International Seaways Inc (INSW) 2023 Q2 法說會逐字稿

Hello, everyone, and welcome to International Seaways Second Quarter 2023 Results Call, and thank you for standing by. My name is Daisy, and I'll be coordinating your call today. (Operator Instructions)

I would now like to hand the call over to your host, James Small, General Counsel, again. So James, please go ahead.

Thank you, Daisy. Good morning, everyone, and welcome to International Seaways Earnings Call for the second 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: 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 at Ukraine, 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 2023 or in any other period, projected scheduled drydock and off-hire days; purchases and sales of vessels, construction of new build vessels and other investments; the company's consideration of strategic alternatives; anticipated and recent financing transactions of inquired 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, expense tauter 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 2022. Our quarterly reports on Form 10-Q for the first and second quarter of 2023 and in other filings that we have made or the future may make with the U.S. Securities and Exchange [question].

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 very much for joining International Seaways earnings call for the second quarter of 2023. Going to Slide 4 of the presentation found on the Investor Relations section of our website. Net income for the second quarter was $154 million, $3.11 per diluted share, bringing our cumulative earnings over the last 12 months to over $650 million. Adjusted EBITDA was $205 million. Based on our strong results in the second quarter and strong spot rates thus far in the third quarter, we have declared a combined dividend of $1.42 per share.

Following the dividend payment in September, returns to shareholders over the last 12 months include a cumulative $6.16 in combined dividends as well as $14 million in buybacks. This equates to approximately $360 million, which represents a 17% yield on our average market cap over the period. We have returned to shareholders an average of about half of our net income. We have enhanced our capital structure. We have liquidity of nearly $500 million, comprised of $236 million in cash and an undrawn revolver of nearly $260 million.

Our strong liquidity is net of our returns to shareholders and of our deleveraging initiatives. In the second quarter, we prepaid $75 million of our debt portfolio, 2 loans on sale leaseback financing, $46 million that had an interest margin of 390 basis points above bank borrowing rates and $29 million under our largest senior secured facility. This unencumbered in modern Suezmax.

Overall, in the last 12 months, we have prepaid nearly $390 million in debt and unencumbered 30 vessels, 40% of our fleet. Our net loan to value is about 22% today, and our cash breakeven for the next 12 months is under $16,000 per day. This includes about $3,500 per day from our fixed contracted revenue that in aggregate amounts to over $350 million through charter expiries. It excludes profit sharing on applicable charters. As we continue to pull all the levers with our capital allocation approach, our third and final dual fuel VLCC delivered in May.

(inaudible) 3 VLCCs are on time charters for the next 7 years with a fixed base rate of earnings plus a profit share over the index rate on the route from the Middle East to China, TDT. In the second quarter, the TCEs on the shift with the profit share was about $43,000 per day, providing a nice premium on the $96 million per vessel invested. We just signed 2 new building commitments with 2 options for LR1s with K Shipbuilding for delivery in the second half of 2025. These ships will be scrubber-fitted and class certified for LNG conversion.

The aggregate price of $115 million for the 2 vessels includes strengthened decks, oversize generators and equipment considerations. Upon delivery, these ships will deliver into our niche Panamax International joint venture, which has consistently earned a premium to the LR1 broader market. The average age of the LR1s in our fleet is about 14 years old. And the overall LR1 Panamax sector has a very aged fleet profile. Even our bustle at this age, they have earned $67,000 per day year-to-date. We are supporting our presence in this critical strategic joint venture.

On Slide 5, we pull highlights. Oil demand is expected to surpass 102 million barrels per day on average for the second half of the year, increasing by 2 million barrels per day year-over-year. Growth in oil supply mostly comes from the West, in North America, [Diana] and Brazil. In the chart on the lower left of the slide, the average of the EIA, the IEA and OPEC forecasts for oil supply and demand, align projecting a supply deficit in the second half of 2023.

On the lower right chart, oil inventories, we are showing commercial stocks in the OECD have increased in the first half of the year as expected. We now expect that these inventories will rapidly draw early in the second half of the year as OPEC+ cuts are felt. Sentiment from these expected cuts have largely been priced into the spot tanker rates. It will be interesting to watch now in the tanker market as the impact due to the tightening of Urals crude to Brent pricing, which may impact the price cap part of the fleet that has been trading in accordance with sanctions tools. These ships may come back into the commercial fleet and affect daily earnings. It is still very early to tell how this will unfold, and we remain observed.

On Slide 6, the tanker supply side. Despite some new ordering activity, this remains a compelling component to the story of our fundamentals. As you can see on the lower left-hand chart, vessels on order make up less than 15% of the fleet that is over 15 years old that should be replaced over the next few years, and it represents less than 5% of the overall fleet. These orders are also spread over the next 3 to 4 years. Owners cannot easily rush to start replacing tonnage today because lead times are longer as yards continue to build in other shipping sectors, as you can see in the lower right-hand chart, environmental regulations continue evolving, creating uncertainty towards building new vessels and selecting engine types.

Flipping the presentation to Slide 7. Since the IEA recently updated their oil outlook through 2028, we reiterate our stance that near-term fundamentals. In this map of the world, we wanted to simply show that oil supply growth is coming largely from the Americas as you see on the blue bars, what oil demand rose shown in the green bars is mostly driven by Asia. These dynamics create an incredible investment case for seaborne transportation in the near term.

Layer on top of this, geographical changes a constrained supply side that is aging, compounded with trade flow inefficiencies as a result of the Russian invasion and subsequent sanctions and sets the stage for a solid tanker environment. At Seaways, we continue capturing the strength of the tanker markets today, and we are building our future as a meeting tanker owner listed on the New York Stock Exchange. With our comprehensive capital allocation approach, we are utilizing all the possible levers that builds upon our track record of returning shareholders, cash to shareholders, maintaining a healthy balance sheet and growing the company.

Now I'll turn it over to our CFO, Jeff Pribor, for the financial review. Jeff?

Thanks, Lois, and good morning, everyone. On Slide 9, net income for the second quarter was $154 million or $3.11 per share. On the upper right chart, adjusted EBITDA for the second quarter of 2023 was $205 million. In the appendix, we provided a reconciliation from reported earnings to adjusted earnings. While our expense guidance for the second quarter mostly fell within the range of expectations, I'd like to point out a few items of note within our income statement. Vessel expenses were higher than our prior guidance for the quarter. The majority of the increased spend is due to the timing of purchases of spares, which is unavoidably lumpy as it is related to when a ship is a drydock or off-hire. Charter hire, including the profit share is in line with expectations given elevated rates.

Other income for the quarter was over $3 million, which consisted largely of interest income on our significant cash balances, and we've been working hard to maximize this income. On the revenue side, our lining business had another strong quarter, earning $11 million of revenue. With 2 million in vessel expenses, $4 million in charter higher and $1 million of G&A, the veering business contributed about $4 million in EBITDA in the second quarter and almost $10 million in EBITDA year-to-date.

Now turning to our cash bridge on Slide 10. We began the quarter with liquidity of $519 million composed of $261 million in cash and $257 million in undrawn revolving capacity. Following along the chart from left to right on the cash bridge, we had $205 million in adjusted EBITDA for the second quarter, less $56 million in debt service, which is composed of scheduled debt repayments and cash interest expense, less our drydock and capital expenditures of $14 million in the quarter and a working capital benefit of $11 million. We, therefore, achieved free cash flows of about $146 million for the second quarter.

The remaining bars on the cash bridge demonstrates the execution of the capital allocation that we announced on the first quarter earnings call. As a reminder, in Q1, we had $169 million of free cash flow and here, you can see exactly how we used it. First, as we committed to at the time of the call, we repaid $75 million of debt in this quarter, of which $29 million went to unencumbering a modern Suezmax vessel and $46 million was to terminate 2 sale leasebacks that had an interest margin of 390 basis points over a borrowing rates.

Secondly, we paid $79 million in combined dividends of $1.62 per share. And finally, we repurchased approximately 366,000 shares of our stock for $14 million. These components (inaudible) ending liquidity of over $493 million with $236 million in cash and short-term investments and $257 million in undrawn revolving capacity.

Now moving to Slide 11. We have a strong financial position detailed by the balance sheet on the left-hand side of the page. Cash remained strong at $236 million. Vessels on a book stand at approximately $2 billion book value versus current market values of over $3 billion and with about $947 million in gross debt, that equates to a net loan-to-value of about just about 22%, also illustrated in the bottom right-hand chart. I want to point out one last element of the balance sheet that is more of a timing issue.

In the third line down from the top under assets, you see that we separated advanced payment of debt of $46 million, which is related to the prepayment of the 2 sale backs I just mentioned. There is a corresponding $46 million of debt embedded in the current portion of debt. Both of these are eliminated or ordinated with the transaction when it closed on July 3, just after the quarter closed. On the upper right-hand side, we have recapped the debt details to reflect these payments, these prepayments because 73% of our debt portfolio is hedged or fixed. Our weighted average all-in interest rate using current bank borrowing rates is 6.36%, which at current rates is effectively a margin of about 1.25 basis points above today's SOFR and LIBOR refers rates.

As we mentioned in our press release this morning, we expect to continue on this trajectory of a balanced capital allocation approach. We intend to use some of our cash to repay existing debt. Currently, we're exploring options on which facilities in the portfolio we would do, but we expect total repayment may be around $50 million. We also have announced our combined dividend of $1.42 per share, which consists of a regular dividend of $0.12 and $1.30 of a supplemental dividend. These payments will be made in the third quarter as we continue to build on our track record of executing our capital allocation strategy.

Turning now to the last slide that I'll cover. Slide 12 reflects our forward-looking guidance and book to date TCE in line with our cash breakeven levels. Starting with TCE pictures for the third quarter of 2023, which I'll remind you, as I always do, that actual TC, which we'll tell you during our next earnings call may be different. But here, you see we have a blended average TCU across all the sectors of $38,000 a day so far this quarter. On the right-hand side of the slide, you can see our cash breakevens, which we have shown for the next 12 months, reflective of the delivery of the last vessel in our newbuilding program and related payments on principal and interest as well as the new fixed revenues, excluding any profit share on our increased long-term time charters.

Overall, we've reduced our breakeven by $1,000 a day from the second quarter of last year. When you compare this breakeven to our fixtures to date, it certainly looks like the third quarter can be another strong quarter for International Seaways. On the bottom left-hand chart, for the modelers out there, we provide some updated guidance for expenses in Q3 and a total of the year. We also included in the appendix our quarterly expected off-hire and CapEx schedule from T23. We do plan to read each item line by line. We're encouraged 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.

Thanks a lot, Jeff. I'll now summarize the details laid out on the Slide 13, where you can see our investment highlights. Over the last 6.5 years, International Seaways has a track record of returning to shareholders, constantly improving our healthy balance sheet and growing our company. Our total shareholder return over this time is over 290% and surpasses our peers. Over the last 12 months, through regular quarterly dividends, supplemental dividends and opportunistic share repurchasing, we have returned $316 million in cash returns with earnings of $658 million.

This very consistent payout represents a 17% yield.

We have improved our balance sheet over this time. With 75 vessels in the crude and product tanker markets, we had $2 billion in assets on the books that are worth over $3 billion in the market today. We prepaid debt and unencumbered 30 vessels representing 40% of our fleet. Importantly, our cash breakeven level is now below $16,000 per day. We have strategically positioned this company for a sustained robust tanker market with a growing need for seaborne transportation created by regional imbalances. We're focused and safe reliability with our transportation in an industry that will have evolving and environmental regulations, and we remain focused on being a leader in ESG. Collectively, we strive to continue to evolve these principles and provide meaningful platform for all of our stakeholders.

Thank you very much. Operator, Daisy, if you would please open it up for questions.

(Operator Instructions) Our first question today comes from Chris Robertson from Deutsche Bank.

This is around the 2023 off-hire day guidance for Q3. It looks like it ticked up just slightly since the last update. So I was wondering if this is due to pulling forward any dry docking into the third quarter or if this is due to just some delays that are out there?

Some of our dry dockings from the second quarter got pushed into the third quarter. That, I think, is our only change. Isn't it, James?

I have to go back and those. But we have with moving some forward. And we've looked also from 2021 to the end of 2023 and then also some have moved later in the year. We've got a bit about it.

In the third quarter, we anticipate -- Hopefully, this will mark the low point of the year, and we expect a pickup in rates in the fourth quarter. So that's a bit of the concentration there.

Yes, that makes sense. My second question is just around the Corpus Christie Ship Channel dredging project. Do you think this will have any impact on the lightering business? Or could it be offset by maybe some more positive impact on VLCC demand?

I think the project has moved forward very successfully. It is still the case that you can now load a Suezmax and then pop up to a VLCC. That has been the case for the last couple of years. You still need an under kilo clearance that the channel dredging allows for nice safety levels. So we don't really see a big impact on the lightering business, except for the fact that Corpus Christie is just increasingly busier and that actually increases the amount of exports from that port and consequently, some of the lightering's.

Our next question today comes from Omar Nokta from Jefferies.

I wanted to ask about -- I feel like a lot of times I'm asking you about the Panamaxes. But clearly, you've ordered the 2 LR1s, they've got a pretty attractive delivery schedule, I'd say, for 2025. Clearly, that piece of your business has done really well and doesn't really seem to be feeling the effect of seasonality or the OPEC cuts and just looking at your averages so far this year of $68,000 in the first half. It seems like that's probably at least perhaps double what the broad LR1 market average has been. So across your fleet, let's say, $50 million, if we calculate that or just over $1 a share. So pretty meaningful outperformance especially for you guys. My question is, are there risks that owners start to bring vessels into this niche market and crowd out the premium you've been able to consistently achieve here over the past several quarters?

Well, I would say, Omar, that I think the base trade in the Americas, on these vessels and in this class has also benefited from what the overall tanker market, especially the mid sector of the fleet, enhanced ton miles with all of the sanctions and the trade that has benefited us. But there are lots of Panamaxes engaged in this trade. It's an aging sector. The overall trade is strong, and we're supporting our joint venture and making sure that Seaways going forward, we're nearly 20 years. In 2025, it will be 20 years that we've been in this joint venture, and it's been very successful, and we look forward to supporting that trade, our customer base and our partners.

And it sounds like you clearly -- you're ordering those 2 ships to perhaps maybe get deeper into that trade. But in terms of, say, looking at a broader fleet renewal in general, I guess, where we've seen a bit more of your activity recently in terms of adding kind of spend in the LR1s. How are you thinking about the MRs as it is right now? Any plans to reinvest in that segment? And as you think about that, do newbuilding's similar to the LR1s makes sense? Are there opportunities that you think are maybe more appropriate in the secondhand market? Any color you can give there?

Omar, what I would say is that we have been highly selective. So you're really looking for in an environment where we do feel that cyclically, asset level value levels are high. We're looking for those opportunities where it's strategic and overall fundamentals are very strong. What the VLCCs that we just took delivery of and the Panamaxes or LR1s that we just ordered, those 2 sectors have in common, their order book is 2%. And I think that's very strong. I think that as we look at our broader sectors, one of the beauties of being diversified and being present in all of these different markets is having more in-depth knowledge about all of those fundamentals. And we're looking for the opportunities to provide a strong return and that may be in MRs going forward is something that we will continue to study, but it's not something that we're teed up for today.

And just one final -- just quick follow-up. You were just highlighting the profit share on those 3 VLCCs based -- they're based off of the TDIC is that basis just general bunker fuel? Or is that an LNG price LNG fuel component?

Yes, it's based on VLSFO pricing, not LNG pricing, but in the negotiation with the charter we were able to work some advantages to that VLSFO pricing.

Our next question comes from Liam Burke from B. Riley.

The Suezmax out earning the VLCCs, is that a function of the redistribution of crude supply? And do you think this will continue?

Yes, that's a function of the changing trading patterns around the Russian and Basin of Ukraine, where we've seen the mid-sector (inaudible) as well as just talking about the other ones sort of outperform the larger crude. So we expect that to continue while we have these continued hostilities in Europe.

And Jeff, on the capital allocation side, how much does new builds after you've ordered 2 new LR2s? How do new builds come in and balancing your allocation of capital now?

Well, I think Lois touched on it. If we look at assets today, they're generally at the high end of the cycle of pricing as we know. So when there's going to be a new building, if there's to be a new building allocation, it's going to be a specific value proposition. And that's what we found with respect to these was that they work out well, taking into account the financial metrics of making them conversion ready and even considering in a conversion in the future in the DCF. So that's a specific value proposition. So I don't -- as Lois said, I will evaluate that in other sectors, but we're not expecting anything at this time.

Our next question comes from Ben Nolan from Stifel.

Actually, if I could just follow up to you're just talking about, Jeff, on the LR1s that you ordered their LNG ready. I'm curious, you guys trade those in a pretty distinct pattern. Was there any thought about actually making them LNG equipped? And why not just go ahead and go full tilt on that.

Our Chief Operational Officer and Head of Sustainability, Bill Nugent. Just highlight, Bill, if you would, how you're preparing us with this for a multi-fuel future?

So thank you. My responsibility Lois and Derek is to provide them with safe, reliable quality ships to trade. And as we look forward as to how those ships may trade, right? And as the rules evolve and the regulations change and we kind of consider IMO's latest announcements and tightening of restrictions. We want to make sure that we're prepared for a multitude of different scenarios. So these ships can operate on biofuel as a drop-in fuel. We have made considerations in the design for the potential for carbon capture if that becomes the viable logistical technology, viable technology, and then we have the ability to also consider the LNG as a fuel. So what I tried to do is make the ships as flexible as possible so that Derek has the ability to trade them in whatever way he wishes to do so. So I realize I've sort of answered all of the questions there.

So as you know, people talk about whatever something future-ready, and that can be not much or that can be a fully fleshed out program and what you hear what we've got in this case is to have a lot of optionality built into these ships, and we factored in the future cost of that into our decision-making is go. I hope that answers your question.

I assume you even priced that for something like an LR1, what's the incremental cost of having it be LNG equipped versus just ready. Any framework around that?

I mean, maybe what I would say is one of the distinctions that Bill led the team to achieve is that we have a classification, right? Go ahead, Bill, that we're certified for -- to carry LNG with the conversion.

Yes. I mean it's important that dual fuel ready is not just a lift surface. Or even beyond that, right, the actual equipment is certified has been on other ships converted and provided or operates on dual fuels of the boilers, the engine, main engine, the generators can all do that and are sized for that future service, right? So that's a key distinction. Specifically the adder for it to deliver that ship in the market today is steel fuel somewhere the $12 million to $13 million range.

Real estimate would be the cost. But again, then we've prepared for that in the future. We are not undertaking that today.

Just trying to frame in the value proposition a little bit, but I appreciate that. My last question. Again, you are maybe a little bit more on the West Coast with the LRs, but in particular, with the MRs, all over both the Gulf and the Pacific Coast. And there's been a lot of noise about Panama and congestion and low waters and everything else. Is that having any specific impact on the business that you guys do? And have you thought at all about sort of -- or if not, then I'd be curious to hear that. But if it is, any sense of how you would quantify what that impact is?

The Panama Canal for the trading within the joint venture of Panamax International is an integral piece of the trade groups. We are constantly calling there. And Derek, do you want to talk about the delays?

I think, to Ben's point, there's been -- I think you're speaking specifically about the most recent building delays at the Panama Canal, are you?

Well, yes, I mean I talking about for months now, but it's just getting worse and worse, right?

Yes, we have seen increasing delays through both the MRs and the Panamaxes. I think the delay that the neo canal have grown larger than the old team restricted canal. So that's why, longer term, we built the LR1s with the 32.2-meter beam so they can continue to use the older Panama Canal. But some of the delays have had an impact on the TCEs as we picked up longer weighted delays to go through. So we've seen that. And in one instance, we sent a shift from Argentina over to the West Coast and didn't utilize the canal, we went around Kapor. So I think that the chartering teams have to play that game of delay versus cost in each and every voyage, and you've seen it impact us.

Our last question is (inaudible) from BTIG.

I realize it's a bit early to see the full impact, but on the dark pool trading Russian crude, are you seeing tankers leave that pool and return to the regular trade as East Asia started buying more Middle East and crude? Is that something that can happen quickly? Or will you have a lot of visibility as that unfolds?

As Lois touched on it in her remarks, I think as crude has increased overall, Urals crude has increased, and we're starting to see [Euros] crude above the second there's a differentiation within the Russian trading fleet. There's a great fleet who are more comfortable sanctioned busting, if you will, will carry crude at any cost. And then there's the compliant group of holders who are willing to load Russia, unlike us, but who are willing to load Russia provided in accordance with the price cap that set. So as the price goes up for years, some of those shifts come back. They don't come back necessarily completely efficient though. Because when they come back, there's a lot of customers, a lot of charters who are not keen to say ships that have called Russia. So they they'll have to take disadvantaged business to sort of clean up their cargo history. So I think to your point here, it will take a little bit of time to see how that impacts the market.

And then you exercised 2 repurchase options during the quarter. Going forward, how are we thinking about exercising more sale leaseback repurchases versus other parts of the capital allocation strategy?

I think that it's probably the last of the repurchases you might see for a while just based on the terms of the other sale leasebacks that are out there. So nothing imminent. And as we said in our remarks, we will look at the whole portfolio of other debt instruments we have in terms of this incremental debt prepayment that we're -- we've been doing and we'll continue to do it as it nicely brings down our cash breakeven. But it will probably be spread somewhere else in the debt portfolio.

(Operator Instructions) We have no further questions. So I'd like to hand back to Louis for any closing remarks.

Thank you very much. I want to thank everyone for joining us today on our second quarter conference call and a very strong quarter. Thank you very much.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.