Q3 2020 Diamond S Shipping Inc Earnings Call
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Please be advised the todays conference is being recorded thank you and it's now my pleasure to hand, the conference over to the speakers today at Diamond S Shipping Craig Stephenson Junior Chief Executive Officer. Please go ahead, good morning, and welcome to the ominous as third quarter 2020 earnings call.
Thanks for dialing in this morning before the kind of the call we'd like to draw your attention to our forward looking statement disclaimer.
Of the making statements about the future they may or may not happen and the manner in which we described please.
Please read page two and its entirety for a disclaimer about forward looking statements.
Please turn to slide for.
Here, we have our operating performance.
And the third quarter of 2020, our spot crude fleet earned approximately $20225 per day.
The spot product slate earned approximately $10375 per day, which includes our pool and more tankers, earning about $12000 per day, and our handy vessels, earning about $5800 per day.
All in PC, which includes spot and time charters was $21400, a day and $11100 a day and our crude slate and our product slate respectively.
And I'm an S. We look at operating earnings of our fleet, which we calculate as TC less opex less gionee, because we think it's important to highlight given the various ways. These expenses get classified and the industry.
The crude fleet generated 12000, the $300 per day and operating earnings while the product slate, which includes our handysize vessels generated about $3000 per day.
Our reported net loss was $9.7 million and an EPS loss of 24 cents per share EBITDA was approximately $27 million.
And we've maintained our cash position of over 120 million with $60 million and available lines.
As of credit.
On the lower half of the slide you can see spot earnings volatility during the second half of the year and relationship to the 10 year range and.
And last year as you can see rates are currently at the very bottom of the range.
So for in the fourth quarter, we have booked approximately 58% of the spot revenue days and the crude slate at an average rate of just under $7000 a day and 60% of the spot revenue days at the markedly are fixed at approximately $9500 per day and 53% of our handy.
Really is book at about $6000 per day.
Approximately 15% of DSS size fleet is booked on the fixed time charters, which provides downside protection in the near term.
Chronically. These charters were once seen as a negative and capping our upside.
They're all above breakeven levels today details from the time charters can be found in the appendix.
On slide five we show the impact of the global pandemic on the seaborne trade of crude oil and refined products.
While global demand is expected to decline and it's 10% and 2020 from the prior year the charter and the left shows the decline and seaborne crude and product volumes declining about 6% on the year.
Inventories have been drawing which is positive and the.
Average of estimated 72 days forward demand down from 80 days during our last call.
On the other and decrease and inventories as a company by historic lows and refinery Throughputs and utilization.
As we indicated since the beginning of the year the storage play.
Pulls our business away from historical tanker market fundamentals.
And we're seeing some slight increases and recently and floating storage during the fourth quarter.
And thus far are likely to be connected to extremely low rate environment.
On the graph on the right hand side of the page five we're showing another way to look at how low the order book is relative to and aging fleet as of today. The order book is equal to 7% of the fleet compared to 9% of the fleet that is comprised of vessels that are 20 years or older.
And my entire career I've never seen this.
Without a big pickup and orders there could actually be zero net fleet growth over the next few years, but.
But experience tells me and that's probably not going to happen, but it certainly is inching closer to a real possibility.
We continue to see restraint on of the tanker spot of side as well as the pandemic continues to linger into 2021.
Owners of older ships will have tough decisions to make whether the put vessels through another drydocking.
On slide six we show statistics relative to dominate this is felipe and Suezmax and MSR class of supply and demand with barriers to entry and Newbuilding orders, particularly and financing capacity and uncertainty around environmental regulation growth looks to be limited and Lars.
Let's see.
The board trade shown on page six is forecast to rebound in 2021, both and crude and oil products, while demand for crude oil and the refined products is not expected to rebound to 2019 levels and 2021, we expect to see an incremental benefit from longer haul voyages.
Both and crude and products.
The last point, we'd like to make on slide seven as we've shown the asset values relative to the 10 year average for both Suezmax and Edmar fleet.
There is no doubt the pricing has decreased in 2020.
We're close to the bottom, particularly on the older tonnage.
We believe with continued disparity and values of older tonnage, particularly on the crude side there.
Or is the upside potential and asset values from here.
Likewise, we expect the large fleet of middle aged vessels can generate better cash flows than from a smaller younger fleet, especially when considering the amount of capital employed to purchase assets at today's prices.
And this is amplified by lower bunker prices.
I will turn it over to Kevin our CFO to go through the financials.
Thanks, Craig.
I'm continuing on slide nine the.
Third quarter marked a major turning point in the tanker market as both the crude and product fleets delivered sharply lower results than the first half of the year.
The carryover of rate from the stronger environment helped keep the quarter and balance, but product tanker rates and the transition of 28 of our vessels into.
The north and flow arrangement impacted the results on that side.
Current TC ended at 21.3 thousand a day for the quarter with the MRC at 11.1 of our six handysize vessels have been considerably underperforming the rest of our product suite.
Third quarter EBITDA totaled 27.1 million down from 34 last year with 15 million contributed by the current fleet and 12.1 coming from the product side. The fourth quarter outlook is sharply lower we of 58% of Suezmax spot days booked and historically low $6800 per day and 60%.
And the more spot days booked at 9400 per day.
Given the rate outlook for the fourth quarter, we do expect to be considerably below cash breakeven for the remainder of the year in terms of this quarter cash flow generation was slightly negative.
The negative fleet cash flow contribution after debt service and Capex was offset by lower working capital employed due to the lower overall rate environment and movement of vessels into the pool.
Continuing on slide 10, the third quarter was relatively neutral overall for the balance sheet total debt declined the fire scheduled amortization amount of approximately 34 million gross debt outstanding at the ended the quarter with 735 million.
The previously mentioned working capital employed and the does business declined in the quarter.
The liquidity situation at quarter end of the solid with approximately 124 million and free liquidity available to the company after restricted cash and back required minimum cash.
Net debt to asset values as of our latest broker valuations provided at the end of June was approximately 39%.
Moving on to slide 11.
Overall and capital expenditures, we are reiterating very similar guidance to what we've previously provided the market regarding cost of capital events.
To answer the question I've received from several investors the cost guidance that we gave on our equipment project is the all in number that includes the cost of the equipment cost of engineering and design for the cost of installation of the equipment and all ancillary costs related to the project the.
Estimates may not be comparable to the figures provided by other tanker company due to the tighter than anticipated spread between HFO and compliant fuel we have postponed the scrubber installation that was initially planned for the first quarter of next year due.
Due to contractual obligations, we will be purchasing the equipment and moving it into storage, we may elect to install the scrubber and the suezmax vessel in the future.
On the for me on Slide 12.
We'd like to take this opportunity to update the market and our cost guidance going forward the.
The global pandemic continues to impact our operating costs are.
Our internal estimates are that Opex was increased by approximately $400 per vessel day.
In the third quarter for the safe transition of crew and purchase of of Vishal additional vessel stores due to the increase logistical complications of associated with the pandemic.
For 2021, we estimate daily Opex to be approximately 7700 per vessel day on the current fleet and 7300 per day on the product fleet.
Depreciation and amortization figures are slightly higher than the previous as we have the amortization of new capital projects.
On the DNA. The overall number will be down relative to 2020 day due to a reduction and shortsighted staff as the result of the commercial outsourcing of product tankers.
Our guidance has been updated basis, the latest estimates for capital and equipment project.
I will now turn the call back over the correct for summer.
Before we open it up for Q and a briefly like to summarize our priorities. During this unprecedented market environment to give a sense of how diamond as his position and our management philosophy.
First commercial scale is critical while we're happy with the size of our fleet in June we announced the strategic partnership with Nord and were about 28 of our MSR two product tankers.
It will be commercially managed by the noria product pool.
Including ships owned by the Norton and others. The full manages around 150 tankers and is one of the largest operators of Denmark tankers and the world.
We believe this enhances our commercial scale without forcing.
The consolidation of assets.
We're certainly in a position to grow our fleet, but we'll do so under certain circumstances.
We are of course focused on maintaining our cash breakeven levels, which are highly competitive and both crude and product slates, maintaining a lean profile provides strong operating leverage and good markets.
And more importantly axes of buffer in weaker markets. This brings us to our balance sheet.
And a weaker market in Q3 2020, we were still able to maintain strong cash positions without using our revolver capacity.
We have a high quality debt under a traditional loan structure and a maturity profile through 2024, we.
We have a modest capex program to maintain our ships and the comply with regulations. While we expect some challenges ahead as the tanker market is impacted by the global pandemic.
We believe diamond us is well positioned with strong liquidity of modest leverage industry, leading breakeven levels to support the downturn and prepare for when the markets return.
With the natural limitations of fleet supply and the need for tankers due to regional and balances of oil we expect the tanker market to return to the fundamental supply and demand.
As we work through the current inventory levels Diamond S remains exposed to the volatility in the spot market and we will utilize our disciplined capital allocation in order to maximize our return to shareholders, while maintaining a healthy balance sheet.
With that I'd like to open up the call to questions operator.
Certainly at this time, if you'd like to ask the question.
Please press star one on your telephone keypad Omar.
Omar Nokta with Clarksons Platou your low.
Line is open.
Hi, Thank you, hi, Craig and the and Kevin.
Hi, guys I just wanted to maybe touch on the and one of the last point you are making just about the balance sheet asset sales use of capital last quarter, you really low down the buyback and given the uncertainty and the broader markets not the mentioned obviously the weakness we are seeing and tanker its day.
You know you've sold and Omar I sat apparel, the good price relative to what we've seen recent assessments coming in that.
Does that cash start to get put towards share buyback again so.
Especially given the wide variance between the stock price and the and Navy S confirmed at least by the the ship though.
All of our I would say that.
I'd say that you need to have the a clear view of what the future sort of looks like on the spot market and and right now it's.
The reality is its and cash burn mode and and so once we can feel comfortable that there were at least.
The leased on the on the back side of the.
And and and air travel starts to pick up.
Well a lot of the issues are sort of tied to trial.
And so of travel and probably represents of the 8% and so without much travel around the world is it's a very very difficult thing but.
No.
I think and I think the sale is.
Represents us very well and the to the extent the.
That we can see other sales.
The relatively similar values.
I think that Thats, a very smart thing to do and in light of this market. We do have some vessels that are on the sixes and sevens and outlays.
That would be.
Good candidates.
For sale Omar from my perspective, I'll, just point out that our repurchase basket under our debt agreements is tied to the company's net income and.
And therefore, we don't have a basket of currently given the third quarter results.
We're in constant dialogue with our bank group, though and I think if there were additional asset sales that materialize as Craig mentioned.
The there would be a dialogue with them about perhaps loosening up that for some of that excess capital, but but as of now certainly with the with the sale of the Amar we're going to keep the capital on balance sheet.
Yes, Okay no I appreciate the that's fair and then just the yeah. Greg you touched on the I was going to ask about further asset sales and and you mentioned, the low sixes and sevens awaits I.
I was going to maybe ask if you could you know if you've got the identified and whether there are certain characteristics.
For a number of ships that you guys are looking to dispose of.
I know you're not sellers per se, but.
When you can think about say the next six months and and selling shifts is there a number of sales that you have kind of and you had some thought about looking to dispose of here.
And in terms of now.
Yes, Omar I mean, I wouldn't say, it's a number of per se I would say that we do need to transition of the fleet and and the older ships we have.
The fleet of the low sixs and their Handys and.
Not particularly desirable the the other issue is we've got a number of ships that are that are ice class that or not.
Really not utilized and ice and so you're not getting any value there and so and then we've got the Suezmax the is super high cost.
And operating costs and.
And it's it's got about every day.
Every extra that you can put on the suezmax, but the reality is.
And it's we struggle with that ship on performance and and so those are the obvious ones, but I would say I'd say and this marketplace. I mean, I think I think you always I mean, we're we're ship owners most.
The most ship owners just about every asset they have are always for sale at the right price and so it's all about price.
Got it thank you.
You know what I'll I'll leave it there and the jump back in the queue.
Thanks for that.
Hi Tech of our.
Randy Givens with Jefferies. Your line is open.
Oh, the gentleman has gone.
Right.
So I guess just looking at your fourth quarter 20 quarter to date rates you for guidance still little bit below your peers. So around the noria product Paul has that provided any utilization of rate benefit here and the last few months.
Absolutely.
We moved 28 ships and there we've got one more to deliver into it after the kind of.
Time charter the somewhere around May of thing.
But the performance of of that decision relative to the industry is.
Yes, absolutely achieved what we expected it to achieve actually the lower quite frankly and.
And so it's it's very much put us back and too.
And to that sort of that type of band of the top performers.
And in some cases, the the perform those other competitors actually have.
Much much higher degree of eco ships scrubbers, and all kinds of thing, whereas we don't so we're very very pleased with that.
The handys are the Handys and Thats, a totally different market and then and is.
Hi, and and so the.
The performance of those is more or less.
It sort of gets back to Omars question about asset sales.
And then.
Yes, the the performance that we're looking at very closely today is our Suezmax performance, which is sub standard and.
And and so.
We.
Our our basically taking the same type of approach that we took when we looked at our fixing our RMR.
And so we'll look at any and all opportunities to improve that performance.
Got it and then you mentioned there that your and your handy sized the is for certainly the the laggard and that do you view those as kind of course of your business are you purely or do you want to be purely a suezmax and more operator.
Yes I.
I think right now.
We are.
We'd like to be known as and ours and Suezmaxes and and so we've got some handys and we've got.
We've got some aframaxes and I mean.
I will say that our oldest suezmaxes basically.
No.
Well performing sort of negative numbers relative to.
The other ships and so on.
And you have some ships.
Acting as negatives I mean, your average is just going to get crushed and clearly it was crushed.
And so I think I think a lot of those things sort of.
Get you get your mind completely focused on performance and and.
And so we we clearly are I mean I feel like.
The decision, we made with nor it is.
Is the great one and the they have an enormous footprint.
And and so I think the of 82 today, MRF and and so 28 of those are our EPS.
And so we perform.
The performance is basically what we had hoped it would be.
Got it all right and then I guess the last question here you know Theres certainly been some discussion around the crude tanker market versus the product tanker market and which one is better positioned here in the near term. So as you are operating in both the crude and product tanker market.
Which market are you more bullish on here and the coming months.
I mean it changes.
I think I think in previous quarter of call.
Current business is the place to the.
Of those businesses are are generating the.
Cash losses today and.
The spot market.
And certainly on a share basis, they're higher in the and.
And the crude side talk.
Tough to call I think I think of almost all of the answers that the.
That the shareholders, one and the the analyst want or whether you're going to get on the other side of code and because until until you get a handle on coated.
Very very difficult to sort of.
The predict what markets going to do what they are not going to do and so somebody asked the today. What do you think the winter is going to do freight rate was.
I don't think anybody has closed and quite frankly and sort of Europe is absolutely going through the lockdown the United States is talking about.
Tightening is if you will of.
What the population can do and so it's very difficult to predict that so I.
I don't know that.
I would say some people predict that the spot market on the products is actually going to pick up for us.
You know it's.
Hard to tell.
I don't think of venture to pick one over the other I think they are linked.
We all know.
And so I think we need to get back to a more normalized market you see that you see days forward of inventory levels are starting to get in line the.
The still have a long way to go.
I think I think if you look at and Indias consumption today, and you look at Chinas consumption today, they are back to pre Cove and levels Super positive, but we need the rest of the world the policy. So.
Perfect well, thanks for the robust answer there.
Thanks, Rick Thank you.
Again, if youd like to ask a question. Please press star one on your telephone keypad, Ben Nolan with Stifel. Your line is open.
Hey, good morning, and so Craig I'm interested about one of your responses there.
Specifically around maybe Cellmark question around the the Suezmaxes Yeah, you could just the me, but it seems like that's always been a little more Oh Dear to your heart I guess and and then the product side.
And my Am I reading your words incorrectly and that made you know, you're possibly looking and doing a pool arrangement there similar to what you're done and the Mars given given the performance of you've had there is that the.
And that sort of what you're saying at least that you're open to.
Well the.
Right.
[noise], we're certainly going to look at his way I would put it but I would not say the theres been any decision.
We've actually.
I talked to a number of people about it it's it's it's not as big of a.
The marketplace and opportunity as the product side of the business. So you had a lot of choice and competition and we we had a very robust.
Competition amongst amongst all the food and some pools that you well and other pools don't that you well for instance, it's all about your net net net at the end of the day and so.
There are a handful of people that the that do that for a living in the suezmax side, but I don't think there is.
I would say, it's not as obvious.
But.
We are committed to improve the performance of the Suezmaxes period.
Okay.
Well, let me answer of things the how plays out and Kevin I wanted to ask you real quick the the $66 million facility, it's kind of do next year.
And obviously.
Obviously, I assume you're looking to refinance that but but you sort of think through.
That process and.
You know how much you might be willing to draw that ER or leave outstanding vs.
Yeah, maybe even pay a whole lot of it down.
Hi, how are you thinking about sort of that process on the on refinancing and.
Cash retention and the balance of interest rates and all that sort of thing.
Yeah. It's a good question a couple of nuances to that and this is a facility on our two vessels owned by our joint ventures. So we actually only control half of the equity interest and this and we do have a partner that is will be involved and this decision, making it's also makes it a little more difficult for us to give the corporate cash.
Panties on the facility, which impacts it's the attractiveness relative to some of our other debt with the mainline shipping banks that being said there's been.
Pretty good dialogue, so far with with the existing banks there were relatively confident that at a baseline we can replicate what's in place today I'd say those are two extremely attractive assets to their very modern suezmaxes with scrubbers and install both on time charters through 20.
The 22 with an oil majors. So if there was.
The need or the desire to increase the leverage there.
Probably not with the not at the same cost that some of our other facilities are at the we believe that's possible as well.
Okay.
And then lastly for me and and you Greg you talked a lot about asset sales and the ones that really jump off for a day or it's sort of it's been mentioned those handysize vessels, but I noticed the five of them are part of subject to were scheduled for Drydocking next year with ballast water treatment the thing through that the maybe the timing or sort of how it works.
Yes, I mean from your perspective is it better to sell those prior to going through the whole drydocking process or do you give something up.
In terms of the the retail value a resale value.
And if a bunch of capex it needed on.
On the front end.
Yeah I.
And I think all of us sort of sort of were caught by this the covance deal and so current basically shut down your ability to sell for the last.
And the large part of.
For the last six nine months and.
And so.
I would say go ahead and sell those assets now.
I think there and not strategic to to our effort and.
And so there are smaller and they're they're in large part ice class and and so the ships really don't fit with what we what we want to do.
Okay, So that would obviously and say.
On your future Capex commitments and the way our needs. So that you kind of get into full benefit the yeah.
Think fingers crossed so we'll see what huh.
All right sounds good appreciate it guys.
Thank you ex but.
There are no further questions at this time I will now turn the call back over to CEO, Craig Stephenson Junior and for final remarks.
Hey, thanks, everyone.
It's tough tough time for shipping.
The I think every day.
Every answer that we we we the management team we the shareholders. One to have is when do we get back to a more or less and normal world and the in the meantime, we need to the super sensitive to hanging onto as much cash as we can.
And.
And thats difficult in the in a freight rate environment that we have today.
I can I can say to everyone that we are super sensitive about the and so we'll continue to do as much as we can to retain cash.
And and still maintain optionality going forward I think once we come on the other side of this the.
The order book is incredibly bullish and so.
The next quarter or two is going to be tough and we'll just have to got it got it now so thanks for your support I really appreciate it and we'll do the best for you. Thank you. Thanks, everyone.
This concludes today's call. We thank you for your participation you may now disconnect.