International Seaways, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unless otherwise noted, dollar amounts below are in millions. The unaudited statements cover the international-flag business as carved out of Overseas Shipholding Group (OSG); INSW’s spin-off from OSG was completed on November 30, 2016, after the reporting period.
Business context and financial performance
INSW provides ocean transportation of crude oil and refined petroleum products. At September 30, 2016, it owned or operated 55 vessels, including seven chartered-in vessels, and held interests in joint ventures operating FSO and LNG vessels. Its two reportable segments are International Crude Tankers and International Product Carriers.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Shipping revenue | $80.8 | $131.1 | $312.5 | $372.7 |
| Time charter equivalent (TCE) revenue | $77.2 | $126.2 | $302.8 | $355.9 |
| Operating income/(loss) | ($35.3) | $64.0 | $70.5 | $171.9 |
| Net income/(loss) | ($50.9) | $51.9 | $39.5 | $135.6 |
| Basic and diluted earnings/(loss) per share | ($1.74) | $1.78 | $1.36 | $4.65 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $131.1 | $174.6 |
| Adjusted EBITDA (non-GAAP) | $35.0 | $81.1 | $181.1 | $228.1 |
The filing does not provide a clear consolidated operating-margin figure. TCE revenue, a non-GAAP measure, fell 39% in Q3 and 15% year to date. Q3 adjusted vessel-operations income was $13.4 million for Crude Tankers and a $1.6 million loss for Product Carriers; nine-month figures were $96.3 million and $14.6 million, respectively.
Liquidity, debt, and material period-over-period changes
- At September 30, cash and cash equivalents were $110.2 million, versus $308.9 million at December 31, 2015. Working capital was approximately $126 million, compared with $348 million at year-end 2015.
- Reported consolidated liquidity was $160.2 million, including $110.2 million cash and $50 million of undrawn revolver capacity. Nine-month operating cash flow was $131.1 million.
- Debt, net of original issue discount and deferred financing costs, was $439.4 million, down from $595.2 million at December 31, 2015. The company reported a 26.4% debt-to-total-capitalization ratio, versus 30.1% at year-end. The term loan is due in 2019; the company reported compliance with its collateral-value covenant and substantial headroom.
- Financing cash outflows included $202 million of dividends to OSG and debt repurchases and principal payments. The filing reports $68.9 million of open-market term-loan repurchases and $83.8 million of mandatory principal prepayments during the nine months.
- Assets totaled $1.71 billion and liabilities $484.5 million at September 30. Equity was $1.22 billion, compared with $1.38 billion at year-end.
Q3 net loss included a $49.6 million vessel impairment charge. Excluding the impairment and other specified items, adjusted EBITDA was $35.0 million. The nine-month earnings decline also reflects weaker charter rates and revenue, notwithstanding lower G&A and interest expense.
Management commentary, outlook, risks, and unusual items
- Management attributed weaker results chiefly to lower market rates: Q3 TCE rates declined across key VLCC, MR, Aframax and LR2 markets. Management described third-quarter freight markets as weak, with some rates beginning to firm entering Q4.
- Impairment testing covered 28 vessels after market-value and near-term charter-rate declines. The company recorded $49.6 million of impairment on four vessels—two LR1s, an Aframax and a Panamax. The other 24 tested vessels passed the recoverability test, although their aggregate carrying values were about $210 million above estimated market values.
- Management stated that the company was positioned to generate sufficient cash to support operations for the 12 months through September 30, 2017. The filing provides no specific earnings or revenue guidance.
- Two FSO service contracts were due to expire between July and September 2017 and might not be renewed on comparable terms—or at all. Qatar Petroleum’s award of a 30% concession interest to a new development partner could affect renewal negotiations. INSW’s investment and advances in the FSO joint venture were $279.4 million.
- After the spin-off, INSW assumed guarantees relating to the FSO joint venture and LNG charter-party obligations; OSG retained certain guarantees, with INSW indemnification obligations under the separation arrangements. At September 30, the maximum potential future principal payments related to investee secured-debt guarantees were $39.4 million; the recorded guarantee liability was zero. The broader disclosed maximum exposure for certain variable-interest entities was $321.6 million, excluding specified trade receivables.
- The FSO and LNG joint ventures had substantial secured debt, including $648.8 million of LNG joint-venture debt described as nonrecourse to partners. INSW also disclosed uncertainty over potential future assessments to multi-employer pension plans; the amount for one plan could not be reasonably estimated.
- OSG’s SEC investigation received a Wells Notice in July 2016 indicating SEC staff’s preliminary intention to recommend an enforcement action against OSG. OSG disputed the preliminary conclusions. The filing describes an OSG bankruptcy-plan reserve of up to $5 million as the sole source for any allowed SEC claim.
- A company vessel was being held in Venezuela amid a commercial dispute and an ongoing criminal investigation related to allegedly improper cargo documentation. The filing also identifies cyclical freight markets, vessel supply, fuel and operating costs, charter renewals, debt service, environmental rules, litigation and counterparty performance as risks.
Important facts for investors to verify
- Whether spot-market rates and vessel utilization improved after September 30, particularly in crude and product-carrier segments.
- Subsequent vessel valuations and any additional impairment indicators, given the $210 million aggregate carrying-value excess over estimated market values for the 24 vessels that passed testing.
- Renewal terms and financing implications for the FSO contracts expiring in 2017, and the actual exposure under INSW’s new guarantees and indemnities.
- Post-spin-off liquidity, cash distributions, debt covenant capacity and the cost of operating independently of OSG, including transition-service arrangements.
- Developments in the Venezuela matter, pension-plan assessments and any SEC proceedings concerning OSG, including whether any exposure could affect INSW.