International Seaways, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; compared with the corresponding 2019 periods. Dollar amounts below are in millions unless stated otherwise. The company operates crude-tanker and product-carrier fleets and reported 39 vessels, including leased vessels and interests in two FSO joint-venture vessels.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Shipping revenue | $99.9 | $71.3 | $364.9 | $242.2 |
| Time charter equivalent (TCE) revenue, non-GAAP | $94.0 | $65.8 | $349.1 | $222.3 |
| Operating income | $22.2 | $5.6 | $153.7 | $33.1 |
| Net income/(loss) | $14.0 | $(11.1) | $111.4 | $(16.7) |
| Diluted EPS | $0.50 | $(0.38) | $3.88 | $(0.57) |
| Operating cash flow | — | — | $198.8 | $43.4 |
Calculated operating margins were approximately 22.2% versus 7.9% for Q3, and 42.1% versus 13.7% for the nine-month periods. Net margins were approximately 14.0% versus negative 15.6%, and 30.5% versus negative 6.9%, respectively.
At September 30, cash and cash equivalents were $137.3, restricted cash was $16.3, and total liquidity was reported at $193.7, including $40.0 of undrawn revolver capacity. Working capital was $117.0. Debt, net of unamortized financing costs and discounts, was $550.7; net debt to total capitalization was 26.8%, down from 33.3% at year-end 2019. The company reported compliance with financial covenants.
Changes versus the prior period and notable items
- Q3 TCE revenue rose 43%, primarily from higher average rates across most fleet sectors. The nine-month increase was 57%, mainly reflecting stronger rates. Crude Tankers drove most of the improvement; Q3 Product Carrier TCE revenue declined 13% as fewer MR charter days offset improved rates.
- Q3 operating income improved from the prior-year quarter, but included a $12.8 loss on vessel disposals and impairments. Nine-month vessel disposal and impairment losses were $14.2, including $17.1 of vessel impairment charges, partly offset by disposal gains.
- Interest expense declined to $8.0 in Q3 from $17.0 and to $28.9 for nine months from $52.0, reflecting lower debt balances, refinancing economics and lower LIBOR. Nine-month other expense of $13.5 included debt-extinguishment costs and write-offs, notably a $12.5 write-off of deferred financing costs and original issue discount.
- Operating cash flow increased substantially year over year. Investing cash use was $31.0; financing cash use was $164.3, including debt repayments, $30.0 of share repurchases and $5.1 of dividends. Cash, cash equivalents and restricted cash increased $3.4 from year-end 2019.
Outlook, management commentary and risks
- Management expected tanker rates in Q4 2020 and 2021 to be weaker than in the first nine months, citing COVID-related oil-demand weakness and the drawdown of excess oil inventories and floating storage. No numerical earnings or rate guidance was provided.
- To lock in cash generation and reduce exposure to spot-market volatility, the company fixed four VLCCs and one LR2 on time charters during 2020 for periods of seven to 36 months. Spot employment accounted for approximately 67% of Q3 TCE revenue and 81% for the nine-month period.
- COVID-19 and the oil-market recovery remain material uncertainties. Management noted that tanker demand and rates depend on oil demand, production, inventory drawdowns, vessel supply and charter rates; benchmark rates were at or below industry-average cash break-even levels during Q3.
- The company completed a January 2020 refinancing, repaid the $40.0 Transition Term Loan in August, and said the refinancing was expected to reduce annual cash interest by approximately $15.0. Three vessel sale agreements signed in October 2020 were expected to generate aggregate gross proceeds of approximately $62.0; delivery was scheduled between November 2020 and January 2021.
- After quarter-end, the FSO joint venture signed 10-year extensions of both North Oil Company service contracts, beginning after contracts then scheduled to expire in 2022. Extension rates are lower than current rates, but management cited greater cash-flow visibility; the company estimated its 50% interest would represent more than $322 of contract revenue.
- Potential contingent exposures include a maximum $52.9 of future payments under guarantees related to equity-method investees’ debt and interest-rate swaps. The company also reported maximum exposure of $202.6 relating to certain variable-interest entities, excluding $14.9 of receivables; management did not consider the maximum loss probable. Unfunded multi-employer pension assessments cannot currently be reasonably estimated.
- The company reported that claims against its subsidiary in the Galveston wrongful-death lawsuits were dismissed with prejudice in May 2020. Other ordinary-course legal and contractual risks remain. The filing also identifies cyclicality, charter-rate and vessel-value fluctuations, counterparty and credit risks, debt and covenant requirements, environmental regulation, and the LIBOR transition as risks.
Important facts for investors to verify
- Whether the anticipated weaker tanker market materialized, and how spot rates, oil demand and inventory drawdowns affect results and cash generation.
- Actual completion proceeds and timing for the three post-quarter vessel sales, and any further fleet impairments or disposal losses.
- Liquidity and covenant headroom under the debt agreements, including the availability of the $40.0 revolver and the restrictions associated with $16.3 of restricted cash.
- The economics and performance of the new time charters and the extended FSO contracts, including the effect of lower extension-period rates.
- Potential cash requirements from vessel upgrades, guarantees and pension contingencies, and the company’s ability to maintain dividends and execute its expanded share-repurchase authorization.