International Seaways, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. International Seaways operates crude and petroleum-product tankers, with Crude Tankers and Product Carriers segments. At quarter-end, it operated a 40-vessel fleet, including four vessels chartered in long term, and held interests in two FSO joint-venture vessels. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial results and liquidity
- Revenue: Shipping revenue was $125.3 million, up 23% from $101.9 million. Time charter equivalent (TCE) revenue, a non-GAAP measure, rose 27% to $119.7 million from $94.0 million.
- Profitability: Income from vessel operations was $53.3 million versus $19.3 million; operating income was $58.5 million versus $27.4 million. Net income was $33.0 million, or $1.13 per basic share ($1.12 diluted), compared with $10.9 million, or $0.37 per share. Net margin was approximately 26% versus 11%.
- Key operating drivers: Higher fleet-wide daily rates added approximately $44.7 million to TCE revenue, partly offset by fewer VLCC revenue days and lower lightering activity. Average daily TCE rates increased to $43,663 from $28,566 for Crude Tankers and to $26,873 from $16,257 for Product Carriers.
- Unusual items: Other expense of $13.4 million included $12.5 million of write-offs of unamortized financing costs and a $1.0 million debt prepayment fee related to refinancing and debt extinguishments. The company also recorded a $2.8 million gain on vessel disposals. Adjusted EBITDA, a non-GAAP measure, was $74.2 million versus $47.3 million and includes adjustments for specified items.
- Cash flow: Operating cash flow was $38.3 million, up from $24.0 million. Investing activities used $15.2 million, including $28.9 million for vessels and improvements, partly offset by $13.6 million of disposal proceeds. Financing activities used $63.1 million, including debt repayments, dividends and share repurchases. Cash, cash equivalents and restricted cash totaled $110.3 million at quarter-end, versus $150.2 million at year-end 2019.
- Liquidity and debt: Working capital was approximately $83 million. Reported total liquidity was $150.3 million, comprising $110.3 million of cash including $17.0 million restricted, plus $40.0 million of undrawn revolver capacity. Debt, net of discounts and deferred financing costs, was $624.6 million; debt to total capitalization was 33.3%. The company reported compliance with debt covenants at March 31, 2020.
- Margins and balance sheet: Operating margin was approximately 47% versus 27% in Q1 2019. Total assets were $1.741 billion and total equity was $1.030 billion at March 31, 2020. Interest expense was $12.0 million versus $17.5 million; no income tax provision was recorded.
Material changes versus Q1 2019
- Stronger tanker rates, supported late in the quarter by increased oil production and demand for floating storage, drove higher TCE revenue and vessel-operation income.
- Operating expenses declined to $72.0 million from $82.6 million, helped by lower charter-hire and credit-loss expenses; vessel expenses and general and administrative expenses increased.
- Equity-method income fell to $5.1 million from $8.1 million, primarily because the company sold its LNG-carrier joint-venture interest in October 2019; that venture had contributed $3.3 million in Q1 2019.
- Cash and restricted cash decreased, while reported debt declined modestly. The company refinanced several facilities in January 2020, replacing the 2017 term loan, ABN term loan and 10.75% subordinated notes with new secured facilities, while retaining the Sinosure facility and 8.5% senior notes.
- Other comprehensive loss widened to $14.4 million from $3.4 million, mainly reflecting unrealized losses on cash-flow hedges.
Outlook, management commentary and risks
- Management expected Q2 and Q3 2020 tanker rates to be stronger than 2021, citing excess crude supply and tanker use as floating storage. It cautioned that rates could weaken when oil supply and demand rebalance and stored inventories are drawn down. Rates in early Q2 were described as volatile but still robust.
- The company reported that it had opportunistically fixed four VLCCs on time charters for periods of seven to 36 months. It believed its balance sheet and charter coverage supported operations over the next 12 months; this is management’s assessment, not a guarantee.
- Scrubber installations on three modern VLCCs were deferred to 2021; installations on two others were planned for Q2 2020. COVID-19 travel and personnel restrictions could affect maintenance, vessel availability and installation schedules. Vessel betterment commitments totaled approximately $23.0 million.
- COVID-19 had not, as of quarter-end, caused an immediate material negative impact on vessel markets, and management found no impairment trigger for the fleet. The filing warns that pandemic-related economic weakness, reduced oil demand, operating disruptions, customer credit deterioration and liquidity or covenant pressures could adversely affect the business. Floating-storage demand and high rates may reverse.
- The 2002-built VLCC Seaways Mulan had been detained in Indonesia since February 8, 2020. Lenders extended the release deadline to May 8, with a further cure period through June 7; absent release by then, the company said it could repay the vessel-related portion of the Transition Term Loan or obtain another waiver. The filing does not establish the subsequent outcome.
- The FSO joint ventures’ contracts expire in 2022. INSW’s maximum potential payments relating to investee secured debt and swaps were $65.6 million, with a $0.2 million recorded guarantee liability. The company also disclosed unresolved wrongful-death litigation arising from a 2017 accident; it could not reasonably estimate a possible loss or range.
- The company had $9.8 million of derivative losses expected to be reclassified from accumulated other comprehensive loss to earnings over the next 12 months. Interest-rate swaps and refinancing reduce some floating-rate exposure; LIBOR transition remains a disclosed risk.
- Management believed the company would qualify for the Section 883 U.S. tax exemption for 2020, subject to ownership conditions, but gave no assurance. Failure to qualify could result in U.S. federal tax on U.S.-source shipping income.
Important facts for investors to verify
- Whether tanker rates and floating-storage demand remained strong after Q1, and how a decline in storage demand would affect utilization, TCE revenue and vessel values.
- The outcome of the Seaways Mulan detention, lender waivers or any repayment, and any related covenant or operating impact.
- Cash available for operations after restricted cash, scheduled debt amortization, committed vessel improvements and other contractual obligations.
- Execution and cost of scrubber and ballast-water system commitments, including the effects of pandemic-related delays.
- Performance and contract outlook for the FSO joint ventures, including their 2022 contract expirations and INSW’s contingent guarantees.
- Developments in the Galveston litigation and any material changes to the company’s contingent exposures.
- Whether the company satisfies Section 883 ownership requirements and continues to meet its financial covenants.