Overseas Shipholding Group, Inc.

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 and then one on your touch-tone telephones. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Sam Norton, President and CEO of Overseas Shipbuilding Group.

Sir, please go ahead. Thank you, Jamie. Welcome, and thank you for joining our presentation of OSG's fourth quarter and full year 2023 financial results, 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 factors, including factors beyond our control. For discussion of these factors, we refer you to our SEC filings, particularly our Form 10-K for 2023, which we anticipate filing later today, and 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 legally be 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. Before discussing our 2023 performance and offering a perspective on how we see 2024 shaping up, I would like to comment briefly on the unsolicited non-binding indication of interest submitted to our board by Saltchuk Resources to acquire the OSG shares it does not already own for $6.25 per share in cash. As we have previously disclosed, our board is carefully considering Salchuk's indication of interest in consultation with our outside financial and legal advisors and is committed to acting in the best interest of our stockholders. Because the board's work is ongoing, we do not intend to comment further on this matter during this call or to respond to questions regarding Salchuk's indication of interest or the possibility of any potential transactions. We respectfully ask that your questions be focused on the company's financial results and ongoing business activities. We couldn't be more pleased with our 2023 results. Following the positive results reported in prior quarters, it would be appropriate to state that we have stuck the landing for our fourth quarter performance. The quarter's contribution led to meeting our adjusted EBITDA target of $175 million for the full year. a 23.1% gain over 2022 results, despite having three fewer vessels in operation in 2023. The benefits of charter parties fixed at escalating rates over the past several quarters are now being realized, producing strong cash flow and providing the means to make continued progress in meeting our key capital allocation goals. Previously announced capital investments in our Alaskan tanker assets the purchase of 1.425 million shares during the quarter, and the declaration of our first dividend payment in many years underscore this point. Strong fundamentals have continued to support charterer interest in our vessels and allowed us to maintain and expand our preferred contract profile of predominantly medium-term charters. As has been the case for most of the past year, healthy refining margins robust international tanker rates have supported strong performance across our fleet. Cash flow from operations continues to meet or exceed our expectations, giving us continued confidence that our business plan is working. Significantly, at year end, we have entered into an employment contract for the Alaskan Explorer to transport U.S. Gulf Coast crude oil to one of our Delaware Bay refining customers. demonstrating the existence of employment options for this class of vessel outside its traditional Alaskan market. Taken together with three other vessel fixtures concluded in early 2024, we have added 116 months of forward charter cover since our last report, which has increased the value of our forward charter book to over $860 million in time charter equivalent earnings as of the end of March 2024. Also of note on the charter in front has been our exercise of extension options allowed for under the terms of the bare boat agreement with the owner of the overseas Tampa. The charter period has been extended for five years commencing in June 2025. Given this background, we consider OSG to be well positioned now and over the long term to generate strong cash flows in what we expect to be a durably balanced market. characterized by stable demand and constrained supply. Several key developments during 2023 have served to bolster our confidence in our current business plan. Most visible to even casual observer of shipping markets has been the persistent influence of geopolitical tensions outside of the US that have severely disrupted historical trading patterns for crude oil and its refined products. Since December, 2022, The EU has, in response to the war in Ukraine, banned waterborne crude imports from Russia, and the G7 nations have implemented price caps limiting the global price paid for Russian oil and its refined products. Other countries have stepped in to purchase these commodities at a discount to world prices. More recently, the conflict in the Middle East has impacted vessels transiting the Red Sea, where vessels have been the target of Houthi missile and drone attacks causing many vessels to avoid the Red Sea transits and to instead make longer voyages around the Cape of Good Hope. These circumstances have collectively resulted in the redirection of crude oil and refined product trade flows and increased aggregate ton-mile demand. Although the United States was not a major importer of Russian or Persian Gulf oil, its markets have nonetheless been impacted by these global events. Historically high international freight costs have resulted from disrupted trade patterns. Supply constraints now exist in markets that were alternative sources of supply, competing against domestic product shipped on Jones Act tonnage. As a result, traders now seem to favor domestic product sources over overseas alternatives, giving strong support to the use of Jones Act vessels. This increase in demand has resulted in higher utilization levels and higher rates for Jones Act vessels. Domestically, the continued impact of government policies encouraging the use of renewable fuels has driven strong demand growth for transporting renewable diesel and its feedstock components from production sources along the Gold Coast to markets along the U.S. West Coast. California's low-carbon fuel standard regulations in particular have stimulated the use of renewable diesel. which is chemically identical to regular diesel, can be used on its own or blended with conventional diesel and produces less carbon dioxide and nitrogen oxide than conventional diesel. The Gulf Coast currently produces a significant portion of renewable diesel, and California is the largest customer. Marine transportation is the most cost-effective solution of the finished products of the West Coast. The length of the trip to California creates a significant increase in ton-mile demand and has created an important new market for Jones Ag tankers that is expected to expand further in the years ahead. Of equal significance was the Biden administration's approval last year of ConocoPhillips' Willow project in Alaska. This project, together with an earlier permitted project to develop the PICA discovery operated by Santos, is expected to bring nearly 250,000 barrels per day of new crude oil production in Alaska by 2027. The promise of significant increased future production bodes well for the prospective demand for OSG's Alaska-class tankers, which provide the most cost-effective means for delivery of North Slope crude oil to refineries located in California and Washington State. Anticipating this increase in demand, OSG acquired in late 2023 the Alaskan Frontier, sister to our other three ATC-operated crude oil tankers, and contracted with engine manufacturer MAN B&W to perform lifecycle upgrades on each of the engines on all four ATC vessels. The lifecycle upgrades will improve performance and fuel efficiency and also prepare the engines for possible use of methanol fuel in the future. It is expected that the fuel efficiency gain will result in 15 to 20% fuel savings as compared to the original engine design, leading to meaningful reduction in carbon output. The significant capital investment in the four Alaskan-class tankers should permit OSG to operate these vessels for a longer period of time and with lower maintenance costs for their remaining lives. Another development of significance during 2023 was the transaction transferring ownership of the seven veteran-class tankers that OSG operates under bare boat charters from entities previously 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 bear vote agreements and simplified the underlying arrangements that govern the relationship between OSG and now Maritime Partners, a Jones Act qualified company. The Maritime Partners transaction presented OSG with an opportunity to prepay all of its remaining deferred payment obligations on two of the seven bear vote chartered vessels at a 14% discount to the aggregate outstanding liability of $6.5 million. Other material commercial terms of the revised bearable agreements remain unchanged from the original agreements. Looking ahead for the longer term, OSG is actively engaged in pursuing opportunities in the emerging market for transporting carbon dioxide that may be captured from industrial sites in the future. In December, OSG was awarded a $400,000 grant from the U.S. Department of Energy to study the development of its proposed Tampa Regional Intermodal Carbon Hub, or TRICH. The study is an important step towards realizing the potential for participating in an emerging market to manage the transport and sequestration of captured CO2. The study will evaluate the commercial feasibility of developing intermediate storage hubs at Port Tampa Bay for CO2 captured from industrial emitters across the state of Florida. As conceived, TRICH would receive, store, and process initially 2 million metric tons of CO2 per year, which would be transported by OSG vessels across the Gulf of Mexico for permanent underground storage. TRICH will be the first of its kind in the nation and could be scaled in the future to meet expanded volumes of captured CO2. It bears repeating that given the restored health of our core businesses, decisions regarding allocation of capital remain the most important of those regularly considered by board and management of OSG. When considering this question, the following topics feature prominently. First, we are interested in investing opportunistically in incremental U.S. flag tanker and ATB assets, both Jones Act and internationally trading U.S. flag tankers. where we expect long-term cash flow returns to provide value to our stakeholders. Second, the board considers applying peak cycle cash flows to reduce the overall financial leverage in our business, while at the same time, it is 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, the board engages in discussions regarding continuing its ongoing efforts to return capital to our shareholders. And fourth, we seek opportunities to invest judiciously in gaining and sustaining a first mover advantage and participating in the emerging market for transporting liquid bulk commodities that are not currently in the mix of products being shipped on our vessels. In this category, we see the most interesting opportunities to be the transportation of liquid carbon dioxide generated in a value chain seeking to capture and sequester industrial emissions of carbon dioxide. I will now turn the call over to Dick to provide you with further details on our fourth quarter and full year results for 2023. Dick? Thanks, Sam.

Please turn to slide seven. Fossil demand continues to be strong with no additions to supply. Customers continue to show interest in longer-term time charters and entering into new contracts and direct continuation of their existing contracts, often well in advance of the scheduled maturity. Rates reflect this demand strength, with recent rates now exceeding $80,000 per day for Jones Act MR tankers. This resulted in a strong 2023 performance and significant visibility into 2024 and thereafter. We continued our share repurchase efforts with the Board authorizing $45 million for this purpose in 2023. During the year, we purchased 8.6 million shares, including 1.4 million shares in the fourth quarter, bringing the total purchases, which began in 2022, to 18.6 million shares with a cumulative expenditure of $64.8 million. The average share price paid for all of these shares was $3.46 per share. Earlier in 2023, we purchased 75% of our outstanding warrants for $11.4 million. This reduced Potential delusion by 2.6 million shares. The warrants were canceled after acquisition. The remaining outstanding warrants are convertible into 859,000 shares. At this time, we have remaining authority for further share repurchases of $25 million. Please turn to slide 8. We have continued to extend the maturities of our book of business as our customers desire to lock in their transportation requirements. 2024 is essentially fully booked with some variability for our internationally trading vessels. Looking at this chart in 2024, we have two vessels with charters ending before 12-31-24. One of these two vessels, the Mykonos, as a series of one-year options with the Military Sealift Command, which, if all exercised, will keep Iran chartered through August 2028. The two vessels becoming available at the end of 2024 participate in the tanker security program, and by design, the majority of their voyages are in the spot market. The Alaskan Legend and Alaskan Navigator are subject to extension options, that if exercised will continue their charter for years into the future. 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 at March 31, 2024 exceeds $860 million over the remaining lives of those contracts. In arriving at this estimate, we have factored out estimated iron days due to future required dry dock periods. We completed the purchase of the Frontier in the fourth quarter, a sister ship to our three Alaskan tankers. She's been in cold layups since 2019, and we are now actively planning a lengthy shipyard period during which we will also perform engine life cycle upgrades and installation of balanced water treatment systems. We expect her to commence commercial operations in the fourth quarter of 2024. Our total resource commitment, including the purchase price, is expected to approximate $50 million. Please turn to slide nine. We had 7,391 available days in 2023, of which 96% were contracted. This represents a continuous improvement in the low of 2021 during the pandemic, as well as a high point for the last five years. Available and contracted days decreased with the return of three vessels to AMSC at the end of their bare boat charters in December 2023. Please turn to slide 10. We're very pleased with our fourth quarter and four-year results. All elements of our fleet continue to perform well. We did have some fluctuations due to scheduled dry dock days. Fourth quarter revenues increased modestly to $110.1 million from $108.6 million. An increase in off-hire days due to dry dock schedules moderated the increase. Rates and utilization remained high. Revenue declines from the year-ago quarter result from the return of three vessels in December 2022 at the expiration of their bare boat charters. Increased rates and higher utilization from the remaining fleet offset much of this decrease. Full-year time charter equivalent revenues were $423.5 million, essentially flat to 2022 time charter equivalent revenues. of $426.3 million. Fourth quarter adjusted EBITDA was $47.3 million compared to the prior quarter's $48.1 million. Full year adjusted EBITDA was $175.7 million, a 23% increase from 2022. The reduction in operating expenses and charter hire associated with the return vessels offset the revenue decline from those vessels. Please turn to slide 11. Jones Act handy-sized tanker revenues increased $2.2 million from the prior quarter, while ATB revenues increased $900,000. Specialized business revenues decreased $1.6 million. Please turn to slide 12. Lightering volumes increased slightly from the third quarter with a corresponding increase in revenues. Non-Jones Act tanker revenues decreased modestly from the third quarter, resulting from lower quarterly utilization. Jones Act shuttle tanker revenues declined due to a scheduled dry dock period. Alaskan tanker revenues were essentially flat compared to the third quarter as the Alaskan legend underwent per scheduled dry dock period. Each of the third and fourth quarters saw one vessel in dry dock. Please turn to slide 13. Fourth quarter, vessel operating contribution declined $2.2 million due to the lower contribution from the specialized businesses resulting from their scheduled dry dock periods. Jones Act candy-sized tankers contribution increased $1 million. Rate increases due to new contracts provided the impetus for this increase. The contribution from our ATBs increased $1.2 million, and this increase was moderated slightly by the completion of a scheduled dry dock.