International Seaways, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited interim results; dollar amounts below are in millions unless noted. The company operates crude tankers and product carriers, with interests in joint ventures. Its fleet comprised 47 vessels, including six chartered-in vessels, plus interests in six joint-venture vessels.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Shipping revenue | $69.0 | $56.9 | $170.9 | $108.9 |
| TCE revenue | $62.5 | $50.0 | $156.5 | $98.8 |
| Operating income (loss) | $0.1 | $(0.8) | $27.5 | $(19.2) |
| Net loss | $(16.5) | $(18.8) | $(5.6) | $(48.1) |
| Adjusted EBITDA | $21.3 | $9.2 | $68.6 | $15.7 |
- Cash flow: Six-month operating cash flow was $43.8, versus $10.1 in 2018. Investing activities provided $9.1 and financing activities used $20.3. Cash, cash equivalents and restricted cash totaled $150.3 at period-end.
- Liquidity: Management reported working capital of approximately $77.0. Consolidated liquidity was $200.3, comprising $150.3 of cash including $58.6 restricted, and $50.0 of undrawn revolver capacity. Unrestricted cash was $91.7.
- Debt and equity: Debt carrying value was $794.5, down from $810.7 at December 31, 2018; total debt to capitalization was 44.4%. Operating lease liabilities of $30.5 were recognized following adoption of ASC 842. The company reported compliance with debt covenants and substantial headroom under a 2017 facility collateral covenant, with an estimated ratio of 38%.
- Interest: Reported interest expense was $17.4 for Q2 and $35.0 for the first half, up from $13.1 and $24.7, respectively, in 2018.
Changes versus prior periods
- Revenue and TCE revenue rose in both comparisons, reflecting higher average daily rates across fleet sectors; first-half TCE growth also included increased lightering activity. Management said crude tanker rates in Q2 eased from Q1, but averaged about $5,000 per day above Q2 2018.
- Despite higher Q2 TCE revenue, vessel-operations loss improved only modestly, to $7.9 from $9.7. The comparison included a $6.7 vessel-disposal gain in Q2 2018 versus a $1.5 loss in Q2 2019, while charter hire and depreciation costs also increased.
- First-half vessel-operations results improved to $11.4 income from a $36.4 loss. Higher rates and lightering revenue were partly offset by increased charter hire expense.
- Product-carrier adjusted vessel results turned positive in Q2 and for the first half, while crude-tanker adjusted results improved substantially year over year. Higher interest expense and lower equity income from affiliates weighed on results.
- Adoption of ASC 842 on January 1, 2019 brought operating lease right-of-use assets and liabilities onto the balance sheet; management said adoption did not materially change reported shipping revenue or lease expense.
Outlook, risks and unusual items
- No numerical earnings or rate guidance was provided. Management said the balance sheet should provide flexibility for fleet renewal and strategic opportunities and sufficient cash to support operations over the next 12 months. It estimated no 2019 excess-cash-flow prepayment would be required under the 2017 Term Loan Facility.
- After quarter-end, the company prepaid $10.0 of the 2017 Term Loan Facility using restricted vessel-sale proceeds. Management estimated this would reduce remaining-2019 interest expense by $0.35 and lower future quarterly principal amortization by $0.135.
- The company had approximately $51.3 of commitments for scrubber and ballast-water-treatment installations, with options that could add up to $8.6. These environmental and regulatory investments are to be funded through available liquidity, vessel-sale proceeds and permitted financing.
- Management highlights tanker-market cyclicality, charter-rate and vessel-value volatility, oil-market and fleet-supply changes, operating costs, debt service and covenant compliance, interest-rate exposure, counterparty risk, environmental regulation, and geopolitical threats. The filing notes attacks and vessel seizures in the Arabian Gulf region; none involved company vessels, but continued events could increase costs or disrupt operations.
- Two wrongful-death claims arising from a 2017 Galveston accident remained pending; the company could not reasonably estimate possible loss or timing and said it would defend the claims. Separate related claims were settled, and an August 2019 arbitration decision provided partial recovery of an indemnity payment for the benefit of insurers.
- The company qualified for the U.S. Section 883 shipping-income tax exemption for 2019, but said future qualification is not assured. It also reported a maximum potential exposure of $83.0 related to guarantees of equity-method investee debt and swaps, with a recorded guarantee liability of $0.4; separate VIE disclosures reported maximum exposure of $219.6.
Investor verification priorities
- Track realized TCE rates, spot-market exposure and whether rate strength persists; 90% of Q2 and 93% of first-half TCE revenue came from spot markets.
- Reconcile improving operating performance and Adjusted EBITDA with continuing GAAP net losses, higher interest expense and the impact of vessel-sale items.
- Review unrestricted versus restricted liquidity, scheduled debt amortization, covenant requirements and the impact of the $10.0 post-quarter prepayment.
- Assess funding and timing for the $51.3 environmental-system commitments and any exercise of additional options.
- Monitor the Galveston litigation, investee guarantees and VIE exposure, the Section 883 tax exemption, and geopolitical developments affecting tanker operations.