Overseas Shipholding Group, Inc.

Good morning. Thank you for attending today's Overseas Shipholding Group, Inc. First Quarter 2023 Earnings Release Conference Call. My name is Frances and I'll be your moderator today. All lines will be 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 one on your telephone keypad. I would now like to pass the conference over to our host, Sam Norton, President and CEO of Overseas Shipholding Group.

Thank you, Frances. Welcome and thank you for listening in on this presentation of our financial results for the first quarter of 2023 and for allowing us to provide commentary on those results and additional color as to the current state of our business and opportunities and challenges that lie ahead. As usual, I am joined in this presentation by our CFO, Dick Trueblood. 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 an 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-Q for the first quarter of 2023, which we anticipate filing later today, and our form 10-K, both of which can be found 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 non-GAAP financial measures and which we define and reconcile to the most closely comparable gap measures in our earnings release, which is also posted on our website. The year has started well at OSG, with all asset categories achieving financial results at or above expectations. For the third consecutive quarter, we delivered adjusted EBITDA in excess of $40 million. It is notable to point out that this performance was achieved despite having three fewer operating vessels during the first quarter of 2023 as compared to the final two quarters of 2022. Contributing to our favorable first quarter results were above average lightering volumes, continued strength in international MR markets, and incrementally higher average TCE rates for our Jones Act MR tankers. The stability of cash flow witnessed in the past several quarters has allowed cash balances, including investments in Treasury securities, to increase to $118.9 million at quarter end. By far the most significant development in our business since we last spoke with you has been the signing of operating agreements with MARAD for our three internationally trading US flag vessels, the overseas Mykonos, overseas Santorini, and overseas Suncoast, to enter into the tanker security program. These operating agreements the result of many years of work with our government labor and industry partners to stand up this important program upon entering the tanker security program the overseas mykonos and over entering have been withdrawn from the maritime security program osg is proud to have the first ships to be entered into the tanker security program each of osg's participating will receive an annual stipend of six million dollars will have priority access to U.S. government preference cargoes. Recognition of the key role played by domestic tanker operators in supporting the maritime logistical requirements of the country's defense strategies is a welcome vote of confidence in both OSG and in the industry as a whole. With this step towards expanding the fleet of internationally trading U.S. flag tankers, We look forward to further opportunities for growth in the context of the Tanker Security Program as well as in other supporting roles tied to our national security. Staying for the moment with non-Jones Act assets, we await a decision by the Military Sealift Command on awards for bids to charter tankers for up to five years to be used in connection with the Department of Defense efforts to empty underground storage tanks at the Red Hill facility in Hawaii. OSG has submitted bids for two of the MR contracts. MSC has in recent weeks made awards for other bids on this project, offering promise that the balance of awards, including those on which OSG has bid, will be forthcoming shortly. Turning to the domestic market, all indications are that the market is finally balanced at the moment, with all Jones Act tankers and nearly all ATBs fixed on time charter to primary end users and traders. OSG has given delivery into new charter contracts on four of its conventional tankers and one of its ATBs since the beginning of the year. Three of these conventional tankers are in regular service from the U.S. Gulf to the West Coast carrying renewable diesel and or its component feedstocks. The transport of a renewable diesel is creating new and materially additive ton mile demand for Jones Act tankers. We see as many as 8 to 10 Jones Act tankers being involved in moving product across the Panama Canal to California by the first half of 2025, representing nearly 20% of the total Jones Act tanker fleet. The severe disruption to historical international energy supply chains occasioned by the war in Ukraine has made for continued price volatility in international MR tanker trades. However, Domestic supply patterns have been stabilized by the restoration of normalized domestic energy consumption and distribution patterns. These market conditions support, in particular, Jones Act shipping demand in the U.S. Gulf to the Florida market. Inventory levels in Pad 1 for mini-dissolutes of gasoline have risen since the end of the year. Unlike a year ago, there is a notable absence in the public press about existing or looming fuel shortages in any one of the East Coast markets. All of OSG's Jones Act vessels remain fixed on time charter contracts for the balance of 2023, with several fixed for periods extending for up to two years beyond the end of this year. We consider the MR tank the time charter rate for longer periods now to be in the low to mid-70s, with ATV ratings in the range of $40,000 to $50,000 per day, depending on size and fuel consumption. The pricing power for owners of Jones Act vessels has not been this strong in nearly a decade. How long can these owner-friendly conditions persist? The supply side of the equation looks very favorable for the foreseeable future. The order book for MR tankers is empty, and the two primary yards capable of building MRs for the Jones Act are booked up with government contracts well into 2026. The order book for large ATBs is also empty, and while options do exist for constructing new ATBs in domestic yards, Any orders placed now will not likely be delivered before the second half of 2025. Looking ahead, there are presently no clear solutions as to what the preferred option for powering ships of the future may be. This leads ship owners to be reluctant to invest in new capacity at this point in time, as it creates concerns for being left with stranded assets. This reluctance to build could result in progressively aging and diminishing fleet, whether by a reduction in real numbers or simply because ships will be sailing at slower operating speeds, which will have the effect of gradually tightening real supply availability. It is realistic to accept that domestic fuel consumption is more likely than not to decline in the years ahead. Still, all available data suggests that the slope of decline will be very shallow and that a continuing need for marine transport of these fuels will remain in place for many years to come. Looking elsewhere in our current portfolio of assets, the renewed focus on the importance of sustaining and increasing domestic crude oil production bodes well for the future of vessels acquired through our purchase of Alaska Tanker Company. The Biden administration's approval of ConocoPhillips Willow Development Project should add more than 200,000 barrels per day of Alaskan North Slope production in the coming years, giving good reason to believe that demand for our ATC vessels will remain strong for the foreseeable future. Opportunities to increase time charter earnings and contract duration for these vessels are an area of focus for us at this juncture. I will now turn the call over to Dick to provide you with further details on our first quarter results for 2023. Dick?

Thanks, Sam. Please turn to slide seven. Before we start the discussion of our first quarter results, I want to point out that we have realigned some of our vessels in our analytical materials to better reflect those vessels' current employment. Slide 7 illustrates which vessels were reclassified in both their old and new classifications. Specifically, the overseas Tampa is no longer included with our other shuttle tankers. It is now included with our Jones Act tankers for reporting. Likewise, the OSG 350 Vision is now included with our other two ATDs. The appendix to today's presentation includes quarterly historical data for 2019 through 2022, which will provide a consistent historical perspective. Please turn to slide eight. During the quarter, we repurchased 497,000 shares of our stock for $1.8 million. We continue to repurchase shares after quarter end. purchasing an additional 660,000 shares for $2.4 million through last Friday. Beginning in the second half of 22 and continuing in 2023, we have collectively repurchased 11.2 million shares, returning $33.2 million to our shareholders. We are pleased with our first quarter operating results, which met our expectations and position us well for the remainder of 2023. The first quarter of 2023 saw a continuation of the healthy market conditions that existed in the latter half of 2022. Our Jones Act tankers and ATBs are fully contracted through 2023 and in a number of cases in the later years. Jones Act tanker rates currently are in the low to mid 70s with ATB rates ranging from $40,000 to $50,000 per day. During the first quarter, we operated 20 vessels after the fourth quarter 2022 re-delivery of three vessels to American Shipping Company upon expiration of their bare boat charters. Our first quarter TCE revenues were $104.7 million. Operating fewer vessels, TCE revenues declined $9.4 million compared to the fourth quarter TCE revenues. Q4 revenues from the redeveloped tankers were $8.9 million. Factoring out revenues related to the return tankers, TCE revenues were essentially flat between the two quarters. This is our third consecutive quarter with adjusted EBITDA in excess of $40 million. Compared to 2021's fourth quarter, TCE revenues increased $34.1 million, or 43%, and adjusted EBITDA increased 27.1 million, or 163%, reflecting the high degree of operating leverage inherent in our business. Please turn to slide nine. Specialized business revenues collectively continue to demonstrate their stable contribution to our performance. Specialized business now contribute nearly 50% of our TCE revenues. ATB revenues increased modestly from fourth quarter to $11.3 million. The $5.1 million increase from Q1 2022 reflects the return of the OSG 350 to service and higher rates resulting from a long-term time charter that commenced in January 2023 for the OSG 204. Tanker revenues declined from Q4, resulting from the vessel's return to AMSC in December. The increase from Q1 2022 results from full vessel employment, coupled with higher rates, all moderated by the December vessel re-delivery. Please turn to slide 10. Lightering revenues increased $2 million on significantly higher volumes in the quarter. Non-Jones Act tankers' performance was strongly influenced by the continuing healthy international rate environment as well as military sea lift command activity. This was tempered by the conversion of the overseas Suncoast to the U.S. flag from her previous Marshall Island flag. During this time, we also conducted her intermediate survey. The resulting off-fire period reduced her revenue contribution from the fourth quarter. The Suncoast U.S. flag conversion was required to enable her to enter into the tanker security program along with the Mykonos and Santorini. Mykonos and Santorini and the TSP, their participation in the MSP ended.