International Seaways, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless noted otherwise, financial amounts below are in millions of dollars. The company operates crude tankers and product carriers; its fleet comprised 74 wholly owned or lease-financed vessels at quarter-end.
Financial performance
- Q2 revenue: $292.2, up 55% from $188.2 a year earlier. Time charter equivalent (TCE) revenue, a non-GAAP measure, was $288.3, up 55%.
- Q2 earnings: Income from vessel operations was $168.7 versus $87.4; operating margin was approximately 57.7% versus 46.4%. Net income was $153.8 versus $69.0; diluted EPS was $3.11 versus $1.38.
- First half: Revenue was $579.3 versus $289.7; TCE revenue was $571.7 versus $283.5. Net income was $326.4 versus $56.0, and diluted EPS was $6.59 versus $1.12.
- Cash flow: First-half operating cash flow was $414.5, compared with $14.8 in 2022. Vessel and vessel-improvement expenditures were $188.1. Cash and cash equivalents fell by $127.7 to $116.0.
- Liquidity and debt: Total liquidity was $493.5, including $116.0 cash, $120.0 short-term investments, and $257.4 of undrawn revolving capacity. Working capital was $312.4. Debt, net of deferred financing costs, totaled $978.1; net debt to total capitalization was 30.0%, down from 33.3% at year-end 2022. The company reported compliance with its debt covenants.
Material changes and drivers
- Management attributed the improvement primarily to stronger tanker rates: Q2 TCE revenue increased $102.8, including a $100.3 rates-driven increase. First-half TCE revenue rose $288.1, including a $280.7 rates-driven increase.
- Crude Tankers Q2 TCE revenue increased to $148.9 from $59.5; Product Carriers increased to $139.4 from $126.1. MR rates and vessel sales partly offset gains in Product Carriers.
- Q2 operating expenses rose to $123.5 from $100.8, including higher vessel costs and depreciation. Interest expense increased to $17.9 from $12.6, reflecting higher floating rates and additional lease financing.
- First-half cash uses included $177.6 of dividends, $13.9 of open-market share repurchases, debt prepayments, vessel investment, and scheduled debt amortization. Debt declined from $1,023.4 at December 31, 2022.
Outlook, risks, and unusual items
- No numerical earnings or rate guidance was provided. Management said liquidity, 30 unencumbered vessels, and debt maturities spread from 2026 to 2031 support operations over the next 12 months; its stated priorities include fleet renewal, debt reduction, and shareholder returns.
- Management said Q2 tanker rates were lower than Q1, largely due to OPEC production cuts, but remained above 10-year averages and cash breakeven levels. The business is highly cyclical and exposed to spot rates; approximately 91% of Q2 TCE revenue came from spot-market employment.
- Three dual-fuel LNG VLCC newbuilds were delivered in March–May 2023 and began seven-year time charters shortly after delivery. On August 8, the company agreed to build two dual-fuel-ready LR1 product carriers for approximately $115 million, with delivery expected in the second half of 2025; options for two more are exercisable in Q3 2023.
- On August 8, the board declared a $0.12 regular and $1.30 supplemental dividend per share, payable September 27, 2023. It also increased the share repurchase authorization to $50.0 million from $26.1 million.
- In late July, a vessel was arrested in a commercial dispute; the claimant sought approximately $24 million in security. The company is defending the matter, cannot predict the outcome, and accrued no liability. Potential multi-employer pension-plan assessments are also unreserved because they cannot be reasonably estimated.
- The company qualified for the U.S. Section 883 shipping-income tax exemption for 2023, but disclosed no assurance it will qualify in later years. Loss of the exemption could subject U.S.-source shipping income to federal tax.
- The amended rights agreement extends through April 2026 and raises the threshold for an acquiring person from 17.5% to 20%. Management also identifies interest-rate, vessel-market, regulatory, insurance, geopolitical, and counterparty risks.
Important facts for investors to verify
- Whether strong spot-market rates and elevated TCE revenue persist, particularly following Q2’s sequential rate softening and OPEC cuts.
- Liquidity available after the $46.4 million advance payment for two COSCO-financed vessels, subsequent vessel purchases, dividends, and planned newbuild commitments.
- Debt repayment requirements, floating-rate exposure, and the effectiveness and coverage of interest-rate hedges.
- The outcome and potential financial impact of the vessel arrest and any future pension-plan assessments.
- Execution, financing, and delivery terms for the LR1 newbuilds and any exercise of the options for two additional vessels.