Overseas Shipholding Group, Inc. (NYSEMKT:OSGB) Q2 2016 Earnings Conference Call August 9, 2016 9:00 PM ET
James Small - General Counsel
Capt. Ian Blackley - President and Chief Executive Officer
Rick Oricchio - Chief Financial Officer
Lois Zabrocky - Head of our International Business
Erik Stavseth - Arctic Securities
John Reardon - Western International
Good day ladies and gentlemen, and welcome to the Overseas Shipholding Group Incorporated Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host for today’s conference, James Small, General Counsel. Sir, you may begin.
Thank you. Good morning, everyone, and welcome to OSG’s earnings release conference call for second quarter of 2016. Before we begin, I would like to start off by advising everyone on the call with us today of the following. During this conference call, OSG’s management may make forward-looking statements regarding OSG or the industry in which it operates, which could include without limitation, statements about the outlooks for the tanker and articulated tug/barge markets, changing oil trading patterns, forecast of world and regional economic activity and demand for and production of oil and petroleum products, OSG’s strategy, expectations regarding revenues and expenses, including both G&A expenses and vessel expenses, estimated bookings and TCE rates for the second half of 2016 and other periods, estimated capital expenditures for 2016 and other periods, projected scheduled drydock and off-hire days, OSG’s consideration of a potential spinoff or other strategic alternatives and its ability to achieve its financing and other objectives and regulatory developments in the United States and elsewhere.
Any such forward-looking statements take into account various assumptions made by management based on its experience and perception of historical trends, current conditions, expected and future developments, and other factors management believes are appropriate to consider in the circumstances. Forward-looking statements are subject to a number of risks, uncertainties and assumptions, many of which are beyond the control of OSG, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements.
Factors, risks and uncertainties that could cause OSG’s actual results to differ from expectations include those detailed in OSG’s Annual Report on Form 10-K for 2015, its quarterly report on Form 10-Q for second quarter and 2016 and in other filings that OSG has made or in the future may make with the U.S. Securities and Exchange Commission.
With that out of the way, I would like to turn the call over to our President and Chief Executive Officer, Capt. Ian Blackley. Ian?
Capt. Ian Blackley
Thanks James. Good morning everyone and thank you for joining us for our 2016 second quarter earnings call. On the call today Rick Oricchio, our CFO; Lois Zabrocky, Head of our International Business; James Small, our General Counsel who you just heard from; and Brian Tanner, Head of Investor Relations. Also joining us today is Sam Norton, who recently became Head of our Domestic Business. He has been a member of OSG’s Board of Directors for the past two years. Welcome Sam.
Let me begin today on slide 3, with second quarter 2016 highlights and some more recent events. I am pleased to report second quarter results today with adjusted EBITDA in the quarter of $110 million on TCE revenues of $216 million, a net income of $30 million. In the second quarter, we accelerated the payment of $29 million in principle amount of our bank debt and in July we accelerated an additional $20 million.
We continue to strengthen the capital structure of our businesses, as we position them to be standalone companies. During the second quarter, we made open market purchases of approximately $8 million Class A warrants. We also bought back additional Class A common shares through our 10b-18 program during the quarter. We have now completed approximately 40% of our $200 million two-year equity repurchase plan, which we announced in November of last year.
During quarter, we were added to the Wilshire 5000 Total Market Index and the Russell family of Index. And in June 28, we rejoined the New York Stock Exchange Big Board, increasing our exposure within the institutional investment community, and helping to enhance the trading liquidity of our stock. Before I move to discussing our business segments, I want to provide an update on our strategic process.
We’ve taken many steps to enhance shareholder value this year, including dividends and equity buyback. With the filing of our Form 10 on July 15, we take the next step towards separating our businesses, which we believe will unlock greater value for OSG’s shareholders. The filing is an important step in the execution of our plan to create two standalone publicly traded companies.
Following the separation, each company and each board will be better able to focus on their own businesses and more effectively pursue the distinct operating priorities and strategies. By removing those complexities and limitations associated with a combined international and Jones Act business each will have more flexibility to capitalize on opportunities for long-term growth on profitability. Sam's appointment was another important step and puts in place the leadership of our U.S. Flag Business early in the process, helping to ensure a seamless transition when we separate.
It’s time to provide further details about the board and the management teams of the separate companies as they are confirmed. As I have discussed on prior calls, our preference was to merge our international business with another tanker company, which was a combined entity with greater scale and liquidity and helps to promote consolidation within international tanker industry. Currently, we are not in discussions with any potential merger partners. And while we always have been open to opportunities that will create value, our focus today is on separation.
We expect that the separation will be achieved through a spin-off of OSG International later this year. The spin-off and the exact timing remain subject to approval of the OSG Board of Directors and the satisfaction of various other conditions, including the FX business of the Form 10 filed with the SEC. We look forward to completing this spin-off as quickly as we can, so we can focus on unlocking the full potential of each business.
Please turn now to slide 4, and an update on each of a segment. The outcome of the Brexit Board caught financial markets by surprise and added some downside risk for the global economy. Although equity markets have recovered, global GDP growth in 2016 was marked down slightly to 3.1% from 3.2%. In the crude sector the effective fundamentals with low oil prices leading to increasing demand, high oil supply and some stockpiling that lead us to a strong tanker market in 2015 and the first half of 2016 are coming more into balance as we move into the second half of this year.
Global oil supply is no longer growing as it was in 2015, but high OPEC output in 2016 being offset by non-OPEC decline. Within OPEC, increased production by Iran and Iraq has been partially offset by supply disruptions in Nigeria and operational challenges in both Venezuela and Libya. Non-OPEC oil supply has decline led by the U.S. where production was 8.5 million barrels per day in July, the lowest since August 2014.
Global oil demand has remained strong with estimated growth of 1.4 million barrels per day for 2016 taking demand to 95.3 million barrels per day. China continues to be the main growth driver in the crude market with first half imports running at some 14% above the same period in 2015 with crude imports in the second quarter averaging 7.8 million barrels per day. This significant year-to-date increase is tempered somewhat by consolidated China crude import growth is higher than end-user demand. Growing crude inventories could result in demand for imports in China this year beginning to slow to pace more consistent with estimated end-user demand in China plus a growing product export market.
India’s oil imports continue to grow, and is overtaking Japan as the third largest consumer of crude oil. First half imports were up 12% to 4.3 million barrels per day compared to the same period last year. With its increasing dependence on imported crude to meet its energy needs, India plans to finish building 3 SPRs in 2016. The expected capacity of these SPRs is 39 million barrels and the government has announced plans for second phase to add an additional 91 million barrels by 2020.
For this second quarter and into the third quarter typically one of the weaker periods of the year were crude tanker demands as refinery counter align with scheduled maintenance impacts our demand. The seasonal slowdown this year has been greater than anticipated due to weaker refining margins compared to last year, which has led to a reduction in refining throughput and the opportunity has been taken to complete maintenance before from 2015. Finally, throughput is expected to recover as we move through the third quarter and peak summer driving demand draw down the current high inventories.
On the supply side, fleet growth will remain elevated through the end of next year as a significant number of crude tankers scheduled to be delivered in 2016 and 2017. Looking further ahead, there has been little newbuild ordering through the first half of this year. Positive trend and a disciplined approach we would like to see continue, which would result in lower fleet growth beyond 2017.
In the second quarter, our VLCC spot rate was $47,000 per day, the Aframax spot rate was $23,500 per day and the Panamax blended rate was $20,500 per day, all strong returns. On our MRs, we delivered a healthy $14,700 per day in the quarter. While we believe the long-term fundamentals with the product tanker market remain positive with strong underlying demand, we are currently experiencing a period of short-term softness.
When you consider the high inventory levels and the significant number of MRs that were delivered in the first half of this year, the market has been relatively resilient. We believe the market should being to tighten late in the third quarter as we move through the seasonally weak period and start to get a winter market uplift. Additionally, European refineries recently lowered utilization by 5% in an effort to increase drawdown’s and improve the upcoming winter margins.
Longer term, the outlook is positive as like the crude fleet, the MR fleet growth is expected to reduce as there has been little ordering of newbuild so far this year. With continued lower crude oil prices and strong demand for petroleum products particularly gasoline, we expect these supply demand fundamentals continue to support a strong product tanker market.
Please turn now to Slide 5. In our U.S. flag business, the market continues to be impacted by the decline in U.S. crude oil production, delivery of newbuild tonnage and high inventories in the U.S. that has driven down the refinery margins and slowed demand for both crude and product shipments. On top that, a number of Jones Act tankers in ATB’s of either being redelivered from time charters are not being fully utilized and are being offered for re-laid.
Second quarter U.S. crude production averaged 8.8 million barrels a day, 650,000 barrels per day below the second quarter 2015 average. Specifically, Eagle Ford shale, a major source of demand for the Jones Act fleet, declined some 390,000 barrels per day in June 2016 compared to the prior year period. While the decline in U.S. crude production has led to a decrease in demand for coast wide transportation of domestic crude, the narrowed spread between Brent and WTI have made it more attractive for U.S. Northeast refineries to import foreign crude.
Import to U.S. Northeast refineries are up 47% in 2016 versus last year with a majority of this coming from West Africa. As a result, we’ve seen a pickup in our Delaware lightering volumes benefitting our modern lightering ATBs. Our lightering volumes averaged 180,000 barrels a day in the second quarter, up from 145,000 barrels a day in the first quarter and more than doubled to 860,000 barrels a day in the comparable 2015 period. Another positive effect of the decline in crude oil pricing has been the continued increase in gasoline consumption. In the second quarter of 2016, gasoline demand averaged 9.5 million barrels per day, up 4% over the same period in 2015.
According to data released by the Federal Highway Administration, U.S. driving reached 1.3 trillion miles year-to-date in May, up 3.3% compared to the same period a year ago and on pace to beat 2015 record setting year. This has driven stronger demand in the Jones Act fleet product rates including Florida where the majority of gasoline consumed in the state is transported on Jones Act depots and where we employ a significant part of our Jones Act fleet. This strong demand for gasoline will ultimately lower inventory and more spot barges should reappear as a result. Last week, we saw the first drawdown in gasoline and crude inventories in the U.S. for some time, which is a positive development.
On the supply side, newbuild deliveries will continue through the end of next year. There are 15 vessels remaining in the order book with six deliveries expected in 2016 and nine in 2017. There are, however, 23 vessels in the Jones Act that are 30 years older, so we would eventually expect to see some of those scrap as newer vessels deliver.
On our rebuild ATB fleet, we began the year with a total of 800 potential open days, to-date we have successfully concluded new time charter on five of these units producing potential open days for the remainder of this year to only 52. We also recently find a six month charter sanction on a tanker with contracts that due to expire in the fourth quarter. Overall, as of today, more than 92% of our U.S. flag revenue days for 2016 are fixed on time charter or COA and 58% for 2017.
I will now turn the call over the Rick to provide additional details on our second quarter results.
Thanks, Ian. Let’s move directly to reviewing the second quarter results in more detail. Please turn to Slide 7. TCE revenues for the second quarter totaled $216 million, a decrease of $19.5 million or 8% compared with the second quarter of 2015. The decrease was primarily driven by lower daily rates earned by the international flag fleet. TCE revenues for the first half of 2016 were $453 million, a decrease of $4 million or 1% compared with the first half of 2015. The decrease for the first half was primarily due to lower rates in international products crude carrier segment.
Second quarter TCE revenues for the international crude tanker segment totaled $67 million, down 13% compared with the same period a year-ago. This decrease resulted from softening with daily rates across vessel types in the segment. Nearly two-thirds of the revenue decrease in the quarter as compared to the same period a year ago was attributable to lower average daily TCE rates in the Aframax fleet. Declining rates in the VLCC and Panamax sectors also contributed to the decrease.
TCE revenues were $154 million for the first half of 2016, an increase of $10 million compared with the first half of 2015. The VLCC spot rate was $56,500 per day for the first half of 2016, the Aframax spot rate was $27,400 per day and the Panamax blended rate was $23,200 per day. Additionally, revenue days for this segment increased 5% compared to the first half of 2015 primarily driven by our ULCC exiting lay-up and commencing a time charter for storage in April 2015, which has now been extended through March 2017 and 83 fewer drydock days, as compared to the same period a year ago. Ian highlighted the solid performance in our second quarter spot rates and discussed factors that have caused spot rates to soften this summer. In our third quarter, we have booked 66% of the available VLCC spot days at an average of approximately $29,200 per day, 54% of the available Aframax spot days in an average of $16,200 per day, and 42% of the available Panamax spot days at an average of approximately $14,300 per day.
In the international product carrier segment second quarter TCE revenues totaled $34 million, down 19%, compared to the second quarter of 2015. This decrease resulted primarily from significant period over period decreases in average daily spot rates earned by our MR fleet to $14,700 per day. Contributing to the decline was a 180 day decrease in revenue days resulting primarily from the sale of the Luxmar in July 2015. These decreases were partially offset by the LR1 blended rate increasing to approximately $21,300 per day in the second quarter, up 10% from the comparable 2015 period.
TCE revenues were $72 million for the first half of 2016, a decrease of $14 million, compared with the first half of 2015. The MR spot rate was $15,400 per day for the first half of 2016. We have booked approximately 36% of our third quarter MR spot days at a rate of approximately $12,000 per day. In the U.S. flag segment, second quarter TCE revenues totaled $ 115 million, a decrease of $1 million compared with the same period a year ago.
During the quarter, our TCE revenue increases were driven by a 76 day increase in revenue days, resulting from fewer drydock and repair days and our Delaware Bay lightering volumes more than doubling to 180,000 barrels per day. These revenue increases were offset by a decline in coast-wise voyages that were available to the ATBs employed in our Delaware Bay lightering business in the second quarter 2015 that were not available in the second quarter of 2016. TCE revenues were $227 million for the first half of 2016, flat compared with the first half of 2015.
Moving on to slide 8, net income for the second quarter was $30 million, compared with $58 million in the second quarter of 2015. Net income for the first half of 2016 was $81 million, compared with $101 million in the first half of 2015. The decrease in the comparative 2016 periods reflects the impact of lower TCE revenues, increases in depreciation and amortization expenses, and higher income taxes due to the non-cash deferred tax provision recorded on our foreign earnings, partially offset by lower interest expense.
Adjusted EBITDA was $110 million for the second quarter, a decrease of $20 million compared with the second quarter of 2015. These decreases were driven by the decline in TCE revenues resulting from a softer rate environment as I described earlier. Adjusted EBITDA was $240 million for the first half of 2016, a decrease of $4 million, compared with the same period last year.
Please turn to page 9. From a liquidity standpoint, we ended the quarter with approximately $461 million of cash, including $5 million of restricted cash compared with $522 million at the end of 2015. We also have access to undrawn revolving credit facilities of $125 million bringing our total liquidity to $586 million. In the quarter, we purchased and retired $19 million of Class A warrants and common stock at an average share equivalent price of $11.59.
In the second quarter, we accelerated the payment of $20 million in principal amounts of our domestic subsidiary term loan loans. In addition, in July, we accelerated another $20 million to such loan. We also accelerated $9 million of principal amounts related to our international term loan. Our cumulative delivering activities along with scheduled amortization will reduce our 2016 interest expense to approximately $70 million, down $31 million, as compared to 2015.
Our total gross leverage at the end of second quarter of 2016 was 2.4 times our last 12 months adjusted EBITDA, compared to 4.2 times in the same period a year ago. We began the second quarter with total cash of $417 million, which included 15 of restricted cash. During the second quarter of 2016, we are in the $110 million of adjusted EBITDA.
We spent approximately $1 million on drydocking and improvement to our vessels, $32 million on equity buybacks of which 19 was related to buybacks in the quarter and $13 million was related to buybacks initiated at the end of the first quarter, but were not settled until the second quarter, as well as spending $31 million on de-levering activities. We ended the quarter with total cash of $461 million of which $455 million is unrestricted cash.
With that, I would now like to turn the call back to Ian for his closing comments.
Capt. Ian Blackley
Thanks Rick. Our second quarter and first half results were strong. Across our international segment rates have soften this summer with the fundamental remaining positive. In our domestic business, we do face a challenging market, due to the decline in U.S. food production, high inventory, and the delivery of newbuild tonnage. For the sustained lower oil place environment it is also driving record U.S. gasoline consumption helping to offset the impact.
Strategically, we continue to make good progress towards separating our international and domestic businesses by creating two independent public companies with an increased ability to focus on the long term growth and profitability of both businesses we believe each will be better positioned to enhance shareholder value. Over the last 24 months, we have generated $888 million of adjusted EBITDA and continue to provide significant cash flow that gives us flexibility to consider additional opportunity to create value for our shareholders and strengthen the balance sheet of our businesses as we prepare to separate.
We will now open the call up to questions. Operator?
Thank you. [Operator Instructions] And our first question comes from Erik Stavseth from Arctic Securities. Your line is now open.
Good morning guys. A couple of quick ones from me. First of all, do you have any update on the status of the FSO’s or the FSO joint venture? Do you have any visibility on what’s going to happen there?
Yes, thank you for the question Erik. We are looking forward to northern oil company being combined so Total has taken over from or will take over from Maersk Oil Qatar and they are at this moment in the - working on getting that organized and then we expect to be able to engage.
But yes, you [indiscernible] markets have engaged or you are in discussions with total?
We are not going to comment on exactly where we stand there, but when we have firm developments we will let you know.
All right. And second question relates to the Jones Act market, you did say that you had chartered out five ATBs this quarter and that you have limited days open, but you also mentioned that you could look – at the retiring some of these ATBs and my question is kind of multiple I guess because first of all what kind of all what kind of CapEx are you looking at for those ATBs under these charter rates that you’ve now secured, are they – I assume that they defend taking them through that CapEx costs. Can you just sort of comment on how you are thinking about the ATBs at this point?
Capt. Ian Blackley
All right. What I said was that we picked those units during the course of this year and we have done that. And as you know, we don’t comment on individual charter rates, but we believe the average TCE rates for ATBs in 2016, it’s going to be around $35,000 per day. In terms of retiring, that’s – as we have said in the past, the next special survey region within 2019 and 2020. We will continue to trade them as long as we can trade them profitably and when it comes to a decision on CapEx, we will see what charters are available at that time in the marketplace and make a decision at that time.
All right. And final question is on the Jones Act product tankers. You did show a charter rate in the range of $27,000 for the few spot days you had during the quarter – yeah, $20,500 approximately. Is that the running rate for spot tonnage and the Jones Act market these days?
Capt. Ian Blackley
It’s an interesting – it’s currently interesting market. So with the last six weeks or so, there’s been very few spot cargos available. So the vessels that are in the spot market are fairly challenging to trade. We had the Overseas Houston that we deliver from our time charter in the middle of June and we ran her on a short costal voyage, which resulted in that number that you are quoting. But she is currently fixed, so we currently have no tankers that are not fixed.
Okay. All right. And then my final question relates to the financial. Could you just give us the cash position of the OIN and then OBS respectively, it might be in the 10-Q, but I can’t see it.
Yes. So the cash balance – unrestricted cash balance at June 30 at OIN is approximately $279 million and at OBS approximately $153 million.
Thank you. [Operator Instructions] And our next question comes from John Reardon from Western International. Your line is now open.
Good morning and thank you for your time. Recently the Iranians have come back into the oil export market in size and I was wondering has that changed the dynamic of Persian Gulf oil shipping, I mean has it been good or bad I hear they have a big fleet that they carry a lot of their stuff on. Could you comment on that?
Yeah, this is Lois. As far as ton miles, the Iranians coming back on source has been a negative particularly for the VLCC fleet, especially when combined with the reduction of crude coming from the western hemisphere east. It’s just longer ton miles if we come – if we bring the crude from Venezuela or West Africa and shorter coming from the East.
Okay. Thank you.
Thank you. [Operator Instructions] And our next question comes from [indiscernible]. Your line is now open.
Hi, good morning. I read from the 10-Q that you received a Wells notice on July 25 this year. Could you please comment on that how much is it? What could the potential damage be given potential outcome? Thank you.
Hi, Eric, this is James Small, the General Counsel. I mean the SEC investigation is continuing. As you know, we disclosed in the 10-Q that we recently received the Wells notice. We are in the process of responding to that. I would point you to that disclosure and we have no further comment beyond what’s in the 10-Q at this time.
Okay. Thank you. And just one more question on your strategy in the international flag business. Are you doing any, you know, time charters at the moment or do you prefer to keep your employment status as it is?
Yeah, at present we have close to 10-ship on time charter. And right now, the time charters that are being executed in the market are very short and at depressed rates. So I think at the moment, we are likely to keep our status as is.
Okay. Thank you. That was all from me.
Thank you. And I’m showing no further questions at this time. I would now like to turn the call back over to Ian Blackley for any further remarks.
Capt. Ian Blackley
Thank you everyone for giving us the time to attend the call and we look forward to talking to you at the end of third quarter if not before. Thank you.
Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.
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