Q4 2020 Diamond S Shipping Inc Earnings Call
Conference call.
At this time all participants are in a listen only mode. After the presentation. There will be a question and answer session to ask a question. During the session you will need to press the star one on your telephone keypad. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero. Thank you I'd now like to hand, the conference over to <unk>.
Craig Stevenson Junior Chief Executive Officer, President and director of Diamond S shipping Mr. Stevenson. Please go ahead.
Good morning, and welcome to the Diamond S fourth quarter 2020 earnings call.
Thanks for dialing in.
Before we begin the call we'd like to draw your attention to our forward looking statement disclaimer will.
We will be making statements about future events that may or may not happen in the manner in which we described please read page two in its entirety for our disclaimer about forward looking statements.
Please turn to slide four.
Here, we have our operating performance in the fourth quarter of 2020, our spot crude fleet earned approximately $6700 per day.
Spot product fleet earned approximately $9200 per day, which includes the newly of pool of MLR earnings of about $10850 per day, and our handy vessels that are in approximately.
Approximately $4600 per day.
All of the Mtc, which includes spot and time charters was $10375 per day and $9800 per day in the crude fleet and product fleet respectively.
The dominance we look at operating earnings of our fleet, which we calculate as TCE less opex and G&A, because we think it's important to highlight given the various ways that these expenses get classified in our industry. The.
Crude fleet generated $2000 a day of operating earnings while the product fleet, which includes our handy sized vessels generated about the same as the crude fleet or $2000 per day.
Our reported net loss was $57 $8 million.
Or an EPS loss of $1 45 per share.
EBITDA was approximately $8 million and we have maintained our cash position of $100 million with $60 million and available lines of credit.
On the lower half of the slide you can see spot earnings volatility during the second half of the year in relation to the 10 year range and last year.
As you can see rates are currently at the bottom of this range.
So far in the first quarter, we booked approximately 80% of of the spot revenue days in the crude fleet at an average rate of just under $9200 per day, and 85% of the spot revenue days in the EMR fleet are fixed at about $9100 per day and 72.
2% of our handy fleet at $6700 per day.
Approximately 15% of the DSI fleet is booked on fixed time charters, which provides some downside protection in the near term.
They are all above breakeven levels today.
Details of the time charters can be found in the appendix.
If you turn to slide five.
Last week, OPEC, plus decided to hold March production levels for the month of April in an effort to return to average inventory levels.
This is expected to hurt the tanker market in the near term with an upside that we should expect inventory levels to draw in the first half of the year.
Additionally, we expect after a 10% drop in oil demand in 2020 of the demand should grow throughout the year and average about 95 million barrels a day in 2021.
Inventories are drawing, but still remain above historic levels and refinery utilization remains low.
Lastly, the oil price has increased about 35% in 2021 bunker costs have two increased 25% to 30%, which is our biggest cost.
On the right hand side of the slide the number of ships on order is historically low across the crude and the product space.
You will see later in the presentation that when you compare of the order book to the age brackets within each fleet. The order book size does not compensate for the number of vessels that are aging past their prime years and will be scrapping candidates over the next couple of years.
On top of this we are seeing growing number of vaccinations for COVID-19.
Which should continue to grow and get people back to work travel et cetera.
All of this results in increased demand for oil products.
This should be allowing for growth in oil production as inventories returned to historic levels.
Lastly, while refineries remain operating at minimum capacities, we expect that some will take the next step and to actually shut down, especially with new complex refineries building in Asia.
And this should increase ton mile demand for the product tanker markets.
On slide six seaborne trade.
As shown at the bottom of the page six is a forecasted to rebound in 2021.
Both the crude and products while.
While demand for crude oil and refined products is not expected to rebound to the 2019 levels in 2021.
We expect to see incremental benefit from longer haul voyages, both in crude and products.
Last point, we'd like to make is on slide seven as we've shown relative values to the 10 year average in both Suezmax and MLR fleet.
There is no doubt that pricing has decreased in 2020.
And is relatively static this year.
But we are close to the bottom, particularly in older tonnage we expect.
The upside in asset values from here.
Likewise, we expect large fleet of middle aged vessels can generate better cash flows.
A smaller younger fleet when considering the amount of capital employed.
The purchase of assets at today's prices.
I'll turn it over to Kevin our CFO to go through the financials.
Thanks, Greg.
Continuing on page nine the.
Fourth quarter of 2020 was really at the beginning of the current severe down market for both crude and product tankers rates on our <unk> and Suezmax is for both well below historical average it soon.
Suezmax is in particular were pretty hard hit and hovered around historically low levels.
These weak markets drove overall DSI net income and EPS to losses for the quarter.
EBITDA generation was also weak again, the overall current TCE earnings from that the just about daily Opex of G&A.
This is the stark departure from the robust crude earnings from the fourth quarter of 2019.
With our low cost focus and modest leverage we maintain reasonable breakeven levels across the fleet and evidenced strong cash flow generation for the full year 2020. However.
However, prevailing spot rates pushed us below the amount.
As demonstrated in the cash flow of periods of the bottom right the drain.
Our liquidity in the fourth quarter of approximately $16 million.
Focusing on the balance sheet on page 10 of the company finished the quarter with 104 million of cash of 60 million of available under Undrawn credit facility.
Equates to a $108 million of free liquidity above bank required minimum.
Just to note on where we're going in the first quarter.
Craig detailed the fixed the date figures on the spot rates, we expect net revenue to be down slightly quarter over quarter.
The negative cash operating environment liquidity will be partially replaced by the sale of two vessels that closed subsequent to year end.
Overall debt at the end of the first quarter will also be lower by almost $60 million due to scheduled amortization and the amounts of retired on the soul of vessel.
On the debt side. The main maturities are not until 2020, we do have our smaller JV non mature in the fourth quarter of 2021, and we have been in close contact with the relevant bags. We are confident that this loan will be refinanced on equal or better terms as it is secured by two of our youngest most attractive asset.
All of our loans bear interest at LIBOR, plus low incremental margin.
The amortization of debt remains the single largest component of our breakeven and as shown on the prior page you've got the historically low rate levels experienced in the fourth quarter. The crude fleet was still contributing positively to EBITDA.
Yeah.
Looking at Capex on page 11, we reiterating a very similar outlook to the one we posted last November and updated in January as previously disclosed we have canceled our final remaining scrubber installation project and recognize that loss in the fourth quarter.
On the longer term Capex outlook note that I view, our 2023 number as conservative as approximately 15% of the overall figure relates to older vessels that will likely be sold before this day.
Finally on page 12, just a note to say, we're our guidance is unchanged from last November.
No material changes for our outlook in 2021.
And with that I'll turn the call back over to Craig.
Thanks, Kevin.
For we open it up to Q&A.
Like to briefly summarize our priorities during this unprecedented market environment to give a sense of how domino's is positioned and our management philosophy.
First commercial scale is critical while we're happy with our fleet size in June.
We announced the strategic partnership with Norton Whereabout 28 of our <unk> product tankers will be commercially managed by the Orient product pool.
Including ships owned by Nordea and others of the pool manages a round of 150 tankers and.
And as one of the largest operators of the MLR product tankers in the world.
We are of course focused on net.
Maintaining our cash breakeven.
Gaining of lean profile provide strong operating leverage in good markets.
More importantly axes of buffer in weaker markets.
While we expect challenges ahead in the tanker market is impacted by the global pandemic. We believe the dominance is well positioned with strong liquidity modest leverage and industry, leading breakeven levels to support the downturn and prepare for when the market returns.
With natural limitations on fleet supply and a need for tankers due to the regional imbalances of oil we expect the tanker market to return as we work through current inventory levels Diamond S remains exposed to the volatility in the spot market and we will utilize our disciplined capital.
<unk> in order to maximize our return to shareholders, while maintaining a healthy balance sheet.
With that I'd like to open it up for questions operator.
At this time, if you'd like to ask the question. Please press star one.
Randy <unk> with Jefferies. Your line is open.
Howdy gentlemen, how's it going.
Randy.
Alright, so looking first at your feet right. You saw the two 2008 built Suezmax is I guess can you give a little color on why these vessels instead of the older <unk> that were maybe earmarked on the last call and are you more bullish on product tankers and crude tankers at this point.
That's sort of a.
Tough call, we had of sale earlier.
In 2020 of that actually didn't conclude we're on.
Subject to sell of them are at a good price.
So we were certainly engaged in the marketplace, but.
As it turned out.
Selling and in 2020 was challenging.
Thing to do and so if you.
The actually push push to sell hard you just push the price down and so.
As it turned out we just.
We just sell those to the low eights and.
And concluded that.
We've.
And focusing for some time now that that we do need to turn our older <unk> as well as some of the older Suezmax isn't so.
It just happened that the Suezmax is came first.
Okay.
And then any comments on the.
Outlook for the markets relative.
The other.
Yes, I mean I think on.
So gasoline for instance in the United States is starting to pick up pretty significantly.
There are people out there that think that the product side of the business is going to move first historically.
Historically that's.
That's not.
What typically happens typically of the crude moves moves first.
The for its out of the business certainly.
The big ships are struggling here at these levels.
I would say there is a lot of interest in the latter half of the year from the trader activity.
I think it's super difficult to predict I mean, we're predicting how quickly the economy of the world comes back from Covid and so.
It's up and down India, China look good.
Italy is going into lockdown today, so it's very difficult to predict but I would say the latter half of the year. It certainly looks.
Much better for both of those businesses.
Got it okay, well it sounds like you're less bearish, maybe even more bullish than a few quarters ago. So good to hear that.
No I think look I think I think there's a tremendous amount of pent up demand and net.
Whether it's whether it's people wanting to just get out of the house and go on vacation.
Go back to go back to work.
Hi.
Thank you could you could make us really incredibly bullish.
<unk> on that the trouble is sort of predicting these things can be.
Funny and.
And the second you get that.
Youre bullish.
You could have setbacks and so.
I'm reluctant to get ahead of myself.
Yes, more or less conservative right.
Randy since you know my answer on this I'll reiterate it I think we could see a post summer surprise, Brian <unk> product tankers due to a.
Paul from jet fuel demand related to the business travel consumption. So.
The optimistic certainly maybe even more so than some of the other guys on the return and product tankers.
Noted thanks for adding that.
And I guess the second question for me, obviously your cash balance is higher now than a more of liquidity after the sales.
What do you do with that do you look to replace some of these vessels and buy some more modern ships or in terms of your fleet do you know what.
On of deploying much capital and maybe looking at time charters, either in or adding some more time charters out at these levels.
Yeah.
Yes.
Much rather the new time charter is one of the market is not in sort of the cash burn mode.
<unk>.
And so.
If you look at the latter half of the year you can find some time charters, but youre really not it's not.
Probably the smartest thing Youll overdue and so I would rather see the market recover.
And at that point, we definitely would look at timeshare.
And is that in or out sorry.
Yes.
Think right now.
The determining I think you would time charter out at that point in time, I think time chartering in you've got I mean, let's face it dominance of got plenty of ships and so we've got a.
The spot.
Spot leverage.
<unk>.
The.
To account for I don't think we needed anymore.
Sounds good I think the short answer to your question.
With the cash.
Going to page nine and look at where.
We are versus our breakeven for the first.
Only real consideration for cash right now is preservation of liquidity I think fleet replacement and renewal of an intermediate term question that we have some thoughts on but don't really want to spend a lot of time talking to investors about that now because it's not the priority.
Yeah. It seems like you'll be given a little cash back here of this quarter, but hopefully that Terry.
Thanks, again have a great weekend.
Thank you and channel.
Omar <unk> with Clarksons Your line is open.
Thank you Hi, Greg Hi, Kevin.
Wanted to just double check Craig in your opening remarks, just about the MLR performance in the fourth quarter.
Just looking at the figures.
The realized an average of about 90 to 100 across the spot product fleet and did you say that the volume Mr's earned 10800 is that right.
Yes, I think that is right.
Omar the decision to go to northern yet with 28 of our ships and basically it was all of the ships.
We we could commit to them.
<unk> is a fantastic decision.
<unk>.
It's tough tough environment, but their performance absolutely is is great and it's thousands of dollars of day above the the alternative.
So if you think about it you have non eco non scrubber ships performing fantastically realm.
The relative to.
The other people in the industry.
Yes, I agree.
Current noticeable instead of committed all of our ships, we would have done that.
And as you know we have a of <unk>.
Contract too.
With capital to do the.
And of ours.
And just on that.
Can you just remind us how long that contract gross for.
With GAAP.
Approximately another three years.
Okay.
And then just.
Just regarding kind of the first quarter and how things have been developing.
Youre showing 85% of the products that 91 of an average of isn't the only in postal casting that type of premium.
But you started the fourth quarter.
Yes, so far.
It might be slightly less but more or less in excess of that.
Got it.
And then maybe just.
Kind of sticking with that theme in the past I think you've talked about it many of the past couple of quarters.
Sort of pulling together for something similar with the Suezmax is and I know it's the.
Undertaking but.
Any update on that front of pulling together for the lenses.
The other operators.
Yes.
We actually have spent a lot of time looking into that.
We've had discussions with.
All of the players.
It's not as.
Sure.
Especially I'd say that.
Not as big of a market.
To choose from for instance.
When you when you did the MLR pools, there are a lot of people that you could consider and we did and we stress test it.
And made the decision to go with Orient a lot of that was sort of it of the basis of performance of of.
Their ships, but it was also of the basis that most of the ships that the oriented.
More or less like ours.
And the on the Suezmax side.
Just not as many players and and so it's a much much smaller environment.
We have talked to everyone in the in the space, we continue to evaluate that.
It's just not as obvious of the decision.
As of closing and the EMR side. So we had not done anything yet, but we certainly are looking at.
Got it no that makes sense and it's a much different much smaller fleet size overall globally.
Most of the Suezmax.
Correct.
Okay, well I'll leave it there thanks for it.
Thanks, everyone.
The non with Stifel. Your line is open.
Alright.
Yes.
A couple of things I wanted to follow up on.
With respect of the two Suezmax is that you had sold.
I believe those had been acquired from capital and you had mentioned Dale minded view of again.
Three years left on the.
On the management agreement there.
You have to replace.
The Q2, if im correct. Those are part of the agreement you have to replace those or or is it of the agreement just exclusive to the product tanker side any color there.
You do have to replace them.
And so the contracts call for.
It's a little different between the commercial side contract and the technical.
Technical side of the contract they are different.
Periods in which you have a grace period to replace spot, but you do have an obligation to to maintain them.
Okay.
Yes.
Danny decision made out of scope for.
What was there.
Not yet we continue to discuss it internally.
Okay.
And then with respect to.
With respect to the scrubber, well really of the theme of scrubbers, obviously cancel one.
Subsequent relative to the first of the year, we've seen the scrubber economics.
Really come back into play and pull force here.
First of all just checking how many of the Suezmax fleet debt.
Oh now scrubber fit and then also.
I know it is preservation of capital and you sold or canceled one scrubber, but any updated thoughts as to the okay.
Okay.
Maybe now we need to rethink debt yes.
Yes.
It's really for the ship and so the multi out is to US is a very.
The expensive shipped to run.
Speed and fuel is just.
It's it's a VLCC and Suezmax body and it just brings a lot of fuel and so between the age.
And the ship itself.
We think that this ship is more or less destined for floating storage at some point.
It has been a candidate.
The two.
For sale in the sense and so we've looked at a number of people that are interested in the ship.
But that's the real reason why.
We chose to cancel that scrubber, we had two other scrubbers.
From 2016 Suezmax has that are on charter.
But that's it.
And with respect to the rest of the Suezmax fleet Theres no sort of.
Plan on those okay got at this point.
If somebody wants to incentivize you to put of scrubber on we'll certainly listen.
Alright.
All right well that does it for me I appreciate it thanks. Thank you.
Again, if you'd like to ask a question. Please press star one.
Burke with B Riley your line is open thank.
Thank you you're wanting credit good morning, Kevin.
Good day.
Craig you talked about Howard County.
What traditionally has been the the prana.
Product tankers of recovering faster than the crude.
The fact that you've got the refineries opening in the <unk>.
Mid east and in Asia Pacific.
For the longer ton miles is there anything underneath of that that you see besides that the that'll drive.
<unk>.
<unk> on the product side.
Yes.
I think it I think.
Right now in the United States, the driving is picking up very quickly.
What we really need is aircraft and sort of.
Kevin alluded to the people going back to work people.
<unk> is traveling again.
And so.
Back of 19 were 102 million barrels a day.
We hope to be at 95 million barrels a day.
If we get lucky it should be more than 95 million barrels a day.
And I think most of that will be attributed to air travel and so air travel is up.
I'm sure you've listened to the to the same.
The business reports.
We do.
Vegas is as will be booked up.
Probably sometime in May and so.
There's a lot of activity that is coming back and so.
I would go back to there is a tremendous amount of pent up demand both from the business side, but also from.
Vacations and just personal travel.
And so that that is the big upside in the question is whether it whether it.
The.
The crude side of the business takes off before or after the product side and so some people are arguing they think theres more upside in the product side.
It could very well day that the trouble is.
Predicting something that really is.
Not really happened before.
You don't have any history of I guess that for them.
In the history, so, but we don't have history for COVID-19, either.
It's pretty clear of what your near term.
Plans are in terms of managing the fleet.
As you look past.
The 2021.
Are you still comfortable with a heavier weighting on the product side or would you ever think of of allocating more capital to two of the crude side of the fleet.
Absolutely we would look at the crude side of the fleet.
I think I think the crude side of the fleet is.
Long term legs.
I think the price of oil is going up.
The drilling activities is still very very modest and you do have the decline curve in the world.
And if you don't drill the price of oil will go up.
In the near term.
Thank you Craig Okay. Thank you.
There are no further questions at this time I'd now like to turn the call back over to Craig Stevenson for final remarks.
It's very difficult environment. This is.
As difficult as I've ever seen in my history, and we are keenly focused on preserving our capital and the opportunities towards the end of the year looked quite significant.
We're conservative in our in our remarks.
But we will maximize the.
All of the opportunities that debt the mark to get US later on in the year. So we're we're optimistic that we're getting on the other side of this COVID-19.
Problem.
Thanks, very much for your support and I appreciate it.
For your time, thank you.
This concludes the Diamond S shipping fourth quarter 2020 conference call. We thank you for your participation you may now disconnect.