Q3 2022 Overseas Shipholding Group Inc Earnings Call
Good morning look at Uppingham, Luckily legacies Shipholding group third quarter 2022 earnings release Conference call. My name is Adam and I'll be your rough justice today, if you'd like to ask a question in the Q&A portion of today's call may do so by pressing star one on your telephone keypad I will now hand over to Sam Norton to begin to show them. Please go ahead when you're already.
Thank you Adam.
It's a beautiful morning here in Tampa, Florida, providing appropriate backdrop predict true blood and I to share with you our presentation of <unk> 2022 third quarter results.
Thank you for listening and for allowing us to share with you details that's what the current state of our business into other additional commentary and insight into the opportunities and challenges that lie ahead.
I would like to welcome in particular regular participants on this call we've exhibited commendable patients in maintaining their interest in OSB. During what has been a challenging emergence on the market disruptions occasion by COVID-19.
Yes.
To start.
I would like to direct everyones attention.
So the narrative on pages, two and three 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 the historical perspective on <unk> 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 could be affected by.
Risk factors, including factors beyond our control.
A discussion of these factors we refer you to our Form 10-Q for the third quarter of 2022 filed yesterday and available at the SEC Internet site Www Dot SEC dot Gov as well as on our own website www Dot <unk> dot com.
Forward looking statements in this presentation speak only as of the date of these materials 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 certain non-GAAP financial measures, which we defined and reconciled to the most closely comparable GAAP measure earnings release, which is also posted on our website.
Financial results achieved during the past quarter provide a welcome affirmation of our long held belief in the viability of OSD business strategy.
Seeding, our expectations demonstrating strength through the balance of the year and into 2023.
Our niche businesses in particular delivered stellar results for the quarter, adding meaningfully to the continuing rebalancing in the time charter equivalent returns of our conventional tankers and atvs.
Adjusted EBITDA of $42 $3 million generated $14 million of free cash flow for the period clearly the best performance on that measure in many years.
Expectations for future financial performance appear to provide continuing evidence of the benefits of having both our niche and conventional trading businesses healthy and profitable at the same time.
OSD vessels are essentially fully committed well into the middle of next year with only our internationally trading Mars with exposure to the spot market, even that limited spot market exposure will more likely than not proved to be beneficial in the months ahead, given the currently strong MLR rates obtainable nationally.
Considering only our Jones Act assets.
92% of available vessel operating days.
Our covered for all of 2023.
Cash flow is derived from the shift to profitable charterers Amar conventional tankers and the steady and strong earnings provided by our niche market activities are contributing and should continue for the foreseeable future to continue to contribute not only profit as reflected on our GAAP reported income statements, but also to improve.
The quality of <unk> balance sheet.
I will defer to <expletive> to take you through the details behind these headline results.
I will focus my comments on the broader current market environment and the impact that what many observers are calling an emerging energy crisis is having and will likely have in the future and overseas business.
To state the obvious OSD business is largely a domestic business closely integrated with the distribution needs.
Domestic producers of crude oil and refined products.
Some would then surmise that OSD should be largely immune to the major disruptions to energy supply chains and transportation price volatility witnessed in the international tanker markets of late.
I would state is a large producer of natural gas crude oil and refined petroleum products.
Shouldnt, such energy independence proved installations or provide insulation.
From the chaos in foreign markets.
Understanding two things helps answered this question.
First energy is largely an undifferentiated commodity that is priced globally at the marginal cost delivered price.
The marginal cost of energy is delivered price is all about location location location and the availability of transportation links to connect supply surplus supply with markets that are in need.
Ships and ports are the enabling vehicles for Intercontinental trade. It is the cost of shipping allows a trader to byproduct domestically and sell it overseas at a deliberate cost generates a profit.
And the product will move to the market that offers the higher price.
Intercontinental trade of energy products is ruthlessly efficient and seeking out and closing these price arbitrage opportunities.
Prior to 2016, the U S was for all intensive purposes, an energy island insulated from the international energy markets.
Export of U S produced crude oil was legally banned refined product exports were made only in small amounts.
<unk> export facilities or not in service over.
Over the past six years market and regulatory changes have radically altered this landscape, allowing U S energy product to participate in international but international markets more actively.
The increase in the access to international markets has been a net positive for domestic energy producers and shippers, who enable the flow of goods.
A side effect of this however has been to make energy independence.
Chimera.
Under current laws irrespective of where natural gas crude oil and refined products are produced.
Consumers are more and more subject to competing demands from foreign markets development, which helps explain current low product inventory levels and why local prices are rising. Despite the fact that the U S is the largest producer of these products.
The opening up of international markets to U S energy producers as it does reduce the level of installation that OSD ships have from international events.
The ability for a trader to choose the most profitable trade a domestic sale versus an international sale.
Since that Jones Act vessels are indirectly competing with foreign flagged vessels for the transport of domestically produced energy products.
Existing and pending economic sanctions against Russia limit, many OECD countries from purchasing Russian oil and gas.
Creating supply shortages and considerable uncertainty and international energy markets.
The wide profit margin company. This uncertainty has had the effect of drawing record levels of domestically produced oil and gas products overseas.
Last week, the EIA disclosed nearly $11 5 million barrels of crude oil and refined products per day were exported during the week ended October 20 <unk>.
These are truly astounding export figures and increase of over 30% when compared with the average volumes exported last year and a 240% increase from the average export volumes seen in 2015.
The elevated interplay between domestic and international energy transport cost and the visible contrast between record exports on the one hand and record low domestic product inventories on the other has two important implications for OSD.
First it creates rising pressure for intervention to waive the existing domestic maritime regulations opening a wide chasm moral hazard for those wishing to exploit political expediency.
Traders, who are key economic actors in the domestic energy transportation ecosystem are rewarded with Jones Act waivers whenever conditions appear favorable to ask but one they will no longer see the need to guard against risks by planning and entering into a time charters and we'll act accordingly, increasing overall systemic risk.
With little or no consequence to themselves.
Waivers perniciously undermined conditions met to ensure long term visibility and stability and the availability and delivery of vital energy products.
Allowing profit motivated actors to occasionally operate outside these rules with little downside risk and with the promise of windfall profits.
Undoubtedly cause great harm to the community. These rules are intended to benefit and protect.
Grants of waivers in any but the most extreme conditions should thus be assiduously avoided.
Second.
If only indirectly the increased influence of foreign tanker rates on domestic trades has the effect of increasing volatility and demand for our conventional tankers.
While heightened volatility is not always a negative development the related lack of visibility of forward earnings suggests higher risks.
This development to a large degree explains our rationale for electing not to extend three LR tankers leased from American shipping company.
As previously announced the delivery the re delivery in December of three conventional tankers will reduce <unk> exposure to the volatile and often unpredictable and undifferentiated domestic MLR tanker market.
Re delivery of these ships will reduce real financial leverage in our business.
Releasing OSD from annual fixed payment obligations of approximately $27 million.
During 2023 and beyond.
The effective deleveraging achieved through the decision not to extend the options of these three vessels when taken together with the positive free cash flow performance expected in the quarters ahead.
<unk> provides OFC with enhanced flexibility to address existing and anticipated business opportunities with lower volatility and improve profitability.
As noted on prior calls.
We consider there to be interesting opportunities for expanding our business and several of the niche markets in which we have already achieved a level of success.
Specifically, we remain very focused on the continued emergence of renewable diesel as an increasingly important driver of domestic green transport demand.
Our experience with customers in this emerging sector is that security of access to transportation capacity offered by long term contracts is a more important element and the commercial discussions and has been the case recently with customers involved in crude and refined oil product trade.
This bias offers opportunity for OSB to reduce exposure to volatility in our conventional tanker trades.
Over the past year, we have negotiated time charters with four different charters engaged renewable diesel trade with.
With the result that by the Middle of next year, 50% of our conventional tanker fleet <unk> employed and trades related to renewable diesel with several of these contracts extending beyond the end of 2023.
New business with further growth opportunities in the Jones Act is not often been seen in recent years and we are excited about the role that OSB plays in this emerging business.
In addition prospects for an enlarged U S flag fleet operating outside of the United States and outside of the Jones Act trades are solos are solidified.
Congressionally approved and funded tanker security program is expected to be stood up during the first half of next year.
OSB.
Taken a leadership role in working with its industry labor and government partners to make this vision a reality.
Consideration is being given to expand the approved 10 ship program to 20 ship program for.
Further U S Department of defense is seeking bid to provide five additional U S flag tankers to assist with mere organizing fuel storage operation at Hawaii Redhill facility.
Our overseas, making those overseas santorini and overseas Suncoast are well positioned to benefit from these programs.
Depending on the pace and extent of the growth of these programs opportunities to add additional vessels to our current fleet could well arise.
Looking elsewhere in our current portfolio of assets renewed focus on the importance of sustaining and increasing domestic crude oil production bodes well for the continued future of the vessels acquired through our purchase of Alaskan tanker company in 2020.
There is good reason to believe that the band for these vessels remained strong for the foreseeable future.
<unk> to increased time charter earnings from ATC vessels in 2023 and beyond.
<unk> area of focus for us at this juncture.
Our developing and working to finalize business inquiries that are already in hand for these vessels.
Lastly, we recognize breaching importance of understanding and participating in newly developing markets that would transition in the U S economy away from fossil fuels.
These evolving markets point, the interesting and exciting potential for OSB to leverage his strong operating franchise to participate in these new trade.
<unk> continues to commit resources toward an express goal of identifying the best opportunities that will arise from this transition and we are optimistic that these efforts will yield positive results over the medium term.
I will now turn the call over to <expletive> to provide you with further details of our third quarter results for 2022.
<unk>.
Alright, Thanks, Dan.
Let's turn to slide seven.
We commenced a $5 billion share buyback.
In late June during the third quarter, we repurchased three 6 million shares for total consideration of $10 7 billion.
At September 30, we accumulatively purchased 3.800 million shares for $11 million at an average purchase price.
Our share of $2 90 T shirts.
In early October we completed the share repurchase program for a total acquisition cost of $14 $7 million with the resulting average share purchase price of $2 95.
TCE revenues rose to $115 1 million in the third quarter of 2022 from.
From $75 4 million in the year ago quarter, an increase of 53%.
Quarterly adjusted EBITDA was $42 3 million and.
An increase of $30 1 million from last year's third quarter.
GCE revenue growth since the second quarter of 2022 was $12 7 million or 11, 5%.
Adjusted EBITDA grew 34% or $10 $8 million from the prior quarter.
Market demand remains strong with rates at levels significantly greater than experienced in 2021.
We are close to fully committed through December 2022.
As we look forward to 2023, we are almost fully booked for the first half of 2023.
And 92% committed for the balance of the year.
Please turn to slide eight.
There were no vessels in lay up during the third quarter as compared to two player for portions of the second quarter.
Our Jones Act conventional tankers will engage rose to 852 during the quarter or <unk>, 93% of total days.
We had 51 dry dock days during the quarter.
Comparatively we had 379 four days in Q3 2021.
When we began to return ships to service.
The overseas Tampa less lay up in early May and underwear required dry dock period ballast water treatment system installation.
Before she commenced operations.
The OSC 350 vision returned to service in late May.
During the third quarter, the Tampa was fully employed at USG <unk> dollars 50 at 12 unemployed days before commencing a time charter.
Please turn to slide nine.
Lighting revenues increased $4 $3 million this quarter due to a combination of greater volumes wider but the USD 351.
At a time charter for the OSB $3 50, which commenced in August .
Our <unk> increased their revenue contribution by $700000.
The OFC two or entered into a short term time charter upon completion of our previous long term client sharp.
The TCE rate increased from the earlier time charter increasing revenue contribution.
After completion of our short term time charters, you will enter into a long term charter.
With substantial really continue to participate in the Maritime Security program and also provide services to the government of Israel.
We performed several charters for the military Sealift command.
Which provided a high level of utilization as well as rates greater than those generally available in the international market.
Our international flag tanker contributed to increased revenues international market rates rose significantly from prior periods.
As a result, our non Jones Act tanker revenues increased $1 8 million the prior quarters.
The Jones Act handy size tanker revenues were consistent with the prior quarter.
Whereas in contract rates are moderating on a portfolio basis by lower rated contracts previously entered into.
Further there are more days and drydock, which reduced revenues due to the increase.
Off hire days.
Revenues from our Jones Act shuttle tankers increased.
The overseas Tampa was in service for the fourth quarter.
We experienced a slight decrease in Alaska tanker revenues, resulting from the Alaska and explores scheduled dry dock period.
Please turn to slide 10.
The niche businesses registered 11 $9 million increase in revenues.
Driven by the increases in the number of MFC voyage.
Higher international rates for the overseas Suncoast.
Increased lighter volumes from USD 351.
The return to service of both the overseas Tampa OSB $3 50 per quarter.
Please turn to slide 11.
Vessel operating contribution increased $10 3 million for Q2, 2022% to $47 million in the current quarter.
The niche businesses contributed virtually all of the increased vessel operating contribution from our regions regions previously stated.
John Jack Handy sized tankers contributions drops slightly principally due to off hire days related to the scheduled dry dock.
Vessel operating contribution for those vessels were $7 million.
<unk> decrease from the prior quarter.
The ATB contribution increased slightly due to higher short term business.
And Alaska tanker contribution dropped due to off hire days for the Alaskan navigator.
Right.
The combined vessel operating contribution of our niche market activities.
ATB and the Alaska crude oil tankers provided the vessel operating contribution in the quarter current quarter.
But $40 million compared to $29 million in the second quarter.
And their consistent performance.
Please turn to slide 12.
<unk> EBITDA increased $10 $8 million from Q2 of $35 $1 billion.
Third quarter of 2021.
2022 year to date adjusted EBITDA is.
$99 $2 million.
This reflects the improved market conditions and increased and increased rates as well as the increase in vessels in service.
Please turn to slide 13.
Third quarter net income increased $9 5 million to $13 2 million.
Year to date net income was $16 5 million compared to $42 $6 million loss for the first three quarters of 2021.
Improved operating results stem from improved market conditions, which resulted in the return to service of all shifts that we are in lay up in 2021.
Further the rate environment contract.
Duration at close improves.
Okay.
Please turn to slide 14.
As our results improve we want to provide information concerning the profit sharing arrangement.
So as we bareboat charter from American shipping company.
The chart provides information for the years 2022 through 2024.
The 2022 information reflects all 10 vessels, we currently charter from American shipping well subsequent years reflect the seven vessels that we will continue to bare boat after re delivery of three vessels in December this year.
The calculation, which is governed by the terms of the contract between MSC and OSP provide.
Provide for specific deductions to be taken and determining whether there is any profit as defined.
To share between us.
These deductions include among other items, an OSB management fee.
<unk> profit layer and deductions for dry dock costs.
All of which are prior to the termination of the existence of any profit share.
Shareable profit if any has been split evenly between the parties.
The slide provides an estimate of anticipated profit share under the MSC bareboat charters for 2022 through 2024.
The underlying information used to develop 2023 and 2024 estimates.
It is based on our assessment of the market each year is informed by current market conditions.
There will not be any profit sharing payments to 2022 due to the carry forward of losses sustained on the MSC vessels in 2021.
In 2023, if we achieve an average TCE rate of $63400 per day.
<unk>, the 7% of MSP vessels, there would be no profit sharing.
In 2024, if we achieve an average rate of $64300 a day.
Likewise, not be any profit share.
Finally.
It is worth noting that as certain costs are recovered the minimum average rate that will result in profit share declines.
The calculations are complex and have a variety of factors involved.
This chart is meant to be indicative of possible outcomes based on the assumptions made.
Please turn to slide 15.
At June 32022, we had total cash of $84 million.
The third quarter, we generated $42 million of adjusted EBITDA.
Working capital used $5 million of cash.
Our receivables increased due to the decreased utilization of our vessels coupled with increased rates.
And especially the increase in MSC voyages.
Additionally, we have reduced the outstanding accounts payable balances during the quarter.
We expanded $9 million on dry docking and improvements to our vessels.
As previously mentioned, we purchased three 6 million shares of our stock for $10 7 million during the quarter.
We made debt service payments of $13 million in the quarter.
Also in the quarter, we purchased a U S. Treasury note maturing in August 2024 for approximately $15 million.
The result was we ended the quarter with $74 million of cash.
Please turn to slide 16.
Our total debt.
September 30 was $434 million.
This represents a decrease of $5 million in outstanding indebtedness since June 2022.
Scheduled loan amortization for the remainder of the year is approximately $6 million.
The $346 million of equity our net debt to equity ratio was one time.
This concludes my comments on the financial statements and I'd like to turn the call back to Sam.
Thank you Nick.
Our third quarter results evidenced healthy operating conditions in our core markets.
OSB is fleet is responding to the changing patterns of domestic and international transportation fuel shipments and as well well positioned to participate in emerging areas of opportunity.
Our healthy book of four time charter coverage gives us firm visibility towards the results expected for the remainder of 2022 and into 2023.
We anticipate continuing strength in all important financial metrics and a gradual build and available cash balances over the next several quarters as profitable time charters at higher utilization rates are realized.
For the final quarter expect to see that costs associated with the re delivery of the three American shipping company tankers and the reduction of vessel available days associated with fewer trading trading tankers in December will result in a small decrease sequentially from third quarter levels for <unk>.
And adjusted EBITDA, respectively.
Even with this we are now confident in guiding higher for our full year 2022 financial performance.
Charter equivalent earnings for the full year should come in at about $420 million and adjusted EBIT should exceed $133 million.
Taking into consideration cash used for share repurchases, we anticipate year end cash balances of between 90 and $100 million.
Looking further ahead to 2023 absent changes in the trajectory of current market trends, we believe OSD healthy fundamentals offer the prospect of continued solid financial performance throughout 2023.
Our current forecast has time charter equivalent earnings for 2023 approaching $400 million.
Factoring in some allowance for anticipated cost increases we are confident that attaining this top line result should generate adjusted EBITDA of between 100 $135 million during 2023.
After deducting debt service and capital expenses, we anticipate that free cash flow for next year should be between 50% and $55 million.
Stability in our financial profile translates to positive free cash flow in the quarters ahead.
And improvements in our balance sheet.
As stated on prior calls use of surplus cash flow should it arise will be a regular topic of conversation with our board.
Investment in growth opportunities reduction of outstanding debt and can hit in continued consideration to extending acquisition of shares under our renewed share repurchase program will all be part of this conversation.
Our mission is now squarely focused on execution operational excellence and the pursuit of niche business growth opportunities through utilizing osd's unique franchise.
And ourselves for a better future.
Adam we can now open up the call to questions.
Thank you and as a reminder, if you'd like to ask a question today. Please press star followed by one on your telephone keypad now when comparing to ask a question. Please ensure your headsets fully booked in our mutual correctly.
Ill close by one to ask a question.
A reminder, that just kind of wanted to ask a question today.
Sure.
First question today comes from equipment Mullins from value investors. Please go ahead. Your line is open.
Good morning, Thank you for taking my questions.
After raising guidance <unk> guidance you had previously provided could you provide some commentary on what were the drivers for the improved performance relative to.
Previous numbers you have provided.
Broadly speaking.
It was really the niche market activities that we're engaged with that.
Provided the.
<unk>.
Better than expected results.
And in particular.
The international MLR trading market has been trading at near historical highs, we do have.
The overseas suncoast participating in a pool in that market.
I believe that we.
We experienced.
Net earnings our time charter equivalent earnings on that vessel.
Well, it's probably.
And the $15000 per day higher than our original budgeted expectation.
And then the other two vessels are trading internationally.
Overseas.
Looking at Us and obviously the santorini.
As <expletive> mentioned benefited from a number of military Sealift command time charter then boyd's charges during the quarter.
Driving.
Older performance by those two vessels on order of magnitude of close to $2 million for the quarter.
So those were those were very positive surprises for us.
<unk> activity in conventional tankers.
I congratulate the BS.
We're as per expectations, but significantly improved from previous quarter.
And we also saw slightly better.
Results from our lighting businesses.
Given slightly higher volumes in our budgeted levels.
Largely driven by.
<unk>.
Pad, one refineries running at or above 100% of the capacity during the quarter to try and continue to provide more diesel.
No.
Product could the northeast.
I think those are the key drivers are.
Sure.
Yes.
Better than expected results that we achieved during the quarter.
That's very helpful. Thank you you provided some commentary regarding capital allocation.
After completing the share repurchase program are creating significant value how do you think about additional share repurchases.
Look as I mentioned I think that we.
We see.
Largely three buckets of opportunity for us.
Surplus cash flow generated from our businesses.
First and foremost in our minds at least is to consider and pursue growth opportunities to reinvest capital in.
In ships and shipping opportunities that will generate.
Strong longer term cash flows.
The second bucket.
Our regular consideration of deleveraging our business.
That can be achieved.
In numerous ways.
In addition to deleveraging through re delivery of some of the American shipping company ships that we referred to earlier.
We're also looking for.
Ways to reduce liabilities on our balance sheet.
These are liabilities that are generally.
Associated with interest bearing debt, but we also have other liabilities.
Carried on the balance sheet that we have opportunities to reduce.
So we look at those opportunities.
Regularly as ways for.
Strengthening the balance sheet of the company.
And then the third opportunity is you asked.
Referred to.
We will consider share repurchases when appropriate.
The board.
<unk> took steps.
In June two authorized a $5 million share repurchase.
Graham, which we fully completed during the third quarter are actually into October .
And as I said in my remarks, I think that it is highly probable that a conversation about.
Extending our reinstating the share repurchase program going forward.
It is going to feature in all conversations in that.
<unk>.
It's likely to be.
Feature of our capital.
Capital allocation using in the coming quarters.
Makes sense.
I'll pass it over thank you for taking my questions and congratulations for the order.
Thank you Carmen.
Nothing further in the queue up question. So I just want to remind you that star one on today's call to ask a question.
Yeah.
As we have no further questions I would like to sign for any concluding remarks.
That's great Adam.
And thank you everyone for participating on today's call and we look forward to speaking you speaking with you again soon wishing everybody a good day.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.
Okay.