Global Decarbonization Will Erode Tanker Revenues Despite Fleet Renewal

Key Takeaways

• Rising environmental regulations and costly fleet upgrades threaten to increase expenses and reduce profitability amid declining long-term oil transport demand.
  
• Advancements in logistics technology and risk of tanker overcapacity could weaken revenue stability, jeopardizing consistent shareholder returns.
  
• Favorable tanker market dynamics, a modern fleet, disciplined capital management, and strong charter coverage position the company for stable earnings growth and reduced financial risk.

Catalysts

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

• Despite strong recent earnings, accelerating global decarbonization and stricter regulatory mandates could erode long-term oil demand and tanker utilization, putting sustained pressure on International Seaways’ core revenues as seaborne oil transport volumes structurally decline.
  
• Anticipated increases in carbon taxes, international emissions regulation (such as EEXI and CII), and environmental compliance costs will likely raise operating expenses and compress net margins across the fleet over the next decade, as the need for expensive retrofits and technology upgrades intensifies.
  
• The capital-intensive requirement to replace or retrofit aging vessels with more fuel-efficient or alternative-fuel ships may constrain free cash flow and elevate depreciation and amortization, especially as over 45% of the global tanker fleet will be past 20 years of age within several years, thereby lowering future earnings.
  
• Rapid digitalization and deployment of AI-powered logistics within the global supply chain could drive more efficient use of energy and shipping, enabling charterers to minimize unnecessary ton-mileage and shrinking demand for spot and time-chartered tanker voyages, which would reduce topline revenue.
  
• Heightened overcapacity risk due to the 14% orderbook for new tankers delivering by 2028, combined with the risk of alternative transport modes and shifting regional oil flows, could keep freight rates subdued and vessel utilization volatile, undermining predictable cash generation and hampering the company's ability to sustain dividend payouts and shareholder returns over the long term.

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 decrease by 7.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 37.4% today to 14.7% in 3 years time.
• The bearish analysts expect earnings to reach $100.7 million (and earnings per share of $2.02) by about July 2028, down from $321.7 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 23.8x on those 2028 earnings, up from 6.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.74%, as per the Simply Wall St company report.

International Seaways Future Earnings Per Share Growth

Risks

• Persistent global oil demand growth projected at around 1% per year, coupled with non-OPEC production increases and longer trade routes resulting from geopolitical shifts, will likely sustain and even increase revenue and vessel utilization rates for International Seaways.
  
• An aging global tanker fleet and an orderbook that cannot fully replace vessels over the next four years, along with increased vessel recycling, point toward a likely vessel shortage that could elevate freight rates and positively impact net margins and earnings.
  
• International Seaways’ ongoing fleet renewal and average fleet age of approximately 10 years position it to capitalize on tightening environmental regulations, allowing access to premium charters and supporting stable or increased profit margins.
  
• Consistent and disciplined capital allocation, including significant cash returns to shareholders, strong liquidity, low net loan-to-value, an underleveraged balance sheet, and flexible access to revolving credit, provide financial stability and enhance the potential for sustained earnings and dividend growth.
  
• Robust forward charter coverage with substantial fixed revenue in place, healthy spot TCE rates well above break-even, and participation in commercial pools enable predictable cash flow and reduced earnings volatility, supporting potential share price appreciation.

Valuation

• The assumed bearish price target for International Seaways is $41.0, 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 $41.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $686.3 million, earnings will come to $100.7 million, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 6.7%.
• Given the current share price of $40.55, the bearish analyst price target of $41.0 is 1.1% 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.