In this comprehensive article, I will present my strong buy recommendation for International Seaways (NYSE:INSW). I will specifically discuss the company’s 2023-Q2 results and explain why the current oil tanker market dynamics suggest further growth potential for International Seaways.
If you’re interested in other tanker companies, I have also recently covered Teekay Tankers and Scorpio Tankers.
International Seaways is currently trading at $42.97 per share, with a market cap of $2.1 billion. Over the past year, the stock has seen a 46% increase, reaching a peak of $52.9 per share (52-week high on March 3rd, 2023) and a minimum of $28.9 per share on September 1st, 2022. Since the beginning of the year, the stock has gained 16%, indicating a potential ongoing bullish rally. Since my last article on the company when the stock was at $41.8 per share, it has increased by 3%.
2023-Q2 Financial Results
In the second quarter of 2023, Time Charter Equivalent (TCE) revenues increased by 55% compared to the same period the previous year, from $186 million in Q2-2022 to $286 million in Q2-2023. The revenue growth was uneven across different types of tankers: crude tankers’ revenues increased by 148% or $89 million, while product tankers’ revenues increased by 10% or $13 million. This shift led to a higher proportion of revenues coming from crude tankers, rising from 32% in Q2-2022 to 51% in Q2-2023.
Compared to the previous quarter (Q1-2023), TCE revenues only saw a 2% increase, with crude tankers’ revenues rising by 16% and product tankers’ revenues decreasing by 10%.
It’s important to note that International Seaways generates over 90% of its revenues through the spot market.
The increase in revenues is mainly driven by higher day rates rather than increased revenue days. Day rates have increased year-on-year across all vessel types, except for MR vessels. When comparing Q2-2023 to Q1-2023, crude tanker rates increased across all vessel classes, while product tanker rates decreased.
On the cost side, total operating expenses increased by 23% compared to the previous year, from $100 million in Q2-2022 to $123 million in Q2-2023. The largest cost items include vessel expenses ($65 million, +10%), depreciation and amortization ($32 million, +19%), and general and administrative expenses ($12 million, +6%).
Net income reached $153 million, up 122% from $69 million in 2022-Q2.
Cash Flows, Liquidity, and Capital Structure
During the first half of 2023, International Seaways generated positive cash flow from operations of $414 million, mainly driven by high net income. Cash flow from investing activities was negative at -$208 million due to vessel CapEx and improvements. Cash flow from financing activities was negative at -$333 million due to dividend payments and debt restructuring. As of June 30th, the company has total liquidity of $493 million, including $236 million in cash and an undrawn revolver of $257 million. Total debt amounts to $947 million, with net debt at $711 million. It’s important to note that the company’s first debt maturities are not until November 2026.
The analysis of the Q2 results highlights International Seaways’ strong financial position and significant operating cash flow, thanks to high day rates in the tanker market. The success of the company is closely tied to market dynamics: when the market is tight, day rates increase, allowing oil and product tanker companies to generate healthy cash flows.
Over the past year and a half, day rates have reached unprecedented levels due to the Russian-Ukrainian conflict. Although rates have slightly decreased recently, they are still at levels that ensure profitability for International Seaways (day rate cash breakeven is around $16,000 per day).
In the coming months, these dynamics are expected to continue, as there is an imbalance between tanker demand and supply. Oil tanker demand is projected to increase due to rising oil demand (+2 Mbbl/d in 2023 and +1.5 Mbbl/d in 2024, according to IEA) and declining inventory levels. Meanwhile, the supply of tankers remains limited, with no newbuild slots available before 2026. Moreover, oil and product tanker companies are cautious about placing new orders due to potential environmental regulations and relatively high prices for new vessels compared to historical averages.
Overall, these dynamics are expected to sustain high day rates, benefiting International Seaways.
To gauge International Seaways’ trading performance, I conducted a peer multiple review. I selected a group of oil and product tanker companies with comparable market capitalization and analyzed their P/E and EV/EBITDA ratios. The results indicate that International Seaways is trading at a discount compared to similar companies, with a P/E ratio 18% below the mean and 5% below the median, and an EV/EBITDA ratio 17% and 19% lower, respectively. In other words, International Seaways is currently undervalued compared to its peers in the oil and product tanker industry.
According to the analysis of 7 equity research analysts covering International Seaways, the majority have issued a strong buy recommendation, with one providing a buy rating. The average target price is $58.1 per share, indicating a potential 35% upside from the current trading price.
The main risk for International Seaways lies in events that could disrupt the demand and supply dynamics of the tanker market. On the demand side, a potential risk is a drop in oil demand, leading to reduced demand for oil tankers and lower day rates. On the supply side, a sudden influx of new vessels into the market could disrupt the balance and result in lower day rates. However, this is considered a remote possibility.
Additionally, maritime transport companies, including International Seaways, face risks such as piracy, incidents, and environmental issues. While the company is insured against these risks, it’s important to note that insurance may not fully cover potential losses, as disclosed in the company’s 10-K filing.
In conclusion, I believe that International Seaways is a compelling stock to consider. The company demonstrates strength in its financial position, and the current favorable market dynamics are expected to continue in the coming months.