Overseas Shipholding Group, Inc. (OSG) CEO Samuel Norton on Q1 2019 Results - Earnings Call Transcript

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About: Overseas Shipholding Group, Inc. (OSG)
by: SA Transcripts
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Earning Call Audio

Overseas Shipholding Group, Inc. (NYSE:OSG) Q1 2019 Earnings Conference Call May 9, 2019 11:00 AM ET

Company Participants

Samuel Norton - President, CEO & Director

Richard Trueblood - VP & CFO

Conference Call Participants

Robert Jensen - CF Partners

Operator

Hello, and welcome to the Overseas Shipping Group First Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions]. I would now like to turn the call over to Samuel Norton, President, CEO and Director. Please go ahead, sir.

Samuel Norton

Thank you, Keith. Good morning, everyone, and thank you all for joining Dick Trueblood, Molly Arcia, Princeton McFarland and me for our 2019 First Quarter Earnings Call. We welcome the opportunity to provide added depth and perspective to our written public disclosures and appreciate your taking the time to listen in on this call. As was the case during our last call, our presentation today will further expand on our disclosures in an effort to offer more commentary on the future trajectory of our business. It is our hope that the additional information provided will help bring into sharper focus the potential that we see in OSG's business model.

Prior to beginning our review of the past quarter, I would like to direct everyone to the narrative on pages 2 and 3 of the PowerPoint presentation available on our website regarding forward-looking statements, estimates and other information which may be provided during the course of this call. The contents of this 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 projections and could be affected by a variety of risk factors, including factors beyond our control. For a discussion of these factors we refer you specifically to our annual report on Form 10-K for the fiscal year ended December 31, 2018 and to our other filings with the SEC which are available 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 the date of these materials, and we do not assume any obligation to update any forward-looking statements except as may be legally required, or the reasons why actual results could differ. In addition, our presentation today will include certain non-GAAP financial measures which we define and reconcile to GAAP in our first quarter earnings release furnished at the SEC and which is also posted on our website.

Before going into the specifics of the first quarter, I would like to briefly reiterate the strategic priorities that we have advanced in recent quarters and provide some perspective on how to understand our business going forward. Broadly speaking, our strategic objective over the past several quarters has been to position the company to weather a sharp but short-term reduction in cash flow while maintaining market exposure so we could benefit from a recovery in the Jones Act tanker and ATB trades which we now see as well underway.

We achieved five major goals necessary to succeed in this effort. We reduced and refinanced our principal debt obligation. We controlled and right-sized our shore-based overhead costs. We sustained stable cash flows generated by our niche businesses. We extended bareboat leases with AMSC and added an additional leased vessel with the Overseas Key West. Finally, we have kept most of our charter commitments short in duration so as to benefit from what we foresaw as improving fundamentals in the supply and demand balance, leading to more favorable pricing environments.

As Dick will highlight in greater detail in a few moments, our success in meeting all these objectives is evident in our first quarter financial results. Further, we expect the benefits from these successes to factor more heavily still in our results over the coming quarters and into 2020.

The numbers in recent quarters reflect the narrative of a business adjusting to a cyclical downturn caused by an excess of available supplies. However, the gradual restoration of the supply/demand balance which has occurred over the past year-and-a-half, driven largely by the permanent removal of supply via scrapping and the revival of demand for domestic crude oil shipments should, to our minds, shift the narrative to a more positive one in the quarters that lie ahead. Given the shift we believe that it will be useful to share a new framework for understanding the trajectory of our future results.

First, our niche businesses provide a strong foundation of earnings and cash flow. While fluctuations from quarter-to-quarter are evident, the longer-term perspective of our niche businesses is one of stability. Over the 9 quarters dating back to the beginning of 2017, the average time charter equivalent earnings of our niche business is $36.5 million per quarter. Our first quarter results of $35.2 million are largely in line with that average, with the minor reduction being attributable almost entirely to the redelivery of the Overseas Chinook from Petrobras in May of last year and her current status treading as a conventional tender. Given the unique attributes of the assets which serve our niche businesses, we consider the stability that has characterized this portion of our earnings stream to be a reliable component of our future earnings profile.

Second, consider the earnings potential of our conventional tanker fleet. This part of our business is characterized by particularly high operating leverage with essentially all incremental TCE revenues above our fixed break-even levels falling straight to the bottom line. As we have seen in recent quarters, the increased entry into time charters at higher rates is evidence that our customers are prepared to accept a larger exposure to utilization risk in order to secure firm access to transportation capacity.

With now 10 vessels in OSG's fleet characterized as conventional tankers in our presentation formats, each incremental $1,000 per day in average TCE translates to a revenue gain of approximately $3.5 million per annum. With a minimum amount of variable cost associated with these gains, substantially all of this increased revenue drops to the bottom line.

Toward the end of this year, we will be in the position of resetting the rates on most of our tanker charters. We are optimistic that this reset of rates represents an attractive opportunity to realize meaningful earnings expansion. Our confidence relies on our expectation that the incremental tightening of available supply is expected to continue, paired with favorable signs of continued demand for both crude oil and refined product movements.

In addition, several of the tanker charters rolling off in 2019 were signed during a period of relative market weakness as compared with current market conditions. Third, consider the changing nature of the contribution of our ATB fleet to our revenue mix. As recently as 2016, this asset class contributed nearly 25% of OSG's domestic revenues. The advanced age of certain of these assets has increasingly impacted their marketability for regular service in domestic trades and accordingly, we have to date removed four of these older ATBs from our fleet. A conventional ATB fleet revenue contribution has as a result declined to less than 10% of a reduced revenue total. We anticipate that our four remaining legacy ATBs will be phased out over the next 18 months.

Offsetting these foreseeable losses of revenue and cash flow stream that can be expected to be generated by the two newly-constructed barges that are contracted for delivery next year while not wholly replacing the revenue lost from the phase-out of our eight older ATBs, the new barges once placed into service during the second half of 2020 are expected to stabilize our run rate ATB EBITDA contribution at approximately current levels.

Fourth, we should consider the profit share obligations which exist in the contract terms for the vessels we lease from American Shipping Company. Payout of profit share to AMSC has been neither a feature of our business presentations nor in recent years a relevant component of our financial results. With the expectation of better markets ahead, this element will come more clearly into focus. We continue to view the prospect of a payout of profit split as being a relatively distant event. Nevertheless, we will provide more guidance of how and when we expect payouts to arise. Dick will elaborate on this point in his comments.

Finally, an understanding of OSG's potential should not fail to include the possibility of future growth through acquisitions in both the Jones Act and internationally-traded U.S. Flag market. Opportunities for consolidation among existing participants in the Jones Act remains a constant focus. OSG's ability to sustain its good standing in the community of our customers, our peers, and our regulators, is a valuable and differentiating feature of our business model, and positions us well to pursue growth opportunities within the Jones Act market.

Safety and consistent service quality remain, above all, the key focus of our operations. The results achieved on this front are widely recognized by our key constituents. We will continue to place paramount importance on maintaining our established culture of continual progress towards achieving the highest standards and both protecting the environment and ensuring the health and safety of all of our employees.

For U.S. Flag tankers operating outside the Jones Act, broad consensus exists in Washington that a critical shortage of tanker-qualified marine personnel exists today, and that a deeper pool of mariners can only be created to the extent that additional U.S. Flag vessels are available to provide jobs and training necessary to develop qualified sailors.

We view this critical strategic priority for our country as an important opportunity that OSG is ideally suited to fulfill. We have unique qualifications to participate in partnership with MARAD, the Transportation Department and the Defense Department in efforts to develop a workable framework to expand the non-Jones-act U.S. Flag tanker fleet. Our investment in new vessels under construction in Korea, which we intend to sail under U.S. Flag eventually, offers a highly-visible commitment to our support of this initiative with important growth and revenue expansion implications for OSG should we succeed in this effort.

Before turning this presentation over to Dick for a more detailed review of the past quarter's results, I would like to shape expectations as to the remaining quarters of 2019 that lie ahead. We immediately cannot predict with specificity where the market will be in six months' time, but we consider the fundamentals to be strong, the barriers to entry for any prospective new entrants to be high, and the prospects for continued strength in rates to be encouraging. The time charter equivalent earnings for both spot and contracted conventional tankers for the first quarter of this year averaged $49,317 per day, which represents an increase of approximately $4,800 per day over comparable averages for the full year of 2018.

The current contract cover in place for the final three quarters of 2019 amounts to 69% of vessel available days, with specific expiry date details provided in slide 6. Given this visibility of fixed earnings and an assumption of renewals at current rates, we would expect this average to rise above $50,000 per day for the entire year. Taken together with the incremental vessel operating contribution expected to be obtained with the entry of the Overseas Key West into our trading fleet in late April, we expect the 2019 cash flow contribution from our conventional tanker fleet to improve by approximately $20 million over results achieved in 2018 and by a further $20 million to $25 million in 2020.

The conventional ATBs averaged $21,419 per day during the first quarter. During 2018 our conventional ATBs provided $12.5 million of vessel operating contribution. As compared with last year, we anticipate that 2019 will see a transitional $3 million to $4 million decline in annual operating contribution from our current ATB fleet as a result of removing two older ATBs from service in December of 2018 and our plans to remove two additional ATBs from service during 2019.

By mid-2020, we anticipate that the revenue derived from our legacy ATB fleet will have dropped to zero. However, our two new barges currently under construction, once delivered, should fully compensate for the loss of contribution provided by our ATB fleet during 2018. By 2021 we expect continuing operating contribution from the two new conventional ATB units of $15 million to $20 million per year. We have already secured time charter employment for one of these barges, commencing upon its delivery and are in active discussions regarding employment opportunities for the other one.

For our niche businesses, we consider first quarter time charter equivalent and vessel operating contribution of $35.2 million and $22.6 million, respectively, as being a good indicator of performance for the balance of the year. Our expectation is that our full 2019 performance will likely fall within plus or minus 5% of the 2018 results in this sector. We are confident in the stability of cash flows that these assets provide.

Before I hand things over to Dick to take you through a more thorough review of the past quarter's financial results, it is useful to recall that as of the end of March 2019, OSG owned and operated an active fleet of 21 vessels listed in slide 9. Our active fleet includes tankers and articulated tug barges, of which 19 operate under the Jones act and two operate internationally in the U.S. Maritime Security Program. Additionally, we have two MR tankers under construction in Korea with a scheduled deliver in September of this year, and two 204,000-barrel barges under construction at Gunderson Shipyard in Portland, Oregon, which are contracted for delivery in 2020.

With this picture having been refreshed I will now turn the call over to Dick to provide you additional details on our first quarter results for 2019. Dick?

Richard Trueblood

Thanks, Sam. Please turn to Slide 11. During the first quarter we continued to see a positive spread between WTI Houston and Bonny pricing. This was a consistent theme in 2018 and is continuing in 2019. The price relationship supports the use of domestic crude oil and refinery operations. As a result, we continued to see crude oil movement from the Gulf of Mexico and the related employment of Jones Act tankers in this trade. Analysts expect that this pricing differential will continue to exist over the medium term.

Please turn to Slide 12. Spot rates on a TCE basis were in the upper $50,000 to mid-$60,000-per-day range during the quarter. We have limited spot market exposure with only one tanker and one ATB operating in the spot market during the first quarter of 2019.

Please turn to Slide 13. During the first quarter, we had 21 active vessels engaged in our business. This was a two-vessel reduction from the first quarter 2018 due to the sale for scrap of two of our rebuilt ATBs during December 2018. Our contracted affreightment with the Government of Israel is for a minimum of seven voyages annually. We performed one voyage for them in the first quarter compared to two voyages in the year-ago quarter. TCE revenues for the first quarter were $82.8 million with adjusted EBITDA of $23.6 million. This represents a sequential improvement from the fourth quarter when TCE revenues were $79.9 million and adjusted EBITDA was $23.1 million. Compared to the year-ago quarter, TCE revenues and adjusted EBITDA declined by $6 million and $4.4 million respectively.

The sequential improvements result from a higher proportion of our fleet operating under time charters and the reduction of off-hire days related to dry docking. This was partially offset by the aforementioned sale of two ATBs in December and one less GOI voyage. Comparing the first quarter of 2019 with the first quarter of 2018, the reduced revenues and adjusted EBITDA result from trading fewer vessels, the shift of the Overseas Chinook from shuttle tanker operations to conventional tanker operations, and one fewer Government of Israel voyage in the current quarter. Additionally, the year-ago quarter included one high margin extensive voyage for one of our non-Jones Act Tankers.

Please turn to Slide 14. Looking at our TCE revenues on a more granular basis, our Delaware Lightering business experienced a $1.3 million TCE revenue increase from the fourth quarter 2018. The increased revenues resulted from increased liftings for one of our customers due to repair work which required vessels be fully lighter during the first quarter. This resulted in an increase of $8,558 in the average daily TCE rate when compared to the fourth quarter of 2018 due to the impact of increased utilization. Our rebuilt ATBs benefited from increased spot market rates and demand for the one vessel available for spot market trading, which resulted in an approximate doubling of the average spot market TCE rate.

Our non-Jones Act tankers recorded a slight increase in TCE revenues during the quarter when compared to the fourth quarter of 2018. We operated under international time charters for 64 more days in the first quarter, increasing the effective utilization of these vessels by reducing the number of days of spot market exposure. Our Jones Act tanker fleet TCE revenues increased $1.8 million from the fourth quarter to $58.4 million in the first quarter of 2019. This change was driven by the increase in time charter days and the resulting impact of higher utilization levels.

Looking at the year-over-year changes, lightering revenues increased in comparison to the first quarter of 2018 due to the previously-discussed volume increase, which resulted in an increase in the average daily rate. ATB revenues declined from $9.2 million to $7.5 million compared to the first quarter of 2018, primarily due to the decrease in the number of operating vessels.

The non-Jones Act tankers revenues declined from $6.7 million to $3.7 million. The first quarter of 2018 included extensive charters resulting in very high MSC employment. Additionally, we performed two Government of Israel voyages in the first quarter of 2018 and only one in the current year. Considering the seven-voyage minimum commitment from the Government of Israel, there will always be one quarter during a year with one voyage.

Please turn to Slide 15. From the start of 2017, our TCE revenues have decreased due to the retirement of older rebuilt ATBs, the evolution of high-rate time charters in a tight supply market to low spot market rates in an oversupplied market. Beginning in 2018, our great recovery began, although the benefit was impacted by volatility in the spot market which hurt utilization levels and effective rates. Since the beginning of 2017 we have reduced the number of operating ATBs from eight to four. ATB revenues have declined from $18.5 million, 83% of which was from time charters, to $7.5 million in the first quarter of 2019. We will be removing two more ATBs from service in 2019. One is expected to occur at the end of the second quarter and the other at the end of the third quarter.

Further, we will remove the last two rebuilt ATBs from service during 2020. The majority of the revenue loss associated with rebuilt ATBs has already occurred. The balance will continue to reduce over the next 18 months. Our two new barges will enter service at the end of the second quarter of 2020 and during the fourth quarter of 2020. This will begin the replacement of ATB revenues.

The right side of the chart illustrates changes in conventional time charter revenues since the beginning of 2017. Looking at the spot market revenues, spot market revenues represented 7% of conventional tanker TCE revenues in the first quarter of 2017 while we continued to benefit from legacy time charters that were still in effect. Since that time, spot revenues reached a maximum of 35% of total tanker conventional tanker revenues. In the most recent quarter, spot market revenues have declined to 6% of our total conventional tanker revenues as our business has shifted back to a more time-chartered focus. During the first quarter, eight of our nine conventional tankers were under time charter arrangements increasing the stability and predictability of our tanker TCE revenues.

Please turn to Slide 16. In contrast to the prior slide, our niche market operations have produced a stable revenue contribution throughout this period with revenues remaining in a relatively narrow band. If we look at Slide 17, this slide looks at quarterly revenue performance by the three components of our niche operations. Variability is created for all of our activities by such things as market conditions, drydock requirements and repairs. As can be seen, although there are fluctuations, the outcomes stay within a fairly tight and narrow bandwidth. This underpins our business and has permitted us to transit a low-rate, low-utilization oversupplied market. We're now seeing a reduction in vessel supply coupled with increasing demand, resulting in an increase in rates. The rebalancing of the supply/demand relationship has increased demand for committed tonnage by shippers.

Please turn to Slide 18. Vessel operating contribution which is defined as TCE revenues less vessel operating expenses and charter hire expenses, increased $5 million to $28 million from Q4 2018 to Q1 2019. The increase resulted from the continued shift of conventional tankers to increased time charter employment. Time charter revenue days increased to 982 from 826, and spot market exposure decreased from 248 days to 90 days.

Vessel operating contribution increased $2.6 million on a $1.3 million revenue increase. Lightering operating contribution increased $1.9 million on an increase in lightered volumes. Vessel operating contribution decreased $4.7 million from the prior year comparable quarter. The year-ago quarter, again, included two GOI voyages, an extensive MFC voyage, and the Chinook operating as a shuttle tanker.

Our tanker fixed revenue days increased from 720 days during the first quarter of 2019 to 982 days during this year. In Q1 2018, 50% of our ATB revenue days were in the spot market while in 2019 the spot market days represented 24% of our available revenue days. Accordingly, our average ATB spot market daily TCE rate increased 72%.

Please turn to Slide 19. First quarter adjusted EBITDA was $23.6 million compared to $23.1 million in Q4 2018. The increase resulted from improved Jones Act conventional tanker performance as well as the increased lightering volumes. First quarter adjusted EBITDA was $23.6 million compared to $28 million in Q1 2018. The decrease resulted from a reduction in the number of operating vessels, the effective higher-rate legacy time charters still in effect in early 2018, one less GOI voyage and extensive MSC voyage in 2018, which was not available in 2019, and the Chinook transition to conventional tanker operations.

Please turn to Slide 20. Net income for the first quarter of 2019 was $3.2 million compared to a net loss of $5.2 million in the fourth quarter of 2018, and net income of $3.7 million in 2018's first quarter. We recognized the tax benefit of $23.4 million in the third quarter of 2018 upon completion of the IRS audit of our 2012 to 2015 tax returns. We previously reserved beneficial effect of losses recognized in connection with the disposition of two vessels in earlier years.

Please turn to Slide 21. This chart illustrates by quarter the percentage of our revenue days that are covered by time charters. The charts include the Overseas Key West, which joined the operational fleet at the end of April. During the second and third quarters the coverage by vessel type ranges from 65% to 100%. The fourth quarter reflects a tailing off as a number of our time charters end. We're actively engaged in extending or obtaining new time charters at favorable rates. This indicates the high degree of revenue stability that can be expected over the balance of the year. As a reminder, our lightering business and our non-Jones Act tankers primarily operate under contracts for affreightment.

Please turn to Slide 22. The schedule depicted here is for our scheduled drydock and repair activities. It does not include unplanned repairs, which should they occur, could impact the schedule. While vessels are in drydock or otherwise unavailable for use they are off-hire, even if otherwise employed on a time charter. During this year's second quarter, based on our current drydock schedule, we expect 52 off-hire days which will equate to a revenue loss of $2.9 million during the second quarter. We diligently work to minimize the number of off-hire days to reduce the revenue loss we sustain. However, we will experience a revenue disruption within the quarter. The impact is much smaller if we look forward to the third and fourth quarters of 2019.

Please turn to Slide 23. As our operations continue to improve, we want to provide information concerning the profit-sharing arrangement that exists for the 10 vessels we bareboat charter in from AMSC. The chart provides information for 2020 through 2022. As we've previously stated we do not anticipate any profit-sharing obligation would be created this year. We look here at what the profit share picture might be for assumed average TCE rates based on estimated future market rates. In 2020, if we were to achieve an average TCE rate of $62,000 across our 10 AMSC vessels, there would be no profit sharing. Looking further down the 2020 column, the minimum rate required to result in a profit-sharing obligation in 2020 is $67,500 per day. If this were to be achieved, it would create an aggregate payout of $300,000 in total. Years beyond 2020 assume that the rate earned in the prior year was the estimated market rate shown. Based the on the assumptions for trade here, there would be a modest profit sharing of $370,000 in 2021.

If the average rate in 2022 was $65,000 that would produce a profit share of $10.7 million. The minimum average rate necessary to achieve any level of profit share in 2022 would be $60,000. Profit share is made out in the year subsequent to the year earned. Finally, it is worth noting that if certain costs are recovered, the minimum rate that will result in profit share will decline. Calculations are complex and have a variety of factors involved. This chart is meant to be indicative of possible outcomes based on the assumptions made.

We turn to the next slide -- we began 2019 with total cash of $81 million which included $200,000 in restricted cash. During the 2019 first quarter we generated $24 million of adjusted EBITDA. Working capital changes used $8 million in cash. We expended $1 million on drydock and improvements to our vessels, and we invested $11 million in new vessel construction. We incurred $5 million of cash interest expense. We made debt repayments of $4 million. The result was we ended the quarter with $76 million of cash including $200,000 of restricted cash.

Please turn to Slide 25. At the beginning of the first quarter, we adopted the provisions of the new accounting standard on leases. This standard requires the leases meeting the criteria set forth be reflected as assets and liabilities on the balance sheet.

Additionally, we were required to make certain balance sheet reclassifications as part of the adoption. Prior to adoption these leases, which are primarily the bareboat charters on the AMSC vessels, were not reflected on our balance sheet. We recorded the right-of-use asset of $247 million in related liability. There was no earnings or cash flow impact from these changes.

Continuing our discussion of cash and liquidity as we mentioned on the previous slide, we have $76 million of cash including $200,000 of restricted cash. Our total debt was $349 million which represents a $4 million reduction in outstanding indebtedness since December 2018. We also have a $30 million revolver which is presently undrawn. Combining our undrawn revolver with cash, we had $106 million of liquidity at quarter-end. Our $325 million term loan has an annual amortization requirement of $25 million. With $334 million of equity, our net debt-to-equity ratio is 0.8 times which is the same as it was at December 31, 2018.

At March 31, 2019, OSG had aggregate capital commitments of approximately $145 million for the construction of four vessels, two tankers scheduled for delivery in September 2019 and two barges scheduled for delivery in the second quarter of 2020 and then the fourth quarter of 2020. The contracts for these vessels require progress payments based on the shipyard's achievement of contractual milestones during the construction periods with a final payment due on delivery of each vessel. OSG has made all required progress payments to date and we will make the remaining payments including those due on delivery with financing that we will need to obtain, operating cash flow and cash on hand. We are currently in discussions with potential lenders to obtain such financing.

This concludes my comments on the financial statements. I'd now like to turn the call back to Sam for his closing remarks.

Samuel Norton

Thank you, Dick. The encouraging picture that we see for our future is founded on well-established and readily-quantifiable market fundamentals, as well as three components of our business. First, a stable and profitable platform provided by our niche market activities. Second, a renewed contribution from our new ATB capacity to be added during 2020. And finally, a revenue recovery late in our conventional tanker fleet that should allow the operating leverage of our business model to become manifest over the next 18 months.

These elements are not merely expectations for the future. We have been seeing actual results as market conditions progress in the direction we had predicted. We have not been passive in waiting for markets to recover. Rather, we have planned and taken action to position ourselves to be able to achieve positive revenue growth. We continue to believe our business today is at an important inflection point with our prior results providing only marginal insight into our expectations for 2019 and beyond.

I believe comments made earlier this year about factors that underpin our optimism bear reiterating. First is the recognition that the U.S. Flag market, and in particular the Jones Act market, is to a large degree insulated from the heightened uncertainty that can be found in international markets. The barriers to entry are high. New supply is expensive to obtain. Shipyards capable of providing that supply are limited, as are the number of qualified companies that can operate tankers in the U.S. coastwise trade. In this context, it is objectively easier than in the case of other shipping markets to conceive of and believe in the market environment that can be balanced, rational and orderly for an extended period of time. The market disruption that we have experienced in recent years was born out of a sudden change in regulations governing crude oil exports. We have seen that over the past 3 years, the slow progression of supply rationalization and the reemergence of coastwise crude oil transportation demand have combined to restore a healthier balance in our markets. As we have noted often in our recent comments, we see this recovery as now having been well-established. The weight of probability indicates that the cycle has well-turned.

Second is the powerful force of the operating leverage that underpins our business model. Following an unbalanced market that has worked against us in recent years, the fundamentals of both supply and demand are for the first time in several years providing strong support to restoring normalized pricing dynamics in our business relationships. With all of our tankers set to come open for a reset in rates within the next 12 months, and two new barges capable of restoring the revenue and cash flow stream of ATBs that will soon be phased out, the prospects of the positive effects of operating leverage to begin to flow through in our results offers cause for great optimism.

Our first-quarter results fall squarely within our expectations for 2019 to show improved financial results for OSG, with less implied volatility than in recent memory. The lag effect of charters fixed in 2018 will mask the extent of the rebound for a time, but repricing opportunities in the second half of this year should set up 2020 to allow the full benefit of the operating leverage of our business model to be experienced in our results. The new investments in two barges will come on stream in 2020 and should contribute to replacing revenue and cash flow that is exiting with the retirement of our older ATB units. Further, our new Korean new-build tankers offer opportunity to pursue initiative, to work with MARAD in expanding the internationally-trading U.S. Flag tanker fleet while offering interesting optionality to generate incremental revenue in the meantime.

All together, we have cause to believe that this commercial strategy remains sound for the long term and we remain confident that the mix of our revenue streams positions OSG to dependably generate a foundation of stable revenues from our niche businesses while increasingly capturing the upside of the ongoing market recovery.

We will now open up the call to questions, Operator.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from Robert Jensen with CF Partners.

Robert Jensen

Sam, you alluded to this in your prepared remarks and I appreciate you probably cannot say anything for certain at this stage, but is it feasible that two new MR tankers will expand the U.S. Flag fleet, instead of replacing?

Samuel Norton

I think that that's certainly an objective that we're pursuing. There is, as I referred to in my prepared remarks, there are initiative and there is support in Washington for exploring avenues to address the shortage of qualified marine personnel and the recognition that truly the only way to be able to achieve that would be to find means to create an expanded international U.S. Flag tanker fleet. Things in Washington move slowly and there can certainly be no guarantees for results, but it is part of our thought process that these vessels enable us to be able to pursue that kind of development in conjunction with MARAD and the naval forces, TransCom, to pursue that objective.

Robert Jensen

Okay, appreciate that. If we move over to the other new building effort, the barges, have you received an interest from lenders to finance these new builds?

Richard Trueblood

We are talking to several different lenders who have expressed interest in providing financing for those barges.

Robert Jensen

Any sort of indication or anything you can say in terms of a pricing --

Richard Trueblood

No. Not at this time.

Robert Jensen

That's fair. Also in the prepared remarks you mentioned that the two new build barges would contribute between $15 million and $20 million of EBITDA. Is that number based on the level that you've already secured for the first one? I'm just sort of trying to figure out any level in terms of day rates.

Samuel Norton

So I think to guide you we would pitch kind of the operating cost of the barges, tug and barge units combined together, at somewhere around $15,000 per day over the first five years of operation. Probably starting a little bit lower than that, and with escalations over time. And we put the time charter equivalent market rate for a vessel like these barges, prospectively at between $35,000 and $40,000 per day. That -- again, that's our feeling for the likely earnings capacity over the next 3 to 5 years. We might be a little bit lower than that in the earlier years and rising over time. It's really our perspective that the market price for these new barges will be tiered off of the market rate for the tankers. So when looking at a dollar-per-delivered-barrel cost, there will be -- there will be relative movement in the barge cost based on where the tanker rates are. So our expectations over the next several years of the tanker rates were between $60,000 and $65,000 per day, and that's how we get to the $35,000 to $40,000 a day, per day for our expectations for what the barges would earn.

Robert Jensen

And finally, Murphy recently assumed operations of the Cascade and Chinook field and as far as we understand they will try to increase the output there, and I'm sort of curious if you have had any discussions or any thoughts about the need for more shuttle tankers.

Samuel Norton

I think that we have expressed in the past our view that there is more -- there is more than two vessel demand for shuttle tankers in the medium term. And therefore, we remain optimistic that the Overseas Cascade, which is outfitted to provide shuttle tanker services, can find incremental revenue opportunities in performing shuttle tanker services over the medium term. It's important to remember that she can operate as a normal tanker notwithstanding -- sorry, the Chinook -- she can operate as a normal tanker notwithstanding the shuttle tanker features. But we are -- we're constantly awake to discussions with Murphy and others about the possibility of utilizing the Chinook as well as a shuttle tanker rather than just a conventional tanker.

Robert Jensen

It'd be helpful for visibility, at least. All right, thanks.

Operator

[Operator Instructions]. The next question comes from Milambro Popakonomov with Nefex Research [ph].

Unidentified Analyst

Good morning. Thank you very much for taking my call. I would like to ask a couple of questions regarding the Overseas Key West, the new vessel that you have under bareboat charter. Can you give us an estimate of what is the budget for the special survey that the vessel is undertaking?

Samuel Norton

Our expectations are in the range of $4 million to $6 million in terms of total capital costs, including capitalized costs that would be involved in the lead-up to the completion of the special survey.

Unidentified Analyst

And upon completion the bareboat charter, you will account for that as an operating lease, like the--

Samuel Norton

That's correct.

Unidentified Analyst

Thank you very much. Now on your schedule that you provided regarding the expected drydock expenses, I presume that none of this will be for the conventional ATBs?

Samuel Norton

That's correct.

Unidentified Analyst

So they will be phased out before the next special survey?

Samuel Norton

Correct.

Unidentified Analyst

Can you remind me, the one ATB that you have in layup, what is the prognosis for that, to remain in layup or also to be phased out?

Richard Trueblood

I would expect that we will dispose of it over the next few days at a nominal profit. I mean, very nominal.

Samuel Norton

To clarify, dispose means, we would be -- we'll sell the vessel for demolition.

Unidentified Analyst

Thank you very much for the clarification. And that -- I presume that all the other ATBs that you have sold or you are planning to sell will be sold for demolition, right?

Samuel Norton

That's the intention. We remain open to opportunistic inquiries for use of these assets outside of the Jones Act, but our experience to date has been those kinds of inquiries have been less than robust in seriousness. So we have -- we've taken a pretty pragmatic view as to what the likely outcome of these vessels will be once we remove them from service.

Unidentified Analyst

Thank you. And then I have one last question, it's a little more general in nature. I noticed that you discussed about the possibility of if you like expanding the non-Jones Act U.S. Flag fleet for product tankers. I was wondering, any discussion regarding the possibility of U.S. Flag LNG vessels whether these are Jones Act or not? Or I mean, how realistic is this? How commercial physical could it be?

Samuel Norton

It's not really our area of expertise, so I would hesitate to offer any concrete comments. You know, I think anyone that pays attention to the Jones Act news is probably aware that in recent months there has been discussion about trying to enable an LNG trade from the continental United States to Puerto Rico. That's given rise to a number of arguments, both pro and con, as to how that might support construction of LNG vessels in the United States. That is a Jones Act trade, so under current legislation and the application of current legislation, that kind of trade would need to be served by a Jones Act vessel. Notwithstanding that discussion, there's at least to my knowledge, there are no specific plans to design and build LNG tankers that would be suitable for that trade in the United States, but it could be -- it could be going on in the background and I'm not aware of it. It is -- it is also notable that some pressure was brought to bear to obtain a waiver of the Jones Act to allow non-U.S. Flag LNG tankers to participate in the trade of LNG from the continental United States to Puerto Rico. That initiative appears to have died out in recent weeks. That's not to say that it couldn't come back, but at the time -- for the time being that seems to be not a possibility open.

Operator

Thank you. And as there are no more questions at the present time, I would like to return the floor to Samuel Norton for any closing comments.

Samuel Norton

Thank you, Keith. We just want to reiterate our thanks for people listening in and taking an interest in our business. We look forward to speaking to you again in the coming quarters. Have a good day.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.