Q1 2023 Overseas Shipholding Group Inc Earnings Call
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Good morning. Thank you for attending today's overseas Shipholding Group, Inc. First quarter 2023 earnings release Conference call. My name is Frances and I'll be your moderator today.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star one on your telephone keypad.
I would now like to pass the conference over to our host Sam Norton, President and CEO of overseas Shipholding group.
Thank you Frances welcome and thank you for listening in on this presentation of our financial results for the first quarter of 2023.
And for allowing us to provide commentary on those results and additional color and so the current state of our business opportunities and challenges that lie ahead.
As usual I'm joined in this presentation by our CFO <expletive> Trueblood.
To start I would like to direct everyone to the narrative on pages, two and three Powerpoint presentation available on our website regarding forward looking statements estimates and other information that may be provided during the course of this call.
Contents of that narrative and important part of this presentation and I urge everyone to read and consider them carefully.
We will be offering you more than just an historical perspective on OSD today and our presentation includes forward looking statements, including statements about anticipated future results.
These statements are subject to uncertainties and risks.
Actual results may differ materially from those contemplated by our forward looking statements and could be affected by a variety of risk factors, including factors beyond our control.
For a discussion of these factors, we refer you to our SEC filings, particularly our Form 10-Q for the first quarter of 2023, which we anticipate filing later today and our Form 10-K, both of which can be found at the SEC Internet site Www Dot SEC dot Gov as well as our own.
Website, www dot OSD dot com.
Forward looking statements in this presentation speak only as of today and we do not assume any obligation to update any forward looking statements, except as may be legally required.
In addition, our presentation today includes non-GAAP financial measures.
Which we defined and reconciled to the most closely comparable GAAP measures in our earnings release.
It is also posted on our website.
The year has started well gee with all asset categories, achieving financial results at or above expectations.
For the third consecutive quarter, we delivered adjusted EBITDA in excess of $40 million.
It is notable to point out that this performance was achieved despite having three fewer operating vessels during the first quarter of 2008 to 2023 as compared to the final two quarters of 2022.
Contributing to our favorable first quarter results were above average lighter and volumes continued strength in international markets.
Incrementally higher average TCE rates for our Jones Act tankers.
Stability of cash flow witnessed in the past several quarters.
Cash balances, including investments in Treasury securities to increase to $118 9 million at quarter end.
By far the most significant development in our business since we last spoke with you has been the signing of operating agreements with merit for our three internationally trading U S flag vessels, the overseas Mykonos overseas Santorini and overseas Sun coast to enter into the tanker security program.
These operating agreements are the result of many years of work with our government labor and industry partners to stand up this important program.
Upon entering the tanker security program, the overseas Mykonos and battery.
I had been withdrawn in the Maritime security program.
OFC is proud to have the first ships to be entered into the tanker security program.
Each of OSB is participating would receive an annual stipend of $6 million.
We will have priority access to U S government preference cargoes.
Recognition of the key role played by domestic tanker operators in supporting the Maritimes logistical requirements of the country's defense strategies is a welcome vote of confidence in both OSP and then the industry as a whole.
With this step towards expanding the fleet of internationally trading U S flag tankers.
Look forward to further opportunities for growth in the context of the tanker security program as well as in other supporting roles tied to our National security.
Staying for a moment with non Jones Act assets, we await a decision by the military Sealift command on awards for bids to charter tankers for up to five years to be used in connection with the department of defense efforts to empty underground storage tanks at the Red Hill facility in Hawaii.
OSB has submitted bids for two of the MRO contracts MSC.
<unk> has in recent weeks made awards for other bids on this project offering promise that the balance of the awards, including those on which OFC is bid will be forthcoming shortly.
Turning to the domestic market all indications are that the market has finally balanced at the moment with all Jones Act tankers that nearly all ATB is fixed on time charter to primary end users and traders.
OFC is given delivery into new charter contracts on four of its conventional tankers and one of its atvs since the beginning of the year.
Three of these conventional tankers are regular service from the U S Gulf to the West coast carrying renewable diesel <unk> component feedstocks.
The transport of renewable diesel is creating new and materially additive ton mile demand for Jones Act tankers.
We see as many as eight to 10 Jones Act tankers being involved in moving product across the Panama Canal to California by the first half of 2025, representing nearly 20% of the total Jones Act tanker fleet.
The severe disruption historical international energy supply chains occasion by the war in Ukraine is made for continued price volatility in international MLR tanker trades.
However, domestic supply patterns have been stabilized by the restoration of normalized domestic energy consumption and distribution patterns.
These market conditions supported particular Jones Act shipping demand in the U S Gulf to the Florida market.
Inventory levels in pad, one for middle distillates and gasoline they've risen since the end of the year. Unlike a year ago. There was a notable absence in the public press about existing or looming fuel shortages in any one of the east coast markets.
Olive Osd's Jones Act vessels remain fixed on time charter contracts for the balance of 2023 with several fixed for periods extending for up to two years beyond the end of this year.
Consider the MLR tanker time charter rate for longer periods now to be in the low to mid seventies with ATV ratings in the range of $40 to $50000 per day, depending on size and fuel consumption.
The pricing power for owners of Jones Act vessels has not been this strong nearly a decade.
How long can these owner friendly conditions persist.
The supply side of the equation looks very favorable for the foreseeable future.
Order book for MRI tankers is empty and the two primary yards capable of building Jones Act are booked up with government contracts well into 2026.
The order book for large Atvs is also empty and while options do exist for constructing new atvs and domestic yards any orders placed now will not likely be delivered before the second half of 2025.
Looking ahead, there are presently no clear solutions as to what the preferred option for powering shifts of the future may be.
This lead ship owners to be reluctant to invest in new capacity at this point in time.
It creates concerns are being left with stranded assets.
This reluctance to build could result in progressively aging diminishing fleet, whether by a reduction in real numbers are simply because ships will be sailing it's slower operating speeds, which will have the effect of gradually tightening real supply availability.
It is real it is realistic to accept the domestic fuel consumption is more likely than not to decline in the years ahead.
Still all available data suggests that the slope of decline it will be very shallow and that the continuing need for marine transport of these fuels will remain in place for many years to come.
Looking elsewhere in our current portfolio of assets the renewed focus on the importance of sustaining and increasing domestic crude oil production bodes well for the future of vessels acquired through our purchase of Alaska tanker company.
Combined the administration's approval of Conocophillips Willow development project.
Add more than 200000 barrels per day.
<unk> north slope production in the coming years, giving good reason to believe that demand for our ATC vessels will remain strong for the foreseeable future.
Opportunities to increased time charter earnings and contract duration for these vessels are an area of focus for us at this juncture.
I will now turn the call over to <expletive> to provide you with further details on our first quarter results for 2023.
Thanks Sam.
Please turn to slide seven.
Before we just start before we start the discussion of our first quarter results I want to point out that we have realigned some of our vessels and our analytical materials to better reflect those vessels current employment.
Slide seven illustrates which vessels were reclassified and both their old and new classifications.
Specifically the overseas Tampa is no longer included with our other shuttle tankers.
Included with our Jones Act tankers for reporting.
Likewise, the OSB $3 50 vision is now included with our other two HDD.
The appendix to todays presentation includes quarterly historical data for 2019 through 2022.
Which will provide a consistent historical perspective.
Please turn to slide eight.
During the quarter, we repurchased 497000 shares of our stock for $1 8 million.
We continue to repurchase shares after quarter end approached Youre seeing an additional 660000 shares for $2 $4 million through last Friday.
Beginning in the second half of 'twenty, two and continuing in 2023, we have collectively repurchased 11 2 million shares returning $33 $2 million to our shareholders.
We are pleased with our first quarter operating results, which met our expert expectations and position us well for the remainder of 2023.
The first quarter of 2023 saw a continuation of the healthy market conditions that existed in the latter half of 2022.
Our Jones Act tankers, and Atvs or fully contracted through 2023 and in a number of cases into later years.
Jones Act tanker rates currently are in the low to mid seventies with ATV rates, ranging from 40% to $50000 per day.
During the first quarter, we operated 20 vessels.
After the fourth quarter 2022 re delivery of three vessels two American shipping company upon expiration of their bareboat charters.
Our first quarter TCE revenues were $104 $7 million.
Operating fewer vessels TCE revenues declined nine four.
$4 million <unk>.
<unk> to the fourth quarter TCE revenues.
Q4 revenues from the Redeliver tankers were $8 $9 million.
Factoring out revenues relates to the return tankers TCE revenues were essentially flat between the two quarters.
This is our third consecutive quarter with adjusted EBITDA in excess of $40 million.
Compared to 2020 one's fourth quarter, TCE revenues increased $34 1 million or <unk>, 43% and adjusted EBITDA increased $27 1 million or 163%.
Reflecting the high degree of operating leverage inherent in our business. Please.
Please turn to slide nine.
Specialized business revenues collectively continued to demonstrate their stable contribution to our performance.
Specialized business.
Now contribute nearly 50% of our TCE revenues.
ATB revenues increased modestly from fourth quarter to $11 3 million.
The $5 $1 million increase from Q1 2022.
Reflects the return of the OSB $3 50 to service and higher rates, resulting from a long term time charter that commenced in January 2023.
<unk> tool for.
Tanker revenues decline from Q4, resulting from the vessels returned to MSC in December .
The increase from Q1 2022 results from full vessel employment, coupled with higher rates all moderated by the December vessel re delivery.
Please turn to slide 10.
Lighting revenues increased $2 million.
Significantly higher volumes in the quarter.
Non Jones Act tankers performance was strongly influenced by the continuing healthy international rate environment as well as military Sealift command activity.
This was tempered by the conversion of the overseas Sun coast to the U S flag or previous Marshall Islands flag.
During this time, we also conducted or intermediate survey.
The resulting off hire period reduced her revenue contribution from the fourth quarter.
The Suncoast U S flag conversion was required to enable her to enter into the tanker security program along with the substantial rainy.
Okay.
You can also the santorini and the TSP their participation in the MSP.
The TSP.
And with fiber.
For 2023 per vessel.
Jones Act shuttle tanker revenues decreased slightly compared to Q4 is the overseas Cascade completed a required intermediate survey.
Alaskan tanker revenues were flat between the quarters as they continue to be fully chartered.
Please turn to slide 11.
Yeah.
Vessel operating contribution increased slightly to $46 6 million from $46 2 million in the fourth quarter.
The contribution from our specialized businesses decreased $2 2 billion.
Survey periods for the Cascade Suncoast.
Coupled with the Suncoast flag conversion were the primary contributors.
John Zak Kennedy sized tankers contribution increased $1 7 million.
Vessels returned to MSC had generated negative vessel operating contribution as operating expenses and charter hire exceeded revenues. They earned in the fourth quarter of 2022.
The contribution from our Atvs increased 900000, primarily due to the OSD tool for its new contract at a higher rate.
Please turn to slide 12.
Adjusted EBITDA continues to exceed $40 million per quarter.
Clients in the fourth quarter reflects the re delivery of three American shipping company vessels off hire days for survey requirements.
As well as fewer operating days in the first quarter.
Adjusted EBITDA increased.
From Q1, 'twenty, two by $15 $5 million.
Please turn to slide 13.
We've generated net income for the past four quarters, the substantial improvement in our markets, resulting in increased demand and rates has driven this performance change from 2021.
Please turn to slide 14.
At December 31, 2022, we had total cash of $79 million.
During the first quarter, we generated $41 million of adjusted EBITDA.
And working capital provided $2 million of cash.
We invested $2 million in vessel Drydock and other capital costs, and we've repurchased 497000 OSD shares for $2 billion.
We paid $14 million for debt service $6 million, which reduced our outstanding debt through scheduled amortization.
As a result, we ended the quarter with $104 million of cash plus an additional $15 million of liquid investments.
Please turn to slide 15.
Continuing our discussion of cash and liquidity.
As we mentioned on the previous slide we had $104 million of cash at March 31 2023.
Our total debt was $422 million representing.
Representing a $6 million decrease in outstanding indebtedness since December 2022.
Our scheduled loan amortization for the remainder of 2023% to $17 8 million.
With $349 million of equity our net debt to equity ratio was <unk> nine times.
This concludes my comments on the financial statements and I'd like to turn the call back to Stan.
Thanks, Nick.
It has been.
A short two months since the last time, we spoke with you in the primary takeaway is that much has gone as planned.
This is largely as expected with such a significant portion of our vessels operating under fixed time charter contracts.
To the extent that variability to expectations will materialize during the coming year.
This will occur as a result of changes in lighter volumes and in the right conditions experienced in the international MLR marketing, which are non Jones act vessels trade.
As noted earlier, we saw better than expected performance in both of these areas during the first quarter, which helped get the year off to a good start.
Improved market conditions have provided opportunities to reduce exposure to volatility in our conventional tanker trades.
And given US a forward book of contract cover that extends for several years.
The reduction in earnings volatility give the OSC more stability in its financial profile and greater visibility of forward cash flows to an extent not seen for many years.
We anticipate the stability to be a feature of the foreseeable future with all of those to use Jones act vessels, having been fixed under time charter contracts or contracts of affreightment for the balance of 2023.
Over 80% of 2024 available days have also been fully covered at attractive rates.
Our fleet is well positioned to respond to the changing patterns of domestic and international transportation fuel shipments is well situated to participate in emerging areas of opportunity.
We anticipate continuing strength in all important financial metrics the gradual build in available cash balances over the next several quarters as profitable time charters at higher utilization rates are realized.
I do want to point out a number of factors that caused us to be cautious about annualizing, our first quarter results for the balance of the year.
First we expect the over performance seen in lighter ing and international MLR to revert on average to more normalized levels over the balance of the year.
Should this occur we would expect TCE contributions from these assets to drop on a quarterly basis by approximately $5 million.
Second.
We will have a heavier schedule for intermediate survey and dry dock over the balance of the year with nine out of service periods plans versus two in the first quarter.
They've not earning will rise during the balance of the year as compared with the first quarter.
Nonetheless, our forecast for the full year of 2023 does not changed from our views presented two months ago.
We continue to see time charter equivalent earnings for the full year approaching $400 million.
Attaining this top line result should generate adjusted EBITDA between $140 $150 million for the full calendar year 2023.
After deducting debt servicing plan maintenance capital expenses.
We anticipate that free cash flow for the full year should be between 50 and $60 million to.
To deliver these results our mission is firmly focused on execution and operational excellence as well as the pursuit of growth opportunities in our specialized businesses.
As we have stated in prior calls the use of surplus cash flow, it's a regular topic of conversation with our board.
We consider allocation of capital decisions to be among the most important we must make towards achieving a proper balance between investing in the future managing the level of our fixed payment obligations and considering appropriate means for returning cash to our shareholders.
We recognize the need to invest in solutions to ensure the long term sustainability of our business model and to be responsive to ambitious goals of achieving a future target of zero emissions for ocean shipping.
Succeeding in these efforts will require consensus on viable technology.
<unk> solutions to apply across the entire supply chain of production and distribution large capital investments with extended payback periods and scaled development of effective and widely available alternatives to fossil fuels.
During this transition there will be a continued need for transport and conventional fuels and for investing in existing taxes to improve performance and reduce greenhouse gas emissions as our industry evolves.
<unk> is committed to reducing its carbon emission and has set its own specific targets Inc.
Incremental and continual improvement are our goals.
We will meet these targets in the short run by improving our operational efficiencies.
In the medium term, we are using and participating in the supply chain for alternative fuels and testing technologies for investment to retrofit existing ships.
And the longer term, we are partnering with others to invest in and develop technology and processes necessary to make meaningful reductions to carbon emissions.
We are also exploring new opportunities for transporting liquid bulk commodities other than fossil fuels.
These evolving markets point to interesting and exciting potential for OSB to leverage its strong operating franchise.
<unk> continued to commit resources to identify the best opportunities available.
With this vision, we will remain true to our mission of being a world class shipper of liquid bulk commodities.
<unk> recently issued its annual sustainability report that provides greater detail to these commitments.
And we invite you to read it in full it is available on our website at www Dot OSU Dot com.
Francis we can now open up the call for questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad.
For any reason you'd like to remove that question press star followed by Kim again.
Again to ask a question Thats Star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question. We will pass here briefly ask questions are registered.
Okay.
Our first question comes from Ryan Vaughan with Needham and company. Please go ahead Brian .
Alright, Thank you operator.
Hey, Doug good to hear from you guys great job on the quarter.
Thanks, Brian .
Just a couple of quick ones then you covered a lot there that was great. Thanks for all the insight.
And also I like how you reclassified some of the segment reporting.
Just updated the model.
It looks it looks good it makes sense and helps us out for sure.
Not too much just a couple of quick questions here, maybe <expletive>.
It sounded like Youre going to have.
Some more off hire.
So dry docking can you just update us on a few of those items, what youre expecting for Capex. This year and any kind of preliminary for next year. If you don't know Thats. Okay. And then also you had mentioned just the standard stuff that the <unk>. If you could just update us on what youre expecting for <unk>.
As well thanks.
Okay.
The.
Capital expenditures for.
I'll call them maintenance capital, so all the dry docks and <unk>.
Intermediate surveys.
Probably in the low 20 millions.
Looking.
Amortization debt service generally runs about 50% to 55 about $55 million a year.
We will amortize another call it $18 million of principal this year through regular scheduled amortization.
So interest expense.
It will be about $32 million in total.
33 somewhere in there.
Okay perfect Alright, that's great. Thanks for everything Thats It for me.
Okay. Thanks Ryan.
Thank you for your question.
Next question comes from climbing Nolan with value investors. Please go ahead.
Good morning, Thank you for taking my questions. Congratulations on another strong quarter interim security three PSP Awards.
Wanted to start by asking about the ratio you have applied for two spuds in the tender.
And should yield.
Ultimately be aware that the contracts when would those start.
So.
That's a good question.
The.
The big term.
<unk> a delivery of the vessels.
And of the contract.
Between April .
Of 2023 in August of 2023, we are.
Clearly beyond April now so.
There have been some delays in processing and considering the outcomes of the bids that were made.
Foreseeable in my mind that.
That August back.
Back end of the delivery window might shift a little bit.
But I think realistically.
The right way to think about this is sometime during the third quarter of this year.
Delivery will need to be given into the contracts.
And delivery is in Hawaii, so the vessels get to Hawaii.
That's helpful. Thank you.
If everything goes according to plan you will have to move faster I think potential vessel acquisitions do you still see where modern eco vessels or where do you currently see the sweet spot.
No.
I've said before the market.
Selling purchase market.
For international trading MLR.
My mind is distorted by activity at.
At the older end of the spectrum because these vessels are being purchased by opportunistic buyers looking to capitalize on changes in Russian.
Crude and product movement.
There was an interesting article in the financial times last week that cited an Indian company that for as an example, an Indian company that has it.
Address it in a mall in Mumbai.
And even.
Even existed some.
A year ago and that company has been attributed to having purchased as many as 65 shifts over the last eight months.
So that end of the spectrum is creating a different in my mind, a different pricing structure for older assets.
That.
Could bleed into the younger end of the.
I personally don't believe so I think that.
Extrapolating prices for some of the older ships into.
More modern ended at the end.
End of the spectrum is.
It's not the correct approach I think you see it flat and more flattened curve as you get younger because the.
The opportunity the opportunity to capitalize on the dislocation caused by Russia's <unk>.
<unk> export patterns.
Is not going to last it's not likely in the last 15 to 20 years, which we you would need for a younger vessel.
So I believe that the pricing at the front end of the age profile is probably a little bit more attractive than the older Ed I would say as well that should we acquire additional emaar tankers.
As a factor.
When converting the U S flagged its important which is.
Vessels of older tenure of more than 10 years of age.
They faced a different set of criteria from the U S Coast Guard in terms of the.
The requirements for complying with U S registry and U S Coast Guard rules.
So there is a there is an advantage too.
Two using or when reflagging. There is an advantage to reflagging vessels of less than 10 years of age and more than 10 years of age. So thats a factor that we consider when we think about.
We might get additional.
<unk> four <unk>.
For a registry and a U S flag.
Makes sense. Thanks for the color. That's all for me. Thank you for taking my questions and congratulations for the quarter.
Thank you. Thank you.
Thank you for your questions.
There are currently no questions registered so as a reminder.
Star one to ask a question.
Star one to ask a question.
Alright.
There are no questions waiting at this time.
Pass the conference back over to our management team for any additional remarks.
Thank you Francis and thanks, again to everyone for participating on the call today, and we look forward to speaking with you again soon and to continuing.
The recovery of our business and advancements in the future have a good day.
That concludes the overseas Shipholding Group, Inc. First quarter 2023 earnings release Conference call.
Thank you for your participation you may now disconnect your lines.