International Seaways, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company provides international ocean transportation of crude oil and refined petroleum products. At quarter-end it owned or operated 55 vessels; two new Suezmax tankers were delivered in July. Dollar figures below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Shipping revenue | $72.0 | $103.1 | $160.7 | $231.7 |
| TCE revenue | $69.3 | $101.0 | $153.4 | $225.7 |
| Operating income (loss) | $4.2 | $41.1 | $31.2 | $105.8 |
| Net income (loss) | $(11.6) | $30.5 | $6.4 | $90.4 |
| Net income (loss) per diluted share | $(0.40) | $1.05 | $0.22 | $3.10 |
| Operating cash flow | Not separately reported | Not separately reported | $3.7 | $122.8 |
- Q2 TCE revenue fell 31%; management attributed the decline mainly to lower average daily rates. Adjusted vessel-operations income was $3.8 million, versus $37.9 million a year earlier. Product Carriers reported an adjusted vessel-operations loss of $3.2 million; Crude Tankers earned $7.1 million.
- Six-month operating cash flow declined substantially. Cash from operations was $3.7 million, while drydocking payments were $15.9 million and vessel and vessel-improvement expenditures were $18.6 million.
- At June 30, cash was $121.2 million, working capital approximately $146 million, and reported total liquidity $171.2 million, including $50 million of undrawn revolver capacity. The revolver was drawn in July, so quarter-end liquidity does not reflect that borrowing.
- Debt, net of discount and deferred financing costs, was $475.5 million; total debt to capitalization was 28.5%. The company reported substantial headroom under its collateral leverage covenant. Total assets were $1.70 billion and equity was $1.19 billion.
Material changes and unusual items
- In June, the company refinanced its prior facilities with a $500 million term loan due 2022 and a $50 million revolving facility due 2021, extending debt maturities by about three years. The new facilities bear floating rates; the term-loan LIBOR margin is 5.50%. A 50% excess-cash-flow prepayment is required, and an estimated $10.1 million payment is classified as current debt.
- The refinancing generated $7.9 million of third-party debt-modification fees and a $7.0 million write-off of prior deferred financing costs. These items weighed on Q2 results. Interest expense was lower year over year in the first half, but management expected it to be higher in the second half due to the new debt’s higher average rate and principal balance.
- The two Suezmax vessels were purchased for an aggregate $116 million, with $17.4 million deposited by June 30. The remaining purchase commitment was approximately $99 million; both ships were delivered in July. A 2001-built MR tanker was under contract for sale, with delivery expected in Q3 and a gain anticipated.
- Equity-method affiliate income increased to $13.9 million in Q2. The FSO joint ventures signed new five-year service contracts beginning in Q3 at lower rates than the contracts they replaced. Management expects lower FSO revenue in the second half of 2017, partly offset by lower interest expense after the joint ventures repaid their debt in July.
Outlook, risks, and contingencies
- Management said the balance sheet provides flexibility for fleet renewal and strategic opportunities and expects sufficient cash to support operations over the next twelve months. The filing provides no specific earnings, revenue, or rate guidance.
- Management described tanker freight rates as weak, particularly for VLCCs, and expected vessel deliveries and seasonality to limit a meaningful near-term rate recovery. The company earned 80% of total TCE revenue from the spot market in both Q2 and the first half of 2017, increasing exposure to market rates.
- Vessel-value declines and weaker near-term charter-rate expectations had not triggered further impairment testing as of June 30. Management said it would reassess if adverse conditions persist or worsen.
- The company disclosed a maximum potential exposure of $294.5 million related to certain variable-interest entities, excluding $9.6 million of receivables from a pool. It did not record this maximum exposure as a liability because management considered loss not probable; joint-venture debt was secured by the vessels. The FSO debt was subsequently repaid in July.
- Other risks include floating-rate debt, debt covenants and required prepayments, charter-market cyclicality, drydock costs, operating-lease commitments, joint-venture guarantees, and possible future assessments from multi-employer pension plans. A $0.4 million reserve was recorded for a potential MNRPF assessment; the amount of any future MNOPF assessment could not be reasonably estimated.
- The company qualified for the U.S. Section 883 shipping-income tax exemption for 2017; continued qualification beyond 2017 was not assured. It also noted that adopting the new revenue standard in 2018 could materially affect spot-voyage revenue timing and industry TCE comparisons.
- A $30 million share-repurchase program was authorized for 24 months; no program purchases had occurred by June 30. The transition-services period with former parent OSG ended in June, and final separation-cost true-ups could result in additional 2017 costs.
Important facts for investors to verify
- Post-quarter financing and acquisition details: the July $50 million revolver draw, $50 million term-loan increase, and delivery and funding of the two Suezmax tankers.
- Actual second-half tanker rates, spot-market exposure, and the impact of weaker FSO contract rates on affiliate earnings.
- Cash generation, debt-service costs, covenant headroom, and the required excess-cash-flow prepayment.
- Whether the MR sale closes and the expected gain, as well as any final OSG separation-cost allocation.
- Developments in vessel valuations, joint-venture guarantees and pension assessments, and the company’s Section 883 tax-exemption status.