Octave Specialty Group Inc (OSG) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Overseas Shipholding Group fourth-quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you. Good morning, everyone, and welcome to OSG's earnings release conference call for fiscal year 2015.

Before we begin, I would like to start off by advising everyone on the call with us today of the following. During this conference call, OSG's management may make forward-looking statements regarding OSG or the industry in which it operates, which could include, without limitation, statements about the outlooks for the tank and articulated tug barge markets; changing oil trading patterns; forecast of world and regional economic activity, and demand for and production of oil and petroleum products; OSG's strategy; expectations regarding revenues and expenses, including both G&A expenses and vessel expenses; estimated bookings and TCE rates for the first quarter of and other periods in 2016; estimated capital expense expenditures for 2016; projected scheduled drydock and off-hire days; OSG's consideration of strategic alternatives and its ability to achieve its financing and other objectives; and regulatory developments in the United States and elsewhere.

Any such forward-looking statements take into account various assumptions made by management based on its experience and perception of historical trends, current conditions, expected and future developments, and other factors management believes are appropriate to consider in the circumstances. Forward-looking statements are subject to a number of risks, uncertainties and assumptions, many of which are beyond the control of OSG, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements.

Factors, risks and uncertainties that could cause OSG's actual results to differ from expectations include those described in OSG's Annual Report on Form 10-K for 2015 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. Ian.

Thanks, James. Good morning, everyone, and thank you for joining us on the 2015 full-quarter and full-year earnings call. On the call today with me here in New York are Rick Oricchio, our CFO; Lois Zabrocky, Head of our International business; Henry Flinter, Head of our Domestic business; James Small, our General Counsel, who you just heard from; and Brian Tanner, Head of Investor Relations.

Let me begin on slide 3 with the 2015 highlights and some more recent events. I'm pleased to report strong results today with adjusted EBITDA in the quarter of $123 million on TCE revenues of $234 million. For the full-year 2015, adjusted EBITDA was $491 million on TCE revenues of $925 million, generating net income of $284 million.

2015 was a great year for our tanker company with all its assets on the water generating cash flow. 2016 is shaping up to be another strong year. In December, we launched a bond tender offer and successfully repurchased $225 million of our senior notes. This was another positive step in our efforts to enhance our capital structure and deliver value for our shareholders.

As a result of the covenant amendments we obtained in connection with the tender, we now have greater flexibility as we evaluate strategic alternatives that can now include the separation of our international and domestic businesses. Also in December, we paid a 10% stock dividend to all shareholders, which, as of December 1, allowed us to list our Class A common stock under our ticker symbol, OSG.

Establishing a liquid trading market for a Class A stock has been a priority since the mergers, and we now have approximately 135 million freely tradable shares. We'll continue to work towards improving this liquidity.

As a start to our authorized $200 million equity repurchase plan, late last year, we made open market purchases for approximately 3 million Class A warrants. In early February this year, we successfully repurchased $27 million in principal amount of our domestic business bank debt for less than $0.88 on the dollar.

In mid-February, we announced the final settlement in our lawsuit with Proskauer. We are pleased to have reached an agreement to settle this case that we believe it is in the best interest of the Company and other stakeholders. By reaching a final settlement, we also eliminate the distraction that comes with any investigation, allowing us to focus our full attention on adding value to the business, and it will allow us to eliminate the Class B shares and warrants.

The uncertainty which we are seeing in global commodity and equity markets today has had a significant impact on the tanker industry. There is a disconnect between freight rates, asset prices and equity values of public tanker companies. Freight rates are strong; asset prices are stagnant; and tanker equity values are depressed. We believe OSG's equity value does not reflect the results announced today or our view of 2016.

The Board and management are aware of our shareholders' desire for liquidity in our stock and the concern at the levels at which it is trading. We have worked since the mergers to streamline the Company, positioning it to both increase in value and provide the ability to distribute this value to shareholders.

The steps we have taken now provide us with the opportunity to do so. We have engaged an investment bank to help us with the strategic review, which could have a number of outcomes, including separation of our US flag and international flag businesses. We could, for example, spin out the international business as a standalone business or merge it with another company to provide greater scale and liquidity, promoting further consolidation within the fragmented international tanker industry.

There are compelling reasons why we believe that separating the businesses has the potential to unlock greater value. The tax treatment of the two businesses, the limitation on foreign shareholders mandated by the Jones Act, and the different operating models now used by our two businesses.

Additionally, separating should also enable us to distribute this value to equity holders more efficiently than we can today. As part of this process, we will evaluate what capital is available to return to our equity holders and determine the most efficient way to do so.

I am pleased to confirm that the Board has declared a dividend of $0.08 per share to holders of Class A and B common stock, which will be paid in March. Class A and B1 holders who are not entitled to dividends will receive an adjustment to their warrants reflecting the dividend amount as per the warrant agreements. This is the first cash dividend the Company has paid since Q3 of 2011.

We'll turn now to slide 4 and an update on each of our segments, looking first at international crude tankers. The global economy is adapting to more modest growth characterized by lower commodity prices, gradual tightening in US monetary policy, and the slowdown and rebalancing of the Chinese economy. 2015 oil demand, responding to low prices, posted a very strong growth rate of 1.7 million barrels per day, while 2016 growth is projected at a lower 1.2 million barrels per day, which is still ahead of the average oil demand growth in recent years.

It's important to keep in mind that for key crude importers like China, oil demand will be growing faster than the global average, driving greater ton/mile demand, helping to absorb the newbuilds which deliver this year.

China's crude imports hit a record 7.8 million barrels per day in December, up over 9% year-over-year. China's car sales in 2015 reached a new high, driving gasoline demand growth 10% in the first 10 months of 2015, underscoring the country's shift toward a more domestically-focused economy.

China's strategy has been to build refining capacity to meet this domestic demand, and with the Chinese crude production not increasing, the incremental demand is satisfied by crude oil imports. Other factors driving demand in China are the small independent so-called teapot refineries who gained the right to use imported crude oil in the latter part of last year, and the continued stockpiling of crude for the country's strategic petroleum reserves.

It is not just the growth in crude imports that is supporting tanker demand but continued determination of China to diversify its sources, which is leading to more crude coming from longer haul Atlantic basin sources, further increasing ton/mile demand.

We've recently entered into a 12 to 18-month time charter extensions for six of our Panamax vessels, at significantly higher rates and expiry, and we also extended the time charter for storage on our ULCC. We also recently entered into the new 18-month charter with one of our VLCCs also at an attractive rate.

Our chartering strategy remains focused on the spot market, although we will continue to be opportunistic on time charters locking in value. We now have just over 20% -- six days in 2016 for our international business, giving us increased visibility on future earnings and cash flow.

Fourth-quarter average VLCC spot rates increased to $60,300 per day, nearly double from the same period in 2014. Aframax spot rates increased $34,000 per day in the quarter, up 72%, and the Panamax blended rate increased to $20,300 per day, up 17%. We believe 2016 will be another strong year in the international crude sector.

Turning now to slide 5. In the International Product Carrier sector, rates also remained strong. We saw some easing of rates in the first half of the fourth quarter, following a very strong third-quarter, primarily due to refinery maintenance. The fourth-quarter MR spot rates recovered to average approximately $18,100 per day, up 21% compared to the same period in 2014.

Growth in refined products trade worldwide is being driven by expanding refinery capacity in locations distant from consumer markets, building ton/mile demand. The larger part of product carriers have benefited from Saudi and Indian refinery exports traveling long haul to the East and South America, the exported product from Saudi Arabia growing 57% during 2015.

Product tanker supply is now in a more favorable position with net fleet growth expected to be around 4% this year. With lower crude oil prices and strong demand for petroleum products, particularly gasoline, we expect the supply/demand fundamentals will continue to support a strong product tanker market in 2016.

Turning now to slide 6. In our US flag business, the persistent low oil price environment continues to impact the level of US crude oil production. According to EIA data, US production slipped from its highs last year to an average of 9.1 million barrels per day in January and is projected to average 8.7 million barrels per day in 2016.

This led to a softening of market sentiment in the Jones Act, with a decrease in the demand for coastwide transportation of crude oil. The crude oil price collapse has, however, also led to a significant decrease in the price of gasoline and driven up gasoline consumption in the US to its highest level since 2007, with consumption now 5% higher than in 2012.

This has driven stronger demand in the Jones Act King product trade, particularly into Florida, where the majority of gasoline consumed in the states is transported on Jones Act vessels and where we have a significant part of our Jones Act business.

On our rebuilt ATB fleet, we began the year with a total of 800 potential open days. In the last three months, we have successfully concluded new time charters on three of these units, reducing potential open days this year to only 200.

We are also seeing a pickup in Delaware license volumes benefiting a modern lightering ATBs. Lower oil prices and the resulting drop in US production has narrowed the spread between Brent and WTI, making it more attractive for Northeast refineries to import crude, primarily from West African producers.

We have two US side tankers that participate in the US Maritime Security Program. The Omnibus Appropriations bill signed by the President in December increased the annual subsidy amount per ship from $3.2 million in 2015 to $3.9 million in 2016 and to $5 million in 2017, providing incremental fixed cash flow.

As of today, 88% of our US flag revenue days for 2016 are fixed on time charter or COA, and 43% for 2017. We will also add more than 300 incremental revenue days in 2016 compared to prior-year, because our heavy drydock schedule in 2015 is significantly reduced in 2016.

I will now turn the call over to Rick to provide additional detail on our fourth-quarter and full-year results.

Thanks, Ian, and good morning, ladies and gentlemen. Let's move directly to reviewing the fourth-quarter and full-year 2015 results in more detail. Please turn to slide 8.

TCE revenues grew to approximately $235 million for the quarter, an increase of $36 million or 18% compared with the fourth quarter of 2014. This increase was principally driven by continuing strength in crude and product spot market rates. TCE revenues grew to $925 million for the full-year 2015, an increase of $164 million or 22% compared with the full-year 2014.

Let me discuss the results of our business segments beginning with the international crude tanker segment. Fourth-quarter TCE revenues for the international crude tanker segment totaled $84 million, an increase of $33 million compared with the same period a year ago. This 65% increase was driven by a substantial strengthening in daily rates across all vessel types in this segment.

TCE revenues were $304 million for the full-year 2015, an increase of $76 million compared with the full-year 2014. The VLCC spot rate was approximately $54,600 per day for the full-year 2015, while the Aframax spot rate was $34,000 per day, and the Panamax blended rate was $20,500 per day. Ian highlighted the strong performance in our fourth-quarter spot rates and some of the recent time chartering activity we've been fixing.

Our first-quarter performance continues to be strong. We had booked approximately 83% of the available VLCC spot rates at an average slightly in excess of $66,000 per day at approximately 83% of the available Aframax spot days at an average of approximately $29,000 per day. Approximately 58% of the available Panamax spot days have been fixed at an average of approximately $31,000 per day.

In the International Product Carrier segment, fourth-quarter TCE revenues totaled $36 million, essentially flat compared with the fourth quarter of 2014. While we earned higher MR spot rates in this quarter, we had 430 less revenue days as a result of the sale of the Overseas Luxmar in July 2015, the redelivery of a chartered-in vessel, and an increase in drydock days.

TCE revenues were $172 million for the full-year 2015, an increase of $53 million compared with the full-year 2014. MR spot rates were approximately $19,500 per day for the full-year 2015.

We have booked approximately 60% of our first-quarter MR spot days at an average of approximately $18,000 per day. In the US flag segment, fourth-quarter TCE revenues totaled $115 million, an increase of 4% from the same period a year ago, due to a 5% increase in Jones Act product carrier TCE revenues and increased Delaware Bay lightering volumes, partially offset by an increase in drydock days.

TCE revenues were $449 million for the full-year 2015, an increase of $35 million compared with the full-year 2014, driven by a $28 million increase in Jones Act tanker TCE revenues, largely due to increased rates achieved on renewal of expiring time charters and contractual rate increases on a number of our ATBs.

Moving to slide 9. Turning to OSG's consolidated results, adjusted EBITDA was $123 million for the fourth quarter, an increase of $32 million compared with the fourth quarter of 2014, driven primarily by the strength of spot rates in the international crude and product markets. Included in adjusted EBITDA in the quarter are a couple of nonrecurring items: $28 million in premium and consent fees and related third-party professional fees paid on the bonds we repurchased in the quarter, and $2 million of reorganization costs.

Adjusted EBITDA was $491 million for the full-year 2015, an increase of $192 million or 65% as compared with the full-year 2014, driven primarily by the higher rates discussed earlier. Net income for the fourth quarter was $9 million compared with $27 million in the fourth quarter of 2014. The decrease was largely due to the bond tender-related cost I mentioned earlier. Net income for the full-year 2015 was $284 million compared with the net loss for the full-year 2014 of $152 million.

Included in the 2015 amount was a one-time non-cash income tax benefit of $150 million, and the net losses in the comparative 2014 period reflect bankruptcy-related charges. Earnings for 2015 were reduced by a heavy drydock schedule in 2016 of 1,009 days compared to only 362 days anticipated for 2016.

Please turn to slide 10. From a liquidity standpoint, we ended the year with approximately $522 million of cash, including $20 million of restricted cash, up from $512 million at the end of 2014. We also have access to undrawn revolving credit facilities of $125 million, bringing our total liquidity to $647 million.

In 2015, we repurchased and retired $326 million of senior notes, which includes $225 million through a bond tender and $101 million through open market purchases. This will reduce our 2016 interest expense by approximately $21 million as compared to 2015 levels. In addition, we repurchased and retired $300,000 of the 2024 notes in January, which leaves us with approximately $120 million of senior notes outstanding at the parent.

As Ian mentioned, the Board of Directors approved a 10% stock dividend for all shareholders of record of Class A and Class B common stock as of December 3, which resulted in the issuance of approximately 33.8 million shares of Class A common stock on December 17. Holders of Class A and Class B warrants are entitled to receive, upon exercise, 0.1 additional shares of Class A common stock per warrant exercised.

We did two purchases of our Class A common stock warrants -- the first in December for approximately 1.2 million warrants at an average price of [$2.98] and the second in January for 1.7 million warrants at an average price of [$2.87]. In February, we repurchased and retired $27 million of principal balance of our domestic business term loan at a discounted price of $23.6 million. On a pro forma basis for the additional repurchases we did in February, our total gross leverage stands at 2.65 times our adjusted EBITDA.

We began 2015 with total cash of $512 million, which included $123 million of restricted cash. During 2015, we earned $491 million of adjusted EBITDA and we received a $55 million refund from the IRS as a result of the carryback of a portion of our 2014 NOL. We also spent approximately $63 million on drydocking and improvements to our vessels, as well as spending $368 million on our delevering activities. We ended the year with a total cash of $522 million of which $502 million is unrestricted cash.

As we have mentioned in the past, our Board has authorized the Company to purchase up to $200 million of our stock in warrants over a two-year period. Our ability to do this is limited, as our term loans place restrictions on the ability of the operating companies to pay dividends to the parent company.

Of the $522 million of total cash we had as of December 31, 2015, we are currently limited in our ability to transfer approximately $315 million of this cash to the parent under the operating company term loan agreements. As Ian mentioned earlier, the Board has authorized the payment of an $0.08 per share dividend, resulting in a distribution of approximately $30 million. The balance can be used to support the strategic alternatives mentioned earlier or a return to equity holders in the future.

One final note before I go back to Ian. Due to the confidentiality obligations contained in the settlement agreement, we are unable to discuss details of the Proskauer settlement. But once we have received the settlement payment, we will be able to determine the final net litigation recovery and the exact amount of the dividends to be distributed to recordholders of Class B common stock and Class B warrants. Following the distribution of that dividend, all Class B common stock and Class B warrants will be converted into Class A common stock and Class A warrants, respectively.

With that, I would now like to turn the call back to Ian for his closing comments.

Thank you, Rick, and I will finish with a short summary, if you will turn to page 11. So our 2015 results reflect the earning power of our 79 vessel fleet and the effectiveness of our operating strategy. We expect that many of the positive tanker fundamentals in all sectors during 2015 will remain in place during 2016, and the disconnect between freight rates, tanker asset pricing, and equity values will offer opportunities.

Our strong cash generation and the successful execution of a number of key transactions have strengthened our financial position and provided us with greater flexibility as we evaluate strategic alternatives. We are confident in our ability to drive value and return that value to shareholders.

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

(Operator Instructions) Michael Schwartz, Redwood Partners.

Congratulations on a great quarter. Doesn't the term loan agreement prohibit you from buying back stock?

Rick?

The term loan agreement does not prevent us from -- does not prohibit us from buying back stock. The term loan agreements have limitations on our ability to move cash from the operating companies to the parent.

Okay. So, with the stock below $2, I mean, isn't that better than giving a dividend? I mean, it's in the system. I mean, it's nice that you are giving a dividend, but it would be much better efficiently to use the capital just to buy in the stock.

As Ian mentioned, this is the first cash dividend that we've paid since 2001 -- excuse me, 2011. The Board determined that it was appropriate to return a certain amount of capital to the shareholders through the use of a dividend, and that's the $0.08 per share.

Right. Okay. Because your market cap is only like $750 million. I mean, you could probably take this company private in two or three years if the rates hold up.

I would point out the market cap that you refer to refers to the A and B shares, and does not take into account the warrants that are outstanding.

How many warrants are outstanding?

Approximately 200 million.

200 million shares and warrants?

200 million warrants that will convert into approximately 220 million shares.

I see. Okay. All right. And when will they convert? And what strike is that?

They are penny warrants and they will convert at the option of the holder.

This is James, the General Counsel. I mean, the warrant structure is described in the 10-K, but it's essentially a vestige of our emergence from bankruptcy and the international debt with the -- our Jones Act US/non-US ownership limitations.

Yes. Okay. All right. Well, thank you very much.

Thanks, Michael. And I'd point out this is -- we talked earlier in our remarks about separating the two businesses -- our international domestic business and then another example of how by separating businesses we simplify our structure.

Right. Okay.

Thanks, Michael.

Great. Thank you.

Warren Kantor, Society Hill Capital.

Yes, could you discuss what the possible impacts will be in 2016 as to the new law which allows oil to be exported from the United States, and what impact that might have on the Jones Act business? Thank you.

Yes, Warren, we speculated on this in prior calls before that legislation passed, and the impact that we suspected would be on the Corpus Christi to the East Coast refineries for US crude. And that's what we've seen happen. With the closing of the gap between West Texas and Brent, the East Coast refineries are now importing foreign crude. But as you may have seen in the press, there has been relatively little US crude being exported.

Therefore does that mean you don't expect any negative impact on the Jones Act business?

I don't think there's been a significant impact on the Jones Act business by that piece of legislation. There's been a reduction in the number of Jones Act vessels carrying crude. I think that's a function of the slowdown in US crude production rather than the export. What we have seen is a pickup in imports into the Northeast refineries, which is a significant benefit to our domestic lightering business.

I see -- so you have an offset. Okay. Fine. Thank you very much.

Thanks, Warren.

John Reardon, Western International.

Regarding the dividend, is this a -- maybe I missed it -- is this a one-timer? Or do you expect to pay the $0.08 dividend quarterly? Or is it a floating rate dividend?

John, this is a -- the Board will always consider how much we -- how much cash we can return to shareholders. As we move through this strategic analysis that we are conducting, we want to make sure we keep enough cash, to keep as much flexibility or optionality as we can to handle any strategic choices we make. The Board has decided that it can make a $30 million dividend at this time.

Okay. Thank you.

You're welcome.

(Operator Instructions) William de Wulf, Goldman Sachs.

Thanks for having the call. The -- I had a few questions. One was on the rechartering of the ATBs in the Jones Act. Just wanted to know what rates you guys were able to charter that, if it was higher or flat? And I think you have also two MRs up for renewal this year, so I wanted to get any color you could give on that, if you were able to renew those and at which terms?

So, William, let me take the ATBs first. In 2015, the average TCE rate in our rebuilt ATBs -- that's the eight older ATBs -- was $38,600. And we can't comment specifically on the rates that we rechartered these units. But as I said earlier, we have concluded three new time charters on three of these units this year to date. And we expect that the average rate per ATBs for the TCE in 2016 will be [above] $35,000 per day.

Okay. Above $35,000? Okay.

Of the average across the fleet in 2016.

And with regards to the --

So the MRs -- there are two MRs that come up for renewal this year. As you know, we -- our strategy is to place our domestic MRs on weekend time charters. Again, we can't comment on the specific negotiations because these negotiations are ongoing currently, but the average rate for our MR fleet in the Jones Act in 2015 was $64,300, and we expect to be in the mid-60's for our average rate across the fleet in 2016.

So the discussions are ongoing for the two MRs, right?

Correct.

Okay. And second question if I may. In terms of the cash you have on the balance sheet, can you break it down how much cash sits at OIN versus OSB? And when you mentioned you can dividend up $320 million of cash, how much can be dividended up from each entity to the parent?

Rick.

William -- give me one second here. So the -- give me one second. The [OIN - sic] cash balance is [$178 million] and the OIN cash balance is approximately $320 million.

$320 million at OIN and [$178 million] at OSB, right?

Yes.

William de Wulf

Okay.

Rick Oricchio

That's today. Correct.

And that will be dividended up from each entity?

OIN is approximately [$130 million] and OBS is approximately [$50 million].

Okay. And one last quick question. You mentioned you bought back some bank debt. Did you buy back some OIN or OBS? I think that --

The $27 million of debt we repurchased was all OBS debt.

Okay. Perfect. Thank you very much.

Thank you.

(Operator Instructions) Jame Donath, Magnolia Road Capital.

Good morning and congratulations on a strong quarter. You had mentioned in the -- in your remarks that the Company had retained an investment bank with an eye towards strategic alternatives, including separation of the international business from the Jones Act business.

Could you give a little bit more color on expected timing of this process? We've obviously heard a fair amount over the past couple of years about potential strategic alternatives. Meanwhile, haven't seen much action. What is the expectation of management and the Board about how this process is going to unfold? And, say, over what kind of timeline is it fair to expect?

So, Jame, I can't really add much more than I made in my earlier remarks. We are going to move through this process as quickly as we possibly can. We have hired an investment bank, as I said. We've taken a number of steps already, but I can't commit to a timeline at the moment.

Is it -- would you say this is going to be 2016's business?

Again, I can't commit to a timeline, Jame, but we certainly want to move through this as quickly as we can.

Okay. Thank you.

John Stichter, MJLF.

Congratulations to everybody on a great year. And I wanted to -- further to the last question, I wanted to know if you could comment on your separation of the foreign flag assets in what is already an asset market on the tanker side that is flooded with candidates at this point in time?

Well, what we're looking to do, John, is separate the two businesses, and we would like to grow the international business. And we'd seek to do that by merging with another international tanker company to provide liquidity and scale in that sector.

The international tanker business is very fragmented. And even though our international business has 55 vessels, it is still smaller than we would like to be a standalone. So, our preference would be to merge with another tanker company to provide a vehicle with significantly greater liquidity and scale. But if we are unable to do that, we would seek to separate the businesses as they stand.

In terms of spinning off the foreign flag group into a separate entity?

That is the likely way we would do it. Yes.

Understood. Thank you.

You're welcome.

Thank you. This concludes today's question-and-answer session. I would now like to turn to call back to Mr. Ian Blackley, President and CEO, for closing remarks.

Thanks, Chelsea. I just wanted to briefly thank everyone for coming on the call. We look forward to speaking to you if not before, certainly after our first quarter. Thank you and good morning.

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