International Seaways, Inc. Q3 FY2022 Earnings Call

Ladies and gentlemen, good morning. Thank you for your patience and for attending today’s International Seaways' Third Quarter 2022 Earnings Call. My name is Amber, and I will be your moderator for today's call. It is now my pleasure to hand the conference over to our host James Small, General Counsel with International Seaways. James, please proceed.

Thank you, Amber. Good morning, everyone, and welcome to International Seaways' earnings call for the third quarter of 2022. Before we begin, I would like to start off by advising everyone with us on the call today of the following. During this call, management may make forward-looking statements regarding the company or the industry in which it operates. Those statements may address, without limitation, the following topics: Outlooks for the crude and product tanker markets and changes in 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 conflict between Russia and Ukraine; the company's strategy; anticipated cost savings and synergies and benefits from our merger with Diamond S; the effects of the ongoing coronavirus pandemic; our business prospects; expectations regarding revenues and expenses including vessel, charter hire, and general and administrative expenses; estimated bookings, TCE rates and/or capital expenditures in the fourth quarter of 2022 and 2023 or any other period; projected scheduled drydock and off-hire days; purchases and sales of vessels, construction of newbuild vessels and other investments; the company's consideration of strategic alternatives; anticipated and recent financing transactions in any plans to issue dividends; the company's relationship with its stakeholders; the company's ability to achieve its financing and other objectives; and other economic, political, and regulatory developments globally. 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 the statements. Factors, risks, and uncertainties that could cause International Seaways' actual results to differ from expectations include those described in our quarterly report on Form 10-Q for the first, second, and third quarter of 2022, and in our 2021 annual report on Form 10-K, and in other filings that we have made, or in the future may make, with the U.S. Securities and Exchange Commission. Now, let me 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 Seaways' earnings call to discuss our third quarter results. During the third quarter, we generated our highest ever quarterly income. This marks our second consecutive record quarter. Crude tanker earnings rose to follow suit with the product carriers from the second quarter, with oil demand increasing more than 1 million barrels per day in the quarter. Combined with the prioritization of energy security, tanker demand and utilization are high. International Seaways is capturing the strong rates. Our commitment to growing the company, maintaining a healthy balance sheet, and returning cash to shareholders is serving Seaways well. We have built our overall liquidity, and now with strong cash flow generation, we are returning more to shareholders. We have announced a special dividend of $1 per share in addition to our regular quarterly dividend of $0.12 per share. In the third quarter, we generated net income of $113.4 million or $2.28 per share and earned adjusted EBITDA of $157.1 million as our diversified fleet operated at profitable levels across all asset classes. Our year-to-date adjusted EBITDA in 2022 of $295 million has eclipsed all prior full year EBITDA at Seaways. We are taking advantage of the strong markets, the strongest in the last 10 years. Based on our fourth quarter bookings to date, we expect to generate even stronger earnings in the fourth quarter. We maintain our strong balance sheet supporting our diversified capital structure and our financial flexibility, both of which are hallmarks of Seaways success. We ended the quarter with total liquidity at over $475 million, including $255 million of cash and $220 million in revolver capacity. Our net loan to value is a very low 29%. We repurchased approximately 687,000 shares during the third quarter for $20 million, at an average price of $29, well below our current price. We also paid our regular quarterly dividend of $0.12 per share, which we doubled earlier this year. This marks our 11th consecutive quarter of regular dividends. Overall, Seaways will return about $90 million in cash to shareholders in 2022, increasing the total return to shareholders to $185 million since the start of 2020. We continue to build upon our track record of returning value to shareholders as part of our balanced capital allocation strategy. At this point in the cycle with our large fleet, healthy rates, and our strong balance sheet, we intend to continue delivering returns to shareholders. Turning to slide five, we examine one of the most prominent topics in tanker demand today, the sanctioning of seaborne Russian barrels of crude and product into the EU. This will create a structural shift in trade routes with cargoes exported from Russia. About 2.5 million to 3 million barrels per day of Russian crude were exported to Europe prior to the invasion of Ukraine. Today, around 1 million seaborne barrels continue to flow into the EU. As of December 5th, Russian seaborne crude will be displaced from the EU. Europe has been pulling incremental barrels in from the AG, West Africa, and the Americas. These voyages add about 20 plus days of length compared to importing from Russia. We also note that Europe is increasing their overall crude imports as part of a switch from natural gas to oil. We believe the world will switch in the fourth quarter to 600,000 to 700,000 barrels per day of additional oil consumption due to the switching from natural gas. Overall, we expect further displacement of Russian crude backed out of the EU as sanctions take effect. While a majority of Russian crude has moved toward Asia, it's too early to see if all of these displaced barrels will head East, but the overall trade is moving to more inefficient patterns and soaking up a lot of tonnage. On the right-hand side of the page, product exports from Russia are still moving into Europe, which we do not expect to continue once the EU sanctions on products take effect on February 5th, 2023. This could present further upside to the product tanker markets. We believe the tonnage to move these barrels is largely in place with the Russian fleet, yet we still see about 40 to 60 MR Vessels likely rotating from commercial markets to new Russian trade groups. Overall, this should have a similar impact on the product market as it has improved longer haul trades absorbing more tonnage and pushing earnings higher. Turning to slide six, we have highlighted major drivers of tanker demand. Oil demand has averaged about 99 million barrels per day through the first three quarters of 2022. This is about 2 million barrels per day higher year-on-year. In the fourth quarter, we expect oil demand to close the year above 101 million barrels per day, driving the 2022 average to be just under 100 million barrels per day. The outlook for 2023 is for an additional 2 million barrels per day of oil demand increase to average around 102 million barrels per day for the year. Of course, as high inflation persists, recessionary concerns could adjust these estimates going forward. While the announced production cuts of OPEC, OPEC+ have put a focus on oil supply, research suggests OPEC+ has a history of underperforming on the production targets. We believe with Saudi, the UAE, Kuwait, and Iraq leading the production cuts, this could result in close to 1 million barrels per day of reduction. This reduction would be offset by the increased oil production largely from the Americas, which is expected to increase by around 1.5 million barrels per day. Overall, we see a balanced market of supply and demand in the near term. Inventory levels, already at the lowest levels in 10 years, are not likely to be replenished, and therefore further market disruptions could create more demand for tankers. The strategic petroleum reserve has been covering shortfalls across the globe for the last several quarters, but soon these releases will cease, and eventually, we will need to replace the barrels and the SPPR, which should further create tanker demand. On the bottom right chart, seasonal global refinery turnarounds could help seaborne trades. We expect planned outages to increase in early Q4, which draws on inventories and creates the need for imports. As a result of this, we expect tanker demand to remain strong, especially in the near term as the Russian trade is a major market disruption. We believe the fundamental drivers remain positive for tanker earnings. The overall tanker order book is presently below 5%, continuing to record its lowest level relative to the size of the fleet. Net fleet growth is just 1.5% year-over-year. The average age of the global tanker fleet has increased to over 12 years. This is the highest it has been in about 20 years. This all means the fleet will continue to get older, and more vessels over the age of 20 will be removed from the commercial trading fleet. Sanctioned oil trade is likely to take in the older tonnage as barrels from Iran and Venezuela may face some competition with Russian oil. The dark fleet stands at around 240 vessels, and we've seen only about 10% switch thus far into the Russian trade. Should there be the removal of sanctions on any or all of these countries, we expect this would lead to higher recycling volumes. Moreover, newbuild contracting is the lowest in over 20 years. New orders will likely have delivery dates three years from now with uncertainty about their economic useful life. Overall, tanker fundamentals remain positive over the short and medium term, barring any major economic upheaval. Seaways is well-positioned to capture the strong rate environment with our diversified fleet of 78 tanker vessels. With our healthy balance sheet and liquidity, we expect to continue our balanced capital allocation strategy, invest opportunistically, reduce our debt level, and return cash to shareholders.

Thanks, Lois, and good morning, everyone. Let's go straight to reviewing the second quarter results in greater detail. As always, before turning to the slides, let me provide a quick summary of our financial results for the quarter. In the second quarter, we generated a record adjusted EBITDA of $157.1 million. Net income for the third quarter was $113.4 million or $2.28 per diluted share compared to a net loss of $67.4 million or $1.44 per diluted share in the third quarter of last year. Our TCE revenues for the Crude Tanker segment were over $75 million for the quarter compared to $35 million in the third quarter of last year. Crude Tanker revenues remain strong in the Aframax and Suezmax, and the increase in the quarter was largely due, therefore, to higher earnings from the VLCC. Adjusted EBITDA for Q3 was $157 million compared with $8 million in adjusted EBITDA in the third quarter last year. These significant increases demonstrate our significant operating leverage to the strengthening tanker markets driven by product tankers and increasingly by the Crude segment. We finished the third quarter with spot earnings averaging $24,400 a day for VLCCs, $34,200 per day for Suezmax, $38,300 per day for Aframax, $41,000 per day on the LR1 fleet, and $36,000 per day in MR spot earnings. Our fourth quarter bookings have increased considerably across the entire fleet compared to Q3. The cash cost TCE breakevens for the forward 12 months are illustrated on this slide. International Seaways' overall breakeven rate is estimated to be about $18,600 per day. Our total cash and liquidity was $452 million at the beginning of the third quarter. During the quarter, our adjusted EBITDA was $157 million, and our debt service for the quarter was $25 million. We expended $12 million on drydocking and maintenance CapEx. We have a very healthy balance sheet, and as of September 30th, we had about $2.5 billion of assets compared to $1.1 billion of long-term debt. Our net loan to asset value is below 29%, and our total liquidity is $476 million. Accordingly, at this point in our tanker cycle, with current asset values at 10-year highs and a healthy debt amortization schedule of approximately $180 million a year, we are well-positioned to return a substantial portion of our free cash flow to shareholders. This will be reflected in our announcement today of a $1 per share special dividend, along with our normal quarterly dividend.

Thank you very much, Jeff. On slide 15, we provide Seaways' investment highlights. I encourage you to read these fully. However, I will summarize them briefly. Key ways in our history as a public company have been maintaining a balance sheet throughout the cycle. We are disciplined stewards of capital, balancing consistent returns to shareholders with fleet growth and healthy financial metrics. The company today has significant operating leverage to capitalize on what we expect to be a robust tanker cycle over the next few years. We are staying in front of the growing ESG priorities, investing in the fleet to reduce our carbon footprint, and build a corporate culture of diversity with appropriate checks and balances. Thank you very much. And with that said, Amber, we would like to open up the lines for questions.

Of course. Thank you. We will now begin the Q&A session. Our first question comes from the line of Chris Robertson with Deutsche Bank. Chris, your line is now open.

Hi, Lois and Jeff, good morning and thanks for taking our questions.

Yes. Good morning.

Welcome to the group, Chris.

Yeah. Thank you. I just wanted to talk about leverage for a moment. Jeff, how are you thinking about just leverage overall your kind of methodology here? Are you looking at certain leverage ratios that you're targeting? Are you aiming for a specific total cash breakeven level eventually? And can you just walk us through your philosophy around that?

Sure, Chris. I think that our feeling is, whether it's leverage levels or other capital allocation policies, they need to be responsive to the cycle. It's not a one-size-fits-all situation. So, we don't have any one loan-to-value target when values change so dramatically. Instead, it's more about a process. So, at this time, when we're in the second quarter of an upcycle, generating significant cash, one of the things that we want to make sure happens is that we are continuing to deleverage. We fully believe that deleveraging and returning cash to shareholders are not mutually exclusive. Hence, our announcement today of dividends.

Okay. Yeah. I got it. I guess, following up on that, you mentioned the special dividend. Can you walk us through how that special dividend was calculated, the decision to go with a special dividend rather than increasing the normal quarterly dividend? Is that going to be supplemental to the quarterly dividend? Or should we think about this as more of an annual occurrence?

You should consider the special dividend as an addition to the quarterly dividend. Our focus on capital allocation is consistent throughout all phases of the cycle. In the last quarter, we engaged in share repurchasing, and this quarter, we are introducing a special dividend due to the rise in our share price, which has narrowed the gap to net asset value. This special dividend is distinct from our regular dividend, which will remain unchanged.

Yeah. Thanks for the color, Jeff. And I will turn it over.

Thank you. Our next question comes from the line of Omar Nokta with Jefferies. Omar, your line is now open.

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

Hey Omar.

Nice strong results, and very good figures ahead. The share price has been trending nicely all year. In fact, I think INSW has been the best performer in terms of gains since around the beginning of the third quarter. How are you thinking about valuation today, as it seems you are closest to NAV? Since you took the helm, how do you view that? Does it change anything in terms of how you approach capital allocation, whether that's returning capital to shareholders or investing in the business?

So, Omar, indeed, our asset values, our net asset value continues to improve and increase. We think that this will continue as you see the extremely high rates projected for the fourth quarter. Overall, in making the pie bigger, we believe we will continue to earn strong cash flows and see increased vessel value. We see overall, the tanker market, both crude and products, strengthening.

I'd just add that Omar, we're very confident that we have a strategy that works, investing in fleet renewal at the bottom of the cycle, focusing on returns to shareholders and deleveraging in the up part of the cycle. We're grateful that this is being recognized in our share price now. We plan to continue to stay the course and follow the strategy.

Yeah. And I agree, it makes sense. Nice to see the stock price performed so well. And maybe just wanted to ask then about the fleet makeup. You obviously have critical mass in the VLCCs, the Suezmaxes, and the MRs. Not so much a big presence, I'd say, in the Afras and the LR2. In the past, you've sold the FSO business, the LNG vessels. I think it may be the handies that you got from Diamond S. Do you perhaps look to monetize that and maybe take that capital and boost your presence elsewhere? Or what do you think just generally on that?

I would say you did a really good job of recapping those non-core businesses that we did move out of, including the handy tankers, due to the Russian exposure in that market. As you can see, with earnings booked in the quarter, it's a very strong piece of our portfolio. We are not looking to divest the Aframaxes or LR2 at this point. Thanks, Omar.

Okay. Thanks, Lois. And thanks, Jeff. Congrats on the strong quarter.

Thanks, Omar.

Thank you. Our next question comes from Greg Lewis with BTIG. Greg, your line is now open.

Thank you, and good morning everyone. I appreciate you taking my question. Lois, could you explain your thoughts on capital allocation? I'm considering the timing of the sanctions or embargoes related to crude and its derivatives. Is there a way the industry can adapt their fleets in response? Will we observe similar impacts in the product market due to the crude embargo? I'm trying to understand how INSW can leverage this situation.

We believe that there is about 1 million barrels per day of seaborne crude still going into the EU. Some of this has to find a home. Certainly, India and China have been the biggest takers of Russian crude. The remaining barrels need to find alternative routes either through the price cap, or with vessels in the gray fleet. We think there will be dislocation and inefficiency, which is good for the tanker market.

And then I did want to follow-up on that because of the February timing. We're already starting to hear concerns about heating oil and if it's an unseasonably cold winter. Could you walk us through a little bit around the heating oil market? And really, does a cold winter typically last?

The middle of the barrel, the diesel is at the lowest inventories on the East Coast since 2007. The Northeast is really the principal market still relying on heating oil. We are seeing positive movements in refining margins on the East Coast which may tighten the gap. We're well aware of some movements from the U.S. Gulf to bring diesel to the East Coast.

Okay. Super helpful.

Thank you. Our next question comes from the line of Liam Burke with B. Riley. Liam, your line is now open.

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

Hey, how are you Liam?

Good. Thank you. Just touching back on Omar's question on the fleet management. Not that you would need the cash, but is there any thought of lightening up on some of the older MRs with the asset value so high here?

We have one vessel that is under contract for sale at present. We're looking carefully at the fleet because these vessels are earning very strong returns. So, we are okay to consider sales selectively.

Okay. Fair enough. And I guess, is there any thought with spot rates so high to move any more of the vessels over to the time charters?

The team looks at that, and we executed a couple of time charters. We continue to monitor the market for further opportunities.

Great.

Thank you. This will now conclude the question-and-answer session. I will also hand the conference back over to Lois for any additional or closing remarks.

Thank you very much, everyone for joining International Seaways' third quarter call. We look forward to a strong performance in the coming quarter. Thank you very much.

This concludes today's International Seaways' third quarter 2022 earnings call. Thank you for your participation. You may now disconnect your line.