Q4 2019 Earnings Call

Emerging strength of our conventional tanker earnings contribution is now evident combined with the expectation of continued stability from our other revenue streams. We have reason to believe that the long-anticipated return to sustained profitability profitability is now at hand.

We continue to see in are now beginning to visibly realize the benefits of a clear strengthening of fundamental driving a great recovery evidence and our foreign markets. I will leave it predict to take up the specifics of the fourth quarter Financial impact of these developments later in this presentation for now. I would like to share the high points of our progress in achieving our key strategic strategic objectives.

As a review of commentary provided in earnings calls over the past several quarters will show we have consistently seen the potential that lies within our business model as being built on a foundation of three.

first

It's the stability of earnings and cash flow inherent in the niche businesses within which we operate our unique position as being the Sole Provider of service in our shuttle tanker and Delaware Bay off during markets as well as being the only tanker operator within the maritime security program as long provided us with a steady and reliable source of high-quality revenue and cash-flow.

As Illustrated in the graphic provided in slide, six showing operating contribution from our niche market activities. We continue to enjoy remarkable stability the job performance of these athletes notwithstanding fluctuations Within These Niche markets over the past several years.

Strong forward contract cover for two of our shuttle speakers approximately half of the operating days for our MSP vessels and one of our specialized lighting matches give us a call to believe that we can continue to rely upon which assets to deliver reliable and stable results.

Second the powerful operating leverage that characterizes our conventional tanker HD acid and the positive impact that this levers has on our overall performance as a more normalized supply-demand Banner balance for vessels emerges.

I can be observed in the graphic provided in flight seven vessel operating contributions from our conventional AP B & Anchor assets have sharply increased over the past several years as a result of the combined impact of higher day rates and higher utilization rates.

In addition to the positive rate environment that we have now been experienced experiencing. It is worth repeating that the normalized market is our vessels trade is one marked by stable relationships with our customer base significantly for virtually the entire fourth quarter and for all of the first quarter of this year all of our vessels, but otherwise operating under contracts of the fragrance with fixed on time charge.

A return to this normalized profile at what are now possible rates allows us to achieve predictable higher-quality cash flow.

Flight eight provides you with a picture of the updated maturity profile of our current time Charter book.

With all of our conventional ATVs and the OSG 350 Vision also currently committed on short-term time Charters we have at this time no spot availability on bath.

We have largely achieved our objective of increasing the duration of our Charter book at higher Charter means we consider this result to be evidence that our customers are responding to an increasingly office. Supply constrained Market an outcome that we have been anticipating for our principal customer base. The Marine link between production and distribution points is not easily replicated a such Charter acceptance of a larger exposure to utilization risk in order to secure a firm access to system. Critical Transportation capacity is a strong signal of improved fundamentals.

The last few years we endured.

Short-term volatility in our earnings as an unavoidable cost while we await at a time Charter pricing environment that offered more renewed or returns.

This strategy bore fruit across the second half of last year during that. We are pleased to have been able to store time Charter contracts for all 10 of our conventional Jones act anchors off or remaining ATVs including both of our new bill date. Each of these ten tanker fixtures were made at rates higher than last done and together. They have increased our forward Revenue Cup 2022 nearly 90% of available vessel day several of these fixtures were made for periods longer than one year.

Is it a year end? We had the only two active conventional HP units and service both of which we were planning to retire in two thousand and twenty. These remaining units once were dead tired would be replaced with two new barges currently under construction to be delivered in May and November of this year.

Both of these new charges are already committed on one year time Charter contracts upon delivery.

I'm Charter commitments for a TBH please including those for the new bar just now cover 75% of the available days in 2020.

In addition to the contract of paying for our conventional tankers, we secured a charter for the overseas took the shuttle tanker currently trading with the conventional tanker covering all or 2028 GT350 Vision now trading as a conventional ATB following the closure of the PES refineries last summer has also secured for unemployment commitments covering substantially all available through the end of the third quarter of this year.

The third element of upside potential within our business is the frequently highlighted promise for OSG to utilize as well established profile and reputation and equality tanker and off Pursuit growth to consolidation within the US flag sector earlier in 2019. We added the overseas Key West to our conventional tanker was significantly our acquisition of Alaska tanker company and the large crude oil tankers operated by that company highlights the benefits of pursuing greater scale. And what remains is somewhat fragmented Market.

The ATC transaction was successfully completed yesterday. The transaction had two components first. We acquired all of the membership interests in ATC from our partner or not already on by osgeo second. We purchased from VP three one point three million barrels hangers that have been and will continue to be operated by a month. We have paid internet price $54 to complete these transactions.

Tanker acquired from BP's have been engaged in the transportation of crude oil out of the last game to the west coast of the United States the vessels purchased will continue to be operated by 18 time charges with BP exploration Alaska with firm Charter periods lasting until 2022 2025 and 2026 each Charter also provides one year extension options there after we anticipate that the ATC transaction will have a profoundly positive impact on our 2020 results. Now an incrementally but the contribution of $15 amount of this year and more than $20 for the First full year of operation in 2021 off. The transaction allows us to build on our strong Jones act franchise and presents an exciting opportunity for our students and one that we are looking forward to delivering on

awesome

At the end of September last year. We took delivery of to Mr. Tankers, you'll receive Suncoast and go overseas goalposts both built at Hyundai. Mipo backyard and Curry on both vessels are now trading in a nationally under the Marshall Islands flag on 1 year charger is at rates that you provide an incremental operating contribution without 3.5 million for each decimal during the first year following delivery.

We are awaiting final disposition of the proposed security program which Remains the subject of considerable debate in Washington continue to work closely with multiple constituencies Marshall legislative and executive office support for authorizing and funding this important program as previously disclosed. If this program is made law substantially in the former by the House of Representatives last year, we intend to nominate both of these Mr. Tankers to participate in the new tanker security program Andre flag each vessel into the u.s. Flag registry office.

For presentation purposes we have included the overseas Gulf Coast and overseas Suncoast earnings as part of our Niche business group together with our existing and tankers the overseas Santorini off overseas Mickey Mouse.

OSD is $22 us Flag fleet consists of three crude oil tankers just acquired in business in Alaska through conventional eighty-two lightering ATVs thrash metal tanker NMR anchor and non Jung Mr. Tankers that participate in the US Maritime security program osc also currently owns and operates Marshall Islands flag that Mark tankers which trade internationally

In addition to the currently operating OS you have on order to Jones a complaint which are scheduled for delivery 2020. I will now turn the call over to dick to provide you with details on a fourth-quarter results 2019. Thanks, Sam 2019 demonstrates the tangible results with rebalancing of our markets resulting from a combination of refined products movements and a continuation of demand for crude oil Transportation within the general Tech Market.

As we believe this is resolved in a tightening Market with Rising rates growing time charge and it profitable rates and an interest from customers and lengthening time charge or commitments to ensure their access to transportation.

It's 2019 ended. There were no vessels available in the stock market.

September Thirty, we accept the delivery of the overseas call Coast overseas Suncoast this represents the first handful expression of the renewal of our Fleet these Marshall Islands off both operating under what year time charters.

US Government continues to consider the creation of the tanker security program and if enacted into law would create a tent anchor program to support the United States military time National Emergency or War the TSB would provide for a six million dollar per vessel annual stipend.

It acted we will reflect our vessels under the US play for using the ASD.

Please turn to slide 13.

During the fourth quarter we continue to see if positive spread between WTI used and and Bonnie price this continues to perform. It is evident through most of 2019 Dodge a result it in and open Arbitrage when the are of is open. This is a favorable for the Jones act anchors and encourages the use of domestic crude oil and Refinery operations.

Easter just like 40

fourth-quarter demonstrated strong year-over-year Revenue growth seating 17% as tce revenues reach ninety three point eight million dollars off sequentially fourth quarter revenues increased almost 23% of the third quarter.

Correspondingly adjusted ebitda was thirty three point seven million dollars almost a 46% increase from Q4 2018.

Compared to Q3 2019 adjusted ebitda for the doubles in the fourth quarter.

Benefited from our increased time Charter days and corresponding the higher rates the initial operations of the Gulf Coast at Suncoast and the concentration of three government of Israel wage during the fourth quarter.

Well the mix of our vessels change. We operate a 21-gun salute both Q4 2019 and 2018.

It's the third quarter of 2018. We have reduced the number of operating rebuilt TVs to 2 and a deal receives Key West overseas Gulf Coast and overseas summer hours to our Fleet.

The last to rebuild a CBS will be removed from athlete in 2020.

The impact of our increased time charges higher rates on our contact. Anchor performance is evident in the results of the 2019 Ford quarter wouldn't care of the year ago quarter.

GCE revenues increased almost 24% of revenues Jones act Mr. Tankers almost tripled from a year ago as we added the Gulf Coast and some codes off and perform three government of Israel voyages.

Why you can revenues decline one point seven million dollars due to the shift of the OSG 352 the Gulf of Mexico.

Wiley tce revenues from our rebuild ATVs continues to decline as we further reduce the number of vessels of the operating.

Please turn to slide.

Near dark tce revenues on a more regular basis are doing where lightering business tge revenues sequentially were flat comparison to the third quarter. This reflects continued years ago. Sd350 in the Gulf of Mexico following the PES bankruptcy and check down.

experience

Decrease of a $1,867 the average TC daily rate when compared to the third quarter of 2019 resulting from the lower rates uses the utilization a class by our operating us g350 Nicole, Mexico.

TCU revenues are rebuilt ATVs with flat at three point five million or Nigel attack tankers recorded at 5.8 million dollar increase revenues during an order when compared to the third quarter.

Yeah, the 4th quarter included the operation for the Gulf Coast and Suncoast which were delivered on September 13th is increased over International time Charter days, the effective tax rates that we aren't.

So for three government of Israel voyages and an MSC Voyage during the quarter.

We operated under International time charges for 175 days increasing the effective utilization of our vessels by reducing the number of days respond Market exposure.

Jones act tanker Fleet TCU revenues increased 11.6 million dollars from the 3/4 to 70.1 million in fourth quarter of 2019 our fourth-quarter spot off the exposure with less than two weeks.

This is driven by the increasing time Charter date and the resulting impact of effectively one hundred percent utilization coupled with increased rates.

average daily tce rate increase for time Charters by $2,338

Black Market effective tce rates increased significantly driven by higher utilization and increased rates.

Looking at year-over-year changes lightering revenues were down 1.7 million in comparison to the fourth quarter of 2018.

TV revenues declined from 8.1 million to 3.5 million compared to the fourth quarter of 2018 due to the decrease number of operating vessels.

The Don Jones rectangle revenues increased from 3.4 to 10 million the fourth quarter of 2019 saw the introduction of the coast and Suncoast in the fleet which contains in excess of three million dollars and TCU revenues.

We perform three government of Israel wages and an MSC Voyage as well.

Conventional tanker tce revenues increased eight point three million dollars driven by reduced spot Market presence higher rates and higher utilization to decrease time charge of activity off. Please turn to slide 16.

The fourth quarter of 2017 euronews 82.8 million of which twenty-five million or 30% were earned in the spot Market.

instead

Spot Market TCU burning feet is 34.9 million or 39% of our total TCU revenues during q1 2018.

Black Market tce revenues generally been on a continuous decline since then down to $19 million or 20% of our GCU revenues into for 2019.

Tce routers hit their highest level 75.1 million during this time. In the fourth quarter of 2019.

Please turn to slide 17.

conventional tanker spot markets euronews

speak to 13.9 million or 35% of conventional tanker revenues first quarter of 18.

Continuing reduction and important to spot Market activity result in lower Revenue volatility increased predictability as we look forward.

Please turn to slide 18.

Our Niche businesses continue to provide or any stability which serves to underpin our overall operations.

This continues to be true even after considering the impact that the es bankruptcy net of the revenues be generated dos3 g350 operates in the Gulf of Mexico.

Looking at quarterly Revenue performance by the three components of our operations are niche market operations are produced a relatively stable Revenue contribution throughout this period with rep is remaining in a fairly narrow band.

Variability is created for all of our activities by market conditions right off requirements and repairs.

As could be seen although there are fluctuations the outcome stay within a fairly narrow range.

PES bankruptcy introduces a higher level of variability but this business will continue to be a stable platform.

We started to slide ninety.

That's cooperating contribution, which is defined as tce revenues less vessel operating expenses are higher expenses increased 12.4 million or 54% off from Q4 eighty-two thirty five point four million in the current quarter.

Largest contributor to the increase was the nine point four billion dollar contribution to Federal The Vessel operating contribution from a previously negative asset wage operating contribution from our conventional Jones act anchors.

This reflects the increased time Charter employment higher rates the addition of one vessel late in the second quarter of 2019.

The days of spot Market exposure from our for our tankers decrease a 92 from 248 to the prior-year.

Are rebuilt a TV contribution decreased by 1.1 million at the number of AC being created was reduced to two.

That's why operating contribution from our niche market activities increased $4000000 principally driven by increased contributions from the MSD tankers as well as the Gulf Coast and Suncoast off. This is slightly offset by declines and wiring part sequentially vessel operating contribution increased fifteen point seven million dollars from June 2019.

Increase was driven by the continuing shift the time Charter contract for a conventional Jones anchors new vessels entering the fleet and increased government of Israel voyages nemesea voyages month.

Please turn this light twenty.

Fourth quarter 2019 to drop the DVD was 33.7 Million compared to 34. 16.1 million higher utilization that includes a great new vessels were primary contributors to this increase fourth quarter adjusted ebitda increased 10.6 billion of 23.1 billion in Q4 2018.

Again, the increase resulted from increased rates across the fleet and improve utilization to the shift to time charges.

Eastern just like 21.

Eddie account for the fourth quarter of 2019 was eleven million dollars compared to a net loss at 5.2 million quarter of 2018.

As previously mentioned the shift good time Charters at higher rates the introduction of two new vessels to the fleet made significant contributions to this performance.

Eastern just like 22

To earn each year, we perform scheduled maintenance is required by regulation the slide provides information for scheduled maintenance and ballast water treatment system installations.

It does not include unplanned repairs, which should they occur? What impact the schedule?

All vessels are in drydock or otherwise unavailable for use. They are off-hire. Even if otherwise employed on a Time Charter. We work to minimize the number of on fire days to reduce reduce the revenue loss. We sustained. However, we will experience a revenue disruption.

Maintenance Capital expenditures are required to tied to the vessels original Bill date. The result is that this makes our Capital expenditures expenditures lumpy some years requiring more resources than others 20/20 will also require the installation of ballast water treatment systems on vessels undergoing drydock.

In addition to the cost of the dry dock vessels draw fire and not earning revenues during Transit time to and from the dry dock as well as time actually in Dry Dock 28 will be an active dry. Your horse Viet estimate that our investment will be thirty three point nine million dollars and try time expenses and 13.4 million Bala Cynwyd treatment systems.

additionally

We expect to incur an estimated 370 days with a loss of Revenue of 15.8 million dollars.

In all cases we Endeavor to work through this process expeditious think the minimize the costs incurred and the number of days on fire.

Please turn this light 23.

This slide shows accumulative amount of progress payments made and for future progress payments the estimated payments, we expect to make in each quarter. The timing of actual payments will depend on the stage when the shipyard achieves the required milestones.

At the end of the fourth quarter, we did made forty five point six million dollars of progress payments on the OSG 204 and $14 in progress payments on the OSG 205. Total privacy statement at quarter-end or fifty nine point six million dollars.

We have a financing commitment for the OSG 204 that provides construction financing converting into permanent financing. We believe that we will secure approximately 33.155 million dollars of financing for each barge.

When the financing for the OSD to 4 is complete our Equity investment will be reduced by approximately $28 million dollars.

Ultimately osg's equity in each Parish will be approximately 17.7 million dollars or thirty five point four million dollars total.

Please turn this light 24.

Is our operations continue to improve we want to provide information concerning the profit sharing Arrangement that exists for the ten vessels. We turbocharger from amsc.

this chart provides information for 20 23 23

As we previously stated we do not anticipate any profit sharing obligations will be created in 2020.

Look here and what the prophets your picture might be for assumed average tce rate based on estimated future Market rates.

In twenty-twenty if we were to achieve an average tce rate of $62,000 and costs the 10 a.m. SC vessels, there would be no profit sharing.

The minimum average rate required to resolve in profit-sharing obligation and twenty twenty $69,000 per day.

This would create an aggregate pay out of $300,000.

You're on twenty-twenty assume. It's already turned in the prior-year. This is market rate.

Based on the inside of the assumptions portrayed here the first year which profit-sharing obligation could exist is twenty twenty-two given the assumptions used the profit sharing place. That would be eight million dollars.

The name of average rate necessary to achieve any level of profit sharing 2022 would be $59,000.

Yeah using these options here the profit sharing or the 2023 would be fourteen million dollars.

Profit shares paid out here subsequent to the error.

Finally is worth noting that a certain costs are recovered. The minimum rate that will result in profit-sharing declines calculations are complex and have a variety of factors involved.

Discharge is meant to be indicative of possible outcomes based on the assumption.

Please turn to slide twenty-five if you can 2019 with total cash of $81 which included $200,000 cash wage 2019. We generated $82 of adjusted ebitda.

Should fifty million dollars a debts here by the overseas Suncoast and overseas golf code.

So sales generated $300 in cash oil changes provided $13 of catch.

Re spending twelve million dollars and dry-docking and improvements to order vessels.

We invested $133 billion dollars you cancel Construction.

We encourage twenty-five million dollars of cash interest expense.

Debt repayments of twenty-seven billion dollars three million dollars of which represented represented proceeds from vessels sales, which used to reduce data.

Result was we ended the year with $42 of cash including 200,000 restricted cash.

Please turn to slide twenty-six.

Continuing our discussion of cash and liquidity is mentioned in the previous slide. We have $42 cash to 7:31 2019.

I told that was 375 million dollars which represents a $22 increase and outstanding indebtedness since December 2018.

$325 per month has an annual amortization require but a $2,500 or six point five million dollars per quarter.

342 million dollars of equity our net debt-to-equity ratio is one time compared to twenty eight times at December Thirty One 2018

one final note is Sam mentioned yesterday. We completed the acquisition three tankers from DP in the acquisition of the sixty two and half percent interest and alack Alaska tanker company corporators. We obtain financing and fifty four million dollars fixed interest rate. 4.43% Sloan has a twelve year olds five year term with a 12 year amortization.

Just conclude.

By comments on the financial statements not like to turn the call back to Sam.

Thank you. Dick. No reason my opening remarks. We have over the second half of 2019 and during the early months of this year realize success in obtaining for noon time sort of coverage off the substantial portion of our conventional taxes. And this is giving us time Charter coverage for close to 90% of available operating days for 2020 this coverage taken together with starkly stable operating contribution from our Niche businesses and the incremental cash flow expected from nine months of operating the newly acquired a TCS gives us confidence in projecting the Home Improvement expect to resolve for 2020.

We see conditions in our spread of businesses is indicating. We can now expect time Charter equipment or earnings for 2020 to be in the range of $395 to $400 off. This represents roughly 19% increase over just announced results for a full year of 2019.

We are even in context of this level of revenues are forecast to be in the range of 113 to $118 with adjusted even in the range of 118123 million dollars.

We consider the fundamentals of our markets to have reached the healthy with limited availability of three times of Market balance the barriers to entry for any projected new entrance are high and with the exception of our two new barges to be delivered next year. No new Jones at capacity is on order will be delivered within the next several years off the prospects for continued strength in our rates appears to be realistic.

Encouraging picture that we see for our future is founded on what we believe to be well established and readily quantifiable Market fundamentals as well as key components of our business that I have highlighted. In fact, I opening remarks we expect our store stable and profitable Niche business to continue to deliver consistent results. The revenue recovery wage in our conventional tanker, which can now be understood to be seen with much higher degree of visibility should allow the operating of the different business model to manifest itself from the coming. Of course.

Finally realization of opportunities for consolidation pertains to the acquisition of a t c provides us with real growth and revenues and expected me back with the pains through entry into a new sector down that trade.

Consider the successful completion of the agency transactions is affirming osg's ability to sustain its good standing in the community of our customers appears in our Regulators off safety consistent service remain above all the focus of our operations of achieving our goals. We also offer Paramount importance on maintaining our established culture of achieving the highest standards that go protecting the environment ensuring the health and safety of all of our employees wage has remained as do opportunity, but overall We Believe steps taken over the past several years to improve the promise of osts future and positioned the company well to benefit from cardinal

strengthens our balance sheet invested in new assets under contract

Cover as possible rates reduced costs and achieved a few improvements in our safety and operational performance measures. We are pleased that the results that we bought a house today give Credence to The Narrative of potential that we have been speaking to over recent quarters. We look forward with anticipation to achieving more of the same and visit by hand.

Operator you can now open up the call to questions.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys off to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

First question comes from Ryan Vaughn with Needham, please go ahead. Great job in the quarter. Everything sounds really great. Just want to I was hoping to get an update. Obviously the situation A lot has changes in the marketplace over the last few weeks, but was just hoping you know, you could just give us some sort of updates kind of what what you're seeing. We did notice in the presentation your extended a few of your time Charters by you know, one to six months in in in several situations several cases, but just sort of like, you know with 90% locked up for this year what you guys are watching what we should be watching for just with the the recent moves in the oil.

So I think from our perspective we're feeling pretty comfortable that we have a healthy punch our coverage that obviously danton's volatility and the context of changing Market environments really the things that we've spoken about before to me continue to be supportive of a pretty optimistic view of the Jones act Market. The the WTI Houston Bonnie spread continues to be support is encouraging domestic refineries to use domestic crude. Also the bar and market for international tankers has spiked as a result of the Russians going on in the in the in the food supply Market internationally, but also is supportive of using drugs act vessels to transport Cuoco.

Domestically as the operable cost of international Transportation goes up and makes it less attractive, you know in the clean Market.

Always observed that consumption of buying products particularly in Florida and along the west coast serve those markets is relatively stable history suggests a significant drop in prices for transportation fuel tends to be demands. They live so in an environment where we have relatively low oil prices, that would be positive for

Transportation fuel consumption in the medium-term. And as long as the rental is a price differential between crude oil and not producing the United States and crude oil produced overseas remains off at a discount. All of those would our mind be supportive of fundamentals about business continuing for the foreseeable future.

Great next question just as you were able to seemingly take advantage of a great opportunity with the acquisition as you start thinking about, you know. Kind off of 20 20 and 220 21 your view on use of the the free cash flow, whether it's additional kind of tuck in Opportunities or some other kind of Return of shareholders any sort of update as we're getting closer to that free cash flow.

I'll give you credit line for asking the same question every quarter, but I'll take the same I'll take the same approach and tell you we're we're coming down to be to the tail end of what has been pretty significant for us commitment of capital to not only a replacing the Box going out of service. But also I think touched on in his comment this lumpy timing of my doc expense is coupled with the need to speak to treatment systems. All of that is pretty pretty heavily focused in the first six to eight months of this year. We do have uh-huh.

Financing in place for the transaction and we have committed financing for the first of the two barges which give us a lot of confidence that we have sufficient liquidity to meet all the obligations that we have and given our expectations for the business to generate Surplus cash flow. Now, this is this is a pretty significant change from what we've seen in recent quarters. Go back several years to two months have us moved from a business that was cash flow positive, but in capital expenditure profile that was actually seeing this drawdown cash both for Investments to assets as well as a reduction reductions to our debt. So so once we get to sort of Promised Land of of generating significant Surplus cash flow, I think Jake opens the door at that time for conversations about how best to deploy that capital I think as as we've said before, uh, you know, bolt-on Acquisitions wage,

a creative and profitable to us to allow us to expand and and

Take advantage of our franchise and the Jones act that those obviously look interesting. They are they don't come along like somebody cars so we can't really predict the timing of them home, but there are I think in the opportunities to look at some Assets in the Jones act that could could possibly affect our our future performance but beyond that I think there's there's a lot of debate about whether a proposed cash flow should be used to reduce fat or to start to consider a program to to return some of that Capital to our shareholders money that I believe will be uh a discussion that would become more current during the second half of this year and in the next year.

Excellent. And one last one. We saw last night. We have a new shareholder quite significant any sort of do you have any background or any information about the shareholder?

I don't know anything more than you. Do you read the piling, you know, I think that dick and I would would would comment that we think they made a good life, right? Absolutely actually. All right. Well, thanks guys. Thank you.

again, if you have a question, please press * then 1

this concludes our question-and-answer session. I would like to turn the conference back over to Sam Norton president and CEO for any closing remarks.

Thank you. Thanks again to everyone for participating in today's call and we look forward to speaking with you later in the year a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.