Octave Specialty Group Inc (OSG) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Overseas Shipholding Group's second-quarter 2015 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you. Good morning, everyone, and welcome to the second-quarter 2015 earnings release conference call. 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, 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 and regional economic activity and demand for oil and petroleum products; OSG's strategy; expectations regarding revenue and expenses, including G&A expenses and vessel expenses; estimated TCE rates achieved for the third 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 development 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 actual results to differ from expectations include those 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 US 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, Captain Ian Blackley.

Thanks, James. Good morning, everyone. Thank you for joining us on our 2015 second-quarter earnings call.

On the call with me today here in New York are Rick Oricchio, our CFO; Lois Zabrocky, head of our international business; James Small, General Counsel, who you just heard from; Brian Tanner, our head of Investor Relations. Henry Flinter, head of our domestic business, is joining us from Tampa, Florida.

Before we start on the quarter, I want to mention a recent announcement regarding some changes we made to our Board of Directors. Through discussions with our Board and several other major shareholders, we determined that having shareholder representation on the Board has allowed us to more efficiently make strategic decisions, move the Company forward.

With Chad Valerio from BlueMountain Capital Management, Joe Kronsberg from Cyrus Capital Partners, Ty Wallach from Paulson & Co., were appointed to the Board effective August 3. We look forward to working with the new Board so we can further build on our successful year.

Turning now to our second-quarter results, an update about each of our segments, TCE revenue for the second quarter was $235 million, up 37% from the same period last year. Revenue growth in the quarter was driven by continued strength in the spot rates across our International Flag segment and a continued robust Jones Act market.

Our adjusted EBITDA was $130 million for the second quarter, an increase of $75 million compared with the second quarter of 2014. Net income increased to $58 million in the quarter compared to a net loss for the second quarter 2014 of $202 million. The fundamentals of our US flag business remains strong. 20 of our 24 vessels have time charters long-term blue-chip customers with an average remaining duration of 2.4 years as of the end of the quarter.

In our sector, the Jones Act, there are 73 vessels totaling approximately 19 million barrels of carrying capacity. We hold the number one position: 30% of the Jones Act vessels and 37% of the carrying capacity. Since 2011 demand for Jones Act transportation has increased significantly due to the dramatic increase in US [developed] production with a strengthened time charter (technical difficulty) with our Jones Act fleet.

All 12 of our Jones Act tankers are on time charters. Three of those are shuttle tankers, two of which are chartered to Petrobras and the third was delivered to Shell in June of this year. Eight of our 10 ATVs are committed to multiyear time charters, while our two Lightering ATBs are on take-or-pay (inaudible).

In the international crude sector, attractive supply and demand fundamentals continued. Global oil production hit record levels in the second quarter, supported by a three-year-high OpEx production level. The market is oversupplied today and outputs continue to rise slowly, maintaining a downward pressure on prices. Lower oil prices contribute to higher overall demand and forecasts continue to be revised upward with non-OECD countries, particularly in Asia, accounting for the majority of that demand growth.

In addition to oil demand growth, the tanker market continued to benefit from increased ton-mile demand, driven by Atlantic Basin oil being shipped on longer haul routes to the Far East. This rising ton-mile demand, coupled with a manageable supply side, has further tightened the tanker supply/demand balance resulting in a strong rate environment.

Even in what is historically one of the weakest periods of the calendar, these factors led to significantly improved rates on our crude sectors, second-quarter average VLCC spot rates increasing to $50,600 per day, up nearly 3 times from the 2014 period. Aframax spot rates increased to $34,800 in the quarter, up 83%, and the Panamax blended rate increased to $20,700, up 44%.

International product sector fundamentals continues to strengthen. The growth in refined product trade worldwide is driven by increasing demand and expanding refinery capacity in locations distant from consumer markets. These structural shifts in global refining capacity and changes in trading patterns continue to increase ton-mile demand, which coupled with a somewhat limited fleet dwell has led to significantly improved rates on MRs. This is evidenced by our second-quarter MR spot rates more than doubling to approximately $18,200 from $8,300 in the same period of 2014.

Our second-quarter results completed a very satisfying first-half performance, highlighted by the continued strength in charter rates and the strong cash flow generated by our 79 tankers on the water. Our unique position in both the US and international flag markets allows us to pursue a chartering strategy that balances time charters and contracts, that provides stable cash flows covering most of our fixed costs with significant spot rate exposure.

In the first half of this year we generated $156 million of cash, taking our total cash to $668 million. Coupled with undrawn revolvers of $125 million, we have liquidity of almost $800 million, providing us with significant flexibility including the ability to renew or grow our fleet. I remain excited by our prospects and confident in our ability to create value for our shareholders.

I will now turn the call over to 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.

On a consolidated basis, TCE revenues grew to $235 million for the quarter, an increase of $64 million compared with the second quarter of 2014. The 37% increase was principally driven by the continued strength in charter rates across all our segments.

TCE revenues grew to $457 million for the first half of 2015, an increase of $71 million, or 18%, compared with the first half of 2014. This increase came about even as revenue days decreased 16% compared with the same period in 2014, clearly indicating a very strong rate environment. 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 during 2014, action that is consistent with our strategic direction.

Adjusted EBITDA was $130 million for the second quarter, an increase of $75 million compared with the second quarter of 2014. The near doubling of our adjusted EBITDA was primarily driven by the strength of spot rates, particularly in the international crude market, and lower G&A expenses. Adjusted EBITDA was $244 million for the first half of 2015, an increase of $102 million compared with the first half of 2014.

Net income for the second quarter and first half was $58 million and $101 million, respectively, compared to a net loss for the same period in 2014 of $202 million and $189 million, respectively. The second quarter and first half of 2014 periods reflect bankruptcy-related charges.

With respect to the US Flag business, second-quarter TCE revenues for the US Flag segment totaled $116 million, an increase of $11 million from the same period a year ago, driven by the continued strength of the Jones Act market. Our lightering ATBs occasionally perform attractive Jones Act spot voyages when the lightering schedule has openings. In the first half of 2015, one of the vessels did seven coastwise voyages, resulting in approximately $10 million in gross revenue.

With the Brent/WTI spread narrowing, the demand to move crude from the Gulf of Philadelphia has slowed somewhat, but we are seeing lightering activity pick up in the Delaware Bay, so we will focus more of their activity there. TCE revenues were $227 million for the first half of 2015, an increase of $22 million compared with the first half of 2014.

Let's look at the international crude tanker segment. Second-quarter TCE revenues for the international crude segment totaled $77 million, an increase of $32 million compared with the same period a year ago. This significant increase was driven by substantial strengthening in average daily rates across all vessel types in the segment.

Ian highlighted the strong performance in our second-quarter average spot rates and third-quarter performance continues to be strong. We have booked approximately 60% of the available VLCC spot days at an average of approximately $62,000 per day and 50% of the available Aframax spot days at an average of approximately $38,000 per day. In addition, our ULCC was taken out of lay up in the first quarter and commenced an 11-month time charter for storage starting on April 1 at an attractive rate of $40,000 per day.

TCE revenues were $144 million for the first half of 2015, an increase of $16 million compared with the first half of 2014.

In the international product carrier segment, second-quarter TCE revenues totaled $42 million, an increase of $20 million compared with the second quarter of 2014. TCE revenues were $86 million for the first half of 2015, an increase of $32 million compared with the first half of 2014. Last month we entered into an agreement to sell a 1998-built MR tanker, recognizing a gain of $3 million, which will be recorded in the third quarter.

Our second-quarter 2015 G&A totaled $17.5 million compared with $19.5 million for the second quarter of 2014. That decrease was primarily due to reduced employee-related costs from our shift to an outsourced model in our international business.

From a liquidity standpoint, we generated $156 million of cash in the first half of 2015, ending the quarter with approximately $670 million of cash, including $22 million of restricted cash. We also have access to undrawn revolving credit facilities of $125 million.

Lastly, let me highlight changes we made to our credit facilities back in June. OSG International, our international subsidiary, or OIN, and OSG Bulk Ships, our US subsidiary, or OBS, entered into several amendments to their credit facilities, which served multiple purposes, including allowing OIN to make a $200 million dividend to the holding company. While the amendments were diverse in nature, they generally were intended to provide both OIN and OBS with greater flexibility in managing their operations and to provide OSG greater flexibility at the parent level.

Before beginning the Q&A session, let me remind everyone that we are still in the registration process, so our ability to answer questions on the Company and its prospects is limited. We apologize in advance for this.

With that, we will now open the call up to questions. Amanda, could you please begin the questions?

(Operator Instructions) Andrew Casella, Imperial Capital.

Thanks for taking my question. I guess first if you could -- just again not specifically on OSG, but we've seen some additional consolidation news this morning with (inaudible) tankers and Kinder Morgan. If you could just talk a little bit about the consolidation opportunities within the market and how you see that developing potentially for other players, and if you think it's going to continue to concentrate into the hands of a few tonnage providers. Any color would be helpful.

Andrew, it's hard to talk on behalf of others. We are already the number one player in the Jones Act; that is a position we would like to keep. But we -- as Rick said earlier, we are not really able to talk to the specifics at the moment.

Okay, that's fine. Then just on the dividend and your tax position, I know you guys have a couple tax assets that were created from the restructuring. If you could comment just if you guys expect to pay taxes this year and also is the dividend up to -- from OIN to the holding company, if that was a taxable event.

We don't anticipate paying cash taxes in 2015. The dividend from OIN to OSG did not result in a cash tax requirement at the OSG level.

Okay, got it. And then just two other cash flow items, if you could comment on where you think drydocking and CapEx will be for the year. And then also I know you guys have a couple free cash flow sweeps that are required under the bank debt facilities; if you could just remind us of the mechanics on those.

On the domestic side, the total drydock CapEx this year is about $42 million, for which we are -- at mid-year we'd spent roughly half. And on the international side it's about $22 million, of which we've spent just over one-third.

Got it. And then just on the excess cash flow dynamics for the credit facilities you have in place?

The excess cash flow dynamics are it's a function of our EBITDA multiple and at the end of the year we look at our leverage model and the excess cash. Well, there is a formula in the agreements that will operate to provide the appropriate cash flow sweep.

All right, great. Thanks for the color. I will get back in the queue.

Ben Nolan, Stifel.

I will try to make this as clear-cut from a compliance perspective as possible. Firstly, on the ATBs that you guys had; in the past I know that you've broken out what they earned in terms of a TCE basis in the spot market. Or, frankly, just for the Jones Act business. I didn't see it in the release; could you give me an idea of what the day rates are that you earned?

Sorry. Ben, it's in the Q and it's approximately $38,000 a day.

Okay, perfect. And then along those same lines, I know you said it, but could you maybe repeat what the percentage of your third-quarter VLCC spot rates that you have fixed and the rate? And then maybe also give that same number for the Aframaxes, if you could.

Lois Zabrocky will take that.

Thank you, Ian. So on our VLCCs, we are roughly 65% fixed at around $62,000 per day. On the Aframaxes and Panamaxes, we are over half fixed for the quarter; on the Afras over $35,000 per day and the Panamaxes close to $30,000.

Perfect. What about the Handys, just since I'm on it?

Spot, spot on the Panamaxes. That's not a blended rate for the time charter. I'm sorry, your last question?

The Handys, just to round it out I guess.

Yes, the Handys are -- have more of a -- fewer days fixed because they fix more promptly and they are over $20,000 per day. Obviously, we are fixed probably through first 10 days of August.

Okay, perfect. Then my last question is in the Wall Street Journal today there was an article, and it seems to keep coming up, about the eventual allowance of US crude exports. Could you maybe just talk me through what your thoughts are specifically as it relates to the Jones Act market? If and when that were to happen, what impact do you think it might would have?

Well, the biggest impact we believe would be on the [corpus to Delaware], taking crude from off the East Coast (technical difficulty) a number of vessels, small number of vessels we believe will be impacted. So while we would expect it to have something of a negative impact, we don't think it would be significant on the Jones Act side.

Okay, that's helpful. Any idea maybe how many cargoes that would constitute in terms of the Gulf Coast -- the East Coast? That might would be impacted.

We think it's worth -- in terms of vessels it's probably a couple of vessels in the fleet.

Okay. Out of 70 some-odd, 72, something like that, right?

Correct.

All right, that does it for me. Thanks a lot, guys.

[Fritz Lu, Rogue Global].

Good morning, sorry. If you could just repeat the number of vessels that are involved in the traffic from the Gulf to the East Coast. And then my second question is regarding the VLCCs, etc., that you have on charter rate, the percentage that are chartered, is that just for the third quarter? And, if so, can you give me some idea of what this for the whole year?

What we said earlier, Fritz, was that we think it's a couple of vessels in total involved in that trade Corpus up to Delaware. And on the Vs Lois was talking to, only the third quarter, so our Vs are spot.

Yes, the first half was fixed at $50,000 per day roughly, which is released. And then the third quarter, what we had said was it was $62,000 per day at 65% fixed. And the rest of the days for the year would be spot.

Do you envision your strategy to stay like that, to just fixed roughly half to two-thirds of the fleet three months out and go spot for the rest?

We do have one vessel, as the CFO mentioned, on storage, which is the Overseas Laura Lynn, and we will entertain inquiry as it occurs. And we have just started to receive inquiry on that particular vessel for extensions, so it is something that we constantly evaluate.

Okay, thank you.

(Operator Instructions) Erik Stavseth, Arctic Securities.

Quick question from me regarding the status of your phase out, fast scrapping of the ATBs. You did mention that when you came out of bankruptcy. Could you give us some color on where that stands? Are you still targeting to scrap them or what's the plan there?

We did an emergence plan where -- we had a schedule going out to 2019 I think, so we look at the units as they come up for docking and if there's an appetite for them, which thus far there has been. We use the drydock, pay the drydock CapEx and take (inaudible) offering. There's no technical reason that these units need to go out of service as long as our clients want them and we maintain them to very high standards. We are able to put them through the drydockings.

And could you give some color on how much of the drydocking CapEx has been related to the ATBs this year or how much of those $42 million will be related to the ATBs?

It's about $3 million to $4 million is the drydock cost for the ATB. We don't break -- we haven't broken out ours separately in our filing.

But that's $3 million to $4 million per ATB, per drydocking, right?

Correct.

Then also secondly, you mentioned the Corpus Christi to Delaware trade. Sort of going back to Corpus Christi only, how dependent would you say the Jones Act project and ATB market is right now the Corpus Christi outbound volumes? If that were to go away, what would happen with the Jones Act market then?

Henry, can you take that?

Yes, I will make an effort at that. So Corpus Christi volumes is probably around, on Jones Act vessels, a little over 500,000 barrels a day. We see only a small portion of that going up coast to Delaware refineries. A large majority of that stays within the coast, Gulf Coast I mean, going to loop, for instance, up the Mississippi River to refineries. So we think a large majority just naturally will stay in that market.

We don't -- you presume what happens if it goes away. I just don't see it going away.

Okay. Then, lastly, we have seen NASSCO being active on the commercial shipping side alongside with (inaudible) shipyard, (inaudible) being pretty much tied up through 2019. But NASSCO has a lot of available capacity if they want to do commercial shipbuilding post 2017. Do you any thoughts or comments on what the status is for NASSCO in their commercial versus naval work?

Take that, Henry.

Sure. I agree with you; they have more availability than Aker and they can produce more tankers per year than Aker Philadelphia can. I think I would rely their own statements that they don't see a lot of interest right now in people ordering additional MRs, MR tankers I mean, and they have a focus on government shipbuilding.

Okay, thanks. That's all for me.

[John Reardon, Western International].

Good morning and thank you for taking my call. I was wondering can you give us a timetable as to when we can expect the A stock to get a proper public markets venue to trade in?

John, I'm afraid that we can't answer that question. We are in registration. We're continuing to work with our underwriters and the Board. And I have to follow-up with the statement: there's no certainty and offering will take place. Timing, price, and other terms have not yet been determined.

Okay, thank you.

Thank you. I'm showing no further questions. I would now like to turn the call back to Ian Blackley, CEO, for closing remarks.

Thank you, everyone. I appreciate the time early on a Monday and we look forward to talking to you again in three months. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.