Overseas Shipholding Group, Inc. (OSG) Q1 2023 Earnings Call Transcript

Overseas Shipholding Group, Inc. (NYSE:OSG) Q1 2023 Earnings Conference Call May 8, 2023 9:30 AM ET

Company Participants

Sam Norton - President and Chief Executive Officer

Dick Trueblood - Chief Financial Officer

Conference Call Participants

Ryan Vaughan - Needham and Company

Climent Molins - Value Investor's

Operator

Good morning. Thank you for attending today's Overseas Shipholding Group Inc., First Quarter 2023 Earnings Release Conference Call. My name is [Francis] [ph], and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]

I would now like to pass the conference over to our host, Sam Norton, President and CEO of Overseas Shipholding Group.

Sam Norton

Thank you. Francis. Welcome, and thank you for listening in on this presentation of our financial results for the first quarter of 2023 and for allowing us to provide commentary on those results and additional color as to the current state of our business and opportunities and challenges that lie ahead. As usual, I am joined in this presentation by our CFO, Dick Trueblood.

To start, I would like to direct everyone to the narrative on Pages 2 and 3 of the PowerPoint presentation, available on our website regarding forward looking statements, estimates, and other information that may be provided during the course of this call. The contents of that narrative are an important part of this presentation, and I urge everyone to read and consider them carefully.

We will be offering you more than just an historical perspective on OSG today, and our presentation includes forward-looking statements, including statements about anticipated future results. These statements are subject to uncertainties and risks. Actual results may differ materially from those contemplated by our forward-looking statements and could be affected by a variety of risk factors, including factors beyond our control.

For a discussion of these factors, we refer you to our SEC filings, particularly our Form 10-Q for the first quarter of 2023, which we anticipate filing later today, and our Form 10-K, both of which can be found at the SEC's internet site www.sec.gov, as well as our own website, www.osg.com. Forward-looking statements in this presentation speak only as of today and we do not assume any obligation to update any forward-looking statements except as may be legally required.

In addition, our presentation today includes non-GAAP financial measures, which we define and reconcile to the most closely comparable GAAP measures in our earnings release, which is also posted on our website. The year has started well at OSG with all asset categories achieving financial results at or above expectations.

For the third consecutive quarter, we delivered adjusted EBITDA in excess of $40 million. It is notable to point out that this performance would achieve despite having three fewer operating vessels during the first quarter of 2023, as compared to the final two quarters of 2022.

Contributing to our favorable first quarter results were above average lightering volumes, continued strength in international MR markets, and incrementally higher average TCE rates for our Jones Act MR tankers. The stability of cash flow witnessed in the past several quarters has allowed cash balances, including investments in treasury securities to increase to $118.9 million at quarter-end.

By far, the most significant development in our business since we last spoke with you has been the signing of operating agreements with MARAD for our three internationally trading U.S. flag vessels, the Overseas Mykonos, Overseas Santorini, and Overseas Sun Coast to enter into the Tanker Security Program. These operating agreements are the result of many years of work with our government, labor, and industry partners to stand up this important program.

Upon entering the Tanker Security Program, the Overseas Mykonos and [Technical Difficulty] entering have been withdrawn in the Maritime Security Program. OSG is proud to have the first shift to be entered into the Tanker Security Program. Each of OSG's participating will receive an annual stipend of $6 million will have priority access to U.S. Government preference cargoes.

Recognition of the key role played by domestic tanker operators in supporting maritime logistical requirements of the country's defense strategies is a welcome vote of confidence in both OSG and in the industry as a whole. With this step towards expanding the fleet of internationally trading U.S. flag tankers, we look forward to further opportunities for growth in the context of the Tanker Security Program, as well as in other supporting roles tied to our national security.

Staying for the moment with non-Jones Act assets, we await a decision by the military sea lift command on awards for bids to charter tankers for up to five years to be used in connection with the Department of Defense efforts to empty underground storage tanks at the Red Hill facility in Hawaii.

OSG has submitted bids for two of the MR contracts, MSC has in recent weeks made awards for other bids on this project offering promise that the balance of awards, including those on which OSC has bid, will be forthcoming shortly.

Turning to the domestic market, all indications are that the market is finally balanced at the moment with all Jones Act tankers and nearly all ATBs fixed on time charter to primary end users and traders. OSG has given delivery into new charter contracts on four of its conventional tankers and one of its ATBs since the beginning of the year. Three of these conventional tankers are in regular service from the U.S. Gulf to the West Coast carrying renewable diesel and/or its component feedstocks.

The transport of a renewable diesel is creating new and materially additive ton mile demand for Jones Act tankers. We see as many as 8 to 10 Jones Act Tankers being involved in moving product across the Panama Canal to California by the first half of 2025, representing nearly 20% of the total Jones Act Tanker fleet. The severe disruption in historical international energy supply chains occasioned by the war in Ukraine has made for continued price volatility in international MR Tanker trades.

However, domestic supply patterns have been stabilized by the restoration of normalized domestic energy consumption and distribution patterns. These market conditions supported particularly Jones Act shipping demand in the U.S. Gulf to the Florida market. Inventory levels in PAD 1 for middle distillates and gasoline of resins at the end of the year. Unlike a year ago, there was a notable absence in the public press about existing or moving fuel shortages in any one of the East Coast markets.

All of OSG’s Jones Act vessels remained fixed on time charter contracts for the balance of 2023 with several fixed per periods extending for up to 2 years beyond the end of this year. We consider the MR Tanker time charter rate for longer periods now to be in the low-to-mid 70s with ATB ratings in the of $40,000 to $50,000 per day, depending on size and fuel consumption.

The pricing power for owners of Jones Act vessels have not been this strong in nearly a decade. How long can these owner friendly conditions persist? The supply side of the equation looks very favorable for the foreseeable future. The order book for MR Tankers is empty and the two primary yards capable of building MRs for the Jones Act are booked up with government contracts well into 2026.

The order book for large ATBs is also empty and while options do exist for constructing new ATBs and domestic yards, any orders placed now will not likely be delivered before the second half of 2025. Looking ahead, there are presently no clear solutions as to what the preferred option for powering ships of the future may be. This leads ship owners to be reluctant to invest in new capacity at this point-in-time as it creates concerns for being left with stranded assets.

This reluctance to build could result in progressively aging and diminishing fleet, whether by a reduction in real numbers are simply because ships will be sailing at slower operating speeds, which will have the effect of gradually tightening real supply availability. It is realistic to accept that domestic fuel consumption is more likely than not to decline in the years ahead.

Still, all available data suggests that the slope of decline will be very shallow and that a continuing need from the transport of these fuels will remain in place for many years to come.

Looking elsewhere in our current portfolio of assets, The renewed focus on the importance of sustaining and increasing domestic crude oil production bodes well for the future of vessels acquired through our purchase of Alaska Tanker Company. The Biden Administration's approval of ConocoPhillips’ Willow development project should add more than 200,000 barrels per day of [Alaskan north slope] [ph] production in the coming years, giving good reason to believe that demand for our ATC vessels will remain strong for the foreseeable future. Opportunities to increase time charter earnings and contract duration for these vessels are an area of focus for us at this juncture.

I will now turn the call over to Dick to provide you with further details on our first quarter results for 2023. Dick?

Dick Trueblood

Thanks, Sam. Please turn to Slide 7. Before we just start, Before we start the discussion of our first quarter results, I want to point out that we have realigned some of our vessels in our analytical materials to better reflect those vessels current employment. Slide 7 illustrates which vessels were reclassified and both their old and new classifications.

Specifically, the Overseas Tampa is no longer included with our other shuttle tankers, is now included with our Jones Act Tankers for reporting. Likewise, the OSG 350 vision is now included with our other two ATBs. The appendix to today's presentation includes quarterly historical data for 2019 through 2022, which will provide a consistent historical perspective.

Please turn to Slide 8. During the quarter, we've repurchased 497,000 shares of our stock for $1.8 million. We continue to repurchase shares after quarter-end, purchasing an additional 660,000 shares for $2.4 million through last Friday. Beginning in the second half of 2022, and continuing in 2023, we have collectively repurchased 11.2 million returning $33.2 million to our shareholders.

We are pleased with our first quarter operating results, which met our expert expectations and position us well for the remainder of 2023. The first quarter of 2023 saw a continuation of the healthy market conditions that existed in the latter half of 2022. Our Jones Act Tankers and ATBs are fully contracted through 2023, and in a number of cases in the later years.

Jones Act Tanker rates currently are in the low-to-mid 70s with ATB rates ranging from $40,000 to $50,000 per day. During the first quarter, we operated 20 vessels after the fourth quarter 2022 redelivery of three vessels to American ship company upon expiration of their Bareboat Charters. Our first quarter TCE revenues were $104.7 million. Operating fewer vessels, TCE revenues declined $9.4 million, compared to the fourth quarter TCE revenues. Q4 revenues from the redelivered tankers were $8.9 million.

Factoring revenues related to the return tankers, TCE revenues were essentially flat between the two quarters. This is our third consecutive quarter with adjusted EBITDA in excess of 40 million, compared to 2021’s fourth quarter TCE revenues increased 34.1 million or 43% and adjusted EBITDA increased 27.1 million or 163% reflecting the high degree of operating leverage inherent in our business.

Please turn to Slide 9. Specialized business revenues collectively continue to demonstrate their stable contribution to our performance. Specialized business now contribute nearly 50% of our TCE revenues. ATB revenues increased modestly from fourth quarter to 11.3 million, a $5.1 million increase from Q1 2022 reflects the return of the OSG 350 to service, and higher rates resulting from a long-term time charter that commenced in January 2023 for the OSG 204.

Tanker revenues declined from Q4 resulting from the vessels returned to AMSC in December. The increase from Q1 2022 results from full vessel employment coupled with higher rates all moderated by the December vessel redelivery.

Please turn to Slide 10. Lightering revenues increased $2 million, significantly higher volumes in the quarter. Non-Jones Act Tankers performance was strongly influenced by the continuing healthy international rate environment, as well as military sealift command activity. This was tempered by the conversion of the overseas Suncoast to the U.S. flag [from our] [ph] previous Marshall Island flag.

During this time, we also conducted here intermediate survey. The resulting off-hire period reduced her revenue distribution from the fourth quarter. The Suncoast U.S. flight conversion was required to enable her to enter into the Tanker Security Program along with the Mykonos and Santorini.

Mykonos and Santorini [ended] [ph] the TSP. Their participation in the MSP ended. The TSP [Technical Difficulty] for 2023 per vessel. Jones Act Shuttle Tanker revenues decreased slightly, compared to Q4 as the overseas cascade completed her required intermediate survey. Alaskan Tanker revenues were flat between the quarters as they continue to be fully chartered.

Please turn to Slide 11. Vessel operating contribution increased slightly to 46.6 million from 46.2 million in the fourth quarter. The contribution from our specialized businesses decreased 2.2 million. Survey periods for the cascade and Suncoast, coupled with to Suncoast flag conversion were the primary contributors. Jones Act Handysize Tankers contribution increased 1.7 million.

Vessels returned to AMSC had generated negative vessel operating contribution as operating expenses and charter hire exceeded the revenues they earned in the fourth quarter of 2022. The contribution from our ATBs increased 900,000, primarily due to the OSG 204s new contract at a higher rate.

Please turn to Slide 12. Adjusted EBITDA continues to exceed $40 million per quarter. Its decline from the fourth quarter reflects the redelivery of three American shipping company vessels, off-hire days for survey requirement, as well as fewer operating days in the first quarter. Adjusted EBITDA increased from Q1 2022 by $15.5 million.

Please turn to Slide 13. We've generated net income for the past four quarters. The substantial improvement in our markets resulting in increased demand and rates has driven this performance change from 2021.

Please turn to Slide 14. At December 31, 2022, we had total cash of $79 million. During the first quarter, we generated $41 million of adjusted EBITDA, and working capital provided $2 million of cash. We invested $2 million in vessel drydock and other capital costs, and we've repurchased 497,000 OSG shares for $2 million.

We paid $14 million for debt service, $6 million of which reduced our outstanding debt through scheduled amortization. As a result, we ended the quarter with a $104 million of cash, plus an additional $15 million of liquid investments.

Please turn to Slide 15. Continuing our discussion of cash and liquidity, as we mentioned on the previous slide, we had $104 million of cash at March 31, 2023. Our total debt was $422 million, representing a $6 million decrease in outstanding indebtedness since December 2022. Our scheduled loan amortization for the remainder of 2023 is $17.8 million. With $349 million of equity, our net debt to equity ratio is 0.9x.

This concludes my comments on the financial statements, and I'd like to turn the call back to Sam.

Sam Norton

Thanks, Dick. It has been a short two months since the last time we spoke with you, and the primary takeaway is that much has gone as planned. This is largely as expected with such a significant portion of our vessels operating under fixed time charter contracts. To the extent that variability to expectations will materialize during the coming year, these will occur as a result of changes in lightering volumes and in the rate conditions experienced in the international MR market in which our non-Jones Act vessels trade.

As noted earlier, we saw a better than expected performance in both of these areas during the first quarter, which helped get the year off to a good start. Improved market conditions have provided opportunities to reduce exposure to volatility in our conventional tanker trades and given us a forward book of contract cover that extends for several years.

The reduction in earnings volatility gives OSG more stability in its financial profile and greater visibility of forward cash flows to an extent not seen for many years. We anticipate the stability to be a feature of the foreseeable future with all of OSGs Jones Act vessels having been fixed under time charter contracts or [contracted defrayments] [ph] for the balance of 2023.

Over 80% of 2024 available days, have also been fully covered at attractive rates. Our fleet is well-positioned to respond to the changing patterns of domestic and international transportation fuel shipments is well situated to participate in emerging areas of opportunity. We anticipate continuing strength in all important financial metrics The gradual build and available cash balances over the next several quarters as profitable time charters and higher utilization rates are realized.

I do want to point out a number of factors that caused us to be cautious about annualizing our first quarter results for the balance of the year. First, we expect the over performance team in lightering and international MRs to revert on average to more normalized levels over the balance of the year. Should this occur, we would expect TCE contributions from these assets to drop on a quarterly basis by approximately $5 million.

Second, we will have a heavier schedule for intermediate surveys and drydocks over the balance of the year with nine out of service periods planned versus two in the first quarter. Days not earning will thus rise during the balance of the year as compared with the first quarter. Nonetheless, our forecast for the full-year 2023 does not change from our views presented two months ago.

We continue to see time charter equivalent earnings for the full-year approaching $400 million. Attaining this top line result should generate adjusted EBITDA between a 140 million and 150 million for the full calendar year 2023. After deducting debt servicing plan, maintenance capital expenses, we anticipate that free cash flow for the full-year should be between $50 million and $60 million.

To deliver these results, our mission is firmly focused on execution and operational excellence, as well as the pursuit of growth opportunities in our specialized businesses. As we have stated in prior calls, the use of surplus cash flow is a regular topic of conversation with our board.

We consider allocation of capital decisions to be among the most important we must make towards achieving a proper balance between investing in the future, managing the level of our fixed payment obligations, and considering appropriate means for returning cash to our shareholders.

We recognize the need to invest in solutions to ensure the long-term sustainability of our business model and to be responsive to ambitious goals of achieving a future target of [zero emissions] [ph] for ocean shipping. Succeeding these efforts will require consensus on viable technology and practical solutions to apply across the entire supply chain of production and distribution, large capital investments with extended payback periods and scale development of effective and widely available alternatives to fossil fuels.

During this transition, there will be a continued need for transporting conventional fuels and for investing in existing tankers to improve performance and to reduce greenhouse gas emissions as our industry evolves. OSG is committed to reducing its carbon emissions and has set its own specific targets. Incremental and continual improvement are our goals. We will meet these targets in the short run by improving our operational efficiencies.

In the medium-term, we are using and participating in the supply chain for alternative fuels and testing technologies for investment to retrofit existing ships. In the longer-term, we are partnering with others to invest in and develop technology and processes necessary to make meaningful reductions to carbon emissions.

We are also exploring new opportunities for transporting liquid bulk commodities other than fossil fuels. These evolving markets point to interesting and exciting potential for OSG to leverage its strong operating franchise. OSC continued to commit resources to identify the best opportunities available. With this vision, we will remain true to our mission of being a world-class shipper of liquid bulk commodities.

OSG recently issued its annual sustainability report that provides greater detail to these commitments. And we invite you to read it in full. It is available on our website at www.osg.com.

Francis, we can now open up the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Ryan Vaughan with Needham and Company. Please go ahead, Ryan.

Ryan Vaughan

Alright. Thank you, operator. Hey, Sam. Hey, Dick. Good to hear from you guys. Great job in the quarter.

Sam Norton

Thanks, Ryan.

Ryan Vaughan

Just a just a couple quick ones. Sam, you covered a lot there. That was great. Thanks for all the insight. And also, I like how you reclassified some of the segment reporting. Just updating the model now, looks good, makes sense. And helps us out for sure. You know, not too much. Just a couple of quick questions here. Maybe, Dick, it sounded like you're going to have some more off-hire, so drydocking. Can you just update us on a few of those items what you're expecting for CapEx this year and any, kind of preliminary for next year, if you don't know that's okay? And then also you had mentioned just the standard stuff, the [amort] [ph]. So, if you could just update us on what you're expecting for [amorts] [ph] and interest as well? Thanks.

Dick Trueblood

Okay. The sort of capital expenditures for, you know, I'll call them maintenance capital, so all the dry docks and intermediate surveys. Probably in the low 20 millions. Looking – amortization, you know, I mean, debt service generally runs about 50 to 55 and [about $55 million] [ph] a year. We'll amortize another call it $18 million of principal this year through regular scheduled amortization. So, interest expense, you know, will be about $32 million in total. $33 million, somewhere in there.

Ryan Vaughan

Okay. Perfect. Alright. That's great. Thanks for everything. That's it for me.

Dick Trueblood

Okay. Thanks, Ryan.

Operator

Thank you for your question. The next question comes from Climent Molins with Value Investor’s. Please go ahead.

Climent Molins

Good morning. Thank you for taking my questions. Congratulations on another strong quarter and on securing 3 TSP awards. I wanted to start by asking about the Red Hill. You have applied for two spots in that tender and should you ultimate – like, ultimately be aware [of the] [ph] contracts, when would those start?

Sam Norton

So, that's a good question. The big terms imagine a delivery of the vessels into the contract between April of 2023 and August of 2023. We are clearly beyond April now. So, there have been some delays in processing and considering the outcomes of the bids that were made. It's foreseeable in my mind that that August back-end of the delivery window might shift a little bit. But I think, realistically, the right way to think about this is sometime during the third quarter of this year, the delivery will need to be given into the contracts, and delivery is in Hawaii. So, the best is we get to Hawaii.

Climent Molins

That's helpful. Thank you. And if everything goes according to plan, you will have to move fast regarding potential vessel applications. Do you still favor modern echo vessels or where do you currently see the sweet spot?

Sam Norton

You know, I've said before the market – the [selling purchase market] [ph] for international trading MR is, to my mind is distorted by activity at the older end of the spectrum because these vessels are being purchased by opportunistic buyers looking to capitalize on changes in Russian crude and product movements.

There was an interesting article in the Financial Times last week that cited an Indian company that for as an example, an Indian company that had an address in a mall in Mumbai, and hadn't even existed some – a year ago, and that company has been attributed to having purchased as many as 65 ships over the last 8 months.

So, that end of the spectrum is creating a different – in my mind, a different pricing structure for older assets. That could bleed into the younger end of the spectrum. I personally don't believe so. I think that extrapolating prices for some of the older ships into the more modern end of the spectrum is not the correct approach.

I think you see a flat and more flattened curve as you get younger because the opportunity to capitalize on this location caused by Russia's changing export patterns. It's not going to last, it's not likely going to last for 15 to 20 years, which we would need for younger vessel.

So, I believe that the pricing at the front-end of the age profile is probably a little bit more attractive than at the older end. I would say as well that should we acquire additional MR Tankers, there is a factor when converting the U.S. flag that’s important, which is vessels of older 10 – more than 10 years of age. They face a different set of criteria from the U.S. Coast Guard in terms of the requirements for complying with U.S. registry and U.S. Coast Guard rules.

So, there is an advantage to using or it – when re-flagging, there is an advantage to reflagging vessels of less than 10 years of age than more than 10 years of age. So that's a factor that we consider when we think about where we might get additional tonnage for registering into the U.S. flag.

Climent Molins

Makes sense. Thanks for the color. That's all from me. Thank you for taking my questions and congratulations for the quarter.

Sam Norton

Thank you.

Dick Trueblood

Thank you.

Operator

Thank you for your questions. There are currently no questions registered. [Operator Instructions] There are no questions waiting at this time. I'll now pass the conference back over to our management team for any additional remarks.

Sam Norton

Thank you, Francis. And thanks again to everyone for participating on the call today. We look forward to speaking with you again soon, and to continuing the recovery of our business and advancements into the future. Have a good day.

Operator

That concludes the Overseas Shipholding Group, Inc. first quarter 2023 earnings release conference call. Thank you for your participation. You may now disconnect your lines.