Octave Specialty Group Inc (OSG) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Overseas Shipholding Group Incorporated second-quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to our host for today, James Small, General Counsel. You may begin.

Thank you. Good morning, everyone, and welcome to OSG's earnings release conference call for the second quarter of 2016.

Before we begin, I would like to start off by advising everyone on the call with us today of the following. During this conference call, OSG's management may make forward-looking statements regarding OSG or the industry in which it operates which could include, without limitation, statements about the outlook for the tanker and articulated sub-barge market, change in oil trading patterns, forecasts of world and regional economic activity and demand for and production of oil and petroleum products, OSG's strategy, expectations regarding revenues and expenses, including both G&A expenses and vessel expenses, estimated bookings and TCE rates for the second half of 2016 and other periods, estimated capital expenditures for 2016 and other periods, projected scheduled drydock and off-hire days, OSG's consideration of a potential spinoff or other strategic alternative 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, its quarterly report on Form 10-Q for the second quarter of 2016, 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, and thank you for joining us for our 2016 second-quarter earnings call. On the call today with me here are Rick Oricchio, our CFO, Lois Zabrocky, head of our International business, James small, our General Counsel who you just heard from, and Brian Tanner, head of Investor Relations. Also joining us today is Sam Norton, who recently became head of our Domestic business. He had been a member of OSG's Board of Directors for the past two years. Welcome Sam.

Let me begin today on Slide 3 with second-quarter 2016 highlights and some more recent events. I'm pleased to report second-quarter results today with adjusted EBITDA in the quarter of $110 million on TCE revenues of $216 million and net income of $30 million. In the second quarter, we accelerated the payment of $29 million in principal amount of our bank debt, and in July, we accelerated an additional $20 million. We continue to strengthen the capital structure of our businesses as we position them to be standalone companies.

During the second quarter, we made open market purchases of approximately 8 million class A warrants. We also bought back additional class A common shares through our 10b-18 program during the quarter. We have now completed approximately 40% of our $200 million two-year equity repurchase plan which we announced in November of last year.

During the quarter, we were added to the Wilshire 5000 Total Market Index and the Russell family of indexes, and on June 28, we rejoined the New York Stock Exchange Big Board, increasing our exposure within the institutional investment community and helping to enhance the trading liquidity of our stock.

Before I move to discussing our business segments, I want to provide an update on our strategic process. We've taken many steps to enhance shareholder value this year, including dividends and equity buybacks. With the filing of a Form 10 on July 15, we take the next step towards separating our businesses, which we believe will unlock greater value for OSG shareholders.

The filing is an important step in the execution of our plan to create two standalone publicly traded companies. Following the separation, each company and each board will be better able to focus on their own businesses and more effectively pursue their distinct operating priorities and strategies. By removing those complexities and limitations associated with the combined international and Jones Act business, each will have more flexibility to capitalize on opportunities for long-term growth and profitability.

Sam's appointment was another important step and put in place the leadership of our U.S. Flag business early in the process, helping to ensure a seamless transition when we separate. We plan to provide further details about the board and the management teams of the separate companies as they are confirmed.

As I have discussed on prior calls, our preference was to merge our international business with another tanker company which would provide a combined entity with greater scale and liquidity and help to promote consolidation within the international tanker industry. Currently, we are not in negotiations -- in discussions with any potential merger partners, and while we always remain open to opportunities that will create value, our focus today is on separation. We expect that the separation will be achieved through a spinoff of OSG International later this year. The spinoff and exact timing remain subject to approval of the OSG Board of Directors and the satisfaction of various other conditions, including the effectiveness of the Form 10 filed with the SEC. We look forward to completing the spinoff as quickly as we can so we can focus on unlocking the full potential of each business.

Please turn now to Slide 4 and an update on each of our segments. The outcome of the Brexit vote caught financial markets by surprise and added some downside risk for the global economy. Although equity markets have recovered, global GDP growth in 2016 was marked down slightly to 3.1% from 3.2%.

In the crude sector, the attractive fundamentals with the lower oil prices leading to increasing demand, high oil supply and some stockpiling that led us to a strong tanker market in 2015 and the first half of 2016 are coming more into balance as we move into the second half of this year. Global oil supply is no longer growing as it was in 2015 with higher OPEC output in 2016 being offset by non-OPEC declines.

Within OPEC, the increased production by Iran and Iraq has been partially offset by supply disruptions in Nigeria and operational challenges in both Venezuela and Libya. Non-OPEC oil supply has declined, led by the US, where production was 8.5 million barrels per day in July, the lowest since August 2014.

Global oil demand has remained strong with estimates of growth at 1.4 million barrels per day for 2016, taking demand to 95.3 million barrels per day. China continues to be the main growth driver in the crude market with first-half imports running at some 14% above the same period in 2015 with crude imports in the second quarter averaging 7.8 million barrels per day. This significant year-to-date increase is tempered somewhat by concerns that China crude import growth is higher than end-user demand. Growing crude inventories could result in demand for imports into China this year beginning to slow to a pace more consistent with estimated end-user demand in China plus a growing product export market.

India's oil imports continue to grow and has overtaken Japan as the third largest consumer of crude oil. First-half imports were up 12% to 4.3 million barrels per day compared with the same period last year. With its increasing dependency on imported crude to meet its energy needs, India plans to finish building three [SVRs] in 2016. The expected capacity of these SVRS is 39 million barrels. And the government has announced plans for a second phase that would add an additional 91 million barrels by 2020.

The late second quarter and into the third quarter is typically one of the weaker periods of the year for crude tanker demand as refinery turnaround and scheduled maintenance impact oil demand. The seasonal slowdown this year has been greater than anticipated due to weaker refining margins compared to last year, which has led to a reduction in refinery throughput and the opportunity is being taken to complete maintenance deferred from 2015. Refinery throughput is expected to recover as we move through the third quarter and peak summer driving demand draws down the current high inventories.

On the supply side, freight growth will remain elevated through the end of next year with a significant number of crude tankers scheduled to be delivered in 2016 and 2017. Looking further ahead, there has been little newbuild ordering through the first half of this year, a positive trend and a disciplined approach we would like to see continue, which would result in lower fleet growth beyond 2017.

In the second quarter, our VLCC spot rate was $47,000 per day, the Afra spot rate was $23,500 per day, and the Panamax blended rate was $20,500 per day, all strong returns.

On our MRs, we delivered a healthy $14,700 per day in the quarter. While we believe the long-term fundamentals for the product tanker market remain positive with strong underlying demand, we are currently experiencing a period of short-term softness. When you consider the high inventory levels and the significant number of MRs that were delivered in the first half of this year, the markets have been relatively resilient. We believe the market should begin to tighten late in the third quarter as we move through the seasonally weak period and start to get the winter market uplift. Additionally, European refineries recently lowered utilization by 5% in an effort to increase drawdowns and improve the upcoming winter margins.

Longer-term, the outlook is positive as, like the crude fleet, the MR fleet growth is expected to reduce as there has been little ordering of newbuilds so far this year. With continued lower crude oil prices and strong demand for petroleum products, particularly gasoline, we expect these supply-demand fundamentals to continue to support a strong product tanker market.

Please turn now to Slide 5. In our U.S. Flag business, the market continues to be impacted by the decline in US crude oil production, delivery of newbuild tonnage, and high inventories in the US that have driven down refinery margins and slowed demand for both crude and product shipments. On top of this, a number of Jones Act tankers and ATBs have either been redelivered from time charters or are not being fully utilized and are being offered for relet.

Second-quarter US crude production averaged 8.8 million barrels a day, 650,000 barrels per day below the second-quarter 2015 average. Specifically, Eagle Ford Shale, a major source of demand for the Jones Act trade, declined some 390,000 barrels per day in June 2016 compared to the prior-year period. While the decline in US crude production has led to a decrease in demand for coastwise transportation of domestic crude, the narrow spread between Brent and WTI has made it more attractive for US Northeast refineries to import foreign crude.

Imports to US Northeast refineries are up 47% in 2016 versus last year with the majority of this coming from West Africa. As a result, we've seen a pickup in our Delaware Lightering volumes benefiting our modern lightering ATBs. Our lightering volumes averaged 180,000 barrels a day in the second quarter, up from 145,000 in the first quarter and more than double the 86,000 barrels a day in the comparable 2015 period.

Another positive effect of the decline in crude oil prices has been the continued increase in gasoline consumption. In the second quarter of 2016, gasoline demand averaged 9.5 million barrels per day, up 4% over the same period in 2015. According to data released by the Federal Highway Administration, US driving reached 1.3 trillion miles year-to-date through May, up 3.3% compared with the same period a year ago, and on pace to beat 2015's record-setting year. This has driven stronger demand in the Jones Act Clean Products trade, including Florida, where the majority of gasoline consumed in the state is transported on Jones Act vessels and where we employ a significant part of our Jones Act fleet. This strong demand for gasoline will ultimately lower inventories, and more spot (inaudible) should be appear as a result. Last week, we saw the first drawdown in gasoline and crude inventories in the US for some time, which is a positive development.

On the supply side, newbuild deliveries will continue through the end of next year. There are 15 vessels remaining in the order book with six deliveries expected in 2016 and nine in 2017. There are, however, 23 vessels in the Jones Act that are 30 years or older. So we would eventually expect to see some of those scrapped as the newer vessels deliver.

On our rebuild ATB fleet, we began the year with a total of 800 potential open days. To date, we have successfully concluded new time charters on five of these units, reducing potential open days for the remainder of this year to only 52. We also recently signed a six-month charter extension in a tanker whose contract was due to expire in the fourth quarter. Overall, as of today, more than 92% of our U.S. Flag revenue days for 2016 are fixed on time charter or COA, and 58% for 2017.

I will now turn the call over 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. Please turn to Slide 7.

TCE revenues for the second quarter totaled $216 million, a decrease of $19.5 million or 8% compared with the second quarter of 2015. The decrease was primarily driven by lower daily rates earned by the international flag fleet. TCE revenues for the first half of 2016 were $453 million, a decrease of $4 million, or 1%, compared with the first half of 2015. The decrease from the first half was primarily due to lower rates in the international product crude carrier segment.

Second-quarter TCE revenues for the International Crude Tankers segment totaled $67 million, down 13% compared with the same period a year ago. This decrease resulted from softening in daily rates across vessel types in the second. Nearly two-thirds of the revenue decrease in the quarter as compared to the same period a year ago was attributable to lower average daily TCE rates in the Aframax fleet. Declining rates in the VLCC and Panamax sectors also contributed to the decrease.

TCE revenues were $154 million for the first half of 2016, an increase of $10 million compared with the first half of 2015. The VLCC spot rate was $56,500 per day for the first half of 2016, the Aframax spot rate was $27,400 per day, and the Panamax blended rate was $23,200 per day. Additionally, revenue days for this segment increased 5% compared to the first half of 2015, primarily driven by our ULCC, the Laura Lynn, exiting layup and commencing a time charter for storage in April 2015, which has now been extended through March 2017, and 83 fewer drydock days as compared to the same period a year ago.

Ian highlighted the solid performance in our second-quarter spot rates and discussed factors that have caused spot rates to soften this summer. In our third quarter, we have booked 66% of the available VLCC spot days at an average of approximately $29,200 per day, 54% of the available Aframax spot days at an average of $16,200 per day, and 42% of the available Panamax spot days at an average of approximately $14,300 per day.

In the International Product Carrier segment, second-quarter TCE revenues totaled $34 million, down 19% compared to the second quarter of 2015. This decrease resulted primarily from significant period-over-period decreases in average daily spot rates earned by our MR fleet to $14,700 per day. Contributing to the decline was a 108-day decrease in revenue days resulting primarily from the sale of the Luxmar in July 2015. These decreases were partially offset by the LR1 blended rate increasing to approximately $21,300 per day in the second quarter, up 10% from the comparable 2015 period.

TCE revenues were $72 million for the first half of 2016, a decrease of $14 million compared with the first half of 2015. The MR spot rate was $15,400 per day for the first half of 2016. We have booked approximately 36% of our third-quarter MR spot days at a rate of approximately $12,000 per day.

In the U.S. Flag segment, second-quarter TCE revenues totaled $115 million, a decrease of $1 million compared with the same period a year ago. During the quarter, our TCE revenue increases were driven by a 76-day increase in revenue days resulting from fewer drydock and repair days, and our Delaware Bay Lightering volumes more than doubling to 180,000 barrels per day. These revenue increases were offset by a decline in coastwise voyages that were available to the ATBs employed in our Delaware Bay Lightering business in the second quarter of 2015 that were not available in the second quarter of 2016. TCE revenues were $227 million for the first half of 2016, flat compared with the first half of 2015.

Moving on to Slide 8, net income for the second quarter was $30 million compared with $58 million in the second quarter of 2015. Net income for the first half of 2016 was $81 million compared with $101 million in the first half of 2015. The decrease in the comparative 2016 periods reflect the impact of lower TCE revenues, increases in depreciation and amortization expenses, and higher income taxes due to the non-cash deferred tax provision recorded on our foreign earnings, partially offset by lower interest expense.

Adjusted EBITDA was $110 million for the second quarter, a decrease of $20 million compared with the second quarter of 2015. These decreases were driven by the decline in TCE revenues resulting from a softer rate environment, as I described earlier. Adjusted EBITDA was $240 million for the first half of 2016, a decrease of $4 million compared with the same period last year.

Please turn to Page 9. From a liquidity standpoint, we ended the quarter with approximately $461 million of cash, including $5 million of restricted cash, compared with $522 million at the end of 2015. We also had access to undrawn revolving credit facilities of $125 million, bringing our total liquidity to $586 million.

In the quarter, we repurchased and retired $19 million of class A warrants and common stock at an average share equivalent price of $11.59. In the second quarter, we accelerated the payment of $20 million in principal amount of our domestic subsidiary term loans. In addition, in July, we accelerated another $20 million of such loans. We also accelerated $9 million of principal amount related to our international term loan. Our cumulative delevering activities, along with scheduled amortization, will reduce our 2016 interest expense to approximately $70 million, down $31 million as compared to 2015.

Our total gross leverage at the end of the second quarter of 2016 was 2.4 times our last 12 months adjusted EBITDA, compared to 4.2 times in the same period a year ago. We began the second quarter with total cash of $417 million, which included $15 million of restricted cash. During the second quarter of 2016, we earned $110 million of adjusted EBITDA. We spent approximately $1 million on drydocking and improvements to our vessels, $32 million on equity buybacks, of which $19 million was related to buybacks in the quarter and $13 million was related to buybacks initiated at the end of the first quarter but were not settled until the second quarter, as well as spending $31 million on delevering activities. We ended the quarter with total cash of $461 million, of which $455 million is unrestricted cash.

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

Thanks Rick. Our second-quarter and first-half results were strong, plus our international segment (inaudible) in the summer but the fundamentals remain positive. In our domestic business, we do face a challenging market due to the decline in US crude production, high inventory and delivery of newbuild tonnage. But the sustained low oil price environment is also driving record US gasoline consumption, helping to offset the impact.

Strategically, we continue to make good progress towards helping our international and domestic businesses by creating two independent public companies. With an increased ability to focus on the long-term growth and profitability of both businesses, we believe each will be better positioned to enhance shareholder value.

Over the last 24 months, we have generated $888 million of adjusted EBITDA and continue to provide significant cash flow that gives us flexibility to consider additional opportunities to create value for our shareholders and strengthen the balance sheets of our businesses as we prepare to separate.

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

(Operator Instructions). Erik Stavseth, Arctic Securities.

Good morning guys. A couple of quick ones for me. First of all, do you have any update on the status of the FSOs, or the FSO joint venture? Do you have any visibility on what's going to happen there?

Lois?

Yes, thank you for the question, Erik. So we are looking forward to Northern Oil Company being combined, so Total has taken over from or will take over from Maersk Oil Qatar. And they are at this moment working on getting that organized, and then we expect to be able to engage.

But you have not yet been engaged or are in discussions with Total?

We are not going to comment on exactly where we stand there, but when we have firm developments, we will let you know.

All right. And the second question relates to the Jones Act market. You did say that you had chartered out five ATBs this quarter, and you have limited days open, but you also mentioned that you could look at being retiring some of these ATBs. And my question is kind of multiple I guess because, first of all, what kind of CapEx are you looking at for those ATBs, and do these charter rates that you've now secured, do they -- I assume that they defend taking them through that CapEx cost. Could you sort of comment on how you're thinking about the ATBs at this point?

What I said was that we'd fix those units during the course of this year, and we have done that. And as you know, we don't comment on individual charter rates, but we believe the average CTE rates for ATBs in 2016 is going to be around $35,000 per day.

In terms of retiring these units, as we have said in the past, the next special service of these units is in 2019 and 2020. We will continue to trade them as long as we can trade them profitably. And when it comes to a decision on CapEx, we will see what charters are available at that time in the marketplace, and make a decision at that time.

All right. And final question is on the Jones Act product tankers. You did show a charter rate in the range of 20-some-thousand for the few spot days you had during the quarter. Sorry, yes, 26,500 approximately. Sort of is that the running rate for spot tonnage in the Jones Act market these days?

It's an interesting -- it's currently an interesting market. Over the last six weeks or so, there's been very few spot cargoes available, so the vessels that are in the spot market are fairly challenging to trade. And we had the Overseas Houston that we delivered from time charter in the middle of June, and we ran her on a short coastal voyage which resulted in that number that you are quoting. But she is currently fixed, so we currently have no tankers that are not fixed.

Right. And then my final question relates to the financials. Can you just give us the cash positions in OIN and OBS respectively? It might be in the 10-Q, but I couldn't see it.

Rick, do you want to get that?

Yes. So the cash balance, unrestricted cash balance, at June 30 at OIN is approximately $279 million and in OBS approximately $153 million.

Okay, thanks.

(Operator Instructions). John Reardon, Western International.

Good morning and thank you for your time. Recently, the Iranians have come back into the oil export market in size. And I was wondering. Has that changed the dynamic of Persian Gulf oil shipping? I mean, has it been good or bad? I hear they have a big fleet that they carry a lot of their stuff on. Could you comment on that?

Yes, this is Lois. As far as ton miles, the Iranians coming back on in force has been a negative, particularly for the VLCC fleet, especially when combined with the reduction of crude coming from the Western Hemisphere east. It's just longer ton miles if we come -- if we bring the crude from Venezuela or west Africa, and shorter with it coming from the AG to the east.

Okay, thank you.

(Operator Instructions). Erik Folkeson, Swedebank.

Hi, good morning. I read from the 10-Q that you received a wells notice on July 25 this year. Could you please comment on that, how material is it, and what could the potential damage be, given potential outcome? Thank you.

This is James Small, the General Counsel. The SEC investigation is continuing. As you note, we disclosed in the 10-Q that we recently received a wells notice. We are in the process of responding to that. I would point you to that disclosure, and we have no further comment beyond what's in the 10-Q at this time.

Okay, thank you. And just one more question on your strategy in the international flag business. Are you doing any approaches to doing time charters at the moment, or do you prefer to keep your employment status as it is?

At present, we have close to 10 ships on time charter. And right now, the time charters that are being executed in the market are very short and at depressed rates. So I think, at the moment, we are likely to keep our status as is.

Okay, thank you. That is all for me.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back over to Ian Blackley for any further remarks.

Thank you, everyone, for giving us your time today on the call and we look forward to talking to you at the end of third quarter if not before. Thank you.

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