Overseas Shipholding Group, Inc.

Good morning and welcome to the Overseas Shipholding Group second quarter 2023 earnings release conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sam Norton, Chief Executive Officer. Please go ahead.

Thank you, Drew. Welcome, and thank you for listening in on this presentation of our financial results for the second 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 the 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 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 SEC filings, particularly our form 10Q for the second quarter of 2023, which we anticipate filing later today, and our previously released forms 10K and 10Q, 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 certain non-GAAP financial measures, which we define and reconcile to the most closely comparable GAAP measure in our earnings release, which is posted on our website. Solid and satisfying best characterizes the second quarter results that OSG announced earlier this morning. Following on from an equally strong performance during the first quarter of the year, we are now comfortably on track to exceed our prior guidance for full-year financial results, with first half adjusted EBITDA having reached $80 million. Contributing to our second quarter results were incrementally higher average TCE rates for our Jones Act MR tankers and stable and historically consistent returns from our specialized assets. Positive real cash flow witnessed in the past several quarters has continued to allow a build in liquid assets. The quarter end cash balances, including investments in treasury securities, stood at $120 million, an increase when compared with first quarter comparable levels, even after taking into consideration the nearly 10 million of stock repurchased during the period. Favorable market conditions over the first half of this year have allowed us to achieve our preferred contract profile, which consists predominantly of medium-term charters. As of the end of June, the average contracted duration for our Jones Act vessels was over 21 months, with 100% of 2023 available days and 80% of 2024 available days now fully fixed. This contract duration gives us an unusually high level of forward revenue visibility. Further, In none of the next 10 quarters do we expect more than two vessels to be open for fixing at the same time. The combination of firm charter rates, staggered maturities, and extended contract durations bodes well for continuing into the foreseeable future our recent run of strong financial results. During the quarter, the much-anticipated conclusion of the Military Sealift Command's tender for vessels to be stationed in the Pacific in support of key Department of Defense operations, saw OSC's overseas Mykonos awarded one of the long-term contracts for MR tankers, adding to the book of forward cover. The MSC contract is structured as a firm one-year time charter, with options to extend the contract on an annual basis for up to 66 months in total. It will produce more than $20 million of time charter equivalent earnings during the first year and close to $100 million of total TCE over the life of the contract if all options are exercised. Our success in securing at least one of these tender contracts was a major objective for the year. As with OSG's participation in the Tanker Security Program, recognition of the key role played by OSG in supporting the maritime logistical requirements of the country's defense strategies is a welcome vote of confidence in the value of the services that we provide. The overseas mechanos delivered into the MSV contract last week and will as a result be withdrawn from the tanker security program. This creates an opportunity for OSG to expand its fleet of internationally trading U.S. flag tankers through the acquisition of a secondhand tanker to fill the TSP slot vacated by the Mykonos. We are actively evaluating options to replace the Mykonos and are working to do so in the near future. As mentioned on previous calls, we have been seeking to add to our fleet count, opportunities for which are most promising through expansion of activities in U.S. flag operations outside of coast-wise trades. Congress's authorization of an increase in the number of ships participating in the TSP from 10 to 20 ships offers optimism for the chance to further expand in this niche sector. Moving from two U.S. flag vessels engaged in foreign trade at the beginning of this year To potentially force such vessels by the end of this year is a good start to realizing this growth potential. Turning to the domestic market, most indications reflect a market that is continuing to tighten, with all Jones Act tankers and nearly all ATBs fixed on time charter to primary end users and traders. Recent fixtures by competitors are reported to have seen an MR tanker taken for two years at a rate exceeding $80,000 per day. A 270,000-barrel ATV fixed at over $60,000 per day, also for two years. And a 180,000-barrel ATV committed for two years at an average rate of $43,000 per day. The pricing power for owners of Jones Act vessels has not been this strong for nearly a decade. During this past quarter, we reached agreements with each of OSG's two lightering customers who extended their respective contracts of a freightment for two years commencing July 1st of this year. Time charter equivalent earnings on the terms as extended at the minimum barrels committed will increase by roughly 10% over the minimum time charter equivalent amounts implied in the expiring contract terms. It is worth noting that both of these lightering customers have exceeded the minimum contract volumes in each of the past two years. OSG has one conventional MR tanker, one ATB, and one Alaskan tanker coming open at the end of this year. Discussions are advanced to conclude terms for future employment of these vessels. It is anticipated that all three of these ships will be fully fixed by the end of the current quarter, a position which, if achieved, will lead to a forward time chart for all of 2024 that exceeds 90% of current vessel available days. OSG is actively taking steps intended to incrementally reduce the carbon footprint of our existing fleet. We have discussed some of these steps in our sustainability report available on our website. This commitment to imagining and delivering on a future business model with a reduced carbon footprint is an important component of our current plans. In this context, we have recently entered into several memoranda of understanding to make capital investments on existing vessels intended to reduce fuel consumption and associated CO2 emissions. Of these initiatives, the most significant is an MOU signed with engine maker Mann B&W to upgrade engines on two of our ATC tankers with a goal of achieving as much as a 15% reduction in annual fuel consumption. These engine upgrades, if concluded as planned in 2024, will involve a total project cost for two vessels of close to $25 million. The MOU includes options for upgrades on up to two additional Alaskan-class vessels. Expected benefits to be achieved by these engine upgrades include reduced annual fuel maintenance and operating costs of approximately $2.5 million per vessel and an estimated reduction of 6,000 tons of CO2 emissions per year for each vessel. As important, these upgrades will ensure CII compliance under current rules beyond 2030, ensuring continued availability for these vessels to operate in Jones Act trades for the foreseeable future. Other upcoming investments on selected vessels include planned modifications to improve propeller efficiencies, installation of electronic performance monitoring equipment, and use of high-performance hull coatings, all intended to reduce fuel consumption and improve operating efficiencies. These initiatives will help us move towards our stated goal of reducing overall greenhouse gas emissions across our fleet by 10% by the end of 2024. Beyond modifications intended to incrementally reduce carbon footprint of our existing fleet, OSG continues to develop plans for contributing to a reduction in global greenhouse gas emissions through CO2 capture and sequestration. In recent months, we have witnessed considerable momentum building towards the development of intermediate storage hubs and transport networks to facilitate industrial-scale CO2 capture and sequestration projects. OSG's established franchise for domestic transport of liquid bulk commodities gives us a significant competitive advantage for participating in this emerging market. OSG has recently partnered with key port operators along the Gulf Coast to submit applications for grants from the U.S. Department of Energy to develop detailed projects for intermodal transport hubs for captured CO2. OSG believes that the marine transport of captured CO2 is the most attractive means of connecting stranded industrial emitters in the region with sequestration sites. We are focused on working with our new partners to develop economically viable solutions to achieve this vision. I expect to be able to share with you more specifics on this topic in the quarters ahead. I will now turn the call over to Dick to provide you with further details on our second quarter results for 2023. Dick? All right. Thanks, Dan.

If we could turn to slide seven, please. Our board authorized a $10 million share repurchase program in March 2023, and in June, increased the authorization by an additional $10 million, bringing the current program to $20 million. In the second quarter, we repurchased 2.1 million shares for $8 million. Cumulatively in 2023, our purchases through June 30, 2023, 2.6 million shares for approximately $9.8 million. Since then, we have repurchased an additional 258,000 shares for $1 million through August 3rd. Cumulatively, since we began to repurchase shares in June 2022 and including the purchases in the third quarter of this year, we have bought a total of 12.9 million shares returning $39.9 million to shareholders. Please turn to slide eight. Expanding on Sam's comment and also including revenue days from both our U.S. Flag and Jones Act operations, our contracted book of business for 2023 represents 96% of all available days. Keep in mind that the international U.S. Flag business is a combination of contracted for the freightment business and spot voyages. This high level of contracted business substantially increases the predictability of our future operations. Looking at this on a revenue basis, without considering any business currently under negotiation and not assuming the exercise of any existing contractual options, our future book of business is approximately $840 million over the remaining lives of our existing contracts. This factors out estimated off-hire days due to future required dry dock periods. Second quarter operating results were in line with expectations. We continue to see active demand for future time charters as customers ensure their ability to meet their future transportation needs. As Sam addressed in his comments, the rate environment remains quite healthy, along with demand for longer-term contract duration. the tanker security program commenced during the second quarter, saw three of our vessels accepted into the program. Program participation provides a $6 million annual stipend paid monthly per vessel to reduce effective operating costs to permit US flag vessels to compete in the international marketplace. Subsequently, one of these vessels, the overseas Mykonos, entered into a time charter with the military sea lift command and will be removed from the TSP. As Sam discussed, we are actively seeking to acquire another vessel to fill the TSP position formerly occupied by the Mykonos. Please turn to slide nine. Second quarter TCE revenues were $100.1 million, $4.6 million decline from the first quarter of this year. 77 off-hire days due to dry dock schedules was a primary contributor to the change. We will continue to see the impact of increased survey activity in the third quarter. We have 136 budgeted dry dock days in the second half, of which 96 days will occur in the third quarter. We expect to expend approximately $23 million on dry dock and related capital expenditures over the balance of this year. Adjusted EBITDA was $39.5 million, a small decrease from the prior quarter, principally resulting from the discussed decrease in revenues. Please turn to slide 10. Our specialized business revenues declined $4.7 million, and ATB revenues declined $1.5 million. Jones Act product tanker revenues increased $1.4 million due to the higher average daily rates. Looking at slide 11, during the first quarter, lightering volumes had exceeded historic levels. In the second quarter, volumes returned to more typical levels and TCE revenues associated with this business reverted to historical means. Non-Jones Act tanker performance was influenced by the scheduled 30-day dry dock period for the overseas Mykonos and fewer military sea lift command voyages during the quarter. Jones Act shuttle tanker revenues increased $1.1 million, returning to customary quarterly levels following the completion of the overseas Cascades Intermediate Survey during the first quarter. Alaskan tanker revenues were stable between the quarters as those vessels continued to be fully chartered. Please turn to slide 12. Vessel operating contribution decreased slightly to $43.5 million from $46.6 million in the first quarter. The contribution from our specialized businesses decreased $2.9 million as the lightering volumes returned to more customary levels coupled with the survey period for the Mykonos, and a decrease in MSC cargoes reduced the non-Jones Act product tanker contributions. Jones Act candy-sized tankers contribution increased $1.3 million due to rate increases on new contracts providing the impetus for this change. The contribution from our ATVs decreased $1.7 million as both the OSG-204 and OSG-350 experienced off-hire for dry dock periods during the quarter.