International Seaways Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 8, 2024

There are 9 speakers on the call.

Operator

Good morning. Thank you for attending today's International Seaways First Quarter 20 24 Results Call. My name is Jennifer, and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to turn the conference over to CAO and General Counsel, James Small.

Operator

James, please proceed.

Speaker 1

Thank you, Jennifer. Good morning, everyone, and welcome to International Seaways Earnings Call for the Q1 of 2024. Before we begin, I would like to start off by advising everyone with us on the call today of the following. During this call, 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 ongoing and threatened conflicts around the globe the company's strategy our business prospects expectations regarding revenues and expenses, including vessel, charter hire and G and A expenses estimated bookings, TCE rates and or capital expenditures for periods during 2024 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 and any plans to issue dividends the company's relationships with its stakeholders the company's ability to achieve its financing and other objectives and other economic, political and regulatory developments globally.

Speaker 1

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 could cause International Seaways' actual results to differ from expectations include those described in our annual report on Form 10 ks for 2023, our report on Form 10 Q for the Q1 of 2024 and in other filings that we have made or in the future may make with the U. S. Securities and Exchange Commission.

Speaker 1

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

Speaker 2

Thank you very much, James. Good morning, everyone. Thank you for joining Seaways' earnings call for the Q1 of 2024. You can find our presentation on our website in the Investor Relations section. Starting on Slide 4, Our results for the Q1 represent our 8th consecutive quarter of strong earnings.

Speaker 2

Net income was $145,000,000 $2.92 per diluted share. This quarter came in higher than our prior two quarters. Adjusted EBITDA was over $190,000,000 On the upper right hand slide, we highlight enhancements that we have made to our already strong balance sheet. At the end of the Q1, we had $626,000,000 in total liquidity, including $411,000,000 of undrawn revolver. Now we have consolidated our term loans and converted them into more revolver capacity.

Speaker 2

In the execution of this facility, we have saved about $80,000,000 per year in mandatory payments or about $3,000 per day across our flat fleet. For some perspective on how Seaways have evolved our balance sheet. 2 years ago in 2022, we had mandatory debt repayments of $180,000,000 Now for the forward 12 months, our mandatory payments are under $50,000,000 This is a tremendous work by Jeff and his finance team along with our valued relationships with our bank group. This gives us extensive flexibility embedded in the balance sheet. As a result of these efforts, our spot vessels need to earn $13,600 per day to breakeven.

Speaker 2

With 52% of our spot days booked in the 2nd quarter, it looks like we will generate a significant amount of free cash flow again in the second quarter. We now have $559,000,000 in undrawn revolver capacity, putting Seaways in a position to respond to market opportunities. On the lower left hand slide, we give detail on our fleet upgrading progress. In the last couple of weeks, we have taken delivery of 3 of 6 Eco MRs that we purchased in February. The remaining ships delivered before the end of May.

Speaker 2

The 6 vessels are under contract for $232,000,000 in aggregate. We also declared our options for an additional tool to dual fuel ready LR1 expected to deliver in the Q3 of 2026. Overall, our program of building 6 LR1 has the first two deliveries in the second half of next year. The lower right hand slide outlines our continued return to shareholders. Our strong earnings and our strong balance sheet allow us to return a substantial portion of our net income to our shareholders.

Speaker 2

Today, we declared a combined dividend of 1.75 dollars per share. This represents 60% of our adjusted net income and another quarter of a double digit yield for our shareholders. Over the last 12 months, we have returned an actualized greater than 13% return. Here at Seaway, we are focused on a balanced approach to capital allocation. This continues to create value for the company and our shareholders.

Speaker 2

We utilize the cash we're generating in this up cycle to strengthen our balance sheet and put us in position for the next opportunity. We're now renewing our fleet by acquiring these 6 more modern Eco MR. We are building vessels for our niche premium LR1 trade and we are selling some older vessels. These older MRs have more than paid for themselves since acquiring them in 2021. We're able to execute each of these facets while still remaining double digit yield to our shareholders.

Speaker 2

On Slide 5, we've updated our standard set of bullets on tanker demand drivers with the positive green up arrows, neutral black dashes and red arrows for negative tanker factors. Touching on the highlights, oil demand continues to grow with estimates of growth averaging around 1.5% for this year of 2024 year over year with similar projections for 2025. This represents an above average demand growth level, specifically for Seaborne transportation. Existing regional imbalances of crude oil production and the availability of refined products contrasted with distant strong demand centers makes a tanker market. In the bottom chart, we highlight the difference between crude oil production, expected throughput and product demand by region.

Speaker 2

Both Europe and Asia are structurally short crude oil, which they source from the Americas, Middle East, Russia. With the enforcement of sanctions on Russian oil tightening, the disruption of traditional routes has enhanced ton mile finance and supported the tanker market. On the refined mark product sector, most regions are short specific refined products except for the Middle East and Russia. This creates a lively products trade as charters continue to take advantage of arbitrage plays to meet demand in different regions for specific grades. It remains very constructive that commercial inventories are low throughout the world.

Speaker 2

Continued disruption within the tanker market on top of strong phenomug underpinned increased need for seed borne transportation. Slide 6. The supply side has seen some ordering with our tanker order book now at 9%. Of the existing total tanker fleet. You can see this in the lower left hand chart.

Speaker 2

These new orders stretch into 2027 as shown in the chart on the lower left hand corner of the slide. These vessels that are on order will replace older ships turning 20 plus years old and at the very least would be removed from commercial trading. As a result, the average fleet age will rise in the next few years at a faster rate than it has over the prior 10. Generally, older ships have less efficiency and lower utilization. With an increasing percentage of the fleet falling into this category, the industry will put the new ships to work covering the increasing seaborne demand.

Speaker 2

Overall, this sets the stage for a strong up cycle over the next few years and Seaways remains well positioned to capitalize on these market conditions. You can count on Seaways to utilize our balanced capital allocation approach to renew our fleet and adapt to industry conditions with a strong balance sheet while returning to shareholders. I'm now going to turn it over to our CFO, Jeff Prebore, to provide financial review. Jeff?

Speaker 3

Thanks, Louis, and good morning, everyone. Turning to Slide 8. Net income for the Q1 was just about $145,000,000 or $2.92 per diluted share. On the upper right chart, adjusted EBITDA for the Q1 of 2024 was $192,000,000 In the appendix, we provided a reconciliation from reported earnings to adjusted earnings. Our expense guidance for the Q1 fell largely within a range of expectations, but I'd like to point out a few items of note within our income statement.

Speaker 3

On the revenue side, our lightering business continues to outperform, earning about $14,000,000 of revenue in the quarter With about $2,500,000 of vessel expenses, dollars 3,500,000 in charter hire and $1,000,000 of G and A, the lightering business contributed about $7,000,000 in EBITDA in the first quarter, just shy of its record of nearly 8 months. Turning now to our cash bridge on Slide 9. We began the quarter with a total liquidity of $601,000,000 which was composed of $187,000,000 in cash $414,000,000 in undrawn revolving capacity. Following along the chart from left to right on the cash bridge, we first add $192,000,000 in adjusted EBITDA for the quarter, plus $44,000,000 in debt service, which is composed of scheduled debt repayments and cash interest expense, led us our drydocking capital expenditures of about $14,000,000 in the quarter and to draw our working capital due to timing of about 13,000,000 dollars We therefore achieved our definition of free cash flow of about $121,000,000 for the Q1. This represents an annualized cash flow yield of 18% on today's share price.

Speaker 3

The remaining bars on the cash bridge reflect our capital allocation for the quarter. We spent $23,000,000 as a deposit for the 6 ECO MRs that are delivering in the 2nd quarter as Bo has mentioned, and we paid $1.32 per share or about $65,000,000 in dividends during the quarter. These components then lead us to an ending liquidity of $626,000,000 comprised of $215,000,000 in cash, short term investments and $411,000,000 in undrawn revolving capacity. Now moving to Slide 10. We continue to have a strong financial position detailed by the balance sheet you see on the left hand side of the page.

Speaker 3

Cash and liquidity remained strong at over $626,000,000 Vessels on the books at cost are approximately $2,000,000 versus current market values of nearly $3,500,000 and with $700,000,000 in gross debt at March 31. This equates to a net loan to value of just about 14%. Our debt today is 85% hedged to our fixed rates, therefore, equating to an all in weighted average interest rate of about 6% or less than 100 basis points above SOAP. In the table on the bottom right of the slide, our debt balances as of April 30 reflect the amend and extend $750,000,000 facility, which we now call the $500,000,000 RCF. As Lois mentioned earlier, this facility has no mandatory debt payments at this time, representing a savings of about $80,000,000 per year.

Speaker 3

We continue to enhance the balance sheet create the financial flexibility necessary to facilitate growth and returns to shareholders. We have $559,000,000 in undrawn revolvers. Our nearest maturity in the portfolio isn't until the next decade. We continue to lower our breakeven costs and we share in the upside double digit returns to shareholders. On the last slide that I'll cover, Slide 11, this reflects our forward looking guidance and our booked to date TCE aligned with our spot cash breakeven rate.

Speaker 3

Starting with TCE fixtures. For the Q2 of 2024, I'll also remind you, as I always do, that actual TCE earn that you'll see on our next earnings call may be different. But as of today, we have a blended average spot TCE of about $43,700 per day fleet wide for the quarter. On the right hand side of the slide, you can see how that lines up against our spot cash breakeven rates. The methodology here is exclusively using expenses on our spot vessels less the excess of our time charter revenues above chartered vessel costs and dividing that by spot days.

Speaker 3

This then relates to the average spot TCE, which as I said was $43,700 per day for more than half the days in Q2. Looking at the bottom left hand chart for the modelers out there, we provided some updated guidance on our expenses in the Q2 and our estimates for 2024. We also include in the appendix our quarterly expected off hire and CapEx scheduled for 2024. I don't plan to read these items flying by line, but want to encourage you to use them for modeling purposes. That concludes my remarks.

Speaker 3

So I'd now like to turn the call back to Lois for her closing comments.

Speaker 2

Thank you very much, Jeff. Slide 12 details our investment highlights. In brief, over the last 7 years, International Seaways has built a track record of returning to shareholders, maintaining a healthy balance sheet, while growing the company. Our total shareholder return is over 4 90% since our inception, representing a 24% compounded annual return. Over the last 12 months, our combined dividend of $5.74 represent a 13% yield.

Speaker 2

We continue to upgrade our fleet, purchasing 6 Eco MRs and building 6 LR1s for our strong niche Panamax International joint venture. We've taken advantage of strong values by selling some of our older MRs. These MRs have gains on the sales that are higher than what we paid for the vessel. This is all while quietly improving our balance sheet. We now have 36 unencumbered vessels and under $700,000,000 in debt.

Speaker 2

We have $559,000,000 in undrawn credit capacity, which we will carefully utilize to opportunistically grow our balance fleet. Finally, our balance fleet of spot ships now need earned below $14,000 per day to breakeven in the forward 12 months. At this point in the cycle, we expect to continue generating cash that we will put to work creating value for the company and most importantly for our shareholders. Thank you very much. And with that said, Jen, we'd like to open up the lines for questions.

Operator

Thank you.

Speaker 4

I apologize in advance because I'm going to ask this question about the Panamax LR1s, which I feel like I'm asking habitually on your calls. But here we are again with a very strong performance in the mid-60s in the Q1 and again here into 2Q, well above global averages, whether it's in Panamaxes on the dirty side or clean LR1s. Is there a seasonal element underway and that's why we're seeing this strong performance at the moment? And then also just kind of thinking about that in terms of I know it's a niche trade in South America, you've added to the LR1 newbuilding tally, you're up to 6 shifts now. Are those plans to all be deployed into that market on delivery?

Speaker 2

Good morning, Omar. Thank you for the compliment on the performance on that sector. I would say that in the Q1, you again saw very strong performance across the midsized sector. You're now seeing in the spot the bees sort of assert themselves for the first time really and kind of have a little lift off for the first time in a couple of years. So I think the seasonality of the Q1 is generally quite a strong quarter in the tanker market and you see that on the LR1s, which as you know are trading in the Americas in their niche trade.

Speaker 2

And we look forward to the additional barrels that will be coming out of Vancouver with the TMX pipeline to even add probably more to Aframaxes mostly, but also to the base trade on the for Panamaxes as well. And as far as the building of the LR1s, the intention is to add those into that particular customer base and joint venture. If you look at the LR1 space, it is not a big growth trade. However, it's a very strong customer base there and the age profile of that sector is quite old.

Speaker 4

Thanks, Lois. Okay, that's interesting. So a lot of the TMX discussion has been on Aframaxes, but you see potential, at least Aframaxes that seem like they won't be fully loaded. So perhaps kind of what you're talking about, the LR1s or the Panamaxes may start to capture some of that?

Speaker 2

Well, we're going to have to see here as the trade emerges, how many barrels go down to the West Coast, how many get exported to Asia. For sure, the Aframax is the largest size that you can load directly at first there. But overall, it's increased volumes in that arena.

Speaker 4

Yes. Okay. And then just a follow-up. You've obviously been adding more and more charge recovery. You still have predominantly a lot of spot exposure, but you added the charger on the loan LR2 you have and then you added a couple on the 2,009 built MRs.

Speaker 4

What are you thinking here in terms of more cover? Clearly, it sounds like there's opportunities to continue to push ships away if you wanted. Is that something you want to do? And is there a particular segment you'd like to add more cover in? Yes, any color there, please?

Speaker 4

Thank you.

Speaker 2

I'm going to start that and then I'm going to have our Chief Commercial Officer, Derek, complete the question. And we have around 15% of the fleet on time charter at the moment. So we maintain a significant operating leverage to this very strong market. And when we see outside returns outsized returns for a longer period, somewhere certainly more than a year heading towards 3 years at a high level that we can lock in, we tend to seek those opportunities. And then Derek?

Speaker 5

Thanks, Lois. Good morning, Omar. I'd just piggyback on Lois. We've been able to sort of crystallize the value on some of the 15 plus MRs for 2 years and recently 3 years. So we've been happy to sort of lock in that value for the 15 plus shifts.

Speaker 5

And thanks for highlighting the LR2 as well. Like you say, she's our lone LR2. So putting her away for 3 years, seemed like the right move. But to your point, would any specific sector, not necessarily. We'll just continue to look for as low as said outsized returns for longer periods.

Speaker 4

Okay, sounds good. Thank you. Thanks for the color. I'll turn it over.

Speaker 2

Thanks, Omar.

Operator

Thank you. Our next question comes from the line of Liam Burke with B. Riley. Liam, your line is now open.

Speaker 6

Thank you. Good morning, Lois. Good morning, Jeff.

Speaker 2

Good morning.

Speaker 6

Lois, it doesn't look like it, but has there been any pushback from your shipping customers on your older MRs? Have you had any trouble chartering them as they move into that 15 to 20 year range?

Speaker 2

Thank you for that question, Liam, because that really sets Derek up to say, if you look at this sector and the strength of those rates.

Speaker 5

Right, Liam. So good morning. This is Derek. To your point, we're looking at several ships in our fleet that trade spot that are 15 years older, but we're coming in at 38 a day for the quarter and continuing to show strong rates into Q1 sorry, correction, into Q2. So at the moment with the freight market like this, no, we're not really seeing too much discrimination on age.

Speaker 6

Great. Thank you, Derek. Jeff, on the dividend policy, it seems to be the investors are very comfortable with the fact that you have a variable quarterly, but your cash costs are coming down, your cash flow is accelerating. Any thought to moving the $0.12 up or do you comfortable with the base dividend plus the variable right now?

Speaker 3

Hi, Liam. Yes, we moved the fixed component from $0.06 to $0.12 I think it was 2 years ago. So I think it's something we'll evaluate from time to time. It's sort of a natural thing as the company is growing, but there's no set timetable for that. So I think it's a good question and it's something we always consider and in the fullest of time, I think that's probably likely.

Speaker 6

Fair enough. Thank you.

Operator

Thank you. Our next question comes from the line of Chris Robertson with Deutsche Bank. Chris, your line is now open.

Speaker 7

Hey, good morning everybody. I apologize for my voice in advance. I've been a little bit under the weather. But, Jeff, now that you have 14% net loan to value, the cash breakeven has been lowered, especially around this consolidation of the senior secured facilities. I mean, it seems like the company is in a very good place to kind of just sit back here and harvest and return capital.

Speaker 7

I guess, would you characterize it that way? Is there anything more to do to further lower the cash breakeven, whether it comes to something that you can do with the financing or the cap structure or targeting OpEx, things like that. I mean, where are we at just with the cash breakeven level, plans to lower it further or are we just kind of steady as she goes from this point forward?

Speaker 3

Yes. Hey, Chris. I think we're pleased that we've been able to achieve what we have on reducing the cash breakevens where they are today. I think we're getting it's all kind of works together like we're not heading or aiming even for 0 debt, but getting debt that's below recycle value and that's middle teens range enables us to do things like the new facility where we switch or transform the term debt to revolver at these levels doesn't require any fixed amortization. We may choose to amortize, but the breakevens are lower, which produces more cash as well as puts us in a place where it's hard to remember in this up market, but it was only a couple of years ago that we had a terrible market.

Speaker 3

So having your breakeven such that you would still do well even in a low market is one of our objectives. So we're really happy about that. So yes, we'll always look for ways to do even a little better. But I think with the debt that we have now, I don't see major changes in the next year or so. It's kind of high quality debt, we'd like to say.

Speaker 3

Some of it's below the rates of earning and interest and others of it, this is naturally not in place for a while. So I don't know, Chris, I guess one way of saying, I think we're not sitting back. I don't think that would characterize the company. And you have seen Lois talked about it pretty extensively. We do find opportunities to use cash flow in addition to the returns to shareholders, we've found some good opportunities to use the cash flow to renew the fleet and grow the fleet.

Speaker 3

So I think we are harvesting, but we're also looking selectively to grow.

Speaker 7

Yes, fair enough. Yes, thank you, Jeff for clarifying that categorization as well. Yes, speaking of the fleet renewal efforts and just kind of looking at the portion of the MRs that are still a little bit dated, you've had that recent sale. Should we be looking forward to some potential sales of the other MR assets at this point? Or what's the secondhand market looking like today?

Speaker 2

So Chris, secondhand market is very strong, 38 a day in the Q1 and thus far booked in the 2nd quarter very strong, putting 6, 7 of because it's a balance in this very strong market.

Speaker 7

Definitely. And Lois, on the proceeds from any potential vessel sales, would that then in turn be used for further renewal efforts on maybe some acquisitions or even ordering?

Speaker 2

We don't specifically bucket it exactly that way, but it does tend to be how we execute and how we look to continue to hydrate the fleet.

Speaker 3

Yes, I'd say you get free cash flow from operations and you get free cash flow from monetizing older vessels at a significant profit. It all becomes cash to be allocated.

Speaker 7

Yes. Thank you. Thank you, Jeff. I'll turn it over. Thanks for taking the time.

Operator

Thank you. Our next question comes from the line of Sherif Elmoghrabie with BTIG. Sherif, your line is now open.

Speaker 8

Hey, good morning. Thanks for taking my question. So these LR1 new builds are a pretty unique opportunity given how early their delivery is. And I'm curious if you were to go to a yard today and order a tanker. First, when would that be delivered?

Speaker 8

And do you have any insight into how many similar open slots for delivery before 2027 may exist at yards?

Speaker 2

Okay. I'm going to try a little bit of that now. I'll give it to Derek as well, our commercial man. So yes, we knew obviously, this has been a strong sector for us for some time. So we wanted to take advantage of those slots as we found them.

Speaker 2

Most slots today are into 2027, really kind of across the tanker space, maybe you can get some MRs in 2026. And Derek, would you give a little more color on that or

Speaker 5

Sure, Lois. Thanks, Sherif. The only color I could really add to what Lois said is there are like Lois said, most of the births available will be in 2027. And then for us, on these LR1 specifically, what we try to highlight is, while there are other LR1s being built at other yards, our LR1s are still built to the old Panamax Canal beam, that 32.2 meter beam. So that's been part of the reason for our strong earnings is being able to go through the canal, trade on both sides of the Pacific and the Atlantic.

Speaker 5

And these new buildings will do the same, while most of the new build LR1s are around 38 meter beam. So really built for that clean trade and can't really compete with us on the crude trade in the Americas.

Speaker 8

That's interesting color. Thanks, Lois and Derek.

Operator

Thank you. There are no questions registered at this time. So I will pass the call back over to CEO, Lois Zabrocky, for any closing remarks.

Speaker 2

I just want to thank everyone for joining us for our Q1 earnings call at International Speedway And we'll talk to you soon. Thank you.

Operator

That concludes today's call. Thank you for your participation. You may now disconnect your line.

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Key Takeaways

  • International Seaways reported $145 million in net income ($2.92 per diluted share) and $192 million in adjusted EBITDA for Q1, marking its eighth consecutive quarter of strong earnings.
  • The company bolstered its balance sheet to $626 million of total liquidity (including $411 million undrawn revolver) and cut mandatory debt repayments from $180 million in 2022 to under $50 million over the next 12 months, achieving a net loan-to-value of ~14%.
  • Fleet renewal is underway with six Eco MRs (three delivered, three by May for $232 million) and options for dual-fuel LR1s, plus six LR1 newbuilds due in 2025–2026, while monetizing older MRs at significant profits.
  • The board declared a combined dividend of $1.75 per share (60% of adjusted net income), delivering a >13% yield over the last 12 months and contributing to a 24% CAGR and 490% total shareholder return since inception.
  • Market fundamentals remain constructive with ~1.5% annual oil demand growth, structural regional imbalances boosting ton-mile demand, a tanker orderbook at just 9%, and Q2 spot TCE fixtures at ~$43,700/day well above a breakeven of ~$13,600/day.
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Earnings Conference Call
International Seaways Q1 2024
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