Overseas Shipholding Group, Inc.

Good day and welcome to the Overseas Shipholding Group Second Quarter 2021 Earnings Release Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Sam Norton, President and CEO. Please go ahead.

Thank you, Sarah. Good morning. Thank you all for joining Dick Kubla and me on this call for the presentation of our 2021 second quarter results and for allowing us to provide additional commentary and insight into the current state of our businesses and the opportunities and challenges that lie ahead. As usual, Molly Arcia and Princeton McFarland are participating with us on this presentation. To start, I would like to direct everyone to the narrative on pages two and three of 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 a historical perspective on OSG 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 discussion of these factors, we refer you specifically to our annual report on Form 10-K for the fiscal year ended December 31st, 2020, our Form 10-Q for the quarter ending March 31st, 2021, our Form 10-Q for the second quarter of 2021, which we anticipate being filed later today, and our other filings with the SEC, which are available at the SEC's website, www.sec.gov, as well as on our own website, www.osg.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 define and reconcile to the most closely comparable GAAP measures in our second quarter earnings release which is posted on our website. The progression back to a healthy domestic energy transportation market has been, and will likely continue to be in the short term, uneven. Demand for conventional tanking use has remained subdued, affected by a combination of volatile market forces. A significant percentage of Jones Act tankers remains underutilized, including six OSG tankers that were in layups throughout the quarter. Nonetheless, OSC's financial performance this quarter offers evidence of improving fundamentals in our core markets and progress towards restoring earnings potential of our full fleet. Our ATBs, Alaskan tankers, and niche market assets achieve results approaching or exceeding historical norms. Outside of our conventional tanker trades, we have seen increasing chartering interests and emerging new trades. Overall, we are pleased with the progress we have made and the cash flows delivered, which exceeded anticipated EBITDA during the quarter. Evident in the markets that we serve is the continuing impact of the ongoing global coronavirus pandemic. Conditions of heightened uncertainty have persisted in our core markets. Erratic recovery profiles outside of the United States and the resulting drag on economic activity internationally has acted to inhibit a rebound in international tanker markets. Weakened demand for refined products overseas, coupled with very low international freight rates, have led to a meaningful increase in petroleum product imports over the first half of this year, dampening demand for especially conventional Jones Act tankers. Similarly, compressed crude oil price spreads and restrained international crude oil production has led to a very soft crude tanker market, As such, while demand for transportation fuels in the United States has recovered strongly from year-ago lows, the slope of recovery in domestic marine transportation demand has been flatter than what we had expected earlier in the year. Overall market conditions that led us to lay up six tankers and one of our lighter ATBs early this year have only marginally improved. It remains clear to us that we are still in the early stages of what we consider to be an emerging recovery. The pace and trajectory of demand recovery continues to be influenced by many factors, including importantly progress in moving beyond the pandemic. Given this operating environment, the results announced this morning are satisfying and once again point to the benefit of having a diversified asset portfolio. Although our conventional Jones Act tankers experienced losses this quarter, time charter equivalent earnings from these assets saw improvements over our first quarter results this year. In addition, we are encouraged by progress made in a number of business initiatives which fall outside of the core MR petroleum transport trades. Since our last communication, we have secured contract extensions with each of our two remaining Lightering customers. The term of each contract is 12 months commencing July 1st, 2021. Each contract provides for minimum take or pay volumes at volume commitments higher than the expiring contract periods. Given current expectations, one laddering ATB, the OSG 351 Horizon, will be sufficient to serve these contracts. We have received notice from the Government of Israel of its decision to exercise its option to extend our current contract of entrapment served by our MSP vessels through the end of calendar 2022. OSG will continue to have two vessels available in order to provide scheduling flexibility. predicated on a minimum of seven annual voyages during the contract year. With this extension, we can expect our two MSP vessels to maintain historic TCE contribution rates consistent with years past over the full calendar year 2022. We have fixed the overseas Key West for delivery within a window of 15 November to 15 December with an intended trade of shipping renewable diesel from the Mississippi River to California. The contract period is 26 months. We will take the vessel through dry dock and intermediate survey prior to entering into this contract to allow for uninterrupted service over the full 26 months. This fixture is significant in highlighting the emerging trade in renewable diesel, moving from new production units in Louisiana and Texas to California, a trade that appears ready to expand significantly in the next two to three years. We have reached agreement with the current charterer of the OSG 205 to extend the vessel's employment in direct continuation for a period of three years commencing in early December 2021. This fixture will generate just under $39 million in time charter income and an estimated $8.5 million a year in EBITDA over the extended period of employment. We have reached agreement on the principal commercial terms to extend the current charter of the Alaskan Explorer through the end of 2023. This extension will generate an estimated $12 million incrementally above the original charter period agreed. The overseas Martinez has been extended by her current charter for the first of two three-month options included in the original fixture. The three-month period is with effect from mid-September and will keep the vessel firmly employed through the middle of December. Finally, in a significant positive development for the prospects of the tanker security program, the Defense Department delivered a long overdue report to the House affirming the critical importance of an expanded U.S. flagged tanker fleet in the interest of national security. On the heels of this report, the House Transportation, Housing, and Urban Development Appropriations Committee has approved the full $60 million annual funding for its recently passed appropriations bill. Senate approval is likely in the following weeks to come. Each of these steps is a significant milestone in the efforts to stand up the tanker security program. Moving now to our plans to restore to regular employment the six conventional tankers and one laddering ATB in layup. Near-term uncertainty will continue to impact a wide spectrum of possible vessel reactivation outcomes as we move through the balance of this year. We continue to believe that to the extent our customers' disability and incompetence in the future returns, more typical customer behavior and time charter activity will rebound, leading to improved financial performance for OSG. In this context, expanding vaccine penetration rates and progressive lifting of COVID-19 restrictions have resulted in greater mobility and restored U.S. consumption of gasoline and diesel fuel. Hopefully these trends will continue. The latest Energy Information Agency data indicate that fuel demand patterns consistent with historical levels for these products have largely recovered in the United States. With gasoline and diesel inventories below average levels for this time of year, this normalization of consumption patterns should stimulate more domestic marine transportation demand as we move into what is historically the seasonal high demand winter months and once import substitution subsides. On that note, recent import data is encouraging, with gasoline imports last week having dropped to 845,000 barrels per day from over 1.3 million barrels per day as recently as a month ago. Also encouraging is that international MR rates have been rising over the past 10 days. I will now turn the call over to Dick to provide you with further details on our second quarter results for 2021.

Thanks, Sam. Second quarter results achieved in a difficult market reflected improvement over our first quarter results. Domestic transportation fuel consumption levels increased as vaccine penetration improved over the first quarter, and economic activity continued to increase. Internationally, we continue to see pandemic-related restrictions, which are limiting economic activity and delaying the recovery in global transportation fuel demand. International tanker rates during the quarter remain significantly depressed. International petroleum product flows and tanker rates both impact the domestic transportation fuel markets. Higher levels of gasoline have been flowing to the United States from Europe, and the economics of this trade have been augmented by the very low tanker rates that have been available. Our customers, accordingly, have continued their reluctance to make longer-term transportation commitments. Spot market activity increased during the second quarter. The overseas Houston handled a series of spot voyages all in direct continuation that kept her busy for the majority of the quarter, and the overseas Boston operated under a short-term time charter during the quarter. There were two other short-term time charters available in the market which were filled by other vessels. The remaining spot voyages during the quarter were smaller in size and generally satisfied with ATVs. As Sam has described, we had a more active quarter in developing new business or extensions of existing business than was the case during the first quarter. Nevertheless, the number of vessels in layup remained constant. We continue to manage our costs by maintaining these ships in layup for which there is no current demand with a daily operating savings per vessel of approximately $15,000. As we indicated during our fourth quarter 2020 call, our expectation was for breakeven adjusted EBITDA in the first quarter of 2021 with a modest improvement in the second quarter. Our second quarter 2021 adjusted EBITDA was $10.2 million, a $4 million increase from the first quarter, resulting in first half adjusted EBITDA of $16.4 million. The impact of the overall domestic economic recovery on the marine transportation sector has been somewhat muted to date. We firmly believe that the recovery in our markets is only a question of time. We expect to see demand return during the second half of 2021 with the expectation of significant improvements in our operating performance. Please turn to slide seven. CCE revenues in Q2 were $71.7 million, a 9.5% increase from the first quarter, which were driven in large measure by our niche businesses. CCE revenues, however, declined 28.6% when compared to the second quarter of 2020. We had six tankers and one lightering barge in layup during both the first and second quarters of 2021. In Q1 of 2020, vessels were either on time charted or employed under contracts of a freightman. There were no vessels in layup in the prior year. We had two vessels re-delivered to us towards the end of the first quarter, and they operated in the spot market during the second quarter. On the previously mentioned series of boys charters and the other on short-term time charters through mid-April and then again on another short-term time charter later in the quarter. Adjusted EBITDA in the 2021 second quarter increased 64.5% from the first quarter of 2021 to $10.2 million due to the increase in revenue levels. Comparatively, adjusted EBITDA declined significantly from the year-ago quarter when our vessels were more fully employed. Dry dock days increased during the quarter to 45 from 43 in the first quarter of 2021. In the year-ago quarter, we had 56 dry dock days. Please turn to slide 8. The increase in TCE revenue from the first quarter of 2021 was led by improved performance in our niche businesses. Lightering revenues increased $1.2 million to $8 million from the first quarter of 2021 and increased $2.6 million from the second quarter of 2020. Both lightering barges were operating in the year-ago quarter while only one was operating during this year's second quarter. Increased lightering volumes during the second quarter drove the revenue gain and average TCE daily revenues increased to $92,500 a day from $74,600 per day in the first quarter. Both of our new-build ATVs were in operation under time charters during the first and second quarters of 2021, generating consistent revenues. During the second quarter, as previously announced, we sold the overseas Gulf Coast and delivered her to the new owners in mid-June. Prior to the sale, we operated four non-Jones Act MR tankers, The overseas Suncoast and Gulf Coast, until her sale, continued to operate in an international MR pool on a time charter arrangement. Realized rates have declined due to the international market conditions. The Mykonos and Santorini continue to participate in the Maritime Security Program and provide services to the Government of Israel. During the quarter, we performed two GOI voyages and two voyages for the military sea lift Resulting revenues increased $3.6 million. Our Alaskan tankers all operate on long-term time charters and continue to perform in line with expectations. The second quarter of 2021 contained 45 off-fire days for dry dock activities for the Alaskan Legend, while the first quarter of 2021 contained one month of dry dock off-fire for the Alaskan Navigator. The slight increase in second quarter dry dock days accounts for the slight revenue decline from the first quarter. In the year-ago quarter, there were no dry dock days. Conventional tanker revenues increased $1.2 million from the first quarter. This increase resulting from the first quarter was due to a full quarter of time charter operations for the overseas Martinez. partially offset by the impact of the re-delivery of the Houston and Boston during the first quarter. We had six conventional tankers in layup in both Q1 and Q2 this year. The impact of vessels in layup and the addition of two vessels to the spot market in Q2 of 2021 resulted in a TCE revenue decline of $33.6 million from the results achieved in Q2 2020. Please turn to slide nine. Revenues from our niche businesses increased $5.2 million from the first quarter of 2021. Again, this was driven by an increase in lightening volumes and an increase in GOI voyages from one to two, as well as the impact of the MSC voyages during the current quarter. GCE revenues declined by $1.8 million from the year-ago quarter in which one shuttle tanker had been operating as a conventional tanker and is now currently in layup. Lightering and non-Jones Act tanker revenues both increased compared to last year due to the volume increases and the mix of business from the U.S. flag non-Jones Act tankers. Revenues from shuttle tankers providing shuttle tanker services were, as expected, essentially flat from the prior quarter and year. Please turn to slide 10. Vessel operating contribution, which is defined as TCE revenues less vessel operating expenses and charter hire expenses, increased $3.7 million from Q1 2021 to $15.1 million in the current quarter. Niche market activities contributed $4.6 million of an increase from the prior quarters, while the HDB contribution remains stable. The Alaskan tanker contribution declined due to the increase in off-hire dry dock days. Jones Act tanker's loss decreased from $12.3 million to $11.5 million, the improvement principally resulting from the overseas Martinez operating under time charter for the full period in the current quarter. partially offset by the contribution change resulting from the re-delivery of two tankers into the spot market. The number of layup days was essentially flat between the two quarters. Combined vessel operating contribution of our niche businesses, ATBs and the Alaska crude oil tankers provided a vessel operating contribution in the current quarter of 26.7 million compared to 23.6 million in the first quarter. Bustle operating contribution declined from the first quarter of 2020 by $21.2 million. The Jones Act candy-sized tanker contribution decreased $21.4 million. Year-over-year niche market contribution was flat, while contribution from our new ATBs increased $3.6 million, as only one of the new ATBs operated for a brief period of Q2 2020. The current quarter reflects a full quarter of operations for each. In Q2 2020, all Alaskan tankers were in operation for the full quarter, while in the current quarter, the Legend was in dry dock for half of the quarter. Please turn to slide 11. Second quarter 2021 adjusted EBITDA increased $4 million from the first quarter of 2021. This resulted from increased contributions from our niche market activities and stable operations of our ATVs. Alaskan tankers reflected a decline due to the increased dry dock days. Adjusted EBITDA continued to be negatively impacted by the six Jones Act tankers in layup and lower utilization of the two ships in this flat market. Adjusted EBITDA decreased $19.2 million from the second quarter of 2020. The decrease, again, was driven by the reduction in tanker employment between the two periods, as six tankers have been placed in layups since then. Please turn to slide 12. Net loss for the second quarter of 2021 was $10.7 million, compared to a net loss of $15.9 The change was principally driven by improved performance of our niche businesses. In the year-ago quarter, we recorded net income of $6.4 million as our fleet was primarily operating on time charters. Please turn to slide 13. By early in Q3 2021, we completed all scheduled dry dock work for 2021. The total 21 uh investment to date including amounts expended in july 2021 with approximately 20.4 million dollars we will be activating the overseas key west to enter her new time charter in order to make her available without interruption to her charter or during the 26-month charter period we have accelerated her dry dock that would have been due in second quarter of 2022 to occur prior to the commencement of her charter in november 2021 We anticipate that the expenditure will be approximately $6 million, which includes installation of the ballast water treatment system. At March 31, 2021, we get total cash of $45 million, including $100,000 of restricted cash. During the quarter, we generated $10 million of adjusted EBITDA, and we received net proceeds from the sale of the overseas Gulf Coast of $32 million. Working capital used $1 million of cash, and we expended $6 million on dry docking and improvements to our vessels. Additionally, we invested $2 million in vessel and other CapEx. During the quarter, we incurred $6 million in interest expense and repaid $10 million of debt. The result, we ended the quarter with $62 million of cash, including $100,000 of restricted cash. Please turn to slide 14. Continuing our discussion of cash and liquidity, as we mentioned on the previous slide, we had $62 million of cash at June 30, 2021. Our total debt was $417 million, representing a decrease of $10 million in outstanding indebtedness since March 2021. We were amortized an additional $20 million of our loans over the remainder of 2021. With $354 million of equity, our net debt to equity ratio is one times. This concludes my comment on the financial statements, and I'd like to turn the call back over to Sam. Sam?