International Seaways, Inc. (NYSE:INSW) Q3 2023 Earnings Call Transcript

International Seaways, Inc. (NYSE:INSW) Q3 2023 Earnings Call Transcript November 7, 2023

International Seaways, Inc. beats earnings expectations. Reported EPS is $2.04, expectations were $1.68.

Operator: Hello everyone and welcome to the International Seaways Third Quarter 2023 Results Conference Call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions] I would now like to turn the conference over to our host, James Small, General Counsel and Chief Administrative Officer. Please go ahead.

James Small: Thank you, Candice. Good morning, everyone, and welcome to International Seaways earnings call for the third quarter of 2023. Before we start, I would like to begin 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 the ongoing 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 the fourth quarter of 2023, during 2024 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 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, including those described in our annual report on Form 10-K for 2022, our quarterly reports on Form 10-Q for the first three quarters of 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?

Lois Zabrocky: Thank you very much, James. Good morning, everyone. Thank you for joining International Seaways earnings call for the third quarter of 2023. Following Slide 4 of the presentation, which you can find on the Investor Relations section of our website, International Seaways net income for the third quarter was almost $100 million, roughly $2 per diluted share, bringing our cumulative earnings over the last 12 months to over $640 million. Adjusted EBITDA was $151 million for the quarter and over $800 million in the last 12 months. Based on our strong results in the third quarter and the spot fixtures well above our breakeven level thus far in the fourth quarter, we declare a combined dividend of $1.25 per share. Following this dividend payment in December, actual last 12 months returns to shareholders will include a cumulative $6.29 per share in combined dividends as well as $14 million in buybacks equating to over $320 million, a 16% plus yield on our average market cap during this period.

We continue to enhance our balance sheet with our balanced capital allocation approach. Total liquidity at the end of the quarter was over $580 million, comprised of $215 million in cash and an undrawn revolver capacity of over $365 million. We added $160 million of revolver capacity after executing this new credit facility during the quarter. This facility features a 20-year amortization profile, a margin of 190 basis points over SOFR, and a five and a half year term, all of which are critical key outcomes for Seaways. We drew about $50 million on the revolver during the quarter, which has been repaid. The final results on our major senior credit facility allowed us to repay $100 million. We now have a total undrawn revolving capacity of over $400 million and 30 unencumbered shifts.

Our quarter’s balance sheet highlights the success of our balanced capital allocation strategy over time. We have acquired assets. These assets are on the books for $2 billion, where the value of the fleet today is nearly $3.3 billion. Our net loan to value is 19%. Our cash breakeven for the next 12 months is under $15,000 today. This is an exceptionally low level and a key differentiator for International Seaways. This includes about $3,700 per day of our fixed contracted revenue that in aggregate amounts to over $344 million through the charter expiry. It excludes any profit sharing element on applicable time charters. This low breakeven level paves the way for enhanced free cash flow during 2024. We have exercised two optional LR1 new building contracts.

We now have four LR1 new buildings with delivery schedule beginning in the second half of 2025 through to the first quarter of 2026. These four ships are designed to be scrubber fitted, and they are certified as dual fuel ready. The aggregate price is $231 million for the four vessels. Upon delivery, these ships will trade in a niche Panamax International joint venture, which has earned over $64,000 per day on average in the last 12 months. Turning to Slide 5. We updated our standard set of bullets on tanker demand drivers with the subtle green up arrow next to the bullet represented as positive for tankers and the black dash representing neutral impacts and a red down arrow meaning the factor is not positive for tanker demand. Pulling some highlights, oil demand increased in 2023 on average about 2 million barrels per day over 2022 and is projected to increase another 1.5 million barrels per day in 2024.

Scheduled growth in oil supply is about 1.5 million barrels per day over the next two years, each of the two years, mostly coming from the west in the United States, Guyana, and Brazil. A relevant question for the tanker space is when will OPEC decide to turn some of the pumps back on and increase production? We believe this will bring positive sentiment and lift average time charter equivalents. On the flip side, during the duration with OPEC keeping production at bay, we are drawing inventory in the fourth quarter based upon present demand levels, which we believe benefits a longer term horizon on tankers. As the chart on the lower right shows, current levels of commercial inventory are well below their 15-year highs. Previously, key events caused big bills and draws such as COVID in 2020 and 2021.

It took us time to draw these inventories down. We looked at the five-year average all the way from 2/10 [ph] since it predates events and have included the average of 2019 and 2022 separately as these two periods match better with oil demand. The bottom line is that inventories are historically low, especially when combining commercial and strategic reserves. Before moving on from this slide, there are a number of outstanding geopolitical events that are sadly affecting our current tanker environment. Over the last few years – over the last few months, the price cap imposed on the Russian oil had been effectively priced out due to rising crude oil costs from OPEC plus production cuts. We have seen an impact on the tanker market as many ships in the great fleet migrate into the commercial fleet.

An upside over time is that we see the loosening of sanctions on 800,000 barrels per day of Venezuelan crude oil. Moving to Slide 6, the supply side continues to be compelling. This component is very strong for tanker fundamentals. On the lower left hand chart, we breakdown the order books by each step of class relative to the total fleet. More specifically, potential candidates in the next few years that will be at the very least removed from intensive commercial trading, which we categorize as becoming somewhat marginalized around 20 years of age or older. In aligning the dark bars on the graph, vessels on order do not meet the need to replace these existing fleets. On the lower right hand chart, the limited replacement of the fleet over the next few years is expected to increase the average fleet age to levels that we have not seen in 30 years.

15% of the tanker fleet today is over 18 years, and by 2027, we anticipate that figure to double to 30%. And the average age of the fleet, if this were the case, would be about 15 years old. We believe that in order to meet growing demand in the next few years that ships over 15 years old will need to stay in service beyond the next few years as we transition to a multi-fuel future. The candidate pool for recycling will then be very high. Overall, we expect a great run for tankers over the next few years. Regional imbalances of oil should continue to increase the need for tankers as the growth in oil production is coming from the West, and largely the growth in oil demand is driven by emerging markets in the East. At Seaways, we will continue to capture the strength of the tanker market today and tomorrow.

With our balanced capital allocation approach, we continue to utilize all possible levers that builds upon our track record of returning to shareholders, maintaining a healthy balance sheet, and growing the company. I’m now going to turn it over to our CFO, Jeff Pribor, to provide our financial review. Jeff?

Jeff Pribor: Thanks, Lois, and good morning, everyone. Looking at Slide 8 on the upper left, net income for the second quarter was $98 million, or $1.99 per diluted share. On the upper right, you can see adjusted EBITDA for the third quarter of 2023 was $151 million. In the appendix, we provided a reconciliation from reported to adjusted earnings. While our expense guidance for the third quarter mostly fell within the range of expectations, I’d just like to point out a few items of note within our income statement. Vessel expenses were a bit higher than expected with the largest variance due to some repairs and maintenance on one VLCC and some increased spend for crew training on the new dual fuel VLCCs. G&A expenses were also higher due to increased costs for legal and regulatory matters.

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 $5 million in EBITDA in the third quarter and has contributed $15 million in EBITDA year-to-date. Turning to our cash bridge on Slide 9, we began the quarter with total liquidity of $493 million, composed of $236 million in cash and $257 million in undrawn revolving capacity. Following along the chart from left to right on the cash bridge, we first add $151 million in adjusted EBITDA in the second quarter plus $54 million in debt service, composed of scheduled debt repayments and cash interest expense, plus our drydock and capital expenditures of about $15 million in the quarter, and a working capital benefit of about $22 million, this comprises our definition of free cash flow of about $104 million for the third quarter.

The remaining bars moving to the right on the cash bridge show our capital allocation for the quarter. Incremental deleveraging reflects a net prepayment of $54 million in connection with executing our new revolving credit facility, or RCF, as I’ll call it for short. $104 million was repaid on our $750 million facility to transfer collateral vessels, and $50 million was drawn on the new facility. With $160 million in overall capacity, we also added $110 million in undrawn RCF capacity as shown in the dotted line cash bridge. Also in the quarter, we paid $61 million in combined regular and supplemental dividends of $1.42 per share in September. These components then led us to ending liquidity of over $581 million, as you see on the far right, with $214 million in cash in short-term investments and $367 million in undrawn revolving capacity.

Moving now to Slide 10, we have a strong financial position as detailed by the balance sheet you can see on the left hand side of the slide. Here are some key items. Cash remains strong at $214 million. Vessels on the books at cost are approximately $2 billion relative to the current market values of over $3 billion. And with about $855 million gross debt at September 30th, you can see that we brought net loan-to-value below 20% to just about 19%, also illustrated in the bottom right hand chart of the page. In the upper right hand table, our pro forma debt balances as of November 1 reflect our recent debt repayments of $71 million comprised of $21 million on the $750 million facility and $50 million pay down on the new RCF, which also increased our revolving capacity to $417 million.

The new RCF, which we executed during the third quarter, was oversubscribed even as we increased the size of the overall facility. Now, because 85% of our debt portfolio is hedged or fixed, our weighted average all-in interest rate using current bank borrowing rates is about 6%, which is effectively a margin of just 50 basis points above today’s benchmark SOFR rates. As we mentioned in our press release this morning, we expect to continue on this trajectory of a balanced capital allocation approach. We’ve already repaid $770 million of debt in this quarter. We’ve also announced our combined dividend of $1.25 per share, consisting of a regular dividend of $0.12 per share and a $1.13 of supplemental dividend, which represents approximately 60% of net income in Q3.

These payments will be made in the fourth quarter as we continue to build our track record of executing our capital allocation strategy. As Lois mentioned earlier, including this combined dividend, our total dividend yield calendar 2023 would be approximately 16% based on average market cap year-to-date. On the last slide that I’ll cover, Slide 11, reflects our forward-looking guidance and booked to date time charter equivalent, or TCE, aligned with our cash breakeven levels. Starting with TCE pictures for the fourth quarter of 2023, which I’ll remind you as I always do, that the actual TCE on our next earnings call may be different than what you’re seeing here, but we have a blended average of about $34,000 a day so far this quarter with the details provided on the upper left.

On the right side of the slide, you can see our cash breakevens, which we’ve displayed for the next 12 months, reflective of the delivery of the last vessel in our current new building program of the dual fuel VLCCs 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. Overall, we’ve reduced our breakevens by $3,700 per day. Let me just say that again, lowered them by $3,000 a day from the third quarter of last year. When you compare this to the breakeven to our fixtures today, compare this breakeven to our fixtures achieved today in the quarter, it certainly looks like International Seaways generates substantial cash flows during the fourth quarter again.

On the bottom left hand chart for the modelers out there, we provided some updated guidance for expenses in the fourth quarter and our estimates for 2024. We also include in the appendix our quarterly expected off-hire and CapEx schedule for 2023 and 2024. I don’t intend to 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?

Lois Zabrocky: All right. Thanks so much, Jeff. On Slide 13, we provide you with Seaway Seaways investment highlights, which I summarize briefly. International Seaways has built a consistent track record of returning to shareholders, maintaining a healthy balance sheet, all the while growing our company. Our total shareholder return over this time is approaching 300%, surpassing many peers. Over the last 12 months, through regular quarterly dividends, supplemental dividends and opportunistic share repurchases, we’ve returned $316 million in cash returns on earnings of $658 million, representing a nearly 17% yield. We’ve improved our balance sheet over the time with 75 vessels in the crude and product tanker markets. We have $2 billion in assets on the books that are worth over $3 billion in the market today.

We’ve prepaid $215 million in debt and unencumbered 30 ships. Our cash breakeven level is at $15,000 per day. We are strategically positioned for sustained, robust taker market with a growing need for seaborne transportation, created by regional imbalances. At Seaways our highest focus is always upon save, reliable transportation in an industry that will only become more transparent with evolving environmental regulations. We remain focused on being a leader in ESG. I want to thank everyone for joining us. And with that operator, we would like to open up the lines for questions.

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Q&A Session

Operator: Thank you, Lois. [Operator Instructions] So our first question comes from the line of Ben Nolan of Stifel. Your line is now open. Please go ahead.

Ben Nolan: Great thank you. So, really good quarter. I have just a couple of questions. First, just as I’m thinking about the fourth quarter, once again, things like LR1s look really good. However, the VLCC rates book-to-date were a little bit lower than what I was thinking, and I appreciate that several of them have time charter contracts on them. But can you maybe just talk through sort of how – the dynamics for the Vs in the fourth quarter thus far?

Lois Zabrocky: Well, I guess I’d say Ben that rates have definitely picked up, and the team at Tankers International is booking quite strong numbers for the remaining open dates in the fourth quarter. So overall, we’re pretty happy with what it looks like there on the Vs.

Ben Nolan: Okay. So just timing kind of a thing, I guess.

James Small: Hey, Ben, the other thing is take a look at our guidance is – look at the percentage, it’s actually pretty low percentage of the fourth quarter, which is every company is going to be a little different, but based on accounting and the particular voyages they are experiencing. But there is a lot of quarter left based on what we reported at this point.

Ben Nolan: Sure. Yes, I know, I appreciate that. And then I was going to ask, the MRs in particular did really well, which is maybe a little surprising to me, given that the average age is solidly in the teens at this point. I know you kind of continue to thin out that fleet a little bit, ones and twos here, but it sounds like most of those assets are unencumbered, the older ones are unencumbered at this point. Seems like you are still doing really well with them. And I know there is always a preference to have a little bit newer assets. But I mean, given the strength of the market here, how do you think about where you think the average useful life within International Seaways of those assets are? Do you think it’s possible to sweat them out to 20 years or even longer, or is that just not part of the DNA for you guys?

Lois Zabrocky: Actually, we totally do think that that’s part of our strategic plan there. And if you really look at the product part of our fleet and you think about what demand has been and how it has increased on the products at a higher ton-mile demand level than it has on the crude and I think the crude will catch up, but the products are just really earning. So we feel like these MRs are just a complete strength for us. And we certainly see that they are trading very competitively in the market. We’ve maintained them very well and they have really strong potential.

Ben Nolan: Okay. And then last for me, and I know it’s just something that you don’t like to and probably can’t talk to, but with respect to the strategic investor kind of issues that have been going on over the last, I don’t know, year and a half or so, just curious if there is any incremental dialogue or if things are relatively quiet on that front?

Lois Zabrocky: I guess what I would say is that we’ve been running and we’ll continue to run International Seaways for all of our shareholders, all of our stakeholders, we’ve been posting extremely strong performance and very systematically engaging with our shareholders and we feel really good about the returns that we’ve been able to deliver to all of our shareholders.

Ben Nolan: Right. Well, there is no question about that. So I appreciate it. Thank you.

Lois Zabrocky: Thank you.

James Small: Thanks, Ben.

Operator: Thank you. Our next question comes from the line of Sherif Elmaghrabi of BTIG. Your line is now open, please go ahead.

Sherif Elmaghrabi: Hey, good morning. Thanks for taking my question.

James Small: Good morning.