Overseas Shipholding Group, Inc. (NYSE:OSG) Third Quarter 2022 Results Conference Call November 4, 2022 9:30 AMm. ET
Participating companies
Sam Norton – President and Chief Executive Officer
Dick Trueblood – Vice President and Chief Financial Officer
Conference Call Participants
Clément Mullins – Value Investors
Operator
Good afternoon. Welcome to the Overseas Shipholding Group’s Third Quarter 2022 Results Conference Call. I’m Adam and I’ll be your operator today. [Operator Instructions]
Now I’ll give the floor to Sam Norton to get started. So Sam, come in when you’re ready.
Sam Norton
Thank you Adam.
It’s a beautiful morning here in Tampa, Florida, which provides a perfect backdrop for Dick Trueblood and I to share with you our presentation of G. S. O. ‘s third quarter 2022 results. Thank you for listening to us and allowing us to share with you the main points about the current state. of our business and additional feedback and ideas about the opportunities and demanding situations ahead.
That is, I welcome the normal participants on this call who have shown that commendable patients have maintained their interest in the GSO in what has been a complicated emergence of market disruptions caused by COVID-19.
To begin, I would like to draw everyone’s attention to the narrative on pages 2 and 3 of the PowerPoint presentation that will be found on our online page regarding forward-looking statements, estimates, and other data that may be provided during this call. The content of this story is a vital component of this presentation, and I urge everyone to read it carefully.
We will provide you with more than old information about G. S. O. today, and our presentation includes forward-looking statements, adding statements about expected long-term results.
These statements are subject to uncertainties and threats. Actual effects may differ materially from those weighted in our forward-looking statements and may be affected by threat points, adding points beyond our control.
For a discussion of those factors, we refer you to our Form 10-Q for the third quarter of 2022 filed and available on the SEC’s website, www. sec. gov, as well as on our own website, www. osg. com The forward-looking statements in this filing speak only as of the date of such documents, and we assume no legal responsibility to update any forward-looking statements, unless required by law.
In addition, our presentation includes certain non-GAAP monetary measures, which we describe and reconcile with the comparable maximum GAAP measure in our earnings release, which is also posted on our website.
The monetary effects achieved in the last quarter are a welcome confirmation of our long-standing confidence in the sustainability of OSG’s business strategy, exceeding our expectations and demonstrating its strength during the year and until 2023. Our niche business, in particular, generated strong effects for the quarter, particularly in addition to the continued uptick in on-time charter-equivalent returns from our traditional tankers and ATBs.
Adjusted EBITDA of $42. 3 million generated $14 million in loose cash for the period, obviously the most productive functionality to this extent in many years. Our expectations of long-term monetary functionality seem to provide continued evidence of the benefits of having our niche and traditional business healthy and profitable activities.
GSO vessels are necessarily fully committed until the middle of next year, with only our RMs traded worldwide exposed to the spot market. Even this limited exposure to the spot market will likely occur in the coming months, given the highest PM rates recently available and nationally.
Taking into account our Jones Act assets alone, 92% of available vessel operating days are covered for all of 2023. Cash flows from the transition to successful chartering between our traditional tankers and the strong and strong revenues generated through our niche market activities make a contribution and are expected to continue to contribute not only to earnings, as reflected in our GAAP reported income statements, but also to the quality of OSG’s balance sheet.
I’ll let Dick explain the main points of those key results. I will concentrate my comments on the broader market environment that exists and the effect that many observers call an emerging energy crisis has and is very likely to have in the long term. run on the GSO business. To put it bluntly, GSO’s activities are largely domestic activities strongly incorporated into the distribution desires of domestic manufacturers of crude oil and subtle products.
Some would then assume that GSO would be largely insulated from the primary disruptions in energy supply chains and the volatility of transportation costs recently observed in foreign tanker markets.
The United States is a leading manufacturer of herbal gas, crude oil and subtle petroleum products. Should such independence be an isolation from chaos and foreign markets?Understanding two things helps answer this question.
First, energy is largely an undifferentiated intelligent whose value is set globally at the marginal rate of value delivered. Second, the marginal tariff of the energy delivery value depends entirely on the location, location, location and availability of the transmission links to connect the excess. source to markets that want it. Ships and ports are the automobiles of intercontinental trade.
If the cost of shipping allows an industry to buy a product in the domestic market and sell it at a cost-making that generates a profit, the product will move to the market that offers the highest value. The intercontinental energy products industry is relentlessly effective in seeking out and concluding those worthwhile arbitrage opportunities. Before 2016, the United States was for all intents and purposes an island of power, far removed from the foreign power market. The export of crude oil produced in the United States has been legally prohibited.
Exports of subtle products were made only in small quantities. LNG export services were not operational. Over the past six years, regulatory and market adjustments have dramatically altered this landscape, allowing U. S. energy products to take advantage of the U. S. U. S. citizens participate more actively in foreign markets. This building to rise to foreign markets has been positive for domestic energy manufacturers and transporters that allow the movement of goods. The side effect of this, however, has been to make energy independence a pipe dream.
Under existing laws, regardless of where natural gas, crude oil, and subtle products are produced, American consumers are increasingly subject to competitive demands from foreign markets, a progression that is helping existing low levels of product inventories and why local costs are emerging despite the fact that the United States is the largest manufacturer of those products.
The opening of foreign markets to U. S. energy manufacturersThe U. S. Department of Commerce has reduced the isolation point of GSO ships from foreign events. that Jones Act vessels are competing with foreign-flagged vessels for locally produced energy products.
Existing and impending economic sanctions against Russia prevent many OECD countries from buying Russian oil and gas, leading to shortages and great uncertainty in foreign energy markets.
The huge profit margin that accompanies this uncertainty has had the effect of attracting record levels of locally produced petroleum products and fuels abroad. Last week, the EIA revealed that they were exported in the Week Ended October 21.
In fact, these are staggering export figures, an increase of more than 30% over average volumes exported last year and a 240% increase over average export volumes observed in 2015. The main interaction between domestic and foreign energy transport prices and the visual contrast between record exports on the one hand and record domestic inventories on the other has two vital implications for SO.
First, it creates growing tension for intervention to abandon existing national maritime regulations, opening up a wide chasm of ethical danger for those wishing to exploit political expediency. If traders were our main economic actors in the national energy transmission ecosystem, they would be rewarded Jones Act situations seem favorable to apply for one, they will no longer see the need to protect themselves from threats by making plans and concluding letters in time, and we will act accordingly, expanding the overall systemic threat with little or no consequence for them.
Pernicious derogations undermine situations that are meant to ensure long-term visibility and stability of the availability and delivery of important energy products, allowing for-profit actors to operate outdoors with those regulations with little threat of trouble and with the promise of providence benefiting, This will undoubtedly cause tremendous harm to the communities that these rules are intended to benefit and protect. The granting of derogations should be assiduously avoided in all cases, even at the highest extremes.
Secondly, albeit indirectly, the greater influence of foreign tanker tariffs on domestic industry increases the volatility of demand for our traditional tankers. The development, to a large extent, explains our explanation of why choose not to manufacture 3 MR larger tankers leased from American Shipping Company.
As previously announced, delivery: The new December delivery of 3 traditional tankers will decrease OSG’s exposure to the unpredictable and undifferentiated domestic MR tanker market. Ongoing payment obligations of approximately $27 million in 2023 and beyond.
The effective deleveraging achieved through the resolution not to enlarge the characteristics of those 3 vessels, combined with the positive loose money functionality expected in the coming quarters, gives OSG greater flexibility to respond to existing and expected trading opportunities with lower volatility and a step forward. profitability. .
As stated in previous calls, we know that there are attractive opportunities to grow our business in several of the niche markets where we have already achieved a point of success.
Specifically, we remain very focused on the continued emergence of renewable diesel as a vital driving force of domestic shipping demand. Our satisfaction with customers in this emerging sector is that the security of access to shipping capacity presented through long-term contracts is a vital detail in industry discussions and has been the case recently with customers interested in the crude and petroleum products industry.
This bias gives G. S. O. the opportunity for exposure to volatility in our traditional tanker transactions. Over the past year, we have negotiated charters on time with 4 other charters involved in the renewable diesel trade, so that by the middle of next year, 50% of our traditional tanker fleet will be contracted in renewable diesel related operations, and many of those contracts will end beyond the end of 2023.
New businesses with new expansion opportunities in the Jones Act have not been noticed in recent years, and we are excited about the role OSG plays in this startup. In addition, customers of an expanded U. S. -flagged fleet are allowed to participate in the U. S. and outdoors, Jones Act exchanges are becoming a reality.
The tanker protection program approved and funded through Congress is expected to be implemented in the early part of next year. OSG has taken a leadership role in working with partners in industry, workers and government to make this vision a reality. Consideration is being given to expanding the approved program from 10 vessels to a 20-vessel program. In addition, the U. S. Department of Defenseis issuing a request for proposals to obtain five more U. S. tankers to reorganize fuel storage operations at the Red Hill facility in Hawaii.
Our Overseas Mykonos, Overseas Santorini and Overseas Sun Coast are well placed to take advantage of those programs. Depending on the speed and scope of the expansion of those programs, opportunities may arise to add more vessels to our existing fleet.
Looking elsewhere from our existing asset portfolio, the renewed importance of maintaining and expanding domestic crude oil production bodes well for the continued long-term vessels acquired through our acquisition of Alaskan Tanker Company in 2020.
There is an intelligent explanation for why that demand for those vessels will remain strong for the foreseeable future. Opportunities to increase on-time freight revenue from ATC vessels in 2023 and beyond, a vital domain of concentration for us at this stage. We are coming into operation to finalize the advertising programmes already in place for these vessels.
Finally, we recognize the importance of participating in new emerging markets that would drive the U. S. economy away from the U. S. economy. UU. de fossil fuels. These evolving markets imply an attractive and exciting prospect for OSG to leverage its strong operating franchise to participate in those new businesses. GSO continues to allocate resources to the stated purpose of identifying the most productive opportunities that will arise from this transition, and we are confident that those efforts will produce positive effects in the medium term.
I will now give Dick the floor to give him more main points about our third quarter 2022 results. Dick? It is ok.
dick real blood
Thank you Sam
Let’s move on to slide 7. We have a $5 million buyback consistent with a percentage at the end of June. During the third quarter, we acquired $3. 6 million consistent with percentages for an overall care of $10. 7 million. As of September 30, we had reacquired a total of $3. 8 billion consistent with $11 million percentages at an average acquisition value consistent with a constant $2. 92 percentage.
In early October, we finalized the percentage repurchase program for a total acquisition charge of $14. 7 million, with an average percentage acquisition value of $2. 95. TCE revenue increased 53% to $115. 1 million in the third quarter of 2022 from $75. 4 million in the prior quarter.
Quarterly adjusted EBITDA $42. 3 million, a cumulative of $30. 1 million compared to the third quarter of last year. TCE’s earnings expansion compared to the current quarter of 2022 is $12. 7 million or 11. 5%. Adjusted EBITDA accrual increased 34% or $10. 8 million compared to the prior quarter. Market demand has remained strong with rates in particularly higher grades than in 2021. We are on track to fully dedicate ourselves until December 2022 and, as we look ahead to 2023, we are almost completely booked for the first part of 2021. 2023 and 92% is dedicated to the rest of the year.
Proceed to slide 8. No vessels were decommissioned in the third quarter, compared to two vessels decommissioned in four numbers in the current quarter. Our traditional Jones Act tankers exceeded 852 days for the quarter, or 93% of total days. We had 51 days of dry dock in the quarter. Comparatively, we had 379 employee-days in the third quarter of 2021 when we began putting ships back into service. The overseas camp left disarmament in early May and went through an era of dry docking required ballast water remedy formula installation before beginning operations.
The OSG 350 Vision returned to service at the end of May. During the third quarter, Tampa fully contracted and GSO 350 had 1200 contract days before beginning a lease for time.
Continue to slide 9. Relief revenue increased to $4. 3 million this quarter due to a combination of reduced superior volumes through GSO 351 and a timely letter for GSA 350 that began in August. Our DSAs increased our revenue contribution to $700,000. GSO 204 entered into a short-term charter at the end of our past long-term charter.
The TCE rate is higher relative to prior-time chartering, which expands its contribution to revenue. After the final touch of our short-term letters, a long-term letter will enter. Mykonos and Santorini continue to participate in the maritime security program and also supply the Israeli government.
We have conducted several charter flights for the Military Shipping Command, which have provided a superior point of use, as well as fares higher than those obtained in the foreign market. Our foreign-flagged tanker contributed to the accumulation of income, as foreign market rates increased particularly compared to previous periods. As a result, our non-Jones Act oil revenue increased to $1. 8 million in prior quarters.
Revenue from Jones Act Handysize tankers was in line with last quarter. While contract fees are moderated on the basis of a portfolio through contracts with lower ratings in the past. In addition, there were more dry dock days, which reduced income due to the increase in days without rent. Revenue from our Jones Act tanker ferries increased as Overseas Tampa was in service during the quarter. We experienced a slight reduction in Alaskan Tanker revenue due to Alaskan Explorers’ planned dry dock period.
Continue to slide 10. Niche businesses saw an $11. 9 million increase in revenue, driven by an increase in MSC travel, higher foreign fares for the Overseas Sun Coast, increased aid volumes for GSO 351 and the return to service of either Overseas Tampa and GSO 350 for a full quarter.
Continue with the slide 11. La contribution to vessel operations increased through $10. 3 million from the second quarter of 2022 to $47 million in the current quarter. Niche corporations contributed almost entirely to the construction of the contribution to ship operations for the reasons discussed above. Jones Law Handysize Tankers’ contributions were minimized primarily due to lease days similar to the planned dry dock period. The contribution to the operation of those vessels was $7 million, a slight reduction from the last quarter. in the short-term business and Alaskan Tanker’s contribution was reduced due to the Alaskan sailor’s unleased days in dry dock.
The combined vessel operating contribution from our niche market business, ATB and Alaska tankers, provided a contribution to vessel operations in the current quarter of $40 million, to $29 million in the current quarter, continuing its consistent performance.
Continue to slide 12. Adjusted EBITDA increased from $10. 8 million from the current quarter to $35. 1 million from the third quarter of 2021. Adjusted EBITDA since the beginning of 2022 is $99. 2 million. This reflects improved market conditions, higher fares and a building in number of vessels and services.
Continue to slide 13. Third quarter net revenue source over $9. 5 million to $13. 2 million. Net source of revenue year-to-date $16. 5 million, compared to a loss of $42. 6 million for the first 3 quarters of 2021. The improvement in operational effects stems from improved market conditions, which resulted in the return to service of all decommissioned vessels in 2021, as the duration of contracts around prices was brought forward.
Continue to slide 14. As our effects improve, we would like to provide data related to the profit-sharing agreement that exists for the vessels we lease bareboat from American Shipping Company. The graph provides data for the years 2022 to 2024.
The 2022 data reflects the 10 ships we are chartering lately from American Shipping, while the following years reflect the seven ships we will continue to charter after returning 3 ships in December of this year.
The calculation, which is governed by the terms of the contract between AMSC and OSG, provides for express deductions to be made if there is an explained benefit to share between us. These deductions include, but are not limited to, GSO control fees, a GSO benefit layer, and deductions for dry dock costs, all of which predate the determination of the lifestyles of any distribution of benefits. The shareable benefit, if any, is similarly divided between the parties.
The slide provides an estimate of the projected percentage of earnings under CSIA bareboat chartering from 2022 to 2024. The underlying data used to expand the 2023 and 2024 estimates is based on our market year assessment, based on existing market conditions. There will be no profit-sharing payments in 2022 due to the transfer of losses incurred on CSIA vessels in 2021.
In 2023, if we achieve an average TCE rate of $63,400 per day on the seven CSIA vessels, there will be no profit distribution. In 2024, if we achieve an average rate of $64,300 per day, there will be no profit distribution either.
Finally, it should be noted that if certain prices recover, the minimum average rate that will result in a share of profits decreases. Calculations are complex and involve a variety of factors. This table is intended to be indicative of imaginable results based on the assumptions made.
Continue to slide 15. On June 30, 2022, we had a total money of $84 million. During the third quarter, we generated $42 million in adjusted EBITDA. Working capital used $5 million in money. use of our ships, along with accrual of fares and especially the accumulation of MSC voyages. In addition, we reduced notable accounts payable balances during the quarter. We spent $9 million on dry dock and modernization of our vessels. 3. 6 million inventories of our inventory for $10. 7 million the quarter.
We had debt service bills of $13 million in the quarter. Also in the quarter, we bought the U. S. Treasury note. U. S. insured in August 2024 for approximately $15 million. The result was that we ended the quarter with $74 million in cash.
Skip to slide 16. Our total debt as of September 30 is $434 million. This represents a minimum of $5 million in notable debt from June 2022. The expected repayment of the loans for the rest of the year is approximately $6 million. With $346 million in equity, our net debt-to-equity ratio is 1x.
That concludes my comments on monetary statements, and I would like to remind Sam. Sami?
Sam Norton
Thanks, dick.
Our third-quarter effects highlighted healthy operating situations in our core markets. OSG’s fleet responds to changing trends in domestic and international transportation fuel shipments and is well placed to participate in emerging opportunities.
Our strong on-time charter policy portfolio gives us company visibility into the expected effects for the remainder of 2022 and through 2023. We expect continued strength of all significant monetary measures and a slow accumulation of monetary balances in the coming quarters. as a successful period. Charter is carried out at higher usage rates.
For the last quarter, expect to see prices related to the return of the 3 tankers of the US shipping company go down to the price. The reduction in ship availability days related to the reduction in tanker numbers announced in December will result in a slight sequential reduction from the third quarter. grades for TCE and adjusted EBITDA, respectively.
Even with this, we are now confident of our continued monetary functionality for the full year 2022. Full-year charter earnings are expected to be approximately $420 million and adjusted EBITDA is expected to exceed $133 million. Based on money used for percentage buybacks, we expect year-end money balances of between $90 million and $100 million.
Looking further towards 2023, in the absence of changes in the trajectory of existing market trends, G. S. O. basics are sound after the prospect of robust and ongoing financial functionality around 2023. over $400 million. Taking into account a safe margin for the expected collection increases, we are convinced that the achievement of this result merits generating an adjusted EBITDA of between $100 million and $135 million in 2023.
After deducting debt service and capital expenditures, we expect the money available for next year to be between $50 million and $55 million. The stability of our monetary profile translates into positive loose money in the coming quarters and innovations on our balance sheet. As stated in previous calls, the use of excess moneyArray, if any, will be a normal topic of verbal exchange with our Board of Directors. Making an investment in expansion opportunities, reducing significant debt, and proceeding to review percentage acquisition expansion under a renewed percentage buyback program will be part of this verbal exchange.
Our project is now fully focused on execution, operational excellence and the search for niche business expansion opportunities through OSG’s exclusive franchise to position ourselves for a better future.
Adam, now we can open the question forum.
Q&A session
Operator
[Operator Instructions] Our first inquiry comes from Clement Mullins of Value Investors. Continúe. Su line is open.
Clément Mullins
Hello, thank you for answering my questions. After expanding on the recommendation, such as the recommendation you provided in the past, could you provide feedback on the drivers of the functionality improvement compared to the previous figures you provided?
Sam Norton
Generally speaking, it is actually the niche market activities in which we interact that have produced the most productive effects than expected. And, in particular, the foreign MR trading market is trading near all-time highs. in a group in that market. We had net income or equivalent time charter income on this ship that was probably $10,000 to $15,000 per day that exceeded our expectations on the same budget.
And then, the other two ships conduct foreign trade, the Overseas Mykonos and the Overseas Santorini, as Dick mentioned, benefited from a series of time charters and voyage chartering by Military Sealift Command the quarter, resulting in past performances by those two ships on the order of magnitude of about $2 million for the quarter. So, those are very positive surprises for us. The balance of activity of traditional tankers and traditional ATBs was in line with expectations, but particularly advanced compared to previous quarters.
And we also saw slightly larger effects from our lightweighting business, given volumes slightly above our budgeted levels, largely due to PAD1 refineries operating at or above capacity to continue supplying more diesel products to the Northeast. I think those are the main drivers of the larger-than-expected effects we had in the quarter.
Clément Mullins
That’s very helpful. Thank you. You provided feedback on the capital allocation. But after completing the percentage buyback program, which creates significant value, what do you think of additional percentage buybacks?
Sam Norton
Listen, as I mentioned, I think we’re seeing a lot of 3 buckets of opportunity for excess money flow generated through our businesses. The first and most important thing in our lines, at least, is to seek and seek expansion opportunities to reinvest capital in vessels and shipping. opportunities that will generate a strong flow of money in the long term.
The cube of moments is a normal attention of the deleveraging of our company. This can be achieved with many tactics besides deleveraging through the delivery of some of the American Shipping Company ships we talked about earlier. We are also looking at tactics to decrease our balance sheet liabilities. These are liabilities that are sometimes related to interest-bearing debt, but we also have other liabilities on the balance sheet that we have the opportunity to reduce. Therefore, we see those opportunities as tactics to strengthen the company’s balance sheet.
And then the third opportunity, as you asked or mentioned, is percentage buybacks if necessary. The Board of Directors took action in June to authorize a $5 million percentage buyback program, which we fully ended in the third quarter or, indeed, October.
And as I said in my remarks, I think it’s very likely that a verbal exchange about extending or reinstating a long-term percentage buyback program will feature in our verbal exchanges and anything that is likely to be a feature of our capital. assignment you have noticed in the coming quarters.
Clément Mullins
Give meaning. It’s all about me. I’ll forget it. Thank you for answering my questions and congratulations on the quarter.
Sam Norton
Thank you Clemente.
Operator
[Operator Instructions] Since we have no further questions, I will contact Sam for any final comments.
Sam Norton
That’s great, Adam. Thank you all for today’s call, we hope to talk to you soon. I wish you all a good day.
Operator
This concludes today’s call. Thank you very much for being here. You can now disconnect your lines.