International Seaways, Inc. (NYSE:INSW) Q1 2023 Earnings Call Transcript May 5, 2023

International Seaways, Inc. beats earnings expectations. Reported EPS is $3.27, expectations were $2.84.

Operator: Good morning, and thank you all for standing by. I would like to welcome you all to International Seaways First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, we will conduct a question-and-answer session [Operator Instructions]. I’ll now turn the conference over to your host, James Small, General Counsel. So please go ahead, James.

James Small: Thank you, Brica. Good morning, everyone. And welcome to International Seaways earnings call for the first quarter of 2023. Before we begin, I would like to start off by advising everyone with us on the call today of the following. During this call, management may make forward-looking statements regarding the company or the industry in which it operates. Those statements may address, without limitation, the following topics: the outlooks for the crude and product tanker markets and changes in trading patterns; forecasts of world and regional economic activity and of the demand for and production of oil and other petroleum products; the effects of the ongoing conflict between Russia and Ukraine; the company strategy; the effects of the ongoing coronavirus pandemic; our business prospects; expectations regarding revenues and expenses including vessel, charter hire and G&A expenses; estimated bookings, TCE rates and/or capital expenditures during 2023 or in any other period; projected scheduled drydock and off-hire days; purchases and sales of vessels, construction of newbuild vessels and other investments; the company’s consideration of strategic alternatives; anticipated and recent financing transactions and any plans to issue dividends; the company’s relationship with its stakeholders; the company’s ability to achieve its financing and other objectives; and other economic, political, and regulatory developments globally.

Any such forward-looking statements take into account various assumptions made by management based on a number of factors, including management’s experience and perception of historical trends, current conditions, expected and future developments, and other factors that management believes are appropriate to consider in the circumstances. Forward-looking statements are subject to risks, uncertainties and assumptions, many of which are beyond the company’s control, which could cause actual results to differ materially from those implied or expressed by the statements. Factors, risks and uncertainties that could cause International Seaways’ actual results to differ from expectations, include those described in our annual report on Form 10-K, our quarterly reports on Form 10-Q and in other filings that we have made or in the future may make, with the US Securities and Exchange Commission.

Now, let me turn the call over to our President and Chief Executive Officer, Ms. Lois Zabrocky. Lois?

Lois Zabrocky: Thanks very much, James. Good morning, everyone. Thank you for joining International Seaways earnings call for the first quarter of 2023. Following Slide 4 of the presentation found on our Investor Relations section of our Web site, net income for the first quarter was $173 million or $3.47 per diluted share, bringing our cumulative earnings over the last three quarters to over $500 million. Adjusted EBITDA, which removes the gain on the sale of an MR, was $209 million. Based on our strong results in the first quarter and strong spot fixtures thus far in the second quarter, we have declared a combined dividend of $1.62 per share. Following the dividend payment in June, Seaways’ year to date dividends are nearly as high as the previous three years combined, as found in the chart on the upper right hand corner of the slide, and surpasses $360 million in cumulative returns to shareholders since the start of 2020.

And finally, represents over $5 per share return to shareholders over trailing 12 months. Our success today is clearly demonstrated in our balanced capital allocation approach. Two of the three dual-fuel VLCCs have been delivered with the third newbuilding and final delivery expected later in the second quarter. We ordered these ships in 2021 at a contract price of $96 million per ship, and today’s vessel’s value has these ships worth nearly $150 million each. These ships will be on time charter for the next seven years through an oil major with a fixed rate component plus a profit share. They are financed at a 64% loan to current value at a fixed interest rate of 425 basis points. We also exercised the purchase options on two vessels under sale leaseback arrangements for a net price of $41 million combined, representing a discount to current value of about 45%, one vessel delivered in March and the other in April.

Additionally, we sold an MR during the quarter and that resulted in a $10 million gain on sale, evidencing our successful investments at low points in the cycle. The balance sheet remains strong with total liquidity ending the quarter at $519 million. This is after our $98 million in dividends and $97 million of repayment toward our term loan. With the repayment on the term loan, we amended the facility to increase our revolving credit to nearly $260 million and released 22 vessels from the collateral package. Today, we have 27 unencumbered vessels, representing 35% of our total fleet. Lastly, we fixed four ships on two to three year time charters during the quarter, increasing our contracted revenue to about $337 million, excluding any profit share component on the newbuild [deal].

These additional time charters increase our fixed coverage to over 10% of the fleet and reduce our cash breakeven levels. On Slide 5, Russian oil exports remain in focus. Trade flows to Europe are displaced due to the ongoing sanctions and creating higher ton mile demand while soaking up tonnage. On the left hand side of the slide, it’s clear that Russian crude is primarily heading to Asia, particularly India and China. The chart shows that crude seaborne exports have remained relatively stable and constant at 4.5 million to 5 million barrels per day, while the composition of the destination on the right access has narrowed significantly to essentially Turkey in Europe and increased significantly to Asia. Product exports from Russia in a similar graph on the right hand side of the page are not as clear in terms of displacement, since the sanctions began only in February.

Turkish imports in the Mediterranean are all that remain for Europe, while volumes to Asia and Africa have increased. While this story continues to develop, including the concept of double handling via FTS transfers, International Seaways and its commercial managers remain constant on our self sanctioning of lifting Russian oil. Turning to Slide 6. We have updated our standard set of bullets on tanker demand drivers. With the subtle green up arrows next to the bullet representing good for tankers, the black dash represents neutral impact on tankers and a red arrow meaning the topic is not presently positive for tanker demand. I won’t read each of these bullets individually, but we’ll pull some highlights for you. While the consensus of oil demand growth for 2023 is around 2 million barrels per day, most believe that the growth in oil demand is weighted to the second half of the year.

In the chart on the lower left of the slide, the average of the EIA, the IEA and OPEC forecast for oil supply and demand reflects a slight older supply in the first half of 2023 that is then more than offset in the second half of the year. We saw inventories grow in the first quarter, some of which seasonal, but we remain cautious on near term views of global recession. With these considerations, it seems logical that OPEC+ announced cuts to their production targets. However, we are a bit skeptical on compliance as these targets, as evidenced in the lower right hand chart, are very close to actual recent OPEC+ production level in the past few months. We believe sentiment has been impacted particularly on the VLCC earnings and we continue to monitor oil supply and oil demand as the year progresses.

On Slide 7, the tanker supply side remains a compelling story to our fundamentals. The supply side remains constraints with an aging fleet and barriers to ordering new ships. Yards are still quite busy over the next two years with other shipping sectors. This is keeping newbuilding prices high and limiting economic decisions on ordering. We expect new environmental regulations to continue to evolve and to further pause a wave of newbuilding orders. In the chart on the lower left of the page, contracting has been somewhat limited this year and there is a significant downward trend over the last few years for tanker vessels that are taking longer to bill with 2026 a reasonable estimate for the early delivery on certain newbuilding contracts today.

The oil tanker fleet age is now about 12 years old with more than one third of the fleet above 15. As you can see in the lower right hand chart, expected new tonnage over the next few years is well under the candidates that could be removed from the commercial trading and we may see negative fleet growth in the near future. The supply outlook for tankers in the near term is incredibly positive. Combined with higher oil demand and disrupted trade flows, the overall outlook for tankers remain strong, particularly in the medium term. There maybe near term recession, which could affect tanker rates or we may return to our regular seasonality in the summer months. In either case, we remain positive on tankers and we believe that Seaways is very well positioned to capture strong markets with our low operating leverage and our diversified fleet of 76 tankers in both crude and product sectors.

With our healthy balance sheet and our liquidity, we expect to continue building upon our track record and on our balanced capital allocation strategy, investing in the fleet opportunistically, reducing debt and returning cash to shareholders. I’m going to now turn it over to Jeff, our CFO, to provide our financial review. Jeff?

Jeff Pribor: Thanks Lois, and good morning, everyone. Turning to Slide 9. Net income for the first quarter was $173 million or $3.47 per share. Adjusted net income, which essentially removes the gain from the sale of vessel, was $163 million, representing the third consecutive quarter of earnings over a $100 million and over $550 million of net income for the latest 12 month period. Similarly, on the upper right chart, adjusted EBITDA for the first quarter of 2023 was $209 million, bringing trailing 12 month EBITDA over $730 million. In the appendix we provided a reconciliation from reported earnings to adjusted earnings. While our expense guidance for the first quarter fell within a range of expectations, I’d just like to point out a few items of note with our income statement.

First, other income for the quarter was over $4 million and that consists largely of interest income on the significant cash balances that we are holding. On the revenue side, our lightering business had a very strong first quarter with $11 million in revenue. Given $2 million in vessel expenses, $3 million charter hire and $1 million of G&A, overall, the lightering business contributed about $5 million in EBITDA for the quarter. Also on the revenue side, our LR1 pool, Panamax International, continues to outperform the general market with earnings in excess of about $5,000 a day above the broader market indices. As you can see in our TCE revenues at the bottom of the page, LR1 spot earnings for the quarter were nearly $71,000 per day. Turning next to Slide 10 for our cash bridge.

You can see we began the year with liquidity of $541 million, which was composed of $324 million in cash and $217 million in an undrawn revolving credit capacity. Following along the chart from left to right on the cash bridge, we added $209 million in adjusted EBITDA for the first quarter, less $57 million in debt service composed of scheduled debt repayments and cash interest expense, less our drydock and maintenance capital expenditures of [$23 million] in the quarter, and a working capital bump of about $40 million. We therefore, achieved our definition of free cash flow of just about $169 million for the first [quarter]. The remaining bars in the cash bridge show all the levers we pulled in our capital allocation strategy for the quarter.

For instance, we sold one 2008 built MR for proceeds of $10 million and we opted to repay more of the term loan rather than reduce capacity on [Technical Difficulty] credit facility. We exercised the purchase options on two Aframaxes that had been on sale leaseback. $24 million of that amount was paid in March for the vessels and $18 million was put in escrow as of the end of March for the final payment on second vessel, which was made in April. We repaid $97 million on our term loan portion of our main senior secure facility, which will reduce our scheduled amortization by about $3 million per quarter and save over $600 a day on our forward cash breakeven ups. Finally, we paid $98 million in combined dividends, which was $2 per shares that we announced on our last earnings call.

The $4 million of other is mostly composed of deferred financing costs or [taxespaidus.com]. Altogether, these components then led us to [energy] and liquidity of over $519 million with $261 million in cash at the end of the quarter and short term — cash and short-term investments at the end of the quarter and $257 million in undrawn revolving capacity. As previously mentioned, the revolving capacity was increased during the quarter in connection with the amendment of the credit facility. Now moving to Slide 11. We continue to have a very strong financial position as shown by the balance sheet on the left-hand side of the page. Cash remains strong at $261 million. Restricted cash of $18 million, as I said, represents the amount of escrow related to the [MAX] vessel purchase with a corresponding lease liability.

With the completion of the sale in April after the quarter, those will be eliminated. Vessels on the books stand at approximately $1.9 billion versus the current market values, which are well over $3 billion with about $950 million in gross debt that equates to a net loan to value of just about 21%. On the right hand side of the page, we wanted to show further strength of our operating leverage, which results in a significant cash flow generation over the last few quarters even after returning substantial cash to shareholders and paying down debt. As we mentioned in our press releases this morning, we expect to continue on this trajectory of balanced capital allocation approach. Two newbuildings of our three dual-fuel VLCC program were delivered in the second quarter.

We also intend to use some of our cash to repay existing debt. Currently, we are exploring options on which facilities of the portfolio we intend to repay, either in their entirety or in a portion. But overall, we expect the total repayment maybe around $75 million. We have also announced our combined dividend of $1.62 per share, which consists of our regular dividend of $0.12 per share and a $1.50 per share supplemental dividend. These payments will be made in the second quarter as we continue to build our track record of executing the capital allocation strategy. The last slide I’ll cover, Slide 12, shows our forward looking guidance and book to date time charter equivalents aligned with our cash breakeven levels. Starting with TCE fixtures for the second quarter of 2023.

And as always, I’ll remind you that actual TCEs that we will report on our next earnings call will probably be different than this. But as of now, we have a blended average spot TCE of nearly $48,000 a day fleet wide for the quarter. On the right hand side, you can see our cash breakevens, which we’ve displayed for the forward-looking 12 months, reflective of delivery of the last vessel on our newbuilding program and related payments on principal and interest as well as the new fixed revenues before any profit share on our increased long term time charters. Altogether, we have reduced our breakeven by $600 a day from the first quarter of last year. But if you consider the approximately 250 basis point increase in bank rates over the same period, the reduction to our breakeven was actually closer to $1,500 a day.

When you compare these breakeven rates to our fixtures for the quarter-to-date, it certainly looks like second quarter could be another strong quarter for International Seaways. On the bottom left hand side of the chart for those modelers out there, we have given you some updated guidance for expenses such as in Q2 and the remainder of 2023. We also include in the appendix of this presentation our quarterly expected off hire and CapEx schedule for 2023. I won’t read each item line-by-line but encourage you to use these for modeling purposes. That concludes my remarks. I’d now like to turn the call back to Lois for her closing comments.

Lois Zabrocky: Thank you very much, Jeff. On Slide 13, we provide a comprehensive Seaways investment highlights. I encourage you to read and review in its entirety that we just summarized briefly for you here. At International Seaways, you will find that we execute on our commitment to all stakeholders and we have a recent track record. We strive to buy assets at low points in the cycle. Our track record and our balance sheet show that we have invested about $2 billion in assets that are now worth well over $3 billion today. We said that we have a balanced capital allocation approach. Last quarter, we generated over $200 million in earnings and we distributed nearly half to shareholders and the other half to reduce debt, and then we bought two ships at discounted prices.

This quarter is much of the same, $170 million of earnings with $80 million to shareholders and another $75 million towards debt reduction. And our balance sheet remains very healthy, with significant liquidity, historically low net loan to asset value and 35% of the fleet [Indiscernible]. We have strategically positioned the company today for a sustained robust tanker market, with our low cash breakeven levels and flexible operating models, we are set to take advantage of the compelling tanker fundamentals on the horizon. The growing distances between oil supply and consumption, creating high demand for seaborne transportation across a globally aging fleet that has barriers towards replacement, much less the expected role we anticipate to comp in demand.

On this, we are mindful of the environmental regulations ahead and remain focused on being a leader in ESG. We have backed this up with sustainability clauses in our cost of borrowing, we strive to continue to evolve these principles and to provide a meaningful platform for all stakeholders. Thank you very much. And with that, operator, we would like to open up the lines for questions.

James Small: Operator, we can’t hear you.

Q&A Session

Operator: [Operator Instructions] The first question on the line is from Greg Lewis with BTIG.

Operator: We now have Ben Nolan of Stifel.

Operator: We now have Omar Nokta with Jefferies.

Operator: We now have Chris Robertson of Deutsche Bank.

Operator: Thank you. We now have our final question on the line from Liam Burke of B. Riley.

Operator: Thank you. I’d now like to hand it back to Lois for any final remarks.

Lois Zabrocky: I want to thank everyone for joining International Seaways today, INSW on the New York Stock Exchange. Thank you very much, and have a great weekend.

Operator: Thank you for joining. I can confirm that this conclude today’s call. Please have a lovely day, and you may now disconnect your lines.