Global Decarbonization Will Crush Oil Transport Margins

Key Takeaways

• Shifting energy demand, regulatory costs, and fleet modernization needs are likely to erode profitability and constrain returns to shareholders.
  
• Market oversupply and reliance on volatile spot rates threaten revenue stability and long-term margin preservation.
  
• Strategic fleet modernization, robust financial health, favorable market trends, constrained industry supply, and disciplined capital returns position the company for sustained growth and enhanced shareholder value.

Catalysts

Owns and operates a fleet of oceangoing vessels for the transportation of crude oil and petroleum products in the international flag trade.

• Accelerating global decarbonization initiatives and the rapid adoption of alternative energy vehicles are set to structurally reduce demand for oil transport, leading to declining vessel utilization rates and downward pressure on International Seaways' future revenues.
  
• Increasing regulatory scrutiny and the escalation of global carbon pricing will raise compliance and operational costs for fossil fuel transportation, which is likely to compress net margins and erode profitability over the long term.
  
• The company's ongoing need for substantial capital to modernize its fleet, particularly to meet stringent future emissions standards, will elevate capital expenditures and depreciation, limiting cash available for dividends and reducing earnings growth.
  
• Historical reliance on spot market exposure continues to present significant risk of earnings volatility; as demand for oil transport wanes, this volatility could translate to more frequent and sustained periods of depressed charter rates, undermining revenue stability.
  
• The risk of oversupply in the tanker market, as operators have placed a surge of new vessel orders anticipating short-term rate strength, may result in persistent low day rates across the sector over the coming years, further threatening International Seaways' ability to maintain current margin levels and return on equity.

International Seaways Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on International Seaways compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming International Seaways's revenue will grow by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 29.9% today to 23.4% in 3 years time.
• The bearish analysts expect earnings to reach $193.9 million (and earnings per share of $3.91) by about August 2028, down from $238.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, up from 8.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

International Seaways Future Earnings Per Share Growth

Risks

• The ongoing fleet renewal strategy, including the sale of older vessels and acquisition of modern scrubber-fitted and dual-fuel-ready ships, positions International Seaways to benefit from tightening emissions regulations and command premium rates, supporting higher margins and long-term earnings growth.
  
• The company's low net loan-to-value under fifteen percent, significant liquidity of over seven hundred million dollars, and ability to secure long-term, low-margin export agency-backed financing provide a strong financial foundation that enables both fleet growth and resilience through cyclical downturns, supporting stable free cash flow and balance sheet strength.
  
• Rising long-haul arbitrage trading due to refinery closures in developed markets and new capacity in Asia is increasing ton-mile demand for tankers, which enhances International Seaways' revenue visibility and fleet utilization, bolstering top-line growth.
  
• Persistent underinvestment in new tanker supply, with an aging global fleet and a relatively modest order book, sets the stage for a potential upcycle as vessel attrition outpaces new deliveries, leading to structurally higher day rates and improved profitability for well-positioned operators like International Seaways.
  
• The company's disciplined capital allocation policy, featuring high dividend payout ratios and share buyback capacity, along with a multi-year track record of double-digit returns to shareholders, increases the attractiveness of the stock and could result in a higher valuation multiple, boosting total shareholder return.

Valuation

• The assumed bearish price target for International Seaways is $44.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of International Seaways's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $70.0, and the most bearish reporting a price target of just $44.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $828.8 million, earnings will come to $193.9 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $42.86, the bearish analyst price target of $44.0 is 2.6% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.