Q2 2019 Earnings Call
Hurdle.
Good morning.
Welcome to the international Seaways second quarter train on hand earnings Conference call.
Okay last one for me I'm, assuming no change in assistance. Please signal a conference specialist paraphrased starchy followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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I'll now turn the conference over to Mr. James Talk General Counsel. Please go ahead.
Thank you.
Good morning, everyone and welcome to International Seaways earnings release Conference call for the second quarter of 2013.
Before we begin I would like to start off by advising everyone on the call with US today is a follow up.
During this conference call management May make forward looking statements regarding the company or the industry in which it operates which could include without limitation the following.
Statements about the outlooks for the crude tanker and product carrier markets.
Changing oil trading patterns.
Forecasts of World and regional economic activity.
Four cats, if demand for production of oil and petroleum products the company strategy.
Purchases and sales our vessels and other investments.
Anticipated financing transactions expectations regarding revenues and expenses, including vessel expenses charter hire expenses and <unk> expenses.
Estimated bookings in T.C.E. rights for the second half in other periods and 29 team.
Estimated capital expenditure for 2019 or other periods.
Projected scheduled drydocking off hire days.
The company's consideration of strategic alternatives.
Its ability to achieve its financing at other objectives.
And economic political and regulatory developments around the world.
Any such forward looking statements to take into account various assumptions made by management based on various factors, including its experienced a perception of historical trends.
Current conditions expected future developments and other factors management believes are appropriate to consider in the circumstances.
Forward looking statements are subject to risks uncertainties assumptions, many of which are beyond the company's control, which could cause actual results to differ materially from those implied or expressed by those statements.
Factors risks and uncertainties that could cause international seaways actual results to differ from expectations.
Include those described in its annual report on Form 10-K , and its quarterly reports on Form 10-Q .
And in other filings that we have made or in the future may make with the U.S. Securities Exchange Commission.
With that out of the way I would like to turn the call over to our President and Chief Executive Officer Mr. <unk>.
Well. Thank you very much James good morning, everyone. Thank you for joining international Seaways earnings call to discuss our second quarter 2019 result.
Over our two and a half year history International Seaways has successfully implemented our disciplined and balanced capital allocation strategy, which has been focused on renewing our fleet.
And our earnings ability ahead of the market recovery.
The second quarter marks a significant turning point.
Not only have we spent $600 million renew our fleet in the second quarter cash and liquidity reached their highest levels ever at sea ways. So we are able to turn towards other accretive capital allocation decisions starting with de leveraging.
Firstly during the quarter, we strengthened our balance sheet.
And our liquidity.
Consistent with our approach to allocating capital, we made a prepayment of $10 million on our 2017 term loan facility in July .
Using restricted cash set aside some of the proceeds from our vessel sales.
During the second quarter as part of our fleet renewal program. We also sold and delivered an inefficient 2004 built edmar to its buyer ahead of its dry dock and agreed to sell our final 2004, Bill MMR, which was then delivered to expire in July .
Jeff will discuss both our recent debt prepayment and vessel sales as they relate to reducing our interest expenses.
Enhancing our current liquidity position in more detail later on the call.
For the second quarter, our cash position increased by $13 million.
We were able to grow our total liquidity, including the $50 million undrawn revolver to $200 million.
This represents nearly $33 million increase in liquidity at year to date.
This is our highest amount of cash and liquidity since our spin off two and a half years ago.
And we continue to maintain one of the lowest leverage profiles in the sector with our net loan to value below 50%.
And with the earliest maturity on our debt three years out and 2020 two.
Secondly, while seasonal weakness and other factors such as increased refinery maintenance ahead of IMO 2020 impacted the market. Following two consecutive strong quarters rates were significantly higher than a year ago.
For the quarter, excluding the impact of a $1.6 million loss related to the MSR sale.
Our net loss was $15 million or 51 cents per share.
PC revenues were for the quarter.
Were $62.5 million.
And adjusted EBITDA was $21.3 million.
In terms of our third quarter bookings they are relatively flat to the second quarter.
Although our fixtures or at significantly higher levels year over year.
Jeff will provide a more detailed third quarter earnings update based on current market conditions later in the call.
However.
Our panamax booked rates have strengthened considerably and during the last several months.
We have taken steps to increase our panamax exposure to capture this rate increase.
During the quarter, we charted in a 2010 built panamax for six months.
And subsequent to the end of the quarter.
We chartered in an additional panamax for two year period.
Thirdly, we continue to maintain significant operating leverage during a time when tanker fundamentals remain supportive of a market recovery.
And the IMO 2020 low sulfur regulations are set to go into effect.
I am old 2020 has yet to impact our rates, but with refinery maintenance now largely complete we anticipate additional demand for both crude and product tankers over the next few months and into 2020 .
I'd like to remind everyone that our sizable fleet comprise comprising.
39, crude and product tankers positions us to capitalize on strengthening market conditions.
Every $1000 per day.
Increase in tanker rates for international Seaways corresponds to a $14 million increase in our EBITDA.
Now turning to slide five.
I will provide an update on three factors affecting tanker demand.
[noise] [noise] firstly following lack luster first half oil demand growth of 800000 barrels per day.
The I.E. now projects strong growth for the second half of 2019 and for the year of 2020 .
Specifically oil demand growth is projected to increase 1.8 million barrels per day in the second half of 2019.
And growth in 2020 is projected at 1.4 million barrels per day.
With refinery maintenance now largely complete as I mentioned, we anticipate throughput to increase which should have a positive effect on the crude and the product tanker market.
As the United States remain a major exporter of refined product.
Secondly in terms of oil supply OPEC recently agreed to maintain cost into 2020 and Saudi Arabia continues to restrict their production.
Which was approximately 500000 barrels per day below its 10.3 million barrel per day target in June .
Additionally, Venezuelan production decline to below 800000 barrels per day in June .
Thirdly, despite the factors that have negatively impacted the tanker market in the second quarter.
Including accelerated new building deliveries in the first quarter decreased OPEC production and extend it refinery maintenance, we expect a rising rate environment for the remainder of the year based on the following.
The slowing pace of new billing deliveries.
Current mid east tension and dislocations as well as incremental demand, resulting from IMO 2020.
In terms of asset values gains achieved in the first quarter had been largely reverse but year over year values are still higher than they were in the fourth quarter of 2018.
Tanker supply.
On slide six.
Let's look both at the order book and the potential for ships scrapping.
In terms of an order book update there have been five VLCC Newbuilding orders placed since January .
Importantly.
[noise] the earliest delivery for new orders is now into 2020 one.
Well the total VLCC order book has decreased to just over 10%. We continue to expect it to be tempered as highlighted in the top right chart by off hire for scrubber installations.
The biggest takeaway in terms of the overall tanker order book is that the order book is at its lowest level in the last 22 years.
Turning to the potential for increased scrapping as I pointed out in the past the global VLCC fleet is aging.
This is evidenced by the bottom right chart, which shows you nearly 25% of the existing VLCC fleet will reach 15 years old by 2020 .
Once this occurs these vessels will be more expensive to operate with significant investments required to continue trading beyond 15, and then every two and a half years thereafter.
In addition, even greater capital expenditures required to keep trading as shifts reach their ballast water treatment deadline.
Now I'll turn the call over to Josh and he's going to provide additional details on our second quarter results.
Thanks, Louis and good morning, everyone.
Before reviewing the second quarter results in greater detail, let me quickly summarize our results as well as mentioned earlier net loss for the quarter was $16.5 million or 57 cents per diluted share compared with $18.8 million or 65 cents per diluted share in the second quarter of 2018.
Excluding the impact of $1.6 million loss related to vessels sold in the quarter. Our net loss was 15 million or 51 cents per share.
Now if you could turn to slide eight.
I'd first like to discuss the results of our business segments, beginning with the crude tanker segment.
Tcs for that crude tanker segment were $46 million for the quarter compared to $34 million in the second quarter of last year.
This increase reflects our success in improving the age profile and also increasing the capacity of the fleet as well is that primarily resulting from the impact of higher average blended rates in the VLCC suezmax panamax and supramax sectors.
The increase was also attributable to increased revenue days in the VLCC sector and higher activity in the company's Lightering business in the second quarter this year compared to last year.
Turning to the product carrier segment, Tc revenues were $17 million for the quarter compared to 16 million in the second quarter of last year.
This increase primarily resulted from the impact of higher average daily glided rates are by our L.R., one cell or to add m., our fleets with spot rates rising to approximately 17000 370700 11600 per day, respectively.
Serving to partially offset these increases was a decrease in EMR revenue days, which resulted primarily from the sales of three m. ours.
Between the second and fourth quarters of 2018, and one our MSR during the second quarter of 2019, all of which are part of our fleet renewal program and as also these are it reflects redeliveries of.
Two chartered at MRC their owners during the second quarter 2018 at the expiry of their respective bareboat charters.
Overall as reflected in the chart top left consolidated TC revenues for the second quarter 2019 were 62 million compared to 59 in the second quarter 2018.
This overall increase was principally driven by higher average daily rates earned across the crude and product carrier fleets this quarter compared to last year as well as increased revenue days and vlccs and incremental activity lighter.
Looking at the chart on the top right of the page adjusted EBITDA was $21 million for the quarter compared to 9 million in the same period of last year again. This increase was principally driven by higher daily rates.
On the bottom half of the page, we look at the results sequentially quarter to quarter consolidated GC revenues and adjusted EBITDA for the second quarter were down from the first quarter, decreasing 32 million to $26 million, respectively as well as mentioned.
These rates were affected by expected seasonal factors and refinery maintenance in advance of IMO 2020.
Now turning to slide nine we provide a Q2.
[noise] review and Q3 rate update.
Spot rates are broken out for a modern vlccs and if you'll see season, our fleet, which are over 15 years old as I've mentioned on previous calls regarding spot rates for vlccs at relatively lower points into tanker cycle modern vlccs aren't higher rates than older vessels.
As the market recovers this gap will narrow significantly and rates are modern vlccs will more closely reflect those for the overall VLCC group.
I will now discuss our bookings for Q3, thus far which are generally flat relative to Q2, but still significantly higher thank you.
Q3 2018 levels.
We booked 65% of available Q3 spot days for modern Vlccs.
As an average of just over 20000, a day, 68% of available VLCC days for our vessels over 15 years old and an average of.
Approximately 7800, a day, 47% of available Suezmax spot days.
And averaged approximately $19000 a day, 56% available aframax spot days at an average of 14600 per day.
For your percentage of variable Panamax I don't want to spot days at an average of approximately $20000 today.
On the EMR side, we booked 40% of our third quarter spot days at an average of approximately $10100 per day.
Now turning to slide 10.
We talk about our breakeven.
Good day for the 12 months ended June 32019.
These rates are the all in day rates are owned vessels must earn to cover operating costs Drydocking DNA expense and debt service costs, which means scheduled principal amortization as well as interest expense.
Of note taking into consideration distributions from our Jvs. The overall breakeven rate for the company drops to $20300 a day, which highlights this competitive rate highlights our strong position for optimizing.
Cash flows.
At this time I'd also like to reaffirm cost guidance for the year.
For modeling purposes.
First with respect to regular daily Opex, which includes our running costs insurance management fees and other similar and related expenses for our various classes.
We will continue to be a level that which we have previously provided.
For details and an update on projected dry dock and capex costs as well as off hire days you can refer to slide 18 in the appendix.
Of note the sale of the MRF mentioned previously will save us $6.7 million in Drydock Capex.
Continuing with cost guidance for your modeling.
We expect third quarter total interest expense cash and noncash to be $17 million. Additionally, our debt calls for $31.6 million principal payment schedule in the second half of the year two quarters for DNA in the third quarter, we expected to be approximately $6.2 million all in which includes non cash charges of just under a million dollars. Finally, we expect $8.7 million in equity income and $19.3 million for depreciation and amortization in the third quarter.
I'd also like to take this time to provide an update on lightering.
As Weve often pointed out on these calls it's a relatively small but very important part of our business, especially given the growth of reverse lightering for exports from the us Gulf.
As with conventional tankers Lightering. These results in the second quarter were affected by heavy refinery maintenance as well as fewer vlccs loading for export due to the us trying to trade dispute and other factors. Despite this volatility we continue to see bright prospects for this business with the previously announced charter end of two aframax tankers, including one of our own 2002 built ships, making marking a significant commitment to lightering full details can be found in the appendix on page 22.
Now if I could ask you to turn to slide 11.
For our cash bridge.
As long as mentioned before we ended the quarter with the highest cash liquidity, we've had since our inception.
So how did we get there moving from left to right.
We began the second quarter with total cash of $137 million during the quarter, we generated $20 million $21 million of adjusted EBITDA, which includes $8 million in equity income from Jvs was a noncash items. So we therefore deducted to reach a cash figure, but then add back the actual cash distributions from Jvs, which were $4 million and then go to proceeds from vessel sales, which were $9 million.
And then against that we expanded $9 million and dry docking and Capex cash interest on our Prince and principal pay down our debt totaled $28 million and finally changes in working capital and other noncash items had.
Positive $23 million impact.
Which is principally related to reduction in trade receivables and a deposit on the Ariad marcell, which will close in the third quarter.
The net result of all this is that we ended the quarter with approximately $150 million of cash and $50 million of an undrawn revolver yields a total liquidity of $200 million.
Now turning to slide 12.
To talk a little bit on our balance sheet.
As low as mentioned, we made a prepayment of $10 million on our 2017 term loan facility that will result in a $400000 dollar reduction of interest expense.
For the remainder of 2019 as well as a.
100000, our proportional reduction in future quarterly principal amortization payments, which will go from 6.1 million a quarter to 6 million.
In terms of balance sheet specifics as of June Thirtyth, we had $1.9 million of assets compared to 30 787 million of long term debt.
In addition, we have as I mentioned $50 million revolving credit facility remains undrawn.
As you can see on the right hand column of the slide our total debt to capital stood at 44%, while our net loan to value using vessel values for conventional tankers and book value per episode joint venture says that just 50% right at 50%.
On the right side of the Slide noted book values for our two joint ventures as of the end of the second quarter. The episode and LNG Joint Ventures had net book values of 133 million and 116 million, respectively, which combined represents almost $9 per international Seaways share.
At the bottom of the slide we outline our debt facilities, all of which importantly mature in 2022 or later.
Turning to slide 13.
We illustrate the strong earnings power of our.
Of our company our fleet heading into the market recovery.
On the far left we show 2018 spot rates earned by international Seaways vessels, which we view as a trough for the tanker market.
To demonstrate the impact of a rising rate environment relative to those 2018 lows as we did last quarter, we presented three specific scenarios to the right.
The first is mid cycle by which we mean fit the 15 year average rate. The next is recent peak, which is represented by 2015 average rates and the last on the right hand side, our historical peak rates achieved in 2008, you can see the based on mid cycle average rates, we would generate an annualized EBITDA of about $278 million and $4.44 per share in EPS.
If rates return to 2015 levels that would represent 476 million of adjusted EBITDA and $11.22 earnings per share and of course should we ever experienced a super cycle that was again, we generate nearly $700 million of Jeff.
Regardless of how the rate environment develops our past success implementing our fleet growth in modernizing monetization strategy has significantly enhanced our upside potential for capitalizing on market recovery in both the product and crude tanker sectors.
As a reminder, every $1000 increase in spot rates.
Fleet wide results in an increase of $14 million in cash flow. This corresponds to 48 cents earnings per share per annum.
Before I conclude my comments and turn it back over Lois I wanted to provide an update on our shareholder base.
After several years of Ownerships.
Of ownership two of our largest pre spin off fund holders have reducer.
International Seaways positions at the time of the spin off they held over 24% of the company and now have each reduced their positions to below the 5% regulatory filing requirements.
One of these holders Blue mountain has been kind enough confirmed their position is now zero and the other paulson and as reported to be below 5%. So overall, we've had a major reduction from it.
About 20% of these positions in the last several quarters.
We appreciate the support that the shareholders and others have provided and continues to provide the company and we view. This development is very positive from a shareholder perspective.
Of note our daily stock trading liquidity averaged $3.6 million per day in the second quarter up from $2.4 million in the first quarter.
I'd now like to turn the call back to Lois for her closing remarks.
Thank you very much Jeff.
During the second quarter and year to date 2019, we've taken steps to further strengthen our financial position.
We ended the quarter with a total liquidity of $200 million.
This was up $33 million year to date, nearly $60 million higher than we were at our spinoff.
We have maintained a low loan to value ratio, which stands at 50%.
Our earliest debt maturity is not until 2022.
International Seaways remains poised to continue to capitalize on our core differentiators.
Specifically, we are in a strong position to further our leading reputation as a disciplined allocator of capital.
Pre paying $10 million of debt in July .
As we focused on enhancing long term shareholder value.
We also maintain a commitment to providing safe reliable service to leading energy companies as well as a commitment to transparency and corporate governance.
We are the number one rated tanker company for corporate governance.
As we progress through the second half of 2019, we are optimistic about the outlook for the tanker market.
Based on the order book being at the lowest level since 1997.
Robust oil demand forecast for the second half of 2019 and for the year 2020 .
In addition, tanker demand game changers, such as increasing us export.
And the upcoming IMO 2020 regulation will provide incremental benefits to our sizable fleet of crude and product tankers.
Importantly, we continue to maintain significant operating leverage to a rising rate environment.
Every $1000 per day increase in rates corresponds to $14 million in EBITDA.
And 40 cents per share in earnings per share.
In conclusion, our financial position is robust.
Seaways remains a disciplined transparent comfortable with strong corporate governance, and we are excited about the favorable outlook with our strong operating leverage is poised to take advantage of our team a recovering tanker market.
We will now open up the call to questions operator.
We will now begin the question and answer session.
First question you May Press Star then one on your Touchtone phone.
Shira using a speakerphone please pick up your handset before personal issues.
So Troy your question. Please press Star then two at this time, we will pause momentarily to assemble roster.
Our first question comes from Randy give vans with Jefferies. Randy. Please proceed.
How'd, everyone how are you.
Good morning, Randy we're doing good yes ask but excellent all right. So first got them on a market question. You know we're hearing one year time charter rates of 35, maybe 37000, a day free eco vlccs without scrubbers have you gotten any bids for some of your vessels at or near those rates, but also obviously your 10 of your vessels are your fees will have scrubbers installed ideally by the end of the year.
What is the charter premium for scrubber equipped VLCC for a one year time charter.
Well, Randy I would say that for one year time charter.
It's a little odd.
Trickier to identify that scrubber premium if you're going to look at like three years or five years, you're you're somewhere $4000 per day 5000 Boes per day Derek.
That's right and we haven't really received too much interest on a one year time charter because were not too keen on doing one of your rights to 2020 discover out just going to retrofit right similar to most owners. We Andy you know if you're going to do a one year time charter really starting in the fourth quarter for scrubber fitted the we really expect a lot of upside, especially when you have a lot of inefficiency and disruption to the oil markets in early 2020.
Okay, and then before I get to my next question.
The 10 scrubbers are they going to be completed by this year, how many are slipping into 2020.
Nothing is slipping we have scheduled from the beginning for seven of our scrubbers to be installed in.
2019, and three of them to be in the first quarter of 2020.
Okay, no no delays to that.
No I won't Okay last question from me as you mentioned cash balance highest level since the spin off very little debt due until 2022 out looks very strong for the back half of this year. Obviously 2020 that said your shares trading near the lowest level since 2016 or early 2017, 30 plus percent discount to NAV you recently sold those two vessels at NAV.
So should we expect NSW to repurchase shares here in the near term since you already have the authorization in place.
Hey, Randy as Jeff.
Yes look I think what lowest said and I'll repeat is that that we're really super pleased that.
Having first allocated capital in our existence.
To to the $600 million you spent renewing our fleet putting ourselves in a really good position for this upturn that that is at hand.
But still we generate a lot of liquidity from operations and from selling older vessels, which brings in cash and saves dry dock right. So we put ourselves in position have the highest liquidity.
Since inception has been spun off and we look and say all right. We've already bought enough ships to be really well positioned. So now we can turn to other types of capital allocation that are accretive.
And it isn't like you make a choice of any one thing that really all tools that you have in the tool kit deleveraging share repurchase dividends, that's where the capital is going to go now and that's where you should be looking for we start it would de leveraging we love that because first of all it's just good de leveraging secondly, it's flexible you can always relever. If you want to it and really also keep in mind that a lot of the proceeds that we have in terms of cash or from selling older vessels and it really year marked.
For for deleveraging because of the way that the credit facilities work. So that's where it started but yes were looking to share repurchase dividends all the above.
Lowest on the sale of the of the 2004 am are are you seeing better pricing or liquidity in that in those markets and does that affect your decision on what to do with some of your older RMR vessel.
Well you know the sale of these final two m. ours, where the completion of a program that we had of six 2004 built MRC, specifically and the prices that we were able to realize for those had indeed strengthened and there was more inquiry in the last quarter.
So we were able to realize some of that benefit.
Okay and Jeff.
You are talking about de leveraging your prepaid 10 million in debt you've got a slug of high cost debt I know its due on 2023, but is there any thought on prepaying that or how do you. How do you look at that.
Well.
Thanks, Liam first of all that the 10 million was applied to that so yes. Okay.
That that that's that's a start.
Right, but so I would say this.
That.
That debt, which would you call it high cost.
If you mean that the term loan b that was really put into place or amended.
For the acquisition last year as well as some of the other debt some of the unsecured debt, we have as well and they have.
The ability, especially the unsecured ability to call. It next year and the term loan b can be called in a time of those.
A slight premium.
Till December 30, Onest of this year, so really the best way to say it is that as we enter this period of time, where.
We are generating a little bit of additional cash as we discussed when we looking at the entire balance sheet and seeing what's the right thing for us to do.
As we as we head into this recovery so it will.
Evaluating it sort of top to bottom.
Great. Thanks, Jeff.
Thank you.
Once again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to <unk>.
This was the Peracchi CEO for any closing remarks.
We just want to thank everyone for joining us for our second quarter earnings call and enjoy the rest of your summer. We're looking forward to that tanker market recovery. Thank you very much.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.