Good day, and welcome to the International Seaways Second Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. .

I would now like to turn the conference over to James Small, General Counsel. Sir, please go ahead. .

Thank you. Good morning, everyone, and welcome to International Seaways earnings release conference call for the second quarter of 2017..

Before we begin, I would like to start off by advising everyone on the call with us today of the following.

During this conference call, International Seaways management may make forward-looking statements regarding the company or the industry in which it operates, which could include, without limitation, statements about the outlook for the crude tanker and product carrier markets; changing oil trading patterns; forecast of world and regional economic activity; forecast of demand for and production of oil and petroleum products; International Seaways' strategy; expectations regarding revenues and expenses, including both vessel expenses and G&A expenses; estimated bookings and TCE rates for the third quarter of 2017, the second half of 2017 and other periods; estimated capital expenditures for 2017 and other periods; projected scheduled drydock and off-hire days; International Seaways' consideration of strategic alternatives and its ability to achieve its financing and other objectives; and economic, political and regulatory developments around the world.

Any such forward-looking statements take into account various assumptions made by management based on various factors, including its experience and perception of historical trends, current conditions, expected and future developments and other factors management believes are appropriate to consider in the circumstances. .

Forward-looking statements are subject to a number of risks, uncertainties and assumptions, many of which are beyond the company's control, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements.

Factors, risks and uncertainties that could cause International Seaways' actual results to differ from expectations include those described in its annual report on Form 10-K for 2016, its quarterly report on Form 10-Q for the second quarter of 2017 and in other filings that we have made or in the future may make with the U.S.

Securities and Exchange Commission. .

With that out of the way, I would like to turn the call over to our President and Chief Executive Officer, Ms. Lois Zabrocky.

Lois?.

Thank you, James. Good morning, everyone. Thank you for joining International Seaways earnings call to discuss our second quarter 2017 results. During the second quarter, we enhanced our financial flexibility, executed on our fleet growth and renewal strategy and increased our contracted cash flows. .

We completed a $550 million refinancing in the quarter, which was upsized to $600 million in July. This successful refinancing was completed on attractive terms and reflects the strong support we've received from debt investors.

In addition to extending our debt maturity, the $600 million refinancing enhances our ability to take advantage of compelling opportunity for shareholders. .

In June, we capitalized on asset values at a low point in the cycle, acquiring 2 high-quality Korean-built Suezmaxes at attractive prices. Upon delivery in July, the 159,000 deadweight Seaways Hatteras and Seaways Montauk commenced trading in a leading Suezmax pool.

Consistent with the acquisition of these vessels, we intend to maintain a disciplined approach to capital allocation, as we seek opportunities to continue to take advantage of our strong balance sheet and attractive asset value to further grow and modernize our fleet. .

During the quarter, we also entered into an agreement to sell a 2001-built MR, which is expected to be delivered to buyers within August. We expect to recognize a gain on this transaction in the third quarter. We also increased our contracted cash flows in the quarter with the execution of 2 5-year contracts for our FSO joint venture with Euronav.

The contracts are with North Oil Company, the operator of the Al Shaheen oilfield, whose shareholders are Total Limited and Qatar Petroleum oil and gas. These contracts for the FSO Africa and the FSO Asia commenced in the third quarter upon expiry of the current contract.

Based on our 50% ownership in the joint venture, we expect to generate in excess of $180 million of EBITDA over the 5-year term of the contract. .

During the second quarter, our fleet performed well in a weak market, and we continued to deliver safe and reliable service to our customers and our partners. For the second quarter, we reported an adjusted EBITDA of $31.8 million on time charter equivalent revenues of $69.3 million.

Net loss for the quarter was $11.6 million, which included $15 million of onetime costs associated with the refinancing of the company's debt facilities that Jeff will discuss in greater detail later on the call. Excluding onetime costs, we had a net income of $3.6 million or $0.12 per share. .

Please turn to Slide 5, where we provide an overview of the vessels owned and operated by International Seaways. Following the acquisition of the 2 new Suezmax newbuildings, which further diversified our fleet, we currently have a 57-vessel fleet of crude and product tankers operating in the time charter market and spot market.

Our FSO joint venture, which we discussed earlier, combined with our LNG joint venture, illustrates our balanced fleet deployment strategy and positions International Seaways to optimize revenue through the current tanker cycle. .

We continue to expect revenues from our 9 vessels on time charter and distributions from our joint ventures to cover our fixed cost for debt service, G&A, drydocking and other CapEx in 2017. .

In addition, our 42 vessels operating in the spot market have low breakevens and, together with our exposure to both the crude and product market, position the company with significant operating leverage to take advantage of a market recovery in both sectors.

We remain positive on crude tanker rates and fundamentals in 2018 and continue to be encouraged by attractive near-term prospects for a strengthening product tanker market. .

Now turning to Slide 6. We provide an update on tanker demand. Global oil demand remained strong as the IEA revised upwards its 2017 demand growth forecast to 1.4 million barrels per day, an increase from the previous forecast of 1.2 million barrels per day. China continues to be the main growth driver in the crude market.

As you can see from the chart at the top right of the slide, China's imports reached record levels in the first half of 2017, and June imports remain very strong at close to 9 million barrels per day. .

In terms of OECD stock, they continue to trend downwards, and from April to May, stocks decreased by 6 million barrels per day, 6 million barrels. Notably, U.S. crude and product stockpiles are currently at the lowest level since January. .

Although OPEC-led production cuts were renewed in May and we have seen a negative impact from those cuts, especially on the midsized crude tankers, OPEC continues to struggle to limit output. OPEC members Libya and Nigeria have been exempt from OPEC cuts. However, Nigeria may become subject to a production ceiling.

Saudi Arabia vows to cut by 520,000 barrels in September of this year. .

Buyers in Asia continue to source oil from the Atlantic Basin, which represents the continuation of a shift in supply that began in the first quarter. Additionally, U.S.

crude exports, as can be seen in the chart at the bottom right of the slide, continue to grow, and Brazilian exports are forecasted to reach 1 million barrels per day in 2017, a 25% increase compared to 2016 exports of nearly 800,000 barrels per day.

Increased volumes from the Atlantic to the Pacific, representing strong demand from Asia, have translated into a longer ton-miles compared to the Arabian Gulf. .

In terms of the product sector, we are seeing increased demand for product tankers. In addition to strong fundamental product demand growth, a recent refinery fire in Mexico and ongoing disruptions in Venezuela have created shortages of refined products in these 2 countries.

With refinery utilization in Mexico at 40% and below 50% in Venezuela, the U.S. Gulf exports are being used to make up the shortfall. .

In addition to the disruption in Mexico and Venezuela, we are watching closely the situation in The Netherlands where Shell was forced to suspend the cargo loading from its largest refinery in Rotterdam following a fire.

We will continue to monitor this situation, which has the potential to positively impact the product tanker market and could result in increased exports from the Gulf. .

Turning now to Slide 7. We provide an update on tanker supply. Supply fundamentals in the product sector remain favorable.

At under 9% of the current global fleet, the MR order book is at the lowest level since January of 2000, which, together with decreased newbuilding deliveries, limited newbuilding activity and strong overall demand fundamentals, supports an increased rate environment in the near term. .

Regarding VLCCs, since the end of May, there have only been 5 additional newbuilding orders. Taking into account all orders placed in 2017, the VLCC order book currently stands at 12.6% of the global fleet and, combined with strong demand outlook, is consistent with our expectations for a stronger rate environment in 2018. .

In addition to the dynamics affecting the order book, we expect declining shipyard capacity and the aging global fleet to have a positive effect on tanker supply. As highlighted in the chart at the top right of the slide, there has been a drastic decline in shipbuilding capacity across sectors.

Out of 353 shipyards with one or more vessel on order, only half had been awarded a new contract since the beginning of 2016. .

Another factor impacting tanker supply is the aging global fleet. 9% of VLCCs today are over 17.5 years old. This percentage will continue to increase in the coming years, and by 2020, 18% of VLCCs will be older than 17.5 years, with 8% over 20 years of age. .

As can be seen in the chart at the lower right of the slide, by the end of 2019, VLCCs representing 27 million deadweight will reach an age of 17.5 years compared with a total VLCC order book through 2019 of 28 million deadweight.

This aging of the global fleet, combined with escalated costs related to capital improvement requirements, such as ballast water treatment systems, increases the possibility that vessels over 17.5 years will exit the market. .

I will now turn the call over to Jeff to provide additional details on the second quarter results. .

Thanks, Lois, and good morning, everyone. Let's move directly to reviewing the second quarter results in more detail. And if you can please turn to Slide 9. .

Consolidated TCE revenues for the second quarter of 2017 were $69.3 million compared to $101 million in the second quarter of 2016. The decrease was principally driven by lower daily rates this quarter compared to Q2 last year. .

I'll now discuss results by business segment, beginning with the crude tanker segment. TCE revenues for the crude tanker segment were $45.7 million for the quarter compared to $66.5 million in the second quarter of 2016.

This decrease was primarily due to significantly lower average blended rates in the VLCC, Aframax and Panamax sectors, with spot rates declining to $26,700, $13,000 and $12,300 per day, respectively; and fewer revenue days in the Panamax sector resulting from an increase in drydock days. .

Increased activity levels in the crude tanker lightering business partially offset the declines in revenue. As we discussed on the last call, with crude being exported from the U.S.

Gulf, we continue to see a significant increase in full-service lightering in our lightering business as Aframax vessels are used to transfer crude to VLCCs that can't gain access to U.S. Gulf ports.

In the third quarter, we booked 52% of the available VLCC spot days at an average of approximately $19,000 per day; 45% of the available Suezmax spot days at an average of approximately $14,000 per day; 53% of the available Aframax/LR2 spot days at an average of approximately $11,000 per day; and finally, 43% of the available Panamax spot days at an average of approximately $11,000 per day.

.

TCE revenues for the product carrier segment were $23.5 million for the quarter compared to $34.4 million in the second quarter of 2016. This decrease was primarily due to a decline in average daily blended rates earned by MR, LR1 and LR2 fleets, with spot rates declining to $10,700, $10,900 and $10,100 per day, respectively.

The decline in blended MR, LR1 and LR2 rates accounted for $10.6 million of the decline in TCE revenues. Looking forward, we booked 43% of our third quarter MR spot days at an average of approximately $11,000 per day, which is a higher rate than we earned in the MR spot market in the second quarter. .

Now shifting your attention to the top right corner of the slide, I'd like to [ talk about ] the revenue contribution from lightering. Lightering revenues were $8.2 million for the quarter with 10 full-service lighterings, up substantially compared to $3.6 million in the prior year period with 2 full-service lighterings. .

Turning to our consolidated results. Net loss for the second quarter was $11.6 million or $0.40 per diluted share compared with net income of $30.5 million or $1.05 per diluted share in the second quarter of 2016.

The net loss reflects $15 million of onetime costs associated with the company's debt refinancing, of which $7 million was related to expensing a previously deferred financing cost for the 2014 credit facility, which is a noncash charge. .

These onetime costs as well as lower TCE revenue for the quarter were partially offset by a decrease in general and administrative expenses, reflecting management's streamlining of the company's operations after the spin-off of OSG in November 2016 and decreased depreciation and amortization.

Excluding onetime cost, net income would have been $3.6 million or $0.12 per diluted share for the quarter. .

As you can see on Slide 10, adjusted EBITDA was $31.8 million for the quarter compared to $62.3 million in the same period of 2016.

This decrease mainly reflects lower daily rates in the second quarter compared to second quarter of 2016, partially offset by increases in full-service lightering in our lightering business as well as reduced G&A expenses. .

Lightering EBITDA was $2.3 million in Q2 compared to $50,000 in Q1 2016 based on increased demand for our lightering services, as discussed earlier. For the last 12 months through June 30, lightering EBITDA was $6.6 million. .

Please turn now to Slide 11. The cash cost/TCE breakeven rates for the last 12 months ended June 30, 2017, were $16,800 per day for VLCCs, $13,600 per day for Aframaxes, $16,700 for Panamaxes and $11,500 per day for MRs. The higher Panamax TCE breakeven compared to last quarter resulted from increased drydock and repair days in Q2.

International Seaways' overall breakeven rate was $14,500 per day for the 12 months ended June 30. .

These rates are the all-in daily rates our own vessels must earn to cover operating costs, drydock and CapEx, G&A expense and debt service costs, which includes scheduled principal amortization and interest expense.

Our low TCE breakeven rates allow International Seaways to navigate low points in the tanker cycle while providing significant operating leverage in rising markets. .

VLCCs $9,300 per day; Aframax, $8,600; Panamax, $8,300; and MRs, $7,300 per day. .

G&A for Q2, excluding $296,000 of separation cost, was $5.2 million. Our cash G&A run rate for year-to-date 2017 of $1,106 per vessel per day is well inside of our previously disclosed 2017 cash G&A target of $24 million or $1,340 per vessel per day.

Additionally, we expect $27 million of drydock commitment and CapEx in 2017, of which we incurred $9.6 million in Q2. This number excludes $17.4 million of initial payments for our 2 new Suezmaxes, and we're expecting to incur approximately $9.5 million over the rest of 2017.

This takes into account -- into consideration the last planned drydocks in Q3 and Q4 2017. .

Interest expense in Q2 was $9.1 million with approximately $2.0 million related to deferred financing cost, a noncash cost.

Quarterly interest expense on $550 million of outstanding term loans, including the $50 million increase at close of July, is expected to be approximately $11.6 million at current LIBOR rates, which will include approximately $1.9 million related to deferred financing cost, also a noncash cost. .

Now turning to Slide 12. Moving from left to right. We began the second quarter with total cash of $101 million. During the quarter, we generated $32 million of adjusted EBITDA. This includes $14 million in equity income from JVs, a noncash item, which is, therefore, deducted from our EBITDA in order to reach a cash figure.

Then we add back the actual JV cash distribution, which are $19 million. And debt refinancing net of fees contributed $22 million. In addition, we expended $10 million on drydock and CapEx and $17 million for the deposit for the 2 Suezmax newbuildings.

Cash interest paid on our debt was $10 million in the quarter, and working capital related to decreased payables was $3 million. The result was we ended the quarter with approximately $121 million of cash. .

Please turn now to Slide 13. Let me talk about the balance sheet. As of June 30, 2017, we had $1.1 million of conventional vessel assets against $453 million of long-term debt. This does not include $47 million of current portion of the long-term debt, which is found in the current liabilities line. .

In June, the company closed on a new $50 million revolving credit facility and a $500 million term loan facility containing an accordion feature.

The proceeds from this term loan were used to prepay the $458.4 million which were outstanding balance on 2014 term loan, which was scheduled to mature in August 2019; also to pay certain expenses related to the refinancing and for general corporate purposes. .

In July, we upsized the 2017 term loan facility by $50 million, pursuant to the accordion feature, increasing it to $550 million and the total debt refinancing, including the revolving credit facility, to $600 million. .

This successful refinancing provides us with added liquidity to capitalize on an attractive opportunity to acquire the 2 Suezmax newbuildings. We funded the $116 million acquisition with the $50 million increase in the term loan facility that I discussed, a $50 million draw on the revolving credit facility and cash on hand.

Importantly, the term loan facility which carries an interest rate of LIBOR plus 5.5% extends our final maturity date out 5 years to June 22, 2022. The revolving credit facility was also extended and has a final maturity date of December 22, 2021. Amortization is 2.5% in the first year and 5% annually thereafter.

We continue to have relatively low mandatory amortization, which contributes to our low breakevens compared to our peers. .

Also, as you can see on this page, we were at 3.3x leverage on a debt-to-EBITDA basis as of June 30, 2017, and total debt to total capital stood at 30% and net loan to value at 36%, taking into account our conventional tanker fleet and the FSO JVs..

Overall, our strong balance sheet and low cash breakevens as well as our substantial contracted revenue and cash flows protect us during low portions of the tanker cycle while our 42 spot vessels provide ample upside in a rising market. At the bottom of the slide, we have noted book values for our 2 joint ventures at the end of Q2.

The FSO and LNG JVs had book values of $260 million and $88 million, respectively. .

Now turning to Slide 14. We've outlined our chartered out and chartered in fleet. Regarding our 5 chartered-out vessels, we have 275 days fixed at a blended rate of $19,724 a day in Q3 and 169 days fixed at $18,030 in Q4. 2 of these 5 contracts expire in Q3, which we expect to renew at market rates. .

In addition, we expect to enter into short-term time charters for another 4 Panamax vessels to replace 4 time charters that have recently been delivered. .

At the conclusion of these new contracts, the total number of vessels under time or variable charters will increase to 9, and the number of days fixed in Q3 and Q4 will increase from the current levels indicated in the chart on this slide.

This contracted revenue, combined with our spot market exposure, provides a steady, stable base of fixed income, which has upside potential to a strengthening market, as we previously discussed. .

Regarding our chartered-in vessels, we have 4 MR time charter-ins that redeliver in the second and third quarter of 2018. Of these vessels, charter hire expense for the balance of 2017 is $9.9 million. We also have 3 MR bareboat-ins that redeliver late in Q4 2017 or in Q1 of 2018, with charter hire expense for the balance of 2017 at $3.4 million.

For chartered-in lightering, charter hire expense was $3.7 million in 2Q 2017 compared to $1.9 million in 2Q 2016, an increase that reflects the growing demand for our full-service lighterings, which we discussed earlier on the call. .

This concludes my comments on the financial statements. I'd now like to turn the call back to Lois for closing comments. .

Thank you very much, Jeff. Please turn to the summary slide, Page 16. .

During the second quarter, we strengthened our financial position through our successful $600 million refinancing and the completion of 5-year extensions on the company's FSO joint venture contracts.

The 2 contracts which significantly increase our contracted cash flows will enable International Seaways to generate in excess of $180 million over the fixed 5-year term. .

We also added to our quality fleet, which continues to have a balanced mix of contracted cash flows and spot market upside aimed at optimizing revenues. We executed our fleet growth and renewal strategy during the quarter with the attractive acquisition of 2 Suezmax tanker newbuildings and the agreement to opportunistically sell a 2001-built MR.

Our lean and scalable model also continues to serve us well during the quarter, allowing the company to effectively navigate the current tanker cycle while maintaining significant operating leverage to take advantage of a market recovery. .

Our focus remains on meeting the highest operational standards for customers and partners and benefiting from our low-cost model. Consistent with our acquisition during the quarter, we are driven by a disciplined and balanced capital allocation strategy and remain well positioned to capitalize on attractive asset values to grow our diversified fleet.

Complementing this approach, we also intend to opportunistically execute against our share repurchase plan, which was authorized by the board in the first quarter. .

We will now open up the call to questions.

Operator?.

[Operator Instructions] And our first question comes from Noah Parquette with JPMorgan. .

I just wanted to get a sense.

As you guys pursued the fleet renewal strategy, is there -- as you look across your fleet, is there any particular segment that you think is more urgently in need of it? Or is it really just a function of the deal at the time and its attractiveness?.

Yes. Great to hear from you. So we believe that it's great to remain diversified. And in the quarter, we renewed 4 of our MR time charters for 1 option, 1 year as well as acting on the 2 Suezmaxes resales opportunistically. So across our fleet, we do have more MRs than we do on any one particular crude sector.

We feel that the Suezmaxes, the fundamentals will recover well in tandem with the VLCCs and that they have a diversified route. .

Okay.

And then I just wanted to ask -- within your lightering business and with the increase in crude exports out of the U.S., can you give a sense on how more inefficient it is for those VLCCs to load that way versus a terminal, given how ubiquitous it's been?.

I mean, in essence --I mean, if you assume that a V can load up within 24 hours, if you're going to do a lightering, it's going to take 4 Aframaxes to come alongside and to do that. So I think it all depends on where you're doing the lightering and how smooth that transition is. But beyond that, I wouldn't speculate.

Noah, I might get some more background information for you on that if you follow up with it. .

Our next question comes from Magnus Fyhr with Seaport Global. .

Just a question -- follow-up on Noah's question on the lightering business.

I mean your position, both ways, on the VLCCs and also through your lightering business -- I mean, with this recent developments of potential port expansions to accommodate VLCCs, how do you view expanding your lightering business short term versus potentially long term that could be a declining business?.

It's interesting. Everybody thought lightering would be a declining business before as well, right? So what's important to keep in mind is that we operate on the West Coast, Panama, Bahamas and the U.S. Gulf. We do service only as well as full-service lightering and we do lightening and -- from the Vs to the Afras and from the Afras to the Vs.

So overall, you might be talking about LOOP exports, which they think could happen at the second half of 2018. I still think that you will see a healthy base of lightering. .

Right. And it's not like these assets are just -- if it would potentially decline long term, you can move those assets elsewhere.

And I guess the capital's not that big to that business, correct?.

That is correct. In fact, we operate our lightering in a very asset-light manner. And we charter workboats, but we do not own the workboats. We own basically the fenders and the hoses and the equipment. .

Okay, great. Just switching gears to capital allocation going forward. I mean you guys have done a good job here in refinancing your debt. You secured some long-term contracts.

With a currency that's very strong, are you guys ready to start playing offense now? I know you made a couple of acquisitions, but how's your view on buying individual assets versus fleets?.

So for us, we feel it's still a very good time with asset values. Depressed -- markets are depressed, so that gives us time to carefully look at which sectors we want to move on, and we think it's critically important to continue to do ones and twos while -- in the meantime.

We do always look at fleet purchases, M&As, but that's something that your execution is not always a given and you can't control everything.

Jeff?.

And how -- have you seen much changes in the [ S&P ] market? I'm sure the high-quality assets are -- you bought some high-quality Suezmaxes, but are there opportunities for more acquisitions like that? And what are the motivations by the sellers?.

You do find opportunities. It is not -- for the modern second-hand tonnage, there isn't plethora a of vessels out there, but you do find opportunities. And when you find those, there are other owners looking at -- inspecting those vessels. And of course, the motivation of the sellers is always opportunistic.

I mean, the tanker market, you're seeing low rates now, but you have not seen these low rates for a long period of time. .

Okay, great. Just a final question on your chartered-in fleet. I mean, it's been pretty static, and I guess these MRs are rolling off next year.

How do you view that business as an opportunity to expand your leverage? Or should we -- how should we view your chartered-in fleet going forward?.

What we mentioned there is that we renewed 4 MRs for -- that were about to expire in the middle of 2017 for one option, one year. So if we choose, we can control those vessels until mid-2019. So we do still feel that the MR market will show recovery potentially before the [ cruise ], and we want to stay involved in that sector. .

[Operator Instructions] And our next question comes from John Gandolfo with Clarksons. .

Just had a follow-up.

Basically, how are you looking now towards financing any incremental growth? I mean, more specifically, with the FSO contracts now secured and the assets expected to be debt-free by the close of the next quarter, do you and your JV partners see an opportunity to relever the assets and effectively monetize the contracts now?.

John, it's Jeff. So in general, we expect to finance growth by continued cash flow from our low breakeven by -- so number one, by selectively [ moving ] sales of the older vessels, like you saw us mention on the call today, there's more opportunity for that; and other sources that could be opportunistic based on the markets.

But we will examine the -- you're absolutely right that the FSO is now debt-free, so that's a theoretical option, certainly one that, along with our partner, we will study. But I can't give you any sense right now that there's a definite refinancing plan. It's just something that we will examine our options on. So clearly, we'll look at it. .

Got it. And just one last question.

Basically, with all disruptions and mysteries around Qatar, have you seen any effects on your JVs with that?.

Yes. This is Lois. We have not seen any effects on the joint ventures, and everything continues to operate smoothly on both the FSOs and the LNG. .

And there are no further questions, so this concludes our question-and-answer session for today. This also concludes our conference for today. Thank you for attending today's presentation, and you may now disconnect..