Overseas Shipholding Group Inc

Thank you. Good morning, everyone, and welcome to OSG's earnings release conference call for the first 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 tug/barge markets, change in 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 half of and other periods in 2016; estimated capital 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 detailed in OSG's annual report on Form 10-K for 2015, its quarterly report on Form 10-Q for the first quarter of 2016 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 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 our 2016 First Quarter Earnings Call.

On the call with me today are Rick Oricchio, our CFO; Lois Zabrocky, head of our International business; Henry Flinter, head of our Domestic business; James Small, who we just heard from; and Brian Tanner, Head of Investor Relations.

Let me begin on Slide 3 with first quarter 2016 highlights and some more recent events. I am pleased to report another quarter of strong results today, with adjusted EBITDA in the quarter of $130 million and TCE revenues of $237 million.

2016 is off to a solid start, and the indications for second quarter performance are positive.

In the first quarter, we successfully repurchased $96 million in principal amount of a bank debt for less than $0.93 on the dollar. Delevering business by buying back debt at less than par enhances our capital structure and is strengthening each of our businesses as we position them to stand alone.

We will continue to be opportunistic on additional debt purchases.

During the first quarter, we made additional open market purchases of approximately $25 million -- sorry, approximately 25 million of our Class A warrants. We also initiated a 10b-18 program during the quarter, buying back approximately 0.5 million Class A common shares.

Since announcing our $200 million 2-year equity repurchase plan in November of last year, we have already completed slightly more than 30% of the plan during a period where we believe our stock price has been, and indeed remains, significantly undervalued. At the same time, we have continued to improve the liquidity of our Class A stock, which now is approximately 180 million of freely tradable shares.

In mid-February, we announced a final settlement in our lawsuit with Proskauer. In connection with this settlement, our board recently declared a dividend of just below $0.18 for outstanding Class B common stock and Class B warrants payable on May 13.

This now allows us to eliminate the Class B shares and warrants, which will automatically convert to Class A shares and warrants on May 27.

Before I move to discussing our business segments, I want to provide an update on our strategic process. We continue to pursue a path that will separate our 2 businesses, which we believe will deliver greater value for our shareholders.

We continue to evaluate potential merger opportunities for International business, which could provide greater scale and liquidity. However, we do not have the specific transaction that we can just discuss today on this call.

At the same time, we are developing standalone times for our 2 businesses that will streamline and simplify the structures, allowing them to be more efficient and better positioning them for the future.

The tax treatment of our 2 businesses; the limitation on foreign shareholders mandated by the Jones Act; and the different operating models now used by our 2 businesses. Additionally, separating should also enable us to distribute this value to equity holders more effectively than we can today, and will allow both businesses to develop more efficiently.

Please turn to Slide 4, and I will update on each of our segments.

The global economy continues its slow growth amid volatility. In 2016, global GDP growth is projected to be 3.2%, slightly above the 3.1% growth in 2015.

While many risks in the global economy remain there have been signs in the U.S., China and others that point to improved sentiment for oil demand.

Global oil production is expected to remain high, with an agreement to freeze production amongst OPEC members and Russia proving difficult to orchestrate. With major producers, such as Saudi Arabia and Russia, at the minimum maintaining their production levels, and others like Iran, Iraq and potentially Libya determined to grow output, production levels are likely to remain high.

On the demand side, global oil demand is expected to grow by 1.2 million barrels per day in 2016, which is down from the 5-year peak of 1.8 million barrels per day hit in 2015 and closer to long-term trends. There could be upside potential to this forecast oil demand growth in 2016, however, given recent predictions for China demand versus actual China imports.

China's crude imports in March were the second highest on record, up 21.6% from a year earlier, to approximately 7.7 million barrels per day. And its 2016 year-to-date imports are running 12.3% above the same period in 2015.

Data released yesterday for April show this trend continuing.

I discussed on our last call the factors that could potentially drive increased demand from China include the small-sized, privately-owned refineries that have been given authority to import crude oil from international markets. 16 of these refiners, led by China's largest private refiner, Dongming Petrochemical, have formed an alliance and collectively now have the potential to purchase up to 1/5 of China's 2016 crude import requirements, contributing to port congestion and increasing vessel demand.

India continues to emerge as a driver of global demand growth, expected by IEA to surpass Japan in 2016 as the third largest consumer of crude oil at 4.2 million barrels per day. In 2015, India's demand for oil products grew by more than 9%, and its gasoline demand grew by 16%, driven by growth in passenger vehicle sales, expanding road networks and rising income levels.

This higher product demand is driving increased refinery demand for crude oil, which India traditionally imported from the Arabian Gulf. However, in recent years, like China, India is diversifying its suppliers and has increased its imports from longer-haul Atlantic Basin sources, increasing ton-mile demand.

On the supply side, there are a significant number of crude tankers scheduled to be delivered in 2016 and 2017. These newbuilds continue to be absorbed by increasing ton-mile demand, and there have been no new orders placed in 2016 to date -- almost no new orders, a positive trend and a disciplined approach that we would like to see continue.

First quarter average VLCC spot rate increased to $63,400 per day, up 29% from the same period in 2015. The Panamax blended rate increased to $25,600 per day, up 23%.

And the Aframax spot rates were $31,000 per day, comparable to the same period in 2015. We believe 2016 will be another strong year in our International Crude sector.

Turning to International Product Carriers, average MR spot rates were down approximately 7% to $17,500 per day compared to the same period of 2015. Our reported rates in the quarter were $16,200 a day, which Rick will talk to in a moment.

Ton-mile demand was negatively affected in the quarter by unusually warm winter weather in the U.S. Northeast, and refinery utilization in the U.S.

fell below 90% due to seasonal turnaround and outages. As we now move into the driving season, the U.S.

Gulf refineries are now over 92%, and we're seeing steadier MR rates around $16,000 per day.

With the Atlantic MR market receiving support from gasoline demand in the U.S. and the product tanker supply now in more favorable position, we believe the market fundamentals are well positioned to support a strong products tanker market.

Please turn to Slide 5. In our U.S.

Flag business, the market continues to be impacted by the decline in U.S. crude oil production and the delivery of newbuild tonnage.

First quarter U.S. crude production averaged 9.1 million barrels a day, only 137,000 barrels a day below the first quarter 2015 average, for the first quarterly year-over-year decline in over 7 years.

Specifically, Eagle Ford shale oil production, a major source of demand for the Jones Act trade, declined 400,000 barrels per day in March 2016 from the prior year period.

While the decline in U.S. crude production has led to a decrease in the demand for coast-wide transportation of domestic crude, narrowing spreads between Brent and WTI have made it more attractive for Northeast refineries to import foreign crude oil.

Crude imports to the U.S. Northeast refineries are up 25% in 2016 versus 2015, with the majority of this coming from West Africa.

As a result, we continue to see a pickup in our Delaware lighter -- Delaware Bay lightering volumes, benefiting our modern lightering ATBs. Our lightering volumes averaged 145,000 barrels a day in the first quarter, more than double the 72,000 barrels a day in the comparable '15 period.

Another positive effect of the decline in crude oil prices has been the continued increase in gasoline consumption. In the first quarter of 2016, gasoline demand averaged 9.1 million barrels per day, up 3% over the same period in 2015.

According to data released by the Federal Highway Administration, U.S. driving reached 3.1 trillion miles in 2015, beating our highest-ever record of 3 trillion miles in 2007, and was up 3.7% year-to-date through February.

This has driven stronger demand in the Jones Act team product trade, notably into Florida, where the majority of gasoline consumed in the state is transported on Jones Act vessels, and where we employ a significant part of the Jones Act fleet.

We have 2 U.S. Flag tankers that participate in the U.S.

Maritime security program. The omnibus appropriations bill signed by the President in December increased the annual property amount par vessel from $3.2 million in 2015 to $3.9 million in 2016 and to $5 million in 2017.

These vessels service a contract of affreightment, which accounts for approximately 60% of their available days. The COA, which had been due to expire this year, has now been extended through 2020, further improving our fixed revenue coverage.

The combination of the COA contract, the participation in the MSP program and the international voyages pursued in the remaining open days allow these vessels to produce attractive cash flows.

On the rebuilt ATB fleet, we began the year with a total of 800 potential open days. To date, we have successfully concluded new time charters on 4 of these units, reducing potential open days later this year to only 150.

Overall, as of today, 91% of our U.S. Flag revenue days for 2016 are fixed on time charter or seaway business and 53% for 2017.

Because we have a very light year of drydocks in 2016, our revenue days increased year-over-year by 300 days, adding almost a full additional vessel.

I will now turn the call over to Rick to provide additional details on our first quarter results. Rick?

Thanks, Ian. Let's move directly to reviewing our first quarter results in more detail.

Please turn to Slide 7.

TCE revenues grew to $236 million for the quarter, an increase of $15 million or 7% compared with the first quarter of 2015, while adjusted EBITDA was $130 million for the first quarter, an increase of $16 million or 14% compared with the first quarter of 2015. These increases were principally driven by continuing strength in VLCC spot market rates, increased Delaware Bay lightering volumes and an increase in revenue days due to less drydocking days in 2016.

a $2 million gain recorded due to the repurchase of subsidiary term loans; and the amount related to the settlement of our lawsuit with Proskauer. Net income for the first quarter was $51 million compared with $43 million in the first quarter of 2015.

The increase reflects the impact of strengthening TCE revenues, lower G&A expenses and lower interest expense, partially offset by increases in depreciation and amortization expenses and income taxes.

Our first quarter 2016 G&A totaled $17 million compared with $19 million for the first quarter of 2015. This decrease was primarily due to a reduction in third-party professional fees.

I would now like to discuss the results of our business segments, beginning with the International Tanker Crude segment. First quarter TCE revenues for the International Crude Tanker segment totaled $87 million, an increase of $20 million compared with the same period a year ago.

This 31% increase was driven by a strengthening in daily rates across most vessel types in the segment. Additionally, revenue days for the segment increased 10% over the first quarter of 2015, primarily driven by our ULCC, the Laura Lynn, exiting layup and commencing a time charter for storage in 2015, which has now been extended through March 2017.

And no drydock days in the current quarter compared to 66 in the same period a year ago.

Ian highlighted the strong performance in our first quarter average spot rates. In our second quarter, performance continues to be strong.

We have booked 51% of the available VLCC spot rates at an average of approximately $57,000 per day, 50% of the available Aframax spot days at an average of approximately $25,000 per day and 41% of the available Panamax spot days at an average of approximately $21,000 per day.

In the International Product Carrier segment, first quarter TCE revenues totaled $37 million, down 14% compared with the first quarter of 2015. This decrease was partially due to lower average daily rates earned by our MR fleet, which was impacted by warmer winter weather in the U.S.

Northeast. And during the quarter, we had a vessel that required unplanned repairs and we transitioned another vessel from dirty to clean to take advantage of market conditions.

Also contributing to the decline was a 178-day decrease in revenue days resulting from the sale of the Luxmar in July 2015 and the redelivery of one time chartered in-vessel at the expiry of its charter.

These decreases were partially offset by the LR1 blended rate increasing to approximately $23,000 per day in the first quarter, up 20% from the comparable 2015 period. We have booked approximately 41% of our second quarter MR spot days at an average of approximately $16,200 per day.

In the U.S. Flag segment, first quarter TCE revenue totaled $112 million, an increase of $1 million compared with the same period a year ago, which was largely driven by increased Delaware Bay lightering volume.

In addition, we had 65 less drydock days in the quarter compared to the first quarter of 2015.

Please turn to Slide 8. From a liquidity standpoint, we ended the quarter with approximately $417 million of cash, including $15 million of restricted cash compared with $522 million at the end of 2015.

We also have access to undrawn revolving credit facilities of $125 million, bringing our total liquidity to $542 million.

In the quarter, we repurchased and retired $58 million of Class A warrants and common stock at an average share equivalent price of $2.03.

On March 1, the board authorized the payment of an $0.08 per share dividend, resulting in a distribution of approximately $31 million. This is the first cash dividend the company has paid since the third quarter of 2011.

The board recently declared a dividend of approximately $0.18 per outstanding Class B common stock and Class B warrants in connection with the final settlement of our lawsuit against Proskauer.

In the first quarter, we repurchased and retired $96 million in principal amount of subsidiary term loans at a discounted price of $89 million, $27 million of principal amount related to our domestic term loan at a discounted price of $23.6 million, $69 million of principal amount related to our international term loan at a discounted price of $65 million. In addition, we made a mandatory prepayment of $51 million in principal amount on our domestic subsidiary term loan.

The repurchases and prepayments of the subsidiary term loans, along with scheduled amortization, will reduce our 2016 interest expense by approximately $7 million as compared to 2015. Our total gross leverage at the end of the first quarter of 2016 was 2.3x our last 12 months adjusted EBITDA compared to 5.1x in the same period a year ago.

We began 2016 with total cash of $522 million, which included $20 million of restricted cash. During the first quarter of 2016, we earned $130 million of adjusted EBITDA.

We spent approximately $6 million on dry docking and improvements to our vessels, $75 million on equity buybacks and dividends, as well as spending $143 million on delevering activities. We ended the quarter with total cash of $417 million, of which $402 million is unrestricted cash.

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

Thanks, Rick. And please turn to Page 9.

The first quarter performance was a strong start to the year. In international market, the strength continues to be driven by positive demand fundamentals, which we believe will remain in place during 2016.

In our Domestic business, we faced a more challenging market due to the continued decline in the U.S. crude production, but the sustained lower oil price environment is driving record U.S.

gasoline consumption.

Strategically, we continue to make good progress towards separating our 2 businesses, which we believe will unlock greater value and enable us to distribute that value to shareholders more effectively. At the same time, as our 79-vessel fleet continues to generate cash, we will consider additional opportunities to enhance our capital structure and return value to shareholders.

We'll now open the call up to questions. Operator?

Just wanted to understand a little bit more about on the OBS side, where you -- it sounds like you've leased another -- leased out another 2 vessels. Is that correct?

I'm sorry, Jen. Your question wasn't clear.

Can you repeat the question?

Sure, yes. On the OBS side, it sounds like, I think, you've brought down your revenue days to 150.

So it sounds like you've made -- you've leased out another 2 vessels. Is that correct?

So that's the ATBs you're talking about, the [indiscernible] days. It was one additional ATB chartered out since the last call we had.

So when we started the year, we had 6 vessels, 6 ATBs that were going to come open during the year, most towards the latter half of the year, with 800 open days. And the last time we talked, we had secured new business for 3 of those vessels, reducing the days to about 200.

And since then another, pushing that vessel well past year end.

Okay. Got you.

And can you give the terms of, like, the -- in terms of pricing and/or length of contract versus where TCE revenues are now?

So TCE revenues now, I think we reported for the quarter, for the ATBs, about $38,000 on average. We expect that to decline to about $35,000 on average for the remainder of the year.

Okay. So that's the range where the sort of the new contract is struck.

Is that the way to think about it?

Well, that’s the average of our book of business. Each of the ATBs is a little different.

It's not like in the tanker space where they're all sister vessels. So they're all a little different, little different size.

So that's the average for the book of business of the 8.

And any updates on the remaining 2?

So those come open at the very back end of the year, and we're in discussions with customers.

Okay. And can you give us any color on those?

Are they sort of going better? Or worse?

Or as expected?

Can't really say. I mean, we're in negotiations now, and in discussions.

I wouldn't say -- it's early, so I can't say.

And that was -- just to clarify, that was Henry Flinter, the Head of our Domestic U.S. Flag business.

Great. And I just -- one last question.

How long are those new contracts? Like, what are their lengths?

It sounds like you had 53% of your revenue year-to-date booked for '17. So can I assume that, I guess, those new ones, those new contracts go through 2017?

So Jen, we can't talk to specific contracts, but certainly, the term of the new time charters we're putting in place are shorter than we've seen over the last number of years.

Okay. Got you.

And then on the product tanker side, on the Jones Act business, I mean, do you have any -- I mean, what's sort of the -- are all those revenue days sort of leased up at this point? Or do you have any more work to do there?

So speaking to the product tankers, in the U.S. Flag business segment, at the start of the year, we expected 2 vessels to come open during 2016 for approximately 500 open days.

We have since agreed short-term time charters, reducing the open days by 200 days. So there's still some open days on those 2 vessels towards the back end of the year.

Okay. Got you.

And I guess you're also in discussions around those.

Correct.

And what was the...

Jen, we should -- hey Jen, we should let someone else have a shot here.

Can you tell me what the cash balance is at OIN? And what the cash balance is at OBS, your Jones Act subsidiary?

Lois?

At the OIN level, our cash balance is around $260 million.

Yes. U.S.

Flag, I think, it's $130 million.

$130 million. Okay.

And is all of that cash? And do you know what the dividend basket from those 2 subsidiaries is up to the parent company at this time?

Yes. On the OBS side, it's approximately 51.

And the OIN side, approximately 60.

Okay. And then -- okay.

So that's what you can dividend up, and then the rest of that cash -- or okay, that's the max dividend. And is that what you can dividend up right now?

Yes. That is the available amount as it exists today under the term loans.

Okay. Would you consider -- clearly, you're generating a lot of cash.

Your contract -- the dynamics on the international side certainly are extremely strong, and on the domestic side, are holding in quite well. Would you consider trying to release or get an amendment to any of your credit agreements to try to release more of that -- or to increase the size of your restricted payments basket at the subsidiaries, given the credit quality and low leverage at those 2 subsidiaries?

So Ryan, no. We don't want to speculate on that at the moment.

We're -- we have a significant cash position right? We had $417 million at the end of Q1.

And in terms of our use of cash, we look at it against the background of our strategic review. We want to retain enough cash until we know exactly what steps we're going to take once we conclude that process.

But the board will consider, with any excess cash, delevering both of our businesses and returning cash to shareholders through either buybacks or, indeed, dividends.

Could you just give a little bit more color around the splitting of the 2 companies? And is that a '16 event?

If so, second? Third?

Fourth? Is it something that's going to happen this year, I guess, more importantly?

So Steve, we don't have a specific time line. It is something we'd like to do as quickly as we can, as I said on the last call.

We believe that there's compelling reasons to do that, as I mentioned on my earlier remarks. The tax statement of the 2 businesses are very different, the limitation in shareholders caused by our Jones Act participation.

And lastly, more recently, we've adopted completely different business models in our Domestic business and International business. So we do think that separating the businesses can generate greater value for shareholders, and we're stepping through that process as quickly as we can.

Just a question on the term loan, in the excess cash flow calculation. Is that done on a quarterly basis?

Or on a year-end basis?

Done on an annual basis.

Okay. So the $51 million is the excess payment for last year?

Yes.

Okay. And just a little bit more on the Jones Act outlook for next year.

I don't have good information on sort of supply issues, but what's coming on in terms of supply that may impact you for '17?

So there's 20 units coming out in the next -- through the end of '17, Steve. 12 tankers and 8 ATBs.

20 units coming into the market, is that what you are saying?

Correct.

Okay. Great.

And how was that versus '16?

'16 is a much smaller number. How many, Henry, are delivering this year?

Well, the '16 deliveries are part of the 20 that you just -- the 20 vessels you just mentioned. The backdrop to put that in perspective is the existing Jones Act fleet of large ATBs and tankers, excluding the Alaskan crude oil dedicated tankers, is 82 vessels.

Sorry. I actually had my question answered.

So thank you, everyone, for joining. It's been a busy quarter, and the second quarter will also be busy.

We look forward to talking to you and updating you when we get to the end of the second quarter. Thanks again.