International Seaways, Inc. Q4 FY2023 Earnings Call

Good morning, everyone. Thank you for joining the International Seaways Fourth Quarter and Full Year 2023 Results Call. All lines are muted during the presentation, but there will be a chance for questions and answers at the end. Now, I will pass the call over to our host, James Small, General Counsel of International Seaways. Please proceed.

Thank you, Candice. Good morning, everyone, and welcome to International Seaways earnings call for the fourth quarter and full year 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, 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 ongoing and threatened conflicts around the globe; the company's 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 2024, or in any other period; projected scheduled drydock and off-hire days; purchases and sales of vessels, construction of new build 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, 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, including those described in our annual report on Form 10-K 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 very much, James. Good morning, everyone. Thank you for joining International Seaways earnings call for the fourth quarter and for the full year of 2023. You can find our presentation on the Investor Relations section of our website. 2023 was a record year for International Seaway. Our net income was $556 million, $11.25 per share, eclipsing 2022's net income of $388 million, $7.77 per share. Net income for the fourth quarter of 2023 was $132 million, $2.68 per share. Included in these figures are gains on vessel sales, and a write-off of deferred financing costs. Excluding these special items, adjusted net income was $525 million for the year and $108 million for the quarter. Seaways closed 2023 with just over $600 million in total liquidity, $187 million in cash and $414 million in undrawn revolver. Jeff will highlight our balance sheet in just a few moments, but feeling a little bit of his thunder, our $547 million in net debt is well below our fleet recycle market value. In 2023, we repaid $475 million in debt, of which $300 million was incremental to our natural debt amortization schedule. With this sizable prepayment during the year, we reduced our breakeven level to an impressive sub $14,500 per day across the fleet. We unencumbered 30 vessels and we doubled the size of our revolving credit capacity to $414 million. Today we announced that we signed an MOA to purchase six Eco MR vessels for $232 million. We expect to fund this through shares of common stock for 15% of the price and the remainder will be financed from our available liquidity. We anticipate closing this series of transactions prior to the end of the second quarter. These MRs are high-quality vessels that reduce the age of our overall MR fleet by one year. During 2023, we sold three MRs for $39 million in net proceeds after debt repayment. The sales of the older ships crystallized value generated since our merger with Diamond S in 2021 at the bottom of the tanker market. These ships returned nearly 80% all in, from purchase price due to both their strong earnings and the strong price realized in their sale. Finally, we added two vessels to our charter portfolio, which now has over $354 million in contracted revenue, with an average term of nearly three years. On the lower right-hand side of the slide, you can see the chart where we continue to share our strong earnings, returning a substantial portion to shareholders. During 2023, we paid $308 million in dividends and $14 million in repurchases. Combined, we returned over $320 million to shareholders, a 16% return on our average market cap over the year. Today, we build upon the Seaways record, declaring a combined dividend of $1.32 per share to be paid at the end of this quarter. This is 60% of adjusted net income. At Seaways, we're committed to our balanced capital allocation strategy. We pull all the levers to secure our future and to provide value to shareholders in 2023. We continue to hydrate the fleet, investing in our profitable LR1 joint venture, we're renewing the MR fleet, and we have time chartered out selected vessels with strong customers to secure revenues beyond today. Our balance sheet is strong, with a net loan to value of 17%. We have liquidity over $600 million and breakeven, so though you would expect them for a company with only smaller vessels, not for a tanker company where half the fleet is large crude. We continue to share success with the shareholders, with double-digit yield on our share value. Turning to Slide five. We've updated our bullets on tanker demand drivers, with green up arrows next to bullets representing positive developments for tankers, black dashes for neutral impact, and red down arrows indicating tanker negatives. Pulling some highlights. The forecast for oil demand in 2024 remains robust, with demand growth estimated to be about 1.5 million barrels per day in 2024, representing a 1.5% growth year-over-year. This is an above-average demand growth forecast, particularly for seaborne transportation demand, oil demand growth is largely concentrated in Asia, where countries are structurally short oil with incremental new supply coming from the west. Quite a long haul trade for tankers. Non-OPEC production growth of around a million barrels per day is mostly coming from the Americas in 2024, supporting tanker trends. In the chart at the bottom of the page, we highlight oil supply and oil demand projected trends for the next few years. Europe and Asia are structurally short and therefore focused on imports from the Americas, the Middle East, and Russia. With sanctions on Russian oil, further ton mile support underlies demand and is very supportive for the tanker market going forward. Much of this hinges upon the global macro environment with recent data suggesting a leaning towards a softer landing. It is constructive that commercial inventories are low, and any trade disruptions within the market increase the call for seaborne transportation. So I fix, the supply side continues to be a compelling part of the strong tanker market story. On the lower left-hand chart, we break down the order book by each vessel class relative to the top reading speed and more specifically potential candidates in the next few years that would be removed from broad commercial trading at around 20 years of age. Since the order book is largely fixed through 2026, we are showing vessels that will be 20 years old. By this inflection point, they are 18 years old today. In the dark bars on the graph, you can see that the vessels on order do not even meet the need to replace the existing fleet on the water. On the lower right-hand chart, we show expected deliveries in the near term. In most categories, they are largely lower than they have been over the last 30 years. The number of ships reaching over 20 years of age as the percentage of the total fleet continues to rise exponentially. Essentially, when the cycle turns, the fleet size will rationalize, laying the foundation for the future health of the tanker industry. We do not expect a meteoric rise in new orders either, as tanker owners face pending environmental regulations. Shipyards are full of other shipping sectors and prices remain very robust. We expect a great run for tankers over the next few years. As mentioned, regional imbalances of oil should continue to increase the need for tankers, as growth in oil production is coming from the west. And the oil demand is driven by non-OECD in the East. At Seaways, we will continue capturing the strength of the tanker markets. We will utilize every possible lever to build upon our track record of returning to shareholders, maintaining a healthy balance sheet, and growing the value of Seaway. I'll now turn it over to Jeff Pribor our CFO to provide the financial review. Jeff?

Thanks, Lois. And good morning, everyone. On Slide eight, net income for the fourth quarter was $132 million, or $2.68 per diluted share. This includes gains on vessel sales and the write-off of deferred financing costs. When you exclude the impact of these special items, adjusted net income was $108 million. On the upper right chart, adjusted EBITDA for the fourth quarter of 2023 was $159 million, which also excludes these same special items. In the appendix, we provided a reconciliation from reported earnings to adjusted earnings. While our expense guidance for the fourth quarter fell mostly in line with the range of expectations, I'd like to point out a few items of note within our income statement. Vessel expenses were higher than expected, with the largest variance due to some opportunities in storing repairs and maintenance costs, as well as increased spending for crude changes during drydocks and training on the new dual fuel VLCCs. G&A expenses were in line with guidance. On the revenue side, our lightering business had another strong quarter, earning about $11 million in revenue, with $2 million in vessel expenses, $3 million in charter hire, and $1 million of G&A. The lightering business contributed about $4 million in EBITDA in the fourth quarter and a record of nearly $20 million for the year. Turning now to our cash bridge on Slide nine. We began the quarter with a total liquidity of $581 million, composed of $214 million in cash, and $360 million in undrawn revolving debt capacity. Following along the chart from left to right on the cash bridge, we first add up $159 million in adjusted EBITDA for the fourth quarter, less $44 million in debt service, composed of scheduled debt repayments and cash interest expense. Then less our drydock and capital expenditures of about $9 million in the quarter and a draw on working capital due to timing of about $14 million. We therefore achieved our definition of free cash flow of about $91 million for the fourth quarter. We combine our free cash flow for the year, we generated over $500 million in 2023, or over $10 a share representing a 20% free cash flow yield on today’s share price. The remaining bars on the cash bridge reflect our capital allocation for the quarter. We received about $28 million in net proceeds from two vessel sales during the quarter. We also spent $12 million in progress payments for the first two out of four orders. As we announced last quarter, we repaid just about $71 million in debt, of which $50 million could be drawn again since it decreased our revolving credit capacity, and we paid $1.25 per share, or about $61 million in dividends during the quarter. These components then led us to a liquidity of $601 million with $187 million in cash, short-term investments, and $414 million undrawn revolving debt capacity. Now moving to Slide 10. We have a strong financial position detailed by the balance sheet shown on the left-hand side of the page. Cash and liquidity remain strong and over $600 million. What's on the books at cost are approximately $2 billion versus current market values of over $3 billion. And with about $734 million in gross debt at the end of the year, details on the bottom right of the page, this equates to a net loan to value of just 17%. Our debt today is 85% hedged or fixed rates, which equates to an all-in weighted average interest cost below 6%, or less than 100 basis points above SOFR. As Lois mentioned earlier, we continue to execute on a balanced capital allocation strategy. We are returning $1.32 per share to shareholders in a combined dividend. This represents 60% of adjusted net income for the prior quarter for the second straight quarter. At the same time, we have positioned our balance sheet to support growth. We are purchasing six MRs with our available liquidity and a portion of share issuance. With cash breakevens below $14,500 per day and net debt below 20% in 2024, we will continue to look for opportunities to enable fleet renewal and growth as well as to share in our successful results by continuing to prioritize returning cash to shareholders. And the last slide that I'll cover, please turn to Slide 11. It reflects our forward-looking guidance and booked to date TCE align with our cash breakeven levels. Starting with TCE Fixtures for the first quarter 2024, I'll remind you that actual TCEs in our next earnings call may not be quite the same. But as of today, we have a blended average Spot TCE of about $43,500 per day, fleet wide for the quarter. On the right-hand side of the slide, you can see our cash breakeven, which we have displayed for the next 12 months reflective of our daily cash costs and CapEx plus principal and interest, as well as the new fixed revenues before any profit share on our long-term charts. At this time last year, our cash breakeven was $3,000 per day higher than they are today. Just to repeat that, $3,000 is the amount per day that we produced in our cash breakeven year-over-year. And we’ve returned over $320 million to shareholders representing a 16% yield on our average share price in 2023, while also taking considerable steps to renew the fleet. Looking forward, if you were to compare our breakevens to average spot earnings, you can see the first quarter of 2024 looks like another very strong quarter for Seaways. Looking at the bottom left-hand chart with the modelers out there. We provide this updated guidance for expenses in the first quarter and for 2024. We also include in the appendix our quarterly expected off-hire and CapEx schedules for 2023 and 2024. I don't plan to read this slide line by line but encourage you to use them for modeling purposes. That concludes my remarks. So I'd now like to turn the call back to Lois for any closing comments.

Thank you very much, Jeff. In 2023 Seaways executed our strategy. We have significant operating leverage and low cash breakeven. We achieved record earnings in 2023 with a fleet nearly evenly split between crude and product tankers. We continue to develop the fleet composition that enables us to build upon our operating leverage to capitalize on today's strong market fundamentals. Last year, we took delivery of three dual fuel VLCCs with long-term charters and profit sharing that are running extremely well in our fleet. We ordered four LR1s for a niche Panamax International joint venture. We trimmed some older MRs that returned an 80% IRR for us in the last two years and entered an agreement to purchase six modern MRs. Our balance sheet has never been better. 2023 was transformational for International Seaways, and deleveraging us and to capitalize on growth opportunities, we evenly matched our incremental deleveraging with returns to shareholders with a substantial portion of the cash generated during the year. We built on our track record of balanced capital allocation that positions the company to maximize earnings, build a fortress balance sheet growth through the cycle, and return 16% to shareholders over the last 12 months. Going forward, we will continue to vigilantly prioritize the safety of our crews and our seafarers and our vessels in very challenging geopolitical times. I want to conclude my remarks. Thank you very much. And we'll open it up to questions.

Thank you. Our first question comes from Christopher Robertson at Deutsche Bank. Your line is now open. Please go ahead.

Hey, good morning, Lois and Jeff, congratulations on the very strong quarter here. I just have a couple questions. One is more market-oriented and then a detailed one. So just as it relates to the Red Sea disruptions going on. In your mind, is the market for tankers at peak disruption at the moment? Is there further dislocations that can occur or have all the tankers that were going to switch and divert around the Cape of Good Hope already done? So, was there more room there?

Chris, it's Lois. Good morning. And I would jump in there and say that, I think we are at peak disruption levels. I think that would be due to a variety of attacks, which are indiscriminately on tanker assets traveling through the area that we're really seeing a large number of tankers deviate around the bottom.

Okay. Just next question relates to the MRs. When you got to take delivery of those vessels, is there going to be any incremental CapEx associated with some energy-saving upgrades or anything like that we should think about?

You know, Chris, what I would say is that these vessels are built in SPP, we already have eight in our fleet, that we built a predecessor company at SPP. They are strong, they are designed, they are eco vessels. We will of course bring them into the fleet and then over time, just as we do with every one of our ships in the water, look at okay, are we going to in due course maybe when their natural drydock cycle, will we look to put on like paint and efficiency factors? Naturally, we will do that. But we don't have any immediate required CapEx spend.

Our next question comes from the line of Liam Burke of B. Riley. Your line is now open. Please go ahead.

Yes, thank you. Good morning, Lois. Good morning, Jeff.

Good morning.

Lois, is there any interest in or tendency to sell some of your older MRs?

Yes, we sold 18 MRs over the last 2.5 years. So, we thought it was especially when you just see that continued strong fundamentals in that MRs sector, time to bring some in. And we do continue to prune some of the older vessels, and this is just a natural regeneration; these vessels coming in are seven years younger and it just brings in a renewal that we think is very natural and organic to the company.

And Liam, I just want to add, as Lois said, these vessels we are selling were acquired in the Diamond S merger, looking at the purchase price, the cash contributed, and profits while we've held them and the sale price, it comes down to an 80% IRR. So, we like the ones we have and the ones we're acquiring to continue generating good cash flow, but we like taking profits like that.

Okay. Thanks, Jeff. And do you have any interest in terms of adding to your current time charter fixtures, or are you happy with the balance of spot and time charters?

Hi, Liam, and this is Derek Solon, Commercial Officer for Seaways. Thanks for the question. We've continued to add to TCE covers in 2023, Like Lois and Jeff covered in their remarks, putting away two more ships in the fourth quarter. We continue to look for time charter opportunities, Liam. I think for us, we continue to look for the multi-year charters. Right. So for the shorter-term stuff, one year or less, we'd rather stay in the spot market right now. But for the availability of coverage, that's two or three years out, if we see rates that we can develop and are attractive to us, then we'll continue to look at that.

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

Thank you. Our next question comes from the line of Jae McGarry of Jeffries. Your line is now open. Please go ahead.

Hey guys. Thanks for taking our question. And congrats on the solid year. Just trying to gauge for 2024 market withstanding, just in terms of allocating capital, are you looking to deleverage at the same rate as last year? Or are you more or less content with the amortization profile you have now, maybe looking to build on shareholder returns or your cash position? Just trying to see, is there any priority where you're leaning towards with respect to free cash flow?

Thanks, Jae. And welcome. Yes, in 2023, we were able to both deleverage to the level that we mentioned, that we're at 70% net around on the value and well below recycle value while still returning a lot to shareholders with a combined 60% dividends per share purchase on average market cap. But to your question as we look forward to 2024, having achieved that low level of debt, and with a lot of the debt that's left being good quality debt, like your home mortgage that's below current interest rates, we are satisfied that we've reached a level of debt where our priorities are what you've heard today: it's renewing the fleet, like the six MRs we just talked about, and continuing to return cash to shareholders where, for the second quarter in a row, we've returned 60% of net income in the form of a regular combined dividend, which I think speaks for itself. So I think that's a picture for going forward.

Great, thanks for the color on that. And maybe just the follow-up on Liam's question would be with the older MRs. You just said that you’ll capitalize, but, with six MRs coming in, is this purely just fleet renewal, or do you like the size of MR fleet now, and you're maybe just looking to build and expand within the MR space?

Well, I guess what I would say is when you look at the MR sector, the fundamentals, and the earnings that they have put up, they have been by far the best performing sector throughout the tanker market. Now, we're going into well into year three, and the market continues very strong. So you look at where our booked days are in Q1. And you can see why we're bringing these ships in.

Our final question comes from a line of Sherif Elmaghrabi from BTIG, your line is open please go ahead.

Good morning, everyone. Thanks for taking my questions. Lois, is there any way to think about the composition of the dark fleet in terms of different types of vessels? On the dirty side is probably at first, but what about on the clean side?

Okay, thank you for the question. I'm looking at Derek, as there's a healthy amount of both crude and product that is moving in the dark fleet. But as you think about it, it's going to be more crude, I'm thinking…

I believe if we could account for the entire dark fleet, which consists of around 700 ships, some of that would have to be on the clean side. In response to your question, it involves both crude and clean. Specifically, the dark fleet is engaged in some sanction trades from Venezuela and Iran, which is one aspect of that fleet. Additionally, there's the use of the large fleet, which is involved in Russian trade, questioning whether it is compliant with the price cap. It's important to consider the requirements for demonstrating compliance with the price cap and when regulatory authorities might scrutinize possible violations. I estimate that about half of the dark fleet consists of this composition, with a little less than a quarter categorized as clean, if that information is helpful.

That is helpful. Thanks, Derek. And then on the order book split out by vessel type on class 6, which is interesting, because not all parts of the fleet are growing evenly next year. So I think LR2s are leading tanker fleet product tanker fleet growth, while MRs, for example, are more muted. And so I guess my question is, do you see that shifting the balance of trade between LR2s and MRs? Or is it more to do with kind of shifting refinery capacity?

Sherif, it's Derek again, if I could take that. I agree with you that the LR2 fleet is growing, the order book is growing pretty rapidly. We've been talking about LR2s cannibalizing the MR trade for the past 20 years. So I think MRs will continue to be the workhorse of that fleet. But some of the geopolitical events that we see right now are really helping that LR2 fleet go. I think not so much the Russia-Ukraine situation, but clearly the Israel-Hamas conflict and what that's bringing over the Red Sea, is that there you're starting to see LR2s having to go around the Cape of Good Hope a lot more heading to turning off. So that market is really running. Is that larger LR2 side going to replace the MRs? I don't really think so to sign trade patterns. And that doesn't leave the after fleet a little bit vulnerable as well because they'll just switch to dirty depending upon what's better.

That's helpful. Thanks, everyone.

Thank you.

Thank you. If there are no additional questions at this time, I'd like to hand the conference call back over to Lois Zabrocky for closing remarks.

Thank you very much, everyone, for joining International Seaways, as we share with you our 2023 record earnings. We really appreciate it and we look forward to talking to you. Thank you very much.

Ladies and gentlemen, I would like to thank you for joining us on today's call. Have a great rest of your day. You may now disconnect your line.