated in the spot market for 450 days combined. During 2010, our newly purchased vessels, STI Conqueror, STI Gladiator, STI Matador and STI Highlander operated in the spot market prior to their entry in the Scorpio Handymax Tanker Pool for 167 days. Additionally, Senatore operated in the spot market for 10 days subsequent to the termination of its time charter agreement and prior to its entry in the Scorpio Panamax Tanker Pool.

The increase of pool revenue for time chartered-in vessels of $20.3 million, or 7,163%, in 2011 compared to 2010 was due to an increase in the number of pool revenue days for time chartered-in vessels. In 2011, BW Zambesi, Krisjanis Valdemars, Kraslava, Kazdanga, Histria Azure, Histria Perla, Histria Coral and Khawr Aladid were time chartered-in for 1,806 days, while in 2010, BW Zambesi was time chartered-in for 20 days. All vessels operated in the Scorpio Group Pools.

Vessel operating costs. Vessel operating costs for owned vessels of $31.4 million for the year ended December 31, 2011, increased $12.9 million, or 70% from $18.4 million for the year ended December 31, 2010. The increase is the result of an additional 1,863 operating days in 2011 which was driven by the purchase of two vessels in 2011 and seven vessels throughout 2010, which operated for a full year in 2011 as opposed to partial years in 2010.

Voyage expenses. The increase in voyage expenses is a result of an increase in the number of days that our vessels operated in the spot market to 450 in 2011 from 177 in 2010. During 2011, STI Coral and STI Diamond operated in the spot market for 450 days combined. During 2010, our newly purchased vessels, STI Conqueror, STI Gladiator, STI Matador and STI Highlander operated in the spot market for 167 days prior to their entry in the Scorpio Handymax Tanker Pool. Additionally, Senatore operated in the spot market for 10 days subsequent to the termination of its time charter agreement and prior to its entry in the Scorpio Panamax Tanker Pool.

Charterhire. Charterhire expense of $22.8 million for the year ended December 31, 2011 increased $22.5 million, or 8,157%, from $0.3 million for the year ended December 31, 2010. The increase was due to an increase of the number of time chartered-in days in 2011. In 2011, BW Zambesi, Krisjanis Valdemars, Kraslava, Kazdanga, Histria Azure, Histria Perla, Histria Coral and Khawr Aladid were time chartered-in for 1,806 days, while in 2010, BW Zambesi was time chartered-in for 20 days.

Impairment. In the year ended December 31, 2011, we recognized an impairment loss of $66.6 million for our 12 owned vessels. This impairment loss was triggered by reductions in vessel values, and represented the difference between the carrying value and recoverable amount, being fair value less cost to sell. In determining the fair value less cost to sell, we took into consideration the estimated valuations provided by independent ship brokers. No impairments were recognized in the year ended December 31, 2010.

Depreciation. Depreciation of $18.5 million for the year ended December 31, 2011 increased $8.3 million, or 81%, from $10.2 million for the year ended December 31, 2010. The increase in depreciation expense was primarily due to an increase in our average number of owned vessels to 11.29 in 2011 from 6.19 in 2010. This increase was offset by a change in the depreciable life of our owned vessels from 20 to 25 years in the second quarter 2010. The estimated useful life of 25 years is management’s best estimate and is also consistent with industry practice for similar vessels. This change in estimate was applied prospectively and the impact on the income statement for the year ended December 31, 2010 resulted in a decrease in depreciation expense and increase in net income of $1.2 million.

General and administrative expense. General and administrative expense, which includes commercial management and administrative fees, of $11.6 million for the year ended December 31, 2011, increased $5.4 million, or 88%, from $6.2 million for the year ended December 31, 2010. The increase is a result of incremental costs incurred to operate as a public company and additional compensation arrangements that were entered into as part of the initial public offering in April 2010. This was specifically driven by an increase in the amortization of restricted stock issued in June 2010 and January 2011, a full year of salary costs, directors and officers insurance and fees, legal fees, audit fees and other related expenses.

Financial expenses. Financial expenses of $7.1 million for the year ended December 31, 2011, increased $3.8 million, or 119%, from $3.2 million for the year ended December 31, 2010. Financial expenses for the year ended December 31, 2011 consisted of interest on bank loans ($5.0 million), commitment fees on undrawn portions of the our 2010 and 2011 Credit Facilities ($1.1 million ) and amortization of deferred financing fees ($1.0 million). Financial expenses for the year ended December 31, 2010 consisted of interest on bank loan ($2.4 million), which at the time only consisted of the 2010 Revolving Credit Facility, commitment fees on undrawn portions of our 2010 Revolving Credit Facility ($0.6 million) and amortization of deferred financing fees ($0.2 million).

Realized loss on derivative financial instruments. Realized loss on derivatives from our interest rate swap, was $0.3 million for the year ended December 31, 2010. The realized loss is the result of the settlement difference between contracted interest rates and the actual market interest rates (LIBOR). The interest rate swap, which was related to the 2005 Credit Facility and did not qualify for hedge accounting, was terminated on April 9, 2010.

Financial income. Interest income was $51,008 for the year ended December 31, 2011, an increase of $14,474 or 40% from the $36,534 for the year ended December 31, 2010. The increase was primarily due to an increase in our average cash balance during the period.

Other expenses, net. Other expense, net was a loss of $0.1 million for the year ended December 31, 2011, and a loss of $0.5 million for the year ended December 31, 2010. The decrease was primarily driven by expenses incurred for the initial public offering in April 2010.

Results of operations – segment analysis

Aframax/LR2 segment

The following table summarizes vessel operations for our Aframax segment.


*Aframax/LR2 segment*	For the year ended December 31,									Percentage
*In thousands of US dollars except per day and fleet data*	2011			2010			Change			Change
Vessel revenue	$	6,484		$	641		$	5,843			911	%
Vessel operating costs		(2,547	)		(427	)		(2,121	)		(497	%)
Charterhire		(839	)		—			(839	)		N/A
Impairment		(12,459	)		—			(12,459	)		N/A
Depreciation		(2,074	)		(293	)		(1,781	)		(607	%)
General and administrative expenses		(136	)		(15	)		(121	)		(819	%)
Financial expenses		(841	)		1			(842	)		108206	%
Other expense, net		(134	)		—			(134	)		N/A
Segment loss	$	(12,546	)	$	(93	)		(12,453	)		(13434	%)

Time charter revenue per day		15,457			—			15,457			N/A
Pool revenue per day		14,849			12,460			2,389			19	%
Operating costs per day		6,960			8,293			(1,333	)		(16	%)

Time charter revenue days		72			—			72			N/A
Pool revenue days		361			51			310			602	%
Operating days		365			51			314			609	%

Average number of owned vessels		1.00			0.14			0.86			609	%
Average number of time chartered-in vessels		0.19			—			0.19			N/A

On November 2010, we took delivery of STI Spirit, a 113,091 dwt Aframax/LR2 product tanker. From delivery on November 10, 2010 through January 11, 2011, STI Spirit operated in the Scorpio Aframax Tanker Pool, which traded a mix of crude and product tankers. As of March 25, 2011, this vessel joined the Scorpio LR2 Pool, which focuses solely on product tankers.

Vessel Revenue. Vessel revenue of $6.5 million for the year ended December 31, 2011, increased $5.8 million, or 911%, as the result of an increase in the overall number of total revenue days to 434 days in 2011 from 51 days in 2010. This was driven by the acquisition of STI Spirit. Additionally, we took delivery of the Khawr Aladid, a 2006 built LR2 product tanker (106,003 DWT), on October 24, 2011, on a six month time charter-in agreement.

Vessel operating costs. Vessel operating costs of $2.5 million for the year ended December 31, 2011, increased $2.1 million or 497% as a result of an increase in the number of operating days to 365 in 2011 from 51 2010 which was driven by the purchase of STI Spirit in November 2010.

Charterhire. Charterhire expense of $0.9 million for the year ended December 31, 2011 was driven by the delivery of Khawr Aladid, a 2006 built LR2 product tanker (106,003 DWT), on October 24, 2011, on a six month time charter-in agreement. There were no time chartered-in vessels in the Aframax/LR2 segment in 2010.

Impairment. In the year ended December 31, 2011, we recognized an impairment loss of $12.5 million for the Aframax/LR2 segment. No impairment was recognized in 2010.

Depreciation. Depreciation expense of $2.1 million for the year ended December 31, 2011 increased $1.8 million, or 607%, from $0.3 million for the year ended December 31, 2010. The increase is due to an increase in the number of operating days to 365 in 2011 from 51 in 2010 which was driven by the purchase of STI Spirit in November 2010.

General and administrative expense. General and administrative expense of $0.1 million for the year ended December 31, 2011, increased $0.1 million or 819% from $14,747 for the year ended December 31, 2010. General and administrative expenses for the Aframax/LR2 segment primarily consist of commercial management fees and administrative fees to SCM. The increase is due to an increase in the number of revenue days to 434 in 2011 from 51 2010 which was driven by the purchase of STI Spirit in November 2010 and delivery of Khawr Aladid in October 2011.

Financial expenses. Financial expenses was $0.8 million for the year ended December 31, 2011, an increase of approximately $0.8 million or 108,206% from $778 for year ended December 31, 2010. Financial expenses for the Aframax/LR2 segment represents interest for the STI Spirit Credit Facility which was signed and drawn in March 2011.

Other expense, net. Other expense, net was a loss of $0.1 million for the year ended December 31, 2011. There were no other expenses for the year ended December 31, 2010. This increase is primarily due to the write-off of vessel purchase options that were acquired as part of the purchase of STI Spirit in November 2010 and expired unexercised in September 2011.

Panamax/LR1 segment

The following table summarizes vessel operations for our Panamax segment


*Panamax/LR1 segment*	For the year ended December 31,									Percentage
*In thousands of US dollars except per day and fleet data*	2011			2010			Change			Change
Vessel revenue	$	31,101		$	29,345		$	1,756			6	%
Vessel operating costs		(14,428	)		(12,364	)		(2,064	)		(17	%)
Voyage expenses		(13	)		(253	)		240			95	%
Charterhire		(4,554	)		(276	)		(4,278	)		(1553	%)
Impairment		(28,616	)		—			(28,616	)		N/A
Depreciation		(9,279	)		(7,494	)		(1,786	)		(24	%)
General and administrative expenses		(692	)		(600	)		(91	)		(15	%)
Financial expenses		0			(134	)		134			100	%
Realized loss on derivative financial instruments		—			(280	)		280			N/A
Other expense, net		23			(4	)		27			616	%
Segment (loss)/profit	$	(26,458	)	$	7,940			(34,398	)		433	%

Time charter revenue per day		23,962			22,729			1,233			5	%
Pool revenue per day		12,876			15,213			(2,337	)		(15	%)
Voyage revenue per day		—			2,839			(2,839	)		N/A
Operating costs per day		7,891			8,189			(298	)		(4	%)

Time charter revenue days		355			854			(499	)		(58	%)
Pool revenue days		1,754			634			1,120			177	%
Voyage revenue days		—			10			(10	)		N/A
Operating days		1,825			1,510			315			21	%

Average number of owned vessels		5.00			4.14			0.86			21	%
Average number of time chartered-in vessels		0.91			0.05			0.86			1565	%

Vessel Revenue. Vessel revenue for the year ended December 31, 2011 was $31.1 million, an increase of $1.8 million, or 6% from $29.3 million for the year ended December 31, 2010. The increase in revenue was the result of an increase in the overall number of total revenue days to 2,109 days in 2011 from 1,498 days in 2010. This was driven by an increase in pool days of 1,120 offset by a decrease in time charter days of 499. STI Harmony and STI Heritage were acquired in June 2010 with existing time charter contracts that expired in September and December 2010, respectively. These, along with the time charter contracts with Noemi and Senatore comprised the time charter revenue for 2010. The time charter contract for Senatore expired in August 2010. The time charter arrangement for Noemi expired in December 2011 and was the only vessel in this segment on time charter during 2011. All of these vessels entered the Scorpio Panamax Tanker Pool subsequent to the expiration of the time charters.

As such, in 2011, five of our owned vessels and one of our time chartered-in vessels operated in the Scorpio Panamax Tanker Pool. In 2010, four of our owned vessels and one of our time chartered-in vessels operated in the Scorpio Panamax Tanker Pool. The increase was offset by an overall decrease in daily TCE rates to $12,876 per day in 2011, from $15,213 per day in 2010.

Vessel operating costs. Vessel operating costs of $14.4 million increased $2.1 million or 17%, as a result of an increase in the number of operating days to 1,825 in 2011 from 1,510 in 2010, which was driven by the purchase of STI Harmony and STI Heritage in June 2010 and therefore a full year of operation in 2011.

Voyage expenses. Voyage expenses of $13,383 decreased $0.2 million or 95% as a result of Senatore operating in the spot market for 10 days subsequent to the termination of its time charter agreement and prior to its entry in the Scorpio Panamax Tanker Pool.

Charterhire. Charterhire expense of $4.5 million for the year ended December 31, 2011 decreased $4.2 million or 1,553% from $0.3 million for the year ended December 31, 2010. The increase was due to BW Zambesi which was chartered-in for a total of 333 days in 2011 and 20 days in 2010 at a charterhire rate of $13,850 per day.

Impairment. In the year ended December 31, 2011, we recognized an impairment loss of $28.6 million for our owned Panamax/LR1 vessels. No impairment was recognized in 2010.

Depreciation. Depreciation expense of $9.3 million for the year ended December 31, 2011, increased by $1.8 million, or 24% from $7.5 million for the year ended December 31, 2010. The increase in depreciation expense was primarily due to an increase in our average number of owned vessels to 5.00 in 2011 from 4.14 in 2010. This increase was offset by the effect from a change in the depreciable life of our owned vessels from 20 to 25 years, which occurred in the second quarter of 2010, together with the effect of an increase in estimated residual values of our vessels.

General and administrative expense. General and administrative expense of $0.7 million for the year ended December 31, 2011, increased $0.1 million, or 15% from $0.6 million for the year ended December 31, 2010. General and administrative expenses for the Panamax/LR1 segment primarily consist of commercial management fees and administrative fees to SCM. The increase is the result of an increase in the average number of owned vessels to 5.00 in 2011 to 4.14 in 2010.

Financial expenses. Financial expenses were $0.1 million for the year ended December 31, 2010. Financial expenses for the Panamax/LR1 segment represent interest for the 2005 Credit Facility which was repaid in April 2010.

Realized loss on derivative financial instruments. Realized loss on derivative financial instruments was $0.3 million for the year ended December 31, 2010. The realized loss is the result of the settlement difference between contracted interest rates and the actual market interest rates (LIBOR) on an interest rate swap that was related to the 2005 Credit Facility, and was terminated on April 9, 2010.

MR Segment

The following table summarizes vessel operations for our MR segment. On May 10, 2011, we took delivery of STI Coral and STI Diamond and we did not have vessels operating in this segment in prior periods. As such, no further commentary has been provided in respect of this segment as a year-on-year comparison is not applicable.


*MR segment*	For the year ended December 31,
*In thousands of US dollars except per day and fleet data*	2011
Vessel revenue	$	12,287
Vessel operating costs		(3,178	)
Voyage expenses		(6,842	)
Impairment		(12,573	)
Depreciation		(2,038	)
General and administrative expenses		(314	)
Segment loss	$	(12,658	)

Voyage revenue per day		12,092
Operating costs per day		6,748

Voyage revenue days		450
Operating days		471

Average number of owned vessels		1.29

Handymax segment

The following table summarizes vessel operations for our Handymax segment.


*Handymax segment*	For the year ended December 31,
In thousands of US dollars except per day and fleet data	2011				2010		Change			Percentage Change

Vessel revenue	$	32,238		$	8,812		$	23,426			266	%
Vessel operating costs		(11,217	)		(5,650	)		(5,567	)		(99	%)
Voyage expenses		(26	)		(2,289	)		2,263			99	%
Charterhire		(17,357	)		—			(17,357	)		N/A
Impairment		(12,962	)		—			(12,962	)		N/A
Depreciation		(5,068	)		(2,390	)		(2,678	)		(112	%)
General and administrative expenses		(762	)		(267	)		(496	)		(186	%)
Financial expenses		—			1			(1	)		N/A
Segment loss	$	(15,155	)	$	(1,782	)		(13,373	)		(751	%)

Pool revenue per day		11,343			9,965			1,379			14	%
Voyage revenue per day		—			8,077			(8,077	)		N/A
Operating costs per day		7,619			8,107			(489	)		(6	%)

Pool revenue days		2,840			520			2,320			446	%
Voyage revenue days		—			167			(167	)		N/A
Operating days		1,460			697			763			109	%

Average number of owned vessels		4.00			1.91			2.09			109	%
Average number of time chartered-in vessels		3.85			—			3.85			N/A

Vessel Revenue. Vessel revenue for the year ended December 31, 2011 was $32.2 million, an increase of $23.4 million, or 266% from $8.8 million for the year ended December 31, 2010. This increase was the result of an increase in the overall number of total revenue days to 2,840 days in 2011 from 687 days in 2010. STI Conqueror was delivered in June 2010, STI Matador and STI Gladiator were delivered in July 2010 and STI Highlander was delivered in August 2010. These were the only vessels in the Handymax segment during the year ended December 31, 2010. We time chartered-in Krisjanis Valdemars, Kraslava, Histria Azure, Kazdanga, Histria Perla and Histria Coral during the year ended December 31, 2011. In addition, pool revenue per day increased 14% for the year ended December 31, 2011 when compared to the year ended December 31, 2010.

Vessel operating costs. Vessel operating costs for the year ended December 31, 2011 were $11.2 million, an increase of $5.6 million, or 99%from the year ended December 31, 2010. This was the result of an increase in the number of operating days to 1,460 from 697 for the years ended December 31, 2011 and 2010, respectively which was driven by the purchase of STI Conqueror in June 2010, STI Gladiator and STI Matador in July 2010 and STI Highlander in August 2010, all of which operated for a full year during 2011.

Voyage expenses. Voyage expenses for the year ended December 31, 2011 were $25,760, a decrease of $2.3 million, or 99% as a result of STI Conqueror, STI Gladiator, STI Matador and STI Highlander operating in the spot market for 167 days in during the year ended December 31, 2010. No vessels operated in the spot market during the year ended December 31, 2011 though certain nominal voyage charges were incurred.

Charterhire. Charterhire for the year ended December 31, 2011 was $17.4 million, an increase of $17.4 million from the year ended December 31, 2010. The increase was the result of the chartering-in of Krisjanis Valdemars, Kraslava, Histria Azure, Kazdanga, Histria Perla and Histria Coral during the year ended December 31, 2011. There were no vessels chartered-in during the year ended December 31, 2010.

Impairment. In the year ended December 31, 2011, we recognized an impairment loss of $13.0 million for our owned Handymax. No impairment was recognized in 2010.

Depreciation. Depreciation expense for the year ended December 31, 2011 was $5.0 million, an increase of $2.7 million, or 112% from the year ended December 31, 2010. This increase was a result of an increase in our average number of owned Handymax vessels to 4.00 from 1.91 for the years ended December 31, 2011and 2010, respectively.

General and administrative expense. General and administrative expense for the year ended December 31, 2011 was $0.8 million, an increase of $0.5 million, or 186%, from the year ended December 31, 2010. General and administrative expenses for the Handymax segment primarily consists of commercial management fees and administrative fees to SCM. The increase is the result of an increase in the average number of owned and time chartered-in vessels to 7.85 from 1.91 for the years ended December 31, 2011 and 2010, respectively.


B.	Liquidity and Capital Resources

Our primary source of funds for our short-term and long-term liquidity needs will be the cash flows generated from our vessels, which are currently operating in Scorpio Group Pools or in the spot market, in addition to availability under our 2010 Revolving Credit Facility, 2011 Credit Facility, 2013 Credit Facility (as defined later), which will be used for the partial financing of newbuildings to be delivered after the first quarter of 2014, and cash on hand. The Scorpio Group Pools reduce volatility because (i) they aggregate the revenues and expenses of all pool participants and distribute net earnings to the participants based on an agreed upon formula and (ii) some of the vessels in the pool are on time charter. Furthermore, spot charters provide flexibility and allow us to fix vessels at prevailing rates. We believe these cash flows from operations, amounts available under our various credit facilities and our cash balance will be sufficient to meet our existing liquidity needs for the next 12 months from the date of this annual report.

As of December 31, 2012, our cash balance was $87.2 million, which is an increase from our cash balance of $36.8 million as of December 31, 2011. Additionally, at December 31, 2012 we had $67.4 million in availability under our 2010 Revolving Credit Facility. The increase in cash balance was primarily due to net proceeds from the sales of STI Conqueror, STI Matador, STI Gladiator, STI Coral and STI Diamond, drawdowns on various credit facilities, and proceeds from registered direct placements of common shares in April 2012 and December 2012. These increases were offset by bank loan repayments and payments related to our newbuilding vessels.

For the year ended December 31, 2012, our net cash outflow from operating activities was $1.9 million, our net cash outflow from investing activities was $90.2 million and the net cash inflow from financing activities was $142.4 million. For the year ended December 31, 2011, our net cash outflow from operating activities was $12.5 million, our net cash outflow from investing activities was $122.6 million, and the net cash inflow from financing activities was $103.7 million.

As of December 31, 2012, our long-term liquidity needs were comprised of our debt repayment obligations for our credit facilities, our obligations for our vessels under construction, and obligations under our charter-in arrangements.

Our credit facilities require us to comply with a number of covenants, including financial covenants related to liquidity, consolidated net worth, minimum interest coverage, maximum leverage ratios, loan to value ratios and collateral maintenance; delivery of quarterly and annual financial statements and annual projections; maintaining adequate insurances; compliance with laws (including environmental); compliance with the Employee Retirement Income and Security Act, or ERISA; maintenance of flag and class of the initial vessels; restrictions on consolidations, mergers or sales of assets; approvals on changes in the manager of the vessels; limitations on liens; limitations on additional indebtedness; prohibitions on paying dividends if a covenant breach or an event of default has occurred or would occur as a result of payment of a dividend; prohibitions on transactions with affiliates; and other customary covenants.

No vessels are scheduled to be drydocked within the next 12 months.

Cash Flows

The table below summarizes our sources and uses of cash for the periods presented:


	For the year ended December 31,
*In thousands of US dollars*	2012			2011			2010
Condensed Cash Flows
Net cash inflow/(outflow)
Operating activities	$	(1,928	)	$	(12,452	)	$	4,907
Investing activities		(90,155	)		(122,573	)		(245,595	)
Financing activities		142,415			103,671			308,431

For the Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Net cash outflow from operating activities

Net cash outflow from operating activities was $1.9 million for the year ended December 31, 2012, which was an increase of $10.5 million from a cash outflow of $12.5 million the year ended December 31, 2011. The increase was primarily attributable to (i) an increase in vessel revenue of $33.3 million (ii) a decrease in vessel operating costs of $1.0 million (iii) earnings from profit or loss arrangements of $0.4 million (iv) a decrease in drydock payments of $0.8 million (v) changes in working capital movements of $9.1 million and (vi) a decrease in financial expenses of $1.7 million (excluding non-cash items such as deferred financing fee amortization). These changes were offset by (i) an increase in voyage expenses of $14.9 million and (ii) an increase in charterhire expense of $21.0 million.

Net cash outflow from investing activities

Cash outflow from investing activities was $90.2 million for the year ended December 31, 2012 compared to net cash outflows of $122.6 million for the year ended December 31, 2011. Investment activity during the year ended December 31, 2012 was driven by payments on our newbuilding vessels of $191.5 million (including capitalized costs). This was offset by the sales of STI Conqueror, STI Matador, STI Gladiator, STI Coral and STI Diamond for aggregate net proceeds of $101.3 million.

Cash outflow from investing activities was $122.6 million for the year ended December 31, 2011. Investment activity during the year ended December 31, 2011 was driven by the purchase of STI Coral and STI Diamond for an aggregate purchase price of $71.0 million (including a 1% commission paid to Liberty, our related party Administrator at that time, along with other capitalized costs). Additionally, as of December 31, 2011, we had made payments of $51.0 million relating to our newbuilding vessels under construction at HMD.

Net cash inflow from financing activities

Cash provided by financing activities was $142.4 million for the year ended December 31, 2012 compared to cash provided by financing activities of $103.7 million for the year ended December 31, 2011. Financing activities during the year ended December 31, 2012 were driven by the receipt of net proceeds of $153.1 million from two registered direct placements of common shares in April and December 2012, borrowings of $32.2 million under our 2010 Revolving Credit Facility, and borrowings of $92.0 million under our Newbuilding Credit Facility. These inflows were offset by repayments of $106.0 million into the 2010 Revolving Credit Facility, principal payments of $2.8 million into the STI Spirit Credit Facility, $18.2 million into the 2011 Credit Facility (of which $16.1 million was the repayment made as a result of the sale of STI Coral) and $2.1 million into the Newbuilding Credit Facility. Cash outflows from financing activities also include the acquisition of treasury shares of $2.4 million and debt issuance costs of $3.3 million.

Financing activities during the year ended December 31, 2011 were driven by net proceeds of $68.5 million from an underwritten public offering of common shares in May 2011, net proceeds of $36.5 million from an underwritten public offering of common shares in November 2011, borrowings of $35.0 million under the 2011 Credit Facility, borrowings of $27.3 million under the STI Spirit Credit Facility, and borrowings of $53.0 million under the 2010 Revolving Credit Facility. These inflows were offset by payments of $99.0 million into the 2010 Revolving Credit Facility, principal payments on all of our credit facilities of $10.6 million, payment of debt issuance cost of $4.1 million under the 2011 Credit Facility, STI Spirit Credit Facility and the 2010 Revolving Credit Facility along with $2.9 million of costs related to the repurchase of our common shares.

For the Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

Cash inflow/(outflow) from operating activities

Net cash outflow operating activities was $12.5 million for the year ended December 31, 2011, which was a decrease of $17.4 million from the year ended December 31, 2010. The decrease was primarily attributable to (i) an increase in vessel operating costs of $12.9 million, (ii) an increase in voyage expenses of $4.3 million, (iii) an increase in charterhire expense of $22.5 million, (iv) an increase in general and administrative expenses of $4.4 million (excluding non-cash items), (v) a net increase in interest expense of $3.8 million, (vi) a net increase in working capital movements of $11.5 million, (vii) a decrease in receipts from shareholders of $1.9 million, and (viii) an increase in drydock payments of $1.5 million. These decreases were partially offset by (i) an increase in vessel revenue of $43.3 million, (ii) a decrease in other expenses of $0.4 million and (iii) a decrease in interest rate swap termination payments of $1.9 million.

Cash outflow from investing activities

Cash outflow from investing activities was $122.6 million for the year ended December 31, 2011 compared to $245.6 million for the year ended December 31, 2010. Investment activity during the year ended December 31, 2011 was driven by the purchase of STI Coral and STI Diamond for an aggregate purchase price of $71.0 million (including a 1% commission paid to Liberty, our related party Administrator (at that time), along with other capitalized costs). Additionally, we entered into agreements with HMD for the construction of a total of six newbuilding vessels as of December 31, 2011 for an aggregate purchase price of $223.4 million of which, $51.0 million was paid as of that date. The first five newbuilding vessels were delivered to us in third quarter of 2012 and the sixth newbuilding vessel was delivered in January 2013.

Investment activity during the year ended December 31, 2010 was driven by the purchase of seven product tankers during the period. Two of the tankers, STI Harmony and STI Heritage, are LR1 ice class 1A sister ships and were acquired for an aggregate purchase price of $92.9 million (including a 1% commission paid to Liberty, a related party), which included $2.3 million related to the value of the existing time charter contracts. Four of the other vessels, STI Conqueror, STI Matador, STI Gladiator and STI Highlander are Handymax vessels that were acquired for $100.0 million in aggregate (including a 1% commission paid to Liberty, our related party Administrator). The last vessel, STI Spirit was acquired for $52.7 million which included $0.1 million related to the value of purchase options on two additional vessels which expired unexercised in September 2011.

Cash inflow from financing activities

Cash inflow from financing activities was $103.7 million for the year ended December 31, 2011 compared to $308.4 million for the year ended December 31, 2010. Financing activity during the year ended December 31, 2011 was driven by net proceeds of $68.5 million from an underwritten public offering in May 2011, net proceeds of $36.5 million from an underwritten public offering in November 2011, borrowings of $35.0 million under the 2011 Credit Facility, borrowings of $27.3 million under the STI Spirit Credit Facility, and borrowings of $53.0 million under the 2010 Revolving Credit Facility offset by payments of $99.0 million into the 2010 Revolving Credit Facility, principal payments on all of our credit facilities of $10.6 million, payment of deferred financing fees of $4.1 million under the 2011 Credit Facility, STI Spirit Credit Facility and the 2010 Revolving Credit Facility along with $2.9 million of costs related to the repurchase of our common shares. Financing activity during the year ended December 31, 2010 was driven from our initial public offering of $154.8 million and $150.0 million of borrowings under the 2010 Revolving Credit Facility, which were offset by principal payments of $4.8 million under the 2010 Revolving Credit Facility, the repayment of $39.8 million under the 2005 Credit Facility, $2.6 million of costs related to the repurchase of our common shares and the payment of deferred financing fees of $2.2 million under the 2010 Revolving Credit Facility.

Long-Term Debt Obligations and Credit Arrangements

2005 Credit Facility

Two of our wholly-owned subsidiaries, Senatore Shipping Company Limited and Noemi Shipping Company Limited, were joint and several borrowers under a loan agreement dated May 17, 2005, or the 2005 Credit Facility, entered into with The Royal Bank of Scotland plc, as lender, which was secured by, among other things, a first preferred mortgage over each of Senatore and Noemi. The initial amount of the 2005 Credit Facility was $56.0 million and consisted of two tranches, one for each vessel-owning subsidiary. On April 9, 2010, we repaid the outstanding balance of $38.9 million with a portion of the proceeds from our initial public offering.

2010 Revolving Credit Facility

On June 2, 2010, we executed a credit facility with Nordea Bank Finland plc, acting through its New York branch, DNB Bank ASA, acting through its New York branch, and ABN AMRO Bank N.V, for a senior secured term loan facility of up to $150 million. On July 12, 2011, we amended and restated the credit facility to convert it from a term loan to a reducing revolving credit facility. This gave us the ability to pay down and re-borrow from the total available commitments under the loan.

In March, April and May 2012, we sold three of our Handymax vessels, STI Conqueror for $21.0 million, STI Gladiator for $16.2 million, and STI Matador for $16.2 million. The availability of the 2010 Revolving Credit Facility permanently decreased by $31.0 million as a result of these vessel sales. Commitments are now reduced by $3.1 million each quarter, with a lump sum reduction of $39.9 million at the maturity on June 2, 2015. Our subsidiaries that own the vessels that are collateralized by the 2010 Revolving Credit Facility act as guarantors under the amended and restated credit facility. All terms mentioned are defined in the agreement.

Drawdowns under the credit facility bear interest as follows: (1) through December 29, 2011, at LIBOR plus an applicable margin of 3.00% per annum when our debt to capitalization (total debt plus equity) ratio is equal to or less than 50% and 3.50% per annum when our debt to capitalization ratio is greater than 50%; (2) from December 30, 2011 through September 30, 2013, at LIBOR plus an applicable margin of 3.50% per annum; and (3) from October 1, 2013 and at all times thereafter, at LIBOR plus an applicable margin of 3.25% per annum when our debt to capitalization (total debt plus equity) ratio is equal to or less than 50% and 3.50% per annum when our debt to capitalization ratio is greater than 50%. A commitment fee equal to 40% of the applicable margin is payable on the unused daily portion of the credit facility. The credit facility matures on June 2, 2015 and can only be used to refinance amounts outstanding from the original loan agreement and for general corporate purposes.

The credit facility requires that we comply with a number of covenants, including financial covenants; delivery of quarterly and annual financial statements and annual projections; maintaining adequate insurances; compliance with laws (including environmental); compliance with ERISA; maintenance of flag and class of the initial vessels; restrictions on consolidations, mergers or sales of assets; approval on changes in the Manager of our initial vessels; limitations on liens; limitations on additional indebtedness; prohibitions on paying dividends if a covenant breach or an event of default has occurred or would occur as a result of payment of a dividend; prohibitions on transactions with affiliates; and other customary covenants.

The financial covenants require us to maintain:


•	The ratio of net debt to capitalization no greater than 0.60 to 1.00.

•	Consolidated tangible net worth no less than $150 million plus 25% of cumulative positive net income (on a consolidated basis) for each fiscal quarter beginning on July 1, 2010 and 50% of the value of any new equity issues from July 1, 2010 going forward.

•	The ratio of EBITDA to interest expense no less than 1.25 to 1.00 commencing with the fourth fiscal quarter of 2011 until the fourth quarter of 2012, at which point the ratio will increase to: (i) 1.50 to 1.00 for the first quarter of 2013, (ii) 1.75 to 1.00 for the second quarter of 2013 and (iii) 2.00 at all times thereafter. Such ratio shall be calculated quarterly on a trailing four quarter basis. In addition, we are restricted from paying dividends until our EBITDA to interest expense ratio is 2.00 to 1.00 or greater. EBITDA, as defined in the loan agreement, excludes non-cash charges such as impairment.

•	Consolidated liquidity (cash, cash equivalents, and availability under the 2010 Revolving Credit Facility) not less than $25 million, of which unrestricted cash and cash equivalents shall be not less than $15.0 million, until we owns, directly or indirectly, more than 15 vessels, at which time the amount increases by $750,000 per each additional vessel.

•	The aggregate fair market value of the collateral vessels shall at all times be no less than 150% of the then aggregate outstanding principal amount of loans under the credit facility.

In December 2012, we raised net proceeds of $127.2 million from a registered direct placement of common shares and as part of the use of proceeds of this offering, we voluntarily repaid $50.0 million into our 2010 Revolving Credit Facility.

As of December 31, 2012 and December 31, 2011 the outstanding balance was $17.2 million and $91.0 million, respectively, and the amount available to be drawn was $67.4 million and $37.9 million, respectively. We were in compliance with the financial covenants relating to this facility as of December 31, 2012.

STI Spirit Credit Facility

On March 9, 2011, we executed a credit facility with DVB Bank SE for a senior secured term loan facility of $27.3 million for STI Spirit, which was acquired on November 10, 2010. The credit facility was drawn down on March 17, 2011 and matures on March 17, 2018. On September 28, 2011 and on December 30, 2011, we amended certain financial covenants contained in the credit facility. The loan bears interest at LIBOR plus a margin of 2.75% per annum. The loan is repayable over 28 equal quarterly installments and a lump sum payment at maturity. The quarterly installments commenced three months after the drawdown and were calculated using an 18 year amortization profile. Our subsidiary, STI Spirit Shipping Company Limited, which owns the vessel, is the borrower and Scorpio Tankers Inc. is the guarantor. The credit facility requires us to comply with a number of covenants, including financial covenants; delivery of quarterly and annual financial statements and annual projections; maintaining adequate insurances; compliance with laws (including environmental); compliance with ERISA; maintenance of flag and class of the vessel; restrictions on consolidations, mergers or sales of assets; approval of changes in the Manager of our vessels; limitations on liens; limitations on additional indebtedness; prohibitions on paying dividends if a covenant breach or an event of default has occurred or would occur as a result of payment of a dividend; prohibitions on transactions with affiliates; and other customary covenants.

The financial covenants of the credit facility are described below. On September 28, 2011, we executed an amendment modifying the EBITDA to interest expense financial covenant. On December 30, 2011, we entered into a first amendatory agreement modifying certain other financial covenants.

The financial covenants require us to maintain:


•	The ratio of debt to capitalization no greater than 0.60 to 1.00.

•	Consolidated tangible net worth no less than $150 million plus 25% of cumulative positive net income (on a consolidated basis) for each fiscal quarter.


•	The ratio of EBITDA to interest expense shall be no less than 1.25 to 1.00 for the period commencing with the fourth quarter of 2011 through the fourth quarter of 2012, at which time it will increase to: (i) 1.50 to 1.00 for the first quarter of 2013, (ii) 1.75 to 1.00 for the second quarter of 2013 and (iii) 2.00 to 1.00 at all times thereafter. Such ratio shall be calculated quarterly on a trailing four quarter basis. In addition, we are restricted from paying dividends until our EBITDA to interest expense ratio is 2.00 to 1.00 or greater. EBITDA, as defined in the loan agreement, excludes non-cash charges such as impairment.

•	Consolidated liquidity (cash, cash equivalents, and availability under the 2010 Revolving Credit Facility) not less than $25 million,