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spk04: Good morning and welcome to the Overseas Shipholding Group Third 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 the star key followed by zero. 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, CEO of Overseas Shipholding Group. Please go ahead.
spk03: Thank you, Andrea. Good morning, and thank you for joining our presentation of OST's third quarter 2023 financial results and for allowing us to provide commentary on those results and additional color 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 10-Q for the third quarter of 2023, which we anticipate filing later today, and our previously released forms 10-K and 10-Q, which can be found at the SEC's internet site, www.sec.gov, as well as at our own website, www.osg.com. Forward-looking statements in this presentation speak only as of today, 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 measures in our earnings release, which is also posted on our website. I am pleased to be able to share with you today the results of another solid quarterly performance at OSJU. We have made progress on all of our key objectives since our last earnings call in August. Adjusted EBITDA increased by more than 20% from the second quarter. During the third quarter, we repurchased the equivalent of 7.2 million shares, returning nearly $30 million to our shareholders. We took steps to add additional earning assets to our fleet through an agreement to purchase the Alaskan frontier, which we expect to be in operation within the next 12 months. And after the end of the quarter, we prepaid 6.7 million of interest-bearing liabilities at a discount, which will result in a gain of $911,000 during the fourth quarter. Cash flow from operations continues to meet or exceed our expectations, giving us continuing confidence that our business plan is working. As has been the case for most of this year, healthy refining margins and robust international tanker rates have supported strong performance from our TSP vessels and have boosted volumes lifted in our laddering operations with these two specialized activities largely accounting for the better than expected financial results achieved for the just completed quarter. Favorable fundamentals, which have supported a strong tanker market throughout the year, have allowed us to maintain and extend our preferred contract profile of predominantly medium-term charters. With three-year charter extensions obtained during the quarter for both the overseas Boston and the OSG 204 Endurance, 90% of 2024 available trading days for our Jones Act fleet are now fixed at rates that will generate TCE from fixed contracts in excess of $30 million per month through the end of 2024. Excluding our two current TSP vessels, which trade spot by design, and the overseas Mykonos for which the MSC will likely pick up options extending her current contract, the only open OSG vessel available for charter into the third quarter of 2024 is the Alaskan Explorer. Based on current arrangements, two Jones Act MR tankers will also come open during the final quarter of next year. This contract coverage gives us an unusually high level of forward revenue visibilities. Estimated free cash flow above debt service and capital expenditures generated from our existing fleet of assets is expected to exceed $100 million over the 15-month period between the end of the 2023 third quarter and the end of 2024. This forecast excludes any incremental cash flow that might be generated from additional assets that we may acquire in the coming quarters. The combination of firm charter rates, staggered maturities, and extended contract durations should allow us to make further progress in meeting our key capital allocation goals. These are, first, investing opportunistically in incremental US flag tanker and ATB assets, both Jones Act and internationally trading US flag tankers, where we see expected long-term cash flow returns available to provide value to our stakeholders. Second, applying peak cycle cash flows to reduce overall financial leverage in our business, while at the same time considering ways to sustain access to liquidity, either through creating a pool of unencumbered assets against which future financing could be added if needed, or through establishing new financing facilities which would offer contingent liquidity at an acceptable cost. Third, continuing ongoing efforts to return capital to our shareholders. And fourth, investing judiciously in gaining and sustaining a first mover advantage in participating in the emerging market for transporting liquid bulk commodities that are not currently in the product mix being shipped on our vessels. In this category, we see the most interesting opportunities at this time to be in the transportation of liquid carbon dioxide generated in a value chain seeking to capture and sequester industrial emissions of carbon dioxide. When considering opportunities in the first of these goals, we continue to actively evaluate options to purchase a modern MR to replace the open TSP position created by the overseas Mykonos entry into a time charter with the MSC this past summer. Current asset prices are, in our view, distorted by buyers operating vessels and sanctioned trades, making finding a suitable acquisition candidate challenging in the short term. Nonetheless, we have confidence that the market will in time revert to a more normalized pricing structure and create opportunities to expand our fleet of internationally trading MR tankers. As mentioned on previous calls, we see this niche as providing one of the more promising medium-term growth opportunities in the U.S. flag trades. Congress's authorization to increase the number of ships participating in the TSP from 10 to 20 ships offers optimism in realizing this potential, and we are working actively to ensure that OSU plays a leading role in the continued development of this important program. In the conventional Jones Act trade, we consider the most promising area for growth to be linked to the increased medium-term demand for transport of Alaskan crude production. There have been development projects announced that project incremental Alaskan production over the next several years of more than 250,000 barrels per day. It is with this perspective that we have in recent weeks concluded an agreement to acquire the Alaskan Frontier, a 2004-built sister vessel to the three Alaskan-class tankers already owned and operated by OSG. Over the next 12 months, we will make significant investments in the vessel while bringing the Frontier out of cold layup. including upgrades to our main propulsion system intended to reduce fuel consumption by 15 to 20%. With a total project cost estimated at $50 million, including the purchase price to be paid for the vessel, work done to the vessel should prepare it to operate in compliance with known existing regulations for at least 10 more years. Once in service, we consider the annual operating cash flow contribution that this vessel will provide to be in the range of $15 to $20 million, or roughly a 10% increase to the estimated 2023 adjusted EBITDA. Also in the Jones Act, we have been fielding inquiries into the possibility of constructing new ATBs for some of our key customers. Investments in ATBs offer a reduced risk profile when compared with considering new tanker construction in the U.S. The current regulations exempt ATBs from CII regulations, removing an important risk variable as we consider new investment in long-lived assets. The comparable investment cost of a 200,000-barrel capacity ATB is also likely to be 30 to 40 percent lower than a conventional MR tanker. Importantly, roughly 70 percent of that cost is in the barge. This implies that investment capital that is exposed to the risk of changes in practice and regulation regarding future fuel or propulsion systems are centered on the tug without impacting the useful life of the barge. Finally, crew and operating costs of an ATB remain significantly lower than on a tanker, creating additional economic incentive to prefer an ATB over a tanker under current market conditions. When taken in conjunction with the extremely limited domestic shipbuilding capacity for delivery of new tankers, we think the above factors will favor new ATB construction projects for the foreseeable future. Discussions with our customers on finalizing any such projects are being conducted on the assumption of deliveries three to four years after contract signing and with an assumed minimum firm contract period for seven years following delivery. Turning now to potential capital use for further debt repayments. We would highlight that of our current interest-bearing debt, all of which has fixed-rate interest payment obligations at rates that, under current markets, are quite favorable, roughly $50 million of balloon payments under three separate financing facilities will come due between now and the end of June 2025. Our current thinking is that we will allow these three facilities, one maturing in each of September 2024 March of 2025, and June of 2025 to run off. In the absence of new large capital investment projects, we expect to have sufficient cash on hand to retire these obligations with minimal impact to our operations. The result of this approach will allow us to reduce financial leverage. It will also free up four unencumbered vessels, which would be available as collateral for new financing should a need for additional capital arise in the future. As has been the case for the past 16 months, share repurchases and warrant retirements will continue to be part of our capital allocation playbook. There remains roughly $6.8 million available under the existing $20 million share repurchase program authorized by OSD's board earlier this year. We will continue to seek out opportunities to return capital to our shareholders under this remaining authority. And lastly, When considering business growth opportunities over the longer-term horizon, we continue to invest considerable time and resources into understanding opportunities in the emerging carbon capture and sequestration industry. In recent months, we have witnessed the building momentum 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 undertaken to work with key port operators along the Gulf Coast to submit applications for grants from the U.S. Department of Energy to develop detailed project proposals for intermodal transportation hubs for captured CO2. OSG believes that the marine transport solution for captured CO2 is the most attractive means for connecting stranded industrial emitters in the region with sequestration sites. We are focused on working with these operators to develop economically viable solutions to achieve this vision. Before turning the call over to Dick to take you through the details of OSG's third quarter financial results, I would like to touch on several important transactions within our industry that have occurred over the last quarter. Most significantly from OSG's perspective was the recent transaction which resulted in the ownership of the seven veteran class tankers that OSG operates under bare boat charters being transferred from entities owned by AMSC ASA to new owners owned by a private fund managed by Maritime Partners LLC. In conjunction with this transaction, OSG entered into new bare boat charter agreements and simplified the underlying arrangements that govern the relationship between OSG and now Maritime Partners, a Jones Act qualified company. As noted earlier, the transaction presented OSG with an opportunity to prepay all of its remaining deferred payment obligations related to two of the seven bare boat chartered vessels at a 14% discount to the aggregate outstanding liability of $6.5 million. Other material commercial terms of the revised bare boat agreements remain unchanged from the original agreements. Maritime Partners LLC also recently acquired from Mariscal Lines Limited, the U.S. flag tanker operator, U.S. Maritime Management Inc. Among the U.S. flag assets owned and operated by USMMI are three MR tankers, which are on period charters to the Military Sealift Command, one small coastal tanker, also on period charter to the MSC, and one recently acquired MR tanker that has been entered into the tanker security program. Lastly, as was widely reported, U.S. flag operators Crowley and Seabolt tankers entered into an agreement which, if completed, will result in considerable consolidation of ownership of assets within the Jones Act trades. The intended joint venture seeks to integrate the liquid energy and chemical transportation vessels of both parties into a new independent U.S. Jones Act service provider Fairwater Holdings LLC. If completed, Fairwater will include 20 ocean-going articulated tug barges and 11 tankers. The company will also provide crewing and technical management for an additional 21 third-party owned vessels. I will now turn the call over to Dick to provide you with further details on our third quarter results for 2023.
spk01: Dick? Thanks, Sam. Please turn to slide seven. We repurchased 4.6 million shares for $18.7 million during the third quarter and also purchased 75% of our outstanding warrants for 11.4 million. Warrants are convertible into our common shares and the warrants we purchased were convertible into 2.6 million shares. These warrants were canceled after acquisition, significantly reducing potential dilution. The remaining outstanding warrants are convertible into 859,000 shares. Cumulatively, in 2023, we have bought 7.2 million shares for $28.5 million. Since we started our share buyback programs in June 2022, we have repurchased 17.2 million shares for a total return to our shareholders of $57.5 million. The average price paid per share, $3.35. The combined 2023 authorized share repurchase programs permitted us to acquire $20 million of shares. At this point, we have $6.8 million remaining available for additional share repurchases. Please turn to slide eight. Since the beginning of 2022, we have significantly extended the duration of our book of business. As can be seen in this chart, we are substantially booked through 2024 with only five vessels with charters ending before 12-31-24. One of these vessels, the Mykonos, has a series of one-year options with the Military Sealift Command, which, if all exercised, will keep her on charter through August 2028. The Santorini and Suncoast both participate in the TSP. The nature of this business is principally in the spot market rather than longer-term time charters. The Alaskan Legend and Alaskan Navigator are subject to extension options that, if exercised, will continue their charters for years into the future. We are essentially fully booked for the remainder of the year with some variability for our internationally trading vessels. Looking at our contracted book of business on a revenue basis without considering any business currently under negotiation and not assuming the exercise of any contractual options, our future book of business is approximately $903 million over the remaining lives of existing contracts. We have, in calculating this amount, factored out estimated off-hire days due to future required dry dock periods. We entered into an agreement to purchase the Frontier, a sister ship to our three Alaskan tankers. She has been in cold layup since 2019, and subsequent to the purchase, she will go through an extensive shipyard period during which we will also perform engine lifecycle upgrades and installation of ballast water treatment system. She is expected to commence commercial operations in the fourth quarter of 2024. Our total resource commitment including the purchase price is expected to be $50 million. Please turn to slide nine. We are very pleased with our third quarter results. All elements of our fleet continue to perform well. Vessel demand and rates remain strong. Revenues rose 8.5% sequentially from 100.1 million to 108.6 million, driven by higher rates and utilization. We experienced 57 off-hire days during the quarter due to dry dock schedules. Revenue declines from the year-ago quarter result from the return of three vessels to AMSC in December 2022. Increased rates and higher utilization offset some of the decrease. Adjusted EBITDA increased $8.6 million from the prior quarter to $48.1 million. and $5.8 million in Q3 2022. The reduction in operating expenses and charter hire substantially offset the revenue decline from the return vessels.
spk05: Please turn to slide 10.
spk01: Revenues across each aspect of our business increase. Specialized business revenues increased $5 million while ATD revenues rose 2 million. resulting from an increase in revenue days. Jones Act product tanker revenues increased $1,800,000 due to higher average daily rates driven in large measure by contract extensions at higher rates.
spk05: Please turn to slide 11.
spk01: Lightering volumes in the third quarter were moderated by a turnaround at one refinery we serve. Nevertheless, revenues were consistent with the second quarter. Non-Jones Act tanker revenues increased almost 100% sequentially from the second quarter, returning to levels experienced in prior quarters. The overseas Mykonos commenced their time charter with the military sea lift command in August. International rates continue at higher than anticipated levels, resulting in strong results from our TSP vessels. Jones Act shuttle tanker revenues were stable as is expected from these, from their fully contracted book of business. Alaskan tanker revenues declined from the second quarter as the Alaskan Navigator underwent her scheduled dry dock period. Please turn to slide 12. Vessel operating contribution increased 21% to $52.6 million from the second quarter as each of our business activities contributed. Our specialized businesses contribution increased $5.2 million, driven in large measure by our TSP vessels and the entry of the Mykonos into our MSC time charter. Jones Act handy-sized tankers contribution increased $2 million. Rate increases due to new contracts provided the impetus for this increase. The contribution from our ATBs increased $1.9 million. The OSG 204 and OSG 350 completed their scheduled dry dock periods in the second quarter and experienced fewer off-hire days accordingly during the third quarter. The OSG 205 completed her dry dock period during the third quarter. Please turn to slide 13. Third quarter adjusted EBITDA was $48.1 million, an $8.6 million increase. Adjusted EBITDA for the three quarters of 2023 is 128.5 million, an increase of more than 29% from 2022's first three quarter adjusted EBITDA of 99.2 million. Please turn to slide 14. Year-to-date net income is $42 million compared to $16.5 million for the comparable 2022 period, roughly a 2.5 times increase. The continuing impact of higher rate levels, increased contract duration, and greater utilization have contributed to these positive results. Please turn to slide 15. At June 30, 2023, we had total cash of $106 million. During the third quarter, we generated $48 million of adjusted EBITDA and working capital used $4 million of cash. We invested $9 million in vessel, dry dock, and other capital costs. We repurchased 4.6 million shares for $19 and purchased 13.9 million warrants for $11 million. We paid $13 million for debt service, $6 million of which reduced our outstanding debt through scheduled amortization. We ended the quarter with $98 million of cash plus $15 million of liquid investments, resulting in total liquidity of $113 million. Please turn to slide 16. Continuing our discussion of cash and liquidity, as mentioned on the previous slide, we had $98 million of cash. Our total debt was $410 million. This represents a decrease of $6 million in outstanding indebtedness since June 2023. Scheduled loan amortization for the remainder of 2023 is $6 million. With $343 million of equity, our net debt to equity ratio is 0.9 times. In 2024, scheduled debt amortization is $52.8 million, of which Scheduled debt service is $52.8 million, of which $23.4 million is principal amortization. Additionally, as Sam mentioned, our loan on the overseas Suncoast matures in September 2024 and will have an outstanding balance of $18 million at maturity. It is our current intention to repay this loan using cash on hand. This concludes my comments on the financial statements, and I'd like to turn the call back to Sam. Sam? Thank you, Dick.
spk03: As highlighted by Dick's detailed comments, financial results for the first nine months of 2023 have exceeded our year-ago plans with positive performance in both average TCE pain and the contribution of some of our specialized assets, putting us on track well ahead of where we got it at the outset of the year. With our clear visibility of charter rates and coverage contracted for future quarters, the extent of variability of the expectations for the balance of the year will occur solely as a result of changes in laddering volumes and in the rate conditions experienced in the international MR market in which currently only two of our non-Jones Act vessels trade. Our fleet today remains well positioned to respond to the changing patterns of domestic and international transportation of fuel and is well-situated and actively engaged in participating in emerging areas of opportunity. We anticipate continuing strength in all financial metrics and a sustained build in available cash balances over the next several quarters as profitable time charters at higher utilization rates are realized. Our success in securing improved terms under a number of ESSA contracts gives us confidence in further improving on our guidance for the full year of 2022 results from what we presented last quarter. We now expect time charter equivalent earnings for the full year of approximately $420 million. Attaining this top line result should generate an adjusted EBITDA of about $175 million for the full calendar year of 2023. To deliver these results, our mission is firmly focused on execution and operational excellence, as well as the pursuit of growth opportunities described earlier. The extent of contract coverage into 2024 also allows us to project with a reasonable degree of certainty results that should be achieved from our existing vessels for the next year. Given what we know today, we expect time charter equivalent earnings for 2024 to exceed $430 million and adjusted EBITDA to exceed $175 million for the full calendar year 2024. As the bulk of my remarks today would indicate, we consider allocation of capital decisions to be among the most important that we must make towards achieving a proper balance between investing in the future, managing the level of our fixed payment obligations, and benefiting our shareholders. We recognize the need to invest in solutions to ensure the long-term sustainability of our business model, to continue to meet the investment objectives of our shareholders, and to be responsive to the ambitious goals of achieving a future target of zero emissions for ocean shipping. We believe that we are making good progress towards meeting all of these goals. We hope that you will agree with this assessment and that we can continue to advance these objectives in the months and years ahead.
spk05: Andrea, we can now open up the call for questions.
spk04: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.
spk06: At this time, we will pause momentarily to assemble the roster.
spk04: And our first question will come from Ryan Vaughn of Needham. Please go ahead.
spk00: Great. Thank you. Thanks. Hi, Sam and Dick. Great job on the quarter and excellent guidance there. I have a few questions for you. First one, the frontier, Sam or Dick, can you clarify the estimated timing of payments of the $50 million over the next, let's call it 12 months? Number two, sorry if I missed this, the Alaskan Explorer, just current plans. I think before you had said that you plan on doing an engine upgrade, just current plans, time charter plans after that. And then lastly, Sam, if you don't mind, could you just remind me what that calculation, you said $100 million of free cash flow over the next 15 months. Could you just be a little more specific on what's excluded from that? Thank you.
spk03: Okay, let's see if I can unpack that. So on the Alaskan frontier, we expect to make total payments related to that project of roughly $30 million before the end of this year. The balance of payments will be made over the subsequent nine months with order of magnitude More than 50% of that probably occurring in the third quarter of next year. $30 million between now and the end of the year. Another $5 million over the course of the first half of next year and then probably $15 million or so in the third quarter of next year. Alaskan Explorer, our current plan is for the lifecycle upgrade of the engines on that vessel to occur in coordination with her next scheduled dry dock, which is in March of 2025. We will be making progress payments to the contract for the upgrade uh, of the life cycle upgrade of those engines, uh, we've already made one, uh, initial down payment of roughly 20% of the contract price. Uh, and the balance of the payments, uh, will stagger, uh, over the next, uh, 18 months, uh, roughly. Yeah. You know, in roughly 20% increments every, every three months or so, uh, from memory. Um, uh, and, and again, I think we've, uh, We've indicated that the upgrade projects for the vessels, for both the Explorer and the Frontier, the lifecycle upgrades, have a contract value of about $15 million in total. And that's including all of the related shipyard work that we would need to do to be able to accommodate those upgrades. $100 million of free cash flow over the next 15 months, or 15 months from the end of last quarter, That's after all scheduled debt repayments, after interest payments, obviously, after scheduled dry docs that are not project-related, and therefore excluded from that $100 million would be any further share repurchases, Also excluded is the investment in the Alaskan Frontier Project and the Alaskan Explorer down payments on the engine upgrades. And also excluded would be any incremental capital that we might invest into, for instance, acquiring a replacement vessel for the overseas Mykonos. So $100 million of free cash flow in simple terms is based on normalized projected $175 million of EBITDA plus this quarter's EBITDA, less scheduled debt repayment, interest payment, and scheduled normal maintenance dry dock capital expenditures. I think that answers all three of the questions.
spk00: Yeah, no, that was great. Thank you, Sam. And sorry, just the Alaskan Explorer on the one contract slide, it expires on 12-31-2021. 2023. What are the plans for the Explorer for after?
spk03: We're going to keep the vessel active. We think the market should offer good opportunities to trade the ship. Our preference would be to fix it for the period between re-delivery and her next scheduled dry dock, which would be about 15 months. If we're unable to find a 15-month contract, we'll trade the ship in the spot and look for other opportunities to keep the vessel employed.
spk00: Perfect.
spk03: Thank you for all that. We have a number of ongoing conversations with parties that are interested in taking the ship on time charter. We have yet to finalize any such arrangement.
spk05: Gotcha. Okay. Thank you very much.
spk06: Once again, if you would like to ask a question, please press star, then one. And our next question comes from Thomas Sweeney of Sweeney Holdings.
spk04: Please go ahead.
spk02: Yes, hello. I have a question for you folks. Does this slow down? in the ships going through the Panama Canal from very low water levels affect you in any way? That's a really interesting question, Thomas.
spk03: Thanks for asking. Right now, we have a number of our vessels that are regularly transiting the Panama Canal, most of them in the service of customers that are moving renewable diesel from the U.S. Gulf Coast to West Coast markets. All of those ships are operating under time charter. And what we have seen in recent weeks is that the time charters, the customers that have the vessels on time charters have been paying auction premiums to be able to ensure timely transit of those vessels through the canal. You can read in the trade press about those premiums that are paid. Some of them for LNG vessels are as much as $2.5 million. What we've seen in the context of the MR tankers that go through the older locks is those premiums have ranged from about $100,000 to about $500,000 in recent weeks. I think you're probably aware that the Panama Canal Authority has indicated that they will be reducing the number of vessels that will be allowed to transit through Fox and through Lake Katoon as we progress into the winter. It's yet to be seen how dramatic an impact that will have on our vessels. I would note that for our ships, we're not draft limited, currently not under current draft situation, so we are able to load the full cargoes that we go through, whereas many of the larger container ships are seeing draft limitations. Certainly from what I've read in the press, some of the larger container vessels are looking possibly at rerouting ships because of the implications of less cargo capability or less cargo volumes to be able to carry it on board at the now restricted draft levels in the lake. But it's something that bears watching. Our current sense is it will have minimal impact on our operations, but that could change.
spk02: One other one. Suppose it gets worse. What are the economics? When would you go around South America or alternative routes?
spk03: That would only happen in my view if the canal was closed. The economics going through the canal are always going to be significantly superior to alternatives.
spk05: Okay, very good. Thanks.
spk04: This concludes our question and answer session. I would like to turn the conference back over to Sam Norton for any closing remarks.
spk03: Thank you, Andrea, and thank you all for joining us today. As Dick has highlighted, we're very pleased with the way things are developing in our business, and we look forward to sharing more and better news with you as we progress through the balance of the year and into next year.
spk05: Wishing you all a very good day.
spk06: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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