2023-11-11 04:26:28 ET
Summary
- International Seaways announces solid Q3-2023 earnings, with revenues in line with previous year and a $1.25/share dividend for Q4-2023.
- Stock has gained 28% since the beginning of the year and is currently trading at an 11% discount to its yearly maximum value.
- Demand for oil tankers is expected to remain high in 2024 due to increased oil demand and limited supply, keeping day rates profitable.
A few days ago, International Seaways ( INSW ) announced its Q3-2023 earnings . Results were quite in line with analysts' expectations and there were no big surprises. Results were solid and the management announced a $1.25/share dividend for Q4-2023. In this article, I will provide an analysis of the Q3-2023 earnings and I will explain why I believe International Seaways is still a buy despite the long upward rally it has shown since the beginning of the year.
If you are interested in other investment opportunities in the oil tanker business, you can have a look at my last article about Teekay Tankers’ Q3-2023 results .
Stock performance
International Seaways is currently trading at $47.25/share, equivalent to a market cap of $2.3 bn. Since the beginning of the year, the stock has gained 28% while, in the last 52 weeks, the increase is about 7%. The 52-week minimum is $33.3/share (January 4 th , 2023), while the 52-week maximum was reached on Aprile 3 rd , 2023, at $52.9/share. Therefore, the stock is currently trading at an 11% discount to its yearly maximum value.
Q3-2023 results
In Q3-2023, total revenues were $236 M, exactly in line with the previous year (+0.4%), however, the breakdown between sales generated by crude tankers and product tankers changed. Indeed, crude tankers’ revenues ($111 M) increased by 48% year-on-year and now represent 47% of total sales (vs 32% on year before). On the other hand, product tankers generated 53% (vs 68% on the year before) of total sales ($125 M), down 22% year-on-year. The reason behind this change in revenue breakdown can be explained by focusing on day rates and revenue days:
- Crude tankers: across the crude tankers segment, day rates increased by 68% y-o-y for VLCC and by 13% y-o-y for Suezmax vessels. The two classes also saw an increase in the number of revenue days (+7% and +19% respectively). On the contrary, the Aframax vessels recorded a lower amount of revenue days (-37%) and lower rates (-11%). However, since Aframax vessels are far less than Suezmax and VLCC ones, total crude revenues increased.
- Product tankers: in this segment, revenue days decreased both for LR1 (-17%) and MR vessels (-26%) while day rates showed an inverted trend. LR1 rates increased by 37% to $56k/day while MR rates decreased by 26% to $26.6k/day.
The revenue situation is a bit different if we compare Q3-2023 to the previous quarter, Q2-2022. In this case, one can notice that revenues have dropped by 18%, from $288 M to $236 M with the main reason being a generalized decline in day rates across all vessel classes.
Looking at the operating expenses, total costs increased by 18% from $108 M to $127 M with a $9 M increase mostly due to higher vessel expenses (from $58 M to $65 M, +12%), higher D&A (from $28 M to $33 M, +18%). The net income was positive at $98 M, 13% less than Q3-2022.
Free cash flows
FCF generated in Q3-2023 was $104 M and it was the result of a starting adjusted EBITDA of $151 M to which $54 M of debt service and $13 M of capex were removed while $20 M of net working capital variation was added back.
Focusing on the first nine months of the year, cash flow from operations was positive at $563 M, mostly driven by the high net income. Cash flow from investing activities was negative at -$170 due to expenditures for vessels under construction and vessel improvements. Cash flow from financing activities was negative as well at -$498 M, since International Seaways, among other activities, paid back $323 M of debt and $247 M were paid out in dividends.
Debt position and liquidity
At the end of Q3-2023, the cash and cash equivalents plus short-term investments amount to $214 M while the total debt balance is $771 M. As a result, net debt amounts to $557 M, equivalent to 24% of the market capitalization. The average cost of the debt is 6% and the earliest maturity will be in 2027. At the time being, International Seaways has $417 M of undrawn credit capacity which further increases the company’s liquidity.
Oil tanker market dynamics
The most important value driver behind an oil tanker company valuation is represented by the oil tanker day rates, since it is the most impacting variable on revenues and, consequently, on FCF generation. As an oil tanker investor already knows, the last quarters have been characterized by very high oil tanker rates that have enabled oil tanker stocks to soar to valuation never seen before. However, I believe that the upward rally is far from over since the oil tanker market is still affected by some forces that are keeping the day rates under pressure and at very profitable levels.
The main reason causing this dislocation in day rates is represented by the imbalance between oil tanker demand and supply.
From my point of view, demand for oil tankers will remain high at least for all of 2024 for a series of reasons. First of all, oil demand is forecast to increase in 2024 (by million barrels per day) leading to more oil that will need to be moved and, of course, higher demand for oil tankers. In addition, the EU is still banning crude (and oil products) imports from Russia with the consequent need for European countries to get a supply of oil via tanker from further countries. This, once again, is a factor that is putting pressure on the oil tanker demand.
If, on one side, demand for oil tankers is expected to grow, we cannot say the same for oil tanker supply. Shipyards are still working to reduce the backlogs accumulated during the Covid period and have a very limited bandwidth for new oil tanker orders. To give an idea, since November 2022, the worldwide oil tanker fleet has increased by only 3%. In addition, oil tanker companies are thinking twice before placing new orders for two main reasons: inflation has increased the cost of new builds and potential new regulations are creating uncertainty on the technical specifications that new vessels need to meet.
Overall, the result is that the demand for oil tankers is higher than the supply, thus keeping day rates at high levels. From my point of view, the demand/supply mismatch will remain a key trend for all of 2024 and maybe even beyond since the earliest new building slots are in 2027.
Peer comparison
To develop a better understanding of International Seaways market valuation, I compared it with some peers. I selected oil tanker companies and I looked at their price-to-earnings and EV/EBITDA ratio. From the chart below, one can notice that International Seaways is trading at 4.4x P/E and 4.2x EV/EBITDA and, therefore, it is trading at a discount both to the average mean and average median of peers. In other words, my conclusion is that International Seaways is slightly cheaper than other oil tanker companies.
Analysts’ view
International Seaways is currently covered by 7 analysts of equity research firms. All of them have a positive view of the company with six suggesting a strong buy recommendation. The average target price is $61.2/share, which would represent a potential 28% upside versus the current stock price.
Risks
Being an oil tanker company, International Seaways is exposed to some risks. Focusing on the industry itself, it is worth mentioning that the oil industry is cyclical and a reduction in oil demand will for sure cause a reduction in oil tanker demand with a subsequent day rate decline and lower FCFs. At the same time, day-rates could decline if the supply of oil tankers were to increase with new vessels being built at a faster pace than what is now happening: however, I believe that this situation is very unlikely to materialize. Other potential risks are related to the regulatory aspect with potential new regulations regarding GHG emissions that could lead to more capital expenditure for vessel modernization than expected.
Conclusion
Overall, having analyzed the Q3-2023 results, I believe that International Seaways is a solid company and is properly working to reduce its debt exposure. The current oil tanker demand/supply dynamics are creating a favorable environment where oil tanker companies can thrive thanks to high day rates that ensure strong FCF and profits.
For further details see:
Riding The Waves: Why International Seaways Remains A Buy After Q3-2023