This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning. Thank you for attending today's Overseas Shipholding Group, Inc. Fourth Quarter and Full Year 2022 Results Conference Call. My name is Forum, and I will be your moderator for today's call. All lines will remain muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. It is now my pleasure to pass the conference over to our host, Sam Norton, President and CEO of Overseas Shipholding Group. Mr. Norton, please proceed.
spk06: Thank you, Floram. The sun is shining here in Tampa, Florida, on yet another beautiful morning, friending nicely the backdrop for sharing with you our presentation of OSG's fourth quarter 2022 and full year results. Thank you for listening in on our presentation of details as to the current state of our business and for allowing us to offer you additional commentary and insight and to the opportunities and challenges that lie ahead. As usual, I am joined in this presentation by our CFO, Dick Trueblood. I would like to welcome in particular other regular participants on this call who have exhibited commendable patience in maintaining their interest in OSG during the past several years. As well, I want to acknowledge the presence of new participants who have more recently begun to follow our story. 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 a discussion of these factors, we refer you to our SEC filings, particularly our Form 10-K for 2022. which we anticipate filing 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 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 gap measures in our earnings release, which is posted on our website. Operational and financial performance during the final quarter of 2022 exceeded our expectations and allowed OSG to deliver full year results for both time charter equivalent earnings and adjusted EBITDA well above the guidance provided in early November. Strong contributions during the quarter from our Lightering and Non-Jones Act assets were instrumental in achieving this performance. We are particularly gratified by the full year adjusted EBITDA figure, which had 142.8 million reflected in over 200% improvement versus 2021 adjusted EBITDA, accomplished while completing a heavy dry dock schedule during the year and while returning three MR tankers upon expiry of their leases in early December. UN cash balances, including investments in Treasury securities, came in squarely within the guidelines rate provided in November at $93.5 million. When considering the sharp turnaround of the business environment in which OSG operates, I imagine that two important questions are front of mind, namely, what factors led to such a dramatic change in the operating environment? And perhaps more importantly, can the current conditions supporting OSG's financial performance and opportunities continue And if so, how long can they last? Attempting to address each of these questions in turn, I will start by observing that the domestic market for transporting energy products was, prior to the onset of COVID-19, a market in relative balance, with owners poised to regain some pricing power following several years of oversupply. That has been discussed in some detail in prior presentations. The onset of the COVID pandemic caused severe disruption to normal supply and distribution requirements in the United States, and recovery from those disruptions took longer than had initially been expected. By early 2022, it was becoming clear that the anticipated restoration of normalized energy consumption and distribution patterns was taking shape, and that our markets were in the process of regaining the supply and demand balance that had existed prior to the onset of the pandemic. Two factors combined to accelerate and extend the amplitude of that recovery. First, new charterers entered the market seeking to secure vessels to transport renewable diesel from the U.S. Gulf Coast to the U.S. West Coast, creating new and materially additive ton-mile demand for Jones Act tankers. By our count, as many as eight Jones Act tankers will be involved in moving product across the Panama Canal to California by the end of this year. representing nearly 20% of the total Jones Act MR tanker fleet, an impressive increase in demand in its own right. But in addition, when adding the extended length of each voyage to the West Coast into the equation, the resulting reduction of availability of vessels to serve the conventional pad three to Florida clean product trades is very impactful. One cargo moved from Louisiana to California utilizes capacity that could have been deployed to move as many as four cargoes across the Gulf into Florida. Thus, effective vessel supply has tightened considerably with the advent of renewable diesel trades. Second, and possibly of greater significance both now and for at least the immediate future, the severe disruption to historical international energy supply chains occasioned by the war in Ukraine resulted in chaotic conditions in the international tanker markets for much of 2022. While OSG's business is largely a domestic business, closely integrated with the distribution needs of domestic producers of crude oil and refined products, it is not immune from conditions in the international markets. The opening up of international markets to U.S. energy producers in recent years has in fact reduced the level of insulation that OSG ships may have historically had from international events. Ships and ports are the enabling vehicles for intercontinental trade. If the cost of shipping allows a trader to buy product domestically and sell it overseas at a delivered cost that generates a profit, then the product will move to the market that offers the higher price. The intercontinental trade of energy products is thus ruthlessly efficient in seeking out and closing these price arbitrage opportunities. The increased ability for traders to choose the most profitable trade, a domestic sale versus an international sale, means that the Jones Act vessels are indirectly competing with foreign flag vessels for the transport of domestically produced energy products. While competition from international tankers is a possible concern during periods of market weakness in the international markets, when international markets are soaring, as is currently the case, the relative cost and added security for using Jones Act vessels becomes more attractive to traders with strong focus on the domestic market. Firm international markets and heightened supply uncertainty has thus had the effect of increasing domestic demand for Jones Act vessels. In summary, global market conditions that arose as a result of the war in Ukraine acted to supercharge a domestic market that was already strengthening from the combination of a restoration of pre-COVID demand and the emergence of new demand from renewable diesel transport. The upshot of these developments has been that over the last nine months, All OSG Jones Act vessels have returned to service and been fixed on time charter contracts, all of which extend into 2024 and beyond. Recent MR fixtures have seen rates attained in the low $70,000 per day range for periods of two to three years, with some contracts fixing as much as 12 months in advance of the contract commencement date. ATP fixtures have reached as high as the low 50. Pricing power for owners of Jones Act vessels has not been this strong in over a decade. How long can these owner-friendly conditions last? Fundamental factors suggest that this positive environment is set to persist. New supply of additional tonnage into the domestic market is years away, even if it were to be ordered today. The order book for MR tankers is empty. And the two primary yards capable of building new MRs from the Jones Act trades are booked up with government and other commercial contracts well into 2026. The order book for large ATBs is also empty. And while options do exist for constructing new ATBs and domestic yards, any orders placed now will likely not be delivered before the second half of 2025. Also, the price of new vessel construction is historically high. giving owners and charters alike pause in considering new investments. There is as well the overhang of increased obsolescent risk confronting owners looking to invest capital into assets for use in an uncertain and evolving regulatory environment in light of carbon reduction goals. With no clear solutions as to what may be the preferred option for powering ships of the future, most ship owners are reluctant to invest in new capacity to allow the existing fleet of vessels to be renewed in a timely manner. or in a way that will significantly reduce greenhouse gas emissions in the short term. Increased owner concerns of being left with stranded assets may then result in a progressively aging and diminishing fleet, whether by a reduction in real numbers over time or simply because ships will be sailing at slower operating speeds, which will have the effect of gradually tightening real supply availability. Changes in demand may, of course, limit the effect of static or shrinking supply. Gasoline consumption is more likely than not to decline in the years ahead. The impact of greater penetration of electric vehicles should have a progressively larger influence on declining gasoline sales as we move further into the decade. Demand for middle distillates may be impacted as well by changes in consumption patterns, many of which will arise as a result of climate change initiatives which are receiving strong political support at this juncture. All available data suggests that the slope of decline in domestic fossil fuel consumption will be very shallow and that a continuing need for maritime transport of these fuels will remain in place for many years to come. Regulatory or market-driven changes affecting the demand for shipping renewable diesel from the Gulf Coast states to California could also impact specifically the Jones Act tanker market. However, our experience with customers in this emerging sector is that the security of access to transportation capacity offered by long-term contracts is a more important element in commercial discussions than has been the case recently with customers involved in crude and refined oil product trades. This bias has provided OSG with opportunities to reduce exposure to volatility in our conventional tanker trades and given us a forward book of contract cover with renewable diesel customers extending for several years into the future. Short-term exposure to changes in this emerging market has thus been reduced as a result. Looking elsewhere in our current portfolio of assets, renewed focus on the importance of sustaining and increasing domestic crude oil production bodes well for the continued future of vessels acquired through our purchase of Alaska Tanker Company in 2020. There is good reason to believe that the demand for these vessels will remain strong for the foreseeable future. Opportunities to increase time chart earnings from ATC vessels in 2024 and beyond are an important area of focus for us at this juncture. One last development to note before turning things over to Dick. Prospects for an enlarged U.S. flag fleet operating outside of the Jones Act trades are finally taking shape. Applications for the congressionally approved and funded tanker security program were submitted in mid-February and MARAD is expected to review these applications and advise owners which vessels will be admitted into the program by the end of this month. OSG has taken a leadership role in working with its industry, labor, and government partners to make this program a reality and has submitted applications for three vessels to be considered for the TSP program, two of these vessels which would be transferred from the Maritime Security Program. Outstanding bids for providing the U.S. Department of Defense U.S. flag tankers to assist with reorganizing fuel storage operation at Hawaii's Red Hill facility are also expected to be awarded within the next four to six weeks. Anticipating some success in participating in one or both of these programs, OSG re-flagged the overseas Suncoast in January, marking the first time in many years that additional U.S. flag tanker capacity has been added to the U.S. registry. Depending on the extent of OSC's success and bids to participate in the aforementioned government programs, opportunities to re-flag additional foreign-built vessels and add them to our international trading U.S. flag fleet could well arise. 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?
spk04: Thanks, Sam. Please turn to slide seven. In 2022, our markets began a recovery in the early part of the year. We began to see demand increase and rates rise. This was coupled with a continued reluctance on the part of chargers at that time to make longer duration commitments. As the year progressed, the recovery in user markets began in earnest. Coupled with this was the emergence of a renewable diesel market with the trade principally between the Gulf of Mexico and California. Rates continued to strengthen as the year progressed, and as the year changed and moved along, there was a shift to longer-term time charters, which is the historic Jones Act norm. Recent rates are now in the low $70,000 per day range for Jones Act MR tankers. Our Jones Act vessels are fully fixed for 2023 and approximately 80% fixed in 2024. In December, we re-delivered three vessels to American Shipping Company as their bare boat charters expired. As a result of the re-delivery, fourth quarter time charter equivalent revenues of 114.1 million were approximately flat when compared to third quarter TCE revenues. Adjusted EBITDA increased 1.3 million from the third quarter to $43.6 million. Compared to 2021's fourth quarter, TCE revenues increased $34.1 million, or 43%. Adjusted EBITDA increased $27.1 million, or 163%, reflecting the high degree of operating leverage inherent in our business. In June 2022, we commenced a $5 million share buyback, and this program was completed in early October at a total cost of $14.3 million. In November, we repurchased an additional 5 million shares for $14.3 million. Please turn to slide 8. The steady quarterly progression of increasing TCE revenues in adjusted EBITDA resulted in full-year TCE revenues of $426.3 million, an increase of $133.7 million from 2021. 2022 revenue days increased from $6,064 in 2021 to $7,739 as our full fleet returned to service. Adjusted EBITDA was $142.8 million, an increase of almost $100 million from the prior year. Please turn to slide nine. Lightroom revenues were flat compared to the third quarter as our ATBs were fully employed during both quarters. During earlier 2022 quarters, the OSG 350 had remained in layup. Revenues from our two ATBs were essentially, again, flat between the two quarters. The OSG 204, after completion of her prior long-term charter, operated in both quarters under short-term time charters before entering into a long-term time charter commencing in January 2023. The Mykonos and Santorini continue to participate in the maritime security program and provide services to the government of Israel. During the quarter, we completed one GOI voyage and partially performed a second voyage, which was completed in January 2023. Additionally, we completed one voyage for the military sea lift command. Our TCE revenues were consistent between the quarters. Jones Act shuttle tanker revenues slightly compared to Q3, resulting from increased rates for the overseas Tampa during the quarter. Alaskan tanker revenues increased on an increase in revenue days as the Alaskan Explorer returned to service following her third quarter scheduled dry dock period. Jones Act candy-sized tanker revenues decreased $1.8 million due to the return of three vessels during December, CCE revenues for the other seven vessels actually increased $4.9 million quarter to quarter. Please turn to slide 10. The niche businesses continued their overall stable performance with third and fourth quarter revenues essentially flat. Lighting revenues decreased slightly on volume fluctuations between the quarters. Shuttle tanker revenues increased modestly on increased contract rates from the new time charter. Non-Jones Act part of tanker revenues decreased slightly in comparison to Q3 due to a slight increase in off-hire days. Please turn to slide 11. Vessel operating contribution decreased from $47 million in the third quarter of 2022 to 46.2 million in the current quarter. The Jones Act candy-sized tanker contribution dropped 500,000 due to the vessels returned at the end of the leases. Niche market contribution declined 700,000 from the third quarter, principally due to lighter and volume fluctuations. Please turn to slide 12. Adjusted EBITDA has increased each quarter this year with the fourth quarter's $43.6 million, exceeding the comparable 2021 fourth quarter by $27 million. Growth from the third quarter of 2022 to the fourth quarter was reduced again due to the return of the three ships. The return vessels generated a de minimis amount of revenue while still incurring expenses. Please turn to slide 13. Following an essentially break-even first quarter this year, we have delivered three-quarters of net income, resulting in full-year earnings of $26.6 million in comparison to a net loss of $46.3 million in 2021. Increased demand for vessels from charterers led to the return to service of all vessels still laid up at the end of December 2021, coupled with a full year of operations for vessels returned to service in late 2021. as well as a strengthening rate environment in 2022, which led to significant improvement in our operating performance. Please turn to slide 14. In December 31, 2021, we had total cash of $83 million. During 2022, we generated $143 million of adjusted EBITDA and used $26 million of cash for working capital. Further, we invested $24 million in vessel dry dock and other capital costs. And we purchased $15 million of U.S. Treasury securities. As mentioned before, we repurchased 10 million shares of OSG stock for $29 million. During the year, we paid $54 million in debt service, $22 million of which reduced our outstanding debt through scheduled amortization. The result was we ended the year with $79 million of cash plus $15 million of liquid investments. Please turn to slide 15. Continuing our discussion of cash and liquidity, as we mentioned on the previous slide, we had $79 million of cash at December 31, 22. Our total debt was $428 million, a decrease of $22 million from outstanding indebtedness at December 21. Scheduled loan amortization in 2023 is $23.7 million. With $340 million of equity, our net debt to equity ratio is one times. Sam, I'd like to turn the call back to you as I've concluded my comments.
spk06: Thank you, Dick. Our fourth quarter results evidence healthy operating conditions in our core markets. OSG's fleet is responding to the changing patterns of domestic and international transportation fuel shipments and is well positioned to participate in emerging areas of opportunity. Improving market conditions have resulted in OSG achieving more stability in its financial profile and greater visibility of forward cash flows to an extent not seen for many years. All Jones Act assets are fixed under time charters or contracts of the for the balance of 2023. and nearly 80 percent of 2024 available days are also fully covered at attractive rates. Our healthy book of forward time charter coverage gives us good visibility towards the results expected for 2023 and much of 2024. We anticipate continuing strength in all important financial metrics and a gradual build in available cash balances over the next several quarters as profitable time charters at higher utilization rates are realized. For the first quarter of 2023, as a result of having three less MR tankers in operation following delivery of these ships to American Shipping Company in early December, time charter equivalent earnings will likely see a drop of about 10% when compared with Q4 levels. Notwithstanding the drop of TCE earnings, quarter-to-date strength in what we have been able to observe from our niche market activities gives us confidence to expect levels of adjusted EBITDA to track very closely with what was achieved during the final quarter of 2022. Looking further ahead to the balance of 2023, OSG's healthy fundamentals offer the prospect of continued solid financial performance throughout the year. Our current forecast has time charter equivalent earnings for the full year 2023 approaching $400 million. Attaining this top line result, should generate adjusted EBITDA of between $140 and $150 million for the full calendar year 2023. After deducting debt service and planned maintenance capital expenses, we anticipate that free cash flow for the full year should be between $50 and $60 million. To deliver these results, our mission is now squarely focused on execution, operational excellence, and the pursuit of niche business growth opportunities. In summary, it is fair to say that the business environment for OSG has shifted away from the defensive posture that has characterized much of the past three years. We can now look forward to evaluating real opportunities to extend and expand the cash generating capabilities of our unique franchise while continuing to consider means to utilize surplus cash flow to reduce leverage drive improving share price performance. As stated on prior calls, use of surplus cash flow, should it arise, will be a regular topic of conversation with our board. With this thought in mind, we recognize the increasing importance of understanding and participating in newly developing markets that would transition the U.S. economy away from fossil fuels. These evolving markets point to interesting and exciting potential for OSG to leverage its strong operating franchise to participate in these new trades. OSG continues to commit resources towards an express goal of identifying the best opportunities that will arise from this transition, and we are optimistic that these efforts will yield positive results over the medium term. Forum, we can now open the call to questions.
spk01: Certainly. If you would like to ask a question, please press star followed by one on your telephone keypad. If, for any reason, you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registering. Our first question comes from the line of Ryan Vaughn with Needham and Company. Ryan, your line is now open.
spk03: Thank you. Hey, Sam. Hey, Dick. Good to speak to you again. So I just want to follow up. I think for a while, maybe some of the knock on the stock devaluation, Sam, was that, you know, you preferred for the last couple of years to enter into kind of shorter term charters just until the market had recovered to what seemed more appropriate or fair. And just listening to you now, it seems like we've entered that time period and we should expect that what you're seeing, what the market, what's available to you today, this now is going to transition the thinking from the shorter stuff to medium, longer term. It sounds like you're basically fully booked for 24. And one, I guess I just want to make sure that is accurate, that we're in the environment that you've been waiting for, setting the company up. That's number one. And then number two, I caught something in your prepared remarks. You said some of your customers have signed contracts in advance. Would you mind just giving a little bit more detail on what you meant by that?
spk06: Sure. I think the two points are related. We state in our public disclosure documents that the preferred chartering profile for our business is one heavily weighted towards medium to longer-term contracts with our customers to serve as an integral part of their distribution chain and not just to be an uber-like asset to respond to occasional needs. We still feel very strongly that way. Some of the unique aspects of the Jones Act market, given the short duration of many of the voyages, make it very difficult to optimize utilization of assets if you're running three- to five-day voyages all the time. We've said in the past, it puts a lot of disutilization risk on the owner as opposed to the to the end users, all of those things are mitigated if we're on longer term or on time charter. And the longer the time charter, the better the visibility we have from insulating us from that disutilization risk. So yes, once we have moved into an environment where we feel that the rate structure is remunerative and allows us to earn a reasonable rate of return, we have certainly shifted our focus away from trying to push market rates up to an emphasis more on duration now than on further rate gains. And the market is there. As I said, every MR tanker that I'm aware of is fully fixed for the foreseeable future, not only ours, but our competitors. The market tightened, as I said in my prepared remarks, considerably over the past 12 months. And that's led our customer base to be seeking visibility of transportation cover in a much more progressive and forthright way than had been the case through much of 2019 through 2021. And evidence of that is, as I said in my remarks, some of the contracts that we're fixing are fixing forward. So we have... a number of vessels where they are currently employed and where the customer came to us and said they wanted to extend those contracts. Notwithstanding the fact that the current contracts don't expire for a year or more, looking forward, they came and at their initiative they made a request to say we want to secure the visibility of this access to this vessel and we'd like to extend those contracts. And in one particular case, we fixed a vessel to a different client who was looking for new trade. This is a renewable diesel trade and committed to take a vessel commencing in the first half of 2024. And we fixed that ship three months ago. So that's an indication of the kind of tightness that we see in the market.
spk03: That's helpful. Thank you. And, you know, I always ask you about this, but I do think this, I think the business has changed so much. I just updated based off of the guidance you gave for 2023. I'm at four and a half times EBITDA pre the 50 to 60 million of free cash flow. And if I, if we had spoken, you know, a couple of quarters ago, I probably would have been saying, oh yeah, like keep delivering makes a lot of sense. And, Fast forward to the end of the year or even into next year, you're basically low ones of net leverage one times. But it just seems like with the duration that you're getting, it does open up the door to potential other opportunities, other growth opportunities. I'm sure nothing crazy, but maybe one or two vessels here and there that might be available to you. And even running some of those hypotheticals, and I appreciate the numbers are actually going to be a little bit better than I thought, but under those scenarios, I'm at, call it net leverage of mid ones next year, which I was surprised to see. So I'm just wondering, just with basically how much the business has changed, just getting that duration, has that changed how you guys think about your capital allocation plans? and also balancing that with the stock at four and a half times today. Thanks.
spk06: At the risk of sounding like a broken record, I'll say what I've said. Every time you've asked the question is that there's really three areas that we focus on for capital allocation, and frankly, we see the capital allocation is probably the most important job that we have at this juncture as we evaluate both the cash flow generating capacity of our fleet, together with opportunities for growth in either current businesses or in adjacent spaces. This is clearly a very important topic for the board and for the management team. We continue to believe that there are opportunities to invest in assets that will provide accretive cash flow. I've said in the past that This is not like the international market where you have a very liquid and very deep and broad market to be able to move in and out of the market as the cycles evolve. That being said, there are opportunities, we think, to expand our fleet, probably more likely in the international trading side of our business than in the domestic side. But there are opportunities. We think there may be opportunities to look at expansion in the domestic side as well. So we want to make sure that we have sufficient capital to be able to pursue those opportunities. My bias would be, you know, we can achieve two things at the same time. If we deploy that cash without leveraging that cash, then we achieve the expansion in assets and cash flow generation while at the same time not increasing our leverage or probably decreasing our leverage from a cash measurement point of view. So that would kind of be the first goal if we could deploy some cash and do that without taking on additional leverage. If those opportunities don't present themselves, then clearly the other two areas that we look at are, one, you know, deleveraging the business to provide flexibility for financing at future dates if other opportunities come along at a later date. We have identified, you know, specific areas steps that we might take if we felt that that was the appropriate, you know, steps to take. I would note that some of our debt, all of our debt is fixed and some of it is fixed at levels below what current cash levels are yielding. So we do have a positive carry on some of that debt, which of course is something that we think about. But we're also very mindful of the fact that during periods when the market is strong, it's a good idea to decrease leverage and provide the liquidity and resources to be able to take advantage of turns in markets if and when generally they come. So that's something that we think about a lot. On the share buybacks stage, I think we've demonstrated our willingness to look at that as a real solution. We purchased 10 million shares last year. That's more than 10% of the outstanding shares at the time. That's a pretty substantial amount of share repurchasing. It remains in our playbook. And as you say, the relative value of the stock against how we might be able to deploy that capital and the other two areas that I've discussed is a regular topic of conversation and our board meeting will continue to do so.
spk03: Yep, that makes sense. It just seems like Gaining that duration and basically we're out to 2025. It just opens up the door for some things that might not have existed a couple of quarters ago. Just last one real quick. Sam, can you just remind us, I know most of the vessels are, let's call it, mid-2000s, late-2000s into 2010, 2011, just the remaining useful life there. And then, Dick, just real quick, can you just remind us the Amort, expectations for 2023 along with CapEx, please. And that's it for me. Thank you.
spk04: The average life, Ryan, is a bit under 15 years across the entire fleet. The CapEx for this year will be in the $30 million range. It's slightly up from 2022, but certainly below some of the other peaks that we've seen. From a debt perspective, we have one piece of debt maturing in 2024 towards the third quarter and two in 2025. Debt service this year It will be, again, it's going to be about $54, $55 million in total for the year between principal and interest. Interest costs would be about $32 million, $31 million, and the principal amortization would be just a shade under $24 million.
spk06: So I think your question is, you know, what can we expect in the useful economic life of our vessels? As I hinted at the prepared comments, I think that we can expect a market that will accept longer utilization of assets over time unless and until there's a clear solution or a clear answer that has arrived at what propulsive systems for marine assets will look like. The nascent state of replacement technologies that would address that question today. It's too early for anyone to really endorse, in my opinion, to endorse a favored approach. And I think that the international market will be the testing grounds for what those technologies and what the emerging preferred solution will be. And the domestic U.S. market will most likely observe what happens in international markets and how that question is resolved before taking decisions as to constructing new vessels in the united states so i think that's going to take a while and i think the certainly a useful economic life for a jones act tanker or an atb of 30 years or more is not unreasonable to consider at this juncture and i think that the uh The environmental arguments for sustaining and continuing the use of high-quality assets and the comparable greenhouse gas emissions count that if you look at the full life cycle, building new ships is also a large producer of greenhouse gas emissions. So I think arguments will arise even in the environmental global context that keeping high-quality assets in service for longer periods of time, will actually result in a favorable outcome from a cycle greenhouse gas emissions account. And I think that will encourage, for gel-backed assets in particular, a view towards extending the useful economic life of these assets.
spk04: There's sort of a natural support for that right now, which is just the inability of U.S.-based shipyards to be available to build Jones Act MR class tankers, the preponderance of shipyard capacity committed to the U.S. government for Navy, Coast Guard ships, etc. There isn't anything available, even if you wanted to place an order today for a hull, that would produce something in the foreseeable future.
spk03: All makes sense. Thank you. Appreciate it.
spk01: Our next question comes from the line of Clement Mullins with Value Investors Edge. Clement, your line is now open.
spk02: Good morning. Thank you for taking my questions. I wanted to start by asking about your TC cover on Jones Act vessels in 2023 and 2024. Could you provide some insight on what kind of average TC you expect to realize on each of those years?
spk06: I think that the guidance that we've given on overall PC is helpful in that. As we said, we expect a full calendar 2023 time chart of equivalent earnings across our fleet to be close to $400 million. Obviously embedded in that number is the Jones Act MR time chart equivalent fleet. We still have some historical time charter contracts that are significantly below current market rates. And we've fixed some vessels recently at what I would consider to be current rates. The blended rate on all of that is probably in the mid-60s. But as older contracts roll off, that number should begin to creep higher.
spk02: That's helpful. Thank you. And regarding capital location going forward, you will have more clarity in a couple weeks once the DSP and the Red Heel have been awarded. But if everything goes according to plan, do you have the capacity to service those contracts with your fleet, or should we expect vessel acquisitions? And if fleet expansion is required, where do you see the sweet spot regarding vessel vintage?
spk06: So... If everything goes according to plan, I think there is scope for us to add between one and three additional MR tankers to our international trading fleet over the next six to 18 months, depending on the timing of deliveries and the ability for us to go and consider reasonable priced replacement tonnage. But even more so, I'd like to reiterate what I've said in the past that the 2022 National Defense Authorization Act included within it a provision to authorize the expansion of the Tanker Security Program from the current 10 authorized vessels to 20 vessels in the future. So I believe that the environment in Washington today is very supportive of arguments to expand US maritime in general and US tanker assets in particular, and that the political will to take the necessary steps to see that happen is as strong as it has been in my seven years here. So not only are you looking at near-term resolution of Red Hill and Tanker Security Program applications in the next quarter, six weeks, but over the medium term, I think there is scope to consider additional tonnage to be added over time as that Tanker Security Program, or if and when that Tanker Security Program expands from 10 to 20 ships. And I think that's That's something that we keep our eye on in terms of allocation of capital and making sure that we have the necessary resources to participate in those programs at the level which we think is appropriate for a company of our profile in this industry.
spk02: Thanks for the call. That's all from me. Thank you for taking my questions and congratulations for the quarter. Thank you.
spk01: Our next question is from a private investor, Josh Cahill. Josh, your line is now open.
spk05: Can you guys hear me okay?
spk06: We can.
spk05: Good morning, Josh. Good morning. All right. Well, once again, congrats on a good quarter and thank you for taking my call. Just a quick follow-up on Clement's question. If you do add additional MR tankers, is there a particular vintage that you would be looking at right now? I know that the international tanker market has responded to things Sam had mentioned and prepared remarks around the product tanker markets in general and a five-year old MR tanker right now is probably around $43 million, excuse me, and an eight-year old tanker around 36 million. Once again, is there any particular vintage you're looking at or would it depend on timing and what's available in the market if you were to acquire new vessels?
spk06: I think, Josh, more the latter than the former. I'll make a couple of observations. First of all, I would caution drawing straight lines between transactions that have occurred in the international second-hand market and interpolating those to understand what younger or more conventionally owned tonnage might attract from a pricing point of view. And I say that because the vast majority of activity in the international MR market in recent months has been concentrated at the older end of the spectrum. And the buying market for that older end of the spectrum has been dominated by what I will call sanctioned insensitive buyers who are requiring tonnage largely to be able to participate in the emerging trade of Russian crude oil and Russian product that has been abandoned by conventional Western buyers and traders that traditionally serve those markets. And because of the nature of the opportunity there, The buyers of that type of tonnage are relatively price insensitive because the relatively low capital investment for an older vessel can be rewarded very quickly and over a very short period of time through trading in what the press calls the dark fleet or what I call sanctioned insensitive participants in that trade. And just to put it in perspective, an AfriMax tanker carries roughly 700,000 barrels of crude oil. If you go buy an AfriMax tanker and you load one cargo out of the Baltic region in Russia and you transport it to India, which is an emerging and active trade right now, and you're able to capture somewhere between a $10 and $20 discount to the crude price and pass some of that on to the buyer, Let's just say you take $10, that's $7 million of a profit on the trade alone, plus the market is trading for those types of ships on a freight basis of somewhere between 80 and $100,000 a day. So in one voyage, it's conceivable in my mind that a sanction-intensive buyer could make as much as $10 to $12 million on one voyage. And so if you're paying $20 or $30 million for a vessel, with a view that this market is going to be sustained for at least a foreseeable future, you can see where the price levels would be relatively insensitive to just get your hands on a ship and it doesn't really matter what you pay. I would counter that by saying that as you move forward into the younger age of the fleet, the capital amount that needs to be deployed goes up considerably and Therefore, a belief in the duration of that market arbitrage that's available today needs to be much, much greater. And certainly what I've seen is that there's been very little, if any, activity in the front end of the age profile that would affirm that a buying market exists at the price levels that, if you interpolate those older vessels, would equate to the kinds of price levels that you're talking about. I know that there are organizations that try and provide vessel values based on age. What's a new building cost? What's a 10-year-old? What's a 15-year-old? And what does that translate into in terms of what a five-year-old vessel might be like? Personally, I don't subscribe to that methodology at this juncture because I just don't see the level of transactions at the younger age of the profile that would support those higher valuations at this time. we'll see how this market evolves over the course of the next uh next six to 12 months um you know inputs into ship construction are also a really important part and there's been quite a bit of inflation and the shipyards have been trying to push prices as well once again the volume of transactions that we've seen or at least i've seen in terms of new building activity uh would not suggest that there's a deep market for paying those kind of price levels So I think there is a considerable amount of opacity right now in where price points would exist for age profiles along the curve of 5, 10, 15, 20 years. And we need to see some discovery of that as we move through the year and understand how those price points will play out. I would also observe If you look at the MR trading market and international markets tend to be dominated by spot trading versus time charter returns. It's been an extraordinary volatile period for the MR tanker market over the last two, three months. We've seen rates jump from, you know, or fall from say mid 60s on a voyage across the Atlantic down to single digits and jump back up again to mid 30s, mid 40s, and then drop back down again to negative time charter returns, So there's quite a bit of uncertainty in the actual evolution of how the shift away from servicing Russian product in particular is going to evolve. And I think that creates a difficult market to read from a sale purchase point of view, but one which I think settles out as we move through this year and probably gives us greater clarity as to If we were to buy a new MR tanker, where would we target along the age profile that we think would be an appropriate level for our needs? And where would liquidity be triggered where you had a willing buyer but also a willing seller? That still needs to evolve, and discovery of those price points remain ahead of us.
spk05: No, that's great color. And, yeah, the bifurcated S&P market makes a lot of sense. So thank you for that. And then just a follow-up on your renewable diesel charters. I believe you had mentioned that last quarter having three or four ships doing that. Is that still – and then you had mentioned on this call, you know, perhaps a new 2024 client or an extension on an existing charter. Are you still looking, you know, at roughly four MR tankers or – Any number of changes there for OSG?
spk06: You know, that's correct for right now. But, Josh, we still see demands for renewable diesel transportation capacity, both from existing players, but also we get new inquiries. I think To give you some guidance, I think that we now have a relationship with virtually every major producer of renewable diesel in the Gulf Coast. And you've highlighted in some of your commentary that I've read that there is some uncertainty as to whether or not the production, the increased production that's coming online over the next 12 to 18 months in the Gulf Coast, how much of that is going to be moving to the West Coast and how much of it, including sustainable aviation fuel as a sort of subpart of renewable diesel, how much of that might begin to find export markets to Canada or to Europe or to Scandinavia. I think that's something that bears watching. But certainly from what we can see from the behavior of our customers, there's no indication there of any concern for the demand for transportation to the West Coast for the foreseeable future. I would say the opposite, that There continues to be a very strong level of inquiry to tie up vessels and secure that capacity to ensure that that product can continue to move to the West Coast.
spk05: All right, thanks. Yeah, renewable diesel, you guys were certainly on top of that, so congratulations on grabbing those. And then just one last minor question having to do with the OSG Tampa. I'm looking at slide 10. Looks like Tampa might be placed under the shuttle tanker sort of subcategory. I'm just wondering, is Tampa doing shuttle work or is it doing standard MR work right now? And that's all for my questions. I appreciate, once again, you guys taking them and congrats on a great quarter. No problem, Josh. Hey, buddy. Just as an explanation, we...
spk06: We will be changing our – the way that we disclose the individual kind of asset types in the presentations going forward. We have – historically, the Tampa was a shuttle tanker. The OSG 350 vision was engaged in the lightening business in the Delaware Bay. And so in order to conform with historically presented financial figures, we have kept those as they have been through the end of 2022. But with our next subsequent release, we're going to alter that to reflect the Tampa as a standard MRT because that's in fact the service that she's involved in. And the 350 will be joined in with our conventional ATB assets. And so you'll see that reflected going forward and we'll make the necessary historical adjustments so you can see those comparisons. We, at the advice of our very strict financial advisors, were instructed to keep our presentation consistent with historical purposes through the end of 2022. And you'll only see those changes with our next quarter release when we ship those to reflect more accurately the current services that they're providing.
spk05: All right, thank you.
spk01: This concludes our question and answer session for today's call. I will now pass back to Mr. Norton for any closing remarks. Thank you.
spk06: Thank you, Forum, and thank you all for joining. We're as excited today about our prospects as we have been in a long time. We look forward to being able to deliver the results that we forecast for you and to speaking with you again in the near future to share with you what hopes to be a continually, progressively improving story. Wishing you all a good day. Thanks again for joining.
spk01: This concludes today's Overseas Shipholding Group Inc. Fourth Quarter and Full Year 2022 Results Conference Call. Thank you for your participation. You may now disconnect your lines.
Disclaimer