Tankers: Low Break Evens Key for Tanker Companies in the Tough Market That Will Succeed the Current Inventory Stocking Cycle, says Diamond S. Shipping
Diamond S Shipping Inc., one of the largest publicly listed owners and operators of crude oil and product tankers, today announced results for the first quarter of 2020.
Highlights for the First Quarter and Recent Events
— Net income attributable to Diamond S of $45.0 million, or $1.13 per basic share, and Adjusted EBITDA (see Non-GAAP Measures section below) of $84.7 million.
— Net debt at March 31, 2020 was $720.6 million implying a net debt to asset value leverage ratio of 43% based on broker valuations as of December 2019
— As of May 7, 2020, fixed 63% of Crude Fleet revenue days at an average rate of approximately $41,800 per day and 60% of Product Fleet revenue days at an average rate of approximately $18,500 per day in the second quarter of 2020.
— As of March 31, 2020, Diamond S repurchased 137,289 shares for a total of $1.4 million under the share repurchase program.
Craig H. Stevenson Jr., President and CEO of Diamond S, commented: “Diamond S would like to thank the dedicated seafarers aboard our 66 ships who have kept our Company moving in the face of the global pandemic. These seafarers, many of whom have had their terms of service extended due to logistical difficulties, are absolutely critical to the global energy economy. While the pandemic has created a difficult operational environment, the changes in the oil and petroleum products supply chain have led to a positive near term environment for tankers. This unprecedented volatility provides a reminder of both the benefits of unit leverage and spot market exposure. While Diamond S is positioned to generate substantial cash flow, as we are doing in today’s strong rate environment, our focus is on appropriately managing the volatility inherent in our markets by ensuring that our liquidity profile remains strong and that our cash break evens stay at highly competitive levels. After the current inventory stocking cycle reverses and oil and petroleum products begin to come out of storage, operators that have maintained capital discipline and have low daily break evens will be best positioned to withstand the trough cycle rate environment. We believe these strategic priorities will create value for our shareholders over the long term.”
First Quarter 2020 Results
Net income attributable to Diamond S for the first quarter of 2020 was $45.0 million, or $1.13 basic and $1.12 diluted earnings per share, compared to a net loss of $1.0 million, or $0.04 basic and diluted earnings per share, for the first quarter of 2019. The increase is primarily related to an increase in the number of vessels owned and operated by the Company as a result of the Merger1 and improved tanker market conditions in both the crude and product tanker segments.
The Company groups its business primarily by commodity transported and segments its fleet into a 16-vessel crude oil transportation fleet (the “Crude Fleet”) and a 50-vessel refined petroleum product transportation fleet (the “Product Fleet”). The Crude Fleet consists of 15 Suezmax vessels and one Aframax vessel. The Product Fleet consists of 44 medium range (“MR2”) vessels and 6 Handysize (“MR1”) vessels.
Net revenues for the Company, which represents voyage revenues less voyage expenses, were $135.0 million for the first quarter of 2020 compared to $61.1 million for the first quarter of 2019. Net revenues from the Crude Fleet were $62.3 million in the first quarter of 2020 compared to $21.0 million for the first quarter of 2019. Net revenues from the Crude Fleet increased due to the impact of four additional vessels acquired as part of the Merger1 and stronger market conditions in the first quarter of 2020 as compared to the first quarter of 2019. Net revenues from the Product Fleet were $72.7 million in the first quarter of 2020 compared to $40.1 million for the first quarter of 2019. The increase in net revenues in the Product Fleet was driven by the additional 21 vessels acquired in the Merger1 and improved market conditions.
Vessel expenses were $41.5 million for the first quarter of 2020 compared to $24.8 million for the first quarter of 2019. Vessel expenses, which include crew costs, insurance, repairs and maintenance, lubricants and spare parts, technical management fees and other miscellaneous expenses, increased by $16.7 million primarily due to the increase in the size of the fleet following the Merger1, net of the sale of the two MR2 vessels in the third quarter of 2019.
Depreciation and amortization expense was $28.8 million in the first quarter of 2020 compared to $22.0 million for the first quarter of 2019. The increase in depreciation and amortization expense was primarily due to the depreciation of the 25 vessels acquired in the Merger1, which was partially offset by the sale of two MR2 vessels in the third quarter of 2019.
General and administrative expenses were $8.1 million in the first quarter of 2020 compared to $6.3 million for the first quarter of 2019. The increase was due to higher legal and accounting professional fees related to regulatory filings and an increase in headcount required to maintain the infrastructure for public company reporting standards and vessel management of a larger fleet employed in the spot market.
Interest expense was $11.4 million in the first quarter of 2020 compared to $9.4 million for the first quarter of 2019. Interest expense increased in the first quarter of 2020 due to an increase in debt borrowings as a result of financing the 25 vessels acquired in the Merger1.
Other income, which consists primarily of interest income, was $0.3 million in the first quarter of 2020, compared to $0.5 million for the first quarter of 2019.
1 As used herein, the term “Merger” refers to the business combination of DSS Holdings L.P. (“DSS LP”) and the crude and product tanker business of Capital Product Partners L.P. (“CPLP”) on March 27, 2019. The historical consolidated financial statements of DSS LP and all of its directly owned subsidiaries for periods prior to the Merger are considered to be the predecessor financial statements of the Company. In January 2019, DSS LP’s Board of Directors approved changing the Company’s fiscal year end to December 31 of each calendar year from March 31.
As of March 31, 2020, the Company had $116.6 million in cash and restricted cash. Restricted cash and minimum cash required by debt covenants was $55.7 million. The Company also had $20.0 million in available lines of credit as of March 31, 2020.
Tanker market conditions strengthened considerably in the first quarter as a decrease in demand in Asia in the early stages of the COVID-19 pandemic gave way to a historic drop in prices for crude oil and refined products. Despite recent and planned production cuts, there is a significant imbalance between supply and demand that has led to an insatiable demand for storage, which has boosted rates across all segments. This dynamic is expected to persist and to keep demand for storage elevated, which may result in higher than average seasonal rates in the second and third quarters.
As of May 7, 2020, approximately 63% of the Crude Fleet revenue days in the second quarter of 2020 have been fixed at an average rate of $41,800 per day. Approximately 60% of the Product Fleet revenue days have been fixed at an average rate of $18,500 per day in the second quarter of 2020. These percentages include vessels on longer term time charters that commenced in a significantly lower rate environment than the current market.
Looking forward, the Company continues to monitor the global impact of COVID-19 on transportation demand. It is possible that tanker rates will be negatively impacted when the inventory storage cycle reverses as demand for crude oil and refined products recovers. Effective fleet capacity will increase as the number of vessels used for storage decreases, and demand for transportation may fall as product is drawn out of inventories. The Company remains constructive in its long-term market outlook and strongly believes the current market price of its shares do not reflect the underlying value of its assets. Additionally, the Company believes that its Crude Fleet and Product Fleet both offer very favorable exposure to long-term market dynamics and that it is well positioned to generate substantial earnings in a strong rate environment due to its competitive breakeven levels.
Share Repurchase Program
On March 4, 2020, the Company’s Board of Directors approved a share repurchase program, providing the Company with authorization to repurchase up to $50 million of shares of the Company’s common stock, effective for a period of one year. Diamond S may repurchase these shares in the open market or in privately negotiated transactions, at times and prices that are considered to be appropriate by the Company. As of March 31, 2020, Diamond S repurchased 137,289 shares for a total of $1.4 million under the share repurchase program.Full Report
Source: Diamond S Shipping Inc.