International Seaways Q4 2023 Earnings Call Transcript

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February 29, 2024

There are 9 speakers on the call.

Operator

Good morning, all, and welcome to the International Seaways 4th Quarter and Full Year 2023 Results Call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. I would now like to hand this conference call over to our host, James Moore, International Seaways General Counsel. Please go ahead.

Speaker 1

Thank you, Candace. Good morning, everyone, and welcome to International Seaways Earnings Call for the Q4 and Full Year 2023. Before we begin, I would like to start off by advising everyone on the call today of the following. During this call, management may make forward looking statements regarding the company or the industry in which it operates. Those statements may address, without limitation, the following topics: outlooks for the crude and product tanker markets changes in trading patterns forecasts of world and regional economic activity and of the demand for and production of oil and other petroleum products the effects of ongoing and threatened conflicts around the globe the company's strategy our business prospects expectations regarding revenues and expenses, including vessel, charter hire and G and A expenses estimated bookings, TCE rates and or capital expenditures during 2024 or in any other period projected scheduled drydock and off hire days purchases and sales of vessels, construction of new build vessels and other investments the company's consideration of strategic alternatives anticipated and recent financing transactions and any plans to issue dividends the company's relationships with its stakeholders the company's ability to achieve its financing and other objectives and other economic, political and regulatory developments globally.

Speaker 1

Any such forward looking statements take into account various assumptions made by management based on a number of factors, including management's experience and perception of historical trends, current conditions, expected and future developments and other factors that management believes are appropriate to consider under circumstances. Forward looking statements are subject to risks, uncertainties and assumptions, many of which are beyond the company's control, which could cause actual results to differ materially from those implied or expressed by the statements. Factors, risks and uncertainties that could cause International Seaways' actual results to differ from expectations include those described in our annual report on Form 10 ks for 2023 and in other filings that we have made or in the future may make with the U. S. Securities and Exchange Commission.

Speaker 1

Now let me turn the call over to our President and Chief Executive Officer, Ms. Lois Sabrocki. Lois?

Speaker 2

Thank you very much, James. Good morning, everyone. Thank you for joining International Seaways' earnings call for the Q4 and for the full year of 2023. You can find our presentation on the Investor Relations section of our website. 2023 was a record year for International Seaways.

Speaker 2

Our net income was $556,000,000 $11.25 per share. This eclipsed 20 22 net income of $388,000,000 $7.77 per share. Net income for the Q4 of 2023 was $132,000,000 $2.68 per share.

Operator

Included in

Speaker 2

these figures are gains on vessel sales and a write off of deferred financing costs. Excluding these special items, adjusted net income was $525,000,000 for the year and $108,000,000 for the quarter. Seaways closed 2023 with just over $600,000,000 in total liquidity, dollars 187,000,000 in cash and $414,000,000 in undrawn revolver. Jeff will highlight our balance sheet in just a few moments, but stealing a little bit of his thunder, our 5 $47,000,000 in net debt is well below our fleet recycle market value. In 2023, we repaid $475,000,000 in debt, of which $300,000,000 was incremental to our natural debt amortization schedule.

Speaker 2

With this sizable prepayment during the year, we reduced our breakeven level to an impressive sub $14,500 per day level across the fleet. We unencumbered 30 vessels and we doubled the size of our revolving credit capacity to 414,000,000 dollars Today, we announced that we signed an MOA to purchase 6 ECO MR vessels for $232,000,000 We expect to fund this through shares of common stock for 15% of the price and the remainder will be financed from our available liquidity. We anticipate closing this series of transactions prior to the end of the second quarter. These MRs are high quality vessels that reduce the age of our overall MR fleet by 1 year. During 2023, we sold 3 MRs for $39,000,000 in net proceeds after debt repayment.

Speaker 2

The sales of the older ship crystallized value generated since our merger with Diamond S in 2021 at the bottom of the tanker market. These ships returned nearly 80% all in from purchase price due to both their strong earnings and the strong price realized in their sale. Finally, we added 2 vessels to our charter out portfolio, which now has over $354,000,000 in contracted revenue with an average term of nearly 3 years. On the lower right hand of the slide, you can see the chart where we continue to share our strong earnings, returning a substantial portion to shareholders. During 2023, we paid $308,000,000 in dividends, plus $14,000,000 of repurchases.

Speaker 2

Combined, we returned over $320,000,000 to shareholders, a 16% return on our average market cap over the year. Today, we build upon the Seaways record, declaring a combined dividend of $1.32 per share to be paid at the end of this quarter. This is 60% of adjusted net income. At Seaways, we're committed to our balanced capital allocation strategy. We pulled all the levers to secure our future and to provide value to shareholders in 2023.

Speaker 2

We continue to high grade the fleet, investing in our profitable LR1 joint venture. We're renewing the MR fleet and we have time chartered out selected vessels with strong customers to secure revenues beyond today. Our balance sheet is strong with net loan to value of 17%. We have liquidity over $600,000,000 and breakeven so low, you would expect them for a company with only smaller vessels, not for a tanker company where half the fleet is large crude. We continue to share success with the shareholders with double digit yield on our share value.

Speaker 2

Turning to Slide 5. We've updated our bullets on tanker demand drivers with green up arrows next to bullets representing positive developments for tankers. Black dashes for neutral impact and red down arrows indicating tanker negative. Pulling some highlights. The forecast for oil demand in 2024 remains robust with demand growth estimated to be about 1,500,000 barrels per day in 2024, representing a 1.5% growth year over year.

Speaker 2

This is an above average demand growth forecast. Particularly for seaborne transportation demand, oil demand growth is largely concentrated in Asia, where countries are structurally short oil with incremental new supply coming from the West, quite a long haul trade for tankers. Non OPEC production growth of around 1,000,000 barrels per day is mostly coming from the Americas in 2024, a supported tanker trend. In the chart at the bottom of the page, we highlight oil supply and oil demand projected trends for the next few years. Europe and Asia, structurally short and therefore focused on imports from the Americas, the Middle East and Russia.

Speaker 2

With sanctions on Russian oil, further ton mile support underlies demand and is very supportive for the tanker market going forward. Much of this hinges upon the global macro environment with recent data suggesting and leaning towards a softer landing, it is constructive that commercial inventories are low. Any trade disruptions within the market increases the call for seaborne transportation. Slide 6. The supply side continues to be a compelling part of the strong tanker market story.

Speaker 2

On the lower left hand chart, we break down the order book by each vessel class relative to the operating speed and more specifically potential candidates in the next few years that would be at the very least removed from broad commercial trading at around 20 years of age. Since the order book is largely fixed through 2026, We are showing vessels that will be 20 years old by this inflection point. They are 18 years old today. In aligning the dark bars on the graph, you can see that the vessels on order do not even meet the need to replace the existing fleet on the water. On the lower right hand chart, we show expected deliveries in the near term.

Speaker 2

In most categories, they are largely lower than they have been over the last 30 years. The number of ships reaching over 20 years of age as a percentage of the total fleet continues to rise exponentially. Essentially, when the cycle turns, the fleet size will rationalize, laying the foundation for the future health of the tanker industry. We do not expect a meteoric rise in new orders either As tanker owners face pending environmental regulations, shipyards are full of other shipping sectors and prices remain very robust. We expect a great run for tankers over the next few years.

Speaker 2

As mentioned, regional imbalances of oil should continue to increase the need for tankers West and the oil demand is driven by non OECD in the East. East. At Keyway, we will continue capturing the strength of the tanker markets. We will utilize every possible lever to build upon our track record of returning to shareholders, maintaining a healthy balance sheet and growing the value of Seaway. I'll now turn it over to Jeff Prevor, our CFO to provide the financial review.

Speaker 2

Jeff?

Speaker 3

Thanks, Lois, and good morning, everyone. On Slide 8, net income for the Q4 was $132,000,000 or $2.68 per diluted share. This includes gains on vessel sales and the write off of deferred financing costs. When you exclude the impact of these special items, adjusted net income was 108,000,000 dollars On the upper right chart, adjusted EBITDA for the Q4 of 2023 was 159,000,000 dollars which also excludes these same special items. In the appendix, we've provided a reconciliation from reported earnings to adjusted earnings.

Speaker 3

While our expense guidance for the 3rd quarter, 4th quarter fell mostly in line with the range of expectations, I'd like to point out a few items of note within our income statement. Vessel expenses were higher than expected, with the largest variance due to some opportune storing, repairs and maintenance costs as well as increased spend for crude changes during drydocks and training on the new dual fuel VLCCs. G and A expenses were in line with guidance. On the revenue side, our linery business had another strong quarter, earning about $11,000,000 in revenue, with $2,000,000 in in vessel expenses, dollars 3,000,000 in charter hire and $1,000,000 of G and A, the lighter business contributed about $4,000,000 EBITDA in the 4th quarter and a record of nearly $20,000,000 for the year. Turning now to our cash bridge on Slide 9.

Speaker 3

We began the quarter with a total liquidity of $581,000,000 composed of $214,000,000 in cash, and $360,000,000 in undrawn revolving debt capacity. Following along the chart from left to right on the cash bridge, we first add up $159,000,000 in adjusted EBITDA for the 4th quarter, less $44,000,000 in debt service, composed of scheduled debt repayments and cash interest expense. Then less our drydock and capital expenditures of about $9,000,000 in the quarter and a draw on working capital due to timing of about $14,000,000 We therefore achieved our definition of free cash flow of about $91,000,000 for the Q4. When you combine our free cash flow for the year, we generated over $500,000,000 during 2023 or over $10 a share, representing a 20% free cash flow yield on today's share price. The remaining bars on the cash bridge reflect our capital allocation for the quarter.

Speaker 3

We received about $28,000,000 of net proceeds entered debit payments for the 2 vessels sold during the quarter. Also spent $12,000,000 in progress payments for this first two Auto I orders. As we announced last quarter, we repaid just about $71,000,000 in debt, of which $50,000,000 could be drawn again since it increased our revolving credit capacity. And we paid $1.25 per share or about $61,000,000 in dividends during the quarter. These components then led us to an annual clarity of $601,000,000 with $187,000,000 in cash and short term investments and $414,000,000 in undrawn revolving debt capacity.

Speaker 3

Now moving to Slide 10. We have a strong financial position detailed by the balance sheet shown on the left hand side of the page. Cash and liquidity remained strong at over $600,000,000 Vessels on the books at cost are approximately $2,000,000,000 versus current market values of over $3,000,000,000 And with about $734,000,000 in gross debt at the end of the year, detailed on the bottom right of the page, this equates to a net loan to value of just 17%. Our debt today is 85% hedged or at fixed rates, which equates to an all in weighted average interest cost interest rate of about 6% or less than 100 basis points above SOFR. As always mentioned earlier, we continue to execute on a balanced capital allocation strategy.

Speaker 3

We are returning $1.32 per share to shareholders in a combined dividend. This represents 60% of adjusted net income for the prior quarter for the 2nd straight quarter. At the same time, we have positioned our balance sheet to support growth. We are purchasing 6 MRs with our available liquidity and a portion of share issuance. With cash breakevens below $14,500 per day and net debt below 20%, in 2024, we will continue to look for opportunities to enable fleet renewal and growth as well as to share in our successful results by continuing to prioritize returning cash to shareholders.

Speaker 3

On the last slide that I'll cover, please turn to Slide 11. This reflects our forward looking guidance and book to date TCE, aligned with our cash breakeven notes. Starting with TCE pictures for the Q1 of 2024, I'll remind you that actual TCE during our next earnings call may not be quite the same, but as of today, we have a blended average spot TCE of about $43,500 per day fleet wide for the quarter.

Speaker 4

On the

Speaker 3

right hand side of the slide, you can see our cash breakevens, which we have displayed for the next 12 months, reflective of our daily cash costs and CapEx plus principal and interest as well as the new fixed revenues before any profit share on our long term charts. At this time last year, our cash breakevens evens were $3,000 per day higher than they are today. Just to repeat that, dollars 3,000 the amount per day that we reduced in our cash breakevens year over year. And we've returned over $320,000,000 to shareholders representing a 16% yield on our average share price in 2023, while also taking considerable steps to renew the fleet. Looking forward, if you were to compare our breakevens to average spot earnings, you can see the Q1 of 2024 looks like another very strong quarter for Seaways.

Speaker 3

Looking at the bottom left hand chart for the modelers out there, we provide some updated guidance for expenses in the Q1 and estimates for 2024. We also include in the appendix our quarterly expected off hire and CapEx schedules for 2023 2024. I don't plan to read this line by line, but encourage you to use them for modeling purposes. That concludes my remarks. So I'd now like to turn the call back to Lois for her closing comments.

Speaker 2

Thank you very much, Jeff. In 2023, Seaways executed our strategy. We had significant operating leverage, low cash breakeven. We achieved record earnings in 2023 with the fleet nearly evenly split between crude and product tankers. We continue to develop the fleet composition that enables us to build upon our operating leverage and capitalize on today's strong market fundamentals.

Speaker 2

Last year, we took delivery of 3 dual fuel VLCCs with long term charters and profit sharing that are running extremely well in our fleet. We ordered 4 LR1s for our niche Panamax International Joint Central. We trimmed some older MRs that returned an 80% IRR for us in the last 2 years and entered an agreement to purchase 6 modern MRs. Our balance sheet has never been better. 2023 was transformational for International Seaways and deleveraging us and to capitalize on growth opportunities.

Speaker 2

We evenly matched our incremental deleveraging with returns to shareholders with a substantial portion of the cash generated during the year. We built on our track record of balanced capital allocation that positions the company to maximize earnings, build a fortress balance sheet, grow through the cycle and return 16% to shareholders over the last 12 months. Going forward, we will continue to vigilantly prioritize the safety of our crews and our seafarers, our vessels in very challenging geopolitical times. I want to conclude my remarks. I thank you very much and we'll open it up to questions.

Operator

Thank Our first question comes from the line of Chris Robertson of Deutsche Bank. Your line is now open. Please go ahead.

Speaker 5

Hey, good morning, Lois and Jeff. Congratulations on the very strong quarter here. Just have a couple of questions. One is more market oriented and then a detailed one. So just as it relates to the Red Sea disruptions going on, in your mind, is the market for tankers at peak disruption at the moment?

Speaker 5

Is there further dislocations that could occur? Or have all the tankers that were going to switch and divert around the Cape of Good Hope already done so? Or is there more room there?

Speaker 2

Chris, it's Lois. Good morning. And I would jump in there and say that I think we are at peak disruption levels. I think that with the number variety of attacks sort of indiscriminately on tanker assets traveling through the area that we're really seeing a large amount of tankers deviate around the bottom.

Speaker 5

Okay. This next question just relates to the MRs. When you guys take delivery of those vessels, is there going to be any incremental CapEx associated with some energy saving upgrades or anything like that, that we should think about?

Speaker 2

Chris, what I would say is that these vessels are built at SPP. We already have 8 in our fleet that we built predecessor company at SPP, their strong design, their eco vessels. We will of course bring them into the fleet and then over time just as we do with every one of our ships in the water look at okay, are we going to in due course, maybe when they're natural dry dock cycle, when we look to put on slick paint and efficiency factors, naturally we will do that. But we don't have any immediate required CapEx spend.

Speaker 5

Okay. Okay, great. Thanks a lot. I'll turn it over.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Liam Burke of B. Riley. Your line is now open. Please go ahead.

Speaker 6

Yes. Thank you. Good morning, Lois. Good morning, Jeff.

Speaker 2

Good morning.

Speaker 6

Lois, is there any interest in or tendency to sell some of your older MRs?

Speaker 2

Yes. So, and I know you've been following us along. We sold 18 MRs over the last two and a half years. So we thought it was especially when you just see that continued strong fundamentals in that MR sector time to bring some in. And we do continue to prune some of the older vessels and this just a natural regeneration.

Speaker 2

These vessels coming in are 7 years younger and it just brings in a renewal that we think is very natural and organic to the company.

Speaker 3

Okay. Liam, I would just add as Lois mentioned Liam, as Lois mentioned in her remarks, these vessels when we're selling vessels that we acquired in the Diamond S merger, looking at the purchase price, the cash contributed to profits while we held them at the sale price, it comes out to an 80% IRR. So we like the ones we have and the ones we're acquiring to continue generating good cash flow, but we like taking profits like that.

Speaker 6

Okay. Thanks, Jeff. And on the do you have any interest in terms of adding to your current time charter fixtures or are you happy with the balance of spot and time charters?

Speaker 4

Hi, Liam. This is Derek Stallone, the Commercial Officer for Seaways. Hi, Derek. Thanks for the question. Derren.

Speaker 4

Thanks for the question. We've continued to add to our TC coverage in 2023, like Lois and Jeff covered in their remarks, putting away 2 more ships in the Q4. We continue to look for time charter opportunities, Liam. I think for us, we continue to look for the multi year charters, right? So for the shorter term stuff, 1 year or less, we'd rather stay in the spot market right now.

Speaker 4

But for the availability of coverage that's 2 or 3 years out, if we see rates that if we could develop rates that are attractive to us, then we'll continue to look at that.

Speaker 6

Great. Thank you, Derek. Thank you, Lois. Thank you, Jeff.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Jay McGarry of Jefferies. Your line is now open. Please go ahead.

Speaker 7

Hey guys, thanks for taking our question and congrats on a solid year. Just turning to 2024, market withstanding, just in terms of allocating capital, are you looking to deleverage at the same rate to last year? Or are you more or less content with the amortization profile you have now, maybe to build on shareholder returns or your cash position? Just trying to see, is there any priority where you're leaning towards with respect to free cash flow?

Speaker 3

Thanks, Jay, and welcome. This is Jeff. Yes, in 2023, we were able to both delever to that level that we mentioned where we're at 17% net loan to value and well below recycled value, while still returning a lot to shareholders, a combined 16% to dividends to share purchase on average market cap. But to your question, as we look forward to 2024, having achieved that low level of debt and with a lot of the debt that's left in, we kind of call quality debt like your home mortgage that's below current interest rates that you receive. We're I don't know if it's a good sense to work, but we are satisfied that we reached a level of debt where our priorities are what you've heard today.

Speaker 3

It's renewing the fleet like the 6 MRs we just talked about and continuing to return cash to shareholders where for the Q2 in a row, we've returned 60% of net income the form of regular combined dividend, which I think speaks for itself. So I think that's the picture going forward.

Speaker 7

Great. Thanks for the color on that. And maybe just a follow-up on Liam's question with the older MRs. You just said that you will capitalize, but 6 MRs coming in, is this purely just fleet renewal or do you like the size of MR fleet now and you're maybe just looking to build and expand within the MR space?

Speaker 2

Well, I guess what I would say is, when you look at the MR sector, the fundamentals and the earnings that they have put up, they have been by far the best performing sector throughout the tanker market. Now we're going into well into year 3 and the market continues very strong. So you look at where our book days are in Q1 and you can see why we're bringing these ships in.

Speaker 7

Great. Thanks guys. I'll turn it over.

Speaker 2

Thank you.

Operator

Thank you. Our final question comes from the line of Sherif Amigurabi of BTIG. Your line is now open. Please go ahead.

Speaker 8

Good morning, everyone. Thanks for taking my questions. Lois, is there any way to kind of think about the composition of the dark fleet in terms of different types of vessels? On the dirty side, it's probably Afris, but what about on the clean side?

Speaker 2

Okay. Thank you for the question. I'm looking at Derek, as we there's a healthy amount of both crude and product that is moving in the dark leaf. But if you think about it, it's going to be more crude, I'm thinking

Speaker 4

I think if we you get the whole darker gray fleet around 700 ships, right? So some of that has to be on the clean side, which would be my view, Sherif. So it's both to your question, it's both crude and clean. So I guess your specific question, you have the dark fleet doing some of the sanction trades out of Venezuela and Iran. So that's one element of that fleet.

Speaker 4

And then you have, as you said, the great fleet, which is doing a little bit more of the Russian trade. Is it or isn't it under the price cap? What are the requirements for showing you're under the price cap? When do the authorities pay attention to if you are or if you aren't violating the price cap? But that composition is probably half of that whole dark gray fleet and it's a little bit less than a quarter of it would be clean, would be just an estimation, Sherry, if that helps.

Speaker 8

That is helpful. Thanks, Derek. And then on the order back split out by vessel type on Class 6, which is interesting because not all parts of the fleet are growing evenly next year. So I think LR2s are leading tanker fleet product tanker fleet growth while MRs, for example, are more muted. And so I guess my question is, do you see that shifting the balance of trade between LR2s and MRs?

Speaker 8

Or is it more to do with kind of shifting refinery capacity?

Speaker 4

Sure. It's Eric again. If I could take that. I mean, obviously, the numbers are the numbers, so agree with you. That fleet is growing the order book is growing pretty rapidly.

Speaker 4

We've been talking about LR2s cannibalizing the MR trade for the past 20 years. So I think the MRs will continue to be the workhorse of that fleet. But some of the geopolitical events that we see right now are really helping that LR2 fleet go. I think not so much the Russia Ukraine situation, but clearly the Israel, Hamas conflict and what that's bringing over the Red Sea. And so there you're starting to see the LR2s having to go around the Cape of Good Hope a lot more, adding the ton miles.

Speaker 4

So that market is really, really running. Is that larger LR2 side going to replace the MRs? I don't really think so, just on trade patterns. And then that does leave the after fleet a little bit vulnerable as well, because they'll just switch to dirty depending upon what's better.

Speaker 8

That's helpful. Thanks everyone.

Speaker 2

Thank you.

Operator

Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Lois Zabrocky for closing remarks.

Speaker 2

Thank you very much everyone for joining

Operator

Ladies and gentlemen, I would like to thank you for joining us on today's call. Have a great rest of your day. You may now disconnect your line.

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