Overseas Shipholding Group, Inc.

Hello all and a warm welcome to the overseas ship holding group first quarter 2022 results conference call. My name is Lydia and I'll be your operator today. If you'd like to ask a question at the end of the prepared remarks, you may do so by pressing start followed by the number one on your telephone keypad. It's my pleasure to now hand you over to our host, Sam Norton, President and Chief Executive Officer. Please go ahead when you're ready.

Thank you very much, Lydia. Good morning. Thank you all for joining Dick Trueblood and me on this call for the presentation of our 2022 first quarter results and for allowing us to offer additional commentary and insight into the current state of our business and the opportunities and challenges that lie ahead. 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 to our Form 10-K for 2021 filed with the SEC and our Form 10-Q for the first quarter of 2022, which we anticipate being filed later today. Both are available at the SEC's Internet website, www.sec.gov, as well as at 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 earnings release, which is posted on our website. The continuing impact of Russia's invasion of Ukraine The profound hardship being borne by the people of both countries as a result of decisions and actions directed by the Russian leadership are foremost in our thoughts as we speak with you today. As has been the case since the onset of the conflict, we are hopeful for a swift end to the ongoing violence and destruction there. At the same time, the persistence of COVID-19, its toll on human life, and especially outside of the United States, its impact on economic output, serves to remind us how far we still need to progress to return to normality. While indications of improving business conditions in our core businesses are encouraging for OSG, the conflict and the pandemic continue to lower global energy markets, which remain disjointed, volatile, and difficult to forecast with any degree of confidence. While our core businesses have remained largely insulated from the direct impact of events on the ground in Ukraine, Indirect effects have nonetheless been very visible. U.S. product exports to Europe and Central and South America have increased, resulting in domestic production failing to keep pace with growing domestic and international fuel demand and the concurrent need to restock depleted inventories. Formal sanctions and informal boycotts of nearly all things Russian have altered energy flows and created a highly unusual set of market conditions within which energy products are traded today. New trading routes have emerged to meet shifting supply patterns, resulting in almost universally increased ton-mile demand. This is good news for most ship owners, including OSG, who have seen freight rates rise in response. While the full impact of falling Russian crude volumes has likely yet to be felt, it is fair to say that what was initially looked like a global crude oil supply problem has morphed into a product supply problem, middle distillates in particular. In an attempt to settle crude oil prices, the U.S. made an historically large and internationally coordinated release of its strategic petroleum reserves. U.S. production has increased, and there are prospects for the return of Venezuelan and potentially even Iranian crude exports to the markets. All these actions have served to ease concerns of the emerging shortage of crude oil supply. The easing of COVID restrictions around much of the world has seen a sharp rise in travel and transport activity. Demand for jet fuel and diesel has increased, coincident with the curtailment of Russian product exports into European and North American markets. U.S. refinery exports of petroleum products exceeded 6 million barrels per day for much of the past month, a historically high figure. The present circumstances have resulted in falling inventory levels in the U.S., and increasing prices for jet, diesel, and gasoline. U.S. refiners have become the marginal supply source of the fine per product for nearly all of Europe and South and Central America. U.S. refining margins have soared with the 321 crack spread and an extraordinarily high $55 per barrel last week. The U.S. continues to enjoy natural gas price competitive advantage over the rest of the world. These conditions in many respects caused a reversal of forces that delayed recovery in our core shipping markets last summer. Then, the insufficient demand for jet fuel ballooned middle distillate inventories and depressed middle distillate margins. Now, refineries are maximizing their output of jet fuel at the expense of diesel, which has seen inventories shrinking rapidly despite what one analyst has described as biblically high diesel refining margins. Slide six. in our deck provides a graphical depiction of the Energy Information Agency's data on domestic product inventory movements since early 2020. Low jet and diesel inventories have been especially observable in U.S. East Coast locations, most notably in the New York Harbor market, where recent diesel inventory levels have dropped below 25 million barrels, more than 30% below historical averages. Current price spreads between New York Harbor and U.S. Gulf Coast for both diesel and jet have far exceeded $1 per barrel, multiple times the transport costs needed to arbitrage these differentials. An even more acute shortage of jet fuel in the area has pushed spot jet fuel prices to $6.71 last Friday, $6.71 per gallon last Friday. Most analysts concur that these market conditions are not sustainable. While high prices could impact demand in the immediate The general consensus is that demand will be relatively resilient. Increases in global refinery output in the months ahead are expected to satisfy demand while gradually rebuilding depleted inventories. Higher refinery output means more product to be shipped, which should sustain elevated demand for Jones Act shipping. What does this mean for OSG? The strong demand I have just described has allowed us to achieve better sequential TCE and EBITDA performance for the fourth consecutive quarter. Operating activities during the just-completed quarter have generated positive free cash flow after debt service and capital expenditures, with the quarter-to-quarter change in cash balances attributable solely to changes in working capital. These results give us a heightened confidence in our belief that an enduring recovery in our core markets is solidifying. As we have communicated in recent months, we consider the Jones Act markets to be progressively healing from the demand shock imposed by the rise and fall of multiple variants of COVID-19. All of our laid-up vessels are now operating or in the process of reactivation. Before the end of June, our full fleet of vessels will be in service. This leads us to anticipate continued improvement in all important financial metrics and a gradual build in available cash balances over the next several quarters as higher utilization and stronger time charter rates is realized by substantially all of our vessels. These expectations and opportunities inherent in an improving market environment should set the stage for us to realize the latent potential of our long-term business strategy. Before turning things over to Dick to provide a deeper dive into the numbers, I would like to mention a few important developments that occurred during the first quarter. First, the mix of tanker vessel operating days time charter equivalent rates realized during the quarter stands in sharp contrast to what we were experiencing one year ago. Our Jones Act tankers had 331 more vessel operating days in this year's first quarter than were attained during the same period in 2021. Nearly 80% of these days were earning freight in a firming spot market. Resulting spot earnings improved more than $30,000 per day as compared with last year. A similar jump in time charter equivalent earnings was seen in our internationally trading MR tankers. Clearly, having spot vessel availability in a tightening and rising market has been a good thing for OSG. Yet it bears remembering that our model chartering strategy is to attain longer-term charters at profitable rates. Now that market rates have risen to above break-even levels, our focus is gradually shifting to building some length in our charter book. This objective remains a challenge, as the volatile trading markets continue to inhibit and to inhibit our charter counterparts from entering into longer-term commitments. Nevertheless, since the beginning of the year, we have succeeded in fixing four time charter contracts of between 90 and 120 days, and have recently concluded a number of contracts for six months duration at progressively firming rates. We are optimistic the tightening market conditions and the emergence of incremental demand for shipping renewable diesel will lead to constructive negotiations in the future for charter periods of one year or longer, allowing for more stability and forward visibility in our earnings strings. The second notable development during the quarter was a short-term charter booked for one of our vessels to move liquid urea ammonium nitrate. We are carefully watching the outcome of the Commerce Department's tariff ruling due to be finalized this summer to understand whether or not domestic demand for UAN transport will be sustained. As with renewable diesel, this product's move is incremental to conventional petroleum product demand, and a Commerce Department ruling favorable domestic producers of UAN could result in increased ton-mile demand for conventional Jones Act tankers and ATPs. Third, the Biden administration's mandate for a historically unprecedented release of strategic petroleum reserve barrels will continue at a rate of approximately 1 million barrels per day over the next four to six months. While the SPR barrels moved to date have largely been transported by pipeline or exported on foreign flag vessels, there remains potential for these movements to generate incremental coastwide crude oil transport demand over the next several months. Fourth, I would like to highlight again the important implication of Congress's full appropriation of funds for the Tanker Security Program. This program allocates $60 million for stipends for 10 U.S. flag tankers. Once the program is operational, OSG's current MSP vessels, 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 U.S. flags. Establishing the tanker security program has been one of our key long-term objectives in recent years, and it is gratifying to see the project become a reality. Last but not least, I want to again commend OSG's personnel who have continued to manage operations in the face of COVID with no disruption to service and have allowed us to meet our customers' needs and our safety and environmental KPIs while maintaining operating cost discipline. 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. I am proud of and grateful for the work all of our employees have done to sustain this performance. I will now turn the call over to Dick to provide you with further details on our first quarter results for 2022. Dick? Thanks, Sam. Please turn to slide eight.

Our sequential increase in TCE revenues and adjusted EBITDA continued in the first quarter of 2022. TCE revenues increased 17% from Q4 2021 and adjusted EBITDA rose $8.8 million or 53% from the prior quarter. The year-over-year TCE revenue increase was 43% or $28.4 million, while adjusted EBITDA quadrupled from $6.2 million to $25.4 million. The market remains active in an increasing rate environment, and market volatility has prompted traders to seek shorter contract durations to maintain their flexibility. Thus, the durations have remained shorter than historical norms. Recently, we've been successful in executing contracts of 46 months duration, and we continue to work on extending durations to return to historical market length. Please turn to slide nine. We returned two vessels to service during the first quarter, the overseas Long Beach and the overseas Texas City, each providing additional revenue days from their reactivation points. The three vessels returned to service during 2021's fourth quarter, provided a full quarter of operations during Q1 this year. Our Jones Act conventional tankers continued the sharp upwards trend in employed days. We have almost doubled employed days from last year's third quarter when we began to return ships to service. Correspondingly, layup days decreased from 415 in last year's third quarter to 75 in the current quarter for our Jones Act conventional tankers. Our employed days for this component of our fleet rose to 82% of total days, 45% employment in Q3 of 2021. Unemployed days continued to decline and during the quarter we had 49 dry dock days. We are returning the remaining two vessels currently in layup to service during the second quarter and at that time our fleet will be fully active. The overseas Tampa will leave layup on May 10th. and undergo over a required drive-off period before commencing operations. The OSG 350 vision is expected to return to service later in May. Please turn to slide 10. Lightering volumes continue to remain strong, delivering continuing strong utilization levels and TCE revenues consistent with 2021's fourth quarter. 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 five voyages for the Military Sealift Command. During the fourth quarter, we performed one MSC voyage and one GOI voyage. We recognized an increase in rates on our non-US flag tanker during the quarter as well. As a result, non-Jones Act tanker revenues increased $2.4 million from the previous quarter. Jones Act handy-sized tanker revenues increased $12 million based on the previously described increase in employed days as well as a stronger rate environment. Revenues from our Jones Act shuttle tankers and Alaskan tankers were consistent with the fourth quarter. Please turn to slide 11. The niche businesses registered a $3 million increase in revenue driven by the increase in non-Jones Act product tanker revenues. We performed more voyages for the military SEALIF command during the quarter. Additionally, strong international MR tanker rates resulted in better performance for our Marshall Islands flag vessel. Lightering revenues remained consistent with the previous quarter, while shuttle tanker revenues increased due to no off-fire repair days. Please turn to slide 12. Vessel operating contribution increased $12 million from Q4 2021 to $31.1 million in the current quarter. Jones Act handy-sized conventional tankers, reflecting the high degree of operating leverage in our business, swung from an operating loss of $8.7 million in the fourth quarter to a $1.5 million contribution in the current quarter. Higher demand level, general improvement in rates, all coupled with an increase in conventional tankers available for hire, resulted in 228 more employed days. Niche market activity increased from the fourth quarter as the MST activity increased, coupled with a slight increase in shuttle tanker contribution as we experienced no off-fire repair days. The ATV contribution and Alaskan tanker contribution remained relatively constant between the quarters. The combined vessel operating contribution of our niche market activities, ATVs and the Alaska crew tankers, continue to provide a vessel operating contribution that is consistent and growing in the current quarter of $29.6 million compared to $27.7 million in the fourth quarter. Turning to slide 13, adjusted EBITDA continued to sequentially improve rising from $16.6 million in the fourth quarter to $25.4 million in the current quarter. Compared to the first quarter of 2021, this represents a $19.2 million increase, reflecting a continuing improvement in our business fundamentals. Turn to slide 14, please. The first quarter net loss was a half million dollars. This results from the continuing improvement in operations we have delivered since the first quarter of 2021. As a reminder, 2021's third quarter included a $7.9 million pre-tax loss associated with our refinancing, resulting from prepayment fees and the write-off of previously deferred financing costs. Additionally, during that quarter, we recognized a $1 million impairment charge related to the right of use assets associated with two of our bare boat chartered tankers. Please turn to slide 15. At December 31, 2021, we had total cash of $83 million. During the first quarter, we generated $25 million of adjusted EBITDA. Working capital used $13 million of cash. We expended $5 million on dry docking and improvements to our vessels, and we made $14 million in debt service payments. As a result, we ended the quarter with $77 million of cash. Please turn to slide 16. Continuing our discussion of cash and liquidity, as we mentioned on the previous slide, we had $77 million of cash at March 31, 2022. Our total debt was $445 million, which represents a decrease of $5 million in outstanding indebtedness since December 2021. Scheduled loan amortization over the next three quarters is $17.2 million. With $338 million of equity, our net debt to equity ratio is 1.1 times. This concludes my comments and financial statements, and I'd like to turn the call back to Sam. Sam?