International Seaways, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited financial statements; amounts are in thousands of dollars unless stated otherwise. International Seaways transports crude oil and refined petroleum products. At quarter-end it owned or operated 56 vessels, including seven chartered-in vessels, and held interests in joint ventures operating two FSO vessels and four LNG carriers. The 2016 comparative results include carved-out operations before the November 2016 spin-off from OSG, so comparisons may not be fully like-for-like.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Shipping revenue | $59,968 | $80,771 | $220,675 | $312,509 |
| TCE revenue (non-GAAP) | $56,489 | $77,166 | $209,901 | $302,830 |
| Operating income (loss) | $(10,953) | $(35,270) | $20,218 | $70,543 |
| Net income (loss) | $(21,816) | $(50,862) | $(15,368) | $39,534 |
| Diluted EPS | $(0.75) | $(1.74) | $(0.53) | $1.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(3,681) | $131,174 |
- Q3 TCE revenue fell 27%; management attributed about $20.3 million of the decline to lower average daily rates. Nine-month TCE revenue declined 31%, primarily from lower rates across fleet sectors.
- Q3 vessel-operations loss was $23.7 million, improved from a $47.8 million loss in Q3 2016, chiefly because the prior-year period included much higher vessel impairment charges. For nine months, vessel-operations results shifted to a $20.1 million loss from $34.5 million income.
- Crude Tankers Q3 TCE revenue declined 30% to $34.9 million; Product Carriers declined 20% to $21.6 million. Average daily TCE rates also fell in both segments.
- At September 30, cash was $73.4 million, current assets $144.6 million, current liabilities $38.2 million, and total assets $1.724 billion. The balance sheet implies working capital of about $106.3 million, while MD&A reports approximately $96 million; verify this difference.
- Liquidity was reported as $123.4 million, comprising cash and $50 million of undrawn revolver capacity. Debt was $525.7 million net of discount and deferred financing costs; debt to total capitalization was 31.0%, versus 26.6% at year-end 2016. The filing reports substantial covenant headroom, with an estimated collateral ratio of 43% against a 65% limit.
- Nine-month cash decreased $18.6 million. Investing cash outflow was $86.5 million, including $118.4 million for vessel acquisitions and improvements; financing provided $71.6 million. Drydock payments were $19.8 million.
Material changes and notable items
- In June 2017, the company refinanced its prior facilities with a $500 million term loan and a $50 million revolver, then increased the term loan by $50 million under an accordion feature. The facilities extend maturities to 2022 and 2021, respectively. The term loan carries a LIBOR margin of 5.50% (1.00% LIBOR floor); the revolver’s LIBOR margin is 3.50%. The refinancing generated $9.1 million of nine-month third-party modification fees and a $7.0 million write-off of prior financing costs.
- Two 2017-built Suezmax tankers were acquired in July for an aggregate $116 million. In October, the company agreed to buy a 2010-built VLCC for $53 million; it was delivered in November, with $30 million subsequently drawn on the revolver. It also agreed to sell two MR vessels for delivery in late 2017 and early 2018.
- Impairment testing resulted in $7.3 million of charges on three vessels being marketed or considered for sale. The income statement reports a net $5.4 million loss on vessel disposals and impairments, reflecting a $1.9 million sale gain offsetting impairment charges.
- Operating cash flow was negative despite positive equity-method earnings. The company received net distributions of $24.6 million from affiliates during the nine months. Equity in affiliate income rose to $40.3 million from $36.1 million.
- A $30 million share-repurchase authorization was approved for 24 months. Through September 30, the company repurchased 160,000 shares for $3.2 million at an average $19.86 per share.
Outlook, risks, and contingencies
- Management gave no specific earnings or rate guidance. It said the balance sheet provides flexibility for fleet renewal and strategic opportunities and is expected to support operations over the next 12 months.
- Management described tanker markets as weak: OPEC-led production cuts and substantial vessel deliveries were weighing on rates, and scheduled 2018 deliveries were expected to limit near-term recovery. The third quarter is seasonally weak; lower oil inventories could support shipping demand.
- Spot-market exposure increased: spot employment generated 79% of TCE revenue in Q3 and 80% for nine months, compared with 70% and 76% in the corresponding 2016 periods. The business is therefore highly exposed to volatile charter rates, vessel supply, oil demand, and seasonality.
- The FSO joint ventures began new five-year NOC service contracts in Q3 at lower rates than their preceding contracts. Management expected lower FSO revenue in the second half of 2017, partly offset by reduced interest costs after the joint ventures repaid their bank debt. Over the five-year contracts, the FSO ventures were expected to generate more than $180 million of EBITDA for the company.
- Two lawsuits following a September 2017 industrial accident at a leased Galveston facility each seek damages exceeding $25 million and name a company subsidiary among several defendants. Investigations were ongoing, and management said the financial effect could not yet be determined.
- The company’s maximum stated exposure to loss from certain unconsolidated VIEs was $264.2 million, representing its investment; an additional $8.3 million of receivables from a pool VIE was excluded from that calculation. Management did not consider a loss probable.
- Other risks include the cyclical shipping market, insurance adequacy, interest rates, debt covenants and refinancing, litigation, cyber incidents, and environmental and regulatory requirements. The company qualified for the U.S. Section 883 tax exemption for 2017 but could not assure qualification after that year.
- Adoption of the revenue-recognition standard ASC 606 was expected January 1, 2018. Management said spot-voyage and lightering revenue timing could change materially depending on voyages in progress at year-end, and the cumulative transition adjustment was not yet quantifiable. The new lease standard is expected to increase reported assets and liabilities.
Most important facts for investors to verify
- Reconcile the MD&A working-capital figure of approximately $96 million with the balance-sheet calculation of approximately $106.3 million.
- Track realized charter rates, spot-market exposure, and fleet supply to assess whether weaker tanker conditions persist.
- Confirm post-quarter debt draws, acquisition funding, covenant compliance, and liquidity after the November VLCC delivery.
- Monitor the Galveston lawsuits and investigations, VIE exposure, and any changes to contingent-loss estimates.
- Review the ASC 606 transition adjustment and subsequent reporting of revenue, including any effects on spot voyages and lightering.