International Seaways, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in millions of dollars except per-share data. The company transports crude oil and refined petroleum products; its reported results include Diamond S Shipping from the July 16, 2021 merger, which materially changes fleet size and period comparability.
Business context and key financial metrics
The merger added 64 vessels. At quarter-end, the company reported an 89-vessel operating fleet, with three LNG dual-fuel VLCC newbuilds scheduled for 2023.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Shipping revenue | $84.8 | $99.9 | $177.9 | $364.9 |
| Time charter equivalent (TCE) revenue, non-GAAP | $73.0 | $94.0 | $162.9 | $349.1 |
| Operating income (loss) | $(57.1) | $22.2 | $(75.5) | $153.7 |
| Net income (loss) attributable to INSW | $(67.4) | $14.0 | $(99.5) | $111.4 |
| EPS, basic | $(1.44) | $0.50 | $(2.90) | $3.90 |
| Adjusted EBITDA, non-GAAP | $8.0 | $54.6 | $28.5 | $225.1 |
For the nine months, operating cash flow was a use of $49.0, versus $198.8 provided in the prior-year period. Cash, cash equivalents and restricted cash totaled $132.6 at September 30; reported total liquidity was $172.6, including $40.0 of undrawn revolving capacity. Working capital was negative $52.0.
Debt, net of discounts and deferred financing costs, was $1,108.5, and net debt to total capitalization was 44.0%, up from 24.8% at December 31, 2020. Current debt installments were $220.8. Total equity was $1,244.7.
Material changes versus prior periods
- Q3 TCE revenue fell 22% year over year, primarily reflecting lower average rates; nine-month TCE revenue fell 53%. Management attributed the nine-month decline principally to weaker rates across fleet sectors and fewer VLCC revenue days, partly offset by vessels added in the merger.
- Q3 results included $47.1 of merger and integration costs. These included a $31.1 noncash CSMC termination fee, $5.3 of accelerated equity compensation and $6.8 of severance costs. The quarter also recorded a $9.1 net gain on vessel disposals.
- Vessel operations shifted from income to loss. Adjusted vessel-operation results were negative in both segments in Q3; added MR and Suezmax revenue days from the merger were offset by weak rates and higher vessel expenses.
- Debt and assets increased substantially following the merger. The company issued approximately 22.5 million shares; former Diamond S shareholders owned about 44.25% of shares immediately after closing.
- Operating cash outflow, dividends, debt repayments and vessel and newbuild spending contributed to lower cash, partly offset by vessel-sale proceeds and cash acquired in the merger.
Outlook, risks and unusual items
- Management described tanker rates as weak, with all tanker types at or below industry-average cash breakeven levels during Q3 and continued weakness into Q4. It expected oil supply and demand to move toward balance in the first half of 2022, potentially supporting a market rebound. This is an expectation, not a quantified earnings forecast.
- The company was not in compliance with its consolidated interest expense coverage covenant for the September 30 test date. After quarter-end, on November 8, it prepaid and terminated the $228.4 Sinosure facility using proceeds from sale-and-leaseback financing on six VLCCs; management said this remedied the covenant issue and increased liquidity. The $374.6 net sale proceeds were to be recognized as a financing obligation; the vessels are subject to 10-year bareboat charters and end-of-term purchase obligations.
- The $66.0 credit facility was due November 18, 2021. At filing, the company said it was dissolving the NT Suez joint venture and refinancing its share before maturity; the filing does not establish that this refinancing had been completed.
- Three dual-fuel LNG VLCCs are expected to cost about $290.0, with $259.4 of construction commitments remaining at quarter-end. A financing commitment for about 85% of construction costs was subject to final documentation and customary conditions. Delivery is scheduled for Q1 2023, with seven-year Shell time charters planned at a floor rate plus profit sharing.
- Key risks include cyclical tanker rates, oil supply and demand, vessel values, COVID-19 effects, debt service and covenant compliance, merger integration, interest-rate and LIBOR transition exposure, environmental regulation, and availability of capital. The company also disclosed a maximum potential exposure of $26.6 under guarantees related to equity-method investee debt and swaps, and $169.9 maximum exposure to loss for unconsolidated VIEs; management did not consider the latter loss probable.
- Management said it expected its balance sheet to support operations over the next 12 months, while pursuing liquidity measures and disciplined capital allocation. No specific full-year revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether covenant compliance remained restored after the November 8 Sinosure repayment, and the resulting covenants, cash obligations and liquidity under the sale-and-leaseback financing.
- Completion and terms of the planned $66.0 facility refinancing and NT Suez dissolution, including any effect on restricted cash and debt maturities.
- Actual tanker rates, utilization and cash generation relative to management’s anticipated first-half 2022 market recovery.
- Merger integration costs, further severance or synergies, and the effect of the enlarged fleet on operating expenses and earnings.
- Final financing terms and funding for the LNG newbuilds, as well as remaining vessel, ballast-water-system and other capital commitments.
- Potential exposure from guarantees, VIEs, pension plans and other contingencies, and the company’s ability to maintain liquidity and meet debt covenants.