International Seaways, Inc. Q2 FY2024 Earnings Call

Good morning, everyone, and welcome to the International Seaways Second Quarter 2024 Results Conference Call. My name is Carla, and I will be coordinating your call today. I will now hand you over to your host, James Small, CAO and General Counsel to begin. James, please go ahead.

Thank you. Good morning, everyone, and welcome to International Seaways earnings call for the second quarter of 2024. Before we begin, I would like to start off by advising everyone with us on the call today of the following. During this call and in the accompanying presentation, 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 petroleum products; the effects of ongoing and threatened conflicts around the globe; the company's strategy and business prospects; expectations regarding revenues and expenses, including vessel, charter hire and G&A expenses; estimated future bookings, TCE rates and capital expenditures; projected scheduled drydock and off-hire days; purchases and sales of vessels and construction of new build vessels; the company's consideration of strategic alternatives; anticipated and recent financing transactions that plans to issue dividends; the company's relationships 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 assumptions made by management based on various 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 2023, our quarterly report on Form 10-Q for the second quarter of 2024 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 second quarter of 2024. On Slide 4 of the presentation, which you can find in our Investor Relations section of our website, results for the second quarter represent our eighth consecutive quarter of adjusted net income over $100 million. Net income was $145 million or $2.91 per share, excluding the gains on vessel sales and other one-off items, and adjusted net income for the second quarter was $118 million or $2.37 per diluted share and adjusted EBITDA was $167 million. On the lower left section of the slide, we were busy with fleet renewals in the second quarter, taking delivery of six eco MR while selling three aged 15 years or more. This lowered our average MR age by one year. One of the three vessel sales closed in mid-July. We funded the acquisition of the eco MR with the proceeds from vessel sales, along with a $50 million revolver draw and the issuance of 624,000 shares in cash on hand. On the upper right-hand side of the slide, we continue to benefit from our balance sheet. At the end of the second quarter, we had $682 million in total liquidity, which included $506 million of undrawn revolver. We increased our revolver capacity by nearly $150 million, consolidated our term loan and converted them into a revolving credit facility. We now save about $80 million per year in mandatory repayments, which also raises our free cash flow generation and lowers our spot breakeven rate to under $13,400 per day. As a result of these accomplishments, we continue to share our upside with our shareholders. Today, we declared a combined dividend of $1.50 per share, representing 64% of adjusted net income. And as shown in the lower right-hand chart, another quarter of a double-digit yield for our shareholders. Over the last 12 months, Seaways dividend yield has been 12% of our average market cap. We continue to prioritize our balanced capital allocation, positioning the company for the future with opportunistic fleet renewal and enhancing our balance sheet while sharing in our upcycle with a double-digit dividend yield to our shareholders. Slide 5, we've updated our bullets on tanker demand drivers with subtle green up arrows next to the bullets representing positive for tankers, the black dash representing a neutral impact and a red down arrow meaning the topic is not good for tanker demand. Pulling highlights. We expect oil demand to continue to grow at a rate above its 30-year average growth. A good portion of this growth is regionally in Asia, which has grown slower than expected at the beginning of the year. While oil supply growth is largely in areas not capped by OPEC+, tanker demand, particularly in the V segment, is better off when the cartel's production also grows. It's a heavy election year worldwide, and results could indirectly impact our tanker demand. While Seaways has benefited from geopolitical events that have caused disruptions to both crude and product tanker trade, it is important to recognize that these events have not defined tanker earnings but merely bolstered a fundamentally strong market. The graph at the bottom of the slide shows that the growth in oil demand and seaborne transportation of crude oil and refined products looks to remain healthy over the next few years. On Slide 6, a strong tanker market naturally would dictate more ordering, and the order book has grown to about 11% of the total fleet. However, ships on order, as we show at the bottom left hand of the page, are not enough to replace a fleet that is aging significantly. The average age of the tanker fleet today is over 13 years old and is likely to get older with so few newbuilding deliveries. Generally, older ships have less efficiency and less utilization. With a greater percentage of the fleet in this vintage, the industry needs more shifts to cover the increase in seaborne demand. Different from other cycles, the longer lead time in our order book can limit new orders today, especially when factoring in pending environmental regulations. Overall, this sets the stage for a continued strong upcycle over the next few years, and Seaways will capitalize on these market conditions. You can count on us to utilize our balanced capital allocation approach through our fleet and adapt to industry conditions with a strong balance sheet while returning to shareholders. I'll now turn it over to our CFO, Jeff Pribor, to provide the financial review. Jeff?

Thank you, Lois, and good morning, everyone. On Slide 8, net income for the second quarter was $145 million or $2.91 per diluted share. This includes gains on vessel sales and a provision for the settlement of our UK multi-employer pension funds. Excluding these impacts, our net income was $118 million. On the upper right chart, adjusted EBITDA for the second quarter of 2024 was $167 million. We have provided a reconciliation from reported earnings to adjusted earnings in the appendix. Our expense guidance for the second quarter fell largely within the range of expectations, but I'd like to highlight certain aspects within our ecosystem. At the time of our last earnings conference call, we guided towards 359 days of off-hire and dry docking repairs. As outlined in the appendix, our actual off-hire time was 559 days. About half of the 200-day difference relates to documents that we moved forward into the second quarter ahead of most of these vessels delivering into time charters early in the third quarter. Another 60 days of additional off-hire time relates to repair work, which is generally necessary to maintain safe and reliable operations. The remaining 40 days relate to some additional positioning and adapting of our vessels for U.S. West Coast trading for our customers. Our Wyoming business continues to prosper with nearly $14 million of revenue in the quarter, combined with about $3 million in vessel expenses, $4 million in charter hire and $1 million of G&A. The Wyoming business contributed about $6 million in EBITDA in the second quarter and brought its year-to-date EBITDA contribution to just about $13 million. Turning to our cash bridge on Slide 9, we began the quarter with total equity of $626 million, comprised of $250 million in cash and $411 million in undrawn revolving capacity. Following the chart from left to right on the cash bridge, we first had $167 million in adjusted EBITDA in the second quarter, plus $24 million in debt service, plus our drydock and capital expenditures of $15 million and then added working capital benefits largely due to the collection of receivables of approximately $28 million. We therefore achieved our definition of free cash flow of $154 million for the second quarter. This represents an annualized cash flow yield of about 20% on today's share price. The remaining bars in the cash bridge reflect our capital allocation. We spent $175 million to acquire six eco MRs, which is net of $35 million of share value issued to the sellers in the form of 624,000 shares. We also sold two vessels during the quarter for $48 million and borrowed $50 million from our new $500 million revolving credit facility for funding of the MRs. In connection with the closing of the revolving credit facility, we increased our capacity by $150 million which was subsequently reduced to $100 million after drawing for the MR person. We also extinguished our ING term loan for $20 million. Lastly, we paid $1.75 per share or $87 million in dividends during the quarter. These components led to ending liquidity of $682 million, comprised of $176 million in cash and short-term investments and $506 million in revolving credit capacity. Moving now to Slide 10, we have a strong financial position detailed by the balance sheet on the left-hand side of the page. Cash and liquidity remained strong at $680 million. Vessels on the books at cost are approximately $2 billion versus current market values of over $3.7 billion. With $720 million of gross debt at June 30, this equates to a net loan to value of right around 14%. Our debt at June 30 was 78% hedged to our fixed rates, leading to an all-in weighted average interest rate about 625 basis points or less than 100 basis points above today's rate. In the table on the bottom right-hand side of the slide, our debt balances as of June 30 reflect the amended and extended $750 million facility, which we now follow a $500 million revolving credit facility. As Lois mentioned before, this facility has no mandatory debt, generating a savings of about $80 million per year. It also increases our free cash flow generation by the same $80 million per year in mandatory repayments, which are included as part of the service calculating free cash. We continue to enhance our balance sheet to create the financial flexibility necessary to both facilitate growth and provide returns to shareholders. We have $506 million in undrawn revolvers. Our nearest maturity in the portfolio isn't until the next decade. We continue to lower our breakeven costs and share in the upside with double-digit returns to shareholders. On the last slide that I'll cover, Slide 11 reflects our forward-looking guidance that book to date TCE aligns with our spot cash breakeven rate. Starting with TCE fixtures for the third quarter of 2024, we can see some seasonality returning to the tanker markets. While I will remind you that actual TCE we report in our next earnings call may be different. As of today, we have a blended average spot TCE of about $37,300 per day, meanwhile so far for this quarter. On the right-hand side of the slide, you can see our forward spot breakeven rate is now under $13,400 per day, comprised of a split wide breakeven of about $16,000 per day less the effect of nearly $2,800 per day time charter revenues. As a result, based on our spot TCE book to date and our spot breakeven, it looks like Seaways generates significant free cash flow during the third quarter. On the bottom left-hand side of the chart, we provide some updated guidance for our expenses in the third quarter as well as our estimates for 2024. We also include in the appendix our quarterly expected off-hire for the rest of the year, significantly lower than previously guided due to changes in our drydock schedule and the CapEx schedule for 2024. I don't plan to read in each side line by line, but encourage you to use these for modeling purposes. That concludes my remarks, and I'd now like to turn the call back to Lois for closing comments.

Thank you very much, Jeff. On Slide 12, we have provided you with Seaways investment highlights, summarizing briefly. Over the last seven years, International Seaways has built a track record of returning to shareholders, maintaining a healthy balance sheet and growing the company. Our total shareholder return is nearly 500% since our inception, representing a 23% compounded annual return. Over the last 12 months, our combined dividend of $5.82 per share represents a 12% yield on our average share price over that time. We continue to make strides to keep our fleet age below the global tanker average in what we see as a sweet spot for tanker investments and returns. We've invested in a range of tanker classes, casting a wider net for growth opportunities and supplementing our scale in each class by operating in leading pools. We keep our balance sheet fortified for any down cycle. We have over $500 million in undrawn credit capacity to support our growth. Our net debt is 14% of the fleet's current value and we have 34 tankers that are unencumbered. Lastly, our spot tanker breakeven is only $13,400 per day over the next 12 months. At this point in the cycle, we expect to continue generating cash that we will put to work to create value for the company and for our shareholders. Thank you. And with that said, operator, we'd like to open the lines up for questions.

Our first question comes from Ben Nolan from Stifel.

I appreciate it. I wanted to ask about the dry-docking days. Jeff, you mentioned that you moved some of those forward for charters ahead of time. However, the total number still decreased by over 100 days for the year. I'm curious if some of that is being shifted to next year, or if it’s simply less than you expected last quarter.

Well, yes, for this quarter, I think the point is off-hire was 200 days more than we had provided in the last quarterly conference call. So of that, yes, if you look at the full year, we are up now with our guidance for the full year. So some of it does affect the year, but some of it is just timing between quarters, and that's the main point we want to make is that's not something you could have seen before we put out the information today. So I wanted in my remarks to make clear that part of the off-hire is just timing and a little bit of positioning of vessels.

It was just opportunistic. Yes. Okay. All right.

One of the things we are focusing on with the Aframaxes is getting them positioned for the West Coast trade, and specifically, there are a couple of vessels we are preparing with an extra dry docking.

Got you. Sorry, Lois, you said the Aframax is there?

Yes. We are positioned now with that tool that we've put together with Ultra Chile and have those units out there, and we will try to take advantage of that TMX trade as that develops.

Got you. And that actually leads to my second question. It seems like the Aframaxes in particular have been below sort of market levels. And I appreciate that they're a little bit older maybe than average, but was part of that and as part of that even in the third quarter, simply a function of the shifting around of the fleet and maybe some of that dry docking. And going forward, should we expect those to be a little bit more similar to market rates, would you think?

Ben, it's Derek Solon. I'll respond to that. You essentially answered the question for us. That's correct. We have utilized our joint venture partners, and even prior to establishing the Aframax pool, we had two pools with Ultra Chile focused on the West Coast of the Americas alongside Panamax International and CPTA. As TMX was developing, we decided to launch Aframax International to benefit from the potential TMX trade and the relationships that we have built over the years with those joint venture pools. However, in the first half of the year, this meant advancing dry docks and increasing our efforts to prepare for the West Coast trade. The main challenge was the dry-docks in the East, which required us to position ships to the West Coast of the Americas. So there was considerable logistical effort to get this new pool started.

Got it. Okay. That's very helpful. I appreciate that. And then lastly for me, if I could. Just bigger picture, we talk about the aging fleet, and there's the dark fleet and all of this kind of thing, although it seems like there's been a little bit more cracking down on that. Do you think there's much of a chance that we begin to see some of these older assets actually leaving trade and being scrapped even in a high market? Or is it probably just market related other than maybe one or two? Just curious if you think that we're beginning to get to maybe a tipping point with respect to the age of the assets and the broader fleet.

Ben, we continuously monitor this situation. When we examine the supply side and consider the fees with very few deliveries expected next year, it's evident that there will be minimal new constructions entering the market. I anticipate that in two years, the average age of the total tanker fleet, which is currently over 13 years, will exceed 15 years. We believe we are still in the midst of a very robust cycle. Unless the owners face significant operational challenges, I don't foresee them exiting the fleet, but eventually, that will have consequences.

Ben, another point is the older vessels naturally have lower utilization because of their age. So while it's not scrapping older vessels, they have less utilization. So the fleet shrinks naturally.

Sure. That's a good point. All right. I appreciate it. Thank you, guys.

Our next question comes from Chris Robertson from Deutsche Bank.

Hey, good morning, everybody and thanks for taking my questions.

Good morning.

Jeff, yeah, morning, Lois. Jeff maybe this is a question for you. But just looking at the summer pullback here in rates? And then as that relates to the share price, could you look towards the $50 million repurchase program here to take advantage of what seems like an attractive discount to NAV. How are you thinking about, I guess, the trade-off between the quarterly dividend and potential repurchases here?

Hi Chris, so look, we think it's important to have a share repurchase program in place, and we not long refreshed the amount from our last repurchases. So we do have a solid $50 million in place. And as always, we will look at that opportunistically. But we stuck with the dividend. What we're striving for with that is a measure of transparency, consistency and a really solid yield return to shareholders. I think we've shown that the transparency is based on always being at least 50% of net income, which is an easy statistic for people to wrap their minds around or look up in whatever source they want and consistency for straight quarters of it. That's a measure of consistency and solid yield always mentioned in her remarks said it's still double digits 12% in the last 12 months. So we think that's good capital allocation, but with our to answer your question again with the share repurchase program in place and our low leverage and a lot of liquidity, yes, we will monitor the share price and that's certainly an option available to us going forward.

Got it. All right. Thank you for that. My next question is just around the cash breakeven here which is at very low levels relative to history. Looking at your expectations for OpEx and inflation going forward, do you think you can maintain the cash breakeven where it is today and what would be the main drivers, do you think, of upward pressure on that number from where we are today?

I believe that we are starting to notice some inflation in our transportation expenses, crew shifts, and occasionally in dry dock availability due to high activity levels globally. However, we are confident that we can manage those costs effectively. In the appendix, we provide guidance on expenses and we expect to maintain that stability for the rest of the year.

Got it. It sounds good Lois. Thank you for that. I will turn it over.

Our next question comes from Omar Nokta from Jefferies.

Thank you. Hi, guys. Good morning. A couple of questions from my side. Just wanted to ask we talk about the tanker market and rates are clearly softer at the moment. Seasonally, it looks like both crude and product are lower than where they were in the first half and just wanted to get your sense as we move to the final here four or five months of the year how do you see both crude product pairing? I guess one, perhaps an easy question is do you see a rise in rates in the coming months in both segments? And then two, do you think there's one that's going to lead the other?

You put a lot in there, Omar. How are you? It's Lois. So as we look at the year in crude and products, we have definitely seen seasonality creep into our markets here in the third quarter. Nonetheless, while it doesn't look like there will likely be more than 2 million barrels a day of oil demand growth for the year, there is certainly more than 1 million barrels per day and maybe around 1.5 million in oil demand growth—that's the fundamentals of kind of where we start. The markets have been pretty consistent this year when we look at it. I mean I would say crude may have a little more product. And you look at the Q3 numbers, you're looking at 35 a day for what has been booked on the MRs, right, that we put in our charts. So that's really quite strong, and then I'll have Derek jump in there on there still is an expectation in the second half for demand increase.

Thanks, Omar. Thanks, Lois. I think you said it great, right? We've seen a return to seasonality that we haven't really seen since the COVID recovery in the tanker markets and the Russian-Ukrainian invasion. So some seasonality is not necessarily a bad thing for the markets. We see a softer summer in June and July, but Omar, we've already seen increased OPEC plus crude exports for August—almost 2 million barrels a day more than say compared to July. This sort of push of crude supply should help the crude markets a great deal into the fourth quarter. Coupled with some of the earlier comments on the order book, there's a V to deliver this year. There are five Vs to deliver this year. So do you see some upside in the winter months for the crude sector? For sure.

Got it. Thank you. That's helpful color. So a couple of million barrels more here in August versus July should start to tighten the market. And I guess, presumably then that means crude tankers will lead the charge potentially as we move forward?

Well, they've got, if we look at the Vs, they've got sort of the most room to come up, right? I mean, the MRs are at 38 Q1, 35 Q2, mid-30s for Q3 booked so far. That's historically very strong for the MRs. So we don't see anything softening that per se, but I think that the crude will have to lead sort of the increase because they've got the most room to go up.

Yes. A good point obviously mid-30s on the MRs and the seasonal soft period is obviously not too shabby?

That's going to be...

Yes. Just Lois, you just mentioned in the appendix. I just wanted to ask the guidance on state OpEx. I'm not sure if I'm looking at it the right way or calculating it correctly, but it feels like perhaps maybe the running costs on the ships are going to be maybe $500 a day lower, if not maybe $1,000. Does that sound right? At least in relation to say, the first half. Do you think this is a new baseline or should we just kind of think about the average for the full year as more indicative?

What I would say, Omar, is that I think that in the second half, we were very stable overall. And then I'd like to have Tom come back and kind of look at the first half to second half. But basically we look at pretty stable OpEx overall, and nobody has taken a decrease when we are looking at stable OpEx. So we'll come back just to bridge that to get into those numbers a little bit, if that's okay with you.

Totally fair. I appreciate it. Thank you. I'll pass it over.

Thank you, Omar.

And our next question comes from Sherif Elmaghrabi from BTIG.

Hi. Good morning. Thanks for taking my question. In your prepared remarks, you highlighted your liquidity position, which is approaching about $700 million by the end of August. That's a lot of dry powder and looking beyond the next two years when yards look back up, I'm wondering if you see long-term growth opportunities on the crude side, the product side, or if you would consider something entirely different. I think you've already covered share repurchases, but something different given where asset prices for both are?

Thank you, Sherif. So I'll flip it to Jeff in a moment. What we would say is that we took delivery of three new vessels in 2023, dual-fuel LNG on those. We are building six of these LR1s and we've been selling MRs which are older and bringing in the more modern ones. So we don't feel like there's a rush to do something here. What we really like is having that balance sheet in beautiful shape where you do have that undrawn revolving credit facility there where if you do see an opportunity, we can take advantage of that and we are in both crude and product. We don't plan to take a sharp turn into another particular space at the moment. And then Jeff, did you want to talk at all about our liquidity?

Just to say that liquidity is optionality. So we're happy with the low levels of debt we've got at 14% net loan to value. We want some debt. A lot of that we have left is so-called high-quality debt that we would want to pay off, plus it provides a greater return on the equity. So what we've been able to do is establish a lot of liquidity through the undrawn revolver, as you've noticed, but also we have 34 unencumbered vessels. So that's another form of liquidity that provides optionality for whatever comes. But we're prepared for options when we see attractive transactions available to us.

Got it. And then drilling a little deeper on Omar's question about the market. Last week, Nigeria allowed the Dangote refinery to buy crude directly from NNPC, so it can ramp faster. And I'm curious how you see that affecting crude versus product flows? Any color on how that refinery has already impacted the Atlantic trade would be helpful.

So Dangote is putting out some diesel and is supposed to have a total of 600,000 barrels a day of capacity, which I do believe one day they will utilize. But I think we're looking more at around 100,000 barrels a day of where you're seeing some exports coming out and a lot of that's been diesel and you have seen an effect on the worldwide diesel margins that have gone down and have now bounced back a little bit. So we've also seen in the market some of the imported Dangote crude, which they will continue to do. I think it will be around 25%-ish that they plan to take from Nigeria. So I think that it's early days in Dangote and that's an evolving situation. Derek, any more flavor on that?

Not particularly. I mean we have seen a good deal of imported crude as Dangote was getting up and running, how long we expect that to continue is always debatable, being that you're in OPEC-producing exporting nations. So we were happy to see it when we have it. We don't expect that to drop off to zero anytime soon. I think Sherif, you've got the right question in terms of what that will do to clean product trades in the Atlantic Basin, and I think we still need a little bit of time to tell.

Got it. That's great color. Thanks, everyone.

Thank you.

And our next question comes from Liam Burke from B. Riley.

Good morning, Lois. Good morning, Jeff. Lois, you mentioned adding two more MRs if there’s a time charter market. Are you experiencing an increased demand from the shippers to secure tonnage for a longer-term arrangement?

No, Liam, we've got a total of 15 vessels on time charter, and we look for something that's going to lock in more than you're in very strong spot markets. So we look for a multiyear period. When they can lock it in above long-term averages, then we go ahead and do that. We have about 20% of the fleet on time charter rating now. So we've got strong customer relationships and when they're looking to add in, then we'll do that. Right now, we're in a little bit of a steady state. I think if we see something, we'll go ahead and lock it in. Otherwise, you're in the summer. And it's even August. So I'm thinking everybody comes back in later in Q3 and gets to work on locking in their book.

Fair enough. Thank you. And on the MRs, you've still got a few older ones in the fleet. How are you balancing historically elevated rates with potentially divesting some of these older MRs while lowering the age of the fleet?

Yes, Liam. If you look at it, we've been consistently selling four or five vessels each year. Recently, we've added some more modern assets, and each of these vessels in the spot market over the past year has generated $7 million above the breakeven level. It's quite impressive overall with the MRs. The earnings potential is very robust. We are selling off some of the older vessels and bringing in more modern ones. We feel confident about our approach.

Great. Thanks, Lois.

Thank you, Liam.

And that was our final question. I will hand back over to the CEO, Lois Zabrocky, for any final remarks.

We just want to thank everyone for joining us for really an eighth quarter of really strong returns to shareholders and we're looking forward to getting back together next quarter. So thank you very much. Enjoy the summer.

That does conclude today's conference call. Thank you for joining. You may now disconnect from the call.