Earnings Call Transcript - INSW Q1 2022

Operator, Operator

Good day and thank you for standing by. Welcome to the International Seaways' First Quarter 2022 Results Conference Call. At this time, all participants are in listen-only mode. Please be advised that this conference is being recorded. It is now my pleasure to turn the call over to Mr. James Small, General Counsel.

James Small, General Counsel

Thank you. Good morning everyone, and welcome to International Seaways' earnings call for the first 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; changes in oil trading patterns; forecasts of world and regional economic activity and of the demand for and production of oil and other petroleum products; the effects of the ongoing conflict between Russia and Ukraine; the effects of the ongoing coronavirus pandemic; the company's strategy; the anticipated cost savings and other synergies and benefits from our merger with Diamond S; our 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 second quarter of 2022, the remainder of 2022 or 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 and any plans to issue dividends; the company's ability to achieve its financing and other objectives; and other economic, political, and regulatory developments around the world. Any such forward-looking statements take into account various assumptions made by management based on a number of factors, including management's experience and perception of historical trends, current conditions, expected and future developments, and other factors that management believes are appropriate to consider in the circumstances. Forward-looking statements are subject to risks, uncertainties, and assumptions, many of which are beyond the company's control that 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 forthcoming quarterly report on Form 10-Q for the first quarter of 2022, our 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 Zabrocky, President & CEO

Thank you very much, James. Good morning, everyone. Thank you for joining International Seaways' earnings call to discuss our first quarter results. Following a year of significant growth during which we strategically expanded our fleet through both a transformational merger and a well-timed new building project. We advanced important strategic objectives in the first quarter as well. We further solidified our balance sheet. We completed our exit from the older Handysize product sector. We expect our scale, our capabilities, and sustained operating leverage will serve us well as the rate environment continues to improve. We’ve seen near term catalysts driving tanker rates higher while longer-term positive fundamentals remain fully intact. This is based on historically low oil inventories, growing oil demand, and expectations of increased oil production in the second half of the year. Specifically, as the product tanker market has gathered momentum in recent weeks, we’re benefitting greatly from our 40 spot MRs. Rates on both products and mid-sized cruise carriers have responded positively to changing trade patterns as ton miles have increased. We have not achieved this strategic positioning by accident. We have transformed the company through fleet renewal at cyclical lows, including $900 million invested at the bottom of the cycle, and most recently the Diamond S merger doubled our net asset value, tripled our fleet size, and enhanced our earnings power. We created power alleys in crude end products, positioning us well to capitalize on strengthening marketing conditions. Before reviewing the quarter, I’d like to briefly address Russia’s invasion of Ukraine. Since the outset of the violence in late February, Seaways has not booked any Russian cargoes loading in any Russian ports. The safety of our seafarers and our stakeholders and their families, as well as our duty to preserve human life, have been and continue to be our highest priority. On to the quarter. We are on Slide 4, we summarize our Q1 highlights and our recent developments. First, consistent with our balanced and accretive capital allocation strategy, which has been a hallmark of our success since becoming an independent public tanker company over five years ago. We continue to return capital to shareholders. This remains a priority as evidenced by nearly $100 million returned since the start of 2020, including our regular quarterly dividend of $0.06 per share, $47 million in buybacks, and the $32 million special dividend that we paid in connection with the Diamond S merger. We are proud of our track record providing returns to shareholders amidst challenging tanker market conditions and importantly, while maintaining a very strong balance sheet. Turning to the top right series of bullets, we provided an update on our fleet optimization program. After last year's transformative merger, which nearly doubled our net asset value, we embarked on an initiative to monetize older non-core ships, capitalizing on healthy second-hand asset values and strong steel demand. To date, we have sold or recycled 24 older tankers with an average age of 15 years. We've lowered the average age profile of our fleet to below nine years old and expect to have generated aggregate net proceeds of $165 million after all costs. In March, we completed a vessel swap, exchanging a 2010 built MR for a 2011-built LR1. The addition of the Seaways Eagle was welcomed in our strong earning niche joint venture, Panamax International where we generated the strongest earnings of any of our asset classes during the first quarter. With our focus on further optimizing our sizeable fleet of crude and product carriers, we recycled two Panamax vessels with an average age of 19 years old in April. We took advantage of historically high recycle values, agreed to sell our four remaining Handysize product carriers built in 2006, as well as a 14-year old MR. Combined with enhancing our balance sheet, the additional liquidity provided by these sales gives Seaways further capital allocation flexibility. Moving to the bottom left-hand column of the slide, we have maintained a strong balance sheet. We've advanced initiatives that support a diversified capital structure and significant financial flexibility for the benefit of shareholders. With current total liquidity of $166 million, including $90 million in revolver capacity and a net loan to value of 45%, we are capable of operating effectively in diverse tanker markets and capitalizing on attractive opportunities as they arise. During the year, we've made further progress diversifying our loan portfolio with recent refinancing activities, which Jeff will highlight in his comments. Turning to our financial results, our first quarter net loss was $13 million or $0.26 per share, excluding special items. In a sustained weak rate environment, we generated adjusted EBITDA of $26 million. As I will outline on the subsequent slides, the fundamental backdrop remains favorable for tankers. Turning to Slide 5. While the situation in Russia and Ukraine continues to create volatility in energy markets, we address underlying tanker demand drivers. 2022 oil demand is projected to grow by around 3 million barrels per day to about 100 million barrels per day, with much of the growth backloaded in the second half of the year. While China's oil demand has been slowed based on its COVID zero strategy, oil production increases are anticipated with growth, particularly in the West led by the United States, Canada, and Brazil. Looking at the bottom left chart, inventories have been reduced to their lowest levels in a decade, providing less than 60 days of forward demand cover. As the world scrambles for crude to replace Russian cargoes, strategic U.S. barrels are being released and exported. This combined with the need for further replenishment is supportive of seaborne trade and demand for tankers. As evidenced by the right bottom chart, refining margins have strengthened significantly, more than doubling since the start of the year, which indicates healthy demand for refined products, leading to higher crude throughput and higher clean exports. We anticipate permanent changes to oil movements and trade patterns related to the Russia invasion of Ukraine. We see cargoes moving longer distances in the first few months following the invasion. As a result of government sanctions and due to self-sanctioning of commercial interactions with Russia's oil and transportation industries by many of the nations in the West, we've seen Russian crude exports bound for Asia as opposed to the more natural trade to Europe. We've seen these moves increase by 27% in the months immediately following the invasion compared to January. At the same time, we've seen a 17% increase in crude oil exports from key Atlantic basin producers such as the United States, West Africa, and Brazil to Europe. Both of these trade patterns are additive to ton miles and lead to strong rates at the back of the first quarter heading into the second quarter for Aframax and Suezmax in the crude sector. We see similar alterations to trading patterns in the clean side, which has helped strengthen the MR sector. Middle distillate exports from Russia to Europe decreased at the start of the second quarter by 28%, while charters looking for a more stable source of imports to Europe have led to this category of clean products, with exports from the U.S. to Europe increasing nearly five-fold when compared to the start of the year. Turning to Slide 6. We talk about vessel supply. The global fleet size has grown about 3.8% since the start of the pandemic. However, the average age of the tanker fleet has increased to nearly 12 years old on average. The bottom right chart illustrates the increasing incentives to recycle older tonnage based on historically high recycle values, but substantial volumes have yet to materialize. In terms of sanctions on Iranian and Venezuelan oil, because the sanctioned trades are largely serviced by older large VLCCs, we expect the removal of sanctions would lead to the recycling of these ships, which are trading outside the normal international markets. The overall tanker order book stands at 7% by deadweight. This is the lowest level order book, basically, since statistics have been tracked by Clarksons, relative to the size of the fleet and several factors continue to limit supply. Foremost, with reputable shipyards filled with contracts for other shipping sectors, the earliest new building slots are in 2025. Secondarily, ordering has been tempered by uncertainty around future environmental regulations. Third, new building prices are near all-time highs, limiting tanker owners from ordering. Another factor limiting fleet supply stems from sanctions imposed by many governments prohibiting trade with Russian controlled ships. This will lead to an artificial fleet reduction impacting 30 Aframaxes, 20 MRs, and several ships across various other tanker sectors. Displacement of Russian oil has the potential to necessitate more tankers for longer haul voyages. We're closely watching the longer-term fallout from the war and the implications for our trading routes and our tankers. I want to turn it over to Jeff Pribor to provide the financial review for the first quarter.

Jeff Pribor, CFO

Thanks, Lois, and good morning everyone. Let's go straight to reviewing the first quarter results in greater detail. Before turning to the slides, let me provide a quick summary of our financial results. In the first quarter, we had an adjusted EBITDA of $26 million. Our net loss for the first quarter was $13 million or $0.26 per diluted share, compared to a net loss of $13.4 million or $0.48 per diluted share in the first quarter of 2021. Now, please turn to Slide 8. I’ll first discuss the results of our business segments, beginning with the crude tankers segment. TCEs for the Crude Tankers segment were $36 million for the quarter, which is the same amount as in the first quarter of last year. When we turn to the product carrier segment, we note that TCE revenues were $62 million for the quarter, compared to $9.2 million in the first quarter of 2021. This large increase is attributable to an increase of over 3,400 revenue days as a result of the merger with Diamond S, as well as higher average rates earned by our LR1 and MR fleets. Looking at the right side of the slide, adjusted EBITDA for the recent quarter was $26 million, compared with an adjusted EBITDA of $11 million in the first quarter last year. Now, turning to Slide 9, we provide a first quarter review and second quarter 2022 earnings update. For Q2 bookings to date, we booked 51% of our spot VLCCs at an average of approximately $15,100 per day, 40% of our available Suezmax spot days at an average of $24,600 per day, 39% of our available Aframax LR2 spot days at an average of $43,700 per day, and 27% of our Panamax and LR1 spot days at an average of approximately $31,100 per day. On the MR side, we have booked 41% of our second quarter spot days at an average of approximately $24,500 per day. I would like to add that more so than ever, these rates should not necessarily be seen as guidance for the full quarter with geopolitical events evolving rapidly in a market subject to significant changes in the immediate term. Now, if you could turn to Slide 10. The cash cost TCE breakeven for the 12 months ended March 31, 2022, are illustrated on this slide. International Seaways’ overall breakeven rate is estimated to be $17,400 per day for the next 12 months. As always, these are all in daily rates, our owned vessels must earn to cover vessel operating costs, dry docking costs, cash unit expenses, and debt service costs, which includes scheduled principal amortization, as well as interest expense. At this point, I'd also like to confirm cost guidance for the remainder of the year for modeling purposes. We expect full-year regular daily operating expenses, which includes all running costs, insurance, management fees, and other similar related expenses for our various classes to be as follows: for VLCCs at $9,000 per day; for Suezmax at $7,600 per day; for Aframax at $8,200; for Panamax at $7,900 per day; and for MRs at $7,200 per day. We expect our dry-dock capital expenditures to be between $47.8 million and $56 million respectively for the year. As mentioned on our previous earnings call, the costs are related to ballast water treatment systems and other upgrades in anticipation of the 2023 EEXi Synergy Efficiency requirements. For a more detailed breakdown on projected dry-dock capital expenditures and off-hire days, please refer to Slide 16 in the appendix. Continuing with cost guidance, we expect the 2022 cash interest expense to be about $40 million to $45 million. For the year, we expect cash general and administrative expenses to be between $30 million to $32 million, and finally, we expect about $14 million to $15 million in equity income and $105 million to $110 million for depreciation and amortization. Now, if we can go to Slide 11, we have our cash bridge. Moving from left to right, we began the first quarter with total cash and liquidity of $239 million. During the quarter, our adjusted EBITDA was $26 million, equity income from JVs decreased by $6 million, and the cash distributions from JVs were positive $2 million. We spent $27 million on drydocking and capital expenditures; installments on our dual fuel LNG VLCCs; and the net effect of the vessel swap involving the Seaways Eagle totaled $8 million. This was offset by a gain of $6 million attributable to the completion of a sale-leaseback transaction, net of debt repayments and a $50 million revolver drawdown. Debt service on term loans and sale-leasebacks was $56 million, and finally, taking into account the $3 million quarterly dividend and a negative impact of working capital and other charges of $8 million, the net result was that we ended the quarter with approximately $76 million of cash and a $90 million undrawn revolver yielding total liquidity of $166 million. Now, please turn to Slide 12. I'd like to briefly talk about our balance sheet. As of March 31, we had $2.37 billion of assets compared to $943 million of long-term debt. In addition, we have a $90 million revolving credit facility that was undrawn as of March 31. As you can see in the bottom left of the slide, our net debt to total capital stands at 47%, while our net loan to asset value for our conventional fleet stands at 45%. As shown at the bottom right of the slide, I'd also like to highlight that since the end of the first quarter, we've agreed to refinance a 2000 built MR with a Japanese leasing company through a sale-leaseback arrangement, generating a net increase in liquidity of approximately $5.4 million. We've also sold our final two Panamax vessels, both unencumbered for a net increase in liquidity of approximately $16 million. We've sold our last four remaining handy vessels in two separate transactions, providing a total net increase to liquidity of approximately $24 million, and we've agreed to sell an MR generating additional liquidity and savings on upcoming drydock and ballast water treatment system expenditures. Finally, turning to Slide 13, we take a look at our net debt as of March 31. As you see, our total debt balance is approximately $1.1 billion with $90 million of undrawn revolving capacity. As we continue to maintain a healthy balance sheet, our debt reflects a highly competitive cost of capital and long-term maturity profile with the vast majority of debt due in 2024 or later. That concludes my remarks. I would now like to turn the call back to Lois for her closing comments.

Lois Zabrocky, President & CEO

Thanks a lot, Jeff. On Slide 15, we detailed Seaways investment highlights. We are focused on executing our disciplined and balanced capital allocation strategies. This enables the company to create significant enduring value for shareholders. Since our spin-off in 2016, we’ve transformed Seaways into the largest U.S.-based international tanker company with a diversified fleet and a market cap of nearly $1.1 billion. Complementing the $900 million of vessels we purchased at cyclical lows, our merger with Diamond S last year also occurred at a cyclical low, tripled our fleet size, and significantly enhanced our scale and earnings power. All of this has been accomplished without issuing any equity at any point in our independent history. At the same time, we're proud of our consistent track record of returning capital to shareholders. We’ve returned nearly $100 million through share repurchase and dividends over the past two years. We also differentiate ourselves based on Seaways' commitment to upholding its best-in-class ESG standards. We believe that the diversity and independence of our board, the focus on our environmental impact as demonstrated by our dual fuel VLCC order and our status as the first shipping company to secure sustainably linked financing provides significant benefits to customers, shareholders, and lenders. We have been ranked in the top three in the Webber Research ESG ranking for the past four consecutive years. Our mission to exceed customers’ expectations and deliver value to all of our stakeholders is supported by our hybrid operating model focused on environmental performance, as well as safety and flexibility. We have indicated in the past that we rely on our seafarers to ensure the safe, reliable, and efficient transportation of energy cargoes for our customers. Amidst the global pandemic, the ships' crews have done a remarkable job adhering to the highest levels of not only safety but professionalism standards. In terms of our operating model, our sector-leading commercial tools, many with International Seaways ownership such as Tankers International, provide a competitive advantage to Seaways. TI is one of the largest VLCC pool operators in the world, and as a founding member over 20 years ago, we have taken an active role in developing and expanding the global presence of the pool. In 2020, we established TI’s New York office in Seaways headquarters. Another hallmark of Seaways' success has been our focus on maintaining financial strength with attractive leverage ratios and enhanced balance sheet throughout the cycle. We have one of the lowest net-to-loans to asset values in the industry, as well as liquidity at the end of the first quarter of $166 million. This positions us to operate effectively in diverse rate environments. I'll end my remarks by briefly reiterating Seaways' significant upside potential as the improving rate environment unfolds. As I discussed, we see positive market developments that could translate to a sustained stronger rate environment moving forward. Based on our sizable fleet, we have significant operating leverage to capitalize on this. I note that every $5,000 improvement in the TCE equivalent daily rate provides over $150 million in incremental EBITDA or about $3 per share on an annual basis. Thank you very much, and we'll open it up for questions.

Operator, Operator

Thank you. Your first question comes from Magnus Fyhr from H.C. Wainwright. Your line is open.

Magnus Fyhr, Analyst

Yes, good morning Lois and Jeff. Congrats on a good improvement during the quarter and good bookings for the second quarter. My first question relates to your capital allocation strategy. With first quarter, turning cash flow positive, and based on the guidance you gave, if you extrapolate that into the whole quarter, you could make significant earnings per share in the second quarter and $100 million of EBITDA. Can you talk a little bit about how you're thinking about your capital allocation strategy going forward? How that will evolve as you start tying off in 2022?

Jeff Pribor, CFO

Yes. Hi, Magnus, thanks. Yes, it's nice to be in that position with rates improving. We consistently tell you that we review capital allocation decisions every quarter based on liquidity and the conditions in the market. As Lois said in her remarks, we're really proud of the fact that we were able to return as much as $100 million of capital to shareholders over two years in one of the worst markets that anyone has ever seen. So, you can confirm that with the market improving, that aspect of capital allocation, returning cash to shareholders, remains a very high priority for us.

Magnus Fyhr, Analyst

I mean, the balance sheet is pretty good, 45% net to LTV. Would you say that you'd like to get that down a little bit more before maybe starting, paying a higher dividend?

Jeff Pribor, CFO

You know, this is something I always come back to. We do more than one type of capital allocation at one time. It's not like this quarter is for deleveraging, next quarter is a return of cash to shareholders, next quarter is to buy a ship. You know, you look at them all, all the time. We have a healthy amortization schedule built into our debt. So, we're repaying about $45 million a quarter just from the existing debt. Plus, in our fleet optimization program, when we sold a few older non-core vessels, we pay off some debt. So, you combine those two. We've been allocating capital to and we will continue to deleverage in a healthy fashion. So that will continue and help work that net loan to value down naturally, especially as values are going up Magnus, right? So that's going to develop in a nice way. That is also a priority, but it’s kind of happening naturally along with returning cash to shareholders.

Magnus Fyhr, Analyst

Thank you. Just on my second question, you have a great track record in counter-cyclical acquisition and I think the Diamond S finally starting to gain visibility with significant cash flow generation in the first quarter. My question is, how do you balance the fleet renewal going forward? You sold a 2008 MR ahead of a special survey. With strong cash flow generation now, how do you look at the rest of the fleet that – since you have a lot of 2007, 2008 vessels that will face special service going forward?

Lois Zabrocky, President & CEO

Yes. So Magnus, I'll jump in there. We developed a program when we completed the merger with Diamond and we executed on the majority of that. Specifically, if I touch on the four Handysize vessels that we have under contracts for sale, we strategically wanted to exit that MR1 or Handysize sector due to the age of the profile and also because that sector has a lot of exposure to the Russian Black Sea, and that was a sector we are now completely removed from, right? So, when we look at the initial program developed at the time of the merger, we've largely completed that. Then we look at the rest of our fleet and on balance, we'll do everything very selectively. So, we appreciate the very strong cash flow generation across our MR fleet that we have, and we're thrilled that we have a significant footprint in the MRs. We will be very selective going forward and balancing that.

Magnus Fyhr, Analyst

Alright. If the market persists, we should expect it to continue to run those vessels to generate significant cash flows.

Lois Zabrocky, President & CEO

That's correct.

Magnus Fyhr, Analyst

Thank you. That's all I have.

Jeff Pribor, CFO

Thanks Magnus.

Operator, Operator

Your next question comes from Ben Nolan from Stifel.

Ben Nolan, Analyst

Hi, Lois, Jeff. So, I got a couple of things, but one Lois, maybe for you, just as you talked a lot and gave a lot of color, which I appreciate on how the Russian dynamic is playing out. I guess my question is, in your view, does it feel like we've sort of reached a new normal equilibrium? Do you think that, as long as things don't change materially from where they are now, the trade volumes are going to the places that they would naturally go or is it still very much a work in progress?

Lois Zabrocky, President & CEO

We’re still a work in progress, Ben. When we woke up this morning, we see the EU ever inching forward to cease importing Russian crude and products by the end of 2022. That’s not finalized yet, but if that happens, we're going to continue to see the displacement of barrels because that would mean that the pipelines, you know it’s not only the waterborne barrels that we see today but also the pipelines that deliver into Europe, they would no longer be accepting Russian oil. So, I think that we're going to continue to see this situation evolve certainly until the war ends, and I think even beyond because now the conversation has shifted to energy security beyond just energy transition. All of these complexities, I think we’re going to continue to see this evolve.

Ben Nolan, Analyst

Yeah. I agree. Although, I guess I was asking more about things like ship placement being in the right places at the right times. Obviously, this caused a pretty substantial logistic shift. Barring other things, is that shift in logistics now happened or is it still things trying to reposition to the right places?

Lois Zabrocky, President & CEO

You know, I think the shift has largely happened. You're seeing roughly half of the SPR barrels anticipated to go to Europe. Some fewer barrels from the U.S. are actually going East right now. The big shift has kind of been left out in the U.S. and then the Aframax and Suezmax have taken advantage of these changed trading patterns. Now the world is really crying out for diesel, and that's pulling and causing those refinery margins to spike. On the MR fleet, you know you're seeing, and the LR1s and LR2s, but I mean we're heavy on the MRs. You're seeing that market strengthen now in the East. It had been initiated in the West, but now you’re seeing it strengthen in the East. You’re always going to see some chasing of the returns, but I think that for now the trading patterns are stable.

Ben Nolan, Analyst

I appreciate that. I can shift to Jeff. You've been doing this for quite a while now and not to overemphasize that, but given the noise about consolidation and mergers, do you think the industry is well positioned for that or is this not ordinarily the time or the place that you would expect that to happen? Just curious how you think where we are fits into that mindset.

Jeff Pribor, CFO

Look, I think as long as I’ve been in the business, people talk about consolidation, and I think there's always a level of activity, maybe more than people appreciate. There's been some – I go back to Lois’ comment that we’re happy about the Diamond S acquisition or merger and what it’s done for us in terms of executing our strategy. I don’t think it’s particularly, it’s the same as it always has been. It’s just part of the landscape.

Ben Nolan, Analyst

Okay, that's good color. I appreciate it. Lastly, just real quick, do you have any thoughts about installing scrubbers on any of the V’s or Suezmax as they don't already have them?

Lois Zabrocky, President & CEO

So, Q1 was our heaviest quarter this year and we do have the chart in the back. All of our 10 on-the-water VLCCs have scrubbers, and the three new buildings that will come in Q1 of 2023 will be dual fuel and therefore won't have scrubbers. The intention will be for those to burn LNG. And on our Suezmax fleet, we're just installing one scrubber that Diamond happened to have. In addition to that, Ben, I would say no, we're not going to chase that. The differentials between heavy sulfur and low sulfur crude have been really strong this year, but with all the volatility we’re seeing in oil prices and the fluctuating margins in a recovering market, I don't think that additional scrubber installations will pay off. We're satisfied with where we're at.

Ben Nolan, Analyst

Okay. I appreciate it. Thank you.

Lois Zabrocky, President & CEO

Thank you, Ben.

Operator, Operator

Your next question comes from Chris Robertson from Jefferies.

Chris Robertson, Analyst

Lois and Jeff, how are you?

Lois Zabrocky, President & CEO

Good and thank you, Chris.

Jeff Pribor, CFO

Good.

Chris Robertson, Analyst

Good. Seaways is ahead of the game in terms of ESG and environmental reporting, so along those lines, I'm going to ask a question that ties back to what Magnus and Ben brought up here. How are you thinking about the fleet in terms of the age segments as we head into IMO 2023 and beyond? Not necessarily due to special surveys or anything like that, but how many vessels do you consider future sales candidates to help with getting on the path to IMO 2023 versus how many are going to be upgraded to be IMO ready, and what kind of capital outlays do you think it will require to get the fleet prepped for that?

Lois Zabrocky, President & CEO

Our team is constantly monitoring our existing fleet, and every time we put the vessels into dry-dock, we are upgrading and seeking those incremental efficiency improvements so that we stay on track, and we're monitoring our ships all the time. Our fleet is in good shape to head into the regulatory environment. We don’t have specific ships that need to go right here, but there will be continued efficiency improvements that we will implement on the fleet as we go forward. Overall, we think we're in pretty good shape.

Jeff Pribor, CFO

And I would just add, Chris, if you look at the dry-dock and capital expenditure schedule that's in the deck, the amount of money is front-end loaded into the first quarter of the year. But spread out over the year, a lot of the CapEx is related to being prepared for regulations. There isn’t a ton, but a chunk of it is.

Lois Zabrocky, President & CEO

Right. Absolutely. All the Suezmaxes we're putting on the upgraded hull coatings to make them more efficient in the water and consume less fuel.

Jeff Pribor, CFO

Yes. And then, finally, to part of your question, as a result, the entire fleet is expected to be in compliance and in good shape, and we're working towards that through 2023 and beyond.

Chris Robertson, Analyst

Okay, great. My second question is related to LNG fuel economics. With higher natural gas prices in Europe and Asia now, how are you guys thinking about LNG as fuel on the ships being built? How do the economics change with the prices and if you know offhand, what's the Mmbtu equivalent needed to replace a metric ton of fuel oil?

Lois Zabrocky, President & CEO

I see you're filling big shoes very quickly here. On our dual fuel VLCCs, those vessels will be on time charter to Shell and Shell will be responsible for the bunkering. They are really the leader in the space, first of all, they have a lot of their own natural gas and they are a leader in that bunkering space. Now, that having been said, we've been watching daily the fluctuations of price, and I can tell you that for a period here, probably the last six months, LNG has been significantly more expensive to burn than conventional fuel. However, you're seeing those differentials narrow again. In the longer-term, during an energy crisis, the differentials will narrow significantly, making it suitable price-wise.

Jeff Pribor, CFO

Lois, I don't have that number right at my fingertips this morning, but we can get that to everybody offline.

Chris Robertson, Analyst

Great. Excellent.

Lois Zabrocky, President & CEO

Absolutely. If you check in with us after the call, we’ll provide that.

Chris Robertson, Analyst

Okay, Lois. Thank you very much for your time. Appreciate it.

Lois Zabrocky, President & CEO

Thank you.

Jeff Pribor, CFO

Thanks, Chris, and welcome.

Operator, Operator

Your next question comes from Liam Burke from B. Riley. Your line is open.

Liam Burke, Analyst

Good morning, Lois, good morning Jeff.

Lois Zabrocky, President & CEO

Good morning.

Liam Burke, Analyst

Lois, directionally, the product tanker rates are getting stronger. You've indicated that in your prepared comments. Do you see any opportunity or need to basically fix some longer-term charters at certain rate levels?

Lois Zabrocky, President & CEO

You know, our commercial team is watching all of that right now, and we think we're in the early innings of a market that's building there, especially on the product side. You first see people wanting to lock up six months or a year if they're going to do something strategic, trying to layer it into the portfolio. We will look at those types of time charters, but then we would take that portfolio approach and try to secure some longer deals as the market strengthens.

Liam Burke, Analyst

Okay. And Jeff, I know capital allocation is always something you love talking about, but looking at the returning cash to shareholders, would you be more inclined to maintain the dividend at current levels and then look at buybacks opportunistically, or is there any thought as the markets become more stable to change the dividend policy?

Jeff Pribor, CFO

Look, I think it is early to say that. I think part of what I say is that we look at the entire capital allocation spectrum every quarter, and when we talk about returning cash to shareholders as part of that, it could be share buybacks. We will maintain regular dividends, but whether we would increase that or not, it is too early to say at this point, but certainly it's something that's in the mix to be thought about.

Greg Lewis, Analyst

Hey, thank you and good morning, everybody. I think it’s worth mentioning that you have a new shareholder that built a position last month. Has there been any dialogue between that entity and management? I believe the filing was just a regular shareholder filing, but I'm curious.

Lois Zabrocky, President & CEO

We speak with our shareholders on a regular basis, and we maintain an open dialogue and we welcome communications. As a matter of policy, we don't comment on our discussions or the status. So, we're focused on executing our strategy and generating cash flow across our expanded fleet.

Greg Lewis, Analyst

Could you talk a little bit about the VLCC market? Can we gauge where utilization is? Understanding that the backdrop from supply for VLCCs looks really good, is there any way to think about what needs to happen to get VLCCs to more of a mid-cycle level from where they are languishing?

Lois Zabrocky, President & CEO

We need China, right? Even though we're under their zero-policy and they have very strong restrictions right now, it looks like that should lift in the second half of May or June. We need to see production coming back online, and that will really drive things. We also need OPEC to authorize production increases. They are currently about a million to 1.5 million low on actual production. We need to see the United States continuing those releases, and we need to see China coming back online. I'm not confident based on what I'm reading that the Iranian barrels will come back online quickly. There are conversations between the United States and Venezuela, which would be certainly helpful if those barrels came back on the market.

Jeff Pribor, CFO

All of which the products are carrying now will likely be a bridge to the big crude. It's just a question of timing based on unpredictable factors.

Lois Zabrocky, President & CEO

I also hope that it is available in China. My assumption is that it is. The COVID numbers are bouncing up, but the hospitalization rates are not up, right? The duration is longer and less intense for people, knock on wood, and I hope we continue to move from pandemic to endemic, and everyone is still conducting business. Our hope is that China will get through this quickly.

Greg Lewis, Analyst

That was super helpful. Thank you for that, Lois. Have a great day.

Lois Zabrocky, President & CEO

Thank you. Take care.

Operator, Operator

There are no further questions at this time. You may continue.

Lois Zabrocky, President & CEO

Thank you all for joining us for International Seaways' first quarter earnings results. Everybody stay healthy, and we'll get back to work trying to create shareholder value and stakeholder value. Thank you so much.

Operator, Operator

This concludes today's conference call. Thank you all for joining. You may now disconnect.