International Seaways, Inc. (INSW) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the UBS Global Industrials and Transportation Conference. My name is Michael Zahka. I'm a member of the UBS transportation banking team, and I'll be moderating the session today. I have the pleasure of welcoming the team from International Seaways, one of the largest tanker companies in the world. International Seaways is listed on the New York Stock Exchange under the ticker INSW. INSW operates a fleet of 40 vessels across both crude and product categories. I'm joined by CEO, Lois Zabrocky; CFO, Jeff Pribor; and VP of Chartering and Investor Relations, David Siever. As a reminder, you'll have the opportunity to submit questions throughout the session, and we will cover the Q&A after the presentation. With that, I'll turn it over to Lois to kick things off.

Thank you very much, Mike. We really appreciate the opportunity to present today with UBS. So I'm the President and CEO of International Seaways. We trade on the New York Stock Exchange under INSW. We have a diversified tanker fleet, meaning that we have presence in both crude and product carriers everything from VLCCs, very large crude carriers down to medium-range or 50,000 ton MR product carriers. We have installed 7 out of an intended full program of 10 scrubbers over the last 6 months. And 7 of these vessels are on the water and using these scrubbers now. Six actually, one, the remaining 7th will sail this week. And our liquidity as of March 31 was approximately $150 million. We are in a very strong market environment, where we've been adding liquidity and had positive cash flow significantly from March 31 till today. When you look at our suite, we've got 13 VLCCs, 13 Panamaxes, and then we have 2 Suezmaxes, 5 Aframaxes and 5 MRs. We also have 50% and of a joint venture of 2 floating storage units that are employed off of Qatar on the Al Shaheen Crude field, and they are employed through 2022 in the third quarter. And we are looking forward to renewing those contracts and keeping those episodes there for the foreseeable future. We also have a lightering operation down in Houston, and we get very close insight from all of our customers on volumes that are being imported into and exported out of the U.S. Gulf. That lightering operation also has facilities and vessels on site in Panama as well as on the U.S. West Coast. If you look at Page 4 in our slide deck, this is really the heart of the successes and the differentiation that we've achieved at International Seaways over the last couple of years. In the middle of 2018, we invested the remainder of $600 million. And this was really we bought 10 ships, and we bought them at the bottom of the market before the cycle and asset value started to increase. In October 2019, we sold our LNG joint venture to our JV partner for $123 million in cash. And this was really pivotal for the company because that allowed for us to immediately prepay $110 million of long-term debt and that saved us $9 million in the annual interest. In addition to that, we were able to refinance $390 million of debt in January of 2020, and this saved us another $15 million annually. So just a part of improving our balance sheet and making sure to take advantage of the opportunity when we were able to sell that joint venture, we were able to secure an excellent deal right before the coronavirus hit the world. When you look at our capital allocation priorities, we have done deleveraging, and we have also returned cash to shareholders. We instituted a $0.06 dividend in the first quarter and this is a level that we think is sustainable for the long term. We also, in the first quarter bought back $10 million worth of shares at International Seaways. So we also bought an LR1, a 2009-built LR1 that we took delivery of in the first quarter. We actually used our capital in 4 different ways with our capital allocation. So our priorities have truly been deleveraging, returning cash to shareholders and then we also invested in a vessel. When you look at our low leverage and our balance sheet, Jeff's going to talk about that in the second half of the presentation. But really, this has been one of our foremost efforts and we've been able to reduce our leverage at the same time as we brought on board the $600 million worth of upgraded fleet assets. We're at 41% net loan to asset value as of December 31. So therefore, heading into the -- what turned out in the first several months of the year to be an incredibly robust environment. We've had a very improved balance sheet as well as strong rates. So very strong performance at the company. We had significant operating leverage. We've got 38 conventional tankers, and that offers us a lot of ability when the market was really running. Every $5,000 improvement in TCE, time charter equivalent, provides $68 million in incremental EBITDA for a year. The first quarter rates that we earned in the second quarter, the rates that we booked thus far, have really been the strongest rates that we've seen as an independent company. We have a very strong safety and environmental record and performance, and this is really something that we focused on heavily at the company. We've got sector-leading commercial pools, and many of these have INSW ownership, such as our Panamax pool and our VLCC pools, the 2 largest pools and joint ventures that we're involved in. Strong governance and ESG. This has really been a highlight of International Seaways and the predecessor company, OSG. We have an experienced management team. We have an independent board, and we've been #1 tanker company, international tanker company in Wells Fargo's Corporate Governance Rankings, and this is something that we really take seriously and are very proud of. If you go to Page 5 and you look at how has the company been impacted by and influenced by the coronavirus, it truly has had an effect across all of the shipping, truly all over the world. If we look at our crewing, we have had very strict protocols in place on our vessels. And we're actually sending out full test kits so that all of our ships will have them on hand so that they can ensure that sailors are healthy. If they have a suspected case, they can be tested. Worldwide travel restrictions have made crew changes extremely difficult and we are starting to see some of this opening up. One of the key performance indicators at International Seaways that we have tracked for several years is the criteria of making sure that we repatriate our crews on time. And that -- because that was a priority for us, and we were performing very well, it took quite a few -- the passage of several weeks and months before our crews actually were overdue. Shoreside, we decided early on to make sure that everybody could work remotely. All New York and Houston employees have been working remotely, and we are on week 12. And -- and we've been able to produce all of our SEC documents, our filings on time and run the company remotely. It might take a few more phone calls, but we're getting the job done. From an operational perspective, we're constantly pressing to try to get seafarers designated as essential workers so that they might be able to travel more freely throughout the world. It has been challenging to get inspectors on board our vessels, and we've had a high level of cooperation with classification societies and using remote and virtual and drone capability to be able to inspect vessels. Overall, our priorities are truly for a safe environment for our employees at sea and ashore and safe and continued reliable service. If we go to Page 6, and we look at what is the environment that we're operating in? What does our market look like? So we started out the beginning of this year really looking at a highly favorable demand environment, oil demand environment with strong growth and expecting to have a strong tanker market. But we certainly have had a strong tanker market, but what really happened was that the coronavirus, of course, it originated in the East, at least where you saw the first dramatic impact on consumption of oil and its products. And then you've seen the western hemisphere follow on and be greatly affected. So oil demand, its forecast for the year to be down almost 9 million barrels per day. But the reality is that from what we've seen, oil demand destruction peaked in April, somewhere around 25 million barrels a day. So this was really an unprecedented situation. At the same time, oil supply was still coming on strong, especially after OPEC and Russia decided to produce full out and actually cause oil prices to decline dramatically. This sort of hit the coronavirus wall of demand destruction and then OPEC+, meaning OPEC plus Russia stepped up and put in place production cuts of about 11 million barrels a day. So in the tanker market, what happened to us was there was too much oil on the market and all of our customers were looking for space, ashore and at sea to put their oil. We also had a very contango oil market, very low prompt prices and very strong prices further out. And this was an environment very conducive for many of our customers across all of the sectors to put vessels on time charter, potentially for storage, and that situation continues today. The [ containers seeing ] much, much less, and we're not seeing additional vessels of any scale being put into storage or on the water, but we still do have a high amount of volume of vessels that are storing crude and products on the water today. Then we go to the ship supply side, and we look at the fact that there have been very low ordering over the last couple of years. And one of the knock-on effect of really the coronavirus is that the market was very strong and by very strong on the VLCCs, we saw fixtures that were well in excess of $100,000 a day, even $200,000 a day. Those were done not in dramatic volume, but those are still incredibly high volatile rates. Today, we're still seeing a strong VLCC market around $50,000 per day. And you would normally have owners racing to order vessels. However, the order book on the VLCCs is in the single digits. And really across the entire tanker sector, you're seeing low ordering. Part of this is because owners are not certain if they should order dual fuel engines. Is that the way forward? Also we will have a destocking period where after the market will be healthy and owners are reluctant to step out when they're not certain of exactly when can they get the ships and exactly what will the technology horizon bring. When we look at scrapping potential, what has been happening is that in 2019 and thus far to date in 2020, really, no one has taken any older tonnage out of the market. So particularly, you see we give you an example on Page 7 of the VLCC fleet. This is an aging fleet. And at the end of 2020, you'll have nearly 200 ships out of 800 that are over 15 years old. And that's the year at which all of a sudden, you have to do drydocks and CapEx investment every 2.5 years and this becomes a significant economic hurdle for owners. So we have oil demand returning, we've got oil supply likely to be maintained at a lower level, while demand is coming back. And then on the ship supply, we've got a limited ship supply coming into our market. So overall, we see going into 2021 to be a healthy market. Then if we finish up with Page 8, this is an example of the very large crude carriers 1-year time charter rate estimations. And when you look at it, you really see the volatile period that we've been through in maybe the last 9 months in our market. And that type of volatility is generally the result as it was in this case, of very high utilization, very tight market and a lot of volatility, where you saw the VLCC rates go up as high as $80,000 per day for 1-year time charter and now today being [ tagged ] somewhere just below $50,000 per day. So with that front setup, I would love to turn it over to Mr. Jeff Pribor, our CFO at International Seaways, and he will dig a little deeper into the financial highlights. Jeff?

Thank you, Lois. So I'm turning to Page 9. At the beginning of our presentation -- or our presentation, Lois covered who we are, been public about 3.5 years now as an independent company. And have had a lot of accomplishments in terms of renewing the fleet and creating what we think is one of the best or the leading tanker companies in the world. I'd like to focus here on the financial aspects of what we've done, which is not to minimize some of the other parts like a first-class technical and commercial operator. We're very proud of the organization we put together. But for the next couple of minutes, I just want to talk about some of the things we've done on the financial side. So again, top of Page 9. We are for shipping, for tanker shipping, particularly running at a low leverage rate or low leverage structure with a very strong balance sheet, and specifically our net loan to asset value at the end of March was 41%, I think it says 43% here, but it's 41%, which excludes one of major noncore asset of the -- our FSO joint venture. So with that included, it would actually be quite a bit below 40%. And as Lois mentioned earlier, $150 million in total liquidity, which is quite a strong amount for safety and for opportunism in terms of capital allocation. We completed a very important initiative that began last year to refinance our balance sheet almost in total. As Lois mentioned, we spent $600 million renewing our fleet in the 2017 and 2018 timeframe, which was a trough of the asset value market, so the best time to do the fleet renewal. We were keen -- we were adamant to not issue equity at a price that was below the asset value so we did not. We issued some debt, both in secured and unsecured debt. And this refinancing was a way of removing that transactional oriented debt with this higher price and less flexibility and putting in place a long-term stable shipping oriented debt structure. So we were able to do that and a key part of that was selling the LNG joint venture last summer, as Lois mentioned, but we completed this refinancing in January this year, which we didn't know what was coming this year, but we're very pleased that the timing of that was to get all that nailed down and done before the things began to change in the world. As a result of this financing a little with lower interest and also lower leverage level, among other factors, we have very low cash breakeven. So our cash breakeven is about $21,500 a day for 2020, but it's actually down to $16,000 a day, I'll actually have a slide on that in a couple of minutes to show you. Now at the same time -- though we have lower -- somewhat lower financial leverage, we think that's very appropriate because we maintain very significant operating leverage. We have put some vessels on time charter. We'll be happy to cover that at the end, but meanwhile, we have 38 conventional tankers, of which most of them are on spot market exposed to the kind of record rates or nearly record rates that we've seen, that Lois mentioned. So every $5,000 in TCE equivalent equals about almost $70 million in incremental EBITDA or $2.32 per share annually. And then finally disciplined capital allocator, I think we've mentioned the money we've spent, that the LNG joint venture we sold, and that our current capital allocation priorities, therefore, are rather more focused on deleveraging and returning cash to shareholders, which we have done by both instituting a regular quarterly dividend of $0.06 per share per quarter. And in activating an existing share repurchase program to the tune of $10 million in the first quarter and indicated it's something we will continue to look at as long as our share price is below -- or meaningfully below our net asset value per share. Page 10 turns that is just a snapshot of where the second quarter is, at least as of earlier in May. We give the rates for the various categories of ships, compare them for the second quarter with the percentage of the quarter that was fixed at that point in time compared to the first quarter. So while rates have moderated since this time a bit as the floating storage and dislocation from contango, et cetera, all that has begun to wear off, which is a long-term good thing for everybody concerned, but as it has worn off, the rates have come off those very highs that the volatility provided. Nevertheless, we will -- you will see that the second quarter was very strong as of that moment, and given the percentage that was fixed, it will still be -- end up being a very, very strong quarter compared to Q1, which is in itself -- was a very, very strong quarter. So I think Lois mentioned that rates today for VLCCs, for example, are in the $50,000 range. So in terms of guidance, you would see that we're not guiding that these will be the rates for Q2. We're simply pointing out that these were the rates at that time a couple of weeks ago, a few weeks ago that percentage of the quarter fixed. So hopefully, that's helpful for any modeling that people are doing. Turning to Page 11. This is the effect, the benefit of the financing or the refinancing of our balance sheet that we completed in January. Beforehand, we had -- on the left, we had a Term Loan B, $331 million, a [ bilateral ] ABN Amro, a Chinese guarantee, [ ex-voyage ] the guarantee facility, which will remain in place, because it's very attractive. On down the line, a total of $677 million of debt, if you look also on the left-hand side of the page, you'll see that the average interest rate on that debt was 6.48%. Now if you look on the right-hand side, we have rates that are much lower overall and so the average interest rate pro forma -- well, since the refinancing with an annualized basis be 4.48%. So about a 2%, a 200 basis point saving on over $600 million of debt. So very significant, both in terms of the interest savings and EPS pickup. You will note that the amortization, the right column in each case is higher. We think that's fine. Amortization now is in exact -- almost exactly in line with depreciation, which is a very prudent way to structure a debt stack. So we are amortizing at a rate we consider to be very healthy, paying ourselves, so to speak, so to provide the cash for renewing and growing the fleet in the future. And overall, net loan-to-value remained about the same at 41%. Turning to Page 12. As also a result of this financing, we have no near-term balloon maturities. The first very small balloon is our $25 million unsecured so-called baby bond in 2023. So no looming maturities at all. Turning to Page 13. I mentioned that I would spend a little more time or at least provide a good road map to you for the breakevens. This slide serves 2 purposes. We provide it every quarter in our quarterly calls, just to make sure we're updating cost guidance on a vessel by vessel category basis. But if you -- just to keep it succinct for this presentation, we look at the box, that's the latest 12 months overall cost structure, I mean cash breakeven, including vessel operating expenses, G&A, all dry docking costs and all debt service, not just the interest but principal and amortization as well at $20,000 a day. The little bar next to that is the benefit of the joint venture contributions, reducing the breakeven for the fleet. Most importantly, a better way to look at that probably is going forward. The breakeven per day is a little higher given the higher amortization profile of our new debt. But with the time charters we've entered into during Q1, providing a fixed level coverage on a number of our vessels, the overall breakeven for the remainder of the fleet goes down to $16,000. So that's a -- it's a really strong position that furthers our operating leverage as far as the upside, that means if there's any downside during the destocking period, it increases by far the chances that we will remain significantly cash flow positive throughout. So I'll finish up my segment with just a comment on, not part of the financials, but the other aspect of what differentiates International Seaways is our commitment to the ESG culture. Right from the beginning when we were spun off, we've been at the top rankings for corporate governance in terms of diversity, transparency, lack of third-party involvement or fees or any other of those type of arrangements. So very transparent, very straightforward western New York-based type company. So we're proud to continue that tradition. But in particular, of late, we have been very focused on the environmental side of ESG. And then to mention one thing. It's a second bullet point under environmental here. This new loan facility we put in place in January has a sustainability feature. It's rated as a sustainable loan by a third-party [ rater -- ] agency. And what it means is that we're committed to reducing CO2 emissions, and we actually make the margin on the loan change a little bit based on meeting our targets or not. So if we do meet them when we're committed to not only meeting them but beating them we should get a slightly better rate. And that was an innovative example of the kind of commitment we have to ESG culture at International Seaways. So finish by saying that on Page 15 that we have been recognized as a leader in Corporate Governance from Wells Fargo and Webber Research for example, among others, put us at the top of their list for tankers. So with that, I'll just turn it back to Lois. Do you have any closing remarks? Or are we going back to Mike?

I think we're going to go to Mike and open it up for questions. Thank you so much, Jeff.

Great. Jeff and Lois, really enjoyed the presentation. I was hoping, first, if you could talk about kind of your medium and long-term strategy. Obviously, the market backdrop prior to COVID was really focused around IMO 2020 and the impact on supply and demand. So I'm kind of wondering how you're approaching this kind of new cycle, particularly coming from a position of strength with your pristine balance sheet and what opportunities you might be considering.

Thank you, Mike. Yes. It is -- like we said, we thought we'd have like an 18-month cycle, and it was quite compressed. So we are very careful and talk a lot about our capital allocation and what we should be doing at what time in the cycle. And we have felt that returning cash to shareholders, buying back shares, instituting the dividend that has been the appropriate use of cash. And then as we go forward here, one thing that's interesting is IMO '20 was overshadowed by the coronavirus and the demand destruction and then the response from the oil production side of the market. But the oil markets and the shipping markets were very well prepared for IMO 2020. And I think the logistics are all still in place, and there are a lot of vessels that are involved in supplying the low sulfur fuel oil, and that has been admirably handled worldwide. And as we recover in the demand scenario, we get back to where that becomes an important component because it has increased the base load of demand that is required in the world in a normal operating healthy environment. So we will continue to look to renew and enhance our fleet, upgrade our assets as we go forward. And we're going to just be very, very observant of the market cycles and the trends before we do that. Jeff, do you want to add to that?

I think just to put -- to build on that a tiny bit, I think -- or add my way of saying the same thing, I think we thought it might be as you started the IMO 2020 year as you asked, Mike, a while before we were acquiring vessels. But we -- COVID has given us a whole new cycle within a cycle. So we'll ride that one, manage that as well as we can. And I think we will look forward to being able to allocate some assets. We may well be able to look at, at least evaluate allocating some assets to some cash towards asset acquisition sooner than we might otherwise have thought.

That's great. And kind of looking at the order book, which is obviously critical, Lois, you mentioned, that ordering, is at a relative low. I was just curious, particularly now with the new fuel and propulsion technology, how long typically, what type of lead time are you seeing between when someone would order a vessel and when that would hit the water? So I guess, how long is this current environment and strong rates going to be out there for you guys to capitalize before kind of new ships hit the water to soak up some of that capacity?

That's interesting, we were -- I was looking at a new building report overnight, it looks like a lot of the top Korean yards have early 2022 slots. So you're looking at Q1, Q2 2022. So you're almost 2 years out. You do have some yards with smaller vessel availability slots for late 2021. And one thing that is really significant in our world. The Qataris came out in this week and made a massive government level agreement with Korea about -- to build an additional 100 LNG vessels that they will use to service their north field expansion that is going to increase their LNG capability very much. And what's good about that is that occupies a lot of those high-end Korean yards and satisfies them that they will have some lucrative contracts to work on, and it actually allows a little breathing room for those yards who otherwise start to get too hungry for orders. So that, I thought was a very positive development for those of us in other spaces such as tankers, fills up some of that yard need.

That's great. And there's a follow-up from the audience where when you think about what terms you're seeing at the shipyards for newbuilds, and how does that compare relative to prices in the secondary market? And I guess, how that would factor into your fleet renewal plan, how you're thinking about that?

Absolutely. We -- since International Seaways spinoff, we've been quite vocal about buying second hand. We certainly have, in the past couple of years, found there to be a much greater value in the second-hand market. That is not to say that there will never be a place for Seaways to go back. I mean our predecessor company had ordered dozens and dozens of tankers over 50 years in the market, right? So there can be a place for the newbuildings. I think I would say right now that the values are a little bit in flux in the sense that whether or not you're going to build a tanker, you're going to build dual fuel or are you going to build a conventional engine, I think that these questions, these larger questions are really more on an owner's mind than simply doing that comparison of a 5-year old asset to the newbuild price, which is obviously also a very important part of the equation. So you have not seen a rush, and that's part of why you have not seen a rush to the yards.

Got it. That's very helpful. And kind of thinking about your chartering strategy, how are you looking at opportunities in the time charter market for potentially locking down some longer-dated tonnage to make sure that you have stable cash flows coming up as we move into 2021 and beyond. And I guess also maybe touching on the JV and the cash flows kind of coming off of that. How do you think about capitalizing on opportunities in the market now versus locking down longer-dated time charters?

When the contango was very strong in the markets, we were out there capturing and we fixed 4 of our 13 VLCCs. We fixed 2 for 6-month charters at an average of actually 7-month charters at an average of $100,000 a day. And we did a 1-year deal at 53 on an older vessel and then we did a 3-year deal at $45,000 per day. So we looked where we could to lock in healthy rates certainly well above mid-cycle. And we took advantage of that as we could. Hello?

Yes. I can still hear you, Lois.

Okay. Sorry, I apologize, yes.

Yes. So Jeff, were you going to say something?

No, just to say that Lois was still being heard. That's good.

Thank you, Jeff. Yes. On the FSO, we're locked in through the third quarter of 2022. And after the servicing of the debt at the joint venture level, we passed through a healthy amount of cash to International Seaways on that joint venture. So that is very important to us and is a valuable piece of our fixed rates. And I think the chart that Jeff had hit upon highlights that, didn't you talk about breakeven levels, Jeff?

I did. It was Page 13 has that and shows the contribution of both the FSO joint venture itself produces the overall fleet breakevens by about $1,000 a day and the time charters take -- benefited by another $4,600 a day in reduced breakeven. So FSO is not core, we're not going to be spending more money to allocate capital to the offshore sector most likely, but it is a very, very stable, healthy source of cash for us that, as you say, it's part of our portfolio of fixed income, along with the time charters.

Got it. And we're down to 2 minutes. So I think just one last question. It would be kind of thinking about the portfolio. Obviously, you play in both crude and refined products. As you look at capital allocation and where to focus, I'm curious to know which of those 2 would be a priority. Or if there's a new market segment that you're currently not in? How do you think about that?

Well, look, if you look at the first dollars that we put to work as an independent company, those were really on the large crude, Vs and Suezmaxes, but we also just completed the purchase of an LR1. So we are very opportunistic in where do we have the most scale? Where do we have our strongest joint ventures and our pools? And where can we make -- maximize our upside so we kind of blend in all of that. And we feel being in both products and crude, the markets are very linked, and it really gives us insights into where we think that the markets are going to be performing their best at whatever point. So it's -- we really like to keep a little bit of ability to be opportunistic and take advantage of the markets when we can.

Excellent. Well, we're coming up on 5:20 here. Jeff, Lois, thank you so much for the time and for the excellent conversation. And thank you to everyone that joined on the phone. And thank you for being at the UBS Global Industrials and Transportation Conference.

Wonderful. Thank you very much. INSW on the New York Stock Exchange, we really appreciate your listening to Seaways give our presentation today. So thank you very much.

Yes, bye-bye now.

Thank you.