Diamond S Shipping Inc.
Q3 2020 Earnings Call Transcript

Published: 16 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Diamond S Shipping Third Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. Thank you. It is now my pleasure to hand the conference over to the speakers today at Diamond S Shipping, Craig Stevenson Jr., Chief Executive Officer. Please go ahead.

[Craig Stevenson:]

Good morning, and welcome to Diamond S' third quarter 2020 earnings call. Thanks for dialing in this morning. Before we begin the call, we'd like to draw your attention to our forward-looking statements disclaimer. We will be making certain statements about the future events that may or may not happen in the manner which we describe. Please read page two in its entirety for a disclaimer about forward-looking statements.

[Kevin Kilcullen:]

Thanks, Craig. I'm continuing on slide nine. The third quarter marked a major turning point in the tanker market as both the crude and product fleets delivered sharply lower results than the first half of the year. The carryover of rates from the stronger environment helped keep the quarter in balance, but product tanker rates and the transition of 28 of our vessels into the Norient Pool arrangement impacted the results on that side.

[Craig Stevenson:]

Before we open it up to Q&A, I’d briefly like to summarize our priorities during this unprecedented market environment to give a sense of how Diamond S is positioned and our management philosophy. First, commercial scale is critical. While we're happy with the size of our fleet, in June, we announced a strategic partnership with NORDEN. Where about 28 of our MR2) product tankers will be commercially managed by Norient Product Pool, including ships owned by NORDEN and others, the pool manages around 150 tankers, and is one of the largest operators of MR tankers in the world. We believe this enhances our commercial scale without forcing consolidation of assets. We're certainly in a position to grow our fleet, but will do so under certain circumstances. We are of course focused on maintaining our cash breakeven lows, which are highly competitive in both crude and product fleets. Maintaining a lean profile provides strong operating leverage and good markets, and more importantly acts as a buffer in weaker markets. This brings us to our balance sheet. In a weaker market in Q3 2020, we were still able to maintain strong cash positions without using a revolver capacity. We have a high quality debt under a traditional loan structure and a maturity profile through 2024. We have a modest CapEx program to maintain our ships and to comply with regulations. While we expect some challenges ahead, as the tanker market is impacted by the global pandemic, we believe Diamond S is well positioned with strong liquidity, modest leverage, industry leading breakeven levels to support the downturn and prepare for when the markets return. With the natural limitations of fleet supply and the need for tankers due to regional imbalances of oil, we expect the tanker market to return to fundamental supply and demand, as we work through the current inventory levels. Diamond S remains exposed to the volatility in the spot market, and will utilize our disciplined capital allocation in order to maximize our return to shareholders, while maintaining a healthy balance sheet.

[Operator:]

Certainly Omar Nokta with Clarksons Platou. Your line is open.

[Omar Nokta:]

Hi, thank you. Hi, Craig, and Kevin.

[Craig Stevenson:]

Hey, Omar.

[Omar Nokta:]

I just – hi, guys. I just wanted to maybe touch on one of the last points you're making just about the balance sheet, asset sales, use of capital. Last quarter, you really slowed down the buyback and given the uncertainty in the broader markets, not to mention, obviously, you know, the weakness we're seeing in tanker rates today. You know, you've sold an MR, I'd say at a fairly good price relative to what we've seen recent assessments coming in at. How are you guys thinking about the use of those net proceeds after you pay down debt? Does that cash start to get put towards a share buyback again, especially given the wide variance between the stock price and the – and NAV as confirmed, at least by the ships there?

[Craig Stevenson:]

Omar, I would say that, you need to have a clear view of what the future sort of looks like on the spot market. And, right now, it's, you know, the reality is, it's in cash burn mode. And, and so once we can feel comfortable that there would at least on the, you know, on the backside of COVID, and air travel starts to pick up. A lot of issues are sort of tied to travel, and so travel probably represents something about 80%. And so without much travel around the world, it's a very, very difficult thing. But, I think this sale is - represents us very well, and to the extent that, that we can see other sales at relatively similar values. I think that that's a very smart thing to do, in light of this market. We do have some vessels that are ‘06s, ‘07s, and ’08 that would be good candidates for sale.

[Kevin Kilcullen:]

Omar, from my perspective, I'll just point out that our repurchase basket under our debt agreements is tied to the company's net income, and therefore we don't have a basket, currently given the third quarter results. We're in constant dialog with our bank group, though. And I think if there were additional asset sales that materializes as Craig mentioned, there would be a dialogue with them about perhaps loosening up that for some of that excess capital. But as of now, certainly with the sale of the MR, we're going to keep the capital on balance sheet.

[Omar Nokta:]

Yeah, okay. No, I appreciate that. That's fair. And then just, you know, Craig touched on, I was going to ask about further asset sales. And you mentioned the ‘06s, ‘07s, 08s. I was going to maybe ask if you could - you know, if you guys had identified whether there were certain characteristics or number of ships that you guys are looking to dispose off? I know, you're not sellers, per se. But when you can think about say the next six months and selling ships, is there a number of sales that you have kind of in your heads have thought about looking to dispose of here? And in terms of…

[Craig Stevenson:]

Yeah, I mean, I wouldn't say it's a number per se, I would say that we do need to transition the fleet and older ships we have in the fleet in the ‘06s and they are handys, and they're not particularly desirable. The other issue is, you know, we've got a number of ships that are Ice Class that are not - really not utilized in ice, and so you're not getting any value there. And so - and then we've got a Suezmax, that is super high cost in operating costs, and it's got about every extra that you can put on a Suezmax, but the reality is, you know, it - we struggle with that ship on performance. And, and so those are the obvious ones, but I would say I'd say in this marketplace I mean, I think you always - I mean, we're ship owners, most ship owners just about every asset they have are always for sale at the right price. And so it's all about price.

[Omar Nokta:]

Got it. Thank you. I'll leave it there and jump back in the queue. Thanks.

[Craig Stevenson:]

Thanks, Omar.

[Operator:]

Randy Giveans with Jefferies. Your line is open.

[Randy Giveans:]

Hey, gentlemen, how's it going?

[Craig Stevenson:]

Hi, Randy.

[Randy Giveans:]

So I guess just looking at your fourth quarter ‘20, quarter to date rates, you know, your forward guidance, still a little bit below your peers. So around the Norient Product Pool, has that provided any utilization or rate benefit here in the last few months?

[Craig Stevenson:]

Absolutely. We moved 28 ships in there. We've got one more to deliver into it after it comes off of time charter that somewhere around May, I think. But the performance of that decision relative to the industry is absolutely achieved what we expected it to achieve, actually, a little more, quite frankly. And so it's very much put us back into that sort of that tight band of top performers. And in some cases, through -- the perform - those other competitors actually have a much, much higher degree of eco ships and scrubbers and all kinds of things where as we don't. So we're very pleased with that. The handys are the handys, that's a totally different market. And it's ice. And so the performance of those is more or less - it sort of gets back to Omar's question about asset sales. And then, you know, the performance that we're looking at very closely today is our Suezmax performance, which is substandard. And so we are basically taking the same type of approach that we took when we looked at our - fixing our hiring hours. And so we'll look at any and all opportunities to improve that performance.

[Randy Giveans:]

Got it? And then you mentioned there that you're Handysize is - certainly be still laggard in that. Do you view those as kind of core to your business? Are you purely or do you want to be purely as Suezmax MR operator?

[Craig Stevenson:]

Yeah, I think right now, we're - we'd like to be known as MRs and Suezmax. And so we've got some handys. And we've got - we got some Aframax’s. I mean, I will say that our oldest Suezmax is basically performing sort of negative numbers relative to the other ships. And so, when you have some ships acting as negatives, I mean, your average is just going to get crushed. And clearly, it was crushed. And so, you know, I think a lot of those things sort of get you - get your mind completely focused on performance. And, and so we clearly are, I mean, I feel like the decision we've made with Norient has been a great one. And they have an enormous footprint. And, and so, I think they have 82 today MRs. And so 28 of those are ours. And so we performed - the performance is basically what we had hoped it would be.

[Randy Giveans:]

Got it. And then I guess last question here, there's certainly been some discussion around the crude tanker market versus the product tanker market, which one is better positioned here in the near term. So, as you operate in both the crude and products tanker market, which market are you more bullish on here in the coming months?

[Craig Stevenson:]

I mean, it changes. I think in previous quarters, I would say the crude business is the place to be. Both businesses are generating cash losses today in the spot market. And certainly on a ship basis, they're higher in the crude side. Its tough to call , I think almost all the answers that the shareholders want and then the analyst want are, when are you going to get on the other side of COVID? Because until you get a handle on COVID, it's very, very difficult to sort of predict what market is going to do, what they're not going to. So somebody asked me today or what do you think the winter is going to do? Freight rate was? I don't think anybody has a clue, quite frankly. And so Europe is absolutely going through lockdown. The United States is talking about tightening if you will, of what the population could do. And so it's very difficult to predict that. So I don't know. I would say some people predict that the spot market on the products is actually going to pick up first. It's hard to tell. I don't think I'd venture to pick one over the other. I think they are linked, as we all know. And so I think we need to get back to a more normalized market. You see days forward of inventory levels are starting to get in line. They still have a long way to go. I think if you look at India's consumption today, and you look at China's consumption today, they're back to pre-COVID levels, super positive, but we need the rest of the world to follow soon, so.

[Randy Giveans:]

First off, thanks for the robust answer there.

[Kevin Kilcullen:]

Thanks, Randy?

[Craig Stevenson:]

Thank you.

[Operator:]

Ben Nolan with Stifel. Your line is open.

[Ben Nolan:]

Hey, good morning. So, Craig, I'm interested by one of your responses there, specifically around maybe to Omar's question around, the Suezmax's. It could just be me. But it seems like that's always been a little more dear to your heart, I guess, then, then the product side? Am I reading your words incorrectly? And that may, you know, you're possibly looking at doing a pool arrangement there somewhere what you've done on the MRs, given the performance that you've had there? Is that sort of what you're saying at least that you're open to?

[Craig Stevenson:]

We certainly going to look at it, is the way I would put it. But I would not say that there has been any decision. We've actually talked to a number of people about it. It's not as big of a marketplace and opportunity as the product side of the business. So you had a lot of choice and competition. And, you know, we have very robust competition amongst all the pools, and some pools that do well and other pools don't fit you well. For instance, it's all about your net, net, net at the end of the day. And so there are a handful of people that do that for a living in the Suezmax side. But I don't think there is - I would say it's not as obvious. But we are committed to improve the performance of the Suezmax’s period.

[Ben Nolan:]

Okay. Well, it will be interesting to see how it plays out. Kevin, I wanted to ask you real quick, that $66 million facility is coming due next year. Obviously, I assume you're looking to refinance that, but you sort of think through that process and you know, how much you might be willing to draw down or leave outstanding versus maybe even pay a whole lot of it down? How are you thinking about sort of that process on refinancing and cash retention and the balance of interest rates and all that sort of thing?

[Kevin Kilcullen:]

Yeah, it's a good question. A couple nuances to that. This is a facility on our two vessels, on buyer joint ventures. So we actually only control half of the equity interest in this and we do have a partner that is - will be involved in this decision making. It's also makes it a little more difficult for us to give corporate guarantees on the facility, which impacts its attractiveness relative to some of our other debt with the mainline shipping banks. That being said, there's been a pretty good dialogue so far with the existing banks there. We're relatively confident that at a baseline we can replicate what's in place today. I'd say those are two extremely attractive assets too. They're very modern Suezmax’s with scrubbers installed both on time charters through 2022. With an oil major So if there was the need or the desire to increase the leverage, they're probably not with - not at the same cost that some of our other facilities are at. But we believe that's possible as well.

[Ben Nolan:]

Okay. And then lastly, for me, and Craig, you talked about asset sales, and the ones that really jump off the page are, as sort of has been mentioned as Handysize vessels, but I noticed that five of them are subject to or scheduled for drydocking next year with ballast water treatment, just thinking through that maybe the timing or sort of how it works best. I mean, from your perspective, is it better to sell those prior to going through the whole drydocking process? Or do you give something up in terms of the retail value or resale value, if a bunch of CapEx is needed on the front end?

[Craig Stevenson:]

Yeah, I mean, I think all of us are sort of - were caught by this, the COVID deal. And so COVID basically shut down your ability to sell for the last - in large part for the last six, nine months. And so I would say go ahead and sell those assets now. I think they're not strategic to our effort. And so they're smaller, they're in large part ice class. And so those ships really don't fit with what we want to do.

[Ben Nolan:]

Okay. So that would obviously would save some on your future CapEx commitments as well or needs, so that you kind of get two fold benefit there?

[Craig Stevenson:]

Yeah, fingers crossed. So we'll see what happens.

[Ben Nolan:]

All right, sounds good. Appreciate it, guys.

[Craig Stevenson:]

Thank you.

[Kevin Kilcullen:]

Thanks, Ben.

[Operator:]

There are no further questions at this time. I will now turn the call back over to CEO, Craig Stevenson Jr. for final remarks.

[Craig Stevenson:]

Hey, thanks, everyone. Its tough time for shipping. I think every answer that we the management team, we the shareholders want to have is, is when do we get back to a more or less a normal world. And in the meantime, we need to be super-sensitive to hanging on to as much cash as we can. And that's difficult in a freight rate environment that we have today. I can say to everyone that we are super-sensitive about that. And so we'll continue to do as much as we can to retain cash and still maintain optionality going forward. I think once we come on the other side of this, the order book is incredibly bullish. And so we, you know, the next quarter or two is going to be tough, and we'll just have to get it up. So thanks for your support. I really appreciate it and we'll do the best for you. Thank you.

[Kevin Kilcullen:]

Thanks, everyone.

[Operator:]

This concludes today's call. We thank you for your participation. You may now disconnect.