Octave Specialty Group Inc (OSG) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to your Overseas Shipholding Group First Quarter 2015 Earnings Conference Call.

(Operator Instructions).

I would now like to introduce you to your host for today's call, James Small with General Counsel. Sir, you may begin.

Thank you. Good morning everyone and welcome to the first quarter 2015 earnings release conference call. Before we begin, I would like to start off by advising everyone on the call with us today with the following.

During this conference call, the management may make forward-looking statements regarding OSG or the industry in which it operates, which could include without limitation; statements about outlook for tanker and articulated tug barge markets; changing oil trading patterns; forecast of world or regional economic activity and demand for oil and petroleum products, OSG strategy, expectations regarding revenues and expenses including general and administrative expenses and vessel expenses; estimated TCE rates achieved for the first quarter of 2015 and booked for the second quarter of 2015; estimated capital expenditures for 2015; projected scheduled drydock or off-hire days; OSG's ability to achieve its financing objectives; and regulatory developments.

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 the management believe 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 the actual results to differ from the expectations reflected in any such forward-looking statements are described in OSG's annual report on Form 10-K for 2014 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'd like to turn the call over to our President and Chief Executive Officer, Captain Ian Blackley. Ian?

Thanks James. Good morning everyone and thank you for joining us for our 2015 first quarter earnings call. It's been a while since we held an earnings call. We appreciate you joining and getting us the opportunity to update you on our business.

I'd like to introduce you to our team on the call today. Joining us from the road is Lois Zabrocky, who is President of our International Business. She's currently in Europe and joining us from Amsterdam Airport.

Also, we have Henry Flinter, also on the road. He's President of our Domestic Business. He's in [Baldy] at Alaska and he's about to head to the airport.

I believe many of you will be familiar with both Lois and Henry. They've both been with the company for a fairly long time.

With me here in New York is Rick Oricchio, our CFO. Rick joined us in January after a 30-year career with Deloitte. He was invited to us during the Chapter 11 proceedings. So his knowledge of the company has led him to hit the ground running and his current position. He brings a wealth of tax and capital markets experience to the team and you will hear from him shortly.

James Small is our General Counsel, whom you heard from earlier. He's also here in New York. James joined us in March after almost 20 years with Cleary Gottlieb. He was legal adviser to us during the restructuring process, so he's also familiar with the company. He brings securities law, capital markets and corporate governance experience.

We also have Brian Tanner here with us, our new Head of Investor Relations, who joined us last month.

As you know, we emerged from bankruptcy in August of 2014, marking a new beginning for OSG. Our successful emergence would not have been possible without the hard work and commitment of our advisors, our shareholders, and most critically, our employees both at sea and shore.

We emerged with a stronger balance sheet, giving us greater flexibility. We still maintain our market-leading presence in the Jones Act, and a sizeable international flag fleet.

We've also improved our efficiency and cost structure, positioning us to compete more effectively.

In our U.S. flag fleet, we have 24 vessels, 10 of which are chartered in. 22 of them are Jones Act, making us the largest operator of Jones Act vessels in our sector, both by the number of vessels and by dead weight.

We have a strong presence in all U.S. coastal regions, and we have the largest on the modern Jones Act tanker fleet.

We are also the only operator of Jones Act shuttle tankers.

Our international flag fleet of 56 vessels, seven of which are chartered in, plays predominantly in spot markets. Our international business today, utilizes an outsourced model with all of our international flags and conventional tankers, technically managed by [V ships] in the U.K., and commercially managed through [Pools] or other commercial managers.

We're able to place vessels on time charters in sectors where longer term contracts are preferred, such as LNG, FSO and the Jones Act, while keeping our international tanker fleet spot. This allows us to combine stable, contracted cash flows with the more volatile but historically higher returns available in international spot markets.

Turning now to our first quarter results, and we'll give a short update about each of our segments.

TCE revenues for the first quarter was $221.6 million, up 3% over the same time period last year. Revenue growth in the quarter was driven by stronger rates across our international flag segments and a continued robust Jones Act market.

This strength in both of our businesses more than offset the impact of a decrease in revenue days quarter on quarter, due to the redelivery during 2014 of 10 time variable chartered in vessels and the sale of five older vessels.

Our adjusted EBITDA was $113.7 million for the first quarter, up more than 30% from $86.6 million in the same period a year ago.

Net income increased to $42.9 million in the first quarter, compared to only $12.6 million in the same period a year ago.

Fundamentals of the U.S. flag business remained strong, and we are well-positioned to benefit from this. It's a strong rate environment, it has allowed us to renew all the time charters that expired over the last 12 months at higher rates.

In the international crude sector, the fundamental drivers remain positive, with crude oil demand and tonne-mile demand both rising. This rising demand coupled with a lower growth rate in vessel supply have led to increased utilization, tightening the balance between supply and demand, resulting in increased rates.

Other shorter term factors like oil price and [tangle] may provide further support to this market from time to time with historic opportunities to move ships from the trading fleet.

Together, these factors have led to significantly improved rates in our crude sectors, evidenced by the 54% increase in our first quarter, average VLCC spot rates to $49,280 per day.

Average Aframax spot rates have increased to $30,932 per day in the quarter, up 15%. And our average Panamax blended rates increased to $20,793 per day, up 12%.

The international products carrier sector has also improved, as the market absorbs new builds and demand continues to grow.

The U.S. has become the largest refined product exporter in the world in recent years, but most U.S. product exports currently moving on MR tankers in South America and Europe providing somehow benign growth in the sector. This has led to significantly improved rates on MRs and then a slight 49% increase in the first quarter MR spot rates, to almost $19,000 from $12,600 in the same period of 2014.

Our first quarter performance was a strong start to the year, and we remained well-positioned in both our domestic and international businesses to capitalize from the strength of the tanker markets.

With 80 vessels on the water generating cash, I remain excited by our prospects and I am confident in our ability to create value for our shareholders.

I'll now turn the call over to Rick to provide some additional details on our first quarter results.

Thanks Ian.

Let's move directly to reviewing the first quarter results in a bit more detail. TCE revenue for the first quarter of 2015 totaled $221.6 million, up 3% compared with the same period in 2014. The $7 million increase was driven by both a continuous strength in the U.S. flag markets and strengthening crude and products spot rates in the international flag markets.

This increase came about even as revenue days decreased 18% or 1,432 days compared with the same period in 2014. That decrease was largely due to the redelivery of 10 vessels at the expiry of their short-term charters and the sale of five older vessels in 2014.

Adjusted EBITDA was $113.7 million for the first quarter, an increase of $27.1 million or 31% from the $86.6 million in the comparable 2014 quarter. Adjusted EBITDA is defined as EBITDA adjusted for reorganization items, gain on disposal of vessels and other properties, severance and relocation cost, and technical management transition cost, as described in more detail in our earnings press release.

The increase in adjusted EBITDA was primarily driven by the strength of spot rates, particularly in the international crude markets and lower G&A expenses. This increase was partially offset by reactivation cost we incurred for our VLCC that had to do with this removal from the layout ahead of an 11 month storage charter that started last month.

Net income for the quarter increased to $42.9 million in the first quarter, compared to $12.6 million in the same period a year ago. This increase was primarily due to the factors I just covered, most importantly, the strength of spot rates.

We increased interest expense due to our reinstated debt and exit financing, which essentially offset by the favorable impact of having the reorganization process behind us, resulting in substantially lower cost for reorganization advisors.

Turning to our segment results beginning with the U.S. flag business.

First quarter TCE revenues for the U.S. flag segment totaled $111.2 million, up 11% or $10.8 million from the same period a year ago. This increase reflects the continued strength of the Jones Act market. Time charters on our Jones Act product carriers and ATBs that expired since the first quarter of 2014 have all been replaced with new time charters, averaging above and a number of cases well above the expiring fixed rates. This is reflected in an almost 15% increase in time charter revenue compared with the first quarter of 2014.

First quarter TCE revenue for the international crude tanker segment totaled $66.8 million, down 19% from the same period a year ago. This decline reflects the 1,448 day decrease in revenue days as compared to Q1 of 2014, mainly due to the redelivery of the eight Aframaxes and one Suezmax in 2014 at the expiry of their short-term charters.

Also, we sold five older vessels in 2014; two VLCCs, two Aframaxes, and one Panamax.

The decrease in revenue days is partially offset by strengthening an average daily rates across all fleets in the segment. Ian highlighted the strong performance in our first quarter average spot rates, and second quarter performance continues to be strong.

We have booked approximately 50% of the available VLCC spot days and rates remain at an average of approximately $50,000 per day. And we booked 40% of the available Aframax spot days at an average of close to $30,000 per day.

In the international product carrier segment, first quarter TCE revenues totaled $43.5 million, up 39% or $12.3 million from the same period a year ago. The increase was primarily due to the 49% increase in MR spot rates, which Ian highlighted earlier.

Our first quarter 2015 G&A totaled $19.3 million, compared with $24.4 million for the first quarter of 2014. The decrease was primarily due to reduced employee-related cost from our shift to an outsourced model in our international business.

From a liquidity standpoint, we ended the first quarter with approximately $595 million of cash, including $118 million of restricted cash, of which $40 million is designated for bankruptcy-related cost, and $78 million as per our credit agreements is designated for vessel acquisitions or to pay down debt.

We also have access to undrawn revolving credit facilities of $125 million.

Before beginning the Q&A session, let me comment on the Form S-1 registration statement we filed on Monday of this week.

As previously disclosed, there is no certainty that an offering will take place. And the timing, price, and other terms of any such potential offering have not yet been determined. As we are currently going through the registration process, we have no further comment at this time and will not be able to answer any questions relating to the S-1.

In addition, because we are currently in registration, our ability to answer questions on the company and its prospects is limited. We apologize in advance for this, but we did want to resume investor calls.

With that, we will now open the call up to questions. Mercedes?

Thank you, sir. Ladies and gentlemen, at this time (Operator Instructions).

Our first question comes from the line of Andrew Casella with Imperial Capital. Your line is now open.

Hi, thanks guys, appreciate you hosting the call. I guess just first, when we look at your balance sheet you have about $600 -- $600 million in cash, you know, how are you kind of thinking about capital allocation? Is there a particular side of the business you'd like to invest in? Is it potentially going to be used to address the holding company? That just kind of around your general thoughts on, you know, how you think about that cash balance.

Andrew, we're looking at all the options on our use of cash. You know, we don't want to comment on specifics at the moment, but I can say the scale is important to our business. We do believe that there will be opportunities for us to deploy cash in either of our businesses, domestic or international.

Got it. And then, you know, this is a kind of a follow up related to strategic direction. You know, during the bankruptcy, you guys had retained Deloitte to work on carve out financials to potentially separate the international flag business. You had hired Barclays, I believe, at the end of 2014. You know, any general comments on how you're kind of looking at, you know, splitting apart the businesses where some of the opportunities are in the strategic side, you know, whether it's consolidation in the Jones Act? You know, I think most people are kind of focused on your relationship with American Shipping. Any comments you could, you know, provide there?

Andrew, I have a formal response to such questions. I'm kind of glad this come up early on. And that is the following.

Although from time to time, we may consider various strategic transactions, we have adopted a no comment policy regarding questions relating to potential transaction or market remarks. And those comments should not be taken either an affirmation or denial with merely an indication that we do not plan to comment.

That's kind of where we are on those types of questions, Andrew at the moment.

Okay, that's fine. And then switching to your ATBs in the Jones Act segment; you know, can you comment on their trading life? I think during, you know, the bankruptcy, the plan projections had indicated this, you had the expectations those would be scrapped toward the end of the decade, but you know, they were -- you guys had spent a bunch of money rebuilding them, and I was expected to add some, you know, 20 years of useful life.

You know, how are those trading in the market place? Do you still think that those need to be scrapped on the schedule given the rate environment? You know, obviously it's a big capital investment to re-fleet that. If you could provide any color there.

Yeah, these -- the units are well maintained. We have the option to take them out of service or to take them to a drydock. Really, will be customer-driven. And when they reported to drydock or approaching additional capital expenses, we'll look at their future employment prospects, look at the cost of the drydock and capital expense, and make a decision at that time.

Okay. And when we look at, you know, your Jones act contract schedule, you know, how should we think about the progression of the year? You know, how many vessels between the ATBs and the Jones Act MRs do you have coming off of contract and kind of what are your expectations of where the market rates are today?

Yes. We have none coming off this year, and the three tankers that is coming off in the first quarter 2016. We're currently discussing those with the existing charter. We were not able to make any comments on what the rates maybe and then we have a number of the ATBs that are coming off later in 2016.

Got it. And then just my final question, appreciate the generosity with your time, when we look at the joint ventures, you know, clearly that's generating lot of net income for you, but, you know, are you receiving cash distributions and when is the expected timing of when you'll, you know, that'll become more of a cash number versus just an equity income figure on the income statement?

Yes, we have last year and we received distributions from the two JV from the international side of the business both totaling $35 million. And then the first quarter 2015, again on the international side, we received $12.5 million and then $3.4 million on the domestic side in the first quarter.

Got it. Congrats on the quarter, I'll get back in the queue.

Thank you.

Thank you. And our next question comes from the line of [Omar Delquida] with [Clarksy], your line is now open.

Hi there. Hi guys, congratulations on the new developments and for the structure you have in place. And you know, looking forward to seeing what's ahead.

You know, cognizant of your comments, you know, some of the juicy questions I guess I'll you know, obviously have to steer clear of, just had a couple of maybe, you know, questions about the, you know, the Jones Act market, and you know, the, you know, given, you know, the market had obviously has been strong for quite some time, I just wanted to get a sense from you if you can give us, you know, maybe over the past six months how that market has shifted. Has it remained strong? Has the change in oil prices had any impact? I'm just looking to get some color on that with respect to both ATBs and the tankers if you can.

Henry, can you - do you want to take that question?

Yes, I can do that, Ian. So this is Henry Flinter.

The rates have softened slightly and I emphasize slightly with the uncertainty created by the decline in oil prices which has been quite dramatic since, I'm going to say early Q4 2014. But this is slight and we disclosed this in the 10Q and our estimate is current spot rates in the market, and I think you'll see there's a decline in Q4 and Q1 of 2015 of just a few thousand dollars a day.

Okay. Thank you.

That's helpful and I'll look for that in the Q. And then also just wanted to ask on the two Jones Act shuttle tankers, you know, those were I remember correctly, originally built to as product tankers and then maybe switched later on towards shuttles or maybe halfway through construction. Just, you know, those two vessels, you know, are those going to be -- are those slated to continue working as shuttle tankers? When do those roll off contract?

And also, I guess with that, do you see them continuing on as shuttle or switching into the product trade?

Those vessels were converted to shuttles soon after delivery from the shipyard. They were contracted with Petrobras. They remain under contract with Petrobras providing shuttling services to their field in the ultra deep water. This is the Cascade and Chinook fields.

And that continues into the future. The -- during the course of the bankruptcy, the charters were extended. They exercised option that they had and extended for an additional period of time. So, we foresee that those vessels remain in place with them for some period of time.

Thank you. And are you able to give any sort of, you know, period as to what the extension was for by any chance?

So I believe this was somewhere on the thousands of papers, filed in bankruptcies, so it's public. The -- it was a three year extension that we had available to them. They exercised that on both vessels and then for one of the questions, they extended an additional two years.

Okay, perfect. All right, thank guys, thanks for the help. I'll hop out.

Thank you.

Thank you. (Operator Instructions).

Our next question comes from the line of Benjamin Nolan with Stifel, your line is now open.

I was going to just follow-up a little bit on Omar's innocuous question there. As it relates to the Jones Act business and you know, you mentioned that the spot market had softened just a touch, but could you give me maybe a sense of specifically for the MRs, where is the longer term time charter market or where are rates approximately at this level, is it much demand in the market for longer term contracts and you know, any sense maybe of the direction of the- of where rates have been and maybe are trending?

And Ben we can't really comment on forward rates but, you know, we certainly can say that the market remains strong and albeit with (inaudible) softening sentiment that Henry referred to earlier, you know, typically we put our MRs out on -- in a three to five year time charters, that's our period covenant in the market.

And there were -- currently the market is still somewhere in the 70s or so or 80s? For those longer term duration contracts?

Can we comment? I don't think we can give you projection.

Okay. That's fine. The -- stepping away from that for a second, just thinking about the internationally flagged fleet. Obviously the profile of the fleet has changed a little bit or shrunk a little bit subsequent to the bankruptcy, but are -- when you guys look at your fleet as it stands at the moment for both the clean and the dirty, are you sort of -- do you feel like in each of the categories that you participate, you feel like you have the scale that you would like, you know, are there areas within the profile that you feel like, you know, maybe would be enhanced a bit with more scale?

I think we -- in general, Ben we, you know, we like the large crude space and we certainly like the [cold gate] -- we're certainly like the product space as well. And you know, we're fairly heavy into MRs as you know. There's been a lot of new building deliveries in 2014 and 2015. But the underlying demand in that sector is very positive and when these builds get absorbed, we think that's a good space to be.

Okay. Well, along those lines, would you say maybe that you're more positive, really predisposed to the dirty side or the clean side? Is there or agnostic?

Yes, we, you know, we like being diversified. This was a -- the crude market has been strong over the last couple of quarters and is continuing to be strong. You know, our Jones Act business has been strong for a number of years. Products, as I said earlier, you know, the products were good in the first quarter and we -- and you know, we look forward to seeing where that market goes when the new builds are absorbed.

I should also, to your earlier point about scale, point out we operate all of our international target, our international conventional tankers in pools so we can achieve the scale and high utilization through that strategy.

Yes. Sure. Okay, well that does it for me, thanks a lot guys.

Thanks.

Thank you. And our next question comes from the line of Dean Pagonis with Cove Street Capital, your line is now open.

Hi, guys. I was just wondering if you could kind of go over some of the major tonne mile drivers that you guys are seeing on the crude Jones Act and the product market side.

Sure. Let's start with international. Lois can you take that please?

Yes. Thank you, Ian. Definitely when we look on the international side, at the larger crude space, you know, one thing that we're seeing done much more frequently is that you actually have vessels that will balance from the discharge in China, come over to the Caribbean and pick up a cargo to take back to the east. So, that's, you know, one example of how you're seeing, you know, the changing trade lanes and increase in ton mile.

We also had a pretty cold winter in the Northern Hemisphere and that really helped out the midsized Aframaxes on the crude space as well. That's it, Ian.

So I'll pass it over to Henry.

(Multiple Speakers)

Okay, thank you Ian. On ton miles demand on the U.S. side, the driver is U.S. domestic crude oil. And the spread between two benchmarks, Brent and WTI, there's a healthy spread at the moment.

And that spread encourages coast wise movements of domestic crude oil to refineries here in the United States. So that's been a strong driver of demand and we have done coast wise voyages in 2014 and then in Q1, utilizing the spare capacity in our lightering fleet our two Delaware day lightering ATBs to perform coast ways voyages moving domestic crude.

Then, can you talk for a second about your sales and purchase discipline and how you think about the sales and purchases going forward, and whether or not you have any plans to either add to or trim the fleet at the right prices or rates in today's environment?

So, we're not really in a position to comment on specific S&P deals. We have as we mentioned, in our opening remarks, we have disposed of a number of our older international vessels in the last 12 months. As I said earlier, you know, scale is important to our business, so we look at all options, but we don't want to get into specifics here.

If you can just comment on kind of how you're handicapping the possibility of the crude export ban being lifted and how that's factoring into your decision making agenda?

You know, the potential exporter of crude from the lower 48 is something we keep very close watch on. You know, we don't have a specific view on it, but we certainly think it's possible that the export of condensates may grow as more [splitters] come online.

(Operator Instructions).

Our next question comes from the line of George Schultze with Schultze Asset Management, your line is now open.

Hi, good morning gentlemen. I wondered if you can give --.

Hi, George.

-- a little bit of guidance on expected maintenance capital expenditures going forward? I know that in your bankcruptcy plan you had projections of, I guess $70 million to $85 million per year, I'm curious if that's still a reasonable estimate or if there's a change in your expected maintenance capital expenditures per year going forward?

We have -- in 2015 on the domestic side, we have about 13 vessels we expect to drydock at a total cost of about $35 million and on the international side, we're looking 14 vessels, total cost of around $22 million.

Thank you.

You're welcome.

All right. Actually, one other question if I may. Regarding tax expense going forward, what's a reasonable estimate for the business given, you have both an international and a domestic component to the business?

Very difficult to -- George, this is Rick Oricchio speaking. The -- it's very difficult to predict a -- an effective tax rate because the mix of our earnings could change dramatically with the movement in spot rates and the international -- the tax rate on the international business is significantly different than it is on the U.S. business, so any type of speculation seems inappropriate.

Okay. But on the international side, at this point, you aren't able to repatriate earnings from the international side, by paying taxes in the U.S., right?

Thank you.

And at this time, I would like to turn the call back to Ian Blackley, Chief Executive Officer.

Thanks for that question.

So, thank you everyone for coming on the call, we appreciate it and we certainly look forward to our next call. Thanks.

Thank you ladies and gentlemen, this concludes today's call, you may all disconnect.