Modernized Fleet Will Improve Efficiency, But Geopolitical Conflicts Could Pose Challenges

Key Takeaways

• Fleet modernization through strategic vessel swaps should enhance efficiency and improve margins, bolstering financial performance.
  
• Geopolitical factors and limited new ship supply could boost tanker demand, revenue, and market share.
  
• Global geopolitical conflicts and oil market uncertainties threaten operational efficiency, revenue stability, and financial performance, compounded by aging fleet challenges and rising operating expenses.

Catalysts

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

• The company has modernized its fleet through strategic vessel swaps, selling older vessels and acquiring newer, more efficient ones, which should enhance their fleet efficiency and potentially improve net margins.
  
• There is expected growth in oil demand, particularly from the Americas, which could boost tanker demand and revenue as these regions are set to increase crude production for export.
  
• The limited order book for new ships and the aging global fleet suggest a tightening supply of vessels, which should support strong tanker earnings and potentially drive up revenue and earnings.
  
• The geopolitical landscape, including ongoing conflicts and sanctions, could create opportunities for legitimate tankers by reducing competition from non-compliant vessels, potentially increasing market share and revenue.
  
• The company maintains a solid financial position with significant liquidity and is committed to a balanced capital allocation approach, including a competitive dividend payout ratio, which may continue to drive earnings per share higher.

International Seaways Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming International Seaways's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.8% today to 17.4% in 3 years time.
• Analysts expect earnings to reach $197.3 million (and earnings per share of $3.96) by about March 2028, down from $416.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.8x on those 2028 earnings, up from 4.0x 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 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

International Seaways Future Earnings Per Share Growth

Risks

• Global geopolitical conflicts, such as the Israel-Hamas conflict and tensions involving Russia and Iran, could lead to disruptions in tanker routes and increased safety concerns, which may affect the company's operational efficiency and potentially impact earnings.
  
• Fluctuations in the oil market, including demand growth uncertainties and the impact of geopolitical events on crude production, could lead to volatility in tanker rates, thereby affecting revenue stability.
  
• The fleet's reliance on older vessels and the need to renew aging ships could lead to increased capital expenditures, which might strain cash flow and net margins if not managed carefully.
  
• Changes in global regulations and potential sanctions could impose additional compliance costs and create uncertainties in the tanker market, impacting net income.
  
• Higher operating expenses than anticipated, such as vessel repairs, legal matters, and general administration, could negatively affect net margins and financial performance.

Valuation

• The analysts have a consensus price target of $57.875 for International Seaways based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $82.0, and the most bearish reporting a price target of just $38.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $197.3 million, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $33.54, the analyst price target of $57.88 is 42.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.