International Seaways, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Dollar amounts below are in millions unless otherwise noted. International Seaways transports crude oil and refined petroleum products; its reportable segments are Crude Tankers and Product Carriers. At quarter-end, it reported a fleet of 53 vessels, including eight chartered-in vessels.
Financial results and liquidity
- Revenue: Shipping revenue was $52.0, down 41% from $88.8 in Q1 2017. Time charter equivalent (TCE) revenue, a non-GAAP measure, fell 42% to $48.8 from $84.1.
- Profitability: Net loss was $29.3, or $1.01 per share, compared with net income of $18.1, or $0.62 per share, a year earlier. Operating loss after equity-method income was $18.4, versus operating income of $27.0. The company recorded a $6.6 loss on vessel disposals.
- Margins: Net margin was approximately negative 56% (net loss divided by shipping revenue), compared with approximately 20% in Q1 2017. Operating margin, using operating loss after equity-method income, was approximately negative 35%, versus approximately 30% income a year earlier.
- EBITDA: EBITDA was negative $0.1 and adjusted EBITDA was $6.5, compared with $45.9 and $46.6, respectively, in Q1 2017. Both are non-GAAP measures.
- Segment performance: Crude Tankers TCE revenue fell to $29.2 from $56.0; adjusted vessel-operations result was a $12.0 loss versus $18.4 income. Product Carriers TCE revenue fell to $19.6 from $28.1; adjusted result was a $2.4 loss versus $2.0 income. Average daily TCE rates were $12,958 and $10,771, respectively, compared with $27,312 and $13,088.
- Cash flow: Operating activities used $4.5, versus providing $11.3 in Q1 2017. Investing activities provided $58.8, including $57.4 from vessel disposals. Financing activities used $33.7, including $33.4 of debt payments. Cash, cash equivalents and restricted cash ended at $91.2.
- Balance sheet and liquidity: Cash and cash equivalents were $53.5 and restricted cash was $37.7. Working capital was approximately $75, down from $85 at year-end 2017. Reported total liquidity was $141.2, including restricted cash and $50.0 of undrawn revolver capacity.
- Debt: Debt carrying value was $521.3, down from $552.9 at December 31, 2017; the $30.0 revolver balance was repaid during the quarter. Debt to total capitalization was 32.9%, versus 33.7% at year-end. Interest expense increased to $11.6 from $9.2.
- Other balance-sheet measures: Total assets were $1,612.5 and total liabilities were $548.8 at March 31, 2018. Equity was $1,063.6, down from $1,085.7 at year-end, reflecting the quarterly loss partly offset by other comprehensive income.
Material changes and management commentary
- Management attributed the sharp revenue and earnings decline primarily to weaker tanker rates: fleet TCE revenue fell by $35.3, with approximately $32.7 of the decline attributed to lower average daily rates. The filing describes VLCC rates as generally below $10,000 per day during the quarter and cites vessel oversupply and reduced OPEC exports.
- Crude Tankers were particularly affected by lower VLCC earnings, an idle ULCC, and a vessel held for sale. Product Carrier revenue also declined due to lower rates and fewer MR revenue days following vessel sales and a charter redelivery.
- Equity in income of affiliated companies declined to $8.3 from $13.6, mainly due to lower earnings at the FSO and LNG joint ventures. Interest expense rose primarily because of higher average rates and balances under the 2017 debt facilities.
- Management said the balance sheet provided flexibility and expected liquidity to support operations over the following 12 months. It provided no specific earnings or rate guidance. It cautioned that 2018 was likely to remain a weak-rate environment, with continuing newbuilding deliveries; higher bunker costs were also identified as a headwind.
- The company reported no vessel impairment trigger requiring further impairment testing at March 31, but said it would continue monitoring vessel valuations, charter rates, and planned fleet renewal.
Transactions, risks and contingencies
- Proposed VLCC acquisition: In April 2018, the company agreed to acquire the holding companies for six VLCCs for $434.0, inclusive of assumed debt. Closing was expected in Q2 2018 and depended on specified transaction, lender-amendment, regulatory and other conditions. Planned funding included available liquidity, assumed vessel debt and/or new financing. The company also agreed to guarantee the purchaser’s obligations under the agreement.
- Related financing and fleet actions: The FSO joint venture drew $220.0 under a secured facility in April; $110.0 of term-loan proceeds was distributed to International Seaways, which guaranteed that portion. The company also reported sales of several vessels, including subsequent-quarter deliveries, and a proposed sale of a 2003-built ULCC connected with the VLCC transaction.
- Restrictions and obligations: Debt agreements restrict certain cash transfers and require asset-sale proceeds above specified thresholds to be reinvested or applied to debt. The company estimated substantial headroom under its collateral-value covenant, with a 45% ratio against a 65% limit. Its FSO term-loan guarantee also carries minimum-liquidity and cash covenants.
- Contingencies: The company’s maximum stated exposure to loss from certain unconsolidated variable-interest entities was $252.3, primarily its investment; it did not consider such loss probable. It also disclosed approximately $14.3 of receivables from a pool VIE, excluded from that maximum-exposure calculation.
- Legal and pension matters: Litigation relating to a 2017 Galveston accident remained unresolved; the company could not reasonably estimate a possible loss or range. A potential assessment under the MNOPF pension plan was not estimable and no reserve was recorded; a $0.3 reserve was recorded for the MNRPF plan, with a payment expected in H2 2018.
- Other risks: The company’s results are exposed to cyclical freight rates, vessel supply and demand, fuel costs, interest rates, vessel values, charter counterparties, and regulatory and environmental requirements. It said there were no material changes to the risk factors in its 2017 Form 10-K. Qualification for the U.S. tax exemption under Section 883 depended on shareholder-ownership conditions and was not assured beyond 2018.
Important facts for investors to verify
- Whether the six-VLCC acquisition closed, its final financing mix and terms, and the resulting debt, liquidity and guarantee obligations.
- Whether tanker rates and TCE revenue recovered after the quarter, given the disclosed weak market and exposure to spot rates.
- How much of reported liquidity was unrestricted and available after asset-sale proceeds were restricted under the debt agreements.
- Actual proceeds, gains or losses, and any follow-on obligations from vessel disposals, sale-leasebacks and the planned ULCC sale.
- Developments in the Galveston litigation and pension-plan assessments, for which potential losses were uncertain or not fully estimated.
- Whether the company maintained debt and FSO-guarantee covenant compliance, and whether it continued to qualify for the Section 883 tax exemption.