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International Seaways’ double exposure to crude and products

Photo courtesy of INSW

Profits are on the rise at International Seaways (NYSE: INSW), a New York-based tanker owner with a diversified fleet that could provide upside on multiple fronts.

INSW reported net income of $10.9 million for the first quarter of 2019, compared to a loss of $29.3 million in the same period last year. In the most recent quarter, earnings of $0.37 per share came in just shy of analyst consensus expectations of $0.40 per share.

INSW has a fleet spanning multiple size categories within both the crude oil and refined-product tanker segments. Rates were up across the board from depressed levels in 2018, with total shipping revenues nearly doubling, from $52 million in the first quarter of 2018 to $101.9 million in the first three months of this year.

On the crude oil side, INSW’s spot-employed very large crude carriers (with a capacity of around 300,000 deadweight tons or DWT) achieved an average rate of $31,993 per day, up 148 percent year-on-year. In the smaller Aframax category (80,000-119,999 DWT), spot ships earned $20,905 per day, up 110 percent.

Within INSW’s product-carrier fleet, spot rates for LR1s (55,000-79,999 DWT) rose 106 percent, to $24,017 per day. Rates for LR2s (80,000-119,999 DWT) increased 59 percent, to $22,090 per day.

INSW is also a significant player in the Gulf of Mexico Aframax ‘lightering’ and ‘reverse lightering’ business. When crude oil comes to the U.S., it is generally shipped aboard a VLCC and lightered (transferred) to a smaller Aframax that can fit the berths of a Texas or Louisiana terminal. When America exports crude oil, it is loaded on an Aframax at the pier and transferred, or reverse lightered, onto a VLCC.

The company’s lightering and reverse lightering business posted net income of $2.35 million in the first quarter of 2019, up from a loss of $400,000 in the same period in 2018.

INSW’s fleet mix is a good match for the positive trends in the U.S. export market. According to preliminary data from the Energy Information Administration, the U.S. exported an average of 2.5 million barrels of crude oil per day in April, near an all-time high.

Higher U.S. crude exports support both INSW’s VLCCs, which carry the crude to Asia, and its Aframaxes, which reverse lighter the crude to VLCCs offshore.

U.S. exports of refined products averaged 5.3 million barrels per day in April, also near record levels. INSW has positive exposure to this trade through its LR1s, LR2s and MR2s (40,000-54,999 DWT).

INSW’s ownership of both crude oil and product tankers also provides double exposure to the IMO 2020 regulation, which will mandate the use of low-sulfur marine fuel starting on January 1, 2020. Increased refinery runs in the second half of 2019 are expected to hike demand for crude oil tankers, while the need to move low-sulfur refined products to marine refueling hubs is expected to boost demand for product carriers.

Summing up the future potential, INSW chief executive officer Lois Zabrocky asserted, “With a sizeable fleet and significant upside to a market recovery in the crude and product tanker sectors, we remain well-positioned to capitalize on supportive fundamentals, driven by strong and sustained global oil demand, increasing U.S. Gulf exports, a manageable orderbook, and IMO 2020, which we believe will begin to impact the market in the second half.”

A relative newcomer to the U.S. public markets, INSW traces its roots to former tanker industry giant Overseas Shipholding Group (OSG). That company collapsed in spectacular fashion and filed for Chapter 11 court protection in November 2012, leading to one of the largest and most expensive bankruptcy cases in the history of the shipping industry.

OSG did not emerge from bankruptcy until August 2014. Its post-restructuring plan was to sell its international-flag ships, and retain the company’s U.S.-flag Jones Act ships under the OSG banner. When OSG couldn’t find a buyer for the international fleet, it opted to spin it off under a separate listing, INSW, which began trading on the NYSE in December 2016.

The timing was not auspicious. Tanker rates started to fall in 2017 and reached historic lows in 2018. INSW didn’t report its first profit until the fourth quarter of 2018.

The company faced a disadvantage when competing for tanker employment because its fleet was old – with an average age of 12 years at year-end 2016. Because of the bankruptcy, and the period of financial pressure that preceded it, OSG had not been ordering new ships while its competitors were.

INSW has been moving swiftly to rectify the issue. Most notably, in 2018, it bought five 2015-built VLCCs and one 2016-built VLCC for $434 million. The ships had previously been owned by Gener8 Maritime; that company was sold to Euronav (NYSE: EURN), which opted not to buy the entire Gener8 fleet, but rather to sell off six of Gener8’s VLCCs to INSW and reduce its operating and financial leverage from the deal.

These purchases and other acquisitions, together with sales of several older ships, have brought the INSW fleet’s average age down to a more respectable 8.7 years. Given its improved fleet and the brightening market conditions, INSW’s stock is finally beginning to gain traction with investors.

According Jeffrey Pribor, the company’s chief financial officer, trading volumes are improving. Higher trading liquidity makes a stock more attractive to investors. During the May 9 conference call with analysts, he reported, “One of the interesting things that’s happened to us is that the trading volume has gone up.”

Pribor continued, “In the first couple of months of this year, there were about two million shares per month being traded. In March and April, it was over four million shares per month. That’s a significant increase in trading liquidity, which we think is very positive.”

Greg Miller

Greg Miller covers maritime for FreightWaves and American Shipper. After graduating Cornell University, he fled upstate New York's harsh winters for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he moved to New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at the shipping magazine Fairplay in various senior roles, including managing editor. He currently resides in Manhattan with his wife and two Shih Tzus.