Overseas Shipholding Group, Inc.

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.

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?

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.