Overseas Shipholding Group, Inc.

Hello and welcome to the Overseas Shipholding Group second quarter 2022 results conference call. My name is Katie and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. I will now hand over to your host, Sam Norton, President and Chief Executive Officer of Overseas Shipholding Group to begin. Sam, please go ahead.

Thank you, Katie. Good morning. Good morning. And thank you for joining Dick Trueblood and me on this call for the presentation of our 2022 second 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 narratives on page 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-Q for the second quarter of 2022, which we anticipate being filed later today and will be available at the SEC's Internet site, www.sec.gov, as well as at 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. It is gratifying to have released this morning financial results indicating that the long shadow of COVID-induced demand destruction in our key markets seems to have finally receded. The recovery of demand in our conventional tanker business led to a return to profitability during the quarter and continued the progressive quarter-to-quarter improvements in other important financial measures that we have witnessed over the past year. Time charter equivalent earnings for the second quarter exceeded $100 million for the first time in two years, and adjusted EBITDA of $31.5 million represents the best quarterly performance on this metric in many years. It is worth remembering that for the first four months of this year, we were largely stringing together voyage fixtures for our conventional tankers as we were bringing tonnage out of layups. We took the approach of pushing spot market rates fixture to fixture to condition the market to higher rates with the hope that the tightening market supply picture would eventually induce end users to take on more duration risk and allow us to fix longer-term charter commitments. As a reminder, this is what I said during our first quarter earnings call in early May. For our Jones Act tankers, nearly 80% of vessel available days during the first quarter were earning freight in a firming spot market. Clearly, having spot vessel availability in a tightening and rising market had been a good thing. It bears remembering that our model chartering strategy is to attain longer-term time charters at profitable rates. Now that the market rates have risen to above break-even levels, our focus is gradually shifting to building some links in our charter books. This objective remains a challenge as the volatile trading markets continue to inhibit our charter counterparts from entering into longer-term commitments. I would add that a key part of our chartering strategy coming out of the first quarter was to be patient for rates to reach levels that warranted term fixtures. This approach was grounded in the belief that restocking low transportation fuel inventories and emerging demand for renewable diesel pointed to favorable fundamentals from a vessel owner's perspective. As is often the case when patience is demanded, things happen slowly, slowly, slowly, and then all at once. May, June, and July have seen the emergence of a truly remarkable shift to period versus spot cover. In the past 12 weeks, we have booked over 12 vessel years of aggregate time charter period cover by extending contracts of a freightment with our lightering customers and the government of Israel and by securing eight period fixtures for our tankers and ATBs. With conventional tankers fixing in the mid-60s and our ATB fixtures concluded in the mid-40s, this book of new business should generate nearly $275 million of time charter equivalent revenues to be realized over the next three and a half years. 92% of available vessel days have now been fixed across the balance of 2022, and close to 80% of vessel available days are now fixed for 2023. The sudden shift to profitable charters among our conventional tankers comes on top of steady and strong earnings provided by our niche market activities. Dick will take you through the sector-specific results in a few minutes, but when considering the trajectory of our financial performance going forward, it is noteworthy to point out The benefits of having both our niche and commodity trading businesses healthy and profitable at the same time. It is important to recognize that while improving market conditions have been supportive of the charting strategies we have chosen to pursue, the results achieved in recent months would not have been possible without the extraordinary work done by both shore base and seagoing staff at OSG in making our operating fleet ready to respond to these opportunities. The heavy dry docking schedule, the need to install and commission ballast water treatment systems, and the challenges of bringing seven vessels out of layup in a condition to operate at the standards that we require created demanding working conditions. These and other challenges have been met, allowing all of our vessels to return to work seamlessly with no material operating issues and no off-hire. Thanks to the hard work and commitment of OSG employees, July marked the first time in nearly two years that every one of our vessels was working and contributing operating revenues. Turning briefly to the state of global energy markets, the continuing effects of Russia's invasion of Ukraine have yet to be fully realized or understood. The data to date suggests that Russian exports of both crude and refined products have largely continued at pre-invasion levels. Buyers of crude oil in Asia have replaced reduced EU demand, while restrictions on the import of Russian-produced refined products have been delayed. However, assuming the announced EU ban on waterborne imports of Russian crude and products is enforced and effective next year, more significant dislocations of energy flows to what have been evident to date can be expected. steps to replace Russian gas with imports of LNG and fuel switching to diesel and fuel oil will likely alter energy trading patterns even more significantly next year. These developments should combine to increase ton-mile demand for international tankers and support a healthy global tanker market in the year ahead. According to Clarkson's research, the international MR tanker market has in particular benefited from disrupted trade patterns with products Ton-mile trade forecast to expand by over 8% this year to stand 7% above the 2019 level. Average time charter equivalent rates earned by MR tankers in June were close to $50,000 per day versus a historical average of less than $15,000 per day. A strong international tanker market is supportive of demand within the Jones Act trades as competing sources for domestically consumed crude oil and refined products sourced outside of the U.S. becomes more expensive on a deliberate cost basis. Domestically, inventory levels, particularly of middle-district products on the East Coast, continue to sit well below historical averages. High refining utilization rates at still-elevated margins should continue, with strong Pad 3 refining production generating sustained transport demand for refined products over the near term. Recent data indicate high gasoline prices have impacted U.S. driving patterns resulting in a drop of about 1 million barrels per day of gasoline demand in the United States. Despite this, the consensus view is that demand for all transport fuels globally should continue to increase, leading to robust refining margins for the foreseeable future. On balance, healthy refining output means more product to be shipped, which should sustain elevated demand for international and domestic shipping. Before turning things over to Dick to provide a deeper dive into the numbers, I would like to once again highlight two developments that we feel will offer opportunities in the quarters ahead. First, and most significantly, has been the continued emergence of renewable diesel as an increasingly important driver of domestic marine transport demand. Two of the charter contracts fixed since the end of the quarter, which will both commence early next year, are with new customers engaged in the renewable diesel trade. We are currently fielding inquiries for one and possibly two more vessels to join the two already fixed in this trade, sailing from the Gulf of Mexico to the US West Coast. Added to the overseas Key West, which has been transporting renewable diesel to California since last November, it is possible that OSG could, by the middle of next year, see as many as five of its vessels dedicated to this new trade. It is important to note that a voyage to transport renewable diesel or its related feedstocks from the U.S. Gulf to California has a duration of 35 to 40 days, roughly three to five times the duration of a standard voyage from Texas to Florida. The increased ton miles generated by this trade can thus be understood as a significant boost in domestic shipping demand, one that could ultimately account for 10 to 15 percent of all available capacity. New business with further growth opportunities in the Jones Act has not often been seen in recent years, and we are excited about the role that OSG is and will continue to play in this emerging business. Second, prospects for an expanded U.S. flag fleet operating outside of the Jones Act trade are solidifying. The congressionally approved and funded tanker security program is expected to be stood up during the first half of next year. Consideration is being given to expand the approved 10-ship program to possibly a 20-ship program. Further, the U.S. Department of Defense has indicated interest in chartering in as many as six additional U.S. flag tankers. Our overseas Mykonos, overseas Santorini, and overseas Suncoast are well positioned to benefit from these programs. Depending on the pace and extent of the growth in these programs, opportunities to add additional vessels to our current fleet could well arise. The prime objective of these programs is to deepen and broaden the pool of domestic merchant mariners who possess the requisite skills and experience to support a right-sized U.S. flag tanker fleet. Achieving this goal requires all constituents, tanker owner operators, labor, and the government agencies who ultimately benefit to plan for and commit resources beyond those currently required for normal operations. A common approach to the pace of expansion and to meet startup needs is important to ensure long-term viability. OSG has taken a leadership role in working with its industry, labor, and government partners to make this vision a reality. I will now turn the call over to Dick to provide you with further details on our second quarter results for 2022. Dick? Thanks, Sam. Please turn to slide seven.

TCE revenues exceeded $103 million in Q2 and continued the trend of sequential quarterly revenue increases. The year-over-year revenue increase was $31.5 million. Adjusted EBITDA for the quarter was $31.5 million, an increase of $21.3 million from the comparable year-ago quarter. TCE revenues increased 9.9% from Q1 2022 and adjusted EBITDA rose 5.9 million or 24% in the prior quarter. The market remains active in an increasing rate environment. During the quarter, we saw a shift away from short duration charters to increased duration commitments. Contract durations in some cases have reached three years. As Sam mentioned, there has been an increasingly active market for renewable diesel transportation, both as feedstock and refined product. The principal trade is from the Gulf of Mexico to the US West Coast. Please turn to slide eight. We returned the two vessels remaining in layup at the end of the first quarter, the overseas Tampa and the OSG 350 Vision, to service during May. each providing additional revenue days from their reactivation. Our fleet is now fully active, and the two vessels that returned to service during 2022's first quarter provided a full quarter of operations during Q2. Our Jones Act conventional tankers continue their upward trend in employed days reaching 841 days in Q2. Comparatively, We had 379 employee days in Q3 2021 when we began to return ships to service. Our employee days for this component of our fleet rose to 92% of total available days from 42% employment in Q2 of 21. The overseas Tampa left layup in early May and underwent her required dry dock period and ballast water treatment system installation before she commenced operation. The OSG 350 vision returned to service in late May. In total, we had 82 days in layup during the second quarter. Please turn to slide nine. Lightering volumes declined slightly during the quarter with lower average rates as our customers surpassed their minimum volume commitments. The revenue increase here was driven by the OSG 350's return to service. Revenues from our two ATVs, both of which are on-time chartered, 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 two complete GOI voyages and one voyage for the Military Sealift Command. Additionally, as the quarter concluded, we were performing one MSC voyage and one Government of Israel voyage. As a result, non-Jones Act tanker revenues increased $1,100,000 from the prior quarter. Jones Act handy-sized tanker revenues increased $7 million from Q122 based on the previously described increase in employee days coupled with a stronger rate environment. Revenues from our Jones-Axe shuttle tankers and Alaskan tankers were consistent with the first quarter. Please turn to slide 10. The niche businesses registered a $2.1 million increase in revenues driven by the increase in non-Jones-Axe product tanker revenues. As previously mentioned, Government of Israel voyages, MSC voyages, and higher international rates all contributed. Lightering revenues increased as the OSG 350 returned to service. Turning to slide 11. Vessel operating contribution increased $5,600,000 from Q1 2022 to $36.7 million in the current quarter. Jones Act candy-sized tankers' performance continued to improve based on more vessels in service, higher utilization, and an improved freight environment. Vessel operating contribution was $7.7 million, an increase from $1.5 million in the prior quarter. Niche market activities contribution decreased slightly from the first quarter, principally due to costs associated with the return of the overseas Tampa and OSG 350 to service. The ATB contribution and Alaskan tanker contribution remained constant between the quarters as all vessels were committed on time charters. The combined vessel operating contribution of our niche market activities, ATVs and Alaskan crude oil tankers, provided a vessel operating contribution in the current quarter of $29 million compared to $29.6 million in the first quarter, continuing their consistent performance. Please turn to slide 12. adjusted EBITDA, continuing its sequential improvement, rose $6.1 million from the first quarter of 2022 to $31.5 million in the current quarter. Compared to the second quarter of 2021, this represents a $21.3 million increase, reflecting improved market conditions and increased rates, as well as the return of vessels to service. Please turn to slide 13. Second quarter net income was $3.7 million compared to a first quarter net loss of $1.5 million and a $10.7 million loss in the year-ago quarter. This results from the continuing improvement in operations as we return vessels to service as demand has returned from the COVID-19 lows. Please turn to slide 14. As our results continue to improve, we wanted to provide information concerning the profit-sharing arrangement that exists for the vessels we bare boat chartered from the American Shipping Company. This chart provides information for 2022 through 2024. The 2022 information reflects all 10 vessels we currently chartered from AMSC, while subsequent years reflect the seven vessels we will continue to bare boat after redelivery of three vessels in December 2022. The calculation, which is governed by the terms of the contract between AMSC and OSG, provides for specific deductions to be taken into account in determining whether there is any profit, as defined, to share between us. These deductions include, among other items, an OSG management fee, an OSG profit layer, and deductions for dry dock costs, all of which are prior to determination of the existence of any profit to share. Shareable profit, if any, is split evenly between the parties. We look here at what the profit share picture might be for average TCE rates based on estimated future market rates. The slide provides an estimate of anticipated profit share under the AMSC barebow charters for 22 through 24. The underlying information used to develop 2023 and 2024 estimates is based on our assessment of the market in each year as informed by current market conditions. There will not be any profit sharing payments in 2022 due to the carry forward of losses sustained on the AMSC vessels in 2021. In 2023, if we were to achieve an average TCE rate of $62,300 per day across the seven AMSC vessels, there would be no profit sharing. In 2024, if we achieve an average rate of $63,500 per day, there will not be any profit share. Finally, it is worth noting that as certain costs are recovered, the minimum average rate that will result in profit share declines in the future. The calculations are complex and have a variety of factors involved. This chart is meant to be indicative of possible outcomes based on the assumptions made. Please turn to slide 15. In March 31, 2022, we had total cash of $77 million. During the quarter, we generated $31 million of adjusted EBITDA. Working capital used $5 million of cash. We expended $5 million on dry docking and improvements to our vessels, and we made $13 million in debt service payments. The result was we ended the quarter with $84 million of cash. Please turn to slide 16. Our total debt at June 30 was $439 million. This represents a decrease of $6 million in outstanding indebtedness since March 2022. Scheduled loan amortization in the second half is $11.2 million. With $343 million of equity, our net debt to equity ratio is one time. This concludes my comments on the financial statements, and I'd like to turn the call back to Sam. Sam?