International Seaways, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Dollar amounts are in thousands, except per-share amounts and where noted. International Seaways transports crude oil and refined petroleum products; at quarter-end it owned or operated 46 vessels and reported Crude Tankers and Product Carriers segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Shipping revenue | $71,278 | $60,926 | $242,162 | $169,813 |
| TCE revenue | $65,808 | $51,253 | $222,324 | $150,066 |
| Operating income/(loss) | $5,631 | $(30,683) | $33,106 | $(49,896) |
| Net loss | $(11,095) | $(47,786) | $(16,721) | $(95,898) |
| Net loss per share, diluted | $(0.38) | $(1.64) | $(0.57) | $(3.29) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $43,356 | $1,847 |
Q3 TCE revenue increased 28%, with stronger average daily rates across fleet sectors. Q3 vessel-operating loss narrowed substantially, aided by improved TCE revenue and an $18,832 reduction in vessel disposal losses and impairments compared with the prior-year quarter. For the first nine months, TCE revenue rose 48%; higher rates and increased lightering activity contributed, while lower vessel disposal losses and expenses also helped the operating result. Nine-month interest expense increased to $51,986 from $42,027, mainly reflecting debt facilities entered into in 2018.
Q3 adjusted income from vessel operations, a segment measure before specified corporate and other items, was $2,116 versus an adjusted loss of $13,236 a year earlier. For the first nine months, it was $29,383 versus an adjusted loss of $36,383. The filing does not provide a single consolidated operating-margin figure.
Financial position and liquidity
- At September 30, 2019, cash and cash equivalents were $68,383; restricted cash was $55,839. Total cash including restricted cash was $124,222.
- Consolidated liquidity, including $50,000 of undrawn revolver capacity, was $174,222. Working capital was approximately $59,000, down from approximately $92,000 at December 31, 2018.
- Total debt, net of discounts and deferred financing costs, was $767,749, including $51,013 current. Debt to total capitalization was 43.9%, compared with 44.5% at year-end 2018. Operating lease liabilities totaled $33,993.
- Nine-month cash from operations of $43,356 was offset in part by $49,277 of financing cash outflows; cash, cash equivalents and restricted cash increased by $6,578 overall. Vessel and vessel-improvement expenditures were $9,797, and drydock payments were $13,539.
- The company reported compliance with financial covenants at quarter-end and substantial headroom under a key 2017 Term Loan collateral-value covenant.
Material developments, outlook and risks
- Post-quarter LNG joint venture sale: On October 7, 2019, the company sold its 49.9% interest in the LNG joint venture to Nakilat for $123,000, before fees and expenses. Management expected an approximately $3,000 cash gain and approximately $21,000 of accumulated unrealized swap losses to be reclassified into earnings.
- Debt reduction: On October 8, 2019, the company prepaid $100,000 on its 2017 Term Loan using restricted vessel-sale proceeds and part of the LNG-sale proceeds. It estimated annual cash-interest savings of approximately $8,200 and a fourth-quarter 2019 reduction of approximately $1,900, based on then-current rates. It expected a $4,200 loss on the prepayment, including a 1% fee and write-off of financing costs.
- Market commentary: Management said tanker rates began rising in September amid geopolitical events and sanctions; rates after quarter-end were volatile but generally higher than in Q3. Results remain highly sensitive to tanker supply and demand, charter rates, oil trade flows, and spot-market conditions. Approximately 89% of Q3 TCE revenue came from spot-market activity.
- Investment commitments: At quarter-end, commitments for scrubbers and ballast-water treatment systems totaled approximately $49,326, with potential additional commitments of up to $6,100 if options were exercised. Management cited IMO environmental requirements and fleet renewal or strategic opportunities as capital-allocation considerations.
- Interest-rate and refinancing matters: The company discontinued hedge accounting for its $350,000 interest-rate collar at September 30 after anticipating the term-loan prepayment could reduce debt below the hedge notional. It was exploring refinancing options and expected to seek hedge redesignation. The filing also identifies the expected transition from LIBOR after 2021 as a risk.
- Contingencies: A subsidiary faces unresolved wrongful-death litigation arising from a 2017 Galveston dock accident; the company said it could not reasonably estimate a possible loss or range. A separate multi-employer pension assessment may arise but was not estimable; a £57 ($70) reserve for another pension fund was paid in October 2019. The company also disclosed potential exposure under guarantees related to FSO joint-venture debt; the recorded guarantee liability was $349, while maximum potential future payments were $77,065.
- Other notable items: The company recorded a $1,259 nine-month provision for credit losses. It expected adoption of the CECL credit-loss standard in 2020 to increase accumulated deficit by up to $500. Management said the company qualified for the U.S. Section 883 tax exemption for 2019 but gave no assurance it would qualify beyond that year.
No specific earnings or rate guidance was provided. Management stated that the LNG-sale proceeds and term-loan prepayment reduced leverage and cost of capital, and positioned the company to support operations over the next twelve months while pursuing possible fleet renewal and strategic opportunities.
Important facts for investors to verify
- Whether the LNG sale’s expected gain and approximately $21,000 AOCI reclassification were recorded as described, and the resulting impact on reported earnings.
- Actual interest savings and the accounting loss arising from the October $100,000 term-loan prepayment, as well as any subsequent refinancing terms.
- Subsequent tanker-rate trends, spot-market exposure, and performance of the lightering business, where Q3 charter-in costs pressured results.
- Funding and timing of the environmental-system commitments, including whether optional ballast-water installations were exercised.
- Developments in the Galveston litigation, pension obligations, FSO guarantees, and the company’s ongoing compliance with debt covenants and liquidity requirements.