International Seaways, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unless stated otherwise, dollar amounts below are in millions. The results reflect INSW before its July 16, 2021 merger with Diamond S Shipping.
Business context
INSW transports crude oil and refined petroleum products through its Crude Tankers and Product Carriers segments. At June 30, the company reported an operating fleet of 36 vessels, including vessels operated through leases and joint ventures, and three LNG-fueled VLCC newbuilds scheduled for 2023. Most non-joint-venture revenue came from spot-market activity.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Shipping revenue | $46.3 | $139.7 | $93.1 | $265.1 |
| Time charter equivalent revenue | $44.7 | $135.3 | $89.9 | $255.0 |
| Operating income/(loss) | $(12.0) | $73.1 | $(18.4) | $131.6 |
| Net income/(loss) | $(18.8) | $64.4 | $(32.1) | $97.4 |
| Basic EPS | $(0.67) | $2.26 | $(1.15) | $3.37 |
| Adjusted EBITDA | $9.8 | $96.3 | $20.5 | $170.5 |
Operating cash flow was $(22.5) for the first half, versus $127.7 in 2020. Investing cash outflow was $21.1 and financing cash outflow was $38.5; cash, cash equivalents and restricted cash declined $82.1 to $133.6.
At June 30, cash and cash equivalents were $117.4, including $16.2 of restricted cash reported separately on the balance sheet; INSW also had $40.0 of undrawn revolver capacity. Management reported total liquidity of $173.6 and working capital of approximately $110.0. Debt, net of deferred financing costs and discount, was $506.0; net debt to total capitalization was 28.2%, up from 24.8% at year-end 2020. Total equity was $947.5.
Material changes versus the prior period
- Q2 TCE revenue fell 67% year over year; management attributed most of the decline to weaker average daily rates, with fewer VLCC revenue days also contributing. Six-month TCE revenue declined 65%.
- Crude Tankers Q2 TCE revenue fell 71% to $31.1; Product Carriers revenue fell 54% to $13.6. Average daily TCE rates declined across vessel classes.
- Interest expense declined to $7.0 in Q2 from $8.9, and to $14.3 for the first half from $20.9, primarily reflecting lower debt balances and lower rates.
- Q2 included a $3.5 vessel impairment related to a Panamax held for sale and $0.5 of merger and integration costs. First-half 2020 results included $12.5 of deferred financing cost write-offs and debt extinguishment losses associated with refinancing.
Merger, outlook, risks and commitments
- Merger: On July 16, 2021, INSW completed its stock-for-stock acquisition of Diamond S, issuing 22.5 million shares. Former INSW and Diamond S shareholders owned approximately 55.75% and 44.25%, respectively, of 50.7 million post-merger shares. The transaction added 64 vessels and associated debt. INSW also paid a $31.5 million special dividend on July 15 ($1.12 per share). Management described the merger as an asset acquisition for accounting purposes.
- Market outlook: Management said the first half was weaker than 2020 and tanker rates remained weak into Q3, with rates at or below industry cash breakeven levels in Q2. It expected oil supply and demand to move toward balance in the second half and freight markets to strengthen as demand and supply recover. This is not specific numerical earnings guidance.
- Covenant risk: INSW was compliant with debt covenants at June 30, but forecast lower TCE rates could lead to a breach of the 2.50:1.00 interest coverage covenant at Q3-end. A breach without a remedy or waiver could permit acceleration of debt and foreclosure on pledged vessels. Management was discussing an amendment or waiver and expected lender consent or a waiver by September 30, 2021.
- Post-merger liquidity and asset sales: Combined pre-merger closing liquidity was approximately $274.8. Management estimated the special dividend and merger costs would use approximately $90.0 of cash beyond normal operations by Q3-end. It expected sales of 11 older vessels and acquired MRs to generate approximately $47.9 of net proceeds after associated debt repayment.
- Capital commitments: Three LNG-fueled VLCCs are under construction for approximately $290.0, with $273.8 remaining at June 30; delivery is expected in Q1 2023, with seven-year Shell time charters. Management cited financing commitment for approximately 85% of construction costs, subject to definitive documentation and other conditions. Total contractual obligations were $885.1 at June 30; the filing’s post-merger table reported $1.63 billion, including acquired debt and commitments.
- Other exposures: INSW’s maximum potential future payment under guarantees related to equity-method investee debt and swaps was $33.2. The company also disclosed unreserved potential calls from multi-employer pension plans; the amount could not be reasonably estimated. COVID-19 impacts, volatile tanker rates, vessel values, debt service, LIBOR transition and integration risks remain relevant.
- Tax: INSW qualified for the U.S. Section 883 shipping income tax exemption for 2021; the filing gives no assurance it will continue to qualify after 2021.
Important facts for investors to verify
- Whether lenders amended or waived the interest coverage covenant and whether compliance was maintained after June 30.
- Actual post-merger debt, unrestricted liquidity, merger-related cash costs and proceeds from announced vessel sales.
- Whether the LNG newbuild financing closed on expected terms and how remaining construction commitments will be funded.
- Subsequent tanker-rate trends, utilization and operating results for the combined fleet relative to management’s recovery expectations.
- Integration costs, realized synergies and any merger-related litigation or other contingencies.
- Whether INSW retained its Section 883 tax exemption and how contingent pension and joint-venture exposures evolve.