International Seaways, Inc. Q2 FY2020 Earnings Call

Good morning. Welcome to the International Seaways Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to James Small, General Counsel. Please go ahead.

Thank you. Good morning, everyone, and welcome to International Seaways earnings release conference call for the second quarter of 2020. Before we begin, I would like to start off by advising everyone on the call with us today of the following. During this call, management may make forward-looking statements regarding International Seaways or the tanker industry, which may address, without limitation, the following topics: outlooks for the crude and product tanker markets; changing oil trading patterns; forecasts of world and regional economic activity and of the demand for and production of oil and other petroleum products; the effects of the ongoing COVID-19 pandemic; the company’s strategy; purchases and sales of vessels and other investments; anticipated financing transactions; expectations regarding revenues and expenses, including vessel charter hire and G&A expenses; estimated bookings and TCE rates for the third quarter of 2020 or other periods; estimated capital expenditures in 2020 or other periods; projected scheduled drydock and offhire days; the company’s consideration of strategic alternatives; the company’s ability to achieve its financing and other objectives; and other economic, political and regulatory developments around the world. Any such forward-looking statements take into account various assumptions made by management based on a number of factors, including management’s experience and perception of historical trends, current conditions, expected and future developments, and other factors that management believes are appropriate to consider in the circumstances. Forward-looking statements are subject to risks, uncertainties and assumptions, many of which are beyond the company’s control, which could cause actual results to differ materially from those implied or expressed by those statements. Factors, risks and uncertainties that could cause International Seaways’ actual results to differ from expectations include those described in our Annual Report on Form 10-K for 2019; in its Quarterly Report on Form 10-Q for the first and second quarter of 2020; and in other filings that the company has made or may make in the future with the U.S. Securities and Exchange Commission. With that out of the way, I would like to turn the call over to our President and Chief Executive Officer, Ms. Lois Zabrocky. Lois?

Thank you very much, James. Good morning, everyone. Thank you for joining International Seaways earnings call to discuss our second quarter 2020 results. Before we discuss our strongest quarterly results since our inception, please turn to Slide 4 for an update on our COVID-19 response. We are continuously working to serve and keep safe our onshore and at-sea professionals. First onshore, we’ve maintained full staffing capabilities with our employees all working remotely since March 16. We will continue to evaluate our return to our New York and Houston offices, based upon our highest priority, the safety of our staff. Our commercial and technical operations, finance and administrative departments, continue to run smoothly. We completed the quarterly close on time; all SEC reporting requirements have been done without delay. Seaways' ability to operate smoothly during this challenging time is a testament to the team’s dedication, and we thank everyone for their continued hard work and commitment to Seaways. Regarding our crew, we’ve implemented strict measures on all of our ships to ensure the safety of our seafarers, and we have had no COVID cases to date on board. We are implementing these procedures not only while they’re on board, but also while we are traveling to and from the vessels. As we discussed last quarter, global travel restrictions have made it exceptionally difficult to rotate our crews. We continue to support industry efforts to designate seafarers as key workers and to allow them to return home to their families after many months at sea. To meet this important objective, we have deviated vessels where possible to help facilitate safe and effective crew changes. Given that many of our dedicated crew members have been on board vessels for longer than the original contracts, the situation remains incredibly dynamic. As an example, one of our VLCC crew was disappointed to have a full flight of relievers from Manila to Singapore canceled by the airline at the last minute. We are now working on finding the next best opportunity to get the seafarers home. Another example, with an enormous amount of effort and coordination across three continents; we were successful in relieving 20 seafarers at Reunion Island in the Indian Ocean. We thank all of our seafarers for their professionalism and commitment throughout these extremely challenging circumstances. From an operational standpoint, we have not yet seen material cost increases due to COVID-19. While we have confronted certain challenges, including difficulty arranging Sire inspections from the oil major customers and other inspections, as well as delays transporting spare parts, our operations are running smoothly. Going forward, especially as we continue to operate amid the global pandemic, our priorities remain the safety of our onshore and at-sea professionals and providing best-in-class service to our leading energy customers. If you’ll turn to Slide 5, we review our second quarter 2020 highlights and our recent accomplishments. Our quarterly performance was very strong. We’re pleased to have posted our second consecutive quarter of record earnings while continuing to implement our disciplined and accretive capital allocation strategy, unlocking value for our shareholders. Turning to the first bullet, we highlight our significant operating leverage and success capitalizing on the robust rate environment in the second quarter. We once again generated our highest quarterly net income as a public company. For the quarter, we earned a net income of $68.5 million, excluding items related to an impairment and the gain on the sale of vessels, or $2.39 per share. Our second quarter adjusted EBITDA was $96 million, representing a year-over-year increase of $75 million and quarter-over-quarter increase of $22 million. With our strong results, and during a time when we continue to return capital to shareholders, we ended the quarter with $184 million in total liquidity, including cash and our $40 million undrawn revolver. Moving to the next bullet, our strong Q2 results have extended into the third quarter, notably, with significant exposure to the VLCC market and to the mid-sized tanker sectors. We have already booked over half of our third quarter revenue days at profitable rates. Additionally, we capitalized on the elevated market in the second quarter and we entered into favorable time charters, which strengthen our earnings prospects moving forward. Specifically, we secured four VLCC time charters, for periods ranging from seven to 36 months at an average of $73,000 per day. We have positioned International Seaways to optimize revenue during this time when rates have come off their high. Lastly, we further executed on our disciplined and balanced capital allocation strategy with an intense focus on providing returns to shareholders. We maintained our balance sheet strength and enhanced our capital structure. Specifically, in addition to the repurchase of $10 million of our shares in the first quarter, we completed the repurchase of an additional $20 million of our shares during the second quarter. This brings our total purchases to just under 5% of our outstanding shares. We believe this was an attractive opportunity for Seaways to unlock value given our stock valuation relative to our NAV. We took further steps to delever the company, and we are in the process of repaying the full $40 million outstanding under our transition term loan facility in August. This will reduce our already low cash break-even by an additional $1,800 per day to under $15,000 per day. Once the repayment is made, we will have 14 unencumbered vessels with more than $200 million. We continue to have one of the lowest leverage profiles in the public shipping sector, with our net loan-to-value further improving to 38%. Our liquidity has allowed us the flexibility to continue to deploy capital to best serve shareholders. In June, we paid our regular quarterly dividend of $0.06, and our Board has approved another regular quarterly $0.06 dividend to be paid in September. Our priority is to continue optimizing how we allocate the capital throughout the cycle. In addition to repurchasing close to 5% of our outstanding shares, this includes capitalizing on attractive asset values at the bottom of the cycle, prepaying $40 million of debt, and providing shareholders with dividends totaling $0.12 since implementing our policy this year. In order to ensure that we remain well-positioned to act opportunistically, subsequently to the end of the quarter, the company’s Board of Directors authorized a new $30 million share repurchase program for Seaways. Turning to Slide 6, we provide an update on oil supply and demand. The economic impacts of COVID-19 have reduced the demand for oil. Recently, the IEA has taken a more positive view on demand restoration, increasing their demand forecast to 92 million barrels per day for all of 2020 and 97 million barrels per day for 2021. This is largely driven by the strength of Chinese demand and delays at discharge ports in China due to logistical issues dealing with record imports. This has reduced the effective VLCC fleet size. While down from 100 million barrels per day achieved in 2019, the IEA forecast represents a significant increase from previous estimates and reflects demand for oil in the second half of 2020, given that large segments of the global economy were abruptly halted earlier in the year in response to COVID-19. On the supply side, after extending agreements to curb production in June, OPEC has agreed to ease these cuts and is expected to produce an additional 2 million barrels per day in August. Regarding U.S. shale production, the EIA estimates a 2 million barrels per day reduction in August from its peak in March due to pressures from low oil prices. During the second quarter, we saw strong demand for floating storage due to a steep oil price contango. However, as can be seen in the chart on the right-hand of the slide, as global oil demand recovers and production decreases, the price contango flattened and this deemphasized the need for new floating storage, while inventory destocking began. Although we remain positive on the long-term outlook for the tanker market, the combination of June OPEC production cuts, reduced demand for floating storage, and inventory destocking has pushed rates down from the highs that we saw earlier this year. On Slide 7, an update on ship supply. Overall, the tanker order book remains historically low. You can see this on the chart at the top right-hand of the slide. Only 10 VLCCs have been ordered in 2020 to date, and 31 were ordered in the full year of 2019. Uncertainty regarding the current market, as well as decarbonization and a lack of suitable propulsion systems to meet decarbonization goals, continue to temper new ordering. Moving to the bottom half of the slide, the VLCC fleet is aging, with nearly a quarter of the existing fleet now over 15 years old, as depicted in the chart at the bottom right. Ships 20 years or older have grown by nearly 3 million deadweight from last quarter, an increase of 19%. As we have noted consistently and previously, once vessels reach 15 years of age, they are more expensive to operate, with significant investments required to continue to trade. As ships reach ballast water treatment deadlines, even greater capital expenditure is necessary. Scrapping has been limited during the last 18 months due to the market recovery, but the potential for scrapping has been building based on the aging fleets. There have been no VLCCs scrapped thus far in 2020. As rates moderate, scrapping is likely to increase. I’ll now turn the call over to Jeff to provide additional details on our second quarter results. Jeff?

Thanks, Lois, and good morning, everyone. Let’s move directly to reviewing the second quarter results in more detail. But before turning to the slide deck, let me just summarize the consolidated results. In the second quarter, we achieved adjusted EBITDA of $96.3 million. As Lois mentioned, this was our second consecutive record quarter. Net income for the second quarter was $64.4 million, or $2.24 per diluted share, which compares to a net loss of $16.5 million, or $0.57 per share in the second quarter of 2019. However, excluding the impact of a $4.1 million charge for impairment and gain on sale of vessels, net income was $68.5 million, or $2.39 per diluted share. Now let’s go to the deck, starting with Slide 9. I’ll first discuss the results of our business segments, beginning with the Crude Tankers segment. TCEs for the Crude Tankers segment were $106 million for the quarter, compared to $45 million in the second quarter of last year. This increase primarily resulted from the impact of higher average blended rates in all of the VLCC, Suezmax, Aframax, and Panamax sectors. Now looking at the Product Carriers segment, TCE revenues were $29 million for the quarter, compared to $17 million in the second quarter of last year. This increase again results from the impact of higher average daily rates earned in all of the LR1, LR2, and MR fleets. Overall, as reflected in the chart top left, consolidated TCE revenues for the second quarter 2020 were $135 million, compared to $62 million in the second quarter of 2019. The increase was principally driven by substantially higher average daily rates earned across the crude and product carrier fleets this quarter, compared to last year’s second quarter. Looking at the chart at the top right of the page, adjusted EBITDA was $96 million for the quarter, compared to $21 million in the same period of 2019. Again, the increase was principally driven by higher daily rates. On the bottom half of the page, if we look at the results sequentially, i.e., quarter-to-quarter, consolidated TCE revenues and adjusted EBITDA for the second quarter were up from the very high first quarter, increasing by $15 million and $22 million, respectively. Now, if we turn to Slide 10, we provide a review of Q2 rates and Q3 to date. Let me discuss our bookings in Q3 thus far, which are very healthy, particularly in the larger vessels. Looking at the far right column, we’ve booked 67% of our total available VLCC days at $64,500 per day on our modern vessels and $59,200 per day overall. 56% of available Suezmax days at approximately $30,900 per day, 45% of available Aframax LR2 days at an average of approximately $14,200 per day, and 43% of available Panamax days at an average of approximately $19,000 per day. On the MR side, we’ve booked 48% of our third quarter days at an average of approximately $13,200 per day. As Lois mentioned, these rates reflect the fact that we opportunistically locked in four of our VLCCs on time charters at an average of $73,300 per day for the entire quarter. For the balance in the quarter, you should keep in mind that spot rates today are lower than we have booked thus far in the quarter, but overall, we’re looking at a healthy quarter. Now if we could move on to Slide 11. The cash cost TCE break-evens for the 12 months ended June 30, 2020, as well as our estimates for going forward are illustrated on this slide. International Seaways overall break-even rate was $19,700 a day for the 12 months ended June 30, 2020. These rates are all-in daily rates, our owned vessels must earn to cover vessel operating costs, drydocking costs, cash G&A expense, and debt service costs, which include scheduled principal amortization as well as interest. As Lois mentioned earlier on the call, we entered into four highly attractive time charters. Specifically, we’ve executed three VLCC time charters – three-year VLCC time charter for $45,000 per day and another time charter for an 18-year-old VLCC for one year for $53,000 per day. We also executed two seven-month VLCC time charters at an average rate of $100,000 per day with the vessels delivered in May. The combined rate of those four time charters, as I just mentioned, is $73,300 a day on average. So taking into consideration distributions from our FSO and the fixed time charter revenue, the overall break-even rate for the last 12 months drops to $17,400. But then, if you go all the way to the far right of the page, we’ve included all-in daily break-even rates for the forward 12 months ended June 30, 2021. Taking into consideration the contributions from our FSO JV, the four time charters I just mentioned, and also the full prepayment of the $40 million outstanding on the transition term loan facility that Lois mentioned earlier, which lowers our interest expense by $1.2 million. The overall break-even rate drops further to $14,600 per day. At this time, I’d also like to take the opportunity to reaffirm our cost guidance for the year for modeling purposes. For the remainder of 2020, we expect regular daily OpEx, which includes all running costs, insurance, management fees, and other similar and related expenses for our various classes, as always, to be as follows: for VLCC, $8,400 per day; Suezmax, another $1,700; Aframax, $8,100; Panamax, $7,900; and MRs $7,500 per day, excluding any potential impact attributable to COVID-19. For details on projected drydock CapEx and offhire days by quarter, please turn to Slide 16 or you can refer to it on Slide 16 in the appendix for an update there. Continuing with cost guidance for your modeling, 2020 full-year interest expense is expected to be $37 million after taking into account the payoff of the transition loan in mid-August, which is composed of $33 million of cash interest expense and the balance being non-cash components. This is $3 million of amortization of unamortized discounts and also deferred fees of $1.3 million related to a mark-to-market charge for interest rate swaps; those are non-cash charges. I would also give you guidance that additionally, after the payoff of the transition loan, our debt will call for $15 million in scheduled quarterly principal payments beginning in Q3, which is down from $20 million per quarter previously. For 2020, we expect cash G&A to be in the region of $23 million, of which there has been about $5 million of non-cash items, which is relatively in line with last year. Finally, we expect about $5 million in equity income from our JVs and about $20 million for depreciation and amortization per quarter. Now if we could go to Slide 12 for our cash bridge. Moving from left to right, we began the second quarter with total cash and liquidity of $150 million. During the quarter, we generated $96 million of adjusted EBITDA. This amount includes $5 million in equity income from the JVs, which is non-cash, and therefore deducted to reach a cash figure, but then we add back the cash distributions from the JVs, which this quarter were $2 million. We expected $17 million in drydocking and CapEx. Cash interest and principal payment on our debt was $30 million. I’m only taking into account the $22 million that was cash returned to shareholders in the positive impact of working capital and other non-cash charges of $11 million. The net result was that we ended the quarter with $144 million of cash and $40 million of undrawn revolver, yielding total liquidity of $184 million. Now if we could go to Slide 13, I’d like to briefly talk about our balance sheet. As of June 30, 2020, we had $1.8 billion of assets, compared to $523 million of long-term debt and $81 million short-term. In addition, as mentioned, we had a $40 million revolving credit facility that remained undrawn as of June 30. As you can see on the right side of the slide, our net debt to total cap stands at 30%, where our net loan-to-value of our conventional fleet stands at 38%. As footnote 1 tells you, that is not taking into account the value of our FSO; if you include that in book value, the net debt number drops to 34%. I’d also call your attention to footnote 2. Since its Q2 in the books, our LTM EBITDA is $266 million, meaning that debt to EBITDA is just 2.3 times. As footnote 2 indicates, with this kind of metric, our margin will drop from 260 basis points to 240 basis points in the core facility. Now finally, before turning the call back over to Lois, I’d like to briefly discuss our share repurchase program. During the first six months of the year, we repurchased $30 million of shares. Specifically, during the first quarter of 2020, we repurchased 490,592 shares at an average price of $20.41 per share for a total cost of $10 million. During the second quarter, we repurchased 926,700 shares at an average price of $21.37 per share for a total cost of $20 million. For a year-to-date total of $30 million, which represented nearly 5% of our outstanding shares. In August, our Board authorized a renewal of the share repurchase program in the amount of $30 million. That concludes my financial remarks. I’d now like to turn the call back to Lois for her closing comments.

Thanks a lot, Jeff. We’re excited with our second quarter earnings. We generated our second consecutive quarter of record. Taking advantage of the robust market and we further implemented our disciplined and accretive capital allocation strategy, our substantial operating leverage was evident in the second quarter. This enabled us to generate our highest earnings per share since going public, ending the quarter with $184 million in total liquidity, which includes the $144 million in cash. The strong second quarter results have extended into the third quarter, and we’re pleased to have booked over half of our revenue days at healthy rates. In addition to attractive spot bookings, we’ve capitalized on the elevated market and we entered into a number of highly profitable charters ranging from seven to 36 months and averaging $73,000 per day through the third quarter. During a time when rates have come off their highs, this success positions us to optimize our revenues. Finally, our success executing on our disciplined and balanced capital allocation strategy has allowed us to provide a return to shareholders while ensuring our balance sheet and our capital structure positions us well for the long-term. Complementing our repurchase of $20 million worth of shares in this quarter, our payment of our regular $0.06 dividend during the quarter, as well as the approval by the Board of another regular quarterly dividend of $0.06 to be paid in September, we are prepaying the full $40 million outstanding under our transition term loan facility this month. This will reduce our already low break-even by an additional $1,800 per day to under $15,000 per day. We entered the third quarter with a net loan-to-value of 38%, ample liquidity, and flexibility to continue to further implement our capital allocation. Consistent with our focus on acting opportunistically, our Board authorized a new $30 million share repurchase program, which will provide us with additional opportunities to unlock value for shareholders. We’ve also booked almost 70% of our Q3 VLCC days at a fixed rate of $58,000 per day. Going forward, we remain positive on the long-term outlook for the tanker market. Our priority is to provide safe, reliable service to our leading energy customers and to ensure the safety of our onshore and at-sea professionals as we continue to operate in the challenging COVID-19 environment. Thank you very much. And we’d now like to open it up for questions.

A - Lois Zabrocky: Hello?

Operator?

I think currently, our operator must not have electricity.

Maybe you could send her a note.

Sorry about that. My computer froze. We will now begin the question-and-answer session. Our first question is from Greg Lewis from BTIG.

Good morning, Greg.

Yes. Hey, thanks and good morning, everybody. And hey, Jeff and Lois. Lois, I guess, I – just – my first question is around, hey, congratulations on the Q3 bookings. It seems – as we look at where reported spot rates are, just kind of curious how we should think about that? It seems like an upcycles vessels tend to never actually earn those kind of high levels that are being reported. Kind of curious, like how we should be thinking about it now, where we’re kind of in a trough levels, how we should think about the performance of the ships versus kind of those reported rates?

Well, absolutely. First of all, thank you for your positions. I really appreciate you getting back here. We had you there in the funny while, so thank you so much. It’s much appreciated. Indeed, when the market is running and you’re seeing VLCC rates being reported at over $100,000 per day, what happens is that the market is running up and it’s – the vessels that are in that window that are able to fix those rates, I mean, overall, it’s very strong. And you’ll see that in order for us to secure 30% of our Vs or four out of 13 on these time charters that we got, we pulled plumb positions, right? So those were a lot of May lifting dates. In order to lock in on those two, seven months charters on the Vs at 100 grand a day. So, that was something – it’s really almost a spot decision when you’re doing something six or seven months in a VLCC, because that’s really only a couple of voyages. But likewise, I would say, with what’s booked in Q to date for the third quarter, you also see – you don’t see the market on Vs today is $20,000 to $25,000 per day. You don’t see Q3 booked at that, because we’ve had vessels that have been delayed and discharging. We’ve been able to secure higher rates going into the quarter. The open days on the vessels are indeed lower at present, but Q3 is always your lowest demand quarter. So I think that the market, particularly on the Vs has held up remarkably for the type of demand destruction that we have seen.

Lois, can I jump in? Can I take Greg?

Of course.

I think Greg may also mean, and you can tell us, Greg, that in some of the crazy volatile up quarters with rates really – six-figure rates, like Lois has mentioned in Q1 and Q2, you get the reports from the services of rate. And none of the peer group reports that top ticking rate for the whole quarter. So you wonder what people are really capturing when you read those headline rates. And – but when the rates are like, we’re lowest and I mentioned now in the mid-20s, it’s probably that we and the peer group are probably getting rates that pretty much reflect what you’re reading from whatever benchmark you’re picking up, right? So, as far as looking at where things are today, if you’re looking at the spot rates, that’s probably where things are creating.

Okay, great. Yes, yes, Jeff, thanks for that. And then, I guess, Lois, June, just because it is going to drive your capital allocation decisions, it’s going to drive how you think about deploying and renewing the fleet? I think you kind of like alluded to, and I’m just kind of curious if you could share your thoughts in terms of where you think we are in the cycle? It’s – and realizing that there’s a lot of mini cycles – there has become a lot of mini cycles within bigger cycles over the last few years, just kind of curious how you’re thinking about that?

It is very interesting, because when you look at destocking previously, it took 18 months. I’m not – I’m thinking that the destocking on this one may be a shorter period, because truly, the demand destruction was not – did not arise from anything other than COVID, and we bounce back fairly quickly. The markets will stay down as we go through the destocking, but that could be six months, could be 12 months, something like that. And it’s important for us to be ready and just to make sure we take our actions during that part of the cycle. So we’re watching very closely. And I’m thinking that it may be shorter rather than longer.

Okay, everybody. Hey, thank you, all. Gotcha.

No, and just – I think what we talked about it internally, what Lois is, and that – when that little mini cycle of the restocking caused by the – restocking of which is caused by COVID, when that ends, we’re back to a fundamentally really well balanced tanker market with an even lower order book than we saw at the beginning of this year when things started out so well, so...

Absolutely.

Operator, do you have a next question?

Yes. Our next question comes from Randy Giveans of Jefferies. Please go ahead.

How are you, Lois, Jeff and David, how are you all?

Good. How are you doing, Randy?

Good. Doing all right. Yes, obviously, congrats again on another record quarter, accretive uses of cash to the share purchases, prepayment of the $40 million transition term loan facility. So well done on that. Now with that, why did you choose to repay the transition facility instead of maybe the more expensive 8.5 senior notes? Was it solely to unencumber the ships or just a larger principal balance? And then what are your plans for those kind of 8.5% senior notes?

Go for it, Jeff?

Well, sure. Thanks, Randy. We looked at both. The 8.5% notes, which are just $25 million in total amount became callable at any time. So it’s a little early, I guess, in June – end of June, so that’s definitely an option. That option is still out there. We can call it – effectively, you had to call it in whole, because that’s sort of the minimum listening requirements in New York Stock Exchange. So we thought about it, but we decided, along with our Board, that we would prioritize the transition loans being the first thing that we would take in, because while it’s the second most expensive or priced loan, it is secured, it was low loan-to-value. A – really, as the name implies, a temporary loan that we did as part of facilitating and refinancing our old term loan B. If we had this much cash in January, as we do today, we wouldn’t have needed the transition loan at all. So it just seemed logical to us to remove that. As you mentioned, you get 12 more unencumbered ships to go to. We already had those 14 unencumbered ships worth $200 million in today’s market. Even at scrap, they’re worth about half of that. So tremendous optionality and flexibility of having unencumbered vessels. It’s really like gold. If you’re a ship owner, this is a good thing. We could sell them. As Lois alluded to, that’s gradually part of the plan, or we could borrow again some if we needed to or wanted to. So all that kind of optionality. And then meanwhile, the 8.5% unsecured is a relatively good price for unsecured. And we always can take a look at it quarter-by-quarter and then make that sort of the next – could be the next capital allocations, I think. But we also want to have dry powder for further allocations like further share repurchases. So I hope that answers your question, Randy.

Yes. No, it does, for sure. And then I guess, secondly, looking at the crude tanker market, what kinds of changes have you seen in vessel movements here in recent months? Are there certain regions that maybe have been busier than others? And then I guess, also same question on the refined product side of the business?

No, absolutely, Randy. I mean, you can see in the Q3 earnings on the Aframax, definitely, Libya being completely down and not having been able to restore, I think, they’re like 100,000 barrels a day versus they were well over 1 million barrels a day. That hurts regionally the western Aframax market. Then, I would particularly say, on the Product Carriers, you’ve just seen such an incredible volatility. The LR2s had really were superstars there for a while and then came down dramatically. You’re seeing naphtha now priced higher than LPG. That backed out some of that naphtha demand and kind of hurts some of the larger Product Carriers. So those are the couple of ways we’ve seen some of the trends manifesting themselves. We’ve still seen over or close to 3 million barrels a day still crude exporting out of the U.S. Gulf. I think that has also helped the larger crude market hold itself up a bit going through this period.

Sure. Perfect. Well, cool. I know it’s been a long crazy call. So that’s it for me. But obviously, keep up the great work, especially with the share repurchases and getting your crew back home. I know that’s the priority.

It really is, Randy. And I want to thank absolutely everybody for your patience here on the call and through these challenging times. So we look forward to making our capital allocation decisions for our shareholders in the absolute most optimal way and thank you for supporting Seaways. Thank you very much.

Thank you, Randy.

Our next question comes from Ben Nolan of Stifel.

I thought you’re cutting me off there, Lois.

Yes. I realized I had another one in the queue. I apologize, Ben.

All right. It’s like Randy said, it’s been a unique call. The – I have two questions. Number one is, as it relates to the $30 million of additional buyback authorization that you got, obviously, it was a terrific quarter with lots of cash now on the balance sheet. And taking sort of a tactical shotgun approach to what you’re doing with that. But thinking through sort of – from a longer-term perspective, the eventual needs to or desire to grow the business with – pairing now with the liquidity of the shares, preserving cash for potential opportunities. How – maybe we could talk through how is it that you came to want to re-up the $30 million to buy back? And yes, at what point do you say, 'Okay, well, now we need to transition to thinking about liquidity and long-term growth and everything else?'

Ben, that’s a great question. I mean, the easy – the easiest answer is that, at Seaways, we consistently like to have a full toolbox of our buyback ready, our program authorized. So that when we see that that’s the right capital allocation decision, we can exercise that. I would simply say that, for us right now in this environment of COVID-19 has been very tricky. And I think that we are very actively and very carefully looking at what’s the best way to allocate our capital. And then I’ll flip it over to Jeff, maybe for a little more detail.

Yes. Thanks, Lois. And I think it ties into a question that came up before or an explanation you’ve given, Lois, about the cycle we’re in. We’re in a destocking cycle, but it’s not an easy situation. As I think, we’ve used the expression, the view from the bridge is a little foggy about how long that cycle will last; it involves factors that no management team can control, what OPEC can do, as demand kind of returns, and things like that. So that’s why the capital allocation decisions quarter-by-quarter and then don’t take yourself into a corner is our view. We absolutely like having the program re-upped so we have the flexibility to do it if it makes sense. We’re also keeping in mind other needs that we have eventually for renewing our fleet, et cetera. So we’ll weigh all that stuff quarter-by-quarter and also how the cash is going based on how the destocking has gone. That’s the best answer we can give you, Ben; we’ve got all the tools in place.

Okay. And now this is a sort of a tying question and I apologize. This is a very open-ended. I usually don’t like to ask open-ended questions. But here we are close to six months into this really sort of bizarre situation. And I know that you guys are pretty critical thinkers. I’m curious, from your perspective, how – if you’re thinking about your business differently, both from a sort of asset allocation perspective and how you’re running the business? And then in conjunction with that, are there changes that you sort of can envision in the industry, I mean, does scale matter more than it used to, or, I don’t know, I – again, I apologize, I know it’s very open-ended, but would love to hear your thoughts?

Well, then I would start that from a tactical perspective. The conversations that I’ve been having with Bill on the technical side, it’s been a bit easier for him to sell me on some of these efficiency improvements items like the major stocks and the investment in super sleek paint for our VLCCs, because we’re really focusing on increasing our efficiency and meeting our decarbonization targets. So this is really a big effort, and we will increasingly have a focus on that. You see that the business will continue to change. That lower ordering book is really as owners keep having to see, okay, what’s going to be the next effective technology that isn’t just an intellectual idea, but that can actually be manifested. I think that that’s really going to affect fleet development. So, you start with what can you tactically do to improve the efficiency of the vessels that you own? And then you look at, 'Okay, how is the industry going to change and what will be the proven technology that’s really going to suit our needs going forward?' So I think that really, even during COVID-19, when you have all these urgent issues, everyone has a huge effort to coordinate crew repatriation stuff, you still have to have your eye on the ball. We do as to how that industry is going to change in regard to the next 10 years.

Go ahead, Ben, with your follow-on?

No, no. I was just – maybe also, I guess to be a little bit more specific. Are you guys – can you envision doing things from a cost perspective that maybe you wouldn’t have done in the past? Or does – again, does the scale matter more than maybe used to or not? I don’t know maybe some of those sort of macro level questions?

I do think scale is important. I do think that you get operational efficiencies. You get – from the pools, we often can get commercial efficiencies. But scale, without a doubt, continues to be important, and just in your liquidity of your shares traded and for all of us buying to get attention from shareholders. So anything that we can do to differentiate ourselves and put ourselves forward, we’re really looking at the market. And then, Jeff, you wanted to add something. Go ahead.

Well, I think that – actually, I think your previous comment about looking at the major stocks and slick paint and things like that, those are in addition to being carbon emission focused, they’re sort of cost-related. So we’re spending money to save money and to decarbonize. You’ve got to sweat the details. That’s the tactical kind of, as you said, Lois. But then strategically, Ben, we always spend time thinking about the big picture and where we can move to. I think we’re likely to stay a tanker company just to put that out there. But there’s a lot of things to consider as Lois touched on, from terms of where you’re going to move next and how technology is changing and how we can respond to that. So we try to have a balance of sweating the details and making tactical decisions, but with a lot of consideration given to what’s next. I can’t give you – we can’t give you an answer other than that we do understand the value of scale. We do understand the importance of how trends are changing and don’t want to have stranded assets, we want to put your money in the right place for the next 20, 30 years, and not just the next two years. So there’s no one answer, but the one I gave you about staying in the sector probably led to looking at everything.

All right. I appreciate it. Thanks, Jeff and Lois.

Yes. Thank you.

Our next question comes from Liam Burke from B. Riley.

Thank you. Good morning, Lois. Good morning, Jeff.

Hey.

Good morning.

Jeff, I want to beat the capital allocation subject to death here. But longer-term, do you have a either in terms of debt to total capital or some other metric, an ideal capital structure for the business understanding you’re operating a high fixed cost business there?

I mean, Jeff, I’m going to let you compose your answer there for a second because I would suggest that, that your ideal leverage is going to depend upon where you are in our cyclical business, and that it’s not always the same answer. And then, Jeff, this is your expertise.

Oh, thanks, Lois. Sure. We have no problem starting with 50% leverage. If it’s okay, we’re going to buy a vessel or a few vessels on block, whatever 50%, 55%, that’s – that can take advantage of the situation. But we think there is an advantage to working down your leverage from there. And Lois, you’re absolutely right, like net-to-value is a number that’s very tricky because it depends on what’s – what could be 50% net loan-to-value and the peak could become quickly 75% loan-to-value, and then companies got into trouble with that before. So that’s why we like – starting with level to maximize it benefited your equity when you’re acquiring vessels and then working it down. But we don’t have a set in stone target. We just think it’s good to work it down to lower levels because then you can always relever to help you make a capital allocation decision that’s smart, whether that’s buying a vessel because you’ve got to the right time to do it, or a few vessels or doing more share repurchasing or whatever it is.

Fair enough. Lois, the time charter rates that you secured in a quarter are strong. Looking sort of longer-term, do you see an opportunistic moving in time charter market as you see the cycle to reduce volatility? Or how are you looking at the time charters now?

Right now, the time charter flow has really ebbed, and charters are reluctant to step out. We are, again, in the lowest part of the demand cycle for the year. As we head into Q4, you may see the rates run and charters step out for term business. But right now, it’s a little bit apathetic, I would say.

Great. Thank you.

Our next question comes from J Mintzmyer from Value Investor’s Edge.

Good morning, Jeff. Good morning, Lois and David.

J, good morning.

Congrats on a fantastic quarter.

Thank you.

Yes. So a lot of this has been touched, and I realized the calls getting a little bit long with the glitches here. But just a quick question, not looking for too much detail. But there’s an enormous spread there, right, on the VLCCs between the modern tonnage and those old ships – a massive spread, right? How much of that is specifically, kind of, I guess, you would normally expect due to the age of the ships and how much of that was just like positioning? Not looking for exact answer, but just kind of broadly speaking?

The VLCCs are, obviously, by scale the most attractive vessel to hold story, John, in the most economic, right? So they were the first to really ramp up in the storage market, and then the Chinese have just been voracious in their imports into China. Within the Chinese crude market, they have their own benchmark, and you’re still in contango over there. So while it may not be a situation where you’re putting extra Vs on if you are holding a V and storage of China, you’re not in a big rush to discharge. So the Vs have had a few advantages that the rest of the market did not share in the last eight weeks.

Yes. Thanks, Lois. So I guess, I didn’t phrase it quite correct. I was just asking about the VLCCs themselves between the age profile there, there’s a huge parity between the 15-plus and the younger ones?

Oh, absolutely, I’m sorry for that. Yes. I mean, as soon as you get some softness in the market, if you are a highly flexible, less than 15-year-old VLCC, you’re going to be preferred; you’re going to be more flexible on a lot of the Western trades. The older vessels are going to be left with those charters that are willing to take up for better over 15 years old. But even when you look at it within our portfolio, those ships are still highly cash flow positive, considering what their asset values are at this point and what their book value is.

There’s only – Lois, if I could just jump in, there’s only two of them that are actively in the spot because time charter...

Well – and Jeff, if you look at the first quarter, they – we’re in a running market, they will earn as high as modern tonnage. And we’ll see, we could have some healthiness in Q4, and then you’ll see a shrinking of that vast variance as the market strengthens.

Thanks, Lois. Thanks, Jeff. It sounds like, yes, sounds like not really statistically significant. But there, obviously, is a big spread between the two classes. We covered a lot of the leverage stuff. I just had a quick sort of question for Jeff. I noticed you’ve swapped a lot of that stuff out on LIBOR earlier in the year, and you’ve got great swap rates at the time, right? But the swaps have come down right in price since then. Can you remind us, I don’t if you have this in front of you, or a rough estimate of what your total all-in bank debt cost is? It looks like it’s around 4%, which is hard to believe. Is that right? Or can you remind us about?

Oh, I think if you include – I mean, now you’ve got the spreads are 240 going to be going forward and – on the Sinosure and 200 on the Sinosure. Then you’ve got the LIBOR. And if you include the swap, we’re still going to be between 4% and 5% for those because of having done some swaps earlier on, while at the Sinosure credit facility came with a swap. So that was what we have done. We just did something in this quarter. It’s in the queue; go look it up, that talks about taking advantage of the lower rates that we have now by extending out in time the swap that’s on the Sinosure credit facility, otherwise it would have expired in 2025. We pushed it out to 2027, and that has the effect of saving about 40 basis points of where LIBOR swapped into there. So I think you’re probably right that with the 8.5%, only being $25 million, that they are probably all-in cost is probably around into the 4% and 5% range as you said.

Thanks, Jeff. Yes, it is a legacy facility, it looks like right on the Sinosure. But I did see the blending and that was pretty impressive out there to 2027. I think it was like 2.3% or something. So good job on that. Last question for you, FSO joint venture with Euronav, right? It comes up for renewal in 2022. I know previous commentary we danced around it a little bit with Euronav as well. Kind of the broad expectation is that those have a life still about 2032, at least. Now that was a little bit prior to some of the recent carnage in the market we’ve seen. So I guess, a little part one on that is – are those FSOs still steady and operating at full utilization and all that? And then I guess, part two is when do those negotiations and discussions begin? Are we already in that phase or is that like a year out?

So for part one of that, J, I mean, those FSOs have had been on the field since 2010 without one day of offhire, and so they are both highly efficient units, and they really improve the quality of that crude exports. So they’ve been extremely highly serviceable on that field, and we do expect them to continue to have at least another 10 years of life – so – or 12 till 2032. And then we are constantly in touch with our customer; when we give you more solid detail, we’ll do that.

Thanks a lot. I realize you can – you probably said as much as you can. Thanks again, Lois and Jeff. It’s just excellent to see such great capital allocation and a pure eye towards per share returns, right, and good allocation there. Thanks, again.

Thank you.

Thanks, J.

And that concludes our question-and-answer session. I’d like to now turn the conference back over to Lois Zabrocky for any closing remarks.

Well, there you go. Again – once again, thank you, guys, really for sticking with us here. We had a few technical difficulties on the call, but it’s – 2020 is that kind of a year. We had a great quarter and we’re looking forward to another great quarter in Q3, and thank you so much for your support of Seaways. Thanks a lot.

This concludes today’s conference call. Thank you for attending. You may now disconnect.