International Seaways, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. International Seaways (INSW) owns and operates crude-oil tankers and product carriers, with lightering operations and a 50% interest in two FSO joint ventures. At year-end, its operating fleet comprised 36 vessels, including the JV vessels.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Shipping revenue | $421.6 million | $366.2 million |
| Time charter equivalent (TCE) revenue | $402.0 million | $339.9 million |
| Income from vessel operations | $39.9 million | $55.2 million |
| Net loss | $5.5 million | $0.8 million |
| Adjusted EBITDA (non-GAAP) | $220.1 million | $164.7 million |
| Cash provided by operating activities | $216.1 million | $87.5 million |
| Interest expense | $36.7 million | $66.3 million |
- Revenue grew approximately 15% and TCE revenue approximately 18%. Higher average rates across fleet sectors drove the increase, partly offset by fewer revenue days, vessel sales, drydockings and reduced lightering activity.
- Income from vessel operations fell despite higher TCE revenue, chiefly because the company recorded $103.0 million of vessel impairment charges in 2020. The operating-income-to-shipping-revenue ratio was approximately 9.5%, versus 15.1% in 2019.
- INSW reported fourth-quarter revenue of $56.7 million and a net loss of $116.9 million. Fourth-quarter vessel impairment charges were $85.9 million; the quarter also included the company’s $16.4 million share of a non-cash deferred tax provision recorded by the FSO joint venture.
- Year-end cash and cash equivalents were $199.4 million, with $16.3 million of restricted cash. Consolidated liquidity was $255.7 million, including $40 million of undrawn revolver capacity. Working capital was $148.0 million.
- Debt, net of unamortized discounts and financing costs, was $535.8 million, down from $661.1 million. Net debt to book capital was 24.8%, compared with 33.3% a year earlier. Total equity was $972.0 million, down from $1,022.3 million.
- Cash uses included $50.0 million for vessel and improvement expenditures, $25.6 million for drydocking, $6.8 million in dividends and $30.0 million in share repurchases. The company also received $73.1 million from vessel disposals.
Material changes and business developments
- In January 2020, INSW refinanced substantial debt with $390 million of secured facilities. Management said refinancing, lower LIBOR and lower average debt reduced annual cash interest expense by approximately $25 million. The company repaid the $20 million revolver draw in March and the $40 million Transition Term Loan balance in August.
- Spot-market exposure declined to 79% of TCE revenue from 92% in 2019. INSW placed four VLCCs and one LR2 on time charters during 2020, locking in rates for periods of seven to 36 months.
- The company sold two Aframaxes and two VLCCs and acquired a 2009-built LR1. Its 50%-owned FSO joint venture extended both service contracts with North Oil Company by 10 years, through 2032; the extensions are expected to generate more than $322 million in contract revenue attributable to INSW’s ownership interest.
- Crude Tankers generated $318.6 million of TCE revenue, up from $259.5 million; Product Carriers generated $83.4 million, up from $80.4 million. Adjusted segment vessel-operation income rose in both segments, though the Crude Tankers Lightering business performed no full-service lighterings in 2020 versus 57 in 2019.
Outlook, risks and unusual items
- Management expected 2021 tanker rates to be weaker than 2020 as crude inventories built up during the first half of 2020 were drawn down, more tankers returned to the market and COVID-19 continued to weigh on oil demand. Management expected oil supply and demand to move back toward balance during 2021, but timing and scale were uncertain.
- Although INSW was compliant with debt covenants at December 31, 2020, management warned that forecast lower TCE rates could cause its interest coverage ratio to fall below the 2.50:1.00 minimum at the end of the third quarter of 2021. Without a cure or lender waiver, lenders could accelerate debt and foreclose on pledged vessels. Potential responses included securing waivers, placing vessels on time charters or reducing interest expense.
- In March 2021, after year-end, the company contracted to build three dual-fuel LNG VLCCs for approximately $290 million. Expected delivery is in 2023, with seven-year Shell time charters; construction is to be funded through long-term financing and available liquidity.
- Key risks include highly volatile spot rates and vessel values, impairment and collateral-covenant exposure, COVID-19 effects on demand and crew changes, fuel and environmental compliance costs, counterparty and financing risks, and potential loss of the U.S. Section 883 shipping-income tax exemption. The company qualified for the exemption in 2020; continued qualification is not assured.
- Other notable items: the Seaways Mulan was detained in Indonesia in February 2020 during an investigation and released in June; the filing reports no material resulting effect. The 2020 vessel impairment assessment relies on uncertain forecasts and appraisals; the auditor identified vessel impairment as a critical audit matter. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal controls over financial reporting.
Important facts for investors to verify
- Whether 2021 TCE rates, cash generation and liquidity can support debt service and maintain covenant compliance, particularly the 2.50:1.00 interest coverage test.
- How spot rates, vessel values and utilization compare with management’s impairment assumptions, and whether further impairments or asset sales are likely.
- The terms, financing, construction commitments and charter economics of the three new LNG dual-fuel VLCCs.
- Whether the FSO contract extensions translate into expected distributions despite lower extension-period charter rates and the recorded deferred tax charge.
- Whether INSW continues to qualify for the Section 883 exemption and whether environmental rules, fuel costs or crew disruptions materially change operating costs or vessel availability.
- The sustainability of dividends and any future share repurchases, which remain subject to board discretion and debt-facility restrictions.