Q3 2023 Overseas Shipholding Group Inc Earnings Call
Good morning, and welcome to the overseas Shipholding group third quarter 'twenty to 'twenty three earnings release conference call.
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I would now like to turn the conference over to Sam Norton CEO of overseas Shipholding Group. Please go ahead.
Thank you Andrea.
Good morning, and thank you for joining our presentation I've always tease third quarter 2023 financial results for.
For allowing us to provide commentary on those results.
The additional color.
Is it the current state of our business and the opportunities and challenges that lie ahead.
As usual I'm joined in this presentation by our CFO <expletive> Trueblood.
Start I would like to direct everyone to the narrative on pages, two and three of the Powerpoint presentation available on our website.
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 our sheet 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 third quarter of 2023, which we anticipate filing later today and our previously released forms 10-K, and 10-Q, which can be found at the Sec's Internet site Www Dot dot dot.
As well as at our own website, www dot or SEDAR 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 certain non-GAAP financial measures, which we define and reconcile to the most closely comparable GAAP measures in our earnings release, which is also posted on our website.
I am pleased to be able to share with you today. The results of another solid quarterly performance at O S T.
We have made progress on all of our key objectives since our last earnings call in August.
Adjusted EBITDA increased by more than 20% from the second quarter during the third quarter, we repurchased the equivalent of $7 2 million shares returning nearly $30 million to our shareholders.
We took steps to add additional earning assets to our fleet through an agreement to purchase the Alaskan frontier, which we expect to be in operation within the next 12 months.
And after the end of the quarter.
Prepaid $6 7 million of interest bearing liabilities at a discount which will result in a gain of $911000 during the fourth quarter.
Cash flow from operations continues to meet or exceed our expectations, giving us continuing confidence that our business plan is working.
As has been the case for most of this year healthy refining margins and robust international tanker rates have supported strong performance from our TSP vessels and have boosted volumes lifted in our library and operations with these two specialized activities largely accounting for the better than expected financial results are cheap, but just.
Completed quarter.
Favorable fundamentals, which have supported a strong tanker market throughout the year have allowed us to maintain and extend our preferred contract profile are predominantly medium term charters.
With three year charter extensions obtained during the quarter for both the overseas Boston and D. O S T. Two O for endurance.
90% of 2024 available trading days for our Jones Act fleet are now fixed at rates that will generate TCE from fixed contracts in excess of $30 million per month through the end of 2024.
Excluding our two current TSP vessels, which trade spot by design and the overseas mykonos for which the MSC will likely pick up options extending our current contract.
Only open OSV vessel available for charter into the third quarter of 2024 is the Alaskan explore.
Based on current arrangements two Jones Act tankers will also kind of opened during the final quarter of next year.
This contract coverage gives us an unusually high level of forward revenue visibility.
Estimated free cash flow above debt service and capital expenditures generated from our existing fleet of assets is expected to exceed $100 million over the 15 month period between the end of the 2023 third quarter in the air.
End of 2024.
This forecast excludes any incremental cash flow that might be generated from additional assets that we may acquire in the coming quarters.
The combination of firm charter rates staggered maturities and extended contract durations should allow us to make further progress in meeting our key capital allocation goals.
As our first investing opportunities opportunistically and incremental U S flag tanker and ATB assets, Both Jones Act and internationally trading U S flag tankers.
Where we see expected long term cash flow returns available to provide value to our stakeholders.
Applying peak cycle cash flows to reduce overall financial leverage in our business while at the same time, considering ways to sustain access to liquidity either through creating a pool of unencumbered assets against which future financing could be added if needed or if you were establishing new financing facilities, which would offer contingent.
Liquidity at an acceptable cost.
Third continuing ongoing efforts to return capital to our shareholders.
And fourth investing judiciously in gaming and sustaining our first mover advantage and participating in the emerging market for transporting liquid bulk commodities that are not currently in the product mix being shipped on our vessels and.
In this category, we see the most interesting opportunities at this time to be in the transportation of liquid carbon dioxide generated the value change seeking to capture and sequester industrial emissions of carbon dioxide.
When considering opportunities in the first of these goals, we continue to actively evaluate options to purchase a modern emaar to replace the open P. S. P position created.
Overseas, making us entry into a time charter with the MSC This past summer.
Current asset prices are in our view distorted by buyers operating vessels and sanctioned trades, making finding a suitable acquisition candidates challenging in the short term.
Nonetheless, we have confidence that the market will in time revert to a more normalized pricing structure and create opportunities to expand our fleet of internationally trading in our tankers.
As mentioned on previous calls we see these niches.
As providing one of the more promising medium term growth opportunities in the U S Black trades.
Congress is authorization to increase the number of ships participating the T. S. B from 10 to 20 ships offers optimism in realizing this potential and we're working actively to ensure that always plays a leading role in the continued development of this important program.
And the conventional Jones Act trade.
We consider the most promising area for golf to be linked to the increased medium term demand transport of Alaskan crude production.
There have been development projects announced the project incremental Alaska production over the next several years of more than 250000 barrels per day.
This with his perspective that we have in recent weeks concluded an agreement to acquire the Alaskan frontier.
2004, built sister vessel to the three Alaskan class tankers already owned and operated by our Street.
Over the next 12 months, we will make significant investments in the vessel, while bringing the frontier out of cold lay up including upgrades to our main propulsion system intended to reduce fuel consumption by 15% to 20%.
With a total project cost estimated at $50 million, including the purchase price to be paid for the vessel work done to the vessels should prepare it to operate in compliance with no existing regulations for at least 10 more years.
Once in service, we consider the annual operating cash flow contribution, but this vessel will provide to be in the range of $15 million to $20 million or roughly 10% to 10% increase to the estimated 2023 of adjusted EBITDA.
Also in the Jones Act, we've been fielding inquiries into the possibility of constructing new ATB is for some of our key customers.
Investment in ATB offer a reduced risk profile, when compared with considering new tanker construction in the U S.
Current regulations exempt atvs from C III regulations.
Moving an important risk variable as we consider new investment in long lived assets.
A comparable investment cost of about 200000 barrel capacity ATB is also likely to be 30% to 40% lower than a conventional tanker.
Importantly, roughly 70% of that cost is in the barge. This implies that investment capital that is exposed to the risk of changes in practice of regulation regarding future fuel or propulsion systems are centered on the tug without impacting the useful life of the barge.
Finally crew and operating cost of an ATB remained significantly lower than on the tanker, creating additional economic incentive to prefer an ATB over a tanker under current market conditions.
When taken in conjunction with the extremely limited domestic shipbuilding capacity for delivery of new tankers, we think the above factors will favor our new ATB construction projects for the foreseeable future.
Discussions with our customers on finalizing any such projects are being conducted on the assumption of deliveries three to four years after contract signing and it wasn't assumed minimum firm contract here for seven years following delivery.
Turning now to potential capital to use for further debt repayments.
We would highlight that of our current interest bearing debt.
All of which has fixed rate interest payment obligations at rates that under current markets are quite favorable roughly $50 million of balloon payments under three separate financing facilities will come due between now and the end of June 2025.
Our current thinking is that we will allow these three facilities one maturing in each of September 2020 for March of 2025 and June of 2025 to run off.
In the absence of new large capital investment projects, we expect to have sufficient cash on hand to retire these obligations with minimal impact to our operations.
As a result of this approach will allow us to reduce financial leverage.
It will also free up or unencumbered vessels, which would be available as collateral for new financing should a need for additional capital arise in the future.
Has it been the case for the past 16 months share repurchases and the warrant retirements will continue to be part of our capital allocation playbook.
There remains roughly $6 $8 million available under the existing $20 million share repurchase program authorized by <unk> Board earlier this year.
We will continue to seek out opportunities to return capital to our shareholders under this remaining authority.
And lastly, when considering business growth opportunities over the longer term horizon, we continued to invest considerable time and resources into understanding opportunities and the emerging carbon capture and sequestration industry.
In recent months, we have witnessed the building momentum towards the development of intermediate storage hub transport networks, and facilitate industrial scale T O to capture and sequestration projects.
Oh Jeez established franchise with domestic transport of liquid bulk commodities gives us a significant competitive advantage for participating in this emerging market.
Well she has recently undertaken to work with key port operators, along the Gulf coast to submit applications for grants from the U S Department of energy to develop detailed project proposals or intermodal transportation hubs for captured C O two.
Or.
He believes that the marine transport solution for capturing C. O. Two is the most attractive means for connecting stranded industrial emitters in the region with sequestration site.
We are focused on working with these operators to develop economically viable solutions to achieve this vision.
Before turning the call over to <expletive> to take you through the details of <unk> third quarter financial results I would like to touch on several important transactions within our industry that have occurred over the last quarter.
Most significantly from always choose perspective was the recent transaction, which resulted in the ownership of the seven veteran class tankers that O. S. T operates under bareboat charters being transferred from entities owned by M. S. C. A S E to new owners owned by a private fund managed by Maritime partners LLC.
In conjunction with this transaction O S T entering into new bareboat charter agreements and simplified the underlying arrangements that govern the relationship between O S. T and now Maritime partners, a Jones Act qualified company.
As noted earlier the transaction presented O S C with an opportunity to prepay all of its remaining deferred payment obligations related to two of the seven bareboat chartered vessels.
14% discount to the aggregate outstanding liability of $6 5 billion.
Other material commercial terms of the revised verbal agreements remain unchanged from the original agreement.
Maritime Partners LLC also recently acquired from Maersk lines Limited U S flag tanker operator.
Maritime Management, Inc.
Among the U S flag assets owned and operated by U S. M. M. I R. Three MLR tankers, which are on period charters for the military Sealift command one small coastal tanker also on period charter to the MSC and one of the recently acquired EMR tanker that has been entered into the tanker security program.
Lastly, as was widely reported U S flag operators Crowley and Seabolt tankers entered into an agreement, which if completed will result in considerable consolidation of ownership of assets within the Jones Act trades.
The intended joint ventures seeks to integrate liquid energy and chemical transportation vessels of both parties into a new independent U S. Jones Act service provider Fairwater Holdings LLC.
If completed Fairwater will include 20 ocean going articulated tug barges and 11 tankers. The company will also provide crewing and technical management for an additional 21 third party owned vessels.
I will now turn the call over to <expletive> to provide you with further details on our third quarter results for 2023 <expletive>.
Thanks Sam.
Please turn to slide seven.
We repurchased four 6 million shares for $18 $7 million during the third quarter and also purchased 75% of our outstanding warrants for $11 4 million.
Warrants or convertible into our common shares and the warrants we purchased were convertible into $2 6 million shares.
These warrants were canceled after acquisition significantly reducing potential dilution.
The remaining outstanding warrants or convertible into 859000 shares.
Cumulatively in 2023, we have got seven 2 million shares for $28 $5 million.
Since we started our share buyback programs in June 2022.
Repurchased 17 2 million shares.
For total return to our shareholders of $57.5 million.
The average price paid per share.
$3.35.
The combined 2023 authorized share repurchase programs permitted us to acquire $20 billion of shares.
At this point, we have $6 8 million remaining available for additional share repurchases.
Please turn to slide eight.
It's the beginning of 2022, we have significantly extended the duration of our book of business as can be seen in this chart. We are substantially booked through 2024 with only five vessels with charters ending before 12 31 24.
One of these vessels the Beacon OS as the series of one year options with the military Sealift command, which if all exercised will keep her on charter through August 2028.
The Santorini and Sun coast, both participate in the E. S P.
The nature of this business is principally in the spot market rather than a longer term time charters.
The Alaskan legend, and Alaskan navigator or subject to extension options. If exercised will continue their charters for years into the future.
We are essentially fully booked for the remainder of the year with some variability for our internationally trading vessels.
Looking at our contracted book of business on a revenue basis without considering any business currently under negotiation.
And not assuming the exercise of any contractual options are.
Our future book of business is approximately $903 million over the remaining lives of existing contracts.
We have in calculating this amount factored out estimated off hire days due to future required dry dock periods.
We entered into an agreement to purchase the frontier sister ship to our three Alaskan tankers.
She has been a cold lay up since 2019 and subsequent to the purchase she will go through an extensive shipyard period.
During which we will also perform amgen lifecycle upgrades and installation of ballast water treatment system.
She is expected to commence commercial operations in the fourth quarter of 2024.
Our total resource commitment.
Excluding the purchase price is expected to be $50 million.
Please turn to slide nine.
We are very pleased with our third quarter results all elements of our fleet continued to perform well vessel demand and rates remained strong.
Revenues rose eight 5% sequentially from 100.1 million to $108 6 million driven by higher rates of utilization.
We experienced 57 off hire days during the quarter due to dry dock schedules.
Revenue declined from the year ago quarter result from the return of three vessels to a M. S. C. In December 2022.
Creased rates higher utilization offset some of the decrease.
Adjusted EBITDA increased $8 $6 million from the prior quarter to $48 1 billion.
And $5 $8 million in Q3 2022.
The reduction in operating expenses and charter hire.
Fully offset the revenue decline from the return vessels.
Please turn to slide 10.
Revenues across each aspect of our business increase.
Specialized business revenues increased $5 million, while ATB revenues rose $2 million.
<unk> from an increase in revenue days.
Jones Act tanker revenues increased $1.800 million due to higher average daily rates driven in large measure by contract extensions at higher rates.
Please turn to slide 11.
Fighter and volumes in the third quarter were moderated by a turnaround at one refinery reserves. Nevertheless revenues were consistent with the second quarter.
Non Jones Act tanker revenues increased almost 100% sequentially from the second quarter returning to levels experienced in prior quarters.
The overseas Mika knows commenced or time charter with the military Sealift command in August.
International rates continue at higher than anticipated levels.
The whole thing is strong repo adults from our TSP vessels.
Jones Act shuttle tanker revenues.
Were stable as it is expected from these.
They're fully contracted book of business.
Alaskan tanker revenues declined from the second quarter as the Alaskan navigator under what her scheduled dry dock period.
Please turn to slide 12.
That's all operating contribution increased 21% to $52 $6 million from the second quarter.
Each of our business activities contributed.
Our specialized businesses contribution increased $5.2 million driven in large measure why our TSP vessels.
And the entry they'd make a nose into or MSC time charter.
Jones Act Candy thing handy sized tankers contribution increased $2 million.
Rate increases due to new contracts provided the impetus for this increase.
The contribution from our 80 days increased $1.9 billion, USG 204, and O S. G. III 50 completed their scheduled dry dock periods in the second quarter.
Variance fewer off hire days.
Accordingly during the third quarter.
The O S. G 205 completed her dry dock period during the third quarter.
Please turn to slide 13.
Third quarter, adjusted EBITDA was $48 $1 million and $8 6 million dollar increase.
Adjusted EBITDA for the three quarters of 2023.
$28 5 million, an increase of more than 29% from 2020 twos.
First three quarter adjusted EBITDA of $99 2 million.
Please turn to slide 14.
Year to date net income is $42 million compared to 16, and a half million for the comparable 2022 period.
Roughly two and a half times increase.
The continuing impact of higher rate levels increased contract duration.
And greater utilization have contributed to these positive results.
Please turn to slide 15.
At June 32023, we had total cash of $106 million.
During the third quarter, we generated $48 million of adjusted EBITDA.
And working capital used $4 million of cash.
We invested $9 million in vessel dry dock and other capital costs.
We repurchased four 6 million shares for $19 and purchased $13 9 million warrants $11 billion.
We paid $13 million for debt service $6 million of which reduced our outstanding debt through scheduled amortization.
We ended the quarter with $98 million of cash plus $15 million of liquid investments.
All thing and total liquidity of $113 million.
Please turn to slide 16.
Continuing our discussion of cash and liquidity as mentioned on the previous slide we had $98 million of cash.
Our total debt was $410 million.
This represents a decrease of 6 million in outstanding indebtedness since June 2023.
Scheduled loan amortization for the remainder of 2023 $6 billion.
$343 million of equity our net debt to equity ratio is <unk> nine times.
In 2024 scheduled debt amortization is $52 $8 million of which.
23 point, Eric I'm, sorry, scheduled debt service is $52 8 million of which $23 4 million.
Lambert station.
Additionally, as Sam mentioned barrel bone on the overseas Sun Coast matures in September 2024.
And it will have an outstanding balance of $18 million at maturity.
Our current intention to repay this loan using cash on hand.
This concludes my comments on the financial statements and I'd like to turn the call back to stand down.
Thank you <expletive>.
As highlighted by Dick's detailed comments financial results for the first nine months of 2023 have exceeded our year ago plans with positive performance in both average TCE pain and the contribution of some of our specialized assets putting us on track well ahead of where we guided at the outset of the year.
With our clear visibility of charter rates and coverage contracted for in future quarters, the extent of variability to expectations for the balance of the year will occur solely as a result of changes in lottery volumes and in the right conditions experienced in the international MRO market and which currently only two.
Two of our non Jones Act vessels trade.
Our fleet today remains well positioned to respond to the changing patterns of domestic and international transportation fuel shipments.
And is well situated and actively engaged and participating in emerging areas of opportunity.
We anticipate continuing strength in all financial metrics and a sustained build and available cash balances over the next several quarters as profitable time charters at higher utilization rates are realized.
Our success in securing improved terms under a number of vessel contracts gives us confidence in further improving on our guidance for the full year of 252022 results from.
From what we presented last quarter.
We now expect time charter equivalent earnings for the full year of approximately $420 million attaining this top line result.
<unk> generated adjusted EBITDA of about $175 million for the full calendar year of 2023.
To deliver these results our mission is firmly focused on execution and operational excellence as well, it's the pursuit of growth opportunities described earlier.
The extent of contract coverage into 'twenty 'twenty. Four also allows us to project with a reasonable degree of certainty results that should be achieved from our existing vessels for the next year.
Given what we know today, we expect time charter equivalent earnings for 2024 to exceed $430 million and adjusted EBITDA to exceed $175 million for the full calendar year 2024.
As the bulk of my remarks today would indicate we consider allocation of capital decisions to be among the most important that we must make towards achieving a proper balance between investing in the future managing the level of our fixed payment obligations and benefiting our shareholders.
We recognize the need to invest in solutions to ensure the long term sustainability of our business model to continue to meet the investment objectives of our shareholders and to be responsive to the ambition ambitious goals of achieving our future target of zero emissions for ocean shipping.
We believe that we are making good progress towards meeting all of these goals. We hope that you will agree with this assessment and that we can continue to advance these objectives in the months and years ahead.
Andrea we can now open up the call for questions.
We will now begin the question and answer session.
I ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the key.
Who withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And our first question will come from Ryan Vaughan of Needham. Please go ahead.
Great. Thank you, so hi, Sami deck, guys, great job on the quarter and an excellent guidance there.
Two questions for you first one the frontier San Jose can you clarify the estimated timing of payments of the 50 billion over the next let's call. It 12 months number two sorry, if I missed this the Alaskan explore just current players I think before you had said that you plan on doing an engine upgrades.
Plans are time charter plans after that and then lastly, Sam if you don't mind could you just remind me what that population you said 100 million of free cash flow over the next 15 months can you just.
Be a little more specific on what's excluded from that thank you.
Yeah.
Okay, let's see if I can unpack that so on the Alaskan frontier are we expect to make a total payments.
Related to that project.
Roughly $30 million before the end of this year.
The balance of payments will be made over the subsequent nine months with.
Order of magnitude sort of more than 50% of that probably occurring in the third quarter of next year. So 30 million between now and the end of the year.
Yeah, another $5 million over the course of the first half of next year, and then probably 15 million or so in the third quarter of next year.
Alaskan explore.
Our current plan is for the lifecycle upgrade of though the engines on that vessel to occur.
Coordination with her next scheduled dry dock, which is in May of excuse me March of 2025.
We will be making a progress.
Progress payments to the contract or.
The upgrade of the lifecycle upgrade of those engines are we've already made one initial down payment of roughly 20% of the contract price.
And the balance of the payments.
We will stagger over the next.
18 months.
Roughly.
Yeah.
20% increments every every three months or so from memory.
And again I think we've.
We've indicated that the upgrade projects for the for the vessels for both you explore and the frontier. The lifecycle upgrades have a contract value of about 15 million U S dollars in total.
And thats, including all of the related shipyard work that we do what we need to do to be able to accommodate those upgrades.
$100 million of free cash flow over the next 15 months or 15 months from the end of last quarter.
That's after.
All scheduled debt repayment.
Repayments after.
Interest payments, obviously after a scheduled.
Dry docks Oh.
Not project related.
And therefore excluded from that $100 million would be any.
Any further share repurchases are also excluded is the AR, but the investment in the Alaskan Frontier project and.
Alaskan explore downpayments on the engine upgrades.
And also excluded would be any incremental capital that we might invest into for instance, acquiring a replacement vessel.
Vessel for the overseas Mykonos.
100 million of free cash flow in simple terms is based on normalized.
Our projected 175 million of EBITDA.
This quarter's EBITDA.
Less schedule debt repayment interest payment and scheduled normal maintenance Drydock capital expenditures.
I think that answers all three of the questions.
Yeah.
Great. Thank you and sorry, just the Alaska and explore.
One contract slide expires at 12 31.
One place for what what are the plans for explore for for after.
But we know we're going to keep the vessel active we think the market should offer good opportunities to trade the ship our preference would be to fix it or you know.
The periods between re delivery.
And her next scheduled dry docks are which would be about 15 months.
If we're unable to find a 15 month.
Contract will trade the ships in the spot and look for other opportunities to keep the vessels employed.
We thank you for all that.
We have a number of ongoing conversations with parties that are interested in taking the ship on time charter, we have yet to finalize any such arrangement.
Gotcha, Okay. Thank you very much.
Once again, if you would like to ask a question. Please press Star then one.
Yeah.
And our next question comes from Thomas Sweeney Sweeney Holdings. Please go ahead.
Yes, Hello, I have a question.
For you folks.
Does this slowdown.
In the ships going through the Panama Canal from a very low water levels affect you in any way.
That's a really interesting question Thomas Thanks for asking.
Right now we have a number of our vessels that are regularly transit the Panama Canal most of them in the service of customers that are moving renewable diesel from the.
U S Gulf coast to West Coast.
[noise] market.
All of those ships are operating under time charter.
What we have seen in recent weeks is that.
The time charters are the customers that have the vessels on time charters have been paying auction premiums to be able to ensure timely transit of those vessels through the canal.
You can read in the in the trade press.
So you know about those premiums that are paid on some of them for LNG vessels or as much as two and a half million dollars.
What we've seen in the in the.
Context of the MLR tankers that go through the older locks as those premiums have ranged from about $100000 to about $500000 in recent weeks.
Ah I think you're probably aware that the Panama Canal authority has indicated that they will be reducing the number of vessels that will be allowed to transit.
Through a oxidant through lake attuned as we progress into the winter.
Yet to be seen how dramatic an impact that will have on our vessels I would note that for our ships.
We're not dropped limited currently not under current dress situations. So we are able to load the cargos full cargoes that we go through whereas many of the larger container ships are seeing draft limitations and so.
Certainly from what I've read in the press some of the larger container vessels are looking possibly at rerouting ships.
Because of the implications of less cargo.
Capability or less cargo volumes to be able to carry it on board at the at the now restricted AR draft levels in the Lake.
But it's something that bears watching our current sense is it will have.
Minimal impact on our operations, but.
That could that could change.
111, other one suppose it gets worse.
What are the economics when would you go around.
South America or alternative routes.
I don't that would be that would only happen in my view of the canal was closed.
The economics flowing through the P&L are always going to be.
Particularly superior to alternatives.
Okay very good thanks.
This concludes our question and answer session I would like to turn the conference back over to Steve Martin for any closing remarks.
Thank you Andrea and thank you all for joining us today as well as <expletive> has highlighted we're very pleased with the way things are developing in our business and we look forward to sharing more and better news with you as we progress through the balance of the year and into next year wishing you all a very good day.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.