International Seaways, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; dollar amounts are in millions except per-share and daily-rate figures. International Seaways transports crude oil and refined petroleum products and reported a fleet of 53 vessels, including six chartered-in vessels and interests in six joint-venture vessels.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Shipping revenue | $56.9 | $72.0 | $108.9 | $160.7 |
| TCE revenue | $50.0 | $69.3 | $98.8 | $153.4 |
| Operating income (loss) | $(0.8) | $4.3 | $(19.2) | $31.3 |
| Net income (loss) | $(18.8) | $(11.6) | $(48.1) | $6.4 |
| Basic and diluted EPS | $(0.65) | $(0.40) | $(1.65) | $0.22 |
| Operating cash flow | Not provided by quarter in the filing text | $10.1 | $13.8 | |
| Adjusted EBITDA | $9.2 | $32.0 | $15.7 | $78.6 |
TCE revenue, a non-GAAP measure, fell 28% in Q2 and 36% in the first half. Management attributed most of the decline to lower average rates across fleet sectors. Q2 average daily TCE was $14,644 for Crude Tankers and $9,841 for Product Carriers. No consolidated profit margin is clearly stated in the filing.
Balance sheet, debt and liquidity
- At June 30, 2018, cash and cash equivalents were $115.8 million and restricted cash was $27.0 million. Total liquidity, including the $50 million undrawn revolver, was $192.9 million.
- Working capital was approximately $101 million, compared with $85 million at year-end 2017. Total assets were $1.946 billion; total liabilities were $895.9 million.
- Debt, net of discount and deferred financing costs, was $838.0 million, versus $552.9 million at December 31, 2017. Debt to total capitalization was 44.4%, up from 33.7%.
- Six-month cash increased by $72.2 million, including $10.1 million operating cash flow, $92.4 million net investing inflow and $30.2 million financing outflow. Investing cash included vessel-sale proceeds and repayments of advances from joint ventures.
Material changes and significant transactions
- On June 14, the company completed its $434 million acquisition of six VLCCs. The purchase included approximately $310.97 million of assumed Sinosure debt; cash consideration paid to Euronav was approximately $120.03 million. An estimated $20.95 million payable remained subject to final adjustment.
- The company issued $25 million of 8.5% senior notes and $30 million of 10.75% subordinated notes, drew approximately $28.46 million under a new ABN term loan, and assumed the VLCC-related Sinosure facility. It also prepaid $60 million of its 2017 term loan and repaid the $30 million revolver balance.
- The FSO joint venture drew $220 million under a new secured facility and distributed $110 million of term-loan proceeds to International Seaways. The company guarantees the FSO term loan; its maximum potential future principal payments on the guaranteed portion were approximately $104.6 million.
- Q2 included a $6.74 million net gain on vessel disposals, partly offset by a $0.95 million impairment charge on a Panamax vessel. A further Panamax sale was agreed in July; the company expected to record a loss.
Outlook, commentary and risks
- Management described tanker rates as weak, citing vessel oversupply, newbuilding deliveries and reduced OPEC exports. VLCC rates were generally below $10,000 per day during the quarter, with a brief June increase; higher bunker costs also pressured earnings.
- Management said it expected sufficient cash to support operations over the next 12 months and considered the balance sheet supportive of fleet renewal or strategic opportunities. It expected no mandatory excess-cash-flow prepayment on the 2017 term loan in Q1 2019, based on its 2018 estimate. Interest expense was expected to rise in Q3 2018 as recently added debt remained outstanding for a full quarter. These statements are not guaranteed forecasts.
- Principal risks include the cyclical tanker market, rate and vessel-value declines, leverage and debt service, covenant compliance, refinancing access, operating costs, and dependence on pools, charterers and joint ventures. The company reported compliance with applicable debt covenants at June 30, 2018, but noted that falling vessel values or weaker cash flow could create covenant pressure.
- Management could not reasonably estimate the possible loss from litigation related to a 2017 Galveston accident involving two fatalities. A potential assessment under the MNOPF pension plan was not estimable and was not reserved; a £240,000 reserve was recorded for the MNRPF plan.
- Management expected adoption of the new lease standard on January 1, 2019 to increase reported assets and liabilities, potentially materially. The company also amended its interest-rate cap and swap agreements in July; the swap amendment produced a $7.68 million cash settlement.
Most important facts for investors to verify
- Whether tanker charter rates and fleet utilization recover enough to reverse the sharp year-over-year declines in TCE revenue and earnings.
- Debt repayment capacity, borrowing costs, restricted cash, covenant headroom and the terms and amortization of the newly assumed and issued debt.
- The final purchase-price adjustment for the VLCC acquisition and realized proceeds or losses on announced vessel sales.
- The financial and operational performance of joint ventures, including the FSO debt guarantee and related service-contract economics.
- Developments in the Galveston litigation and pension contingencies, for which potential exposure is partly unquantified.