International Seaways, Inc.

Good morning. Welcome to the International Seaway Second Quarter 2020 Earnings Conference Talk. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to James Small, General Counsel. Please go ahead.

Thank you. Good morning, everyone, and welcome to International Seaway's earnings release conference call for the second quarter of 2020. Before we begin, I would like to start off by advising everyone on the call with us today of the following. During this call, management may make forward-looking statements regarding international seaways or the tanker industry, which may address, without limitation, the following topics. Outlooks for the crude and product tanker markets, changing oil trading patterns, forecasts of world and regional economic activity and of the demand for and production of oil and other petroleum products, the effects of the ongoing COVID-19 pandemic, company strategy, purchases and sales of vessels and other investments, anticipated financing transactions, expectations regarding revenues and expenses, including vessel charter hire and G&A expenses, estimated bookings and TCE rates in the third quarter of 2020 or other periods, estimated capital expenditures in 2020 or other periods, projected scheduled dry dock and off-hire days, the company's consideration of strategic alternatives, the company's ability to achieve its financing and other objectives, and other economic, political, and regulatory developments around the world. Any such forward-looking statements take into account various assumptions made by management based on a number of factors, including management's experience and perception of historical trends, current conditions, expected and future developments, and other factors that management believes are appropriate to consider in the circumstances. Board-looking statements are subject to risks, uncertainties, and assumptions, many of which are beyond the company's control, which could cause actual results to differ materially from those implied or expressed by those statements. Factors, risks, and uncertainties that could cause International Seaway's actual results to differ from expectations include those described in the company's annual report on Form 10-K for 2019 and its quarterly reports on Form 10-Q for the first and second quarter of 2020, and in other filings the company has made or may make in the future with the U.S. Securities 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 Dabrocki. Lois?

Thank you very much, James. Good morning, everyone. Thank you for joining International Seaways Earnings Call to discuss our second quarter 2020 results. Before we discuss our strongest quarterly results since our inception, please turn to slide four for an update on our COVID-19 response. We're continuously working to serve and keep safe our onshore and at sea professionals. First onshore, we've maintained full staffing capabilities with our employees all working remotely since March 16th. We will continue to evaluate our return to our New York and Houston offices based upon our highest priority, the safety of our staff. Our commercial and technical operations, finance, and administrative departments continue to run smoothly. We completed the quarterly close on time. All SEC reporting requirements have been done without delay. Seaway's ability to operate smoothly during this challenging time is a testament to the team's dedication, and we thank everyone for their continued hard work and commitment to Seaway. Regarding our crew, We've implemented strict measures on all of our ships to ensure the safety of our seafarers, and we have had no COVID cases to date on board. We are implementing these procedures not only while they're on board, but also while we are traveling to and from the vessels. As we discussed last quarter, global travel restrictions have made it exceptionally difficult to rotate our crews. We continue to support industry efforts to designate seafarers as key workers and to allow them to return home to their families after many months at sea. To meet this important objective, we have deviated vessels where possible to help facilitate safe and effective crew changes. Given that many of our dedicated crew members have been on board vessels for longer than their original contract, the situation remains incredibly dynamic As an example, one of our VLCC crew was disappointed to have a full flight of relievers from Manila to Singapore canceled by the airline at the last minute. We're working now on finding the next best opportunity to get these seafarers home. Another example, with an enormous amount of effort and coordination across three continents, we were successful relieving 20 seafarers at Reunion Island in the Indian Ocean. We thank all of our seafarers for their professionalism and their commitment throughout this extremely challenging circumstances. From an operational standpoint, we have not yet seen material cost increases due to COVID-19. While we have confronted certain challenges, including difficulty arranging fire inspections from the oil major customers and other inspections, as well as delays transporting spare parts, our operations are running smoothly. Going forward, and especially as we continue to operate amidst the global pandemic, our priorities remain the safety of our onshore and SC professionals and providing best-in-class service to our leading energy customers. If you'll turn to slide five, we review our second quarter 2020 highlights and our recent accomplishments. Our quarterly performance was very strong. We're pleased to have posted our second consecutive quarter of record earnings. while continuing to implement our discipline and accretive capital allocation strategy, unlocking value for our shareholders. Turning to the first bullet, we highlight our significant operating leverage and success capitalizing on the robust rate environment in the second quarter. We once again generated our highest quarterly net income as a public company. For the quarter, we earned a net income of $68.5 million. excluding items related to an impairment and a gain on the sale of vessels, or $2.39 per share. Our second quarter adjusted EBITDA was $96 million, representing a year-over-year increase of $75 million and quarter-over-quarter increase of 22. With our strong results and during a time when we've continued to return capital to shareholders, we ended the quarter with $184 million in total liquidity, including cash and our $40 million undrawn revolver. Moving to the next bullet, our strong Q2 results have extended into the third quarter, notably with significant exposure to the VLCC market and to the midsize tanker sectors. We have already booked over half of our third quarter revenue days at profitable rates. Additionally, we capitalized on the elevated market in the second quarter, and we entered into favorable time charters, which strengthen our earnings prospects moving forward. Specifically, we secured four VLCC time charters for periods ranging from seven to 36 months at an average of $73,000 per day. We have positioned international seaways to optimize revenue during a time when rates have come off their highs. Lastly, we further executed on our disciplined and balanced capital allocation strategy with an intense focus on providing a return to shareholders. We maintained our balance sheet strength and enhanced our capital structure. Specifically, in addition to the repurchase of $10 million of our shares in the first quarter, we completed the repurchase of an additional $20 million of our shares during the second quarter. This brings our total purchases to just under 5% of our outstanding shares. We believe this was an attractive opportunity for Seaways to unlock value given our stock valuation relative to our NAV. We took further steps to de-lever the company, and we are in the process of repaying the full $40 million outstanding under our transition term loan facility in August. This will reduce our already low cash break-evens by an additional $1,800 per day to under $15,000 per day. Once the repayment is made, we will have 14 unencumbered vessels worth more than $200 million. We continue to have one of the lowest leverage profiles in the public shipping sector, with our net loan-to-value further improving to 38%. Our liquidity has allowed us the flexibility to continue to deploy capital to best serve shareholders. In June, we paid our regular quarterly dividend of 6 cents. And our board has approved another regular quarterly $0.06 dividend to be paid in September. Our priority is to continue optimizing how we allocate the capital throughout the cycle. In addition to repurchasing close to 5% of our outstanding shares, which we discussed a moment ago, this has included capitalizing on attractive asset values at the bottom of the cycle, repaying $40 million of debt, and providing shareholders with dividends totaling $0.12 since implementing our policy this year. In order to ensure that we remain well positioned to act opportunistically, subsequent to the end of the quarter, the company's board of directors authorized a new $30 million share repurchase program for Seawaste. Turning to slide six, we provide an update on oil supply and demand. The economic impacts of COVID-19 have reduced the demand for oil. Recently, the IEA has taken a more positive view on demand restoration, increasing their demand forecast to 92 million barrels per day for all of 2020 and 97 million barrels per day for 2021. This is largely driven by the strength of Chinese demand and delays at discharge ports in China, which are due to the logistical issues dealing with record imports. and this has reduced the affected VLCC fleet size. While down from 100 million barrels per day achieved in 2019, the IEA forecast represents a significant increase from previous estimates and reflects demand for oil in the second half of 2020, given that large segments of the global economy were abruptly halted earlier in the year in response to COVID-19. On the supply side, After extending agreements to curb production in June, OPEC has agreed to ease these cuts and is expected to produce an additional 2 million barrels per day in August. Regarding U.S. shale production, the EIA estimates a 2 million barrel per day reduction in August from its peak in March due to pressures from mole oil prices. During the second quarter, we saw strong demand for floating storage due to a steep oil price contango. However, as can be seen in the chart on the right hand of the slide, as global oil demand recovered and production decreased, the price contango flattened, and this de-emphasized the need for new floating storage while inventory de-stocking began. Although we remain positive on the long-term outlook for the tanker market, the combination of June OPEC production cuts reduced demand for floating storage and inventory de-stocking. have pushed rates down from the highs that we saw earlier this year. On slide seven, an update on ship supply. Overall, the tanker order book remains historically low. You can see this on the chart at the top right-hand of the slide. Only 10 Vs have been ordered in 2020 to date, and 31 were ordered in the full year of 2019. Uncertainty regarding the current market, as well as decarbonization and a lack of suitable propulsion systems to meet decarbonization goals continue to temper new ordering. Moving to the bottom half of the slide, the VLCC fleet is aging, with nearly a quarter of the existing fleet now over 15 years old, as depicted in the chart at the bottom right. Ships 20 years or older have grown by nearly 3 million deadweight from last quarter, an increase of 19%. As we have noted consistently and previously, once vessels reach 15 years of age, they are more expensive to operate, with significant investments required to continue to trade. As ships reach ballast water treatment deadlines, even greater capital expenditure is necessary. Wrapping has been limited during the last 18 months. due to the market recovery. But the potential for scrapping has been building based on the aging fleet. There have been no VLCC scraps thus far in 2020. As rates moderate, scrapping is likely to increase. I'll now turn the call over to Jeff to provide additional details on our second quarter results. Jeff?

Thanks, Lois, and good morning, everyone. Let's move directly to reviewing the second quarter results in more detail. But before turning to the slide deck, let me just summarize the consolidated results. In the second quarter, we achieved adjusted EBITDA of $96.3 million. And as well as mentioned, this was our second consecutive record quarter. Net income for the second quarter was $64.4 million, or $2.24 per diluted share, which compares to a net loss of $16.5 million, or $0.57 per share, in the second quarter of 2019. However, excluding the impact of a $4.1 million charge for impairment and gain on sale of vessels, net income was $68.5 million, or $2.39 per diluted share. Now let's go to the deck, starting with slide nine. I'll first discuss the results of our business segments, beginning with the crude tanker segment. TCEs for the crude tanker segment were $106 million for the quarter, compared to $45 million in the second quarter of last year. This increase primarily resulted from the impact of higher average budget rates in all of the VLCC, Suezmax, AfriMax, and Panamax sectors. Now looking at the product carrier segment, TCE revenues were $29 million for the quarter, compared to $17 million in the second quarter of last year. This increase, again, results from the impact of higher average daily rates earned in all of the LR1, LR2, and MR fleets. Overall, as reflected in the chart top left, consolidated TCE revenues for the second quarter of 2020 were $135 million compared to $62 million in the second quarter of 2020. The increase was principally driven by substantially higher average daily rates earned across the crude and product carrier fleets this quarter compared to last year's second quarter. Looking at the chart at the top right of the page, adjusted EBITDA was $96 million for the quarter compared to $21 million in the same period of 2019. And again, the increase was principally driven by higher daily rates. On the bottom half of the page, we look at the results sequentially, i.e., quarter to quarter. Consolidated TCU revenues and adjusted EBITDA for the second quarter were up from the very high first quarter, but increasing by $15 million and $22 million, respectively. Now, if we turn to slide 10, we provide a review of Q2 rates and Q3 to date. Let me discuss our bookings in Q3 thus far, which are very healthy, particularly in the larger vessels. Looking at the far right column, we've booked 67% of our total available DLCC days at $64,500 per day on our modern vessels and $59,200 per day overall. 56% of available Suez Max days at approximately $30,900 per day. 45% of available Afra Max LR2 days at an average of approximately $14,200 per day. And 43% of available Panamax days at an average of approximately $19,000 per day. On the MR side, we've booked 48% of our third quarter days at an average of approximately $13,200 per day. As Lois mentioned, these rates reflect the fact that we opportunistically locked in four of our VLCCs on time charges at an average of $73,300 per day for the entire quarter. In the balance of the quarter, of course, you should keep in mind that spot rates today are lower than we have booked thus far in the quarter. But overall, you're looking at a healthy quarter. Now, if we could move on to slide 11. The cash cost TC break-evens for the 12 months ended June 30, 2020, as well as our estimates for going forward are illustrated on this slide. International Seaway's overall break-even rate was $19,700 a day for the 12 months ended June 30, 2020. These rates are the all-in daily rates our own vessels must earn to cover vessel operating costs, dry docking costs, cash G&A expense, and debt service costs, which includes scheduled principal amortization as well as interest. As Lois mentioned earlier on the call, we entered into the four highly attractive time charters. Specifically, we've executed three BLCC time charters, a three-year BLCC time charter for $45,000 per day and another time charter for an 18-year-old BLCC for one year for $53,000 per day. We also executed two seven-month BLCC time charters at an average rate of $100,000 per day with the vessels delivered in May. The combined rate of those four time starters taken together, as I just mentioned, is $73,300 a day on average. And so taking into consideration distributions from our FSO and the fixed time starter revenue, the overall breakeven rate for the last 12 months drops to $17,400. But if you go all the way to the far right of the page, we've included all in daily breakeven rates for the forward 12 months ending June 30, 2021. taking into consideration the contributions from our FSO-JV, the four-time charters I just mentioned, and also the full prepayment of the $40 million outstanding under the transition term loan facility that Lois mentioned earlier, which lowers our interest expense by $1.2 million, the overall breakeven rate drops further to $14,600 per day. At this time, I'd also like to take the opportunity to reaffirm our cost guidance for the year for modeling purposes. For the remainder of 2020, we expect regular daily OPEX, which includes all running costs, insurance, management fees, and other similar related expenses for our various classes, as always, to be as follows. For VLCCs, $8,400 per day, COSMAX, $7,700, AFRAMAX, $8,100, PANAMAX, $7,900, and NMRs, $7,500 per day, excluding any potential impacts attributable to COVID-19. For details on projected dry dock, capex, and off-hire days by quarter, please turn to slide 16, or you can refer to slide 16 in the appendix for an update there. Continuing with cost for your modeling, 2020 full-year interest expense is expected to be $37 million after taking into account the payoff of the transition loan in mid-August, which is composed of $33 million of cash interest expense And the balance, a non-cash component is $3 million of amortization of unamortized discounts and also deferred fees of $1.3 million related to a mark-to-market charge for an interest rate collar. Those are non-cash charges. So it would also give you guidance that additionally, after the payoff of the transition loan, our debt will call for $15 million in scheduled quarterly principal payments beginning in Q3, which is down from $20 million per quarter previously. For 2020, we expect cash G&A to be in the region of $23 million, plus there's about $5 million in non-cash items, which is relatively in line with last year. Finally, we expect about $5 million in equity income from our JVs and about $20 million for depreciation and amortization per quarter. Now, if we could go to slide 12 for our cash fridge, Moving from left to right, we began the second quarter with total cash and liquidity of $150 million. During the quarter, we generated $96 million in adjusted EBITDA. This amount includes $5 million in equity income from the JVs, which is non-cash, so we therefore deduct it to reach the cash figure, but then add back the cash distributions from the JVs, which this quarter were $2 million. We expected $17 million in dry docking and CapEx, cash interest and principal paid in our debt was $30 million, finally taking into account the $22 million that was cash returned to shareholders and the positive impact of working capital and other non-cash charges of $11 million. The net result was that we ended quarter with $144 million of cash and $40 million of undrawn revolver, yielding total liquidity of $184 million. Now, if we could go to slide 13, I'd like to briefly talk about our balance sheet. As of June 30, 2020, we had $1.8 billion of assets compared to $523 million of long-term debt and $81 million short-term. In addition, as mentioned, we had a $40 million revolving credit facility that remained undrawn as of June 30. As you can see on the right side of the slide, our net debt total cap stands at 30%. Our net loan-to-value of our conventional fleet stands at 38%. As footnote 1 tells you, debt is not taking account of the value of our FSO. If you include that at book value, then that debt number drops to 34%. I'd also call your attention to footnote 2. Since with Q2 in the books, our LTM EBITDA of $266 million means that debt to EBITDA is just 2.3 times, and therefore, as footnote 2 indicates, With the metrics, that kind of metric means that our margin will drop from 260 basis points to 240 basis points on the core facility. Now, finally, before turning the call back over to Lois, I'd like to briefly discuss our share repurchase program. During the first six months of the year, we repurchased $30 million of shares. Specifically, during the first quarter of 2020, we repurchased $493 592 shares at an average price of $20.41 per share for a total cost of $10 million. During the second quarter, we repurchased 926,700 shares at an average price of $21.57 per share for a total cost of $20 million for a year-to-date total of $30 million, which represented repurchasing nearly 5% of our outstanding shares. In August, our board authorized a renewal of the share repurchase program in the amount of $30 million. That concludes my financial remarks. I'd now like to turn the call back to Lois for her closing comments.

Thanks a lot, Jeff. We're excited. With our second quarter earnings, we generated our second consecutive quarter of records, taking advantage of the robust market, and we further implemented our discipline and accretive capital allocation strategy. Our substantial operating leverage was evident in the second quarter. This enabled us to generate our highest earnings per share since going public. ending the quarter with $184 million in total liquidity, which includes $144 million in cash. The strong second quarter results have extended into the third quarter, and we're pleased to have booked over half of our revenue days at healthy rates. In addition to attractive spot bookings, we've capitalized on the elevated market, and we entered into a number of highly profitable charters, ranging from seven to 36 months and averaging $73,000 per day through the third quarter. During a time when rates have come off their high, this success positions us to optimize our revenues. Finally, our success executing on our disciplined and balanced capital allocation strategy has allowed us to provide a return to shareholders while ensuring our balance sheet and our capital structure positions us well for the long term. Complementing our repurchase of $20 million worth of shares in this quarter, our payment of our regular six-cent dividend during the quarter, as well as the approval by the Board of another regular quarterly dividend of six cents to be paid in September, we are prepaying the full $40 million outstanding under our transition term loan facility this month. This will reduce our already low break-evens by an additional $1,800 per day to under $15,000 per day. We entered the third quarter with a net loan to value of 38%, ample liquidity, and flexibility to continue to further implement our capital allocation. Consistent with our focus on acting opportunistically, our board authorized a new $30 million share repurchase program, which will provide us with additional opportunities to unlock value for shareholders. We've also booked almost 70% of our Q3 VLCC days at a fixed rate of $58,000 per day. Going forward, we remain positive on the long-term outlook for the tanker market, and our priority is to provide safe, reliable service to our leading energy customers and to assure the safety of our onshore and at-sea professionals as we continue to operate in the challenging COVID-19 environment. Thank you very much, and we'd now like to open it up for questions.

Hello? Operator?

I think our operator must not have electricity.

David, you can send her a note.

Sorry about that. Sorry about that. Just my computer froze. Okay. We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Greg Lewis from BTIG.

Good morning, Greg. All right.

Well, we may have to go on to the next one. Oh, there's Greg. There you are.

I can't hear Greg. Can you? One moment. I'm having technical difficulties. Let me get some help.

We appreciate everyone's patience.

Yeah, absolutely.

Yep. Well, it looks like there's technical difficulties with the Q&A queue. Let's hang on for a minute or two at least, Lois, and see if the conference call organizer can reassemble the queue.

Okay. Okay.

So for all of you listening, I appreciate your patience and see if we can get back our questions here in a minute. Well, if it's all being transcribed, Lois, I'm wondering what we should be discussing in order to fill up the dead air while we're waiting for the system to work again.

Yes, I'm wondering if we should be questioning one another.

Although, at some point, we'll... Here's the...

Question coming in on the email, Jeff, you know. Okay, go ahead.

The questions, I had some problems with the questions, so please get back on the queue. The person I have up is Omar Noka from Clarkston. Please go ahead, and the others, please sign back. I'm so sorry.

Hey, guys, can you hear me?

Yes, Omar.

We can't. Okay. No, this has been exciting. I have been without power since Tuesday, so I completely understand what's happening. Yeah.

Hang in there. Okay.

Go ahead. Yeah. So, listen, you guys, you've given a good amount of detail in the call. I did have a couple of questions on the fleet, but just maybe before that, I did want to ask about the $40 million of upfront payment on the transition facility and And just so I understand it, you'll pay $40 million this month, and then that reduces quarterly payments to $15 million. How long does that $15 million average go on for?

Jeff, why don't you go ahead on that?

Thanks, Lois. That's our good protocol. Yeah, it will go on for the principal amortization will go on the sign-assure facility. And on the core facility, so if you go to that chart that has the balance sheet, it will continue at those levels until they mature. So that's pretty much going to be the run rate, Omar, $15 million a quarter.

Okay. Okay. And then that $15,000, so it's inclusive. You'll also have that payment in the third quarter. So it's $40,000 plus $15,000-ish?

That's right. Okay. Yeah. All right. Yeah, exactly. Exactly.

Yeah, OK. And then just OK, maybe just a bit more broader and just kind of thinking about how things are set up. And I understand clearly that we're in this uncertain environment with the pandemic and we're in the soft part of the oil market or oil market in general. Clearly, you guys have generated a lot of cash over the past three quarters. You refinanced, you levered, you built up a sizable cash balance. You started a dividend and you've been very active buying back stock. And on top of that, you've got the $200 million of unencumbered assets. So really plenty of flexibility. And I just wanted to ask, you know, what are your updated thoughts on, you know, the VLCCs, you know, the older ones built in 02, 03? You've got three of them. You know, we've noticed that one of them is obviously earning a nice contract this quarter or for the next, I think it's 12 months. But generally, we've seen the other two really grow. the real separation between the earnings of those versus the modern vessels. And so just thinking, you know, as you keep thinking about the longer-term story at International Seaways and keeping just the existing market footprint, what's your thought of just selling those two or three VLCCs and then taking the proceeds, replacing them with three modern VLs? And so you're not putting any strain on the balance sheet. You're just simply rejuvenating the existing footprint.

That's a great lineup, Omar. I mean, obviously, you know, when we talk about being 69% booked in the third quarter at 58 a day, that includes those three older vassals, as you know. In this quarter, absolutely, you know, their spot earnings have been about 24 a day on the quarter. Three older vessels, the one that's on time charter is almost 52. And then if you go back and look at Q1, they were actually the older vessels earned just as much as the modern ships. So I would say that, you know, we have done well with these ladies and we're generating a lot of cash on them. That having been said, we indeed will opportunistically look at marketing and these older two ships as appropriate and look to be, you know, take advantage of the best opportunities we can. And, you know, when you recap quite beautifully there, you know, the things that we've been doing, you know, you see we've been buying back shares, you know, I love this $15,000 per day below that for cash break even in this environment. All of those things are really strong. And as we go through this part in the cycle, then we will turn our eyes towards regenerating the fleet. It might be a little bit early at the moment, but that's something that we will definitely look at when we think that's the right way, the best way to deploy our capital.

Okay. Thanks, Lois. That makes sense. And just a follow-up and maybe just a final question about the about the fleet and clearly you guys have a footprint in the V's and you've got it in the Panamaxes. The MRs, however, you know, you've got four of them and they seem a bit non-core, especially, you know, the earnings power seems to be very range bound in that particular segment. So it's either you have a bunch of MRs or you charter a bunch in. What are you thinking about that piece of the business? Do you monetize those ships in the near term or you still just want to hold on to them? I know that there's probably no debt on them. How do you think about those vessels?

You know, I would say that you've seen us with our actions prioritize and will continue to see us prioritize the, you know, we like the larger crude sector and we also find a home in the mid crude sector, as you noted, you know, on the V's. and on the Panamaxes slash Abramaxes. So that's where we remain committed, definitely more opportunistic on those MRs, where steadily over the last few years we have declined our core-owned ships, and even our time chart is in that sector.

Yeah, so more to come, presumably.

Yes.

Yes.

Just to be clear, I think if you ask, they are a part of the core fleet. So there is a little of that.

Okay.

Thank you.

Thanks, Jeff. All right. And thanks, Lois. That's it for me.

Thank you.

Operator?

Well, if we don't have another question there, definitely one came in on my email from Randy Givens asking about lightering. And, you know, our second quarter on lightering was quite strong. They had something like a $2.5 million EBITDA in lightering, and we really saw a very high volume, a lot of not only crude lightering, but also product lightering, which was a result of the contango situation and crude end product being stored on ships in the U.S. Gulf, as well as heavy volume in Panama and the West Coast. Let's see. Do we have our operator or no?

Yes, I've stepped in while we had a connection. Do you want me to take the next question?

Yes, please, sir.

Okay, thank you. Our next question comes from Greg Lewis of PTIG. Please go ahead.

Yeah, hey, thanks, and good morning, everybody, and hey, Jeff and Lois. You know, Lois, I guess I just – my first question is around, you know, hey, congratulations on the Q3 bookings. You know, it seems – As we look at where reported spot rates are, just kind of curious how we should think about that. It seems like it upcycles. Vessels tend to never actually earn those kind of high levels that are being reported. Kind of curious how we should be thinking about it now where we're kind of at trough levels. how we should think about the performance of the ships versus kind of those reported rapes.

Well, absolutely. And first of all, thank you for your persistence. I really appreciate you getting back with Q. We had you there in the front row. So thank you so much. It's much appreciated. You know, indeed, when the market is running and you're seeing VLCC rates being reported at over $100,000 per day, you know, what happens is that, you know, the market is running up and it's the vessels that are in that window that are able to fix those rates. I mean, overall, it's very strong. And you'll see that, you know, in order for us to secure 30% of our Vs or 4 out of 13 Vs, on these time charters that we got, you know, we pulled plum positions, right? So those were a lot of May lifting dates in order to lock in on those two seven-month charters on the Vs, 100 grand a day. So, you know, that was something, you know, it's really almost a spot decision when you're doing something six, seven months on a VLCC because that's really only a couple of voyages. But, you know, likewise, I would say with what's booked in queue to date for the third quarter, you know, you also see – you don't see the market on these today is, you know, $20,000 to $25,000 per day. You don't see Q3 booked at that because, you know, we've had vessels that have been delayed in discharging. You know, we've been able to secure higher rates going into the quarter. The open days on the vessels are indeed lower at present, but Q3 is always your lowest demand quarter. So I think that the market, particularly on the Vs, has held up remarkably for the type of demand destruction that we have seen.

You know, Lois, can I jump in? Of course. I think Greg may also mean, and you can tell us, Greg – that in the crazy volatile up quarters with the rates really – six-figure rates like Lois was mentioning, Q1 and Q2, you get the reports from the services of a rate, and none of the peer group reports that top-ticking rate for the whole quarter. So you wonder what people are really capturing when you read those headline rates. But when the rates are like where Lois is now in the mid-20s, it's probably that we in the peer group are probably getting rates that pretty much reflect what you're reading from whatever benchmark you're picking up, right? So as far as looking at where things are today, if you're looking at the spot rates, that's probably where things are trading.

Okay, great. Yeah, Jeff, thanks for that. And then I guess, Lois, just because it is going to drive your capital allocation decisions, it's going to drive how you think about deploying and renewing the fleet. I think you kind of alluded to it. I'm just kind of curious if you could share your thoughts in terms of where you think we are in the cycle and realizing that there's become a lot of mini-cycles within bigger cycles. over the last few years. Just kind of curious, you know, how you're thinking about that.

You know, it is very interesting because, you know, when you look at destocking, previously it took 18 months. I'm not, I'm thinking that the destocking on this one may be a shorter period because you know, truly the demand destruction was not, did not arise from, you know, from anything other than COVID, you know, and our, you know, we bounced back fairly quickly and, you know, the markets will stay down as we go through the destocking, but that could, that could be six months, could be 12 months, something like that. And, you know, it's important for us to be ready and just, you know, to make sure we take our actions, you know, during that part of the cycle. So we're watching very closely, and I'm thinking that it may be shorter rather than longer.

Okay, everybody. Hey, thank you all. Go ahead, Jeff.

No, I think what we talked about internally about, Lois, is that when that little mini cycle of the stocking caused by the restocking, which is caused by COVID, when that ends, we're back to a fundamentally really well-balanced tanker market with a even lower order book than we saw at the beginning of this year when things started out so well, you know.

Absolutely. Okay, yeah, no, perfect. Thank you very much, guys, and I hope everybody's gradually getting power back. I got mine back yesterday.

Yeah, no, we're powering through it without power.

Good to hear, Greg. Operator, do you have a next question?

Yes, our next question comes from Randy Givians of Jefferies. Please go ahead.

Howdy, Lois, Jeff, and David. How are you all? Good. How are you doing, Randy? Good. Doing all right. Yeah, obviously, congrats again on another record quarter, creative uses of cash through the share repurchases, prepayment of the $40 million transition term loan facility. So well done on that. Now, with that, why did you choose to repay the transition facility instead of maybe the more expensive 8.5 senior notes? Was it solely to unencumber the shifts or just the larger principal balance? And then what are your plans for those kind of 8.5 senior notes?

Go for it, Jeff. Well, sure. Thanks, Randy. We looked at them both. You know, the 8.5% notes, which are just $25 million in total amounts, became callable at any time. So a little earlier, I guess in June, the end of June. So that's definitely an option. That option is still out there. We can call it, effectively you have to call it in whole because that's sort of the minimum listing requirement for the New York Stock Exchange. So we thought about it, but we decided along with our board that we would prioritize the transition loans being the first thing that we would take in because while it's the second most expensive or price loan. It is secured. It was low loan to value. Really, as the name implies, a temporary loan that we did as part of facilitating and refinancing our old Term Loan B. If we had this much cash in January, as we do today, we wouldn't have needed a transition loan at all. So it just seemed logical to us to remove that. As you mentioned, you get 12 more unencumbered ships to go with two we already had. So that's 14 unencumbered ships worth $200 million in today's market. And even at scrap, they're worth about half of that. So tremendous optionality and flexibility of having unencumbered vessels. It's really like gold if you're a ship owner. It's a good thing. We could sell them as Lois alluded to. That's gradually part of the plan. Or we could borrow against them if we needed to or wanted to. So all that kind of optionality and then Uh, meanwhile, you know, the eight and a half percent unsecured is, you know, a relatively good price for unsecured. Uh, and we always can take, look at it quarter by quarter and, and make that sort of the next, uh, could be the next capital allocation. But we also want to have dry powder for, you know, further, further, uh, allocations like, uh, further share of purchases. So hopefully that answers your question, Randy.

Yeah, no, it does for sure. Um, and then I guess, secondly, looking at the crude tanker market, What kinds of changes have you seen in investment movements here in recent months? Are there certain regions that maybe have been busier than others? And then I guess also the same question on the refined product side of the business.

No, absolutely, Randy. I mean, you know, you can see in the Q3 earnings on the Afromaxis, I mean, definitely the Libya being completely down and not having been able to restore, I think there are like 100,000 barrels a day versus they were well over 1 million barrels a day. That hurts regionally the Western Aframax market. Then, you know, I would particularly say on the product carriers, you know, you've just seen such incredible volatility. The LR2s had really, really, you know, really were superstars there for a while and then came down dramatically. You're seeing NAFTA now priced higher than LPG, and that backed out, you know, some of that NAFTA demand and kind of hurt some of the, you know, larger product carriers. So those are the couple of ways we've seen some of the trends manifesting themselves. You know, we've still seen over or close, close to 3 million barrels a day still of crude exporting out of the U.S. Gulf. And I think that has also helped the larger crude market hold itself up a bit going through this period.

Sure. Perfect. Well, cool. I know it's been a long, crazy call, so that's it for me. But obviously keep up the great work, especially with the share repurchases and getting your crew back home. I know that's a priority.

It really is, Randy. And I want to thank absolutely everybody for your patience here on the call and through these challenging times. So, you know, we look forward to, you know, making our capital allocation decisions for our shareholders in the absolute most optimal way. And thank you for supporting Seawaste. Thank you very much.

Absolutely.

See you, Randy. Okay. Our next question comes from Ben Nolan of Stiefel.

I thought you were cutting me off there, Lois.

Yeah, I realized I had another one in the queue. I apologize, Ben.

Like Brady said, it's been a unique call. I have two questions. Number one is, as it relates to the $30 million of additional funding, buyback authorization that you got. Obviously, it was a terrific quarter with lots of cash now on the balance sheet and taking sort of a tactical shotgun approach to what you're doing with that. But thinking through sort of from a longer-term perspective, the eventual needs to or desire to grow the business with pairing that with the liquidity of the shares, preserving cash for potential opportunities. Maybe you could talk through how is it that you came to want to re-up the $30 million of buyback, and at what point do you say, okay, well, now we need to transition to thinking about liquidity and long-term growth and everything else?

You know, Ben, that's a great question. I mean, the easiest answer is that at Seawaste, you know, we consistently like to have a full toolbox of, you know, our buyback, you know, ready, our program authorized, you know, so that when we see that that's the right capital allocation decision, you know, we can exercise that. And I would simply say that, you know, for us right now, I mean, this environment of COVID-19 has been very tricky. And I think that we are very actively and very carefully looking at, you know, what's the best way to allocate our capital. And then I'll flip it over to Jeff maybe for a little more detail.

Yeah, thanks, Lois. I think it ties into a question that came up before or an explanation you were giving us about the cycle we're in, and we're in a destocking cycle. But it's not easy, as I think we've used the expression. The view from the bridge is a little foggy about how long that cycle is going to last, because it involves factors that no management team can control. What's OPEC going to do? How's demand going to return? Things like that. So that's why the capital allocation decision is quarter by quarter and don't paint yourself in the corner is our view. And as you know, we always sort of take a balanced view on things. That's kind of our style. And so we absolutely like having the program re-upped so we have the flexibility to do it if it makes sense. And we are also keeping in mind the other needs that we have eventually for renewing our fleet, et cetera. So we'll weigh all that stuff quarter by quarter and also how the cash is building based on how the destocking is going. So I think that's the best answer we can give you, Ben, is that we've got all the tools in place and just evaluate continually. Okay.

Now, this is sort of a tie-in question, and I apologize. This is very open-ended, and I usually don't like to ask open-ended questions. But here we are, close to six months into this really sort of bizarre situation. And, you know, I know that you guys are pretty critical thinkers. I'm curious, from your perspective, how – if you're thinking about your business differently, both from a sort of asset allocation perspective and how, you know, a cost perspective, how you're running the business, and then in conjunction with that, are there changes that you sort of can envision in the industry? I mean, does scale matter more than it used to? I don't know. Again, I apologize. I know it's very open-ended, but I would love to hear your thoughts.

Well, Ben, I would start that from a tactical perspective. And, you know, the conversations that I've been having with, you know, Bill on the technical side, you know, it's been a bit easier for him to sell me on some of these efficiency improvement items like the Mavis ducts and an investment in super sleek paint for our VLCCs because we're really – focusing on increasing our efficiency and meeting our decarbonization targets. So this is really a big effort, and we will increasingly have a focus on that. And you see that the business will continue to change. I mean, that lower ordering book, you know, is really as owners keep having to see, okay, what's going to be the next effective technology that isn't just an intellectual idea, but that can actually be manifested. And I think that that's really going to affect fleet development. So you start with what can you tactically do to improve the efficiency of the vessels that you own, and then you look at, okay, how is the industry going to change and what will be – the proven technology that's really going to suit our needs going forward. So I think that, you know, really, you know, even during COVID-19 when you have all these urgent issues and, you know, everybody is a huge effort to coordinate crew repatriation stuff, you still have to have your eye on the ball. And we do as to how that industry is going to change in regards in the next, you know, 10 years.

Okay. Go ahead, Ben, with your follow-up. No, that's all right.

No, no, no. I was just – maybe also, I guess, to be a little bit more specific, are you guys – can you envision doing things from a cost perspective that maybe you wouldn't have done in the past? Or does – again, does scale matter more than maybe it used to or not? I don't know. Maybe some of those sort of macro-level questions.

You know, I do think scale is important. I do think that, you know, you get operational efficiencies. You get, you know, from the pools we often can get commercial efficiencies. But, you know, scale without a doubt continues to be important and, you know, just in your liquidity of your shares traded and, you know, for all of us buying to get attention from shareholders. So anything that we can do to differentiate ourselves, and to put ourselves forward. You know, we're really looking at the market. And then, Jeff, you wanted to add something. Go ahead.

Well, I think that, actually, I think your previous comment about looking at the maize ducks and slick paint and things like that, those are, in addition to being carbon emission-focused, they're sort of cost-related. So we're spending money to save money and to decarbonize. So you've got to sweat the details. That's tactical, kind of, as you said, Lois, but... But then strategically, Ben, we always spend time thinking about the big picture and where we can move to. I think we're likely to stay a tanker company, just to put that out there, but there's a lot of things to consider as Lois touched on in terms of where you're going to move next and how technology is changing and how we can respond to that. So we try to have a balance of sweating the details and making tactical decisions, but With a lot of consideration given to what's next, we can't give you an answer other than that we do understand the values of scale and we do understand the value or the importance of how trends are changing and don't want to have stranded assets, want to put your money in the right place for the next 20, 30 years and not just the next two years. So there's no one answer other than the one I gave you about staying in the sector probably, but we're looking at everything.

All right. I appreciate it. Thanks, Jeff.

Yes, thank you. Our next question comes from Liam Burke from B. Riley.

Thank you. Good morning, Lois. Good morning, Jeff.

Good morning.

Jeff, I want to beat the capital allocation subject to death here, but... Longer term, do you have either in terms of debt to total capital or some other metric, an ideal capital structure for the business, understanding you're operating a high fixed cost business there?

I mean, Jeff, I'm going to let you compose your answer there for a second because I would suggest that your ideal leverage is going to depend upon where you are in our cyclical business. and that it's not always the same answer. And then, Jeff, this is your expertise.

Thanks, Lois. Sure. We have no problem starting with 50% leverage if it's, okay, we're going to buy a vessel or a few vessels on block or whatever, 50%, 55%. That can take advantage of the situation. But we think there is an advantage to working down your leverage from there. And Lois is absolutely right. Net loan-to-value is a number that's very tricky because it depends on what could be 50% net loan-to-value at the peak could become quickly 75% loan-to-value, and companies have gotten into trouble with that before. So that's why we like starting with that level to maximize the benefit of your equity when you're acquiring vessels and then working it down. But we don't have a set-in-stone target. We just think it's good to work it down to lower levels because then you could always re-lever to help you make a capital allocation decision that's smart, whether that's buying a vessel because you've got to the right time to do it or a few vessels or doing more shared purchasing or whatever it is. So I think we'd like – I would just say this, maybe if it helps. I kind of like where we are. How's that?

Fair enough. Lois, the time charter rates that you secured in the quarter are strong. Looking sort of longer term, do you see opportunistically moving in time charter market as you see the cycle to reduce volatility or how are you looking at the time charters now?

You know, right now the time charter flow has really ebbed and You know, charters are reluctant to step out. You know, we are, again, in the lowest part of the demand cycle for the year. And as we head into Q4, you may see the rates run and charters step out for term business. But right now, it's a little bit apathetic, I would say.

Great. Thank you.

Okay, our next question comes from Jay Mintzmeier from Value Investors Edge. Good morning, Jeff.

Good morning, Lois and David. Congrats on a fantastic quarter.

Thank you.

Thanks, Jeff. Yeah, so a lot of this has been touched, and I realize the call is getting a little bit long with the glitches here, but just a quick question, not looking for too much detail, but there's an enormous spread there, right, on the VLCCs between the modern tonnage and those small shifts. massive spread, right? How much of that is specifically kind of, I guess, you would normally expect due to the age of the ships and how much of that was just like positioning? Not looking for exact answer, but just kind of broadly speaking.

You know, the VLCCs are, you know, obviously by scale the most attractive vessel to hold, you know, storage on and the most economic, right? So they were the first you know, to, to really ramp up in, in the storage market. And then the Chinese have just been voracious in their imports into China, um, within, uh, uh, the Chinese, uh, crude market. They, they have their own, uh, benchmark, and you're still in contango over there. So while it may not be a situation where you keep putting extra Vs on, if you are holding a V in storage off China, you're not in a big rush to discharge. So, you know, the Vs have had a few advantages that the rest of the market did not share in the last, you know, eight weeks.

Yeah, thanks, Lois. I guess I didn't phrase it quite correct. I was just asking about the VLCCs themselves between the age profile there. There's a huge disparity between the 15-plus and the younger ones.

No, absolutely. Sorry for that. Yeah, I mean, as soon as you get some softness in the market, if you are a highly flexible, less than 15-year-old VLCC, you're going to be preferred. You're going to be more flexible on a lot of the Western trades. And the older vessels are going to be left with those charters that are willing to take vessels that are over 15 years old. You know, but when you look at it within our portfolio, those ships are still highly cash flow positive, considering, you know, what their asset values are at this point and what their book value is.

Yeah, and there's only – if I could just jump in, there's only two of them effectively in the spot.

Well, yeah, and the third one's our 52-day, yeah.

So that's a little bit of a sort of sampling – not error, but sampling effect of two older vessels. But as you say, Lois, they're still – they're pulling their weight for the capital that we have now. Right. So, you know, they'll do their time, and when it's the right time, they'll move on out of the fleet.

Well, and, Jeff, you know, if you look at the first quarter, they, you know, in a running market, they will earn as high as modern tonnage. And, you know, we'll see. You know, we could have some healthiness in Q4, and then you'll see a shrinking of that vast variance, you know, as the market strengthens.

Thanks, Lawrence. Thanks, Jeff. Sounds like, yeah, it sounds like not really statistically significant, but there obviously is a big spread between the two classes. You know, we covered a lot of the leverage stuff. I just had a quick sort of question for Jeff. I noticed you've swapped a lot of that stuff out on Libre earlier in the year, and you got great swap rates at the time, right? But the swaps have came down, right, in price since then. Can you remind us, I don't know if you have this in front of you, or a rough estimate of what your total all-in bank debt cost is? It looks like it's around 4%, which is hard to believe as Is that right or can you remind us of that?

Oh, I think if you include, I mean, now you've got the spread are 240 going to be going forward and on the Sinusure and to, sorry, on the core facility and 200 on the Sinusure. And then you got LIBOR, you know, and if you include the swap, you're still, You're going to be between 4% and 5% for those because of having done some swaps earlier on. In fact, the Sinusure credit facility came with a swap. So that was what we've done. We just did something in this quarter. It's in the queue. You can go look it up. That talks about taking advantage of the lower rates that we have now by extending out in time the uh swap that's on the signature credit facility uh which otherwise would have expired in 2025 we pushed it out to 2027 and that that has a festive saving about 40 basis points uh of where libor is swapped into there so i think you're probably right that that uh with the eight and a half percent baby bonds only being 25 million dollars that would probably all in cost is uh uh It's probably up around in the 4% to 5% range, as you said.

Thanks, Jeff. Yeah, it is a legacy facility, it looks like, right on the sign of sure. But I did see the blending, and that was pretty impressive out there to 2027. I think it was like 2.3 or something. So good job on that. Last question for you. FSO joint venture with Euronav, right? It comes up for renewal in 2022. I know previous commentary, we danced around it a little bit with Euronav as well. Kind of the broad expectation is that those have a life still about 2032 at least. Now, that was a little bit prior to some of the recent carnage in the market we've seen. So I guess a little part one on that is, are those FSOs still steady and operating full utilization and all that? And then I guess part two is, when do those negotiations and discussions begin? Are we already in that phase, or is that like a year out?

So for part one of that, Jay, I mean, those FSOs have had – been on the field since 2010 without one day of off hire. And so they are both highly efficient, you know, units and they really improve that quality of that crude export. So, you know, they've been extremely highly serviceable on that field. And we do expect them to continue to have at least another 10 years of life till, you know, 12 till 2032. And then, you know, we, You know, we are constantly in dialogue with our customer, and when we can give you more, you know, solid detail, we'll do that.

Thanks, Lois. I realize you can probably say as much as you can. Thanks again, Lois and Jeff. It's just excellent to see such great capital allocation and a pure eye towards per share returns, right, and good allocation there. Thanks again.

Thank you.

Thanks, Jake.

That concludes our question and answer session. I'd like to now turn the conference back over to Lois Zabrocki for any closing remarks.

There you go. Again, once again, thank you guys really for sticking with us here. We had a few technical difficulties on the call, but 2020 is that kind of a year. We had a great quarter, and we're looking forward to another great quarter in Q3. And thank you so much for your support of Seaway. Thanks a lot.

This concludes today's conference call. Thank you for attending. You may now disconnect.