Overseas Shipholding Group, Inc. (NYSE:OSG) Q2 2023 Earnings Call Transcript

Overseas Shipholding Group, Inc. (NYSE:OSG) Q2 2023 Earnings Call Transcript August 7, 2023

Operator: Good morning, and welcome to the Overseas Shipholding Group Second Quarter 2023 Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] 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.

Samuel H. Norton: Thank you, Drew. Welcome, and thank you 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, so 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 second quarter of 2023, which we anticipate filing later today, and our previously released Form 10-K and 10-Q, 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 measures in our earnings release, which is also 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 [heat] (ph) 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 nearly $10 million of stock repurchase during the period. Favorable market conditions over the first half of this year have allowed us to achieve our preferred contract profile which consist predominantly a 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 unusually high level of forward revenue visibility.

Further, in none of the next ten 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 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 OSG’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 a $100 million of total [TCE lightering] (ph) 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 Mykonos delivered into the MSC 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 second hand tanker to fill the TSP slot vacated by the Mykonos.

We’re 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 coastalized trades. Congress’ 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 this mid sector. Moving from two U.S. Flag vessels engaged in foreign trade at the beginning of this year, to potentially four 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 in 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 ATB fixed at over $60,000 per day, also for two years, and 180,000 barrel ATB 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’ve reached agreements with each of OSGs to lightering customers who extended their respective Contract of Affreightment for two years commencing July 1, 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 charter book 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 TiO2 emissions. Of these initiatives, the most significant is an MoU signed an engine maker MAN 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 electronic performance monitoring equipment and use of high performance hulk 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 scales 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?

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Richard Trueblood: All right. Thanks, Sam. If we could turn to slide seven, please. Our Board authorized a $10 million share repurchase program in March 2023. And in June, increase 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, were 2.6 million shares for approximately $9.8 million. Since then, we have repurchased an additional 258,000 shares for $1 million through August 3. 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 of Affreightment 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. The factors that estimated off-hire days due to future required drydock 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 $6 million annual stipend paid monthly per vessel to reduce effective operating costs to permit U.S. Flag vessels to compete in the international marketplace. Subsequently, one of these vessels, the Overseas Mykonos, entered into a time charter with the Military Sealift 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 drydock schedules was primary contributor to the change. We will continue to see the impact of increased survey activity in third quarter. We have 136 budgeted drydock days in the second half, of which 96 days will occur in the third quarter. We expect to expand approximately $23 million on drydock 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 drydock period for the Overseas Mykonos and fewer Military Sealift 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 Cascade’s 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 return to more customary levels coupled with the survey period for the Mykonos and a decrease in MSC cargos reduced the non-Jones Act product tanker contribution. Jones Act Handysize tankers contribution increased $1.3 million due to rate increases on new contracts providing the impetus for this change. The contribution from our ATBs decreased $1.7 million as both the OSG 204 and OSG 350 experienced off-hire for drydock period during the quarter.

Turn to slide 13, please. Adjusted EBITDA was $39.5 million for the quarter, bringing our first half adjusted EBITDA to $80.4 million, a modest $1.4 million decline from the first quarter again, reflects off-hire days for survey requirements and the lightering volume reductions. Adjusted EBITDA increased from Q2 by $8 million. Please turn to slide 14. We’ve continue to generate net income in our trailing 12-month basis, our net income is $47.8 million. The substantial improvement in our markets including the impact of renewable diesel vessel demand, as resulted in rate increases and increased contract duration substantially contributing to these positive results. Please turn to slide 15. First, let me apologize as the published slide is an incorrect slide.

And I’ll discuss the correct information that affects two columns. At March 31, 2023, we had total cash of a $105 million, not $79 million. During the quarter, we generated $39 million of adjusted EBITDA and working capital used $11 million of cash and not contribute $14 million. We invested $5 million in vessel drydock and other capital costs, and we’ve repurchased 2.1 million shares for $8 million. We paid $14 million for debt service, $6 million of which reduced our outstanding debt through scheduled amortization. We ended the quarter with $106 million of cash, plus an additional $15 million of liquid investments resulting in total liquidity of $121 million. Please turn to slide 16. Continuing our discussion of cash and liquidity, as mentioned before, we had $106 million of cash.

Our total debt was $416 million, representing a decrease of $6 million in outstanding indebtedness since March 2023. Scheduled loan amortization for the remainder of 2023 is $11.8 million, with $354 million of equity, our net debt to equity ratio is 0.9 times. In 2024, our scheduled debt service is $53.1 million, of which $24.9 million is principal amortization. Additionally, our loan on the Overseas Sun Coast matures in September 24, and will have an outstanding balance at that time of $18 million. This concludes my comments on the financial statements. I’d like to turn the call back to Sam. Sam?

Samuel H. Norton: Thank you, Dick. As highlighted by Dick’s detailed comments, the first half of 2023 has proceeded largely according to plan, with positive performance in both average TCE attained and the contribution of some of our specialized assets putting us on-track ahead of where we guided at the outset of the year. With now greater visibility of charter rates and coverage contracted for future quarters, the extent of our abilities to expectations for the balance of the year will occur solely as a result of changes in lightering 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 shipments, and is well situated and actively engaged in participating in emerging areas of opportunity.

We anticipate continuing strength in all important financial metrics and to sustain build in available cash balances over the next several quarters as profitable time charters at higher utilization rates are realized. As Dick noted, we do anticipate increased drydocking survey out of service days for the second half of this year. Nevertheless, with our success in securing improved terms on a number of vessel contracts, it gives us confidence in improving our guidance for full-year 2023 results from what we have presented last quarter. We now expect time charter equivalent earnings for the full-year of approximately $410 million. Attaining these top line results should generate adjusted EBITDA of about a $160 million for the full calendar year of 2023.

After deducting debt service and planned maintenance capital expenses, we anticipate that free cash flow for the full-year should be close to $70 million. To deliver on these results, our mission is firmly focused on execution and operational excellence, as well as the pursuit of growth opportunities in some of our specialized businesses. The extended contract coverage into 2024 also allows us to project with a reasonable degree of certainty, results that should be achieved from existing vessels for next year. Given what we know today, we expect time charter equivalent earnings for 2024 to exceed $430 million and an adjusted EBITDA to exceed $175 million for the full calendar year of 2024. Capital allocation and the future use of surplus cash flow is a regular topic of conversation with our Board.

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 considering appropriate means for returning cash to 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 ambitious goals of achieving a future target of zero emissions for ocean shipping. As reflected in the comments made during this presentation, we believe that we are making good progress towards meeting all of these goals. We hope that you will agree with our assessment and that we can continue to advance these objectives in month and years ahead.

Drew, we can now open up the call for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Climent Molins with Value Investor’s Edge. Please go ahead.

Climent Molins: Good morning. Thank you for taking my questions. You provided some very interesting commentary on CO2 transport. Although this is still an exploratory phase, when do you think any potential firm commitment could materialize? Could this be a 2024 event, or how should we think about it?

Samuel H. Norton: Thanks for the question, Climent. This is an area of opportunity that we think is extremely interesting. But as you noted, it’s a project or series of projects that will likely have a long lead time, just to put it in context, if we were to order some vessel to comply with Jones Act regulations to be able to service meaningful volumes of CO2 transport, the likely delivery time for a new vessel in the United States today is probably in the order of magnitude of three to four years. So, even if we were to have a firm project in hand today, revenue generation from that project would likely not be visible for a better part of three to five years. I think our own expectations are that, within the next two years, we’re hopeful that we will see, real progress made towards, actually seeing projects get off the ground.

Projects getting off the ground in my understanding of that, meaning be commitments from, emitters and sequesters to annual volumes of CO2 transport that would allow of the infrastructure to be committed to and to be commenced construction of all of those intermediate, pipelines and storage and vessel and receiving facilities on the other end. So, it’s certainly not something that’s going to be revenue generating in the next, 12 to 20 [Technical difficulty] But I think longer term, it’s an area of opportunity that could provide significant additive revenue to our portfolio in the long run.

Climent Molins: That’s very helpful. Thank you. And following up on that question, would there be any appetite to invest in the online infrastructure, or would you mostly speak with the best one?

Samuel H. Norton: I think that’s a question that we’re still in the early stage of considering. But I think that, we will examine this question from the perspective of how best to deploy our capital to ensure the most competitive position that we can attain in the full value chain of capture and distribution. I don’t think that would include actual capture, carbon capture equipment at the emitter sites. But, in the transportation chain that links stranded emitters with sequestration sites. I think there’s scope for us to examine, each and every part of that value chain in the transportation link.

Climent Molins: Makes sense. That’s really helpful. You’ve secured a grand total of first slots on government contracts, but you have three international MRs. And I was wondering how do you plan to fulfill this last slot. Is a bareboat in the most likely option, or would you rather acquire the vessel?

Samuel H. Norton: I think that we’d look at both options. My own opinion is life is easier if we own the vessel as opposed to bareboat the vessel. But, we’re really looking at it from the point of view of a capital cost perspective, as to which is ultimately the most beneficial structure.

Climent Molins: Thank you. Thanks for the color. That’s all for me. Thank you for taking my questions and congratulations for the quarter.

Samuel H. Norton: My pleasure, Climent.

Operator: The next question comes from Ryan Vaughan with Needham. Please go ahead.