International Seaways, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial statements are unaudited. Amounts below are in millions of dollars, except per-share data and percentages.
Business context and reporting period
International Seaways transports crude oil and refined petroleum products through its Crude Tankers and Product Carriers segments. At quarter-end, its fleet comprised 75 operating vessels, with three dual-fuel LNG-powered VLCC newbuilds scheduled for delivery in Q1 2023. Results versus 2021 are affected by the July 2021 Diamond S merger, which expanded the fleet, as well as improved tanker rates.
About 96% of Q2 TCE revenue came from spot-market employment, compared with 75% in Q2 2021, increasing exposure to volatile market rates.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Shipping revenue | $188.2 | $46.3 | $289.7 | $93.1 |
| TCE revenue (non-GAAP) | $185.5 | $44.7 | $283.5 | $89.9 |
| Operating income/(loss) | $82.2 | $(12.0) | $82.2 | $(18.4) |
| Net income/(loss) | $69.0 | $(18.8) | $56.0 | $(32.1) |
| Diluted earnings/(loss) per share | $1.38 | $(0.67) | $1.12 | $(1.15) |
Consolidated operating margins were approximately 43.7% in Q2 2022 and 28.4% for the first half, versus negative 26.0% and 19.8%, respectively, in the comparable 2021 periods. Net margins were approximately 36.7% and 19.3%, versus negative 40.6% and 34.5%.
- Cash flow: First-half operating cash flow was $14.8, compared with cash used of $22.5 in 2021. Investing activities provided $164.5, including $140.1 from selling the FSO joint venture interest and $79.6 from vessel sales; vessel and improvement expenditures were $53.8. Financing activities used $46.6, including $717.9 of debt repayments offset by $641.1 of borrowings and $60.1 of sale-and-leaseback proceeds. Cash, cash equivalents and restricted cash increased $132.8 to $231.7.
- Liquidity: Reported liquidity was $451.7 at June 30, comprising $231.7 of cash and restricted cash and $220.0 of undrawn revolving capacity. Working capital was positive $226.1, versus negative $10.1 at year-end 2021; the company notes current debt installments are excluded from working capital under its debt covenant definition.
- Debt: Debt carrying value was $1,073.7, including $160.8 current and $912.9 long-term. Net debt to total capitalization was 40.7%, down from 46.2% at December 31, 2021. The new $750 million secured facility replaced several facilities; $530 million of term debt was drawn and $70 million of the revolver was temporarily drawn and repaid in June. The company reported covenant compliance at quarter-end.
Material changes versus the prior comparable period
- Q2 TCE revenue rose $140.8, or 315%, year over year; first-half TCE revenue rose $193.6, or 215%. Management attributed the increases to higher rates across most fleet sectors and additional revenue days following the merger. Product Carriers benefited particularly from strong MR and LR1 rates; VLCC rates remained weaker in the first half.
- Operating expenses and depreciation increased with the larger post-merger fleet. Q2 interest expense rose to $12.6 from $7.0; first-half expense rose to $25.3 from $14.3, reflecting higher average debt and floating rates.
- Cash increased substantially, supported by the FSO interest and vessel sales. The FSO sale generated approximately $140 million cash proceeds but a $9.5 loss on sale.
- Net vessel-sale gains were $9.5 for the first half, alongside $1.7 of vessel impairment charges. The company sold its remaining Handysize carriers during Q2.
Outlook, management commentary, risks and unusual items
- Management said refinancing and other liquidity initiatives diversified funding and extended debt maturities, and that the balance sheet and fleet position the company to support operations over the next 12 months and pursue strategic opportunities. The filing provides no quantified earnings or revenue guidance.
- Management reported that VLCC rates had begun strengthening in Q3 2022. It also described reduced Chinese crude demand as a drag on VLCCs and Russia-Ukraine-related trade disruptions as supportive of rates in other segments. Tanker shipping remains highly cyclical and sensitive to demand, vessel supply, trade routes and charter rates.
- Three LNG-powered VLCCs are under construction for approximately $290 million total cost, with $220.8 million of construction commitments remaining at quarter-end; BoComm financing is expected to fund these costs over construction and delivery. The vessels are intended for seven-year Shell time charters.
- On August 5, 2022, after quarter-end, the company redeemed $25 million of 8.5% senior notes. It also declared a $0.12-per-share dividend payable in September and increased its share-repurchase authorization to $60 million, extending it to December 31, 2023.
- A May 2022 shareholder rights plan becomes exercisable if an unapproved person or group reaches 17.5% ownership and expires May 7, 2023; the company cautions it could delay or deter a change of control.
- Other risks include market-rate volatility, fuel and operating costs, drydock and regulatory requirements, counterparty and pool exposure, leverage and interest rates, LIBOR transition, COVID-19 impacts, and the Russia-Ukraine war. The company also disclosed potential multi-employer pension assessments that it cannot reasonably estimate and has not reserved for.
Important facts for investors to verify
- Whether stronger Q3 tanker rates persisted, particularly in VLCCs, and how spot-market exposure affects future earnings.
- Cash conversion and working-capital needs: first-half operating cash flow was modest despite reported net income, with receivables increasing $74.8.
- Debt amortization, floating-rate exposure, covenant headroom and funding for the remaining newbuild commitments; confirm the post-quarter note redemption and resulting debt profile.
- Execution, delivery timing and employment of the three LNG-powered VLCCs, including expected BoComm funding and the contracted charter terms.
- Exposure to commercial pools and unconsolidated variable-interest entities: the filing reports $168.3 of pool trade receivables and $38.4 of maximum exposure through investments; the receivables are excluded from that maximum-exposure calculation.
- Potential outcomes of the rights plan, pension contingencies, and other legal or regulatory matters; the filing does not provide a clear quantified estimate for possible pension assessments.