International Seaways: Robust Market Fundamentals, Reasonable Valuations

seekingalpha03-26

Shipping disruptions caused by the Red Sea Crisis and EU sanctions against Russia have increased ton-mile demand. In addition, oil supply growth is driven by non-OPEC+ producers.The low orderbook ...

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2422404005?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1449627094/image_1449627094.jpg","is_english":true,"pubTime":"2024-03-26 00:14","share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","id":"2422404005","market":"hk","top_or_hot":-1,"title":"International Seaways: Robust Market Fundamentals, Reasonable Valuations","media":"seekingalpha","content":"<div>\n<p>Shipping disruptions caused by the Red Sea Crisis and EU sanctions against Russia have increased ton-mile demand. In addition, oil supply growth is driven by non-OPEC+ producers.The low orderbook ...</p>\n\n<a href=\"https://seekingalpha.com/article/4680280-international-seaways-robust-market-fundamentals-reasonable-valuations\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>International Seaways: Robust Market Fundamentals, Reasonable Valuations</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nInternational Seaways: Robust Market Fundamentals, Reasonable Valuations\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-03-26 00:14 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4680280-international-seaways-robust-market-fundamentals-reasonable-valuations><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Shipping disruptions caused by the Red Sea Crisis and EU sanctions against Russia have increased ton-mile demand. In addition, oil supply growth is driven by non-OPEC+ producers.The low orderbook ...</p>\n\n<a href=\"https://seekingalpha.com/article/4680280-international-seaways-robust-market-fundamentals-reasonable-valuations\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4588","symbol_name":"碎股","start_time":0,"source_url":"https://seekingalpha.com/article/4680280-international-seaways-robust-market-fundamentals-reasonable-valuations","article_id":"2422404005","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1449627094/image_1449627094.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2422404005","pubTimestamp":1711383241,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Shipping disruptions caused by the Red Sea Crisis and EU sanctions against Russia have increased ton-mile demand. In addition, oil supply growth is driven by non-OPEC+ producers.The low orderbook caus","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4588":"碎股","OSG":"Overseas Shipholding ","STNG":"Scorpio Tankers","FRO":"FRONTLINE PLC","BK4144":"石油与天然气的储存和运输","INSW":"International Seaways Inc","BK4585":"ETF&股票定投概念"},"translate_title":"国际航道：强劲的市场基本面，合理的估值","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"FRO":1,"INSW":1,"OSG":1,"STNG":1},"content_text":"Shipping disruptions caused by the Red Sea Crisis and EU sanctions against Russia have increased ton-mile demand. In addition, oil supply growth is driven by non-OPEC+ producers.The low orderbook caused by few contracting activity in recent years has resulted in few ships delivered to the market.While we saw an uptick in the orderbook, the market's fleet average age is at a two-decade high. Ageing fleet ideal for scrapping will partly help offset future fleet growth.Shares are trading at 0.8x NAV and 5x forward EV/EBITDA, lower than 5-year average. Current market environments will likely lead INSW to generate robust free cash flow.The potential resolution of the Red Sea crisis and EU sanctions will likely reduce ton-mile demand. In addition, the orderbook is picking up, meaning that there will be more supply to the market.   Alexey Bakharev Investment Thesis We anticipate that ongoing geopolitical tensions and constrained vessel supply coming to the market will retain charter rates at elevated levels. While there has been an uptick in the orderbook, near-term net fleet growth is likely to remain below the average of the past decade especially driven by ageing fleets. Shares are trading at 0.8x NAV and 5x forward EV/EBITDA. However, there is a potential slowdown in ton-mile demand growth, upon the resolution of shipping disruptions. Further, attractive market returns should stimulate contracting activity, thereby driving future fleet growth. However, aging fleets present potential scrapping opportunities, which could partly help mitigate supply growth. Initiate with a BUY rating. Introduction International Seaways, Inc (NYSE:INSW) is one of the largest US-listed tanker companies by deadweight tonnage (\"DWT\"). The company specializes in transporting crude oil (\"dirty oil\") and refined petroleum products (\"clean oil\"), such as gasoline, diesel, jet fuel, asphalt, and naphtha. INSW primarily operates in the spot and time-charter markets. In simple terms, a spot charter, also known as a voyage charter, involves a short-term agreement typically covering a single trip between pre-determined loading and discharge ports. On the other hand, a time-charter is akin to a long-term lease, where the rate remains fixed throughout the duration of the contract. This arrangement enables charterers to \"lock-in\" a specific rate while providing shipowners with guaranteed revenue. Unlike spot contracts, time-charter contracts require charterers to bear operating expenses, such as bunker costs, port costs, and loading and discharge costs. As of 2023, the company owns and operates a total 77 fleets, which include vessels that are chartered-out and newbuilds:  13 Very Large Crude Carriers (\"VLCC\") 13 Suezmax 5 Aframax/Long-range 2 (\"LR2\") 11 Long-range 1 (\"LR1\") 35 Medium-Range (\"MR\")  Before the spin-off in December 2016, INSW used to be a part of Overseas Shipholding Group, Inc (OSG). Following the spin-off, INSW purchased new vessels during periods of low newbuilding and secondhand prices while selling vessels with significant mileage. This brought the average age down from 12 years by 2016 to slightly above 9 years before the stock-for-stock merger between INSW and Diamond & Shipping, Inc (\"DSSI\") took place. By December 2023, the average age of INSW's fleets stood at 9.8 years, notably lower than the market average of 12.9 years, a two-decade peak. INSW history of purchases (Company) Since shares began trading, the stock price has surged nearly fourfold from its initial price. This substantial increase came as the tanker market became increasingly more favorable, underpinned by geopolitical tensions that have driven charter rates and asset prices higher. Consequently, consensus estimates have been revised higher.   INSW Stock Price (YCharts, Vektor Research) This article discusses about how increased ton-mile demand and supply constraints will remain supportive to freight rates. Non-OPEC+ Oil Supply Growth And Global Shipping Disruptions Have Driven Ton-Mile Demand The International Energy Agency (\"IEA\") anticipates global oil demand growth at 1.3 million barrels a day (\"mb/d\") for the year, down from 2.3 mb/d in 2023, as the impact of COVID-demand boost has begun to subside. Oil demand growth from China, which has driven global oil consumption thanks to the expansion of petrochemical sector, is expected to decelerate from 1.7 mb/d to 620 thousand barrels per day (\"kb/d\"). Challenging macroeconomic backdrop, slower petrochemical sector expansion, and decarbonization are the primary culprits. However, some industry players have been saying that the IEA forecast is \"too conservative\" and that oil demand is exceeding expectations. On top of that, the sales of electric vehicles, initially expected to put significant pressure on oil demand, are slowing down. Meanwhile, oil supply from several non-OPEC+ countries, such as the US, Guyana, Brazil, and Canada, continues to bolster global oil supply growth, offsetting the impact of OPEC+ extended voluntary production cuts of 2.2 mb/d through the first half of the year. This increases ton-mile demand, since what would typically be a shorter-haul voyage from the Middle East to Asia (specifically China) now turns into a longer-haul voyage originating from the US and Brazil. Danish Ship Finance suggests that the average sea voyage from the Middle East to China spans 20 days at sea. This stands in stark contrast to the 42-day journey from Brazil and the 52-day journey from the US. Forecasted supply and demand by region (Company Presentation Material 4Q23) Additionally, sanctions imposed by the European Union (\"EU\") on crude oil and petroleum products from Russia have further increased ton-mile demand. Previously, the lion's share of Russian's exports of crude and petroleum products originated from Europe. Following the sanctions, Russia has directed its oil exports towards China and India, while the EU has turned to importing crude and refined petroleum products from the US, Asia, and the Middle East. However, the maintenance season at US refinery and the Red Sea crisis have resulted in Europe facing a low inventory level issue, particularly diesel. The Red Sea crisis has notably increased ton-mile demand, as shipowners would rather avoid passing through the Suez Canal to reach Europe and instead choose to reroute to the Cape of Good Hope in Africa. According to the US Energy Information Administration (\"EIA\"), a trip from the Persian Gulf to the Amsterdam-Rotterdam-Antwerp (\"ARA\") petroleum trading hub typically takes about 19 days for a laden Suezmax vessel. But opting for the Cape of Good Hope route extends the journey by an additional 15-16 days. Furthermore, the extreme drought has led to low water levels in the Panama Canal, prompting product tankers travelling from the US Gulf Coast to Asia to seek alternative routes, which will require longer time and higher costs.   Commercial shipping routes through the Suez Canal and alternatives (EIA, Vortexa) In its latest market analysis in February, BIMCO expects distance-adjusted demand growth for crude tankers at 7% and 2.5% in 2024 and 2025, respectively. Product tankers demand growth are estimated at 5.5% and 2%. Similarly, Scorpio Tankers, Inc (STNG), a pure-play product tanker company, expects ton-mile demand to increase by 7.3% and 1% in 2024 and 2025. Refined product export and ton-mile demand growth (Scorpio Tankers) With each trip taking longer, utilization rates rise, driving spot rates up. For example, Aframax rates have surged to $49,000 per day from $39,000 five months ago, as cited in Reuters. LR2 rates have, at one point, soared to $90,000-$100,000 a day on the Persian Gulf-Europe route, as it becomes more economically viable to utilize larger vessels for longer voyages. But the steep increase in LR rates have prompted charterers to consider downsizing. Given its sizable MR fleet, we believe this scenario should be advantageous to INSW. We anticipate chartering rates to stay elevated as ongoing geopolitical tensions are keeping utilization rates high. Although this situation is temporary, the steep increase in earnings will likely result in strong quarterly results for INSW, in our view. The Supply Constraints Story Is Likely To Persist In addition to the current limited supply availability, there will only be few new ships entering the market due to the low contracting activity in recent years. During COVID years, soft demand resulted from social restrictions and economic slowdown. Consequently, OPEC+ producers implemented oil production cuts, negatively affecting seaborne trades. As global oil production cuts were implemented gradually, while demand experienced a sharp decline, vessels were utilized as floating storage to store excess oil supply, leading to a temporary surge in earnings. However, vessels eventually resumed their transportation activities, while at the same time, demand remained subdued. As a result, spot earnings plunged to levels below the cash break-even levels. For INSW, the typical cash breakeven level for a VLCC ranges between $25,000 and $27,000, $21,000 and $24,000 for Suezmax, and $16,000 and $20,000 for Aframax.   INSW's spot TCE earnings (Company, Vektor Research) As the pandemic was approaching its end, rates bottomed-out and began a gradual recovery. Traditionally, shipowners tend to order new ships as market conditions improve. However, contracting activity, primarily within the crude and product tanker markets, continued to lag due to uncertainty surrounding regulations, constrained yard capacity, and high newbuilding prices resulting from soaring steel prices. For example, the International Maritime Organization (\"IMO\")'s decarbonization strategy to reach the net-zero target by 2050 requires 64% of CO2 reduction from the shipping industry to stem from utilizing alternative low or zero-carbon fuels. As one of the initial steps, the IMO requires all ships to calculate their energy efficiency and greenhouse gas (\"GHG\") emissions through Energy Efficiency Existing Ship Index (\"EEXI\") and Carbon Intensity Indicator (\"CII\"). In response, shipowners have the option to reduce speed of their older vessels or retrofit their ships with energy-saving devices. Alternatively, they may choose to invest in new ships capable of running on alternative fuels, such as methanol, ammonia, and hydrogen. But building an alternative fuel-powered engine tends to be more expensive than a conventional one, and the availability of these alternative fuels remains limited. This partly explains the lack of contracting activity despite the short-term recovery in earnings. Furthermore, the shipyard market has undergone consolidation over the past decade, a consequence of the tanker market boom between 2003 and 2008, which preceded the global financial crisis. In the subsequent years, rates remained tepid, leading smaller yards to close down their business as orderbook dwindled. In addition to capacity constraints, containers and gas carriers were flooding yards with new orders. High steel prices also drove up newbuilding costs, prompting shipowners to opt for purchasing secondhand vessels instead. As a result, newbuilding and secondhand prices soared. For instance, according to Intermodal, VLCC newbuilding prices were $92 million and $88 million in 2019 and 2020, respectively. Fearnleys Weekly Report suggests that a new VLCC is now priced at $126 million, per our writing. This trend has led to an increase in the average age of tanker market's fleets, as shipowners tend to retain their older vessels. The low orderbook indicates that there will be few ships deliveries to the market in the coming years. Indeed, we saw the crude tanker orderbook to have picked up from 3% last year to around 6% currently. Product tanker orderbook is around 12% of total fleet. However, if we compare these figures with the number of candidates for scrapping, typically older vessels between 20 and 25 years old, fleet supply is likely to grow more modestly, in our view. Vessels built during the tanker market boom between 2003 and 2008 are also reaching the age of 15 to 20 years.   Tanker market orderbook and fleet age (Company, Clarksons) For example, Frontline (FRO) estimates that as of 2024, there are approximately 133 VLCC vessels aged over 20 years in the market, but the only new VLCC this year has been delivered. STNG estimates product tanker net fleet growth at 0.9% in 2024 and 2% to 3% in 2025 and 2026. However, these figures still fall below the average annual growth rate of around 4% observed during the last decade. Product tankers net fleet growth estimates and historical fleet growth (Scorpio Tankers 4Q23 Presentation Material) Indeed, shipping is a highly cyclical business. Attractive market returns are usually followed by increased contracting activity, leading to a surge in the orderbook. However, the average age of the market is at a two-decade high. Therefore, we believe that the addition of newbuild ships will be partially offset by ageing fleets, resulting in more modest growth of tanker fleets. In our view, this factor is likely to support charter rates. Financial Highlights In 4Q23, Time Charter Equivalent (\"TCE\") revenue was reported at $248 million (+5% Q/Q; -26% Y/Y), as spot earnings were driven by the Red Sea crisis yet remained lower compared to 4Q22, primarily due to the impact of EU sanctions against Russia. INSW's spot TCE rates and income statement highlights (Company, Vektor Research) Adjusted EBITDA and net income came in at $159 million (+5% Q/Q; -38% Y/Y) and $132 million (+35% Q/Q; -40% Y/Y), respectively. During the quarter, INSW sold two, 2008-build medium-range vessels for $28 million in net proceeds after debt repayment. In turn, the company agreed to purchase six Eco MRs build between 2014 and 2015 for $232 million. Strong charter rates significantly exceeding cash breakeven levels have enabled INSW to accelerate debt repayment ahead of schedule and distribute a total dividend of $308 million for the year. This includes a quarterly dividend of $0.12 per share along with a total supplemental dividend of $5.8 per share. In 2023, the company generated free cash flow of $511 million. INSW prepaid $300 million in debt and paid mandatory debt of $150 million along with $27 million prepayment associated with vessel sales. This enables INSW to reduce its cash breakeven level from approximately $19,800 to $18,700 per day. If we take into account revenue from time-charter contracts, the breakeven level decreases to about $14,400 per day.   INSW 12-month-forward cash breakeven levels (Company) Our calculation indicates that for every $2,000 increase in average TCE rates, INSW can potentially generate an incremental $53 million in free cash flow, assuming constant cash breakeven levels. If we assume INSW to earn $42,000 average TCE earnings for the year, we estimate INSW to generate over $600 million free cash flow, excluding newbuild capex.   INSW's 2024F free cash flow scenario (Vektor Research) Looking forward, we expect INSW to continue distributing dividends and renewing its fleet, in line with management's indications that the current level of debt is adequate. The net debt to asset value is 17%.   INSW Debt (Company) Valuation We estimate INSW's Net Asset Value (\"NAV\") per share to be $65 per share, implying a P/NAV ratio of 0.8x. Our fleet value estimate stands at $4 billion, utilizing Charles R. Weber's vessel present value estimates as of March 15th. As of December 2023, net debt amounted to $535 million, with remaining newbuilding capex at $219 million, resulting in an NAV estimate of $3.2 billion. INSW is trading at 5x forward EV/EBITDA, lower than FRO's multiple at 6x, according to data by Koyfin. INSW 5-year average EV/EBITDA is around 6x. With shares trading at 0.8x NAV and 5x forward EV/EBITDA, we believe INSW still holds upside potential at its current price. INSW and FRO forward EV/EBITDA (Koyfin) Seeking Alpha's quant rating has rated the stock as a \"Strong Buy.\" Wall Street Analysts' average target price is $65 per share, aligning closely with our NAV per share estimate. SE Quant Rating (Seeking Alpha) Conclusion We like INSW given its relatively young fleet, 12% dividend payout ratio, robust free cash flows, and reasonable valuations. In the short term, we believe that EU sanctions against Russia and the Red Sea crisis will retain charter rates at elevated levels, as ships would take longer to reach their destinations, thus driving up utilization rates. In the next few years, we expect new ships to enter the market, as the orderbook has begun to pick up. But fleet growth will likely remain below historical levels, underpinned by ageing existing vessels with the average age currently at a two-decade high. We believe that INSW still holds upside potential at its current price. Shares are trading at 0.8x NAV and 5x forward EV/EBITDA, lower than the multiple 5-year historical average. With $42,000 average TCE rates, INSW could generate at least $600 million free cash flow excluding newbuild capex for the year, implying a 23% FCF yield. What could go wrong? The potential resolution of shipping disruptions could lead to reduced ton-mile demand as tankers may not need to travel longer distances. This scenario could result in a normalization of charter rates as more ships become available.  Moreover, shipping is a highly cyclical business. Attractive market returns typically drive contracting activity. The increased demand may contribute to greater supply growth in the market, possibly putting pressure on charter rates and asset prices. However, as mentioned earlier, ageing vessels as potential candidates for scrapping in recent years should partly help offset supply growth. We initiate INSW with a BUY rating. If you have any thoughts, please do not hesitate to comment below.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2422404005"}