International Seaways, Inc. Q2 FY2023 Earnings Call

Hello, everyone and welcome to International Seaways Second Quarter 2023 Results Call and thank you for standing by. My name is Daisy and I'll be coordinating your call today. I would now like to hand the call over to your host, James Small, General Counsel to begin. So James, please go ahead.

Thank you, Daisy. Good morning, everyone. And welcome to International Seaways earnings call for the second quarter of 2023. 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 strategy; our business prospects; expectations regarding revenues and expenses including vessel, charter hire and G&A expenses; estimated bookings, TCE rates and/or capital expenditures during 2023 or in any other period; projected scheduled dry dock 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 and 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 annual report on Form 10-K for 2022, our quarterly reports on Form 10-Q for the first and second quarter for 2023 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, James. Good morning, everyone. I appreciate you joining International Seaways' earnings call for the second quarter of 2023. Referring to Slide 4 in our Investor Relations presentation, our net income for the second quarter reached $154 million, or $3.11 per diluted share, bringing our total earnings over the past year to more than $615 million. Our adjusted EBITDA was $205 million. In light of our strong second-quarter performance and favorable spot rates in the early third quarter, we are declaring a combined dividend of $1.42 per share. After the dividend payment in September, our total returns to shareholders over the last year amount to $6.16 in dividends and $14 million in buybacks, equating to about $360 million, resulting in a 17% yield based on our average market capitalization during this period. We have returned approximately half of our net income to shareholders. We have improved our capital structure, with liquidity nearing $500 million, which includes $236 million in cash and an undrawn revolver of almost $260 million. This strong liquidity is after accounting for returns to shareholders and our debt repayment efforts. In the second quarter, we pre-paid $75 million of our debt, which included two loans from sale-leaseback financing of $46 million and $29 million from our largest senior secured facility. Over the past year, we have pre-paid a total of nearly $390 million in debt and unencumbered 30 vessels, representing 40% of our fleet. Our net loan-to-value ratio is around 22% today, and our cash breakeven rate for the next year is below $16,000 per day, which comprises approximately $3,500 per day from fixed contracted revenue totaling over $350 million through charter expirations, not including profit-sharing from relevant charters. Continuing with our capital allocation strategy, we received our third and final dual-fuel VLCCs in May. These three VLCCs are on time charters for the next seven years based on a fixed earnings rate, along with profit-sharing above the industry average. For the Middle East to China route (TD3), in the second quarter, TCEs, including profit-sharing, were about $43,000 per day, representing a solid premium relative to the $96 million invested per vessel. We have also signed two new building commitments for LR1s with K Shipbuilding for delivery in the second half of 2025. These vessels will be equipped with scrubbers and class-certified for LNG conversion. The total cost for the two ships is $115 million, which includes considerations for strength index, oversized generators, and equipment. Once delivered, these ships will join our niche Panamax international joint venture, which has consistently performed above the broader LR1 market. The current average age of LR1 vessels in our fleet is about 14 years, with our overall LR1 Panamax sector characterized by an aging fleet profile. Even these older vessels have earned an average of $67,000 per day year-to-date. We continue to support our presence in this important strategic joint venture. On Slide 5, recent highlights indicate that oil demand is projected to exceed 102 million barrels per day on average for the second half of the year, marking an increase of 2 million barrels per day year-on-year. The growth in oil supply is primarily coming from North America, Guyana, and Brazil. According to forecasts from the EIA, IEA, and OPEC, there is an anticipated supply deficit in the latter half of 2023. Commercial oil stocks in the OECD have risen in the first half of the year as expected, and we anticipate a rapid drawdown in these inventories in early second half of the year as OPEC plus cuts take effect. Market sentiment regarding these anticipated cuts has already been reflected in spot tanker rates. The implications of tightening euro crude to Brent pricing may impact the portion of the fleet trading under sanctions rules, possibly bringing some vessels back into commercial operation and affecting daily earnings. However, it is too early to determine how these developments will play out, and we remain vigilant. On Slide 6, the tanker supply side still presents a strong narrative for our fundamentals. As illustrated, the number of vessels on order represents less than 15% of the fleet that is over 15 years old and needs replacement in the upcoming years, accounting for less than 5% of the overall fleet. New orders are also spaced out over the next three to four years. Vessel owners are unable to rapidly replace tonnage due to longer lead times and shipyards focusing on other sectors. Environmental regulations continue to evolve, adding uncertainty in vessel construction and engine type selection. Moving to Slide 7, following the IEA's recent update on oil output through 2028, we reaffirm our view that oil supply growth will largely originate from the Americas, while demand growth predominantly comes from Asia. These dynamics present a compelling investment opportunity for seaborne transportation in the near term. The aging supply side, coupled with trade flow inefficiencies due to the Russian invasion and sanctions, prepares a solid environment for tankers. At Seaways, we are actively capitalizing on the current strength of the tanker market while positioning ourselves as a leading tanker owner on the New York Stock Exchange. Through our comprehensive capital allocation strategy, we are leveraging every available option to build upon our successful history of returning cash to shareholders, maintaining a strong balance sheet, and growing the business. Now, I will hand it over to our CFO, Jeff Pribor, for the financial review.

Thanks, Lois. And good morning, everyone. On Slide 9, net income for the second quarter was $154 million or $3.11 per share. On the upper right chart, adjusted EBITDA for the second quarter 2023 was $205 million. In the appendix, we provided a reconciliation from reported earnings to adjusted earnings. While our expense guidance for the second quarter remains within a balanced range of expectations, I'd like to point out a few items of note with our income statement. Vessel expenses were higher than our prior guidance for the quarter. The majority of the increase in spending is due to the timing of purchases of spares, which is unavoidably lumpy as it relates to when a ship and the dry dock are off-hiring. Charter hire including the profit share is in line with expectations, given elevated rates. Other income for the quarter was over $3 million, which consisted largely of interest income on our significant cash balances, and we've been working hard to maximize this income. On the revenue side, our lightering business had another strong quarter earning $11 million in revenue with $2 million in vessel expenses, $4 million in charter hire, and $1 million of G&A. The lightering business contributed about $4 million in EBITDA in the second quarter and nearly $10 million of EBITDA year-to-date. Now, turning to our cash bridge on Slide 10. We began the quarter with liquidity of $519 million composed of $261 million in cash and $257 million in undrawn revolving capacity. Following along the chart from left to right on the cash bridge, we added $205 million in adjusted EBITDA for the second quarter, less $56 million in debt service, which is composed of scheduled debt repayments and cash interest expense, less our drydock and capital expenditures of $14 million in the quarter, and a working capital benefit of $49 million. We therefore achieved free cash flows of about $146 million for the second quarter. The remaining bars in the cash bridge demonstrate the execution of the capital allocation that we announced on the first quarter earnings call. As a reminder, in Q1 we had $169 million of free cash flow, and here you can see exactly how we used it. First, as we committed to at the time of the call, we repaid $75 million of debt in this quarter, of which $29 million went to unencumber a modern Suezmax vessel and $46 million was to terminate a sale-leaseback that had an interest margin of 390 basis points over bank borrowing rates. Secondly, we paid $79 million in combined dividends of $1.62 per share. Finally, we repurchased approximately 366,000 shares of our stock for $14 million. These components then led us to liquidity of over $493 million, with $236 million in cash and short-term investments and $257 million in undrawn revolving capacity. Now moving to Slide 11, we have a strong financial position detailed by the balance sheet on the left-hand side of the page. Cash remains strong at $236 million, representing approximately $2 billion book value versus current market values of over $3 billion. With about $947 million in gross debt, that equates to a net loan to value of about 22%, also illustrated in the bottom right-hand chart. I want to point out one last element of the balance sheet that is more of a timing issue. In the third line down from the top, under assets, you see that we separated advanced payment of debt of $46 million, which is related to the prepayment of the two sale-leasebacks I just mentioned. There is a corresponding $46 million of debt embedded in the current portion of debt. Both of these are eliminated all the label transaction when it closed on July 3, just after the quarter closed. On the upper right-hand side, we have recapped debt details to reflect these payments and prepayments. Because 73% of our debt portfolio is hedged or fixed, our weighted average all-in interest rate using current bank borrowing rates is 6.36%, which at current rates is effectively margin about 1.25 basis points above today's SOFR and LIBOR reference rates. As we mentioned in our press release this morning, we expect to continue on this trajectory of a balanced capital allocation approach. We intend to use some of our cash to repay existing debt. Currently, we're exploring options on which facilities in the portfolio we would do, but we expect total repayment to be around $50 million. We also announced our combined dividend of $1.42 per share, which consists of a regular dividend of $0.12 and $1.30 of a supplemental dividend. These payments were made in the third quarter as they continue to build on our track record executing our capital allocation strategy. Turning now to the last slide that I'll cover, Slide 12, reflects our forward-looking guidance and book to date TCE aligned with our cash breakeven levels. Starting with TCE fixtures for the third quarter of 2023, I remind you, as I always do, that actual TCEs to be referred to in our next earnings call may be different. But here you see we have a blended average of TCE across all the sectors of $38,000 a day so far this quarter. On the right-hand side of the slide, you can see our cash breakevens that we have shown for the next 12 months reflective of the delivery of the last vessel in our newbuilding program and related payments on principal and interest, as well as the new fixed revenues, excluding any profit share on our increased long-term time charters. Overall, we've reduced our break-evens by $1,000 a day from the second quarter of last year. When you compare this breakeven to our fixtures to date, it certainly looks like the third quarter can be another strong quarter for International Seaways. On the bottom left-hand chart for the modelers out there, we provide some updated guidance for expenses in Q3 and total projections for the year. We also included in the appendix our quarterly expected off-hire and CapEx schedule for 2023. That concludes my remarks. I'd now like to turn the call back to Lois for closing comments.

Thanks a lot, Jeff. I'll now summarize the details laid out on Slide 13, where you can see our investment highlights. For the last six and a half years, International Seaways has a track record of returning to shareholders, constantly improving our healthy balance sheet and growing our company. Our total shareholder return over this time is over 290% and surpasses our peers. Over the last 12 months through regular quarterly dividends, supplemental dividends, and opportunistic share repurchasing, we have returned $316 million in cash returns with earnings of $658 million. This very consistent payout represents a 17% yield. We have improved our balance sheet over this time, with 75 vessels in the crude and product tanker markets. We have $2 billion in assets on the books that are worth over $3 billion in the market today. We prepaid debt and unencumbered 30 vessels representing 40% of our fleet. Importantly, our cash breakeven level is now below $16,000 per day. We have strategically positioned this company for a sustained robust tanker market with a growing need for seaborne transportation created by regional imbalances. We're focused on safety and reliability in our transportation in an industry that will have evolving environmental regulations. We remain focused on being a leader in ESG. Collectively, we strive to continue evolving these principles and provide a meaningful platform for all of our stakeholders. Thank you very much. Operator, if you would, please open it up for questions.

Of course. Our question today comes from Chris Robertson from Deutsche Bank. Chris, please go ahead. Your line is open.

Hi, good morning, Lois and Jeff, thanks for taking the time to take our questions. This is around the 2023 off-hire day guidance for Q3, it looks like it ticked up just slightly. Since the last update, I was wondering if this is due to pulling forward any drydocking into the third quarter, or if this is due to just some delays that are out there?

Some of our drydocking from the second quarter got pushed into the third quarter. That I think is our only change, isn't it, Jeff?

I have to go back and look for it. But we haven't looked and we're doing some forecasts. And we've looked also from '22 to the end of '23. And then also some will begin later in the year, so we've got a bit of both.

In the third quarter, we anticipate, and hopefully, this will mark the low point of the year. We expect to pick up the rates in the fourth quarter, so that the bit of the concentration there.

Yes, that makes sense. Thanks for that. My second question is just around the Corpus Christi ship channel dredging project. Do you think this will have any impact on the lightering business? Or could it be offset by maybe some more positive impact on VLCC demand?

I think the project has moved forward very successfully. It is still the case that you can now load a Suezmax and then top up to a VLCC. That has been the case for the last couple of years; you still need an underfill clearance. The channel dredging allows for nice safety levels. So, we don't really see a big impact on the lightering business, except for the fact that Corpus Christi is just increasingly busier, and that actually increases the amount of exports from that port and consequently, some of the lighterings.

Yes, seems like it's good all-around for all segments. Okay. Yes. Thank you very much. I'll turn it over.

Thank you, Chris.

Thank you very much. Our next question today comes from Omar Nokta from Jefferies. Omar, please go ahead. Your line is open.

Hello, and just good morning. Wanted to ask about. I feel like a lot of times I'm asking you about the Panamaxes, but you clearly you've ordered the two LR1s that got a pretty attractive delivery schedule, I'd say for 2025. Clearly that piece of your business has done really well and doesn't really seem to be feeling the effects of seasonality or the OPEC cuts, and just looking at your averages so far this year at 68,000 in the first half. That seems like that's probably at least perhaps double what the broad LR1 market average has been. So across your fleet that's a $50 million. If we calculate that or just over $1 a share. So pretty meaningful outperformance especially for you guys. My question is, are there risks that owners start to bring vessels into this niche market and crowd out the premium you've been able to consistently achieve here over the past several quarters?

Well, I would say Omar that the base trade in the Americas on these vessels and in this class has benefited from what the overall tanker market, especially the mid sector of the fleet has enhanced ton-miles with all of the sanctions and the trade that has benefited us. But there are lots of Panamaxes engaged in this trade. It's an aging sector, the overall trade is strong, and we're supporting our joint venture, and we're making sure that she goes forward. We're nearly 20 years in 2025, it'll be 20 years that we've been in this joint venture, and it's been very successful. We look forward to supporting that trade, our customer base, and our partners.

Thanks Lois. And it sounds like clearly you're ordering those two ships to perhaps maybe get deeper into that trade. In terms of say, looking at a broader fleet renewal in general, I guess, where we've seen a bit more of your activity recently in terms of adding or tonnage has been in the LR1s. How are you thinking about the MRs as it is right now? Any plans to reinvest in that segment? And as you think about that, do newbuildings similar to the LR1s make sense? Are there opportunities that you think are maybe more appropriate in the second-hand market? Any color you can give there?

I mean, Omar, what I would say is that we have been highly selective, so you're really looking for, in an environment where we do feel that cyclically asset value levels are high. We're looking for those opportunities where it's strategic. Overall, fundamentals are very strong. The VLCCs that we just took delivery of and the Panamaxes or LR1s that we just ordered; those two sectors have in common, their order book is at 2%. I think that's very strong. I think that as we look at our broader sectors, one of the beauties of being diversified and being present in all of these different markets is having more in-depth knowledge about all of those fundamentals. We're looking for the opportunities to provide a strong return. That may be an MRs going forward. It's something that we will continue to study, but it's not something that will repeat up for today.

Thanks Lois. Thank you. And just one final, just quick follow-up, you're just highlighting the profit share on the on those three VLCCs. You know, based there based off of the TD3, is that basis just general bunker fillers? Is that LNG price, LNG fuel component?

Derek Solon, our Chief Commercial Officer is going to handle that.

Hi Omar. It's Derek. Yes, it's based on VLSFO pricing, not LNG pricing. But in the negotiation with the charter, we were able to work some advantages to that VLSFO pricing.

Got it. Okay. Thanks, Derek. And thanks, Lois.

Thank you.

Thank you. Our next question comes from Liam Burke from B. Riley. Liam, please go ahead. Your line is open.

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

Good morning, Liam.

Lois, the Suezmax are out earning the VLCCs. Is that a function of the redistribution of crude supply? And do you think that will continue?

Yes, Derek will take that.

Hi Liam, it's Derek Solon here. Yes, that's a function of changing trading patterns around the Russian invasion in Ukraine, where we've seen a mid-sector Suez outperform the larger crude. Expect that to continue while we have these continued hostilities in Europe.

Great. And, Jeff, on the capital allocation side? How much do newbuilds after you've ordered two new LR2s come in balancing your allocation of capital now?

Well, I think Lois touched on it; if we look at assets today, they're generally at the high end as of this cyclical of pricing, as we know. So when there's going to be a newbuilding, if there has to be a newbuilding, allocation is going to be a specific value proposition. That's what we found with respect to these LR1s; they work out well, taking into account the financial metrics of making them conversion ready, and even considering a conversion in the future in the DCFs. So that's a specific value proposition. I wouldn't say that I will evaluate that in other sectors, but we're not expecting anything at this time.

Great. Thank you, Jeff. Thank you, Derek.

Thank you. Our next question comes from Ben Nolan from Stifel. Ben, please go ahead. Your line is open.

Yes, thanks. Yes. Good quarter. Actually, if I could just follow-up to your just talking about the LR1s that you ordered. The LNG raise you're curious. You can just trade those in a pretty distinct pattern. Was there any thought about actually making them LNG equipped? And why not just go ahead and go full tilt on that?

Let me ask my colleagues to answer that question.

Yes, our Chief Operational Officer and Head of Sustainability, Bill Nugent, you just highlight if you would, how you preparing us with this order for multi-fuel future.

So thank you. My responsibility to Lois and Derek is to provide them with safe reliable quality ships to trade. As we look forward, as to how those ships may trade, and as the rules evolve and regulations change, we kind of consider IMO latest announcements and tightening of restrictions. We want to make sure that we're prepared for a multitude of different scenarios. So these ships can operate on biofuel as a drop-in fuel, we have made considerations in the design for the potential for carbon capture if that becomes a viable logistical technology, and then we also considered LNG as a fuel. So, you know, what I've tried to do is make the ships as flexible as possible so that Derek has the ability to trade them in whatever way he wishes to do so. I have realized that sort of answered all the questions there.

Yes, so Ben is Jeff again. So as people talk about whatever, something future already. And that can be not bought back; it can be a fully flushed out program. What we got in this case is to have a lot of optionality built into these ships, and we factored in the future costs of that into our decision-making table. Hope that answers your question.

No, it's helpful. And actually, if I could just, I assume even price that for something like now one, what's the incremental cost of having it be LNG equipped versus just ready any framework around that?

Okay, yes, I mean, maybe what I would say is one of the distinctions that Bill led the team to achieve is that we have a classification, right? Go ahead, Bill, that we're certified to carry LNG with the conversion.

Yes, I mean, it's important that dual fuel ready is not just lip service.

Correct, that exactly.

So yes, I mean, but even beyond that, right? So the actual equipment is certified and has been on other ships converting provided or operates on dual fuel. So the boilers, the engine, main engine generators can all do that and are sized for that future service. Right, so that's a key distinction, specifically that the adder for it to deliver that ship in the market today is dual fuel, somewhere in that $12 million to $13 million range.

We estimate would be the cost, but again, then we prepared for that in the future. We are not undertaking that today.

Understand, just trying to frame in the value proposition a little bit, but appreciate that. My last question. Again, maybe a little bit more on the West Coast with the LRs in particular with EMRs, all over both the Gulf and the Pacific Coast and a lot of noise about Panama and congestion and low waters and everything. Is that having any specific impact on the business that you guys do? And have you thought at all about sort of it or if not, then be curious to hear that. But if it is in any sense of how you would quantify if that impact is?

The Panama Canal for the trading of, within the joint venture of Panamaxes International, is an integral piece of the trade routes. We are constantly calling there. And Derek, do you want to talk about the delays, I mean.

I think to Ben's point has been, I think you're speaking specifically about the most recent building delays at the Panama Canal area.

Yes. Well, yes, I mean, it's months now, but it's just getting worse and worse right?

Right. So in some instances, yes, we have seen increasing delays for both EMRs and the Panamaxes. I think the delays at the Neo canal have grown larger than at the old restricted canal. So you know, that's why longer term we've built the LR1s with the 32.2 meter beam so they can continue to use the older Panama Canal. But some of the delays have had an impact on the TCEs as we picked up longer wait times to go through. So we've seen that in one instance, we sent a ship from Argentina over to the West Coast, and didn't utilize the canal. We went around Cape Horn. So yes, I think that determined interpretive play that game of delay versus cost in each and every voyage, and you've seen it impact us.

Interesting. Okay. All right. That does it for me again, thanks and good quarter, guys.

Thank you.

Thank you. Our last question is from an indiscernible source. Please go ahead. Your line is open.

Good morning. Thanks for taking my question. I realize it's a bit early to see the full impact, but on the dark pool trading Russian crude? Are you seeing tankers leave that pool and return to the regular trade as East Asia started buying more Middle Eastern crude? Is that something that can happen quickly? Or will you have a lot of visibility as though unfold?

Sharif hi, it's Derek Solon. Again, maybe I can answer this one. As Lois touched on in her remarks, I think as crude has increased overall, U.S. crude has increased and we're starting to see U.S. crude above the set. You know, there's a differentiation within the Russian trading fleet. There's the great fleet, who are more comfortable sanctions busting, if you will, will carry crude at any cost. Then there's the compliant group of boaters who are willing to load Russia, unlike us, but we're willing to load Russia provided it's in accordance with the price cap that's set. As the price goes up for some of those ships, they come back. They don't come back necessarily completely efficient, though because when they come back, there's a lot of customers, a lot of charters who are not keen to take shifts that have called Russia. So they'll have to take disadvantaged business to sort of clean up their cargo history. So I think to your point I will take a little bit of time to see how that impacts the market.

That's helpful. Thanks, really, I'm just trying to kind of gauge the volatility there. And then you exercised two repurchase options during the quarter. Going forward, how are we thinking about exercising more sale leaseback repurchases versus other parts of the capital allocation strategy?

Hi. It’s Jeff. I think that is probably the last of the repurchases you might see for a while just based on the terms of the other sale leasebacks that are out there. So nothing imminent. And as we said in our March, we will look at the whole portfolio of other debt instruments we have in terms of this incremental debt prepayment that we're doing and we'll continue to do as nicely brings down our cash breakeven. So it will probably be spread somewhere else in the debt portfolio.

Okay. Thanks for taking my question.

Thank you.

Thank you. We have no further questions. So I'd like to hand back to Lois for any closing remarks.

Thank you very much. I want to thank everyone for joining us today on our second quarter conference call and a very strong quarter. Thank you very much.

Thank you, everyone, for joining today's call. You may now disconnect your lines. And have a lovely day.