International Seaways, Inc. — Q2 2020 Form 10-Q
Business context and period. International Seaways operates crude tanker and product carrier fleets transporting crude oil and refined petroleum products. This unaudited filing covers the quarter and six months ended June 30, 2020. At quarter-end, the company owned or operated 40 vessels and held interests in two FSO joint-venture vessels.
Financial highlights
Amounts below are in millions of dollars except per-share data, percentages and daily rates.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Shipping revenue | $139.7 | $69.0 | $265.1 | $170.9 |
| Time charter equivalent (TCE) revenue | $135.3 | $62.5 | $255.0 | $156.5 |
| Operating income | $73.1 | $0.1 | $131.6 | $27.5 |
| Net income (loss) | $64.4 | $(16.5) | $97.4 | $(5.6) |
| Diluted earnings (loss) per share | $2.24 | $(0.57) | $3.35 | $(0.19) |
| Operating cash flow | Not provided by quarter | $127.7 | $43.8 |
- Q2 operating and net margins were approximately 52% and 46%, respectively, based on reported shipping revenue.
- Q2 fleet-wide average daily TCE rate rose to $49,854 for crude tankers from $18,959, and to $26,343 for product carriers from $13,121.
- Cash and cash equivalents were $128.1 at June 30; restricted cash was $16.4. Total liquidity, including restricted cash and $40.0 of undrawn revolver capacity, was $184.5. Working capital was approximately $112.0.
- Debt carrying value was $604.9, including $81.5 current and $523.4 long-term. Net debt to total capitalization was 30.0%, versus 33.3% at December 31, 2019. The company reported compliance with financial covenants at quarter-end.
- Six-month investing cash outflow was $27.8, including $40.9 of vessel and vessel-improvement expenditures and $13.6 of vessel-sale proceeds. Financing cash outflow was $105.7, including $51.3 of debt payments, $30.0 of open-market share repurchases and $3.4 of dividends.
Material changes versus prior periods
- Q2 shipping revenue more than doubled year over year, while TCE revenue increased 117%. For the first half, shipping revenue rose 55% and TCE revenue rose 63%. Management attributed the gains principally to sharply higher tanker rates amid excess oil supply, floating-storage demand and record Chinese imports.
- Q2 income from vessel operations improved to $67.9 from a $7.9 loss. Lower charter-hire costs also contributed, reflecting fewer chartered-in vessels. The company’s Q2 spot-market share of TCE revenue was 81%, compared with 90% a year earlier.
- Interest expense declined to $8.9 in Q2 from $17.4 and to $20.9 for the first half from $35.0. Management cited lower debt balances, reduced margins and interest rates, and lower LIBOR.
- In January, the company refinanced several facilities with $390.0 of new secured facilities, including a $300.0 term loan, a $40.0 revolver and a $50.0 transition term loan. Proceeds repaid or repurchased prior debt, including the 2017 term loan, ABN term loan and 10.75% subordinated notes. Management estimated the refinancing would reduce annual cash interest expense by approximately $15.0.
Outlook, risks and unusual items
- Management expected tanker rates in the second half of 2020 and in 2021 to be weaker than in the first half as oil supply and demand rebalance, inventories are drawn down, and floating-storage demand recedes. It reported that rates had already weakened in the third quarter as contango declined.
- To secure near-term cash generation and reduce exposure to spot-market volatility, the company fixed four VLCCs on time charters for periods of seven to 36 months at what management described as high rates. Management said liquidity and charter coverage should support operations over the next 12 months; this is an expectation, not a guarantee.
- COVID-19-related travel and personnel restrictions could increase vessel off-hire. The company also identified the cyclical tanker market, vessel values, charter rates, oil demand and supply, debt service and covenant compliance, environmental requirements, counterparty credit and LIBOR transition as risks.
- A $5.5 impairment was recorded on a 2002-built VLCC after a fleet-renewal-related impairment trigger. Management said further vessel impairments could be considered if adverse market conditions persist or worsen. A 2001-built Aframax sale agreement was cancelled in June; the company recognized an aggregate $4.1 gain on the two Aframax sale transactions, including a non-refundable deposit.
- First-half other expense of $13.3 included a $1.0 prepayment fee and a $12.5 write-off of unamortized financing costs and original issue discount related to debt extinguishments.
- The Seaways Mulan was held by Indonesian authorities from February to June 2020, then released and returned to its pool. The company expected at least $3.7 of loss-of-hire insurance recovery in the second half.
- The company guaranteed obligations relating to FSO joint-venture debt and swaps; its maximum potential future payment under that guarantee was $59.4, while the recorded guarantee liability was $0.1. Separately, maximum exposure to loss for specified variable-interest entities was $206.7, excluding approximately $21.1 of pool receivables; the company did not consider such a loss probable. Potential multi-employer pension assessments were not reasonably estimable and no reserve was recorded.
- The company said the subsidiary defendant in the Galveston wrongful-death lawsuits was dismissed with prejudice in May 2020. Other ordinary-course claims were described as not expected to be material, in management’s opinion.
- Subsequent to quarter-end, the board approved prepayment of the $40.0 transition term loan, expected by mid-August 2020; renewed a $30.0 share-repurchase authorization; and declared a $0.06-per-share dividend payable in September. The filing also reports an August extension and repricing of the Sinosure interest-rate swap.
Important facts for investors to verify
- Whether tanker rates, floating-storage demand and the company’s spot-market exposure evolve as management anticipated, and how much of charter revenue is protected by time charters.
- Whether the planned $40.0 transition-loan prepayment occurred, and its effect on cash, debt maturities and liquidity.
- The timing and collectability of the expected Mulan insurance recovery, and whether COVID-related restrictions cause additional off-hire or operating costs.
- Potential vessel impairment exposure if charter rates or vessel valuations weaken further, and the status of the cancelled Aframax sale.
- The FSO guarantee exposure, joint-venture contract renewals after 2022, and any developments in the unquantified pension-plan contingencies.
- Future cash allocation among debt repayment, vessel upgrades, dividends and the renewed share-repurchase program.