Q4 2023 International Seaways Inc Earnings Call
Participants
James Small; Chief Admininistrative Officer, SVP, Secretary and General Counsel; International Seaways, Inc.
Lois Zabrocky; President and CEO; International Seaways, Inc.
Jeff Pribor; SVP and CFO; International Seaways, Inc.
Derek Solon; SVP and Chief Commercial Officer; International Seaways, Inc.
Chris Robertson; Analyst; Deutsche Bank
Liam Burke; Analyst; B. Riley Securities
Jay McGarry; Analyst; Jefferies
Sherif Elmaghrabi; Analyst; BTIG
Presentation
Operator
Yes, morning all and welcome to the International Seaways Fourth Quarter and Full Year 2020 free 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. If you'd like to ask a question, please press star one by one on your telephone. I would now like to hand this conference call over to Ari Danes for International Seaways General Counsel. Got it.
James Small
Thank you, Kate, and good morning, everyone, and welcome to International Seaways earnings call for the fourth quarter 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 of which it operates. Those statements may address without limitation the following comments outlooks for the crude and product tanker markets, changes in trading patterns forecasts of world and regional economic activity that have the demand for and production of oil and other petroleum products. The effects of ongoing have threatened conflicts around the globe. The company's strategy, our business prospects, expectations regarding revenues and expenses, including vessel charter hire and G&A expenses, estimated bookings, TCE rates and or capital expenditures during 2020 or in any other group projected scheduled drydock and off-hire days purchases and sales of vessels, construction of newbuild vessels and other investments. The company's consideration of strategic alternatives anticipated and recent financing transactions has 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. 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 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, which could cause actual results to differ materially from those implied or expressed by the same 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 2023 and in other filings that we have made or in the future may make with the U.S. Securities Exchange.
Now let me turn the call over to our President and Chief Executive Officer with low drug load.
Lois Zabrocky
Thank you very much, Jane. Good morning, everyone, and thank you for joining International Seaways earnings call for the fourth quarter 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 our net income was $556 million, $11.25 per share. This eclipsed 2022 net income of $388 million, $7.77 per share. Net income for the fourth quarter of 2023 was $132 million or $2.68 per share. Included in these figures are gains on vessel sales and a write-off of deferred financing costs. Excluding the special items, adjusted net income was $525 million for the year and $108 million for the quarter.
Seaways closed 2023 with just over $600 million in total liquidity, $187 million in cash and $414 million in undrawn revolver. Jeff will highlight our balance sheet in just a few moments, but feeling a little bit of a center. Our $547 million in net debt is well below our fleet recycle market value. In 2023, we repaid $475 million in debt of which $300 million was incremental to our natural debt amortization schedule. With this sizable prepayment during the year, we reduced our breakeven levels to an impressive sub $14,500 per day level across the fleet. We unencumbered 13 vessels and we doubled the size of our revolving credit capacity to $414 million. Today, we announced that we signed an MOA to purchase six Eagle MR vessels for $232 million. 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 one year. During 2023, we sold three MRs for $39 million in net proceeds after debt repayment the sale of the ownership crystallize value generated since our merger with Diamond up in 2021 at the bottom of the tanker market, these shifts return nearly 80% always from purchase price due to both strong earnings and the strong price realized in their sale.
Finally, we added two vessels to our turnaround portfolio. We now have over $354 million in contracted revenue with an average term of nearly three 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 million. Dividends was $14 million of repurchases. Combined, we returned over $320 million 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. And the way we're committed to our balanced capital allocation strategy, we pull all the levers to secure future and to provide value to shareholders.
In 2023, we continue to high-grade the fleet, investing in our profitable LR one joint venture where 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 million and breakeven so low. You would expect, though, for our 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 yields on our share value.
Turning to slide 5, we've updated our bullets on tanker demand drivers with green arrows.
Next two bullets representing positive developments for tankers, West dashes for neutral impact and read down, you are indicating tanker negative, pulling some highlights. The forecast for oil demand in 2024 remains robust, with demand growth estimated to be about 1.5 million barrels per day in 2024, representing a percentage point growth year over year. It 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 for the incremental new supply coming from the West, quite a long haul trade for tankers. Non OPEC production growth of around 1 million barrels per day is mostly coming from the Americas in 2024 a supportive 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 with sanctions on Russian oil, further tonne-mile support underlying 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 toward 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. On the lower left-hand chart, we break down the order book on each vessel class relative to the operating fleet 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 double 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 need to need to replace the existing fleet on the water on the lower right-hand chart, which we show expected deliveries in the near term. 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 turn the fleet size will rationalize 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.
As mentioned, regional imbalances of oil should continue to increase the need for tankers as growth in oil production is coming from the West and the oil demand is driven by non OYCE. and EFCUA., we will continue capturing the strength of the tanker market. We will utilize every possible 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 Pribor, our CFO, to provide the financial review. Jeff Simmons.
Jeff Pribor
Thanks, Lois, and good morning, everyone. On Slide 8. Net income for the fourth quarter was $132 million, 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 million on the upper right chart, adjusted EBITDA for the fourth quarter of 2023 was $159 million, which also excludes the same special items in the appendix. We provided a reconciliation from reported earnings to adjusted OR, while our expense guidance for the third quarter fourth quarter felt mostly in line with the range of expectations.
I'd like to point out a few items of note with Eric and state vessel expenses were higher than expected with the largest variance due to some opportunity, storing repairs and maintenance costs as well as increased spend for crew changes during drydocks and training on the new dual-fuel VLCCs. G&a expenses were in line with guidance on the revenue side, our lightering business had another strong quarter, earning about $11 million with $2 million invested in vessel expenses, $3 million in charter hire $1 million of P&A. Fiery business contributed about $4 million of EBITDA in the fourth quarter and a record of nearly $20 million for the year.
Turning now to our cash bridge on Slide 9. We began the quarter with a total liquidity of $581 million, composed of $214 million of cash and $360 million undrawn revolving debt capacity.
Follow along the chart from left to right on the cash bridge, we first data $159 million in adjusted EBITDA for Q4 was $44 million and debt service composed of scheduled debt repayments to cash, then less our drydock and capital expenditures of about $5 million a quarter and draw working capital due to timing of about $14 million. We therefore achieved our definition of free cash flow of about $91 million for the fourth quarter. When you combine our free cash flow for the year, we generated over $500 million during 2023 or over $10 a share, representing a 20% free cash flow yield at today's share price. The remaining bars are the cash reflect our capital allocation. For the quarter, we received about $28 million of proceeds after debt repayments for two vessels sold during the quarter. We also spent $12 million of progress payments for the first two out of one orders. As we announced last quarter, we've repaid about $71 million of debt, of which $50 million to be drawn again, since it decreased our revolving credit capacity and we paid $1.25 per share or about $61 million in dividends during the quarter. These components then lead us to an ending liquidity of $601 million e with $187 million in cash and short-term process at $440 million in undrawn revolving debt.
Now moving to Slide 10. We have a strong financial position detailed by the balance sheet so on the left hand side of the page, cash and liquidity remains strong at over $600 million vessels on the books at cost or approximately $2 billion versus current market values over $3 billion with about $784 million of gross debt at the end of the year.
Detailed on the bottom right of the page from this equates to a net loan to value just 17%. Our debt today is 85% hedged or fixed rates, which equates to an all in weighted average interest cost interest rate of about 6% for less than 100 basis points of silver.
As Howard mentioned earlier, we continue to execute a balanced capital allocation strategy. 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 second straight quarter. At the same time, we have positioned our balance sheet to support growth. We are purchasing six MRs with our available liquidity and a portion of shares, yes, 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 share.
Yes. And last slide that I'll cover, please turn to Slide 11 reflects our forward-looking guidance and booked a GC. line with our cash breakeven.
Starting with GCI fixtures for the first quarter of 2024. I'll remind you that actual TCE to 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.
On the right-hand side of the slide, you can see our cash breakevens, which we have displayed for the next 12 months, reflective our daily cash costs and CapEx plus principal and interest as well as the new fixed revenues before profit share on our long-term charters at this time last year, a cash breakeven even for $3,000 per day higher than they are today.
Just to repeat that $3,000 amount per day that we produced in our cash breakevens year over year. And we've returned over $320 million to shareholders representing 16% yield on our average share price 2023, while also taking considerable steps to renew the fleet.
Looking forward, if you were to compare our breakeven has our spot earnings, you can see the first quarter of 2024 looks like another very strong quarter, Steve, looking at the bottom left-hand chart for the modelers out there, we provide updated guidance for expenses in the first quarter. And as for 2024, we also include in the appendix our core quarterly expected off-hire and tap CapEx schedules for 2023 into 2024. I don't plan to read this slide by line, but encourage you to use that for modeling purposes.
That concludes my remarks.
So I'd now like to turn the call back to Lois for closing comments.
Lois Zabrocky
Thank you very much, Jeff. In 2023 key ways executed our strategy. We had significant operating leverage, low cash breakeven. We achieved record earnings in 2023 with a fleet nearly evenly split between crude and product teams. We continue to develop a fleet composition that enables us to build upon our operating leverage and capitalize on today's strong market. Last year, we took delivery of three dual-fuel VLCCs with long-term charters and profit-sharing that are running extremely well in our fleet. We ordered four LR ones or niche Panamax International joint venture. We trimmed some older MRs that returned an 80% IRR for us in the last two years and entered an agreement to purchase six modern MRs our balance sheet has never been better. 2023 was transformational for International Seaways and de-leveraging us and to capitalize on growth opportunities. We easily 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, have positioned the Company to maximize earnings and 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 digital village 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.
Question and Answer Session
Operator
Thank you. And if you'd like to ask a question, please press star on your telephone keypad, ensuring that you are unmuted locally. If you'd like to withdraw your question at any time you can do so by pressing.
Well, I'll call it my two on your telephone. As a reminder, star followed by one to ask your question. Our first question comes from the line of Chris Robertson of Deutsche Bank. Your line is now open. Please go ahead.
Chris Robertson
Hey, good morning, Lois and Jeff. Congratulations on the very strong quarter here on just a couple of questions, one more market orientated and then a detailed one. So just as it relates to the Red Sea disruptions going on in your minds is the market for tankers at peak disruption at the moment, 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 are already done so or is there more room there?
Lois Zabrocky
As Chris said, slower Good morning, and I'll jump in here and say that I think we are at peak disruption levels and take that with the number variety of attacks in your sort of indiscriminately on paper assets traveling through the area that we're really seeing a large amount of tankers on PTA around the bottom of course.
Chris Robertson
Okay. Just next question just relates to the MRs on when you guys take delivery of those vessels, is there going to be any incremental CapEx associated with? I'm sorry, is it energy saving upgrades or anything like that that we should think about?
Lois Zabrocky
You know, Chris, what I would say is that these vessels are built at SPP. We already have in our fleet that we built a predecessor company at SPP. There is strong, the design or 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 on the water look at, okay, are we going to in due course, you know, maybe when they're at their natural drydock cycle. We look to put on flip page and I'm sure efficiency factors. You know, naturally, we will do that, but we don't have any immediate required CapEx spend.
Chris Robertson
Okay. Okay. Great. Thanks. So I'll turn it over.
Lois Zabrocky
Thank you.
Operator
And thank you. Our next question comes from the line of Liam Burke of B. Riley. Your line is now open. Please go ahead
Liam Burke
Good morning, Louis. Good morning, Jeff.
Lois Zabrocky
Good morning.
Liam Burke
On Lowe's, is there any interest in or it does seem to sell some of your older MRs Yes.
Lois Zabrocky
So you know, I know you you've been following us long enough and sold 18 MRU. over the last 2.5 years. So we thought it was a especially when you just see that continued strong fundamentals in the MR sector times, you have to bring something in. And we do continue to prune out some of the older vessels and this is just a natural regeneration. You know, these vessels coming in on a seven years, younger ITO, and it just brings in a renewal that we think is very natural and organic to the company.
Jeff Pribor
Can they leverage those data as well as that? Liam, is that both mentioned in our remarks, you know, these vessels were selling vessels that we acquired the Dime s merger. Looking at the purchase price, the cash contributed profits, while we call them the sale price, it comes down 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.
Liam Burke
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?
Derek Solon
Highly? And this is Derek Solon, no commercial officer for Seaways, Eric, thanks for the question queue, and thanks for the question. We continue to add to our DC covers the 2023 like Lowe's and Jeff cover in their remarks and putting away two more ships in the fourth quarter. We continue to look for potential opportunities. Liam, I think for us we continue to look for the multiyear charters for the shorter term stuff one year or less. We'd rather stay in the spot market right now. But you know, for the availability of coverage, that's two or three years out, if we see rates that are we could develop rates that are attractive to us, then we'll continue to look at that.
Liam Burke
Great. Thank you, Dirk. Thank you, Lois. Thank you, Jeff.
Lois Zabrocky
Thank you.
Operator
Thank you. Our next question comes from the line of Jack McGarry. Please, your line is now open.
Jay McGarry
Okay. Hey, guys. Thanks for taking our question and congrats on a solid year. Just turning to 2024 and no market with standing. Just in terms of allocating capital, are you looking to deleveraging at the same rate to last year? Or are you more or less content with the amortization profile you have now maybe look to build on no shareholder returns or your cash position. I'm just trying to see, I know is there any priority where you're leaning towards with respect free cash flow?
Jeff Pribor
Thanks, Jay, and welcome, Jeff. But yes, in 2023, we were able to both delever to that level that we Mexico were that 70% loan to value at well below recycle value while still returning a lot. So say to shareholders that combined 16% to dividends or share purchases 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 there and what we kind of call quality debt like your home mortgage that's below current interest rates that you receive where?
Yes, I don't know if content-aware, but we are satisfied that we reach a level of debt where our priorities are what you've heard today, it's renewing the fleet like the six MRs we just talked about and continuing to return cash to shareholders where for the second quarter in a row, we've returned 60% of net income in the form of regular combined dividend, which I think speaks for itself. So I think I think that's of the picture for going forward.
Jay McGarry
Great. Thanks for the color on that. And maybe just a follow-up on Liam's question would be are with the older MRs. You just said that you're well capitalized, but you have six MRs coming in. Is this purely just fleet renewal or, you know, do you like the size of the MR fleet now in your maybe just looking at build and expand within our space?
Lois Zabrocky
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 three and the market continues very strong. So you look at where our book days are in Q one, and you can see why we're bringing the ships in.
Jay McGarry
Great. Thanks, guys. I'll turn it over.
Lois Zabrocky
Thank you.
Operator
Yes, final question comes from the line of Sharif Omnicom BTIK. Your line is open, please.
Sherif Elmaghrabi
Yes, good morning, everyone, and 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, the maturity size, probably average, but what about on the clean side?
Lois Zabrocky
Okay. Thank you for the question and I'm looking at, Derek, you know, as we know, there's a healthy amount of both crude and product that is moving in the directly. But you but if you think about it, it's going to be more crude on baking I'm thinking
Derek Solon
I think if we use the whole darker Grizzly around 700 ships, it's just some of that has to be on the clean side would be my would be my view should so it's both to your question is both crude and clean due to, I guess your specific question, you have the dark fleet doing some of the sanction trades out of Venezuela and Iran. So that's that's one element of that fleet. And then you have as you said the great fleet, which is doing a little more Russian trade you have, is it or isn't it under the price cap? What are the requirements showing under the price cap when the authorities pay attention to if you are or if you are filing rate cap on that composition is probably half of that whole dark gray fleet and a little bit less than a quarter of it would be clean would be just an estimation period, if that helps.
Sherif Elmaghrabi
That is helpful. Thanks, Derek. And then on the order book split out by vessel type and classics, excuse me, which is interesting because not all parts of the fleet are growing evenly next year. So I think LR. twos 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? Or is it more to do with kind of shifting refinery capacity?
Derek Solon
I'm sorry, Derek, if I could take that. I mean, obviously, the numbers are the numbers. So I agree with you that our team fleet is growing of the order book is growing pretty rapidly on. We've been talking about LR two cannibalizing the MR trade for the past 20 years. So I think the MRs will continue to be the workhorse of our fleet, but some of the geopolitical events that we see right now are really helping that LR. to go. I think on not so much the Russia, Ukraine situation, but clearly the pound Israel amassed conflict and what that's bringing over the Red Sea and today, are you starting to see BLR. twos having to go around the Cape of Good Hope a lot more, I think the ton-mile. So that market's really, really running that larger LR to start going to replace MRs. I don't really think so just on trade patterns and then that does leave the fleet a little bit vulnerable as well because of the switch to dirty, depending upon what what's better.
Sherif Elmaghrabi
That's helpful. Thanks, everyone.
Lois Zabrocky
Thank you.
Operator
Thank you. As there are no additional questions at this time, I'd like to hand the conference call back over to Lois Zabrocky. Thanks, everyone.
Lois Zabrocky
Thank you very much, everyone, for joining International Seaways. As we shared with you our 2023 record earnings, we really appreciate it, and we look forward to talking soon Thank you very much.
Operator
Ladies and gentlemen, I would like to thank you for joining us on today's call and have a great rest of your day, and you may now disconnect. Your line?
