International Seaways Inc

NYSE:INSW

Earnings Call Transcript

[Operator]

Hello, and welcome to the International Seaways, Inc. Fourth Quarter 2024 Earnings Conference Call. My name is Carla, and I will be coordinating your call today.

[Operator Instructions]

I would now like to hand you over to James Small, General Counsel, to begin. James, please go ahead when you're ready.

[James Small, executive]

Thank you, operator. Good morning, everyone, and welcome to International Seaways Earnings Call for the Fourth Quarter of 2024. Before we begin, I would like to start off by advising everyone with us on the call today of the following.

During this call and in the accompanying presentation, management may make forward-looking statements regarding the company or the industry in which it operates, which may address, without limitation, the following topics: outlooks for the crude and product tanker markets; changes in trading patterns, forecast of world and regional economic activity and of the demand for and production of oil and petroleum products; the company's strategy and business prospects; expectations about revenues and expenses, including vessel charter hire and G&A expenses; estimated future bookings, TCE rates and capital expenditures, projected dry dock and off-hire days, vessel sales and purchases, newbuild vessel construction, the effects of ongoing and threatened conflicts around the globe, the changing global regulatory environment, the company's ability to achieve its financing and other objectives and its consideration of strategic alternatives; anticipated financing transactions and plans to issue dividends, the company's relationships with its stakeholders and other political, economic and regulatory developments globally.

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 in the circumstances. Forward-looking statements are subject to risks, uncertainties and assumptions, many of which are beyond the company's control. Those 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-K for 2024 and in other filings we have made or in the future may make with the U.S. Securities and Exchange Commission.

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

Lois?

[Lois Zabrocky, executive]

Thank you very much, James. Good morning, everyone. Thank you for joining International Seaways earnings call for the fourth quarter and the full year of 2024. On Slide 4 of the presentation, which you can find in the Investor Relations section of our website. Net income for the fourth quarter was $36 million or $0.72 per diluted share. Excluding a loss on vessel sales, adjusted net income for the fourth quarter was $45 million or $0.90 per diluted share, and our adjusted EBITDA was $95 million. We are proud to announce today that we continue to modernize our fleet during the fourth quarter with a vessel swap, as you can see in the upper right-hand corner of the slide.

We sold 2 of our oldest VLCCs and paid $3 million in cash for 3 eco MRs built in 2015. The swap is less indicative of a specific preference for any one particular class of ship, but more showcases our ability to opportunistically reduce our vessel ages across various ship classes, enhance our fleet efficiency while limiting risk compared to a full cash transaction. We have optimized earnings across our tanker segment, which gives us plenty of flexibility to execute fleet optimization. The various transactions within the swap created some temporary changes to our balance sheet in the fourth quarter and the first few months of 2025.

During the fourth quarter, we paid $53 million in cash for deposits and the delivery of 1 MR vessel. Due to this temporary timing difference, we borrowed $70 million on our revolving credit facility, which has been repaid in the first quarter following the final execution of the swap. As a result, our line of credit capacity was reduced to a still quite healthy $475 million at the end of the fourth quarter. We expect that to be around $560 million on a pro forma basis. Our balance sheet highlights are strong, shown in the bottom left of the slide, $632 million of total liquidity composed of $157 million of cash and $475 million on the revolving credit facility. We have $695 million of debt with a net loan-to-value ratio of below 16% and our spot breakeven rates are about $13,700 per day.

On the lower right, we are proud to have shared for a second consecutive year, over $300 million returned to shareholders in 2024. We paid $5.77 in dividends during 2024, representing a 12% dividend yield on our average share price over the time. We also used proceeds from that sale of an older MR to repurchase 500,000 shares for $25 million during 2024. Today, we announced $0.70 in dividends that we will pay in March, representing a payout ratio of about 77%, marking our highest since we've been supplementing our regular $0.12 dividend. We believe in sharing with our shareholders during this cycle, and we expect a payout ratio similar to this last 2 quarters of around 75% to continue into the future.

We believe in our balanced capital allocation approach so that we can provide competitive returns to our shareholders. and still position the company for the future with opportunistic fleet renewal while maintaining a healthy balance sheet to support growth. On Slide 5, we've updated our standard set of bullets on tanker demand drivers with the subtle green up arrows next to the bullets represented as good for tankers, the black dash representing a neutral impact and a red down arrow, meaning that particular topic is not good for tanker demand.

Without reading these bullets individually, I will pull some highlights. Oil demand growth in the near term is still going to grow at its historical rate of about 1% per year, which on 100 million barrels per day of demand is about 1 million to 1.5 million barrels of growth anticipated for 2025. Oil demand growth specifically is spread across the world in 2025 with no one large outlier as China has been for many years. Crude production growth is largely coming from the Americas, which is supportive for tanker demand as much of the incremental growth will be exported. The global economy is still settling the dusts from a post-2024 election period, and there have always been headline grabbers, particularly from the United States.

The geopolitical situations are not going away. They may modify and that could have an effect on the tanker market. But with many moving parts, the markets will adjust. We expect the United States to take a stronger position with Iran, and we see tanker movements shadowing that, pun intended. The Israel-Hamas conflict is still very tense and most ships are wary of their safety in the Red Sea. Russia-Ukraine is similar. And even if there is a resolution on the horizon, we believe that the unwinding could last longer for Russian crudes moving to the West.

We embrace these tanker markets because we can't control them in any case, and we believe that sanctions and their enforcement can only help the legitimate commercial fleet. In the charts below on Slide 5, inventories in the OECD grew about 100 million barrels in the second half of the year. This, in the short term, impacted tanker rates and will refill over time based on history. The United States SPR has grown in 2024 in small chunks. President Trump has indicated refilling the SPR is a priority to historic levels. This would mean around 300-plus million barrels, which may include imports of medium sour crude, which has historically been medium.

On Slide 6, the order book popped in 2024, particularly in the middle of the year. But as seen in the lower left chart, ships on order are still quite low relative to the size of the fleet in historical context. We added a weighted average tanker rate in the chart as an indicator that orders grow when the market is hot. But as we've shown many times, not factored into the chart on the left is the longer time horizon that many of these ships on order are expected to deliver over the next 4 years and the corresponding age of vessels on the water over this time.

The chart on the right reflects that 45% of the fleet is headed towards 20-plus years, the age where we identify as removed from the commercial fleet compared to 14% of the fleet that exists on order. As you can see, there are about 900 ships that are already 20 years old, and there are still another 1,500-plus vessels that are turning 20 during delivery schedule that will need replacement. This is significant for the tanker industry as the limited tanker supply continues to be supportive of strong tanker earnings.

We believe this should translate into a continued up cycle over the next few years, and Seaways remains well positioned to capitalize on these market conditions. We will continue to execute our balanced capital allocation approach to renew our fleet and adapt to industry conditions with a strong balance sheet while returning to shareholders.

I'm now turning it over to our CFO, Jeff Pribor, who will provide the financial review.

Jeff?

[Jeffrey Pribor, executive]

Thanks, Lois, and good morning, everyone. On Slide 8, net income for the fourth quarter was $36 million or $0.72 per diluted share. This includes a loss on vessel sales as a result of timing of the vessel swap that Lois discussed earlier. Excluding this, our net income was $45 million or $0.90 per diluted share. On the upper right chart, adjusted EBITDA for the fourth quarter of 2024 was $95 million. In the appendix, we provided a reconciliation from reported earnings to adjusted earnings. While our revenue based on market conditions was largely within expectations in the fourth quarter, our expenses were a little higher than our guidance from last quarter.

Vessel expenses were higher in the fourth quarter due to the timing of stores and spares at the end of the year and additional repairs and maintenance. G&A was higher primarily for one-off legal matters. Our lightering business continues to prosper with over $9 million in revenue in the quarter. Combining this with about $3 million in vessel expenses, $3 million in charter hire and $1 million of G&A, the lightering business contributed nearly $3 million in EBITDA in the fourth quarter as well as an annual EBITDA contribution of nearly $20 million in 2024.

Turning now to our cash bridge on Slide 9. We began the quarter with total liquidity of $694 million, composed of $153 million in cash, $540 million in undrawn revolving capacity. Following along the chart from left to right on the cash bridge, we first had $95 million in adjusted EBITDA for the fourth quarter, less $23 million in debt service and another $18 million of dry dock and capital expenditures, offset by working capital benefit of about $24 million due to the timing of deferred revenue, payables or accruals.

We therefore achieved our definition of free cash flow of about $78 million for the fourth quarter. This represents an annualized cash flow yield of over 17% on today's share price. We spent $53 million in connection with the vessel swap due to the timing of deposits and the delivery of one of the MRs in the swap. Due to the temporary timing difference, we borrowed $70 million on our lines of credit that we repaid in the first quarter of 2025. The remaining bars on the cash bridge reflect our capital allocation for the quarter. We repaid $20 million of debt early in the fourth quarter, made $12 million in installment payments for our LR1 newbuildings and also paid $59 million in dividends to shareholders, equating to $1.20 per share.

Altogether, these components led to ending liquidity of $632 million with $158 million in cash and short-term investments and $475 million in undrawn revolving capacity. Now moving to Slide 10. We have a strong financial position detailed by the balance sheet on the left-hand side of the page. Cash and liquidity remained strong at $632 million. We have invested about $2.2 million in vessels at cost, which are not on the books currently at a value of $3.5 million. And with $695 million of gross debt at the end of the year, our net loan-to-value is below 16%. Our debt at December 31 was over 70% hedged or at fixed rates, equating to an all-in weighted average interest rate of about 614 basis points or under 200 basis points above today's SOFR.

Following our repayment in the first quarter of 2025, we expect our fixed rate hedge amount to be closer to 80%. We continue to enhance the balance sheet to create the financial flexibility necessary to facilitate growth and returns to shareholders. We have $475 million in undrawn revolvers at year-end, which rose to about $560 million pro forma of our debt repayment following the close of the swap transaction. Our nearest maturity in the portfolio isn't until the next decade. We continue to lower our breakeven costs, and we share in the upside with double-digit returns to shareholders.

On the last slide that I'll cover, Slide 11 reflects our forward-looking guidance and book-to-date TCE aligned with our spot cash breakeven rate. Starting with TCE pictures for the first quarter of 2025, and I'll remind you that actual TCE during our next earnings call may be different. Currently, we have a blended average spot TCE of about $26,500 per day fleet-wide on 70% of our first quarter expected revenue base. On the right-hand side of the slide, our forward spot breakeven rate is about $13,700 per day composed of a fleet-wide breakeven of about $16,200 per day, less nearly $2,500 per day in time charter revenues.

Based on our spot TCE booked to date and our spot breakevens, it looks like Seaways can continue to generate significant free cash flow during the quarter and build on our track record of returning cash to shareholders. On the bottom left-hand chart, we provide some updated guidance for expenses in the first quarter and our estimates for 2025. We also included in the appendix our quarterly expected off-hire in CapEx. I won't plan to read each item 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. Lois?

[Lois Zabrocky, executive]

Thank you so much, Jeff. On Slide 12, we have provided you with Seaways' investment highlights, which we encourage you to read in its entirety, and I will summarize briefly. Over the last 8 years, International Seaways has built a track record of returning cash to shareholders, maintaining and improving our healthy balance sheet and growing the company. Our total shareholder return represents around 20% compounded annual return. For the second consecutive year, we returned over $300 million to shareholders, which is about 25% combined return over the last 2 years. We continue to renew our fleet so that our average age is about 10 years old in what we see as the sweet spot for tanker investments and returns.

We've invested in a range of asset classes to cast a wider net for growth opportunities and to supplement our scale in each class by operating in larger pools. We aim to keep our balance sheet fortified for any down cycle. We have over $500 million in undrawn credit capacity to support our growth. Our net debt is under 16% of the fleet's current value, and we have 36 vessels that are unencumbered. Lastly, we owning our spot ships to collectively earn $14,000 per day to breakeven in the next 12 months. At this point in the cycle, we expect to continue generating cash that we will put to work to create value for the company and for our shareholders.

Thank you very much. And with that said, operator, we'd like to open the lines for questions.

[Operator]

[Operator Instructions] Our first question comes from Ben Nolan with Stifel.

[Benjamin Nolan, analyst]

I appreciate it. So I've got a couple. The first relates to sort of maybe your charter out strategy at the moment. And I think this is particularly true for some of the crude tankers. The charter market is pretty elevated relative to certainly where you built some of your spot vessels and generally, I think spot -- obviously, that's pointing to an inflection up in the spot market. But I'm curious if you think about just given that dislocation, maybe taking a little risk off the table and locking in some capacity just because there is a gap between the 2 at the moment.

[Lois Zabrocky, executive]

So to answer that question -- Sorry, Ben, I didn't wait for your remaining question.

Let me answer that one. And then -- yes, and then we'll take your second one. How is that?

[Benjamin Nolan, analyst]

Okay. Sounds good.

[Lois Zabrocky, executive]

We have 14 time charters in our books right now out of our 78 vessels that are on the water, and then we have our 6 newbuildings that will be arriving, right? So we have nearly 20% of our tonnage on time charter at present, and then I would just have Derek jump in there.

[Derek Solon, executive]

Sure, Lois. Thanks. Further to your question, we would continue to look at time charters like we always do with the right partners, the right term and the right rate. It's something that we're always evaluating.

[Benjamin Nolan, analyst]

Okay. But there's nothing about the market at the moment that makes you more or less compelled to move in that direction, I suppose, is the answer. Okay -- Sorry, go ahead.

I was going to ask my next question. But if you would -- we're going to add any more to it, that's fine. But Well, my next question, just to have it out there is in the quarter, the MR -- you guys -- thus far in the first quarter, your MR rates were pretty decent thus far for what you already have booked. Just curious if maybe you can give a little color, like is there a specific geographic focus? Is this -- how should we think about the remainder of the quarter? Is it just, hey, things are going pretty well there at the moment?

[Derek Solon, executive]

Ben, it's Derek again. If I can take that one. Thank you. Yes, the Q1 bookings we're pleased with so far. I think we're doing well when we look at our peer group. I think the -- we're starting to see -- we're starting to see a little bit of dislocation in the MR rates, whereas we've been kind of carried by the Atlantic Basin over the last couple of quarters. We're seeing U.S. Gulf start to come down a little bit where we do have a good deal of exposure. But we're seeing Asia come up and luckily with an MR fleet of our size and our pool employment, we have good exposure to the East markets as well. So we should be covered to capture some of that Eastern upside.

[Operator]

Our next question comes from Omar Nokta with Jefferies.

[Omar Nokta, analyst]

Good update. Just wanted to ask a couple of questions. Clearly, over the past few years, you've done a lot in terms of strengthening the balance sheet. Debt is now, as you say, below 16%. You have plenty of liquidity, fleet renewals been consistent, capital returns, whether buyback dividends. Just in terms of the dividend at the moment, the 4Q payout is 77% of earnings. That's up from 75% previously. And that 50% to 60% you were doing kind of going back to the beginning and say, in 2022. How should we think about this ratio going forward? I know it's moving -- it's been moving upwards. But just in general, 77%, what we should be expecting going forward?

And then how do we think about what that payout looks like as earnings kind of move up and down? And then if rates strengthen materially and kind of go back to where they were in '23, should we expect kind of a more normal payout kind of coming down closer to that 50% threshold again? Any kind of color you can give on what you're thinking of the payout ratio, especially in terms of earnings swinging? Sorry for the question.

[Lois Zabrocky, executive]

Excellent tee up for Omar, because we do want to highlight that. And as you know, we have steadily increased the percentage of adjusted net income that we have been returning to shareholders. And we have to have -- Jeff has his thunder here on what you should expect going forward.

[Jeffrey Pribor, executive]

You recapped it well. We raised the payout ratio gradually from 2022 until the end of last year as we were allocating free cash flow capital to delever. Having reached a level of leverage, which is sufficiently low, 50%-ish net loan to value, 20% gross, we were able to move up the payout ratio to 75% or a little more last quarter. And again, this quarter, as you noticed, so it's 77%.

I think what I hear from shareholders -- we hear from shareholders most or potential shareholders most often is clarity and consistency around this return of capital to shareholders program. And I think we can say clearly that shareholders should expect 75% or minimum of 75% payout ratio, mean it's helpful to have a round number like $0.70 per share. But I think that's the clear message. And to the second part of your question, I think if rates were to moderate or go up, net income will go up and the payout ratio still works. The payout will go up or down depending on how the year develops. So I think it's fair to say that we put ourselves in a position to have a payout ratio of a minimum of 75%, and that's the message.

[Omar Nokta, analyst]

Okay. That's clear. I appreciate that. And that's really helpful. And maybe just second question, the VLCC MR swap certainly been innovative, and we've been hearing about that for a while, at least in shipping circles as something that was in the hopper. Just in general, as we think about that transaction, how should we think about it in terms of what your plan has been? Is it deemphasizing the VLCCs in favor of products? Or is it really deemphasizing older tankers? And then that's one sort of part one. And then part two, I guess, would be, as you think about further transactions from here, what part of the fleet profile do you look to try to increase the ratio?

[Lois Zabrocky, executive]

Yes, Omar, it would be the latter of your -- what you were opining. Essentially, we really want to drive down the age of the fleet going forward. And because we're in each of these sectors, and we have a very broad network, we were able to come up with what I think was a pretty creative deal from the team and execute that pretty flawlessly here. And our overall age of the fleet is right around 10 years. And selling ships that are 210 and then bringing in 215, you just -- you're buying yourself that longer horizon to capture that upside. I think that would kind of do the summation. And then when you -- we are not deemphasizing crude at all, it simply happens to be an opportunity for us to shed some older inefficient ships.

[Omar Nokta, analyst]

Okay. And just quickly in terms of -- is it thinking about expansion or adding vessels or fine-tuning further, is there any part of the fleet that you want to bolster? Or is it just kind of -- it will depend on what the opportunity set is at the time?

[Lois Zabrocky, executive]

It certainly will depend upon the opportunity set at the time. And over time, you should look for us to add to the big crude side, which is where we've had a little bit of attrition now, right? So that will be a focus as and when that suits.

[Operator]

Our next question comes from Chris Robertson with Deutsche Bank.

[Christopher Robertson, analyst]

Jeff, this might be a question for you. Just turning to the breakeven, just broadly speaking, looking at what makes that up. As you look forward, and there's maybe a bit of a deemphasis here on further delevering. So maybe there's not more savings with regards to breakeven there. But as you look at OpEx and other components to it, where do you see kind of the floor that you could theoretically get to?

[Derek Solon, executive]

Chris, -- that's a good question. I think that we're always working on keeping costs in line and from going up too much. I don't think you'd expect us to be driving down OpEx. We hold it as well as we can. G&A, we're always working on that to make sure it's on a per ship basis that's a good number. And then if we were -- if we find ourselves growing as we have done in the past at the right time, that does bring a little lower per day cost on G&A. In terms of interest, I think we're -- interest -- the debt cost, I think there's a little bit that you can look forward to in the future without necessarily deleveraging further, just as we have a little bit of debt that's higher priced that will roll off.

We have the ability to think about more revolvers as opposed to more amortizing debt as we look out toward the end of this year and into next year. So it's kind of incremental. I think we feel good about our breakevens right now, right? So I'm not -- I think when you look at a fleet that has everything from VLCCs down to MRs to have a breakeven rate that's $16,000 before taking into account time charters and under $14,000 when taking into account time charters. We feel good about that. But we'll always like to find incremental ways to lower even more if we can.

[Christopher Robertson, analyst]

Okay. Great. Yes. That's what I like to hear on that. Turning to the LR1 segment. I know this is a segment that you guys have outperformed historically speaking. So I was wondering if you could just talk about that particular segment for a moment, what the current market dynamics there are? And do you still have kind of a competitive advantage there?

[Lois Zabrocky, executive]

I'll leave that at Lois, and then I'll turn to Derek. I think you can see when you stack up the LR1 Panamax sector against the competition in the fourth quarter, we continue to outturn our competition. And that market continues to be a strong niche, Derek?

[Derek Solon, executive]

Thanks, Lois. Yes, as you said, it continues to be a strong niche. And Chris, I think you're probably raising the question because the rates from sort of the start of the year to the end of the year have come down a good deal. But like you said, Lois is still a good niche for us. A lot of the decrease in rates have to do with just the overall market, but also a little bit from Ecuador. We're seeing a little bit of Ecuador sending more of their barrels out to China. So that will be in bigger shifts. When that dynamic shifts to come back to sort of the West Coast of the Americas, we expect that market to pick up even more again. I hope that answers your question, Chris.

[Operator]

[Operator Instructions] Our next question comes from Liam Burke with B. Riley.

[Liam Burke, analyst]

Lois, there's lots of puts and takes out there in terms of sanctions, redistribution of production. And most of the discussion has been the effect on VLCCs. Specifically, how are you looking at the outlook for the Suezmaxes?

[Lois Zabrocky, executive]

So the Suezmax has had prior to, I would say, the last 3 years had a very tight correlation pretty systematically with VLCCs with something along 85% to 90% correlation with the Vs. And I think that as you see the components of strength coming into place piece by piece with a lot of the political news that we read every day and the over 450 ships or like 100 of these on OPEC list.

As you see those components start to build and the Vs can hopefully get a little bit more of a groundswell here and continue to improve, you're going to see the Suezmaxes come along for that ride.

[Liam Burke, analyst]

Great. Jeff, on the -- with your liquidity situation, you have a tremendous amount of flexibility. Are opportunistic buybacks in the mix? Or is the payout ratio your primary method of returning cash to shareholders?

[Jeffrey Pribor, executive]

Liam, is the simple answer not to be cute at both. you're right. I mean the payout ratio is the primary method that we anticipate that we have been returning and expect to continue returning cash. However, as you asked, share repurchases are in the mix in the sense that we have a $50 million share repurchase program. We did $25 million of share repurchasing right after we sold the ship for roughly the same amount in last year, third quarter. So we have the ability to look at that again. But I'd say the primary plan is dividends, so focus on the payout ratio, but we have the flexibility to do share repurchase as well.

[Operator]

Our next question comes from Sherif Elmaghrabi with BTIG.

[Sherif Elmaghrabi, analyst]

So a couple on, I guess, charter sentiment. You highlighted that nearly 20% of the tanker fleet is over 20 years old. But given that newbuild deliveries aren't going to replace those older vessels at the same rate, do you think we could see charters relaxing their specification requirements if there isn't as much modern tonnage available?

[Lois Zabrocky, executive]

I would say that you do see a bit of flex on the margin from charters depending upon what the tonnage availability is and what the strength of the overall markets are, right? So very well-maintained vessels, I think, could retain their ability to trade and their efficiency. On the other hand, the OPEC list of 100 -- those vessels, it's a rare exception that there's a few there that are under 20 years old, right? So you do tend to see the ships that are on the water and yet highly inefficient and really marginalized being older and certainly controlled by those that are not doing a high level of maintenance. So I think it will be incremental from the charterers. It's never going to be wholesale.

[Sherif Elmaghrabi, analyst]

And then on Red Sea Transit, I appreciate nobody wants to be the first mover in the Red Sea, and everyone has a different opinion on when transit could resume. But is this something that charters are pushing for at this time?

[Lois Zabrocky, executive]

I'm going to turn it over to our Head of Ops, Bill Nugent, and just happy to give a little bit of an opinion there.

[William Nugent, executive]

Thank you, Lois. The -- we don't talk about our specific security measures or policies. What I can say, I think, is that the whole market is looking for a bit more of a sustained stability in the region and the de-escalation. So to answer your question, I'm not aware of any pressure or inquiries from charterers to go through and grateful for their support and like thinking.

[Operator]

And that was our final question. So I will hand back over to you, Lois, for any final remarks.

[Lois Zabrocky, executive]

I would just like to thank everyone for joining us today, and we live in very interesting times and are watching the news frequently, right? So we see an overall construction and the tanker market to be really rather robust. And we hope to hear from you next quarter. Thank you very much.

[Operator]

So this concludes today's call. Thank you, everyone, for joining and for participating. Have a great day. You may now disconnect.