Overseas Shipholding Group, Inc.

Good day and welcome to the Overseas Ship Holding Group fourth quarter and full year 2021 results conference call. All participants will be in a 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.

Sam Norton Thank you, Betsy. Good morning, everyone. Thank you all for joining Dick Kublud and me on this call for the presentation of our 2021 fourth quarter and full year results, and for allowing us to provide additional commentary and insight into the current state of our business and the opportunities and challenges that lie ahead. 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 an historical perspective on OSG today, and our presentations include 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 those factors, we refer you to our SEC filings, particularly our Form 10-K for 2021, which we anticipate being filed later today, which are available at the SEC's Internet site, www.sec.gov. as well as our own website, www.osg.com. Forward-looking statements in this presentation speak only as to the date of these materials, and we do not assume any obligations 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 posted on our website. I think it's appropriate to start by saying that although today's presentation is centered on the results achieved during the final quarter of last year, the sense that many of us here share is that 2021 already seems to be in the distant past. There are decades when nothing happens, and there are weeks when decades happens. It's a quote attributed to many, but whose origin is unknown. What is known, however, is that this phrase aptly captures what has transpired in our business since the last time we spoke shortly before year end. The impact of the Russian invasion of Ukraine on the global energy markets has been profound. Yesterday, the Biden administration took steps to restrict the import of Russian crude oil and petroleum products into the United States. The United Kingdom has taken similar steps. This follows on the heels of a coordinated release of strategic petroleum reserves by 30 nations, including the United States, announced on March 1st, which will begin being drawn down in early April. While formal sanctions against Russian providers of energy products by other countries have not yet been and may not be imposed, the market has nonetheless reacted more broadly and more acutely than most would have imagined only weeks ago. Self-sanctioning of nearly all things Russian has had perhaps a more pronounced impact on market prices and has caused significant disruptions in normal energy flows. We do not yet know whether this pattern will persist or what the long-term impact of these developments may be. However, if the past weeks have taught us anything, it is that conventional wisdom in the current era of global connectivity is of minimal value. Throughout 2021 and entering into 2022, we hadn't been anticipating and planning for a recovery in our core markets. We believed that this recovery was to be driven by a return of demand resulting from an expected normalization of mobility and consumption patterns that had existed in the United States before the COVID-19 pandemic. This narrative, at least for the moment, remains largely in place. Now, the Russian invasion of Ukraine has layered on top of this storyline the dimensions of disruptions in virtually all energy markets and the potential for secondary effects to upend previous assumptions. Our core businesses are largely insulated from the direct impact of the events on the ground in Ukraine. It is wise to remember that international commodity markets are integrated, with shipping acting as the main transmission agent, enabling arbitrage of localized price differentials. Indirect effects in our markets are thus inevitable. Some will no doubt be beneficial, generating potentially more or longer voyages or the emergence of unconventional trading patterns. Others may evoke vocabulary not featured in the United States for decades. Inflation, energy crisis, commodity shortages, and Cold War, to name a few. Adjustments to our thinking and our consequential planning are thus required. As is almost always the case in the shipping business, It is the unforeseen disruptions that have the most significant impact on outcomes. The need to adapt quickly to changing circumstances and to make in-game adjustments will continue in the months ahead. Let us delve into where we might see a continuing impact of the current situation on OSG's businesses. It is likely that Russian crude oil imports will be substituted with alternative crudes by our Delaware Bay Lightering customers. Slide 6 provides EIA data on both aggregate crude oil imports from Russia into the United States, and a pie chart showing to which refineries these imports were directed during 2021. As indicated, total imports of Russian crude oil into the U.S. have averaged as much as 500,000 barrels a day in recent years, with a notable concentration amongst Pad 1 refiners, who are our main mitre and customers. A possible direct consequence of the concern about the need to replace Russian crude supplies is a decision by one of our lighter customers to take the overseas Long Beach on a charter for five consecutive voyages beginning in early March with the intent to transport domestic crude oil to Delaware Bay in order to partially hedge their refinery against disrupted import trades. A second potential impact observable in our markets is the possibility that domestic refined product may be substituted for Russian and European imports. Slide seven provides a recent picture of the price advantage enjoyed by U.S. refineries versus European and Asian refineries due to the high price of natural gas outside of the United States. Note the February natural gas price in Europe was more than $22 per million BTU higher than in the United States, a margin that has widened even further over the past week. This advantage was until recently expected to fade as we moved into the summer months. However, if natural gas availability in Europe is constrained by the Russian-Ukraine situation in the months ahead, this pricing advantage could work to support near-term demand for Jones Act movements of refined product into the East Coast markets. In this context, we have seen a number of voyages fixed from the U.S. Gulf Coast to the Northeast to Northeast U.S. discharge locations since the middle of February, indicating that additional Pad 3 refined petroleum product is finding its way into Pad 1 locations. It is not clear if this development is a function of a reduction in Russian imports or very low product inventories on the East Coast or poor refining economics in Europe emanating from very high natural gas prices. Perhaps it is a combination of all of these. We have fixed four clean product voyages from the U.S. Gulf to New York in the past month, none of which we have seen for the past two years. Other voyages that we have fixed recently that are atypical include a voyage transporting gasoline from Houston to Puerto Rico and several consecutive voyages to deliver agricultural fertilizers from the U.S. Gulf to California over the next several months. All of these movements are the result of trading opportunities not usually seen in the markets within which OSG operates and represent incremental and unusually long 10-mile demand. As we have communicated in recent months, we consider the Jones Act markets to be in the process of progressively healing from the demand shock imposed by the rise and fall of multiple variants of COVID-19 experienced in particular in the United States over the past two years. Evidence of this evolving recovery can be seen in the fact that we have brought five of our Jones Act tankers out of layup in the period between September and February, with all of those vessels having found work almost immediately. We are currently evaluating options to reactivate the overseas Tampa, our last remaining laid-up tanker, during the second quarter and remain hopeful that if current trends persist, we can activate our ATB OSG 350 vision during the second half of this year. With thanks to our energy consultants, ESI Energy, slide eight provides some illustrations of what we mean by a healing market that has over the last several months made its way almost completely back to normalized conditions. Without considering the Russian Ukraine impact, the fundamentals for energy transportation and domestic market have been improving steadily during 2021. The charts in this slide point to a very positive mobility index picture. showing a sharp rebound coming out of the year-end Omicron-influenced drop, rising jet fuel demand as the U.S. gets ready to travel more as the effects of COVID fade, and low distillate inventories on the East Coast, which will need to be replenished as we move into the summer. Finally, in the chart in the lower right-hand corner, ESAI concludes that the impact of the pandemic is over in terms of global oil demand. All of these developments bode well for the domestic tanker demand, Note that these charts were prepared before the ongoing events in Ukraine. So uncertainty as to the actual future trajectory of the line graphs predicted may be affected by the dislocations and broader economic impacts of the war there. Let's now turn to a few comments on the final accounting period of 2021. We are pleased with the operating results achieved during the fourth quarter of last year, marking the third consecutive quarter improved sequential time charter equivalent and EBITDA performance. Importantly, we expect this trend to extend into this year. As noted earlier, business fundamentals for our conventional Jones Act tankers continue to strengthen. We are encouraged by the steadily improving cash flows from our businesses and the improvements realized on our balance sheet resulting from the additional available operating days provided by our newly activated vessels, improved market rates, and a reliably solid contribution for our niche and Alaska tanker company assets. Before turning things over to Dick to provide a deeper dive into the numbers, I would like to mention a few additional important developments that occurred during the fourth quarter that should have increasingly greater visibility in the periods ahead. First, we delivered the overseas Key West into her long-term charter with Valero to move renewable diesel from the U.S. Gulf of Mexico to California. Two more of our competitors' vessels have been committed to that same trade in recent months, one more to Valero and one to Chevron. As evidence of the rising importance of renewable diesel in the middle distillate pools around the country, Chevron recently announced its intent to acquire a renewable energy group, and Marathon announced a joint venture with Neste Oil for production and distribution of renewable diesel at their Martinez, California facility. These projects, and others like them, have generated and will likely continue to generate new incremental ton-mile demand for Jones Act tankers and ATBs over the next two to three years. The emerging trade for renewable diesel has important implications for the Jones Act tanker supply-demand balance, given the priority that California will be afforded as the preferred destination for this fuel. To illustrate this, One tanker that is regularly involved trading from the U.S. Gulf to California generates three times the ton-mile demand as a similar vessel operating between Texas and the east coast of Florida. Each new contract to move renewable diesel to the west coast will thus have a leveraged effect in tightening tanker supply available in the U.S. Gulf. New production of renewable diesel coming on stream on the west coast will also generate new distribution demand. offering further reason to believe maritime transportation and renewable diesel will be a strong catalyst for new business opportunities in the years ahead. Second, I would like to highlight progress made in advancing the establishment of the tanker security program. This project has long featured in my regular comments. We have had to be patient in working through the legislative and political obstacles that prevented the funding of this program, which was authorized in the 2020 National Defense Authorization Act. We are now more optimistic than ever that this program will commence this year, with $60 million allocated to provide stipends for 10 U.S. flag tankers. Once this program is operational, OSG's current MSP vessel, the overseas Mykonos and overseas Santorini, will move over to participate in the Tanker Security Program with the resulting step-up in annual stipend amounts to be received. OSG will also propose the overseas Suncoast to be entered into this program. If approved, the overseas Suncoast would be converted to a U.S. flag and be manned by U.S. persons in the future, a net increase of nearly 50 seafarer jobs that we can look forward to later this year, and a source of expanded niche activity revenues. Establishing the Tanker Security Program has been one of our key long-term objectives in recent years, and it is gratifying to see this project getting close to becoming a reality. Third, I would like to highlight the meaningful contribution that the Alaskan Tanker Company and our two newly built ATBs to our results over the past year. These new investments made in 2019 and 2020 contributed over 70% of OSD's net vessel operating contribution during 2021, an outcome that validates our confidence in the long-term future of OSD's businesses and the benefit of investing in that future, even during challenging times. It is frankly difficult to imagine where we would have been in 2021 had we not made these investments. Finally, I would like to draw attention to the extraordinary efforts that were made by our shore-based staff and seafarers during what was clearly one of the most challenging operational years in recent memory. We have continued to manage operations in the face of COVID with no disruptions to service and have met our safety and environmental KPIs while maintaining operating cost discipline. It is often the case that the things that don't happen are what matter the most, but are the least recognized. Everyone who has a stake in OSG should pause and reflect on just how hard it has been to keep everything in our business moving forward without incident and the stress that many, if not most, of our employees have been under to achieve these results. We owe them all a strong expression of our deep appreciation and gratitude for everything they do to put this company in a position to succeed financially. I will now turn the call over to Dick to provide you with further details on our fourth quarter and full year results for 2022. Dick?

Thanks, Sam. Please turn to slide 10. During the fourth quarter, we experienced a continuing increase in TCE revenues from the prior 2021 quarters. Q4 TCE revenues have increased 22% from 2021's first quarter, rising to $80 million. Adjusted EBITDA has also reflected a significant improvement since Q1 2021, rising from $6.2 million to $16.6 million in the fourth quarter. Spot market activity continued to increase in fourth quarter, along with a strengthening of rates. These trends reflect the continuing improvement in transportation demand, prompting the return to service of vessels from layup. The overseas Key West and overseas Boston both completed their dry dock periods in the fourth quarter and began their time charters approximately halfway through the quarter. The overseas Anacortes returned to service in December, reducing the number of vessels in layup to four as of December 31. Subsequently, we returned two more vessels to service in January and February 2022, reducing the number of vessels remaining in layup to two by the end of February. Please turn to slide 11. Flight ring volumes increased compared to the third quarter, driving higher TCE revenues and better utilization levels. Revenues from our two ATVs, both of which are on time charter, remain stable as the two units continue to operate as contracted. 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 one GOI voyage and one voyage for the Military Sealift Command, in each case, a slight decrease from third quarter activity. We recognized an increase in rates on our non-US flag tanker during the quarter, and TCE revenues on a net basis decreased $1.8 million. Our Alaskan tanker revenues increased slightly due to a small increase in average rates. Jones Act handy-sized tanker revenues increased $4.8 million, principally due to a reduction in vessels in layup, which was partially offset by the higher dried-off periods for the Boston and Key West. Please turn to slide 12. This slide looks at, for our Jones Act conventional tankers only, activities levels from Q3 2020 to the fourth quarter of 2021. The total number of days in each quarter that our 10 Jones Act conventional tankers could be employed without any off-hire days are shown by the blue bars. Employee days represented by the orange line declined by 260 days from the fourth quarter of 2020 to the first quarter of 2021. This was followed by relatively stable employment levels through the third quarter of 2021 with a pronounced increase in Q4 as the impact of improving demand led to the return of vessels to service. Vessel layup days, the gold line, are the reverse image of employee days as we place vessels in layup to minimize costs. This reduction in layup days is continued in Q1 of 2022 as we return two additional vessels to service. Unemployed days were relatively constant across all periods. Please turn to slide 13. Our niche businesses continue to perform consistently with a slight decline in TCE revenues from the third quarter. Again, lightering revenues increased as volumes increased from the third quarter. Our shuttle tanker revenues decreased slightly due to a brief off-fire repair period for one of the vessels. Non-Jones Act product tanker revenues decreased due to the fewer GOI voyage and MSD car loads during the quarter. Please turn to slide 14. Vessel operating contribution increased $2.4 million from Q3 2021 to $19 million in the current quarter. Jones Act handy-sized tankers reduced their vessel operating loss to $8.7 million from $12 million in the previous quarter. Higher demand levels, general improvement rates, all coupled with an increase in vessels available for hire resulted in 140 more employed days. Niche market activities declined very slightly from the third quarter as MSP activity decreased and the shuttle activities experienced their increase in off-hire repair days. Slidering contribution increased again on volumes, higher volumes. Combined vessel operating contribution of our niche market activities ATVs in the Alaska crude oil tanker provided a vessel operating contribution in the current quarter of $27.7 million compared to $28.6 million in the third quarter, continuing their consistent performance. Please turn to slide 15. Adjusted EBITDA continued to sequentially improve, rising from $12.12 million in the third quarter to $16.6 million in the current quarter. Compared to the first quarter of 2021, this represents a $10.4 million increase. We believe this reflects the improving fundamentals of our business. The Jones Act conventional tanker market continues to recover, but nevertheless continues to negatively impact adjusted EBITDA. Please turn to slide 16. Our fourth quarter net loss was $3.7 million, the lowest quarterly loss in 2021. As a reminder, the third quarter included a $7.9 million pre-tax loss associated with our refinancing, resulting from pre-payment fees and the write-off of previously deferred financing costs. Additionally, we recognize a $1 million impairment charge related to the right of use assets associated with two of our airboat chartered tankers. Please turn to slide 17. At December 31, 2020, we had total cash of $70 million, which included $100,000 of restricted cash. During 2021, we generated $45 million of adjusted EBITDA and realized $32 million of cash proceeds from the sale of the overseas Gulf Coast in June. We entered into a $325 million term loan and used $278 million to pay off two loans and partially prepay two additional loans. We incurred $6 million of loan issuance amendment and prepayment fees. Working capital used $19 million of cash. We expended $19 million on dry docking and improvements to our vessels. We further invested $8 million in vessel and other CapEx. Interest expense was $26 million. During the year, we repaid $33 million of debt through scheduled amortization. The result? we ended the year with $83 million of cash, including $100,000 of restricted cash. Please turn to slide 18. Continuing our discussion of cash and liquidity, as we mentioned on the previous slide, we had $83 million of cash on December 31, 2021. Our total debt was $450 million, representing an increase of $14 million in outstanding indebtedness since January 2020. Scheduled loan amortization in 2022 is $22.2 million. With $339 million of equity, our net debt-to-equity ratio is 1.1 times. This concludes my comments on the financial statements. I'd like to turn the call back to Sam.