Diamond S Shipping Inc.
Q3 2019 Earnings Call Transcript
Published:
- Operator:
- Ladies and gentlemen, thank you for standing by and welcome to the Diamond S Shipping Third Quarter 2019 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. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]I would now like to hand the conference call over to Craig Stevenson, President and CEO. Thank you. Please go ahead.
- Craig Stevenson:
- Good morning, and welcome to the Diamond S third quarter 2019 earnings call. Thanks for dialing in this morning.Before I begin the call, I’d like to draw your attention to our forward-looking statements disclosure. We will be making several statements about the future may or may not happen in the manner in which we describe. Please read Page 2 of its entirety for those disclaimers.If you could now turn to Slide 4, and I’d like to review the third quarter operating performance. In quarter three, we earned $18,175 a day in our crude fleet on the spot market and about $12,715 a day in the products spot market, which include our MRs at $12,945 a day.All-in TCE was $18,940 per day and $13,140 per day in the Crude Fleet and Product Fleets respectively. We also like to look at our operating earnings of our fleet in which we calculate TCE less OpEx less G&A, because we think it’s important to highlight given the various ways these expenses get classified in our industry.Our Crude Fleet generated about $11,000 of operating earnings, while our Products Fleet, which includes Handysize vessels generated about $5,600 a day. We sold two vessels during the quarter. It added a net of about $11 million and brought our total liquidity to $87 million at the end of the quarter. Excluding the non-cash loss on the sale of vessels, our net loss was $7.6 million, or a loss of $0.19 per share.We are off to a great start in the fourth quarter, benefited from great timing with ships win rights on Suezmaxes spiked over a $100,000 a day. Thus far, we’ve booked 62% of the available days at close to $43,000 a day. We expect the products market to file a suit over the quarter, but thus far we fixed about 63% at $13,300 a day where more recent voyages are in excess of $20,000 a day.Diamond S is well positioned to capitalize on expected upside in the tanker markets. We have scale of 66 ship fleet with low cash breakevens and 80% of our fleet on the spot market.You can turn to Slide 5. It’s sort of an interesting slide. We’ve highlighted some factors we would ordinarily expect to produce a weak rate environment against the backdrop of the current environment, the absence of these positive drivers is actually quite curious.We included a graph on the left-hand side of t he page that reflects the continued downward revisions to oil demand growth by IEA, EIA and OPEC, combined with the backwardation in the marketplace, inventories at ten year averages, production limits by OPEC plus and another spike in refinery maintenance during the autumn season. These factors typically trend toward a weaker rate environment.The tanker market is telling you an entirely different story. The graph on the right tells us that many scrubber installations are not happening on schedule and thus absorbing tanker supply. According to Clarkson’s over 10% of the crude oil tanker fleet has pending retrofits which suggest it is still likely to continue for some time.We also saw how tightly balanced the market is when recent sanctions of Chinese-owned vessels created a panic exponential rise in crude oil tanker rates.While these rates have settled, they are still well above seasonal expectations. LRs are increasingly moving toward dirty barrels and arbitrages are opening. This is all happening before we see really any impacts of the winter market or the IMO 2020 story.Please turn to Slide 6. The fundamentals in the tanker market are indeed very promising on the supply side. The charts – the top of this page shows the gap in the natural tanker replacement cycle.The number of vessels on order in both Suezmax and the MR segments is about the same number of vessels that are 20 years or older. When this occurs near the end of their useful lives, the potential for a sustained period of historically low fleet growth is very real.Looking at the bottom of this slide, the tanker demand growth in both the Crude and the Product segments is forecasting a very, very strong 2020. Both segments are expected to see greater demand as we continue to see widening distances between oil supply growth in the west and oil demand growth predominantly in the east.Please turn to Slide 7, please. Slide 7 and Slide 8 basically talk about asset values. The Suezmax slide, I think there is additional upside compared to the value with the ten year absolute price range. And you could even see vessels between five and ten years old look to be in the sweet spot for returns of capital employed.The ten year old chart on the left compares to a 20% discount to a straight-line depreciation on the right chart which basically tells you to be buying the older vessel.You can turn to Slide 8. Slide 8 reflects the same analysis under the MRs and here again, we see a lot of value is in the older vessel or a ten year old vessel.At this point, I’d like to turn the presentation over to Kevin Kilcullen, our CFO for the financial review. Kevin?
- Kevin Kilcullen:
- Thanks, Craig. Diving right into the third quarter of 2019, when you remove the loss on sale of the two MRs sold in September, Diamond S had a net loss of $7.6 million which equates to about $0.19 per share for the quarter.Craig covered the TCE performance upfront, but I want to point out that 2019 already through the third quarter represents a huge improvement over the same period in 2018. The Q4 bookings of $43,000 a day on Suezmaxes and $13,500 on MRs – on Product carriers include the results from our time charters.If we remove the time charter day six, we have approximately 50% of the spot days fixed for the quarter on both fleets. Recent spot fixtures, as Craig mentioned, on both fleets have been well above these levels.$30 million in EBITDA for the quarter was slightly lower than anticipated due to fewer revenue days in the clean fleet with the vessel sales and in the crude fleet with two scrubber installations that were completed in the quarter.Cash flow was enhanced by the proceeds from the vessel sales, added about $11 million to cash flow for the quarter. Continuing on Slide 11, the balance sheet remains very strong, net LTV of approximately 48%. This number is headed even lower as vessels appreciate due to the enhanced rate environment.Cash position is solid, $31 million above bank required minimum liquidity at the end of the quarter and our debt capital is entirely comprised of low cost senior secured ship mortgage debt. We have a number of 2021 maturities with our bank facilities and the company is currently examining opportunities in the market for refinancing.Cash breakevens on the fleet remain extremely competitive. Even if you add a $1000 per day normalized annual dry docking, CapEx to these figures with under $20,000 on Suezmax Crude Fleet and under $15,000 on a predominantly MR Products Fleet. These remain some of the most competitive cost breakevens in the industry.Moving on to Slide 12, CapEx outlook for the fourth quarter of 2019 and beyond. We’ve got one vessel in dry dock this quarter followed by five in 2020. All of those will have ballast water treatment systems installed as part of the dry dock.Two of the five scrubber installs on the Suezmax fleet were completed in the third quarter. The remaining three are expected to enter the yard in the first quarter of 2020 or at the beginning of the second quarter. CapEx outlook is largely unchanged from what we announced in August and the good news for Diamond S moving into 2020 is that we are maximizing available revenue days for our fleet in the coming year.Before I turn it back over to Craig, we’d like to give some initial guidance for where we see Diamond S coming out in 2020. OpEx of $7500 a day on the Crude fleet and $7,000 a day on the Products fleet. This is a little bit higher than what we’ve delivered so far in 2019, but we expect the fourth quarter to be higher than Q2 and Q3 and this guidance for 2020 is in line with where we expect the fourth quarter to come in on the OpEx side.Depreciation is down basis - previous guidance numbers based on the two sold vessels in September. Dry dock amortization is roughly $3 million a quarter for next year. Cash G&A of $1,100 a day, a little bit higher than initial figures from this year as we’ve added to the platform post merger in March. All-in SG&A per day for 2020 will likely be between $1,250 and $1,300 per day.Off hire dry docks and capital upgrades, we have five dry docks scheduled for next year. Three to take place in Q1, a one in Q2 and one in the third quarter. Note, there is always some element of unpredictability with the exact timing of dry docks and where those days fall.As I mentioned on the previous slide, we have three scrubber installs. Right now, we see those going to the yard towards the end of the first quarter. So it’s highly likely that some of these off hire days overlap those to first and second quarters of 2020.And finally, our – as disclosed in our documentation from March, we have a management agreement with Capital Ship Management. These OpEx and advisory services are included in the guidance numbers that we’ve given above.Finally, I’d like to point out the tremendous operating leverage that exists with the Diamond S fleet. Every $1000 increase in TCE, which is a very modest number, given the spikes we’ve seen in very recent months translates into approximately $20 million in revenue and EBITDA. We are tremendously well positioned to maximize available earnings in 2020.And with that, I’ll turn it back over to Craig.
- Craig Stevenson:
- Thanks, Kevin. Before we open it up to Q&A, I just want to reiterate how super optimistic we are about the next couple of years. The tanker market is going to be a great place to be. A growing distance between the supply of oil in West of Suez and the demand for oil in East of Suez is expected to drive an increase in demand for tankers.Additionally, as oil demand continues to rise over a 100 million barrels a day, global inventories are expected to actually decrease creating further demand for tankers and the order book for new tanker supply is at historic low levels. We are also excited about the 2020 year.We expect the tanker supply to be relatively inefficient for at least a year as vessels are taken out of service to install scrubbers, prepare for compliant fuel, as well as storage opportunities, all of which are expected to increase tanker earnings.With that, I’d like to open the call up to Q&A. Operator?
- Operator:
- [Operator Instructions] Your first question comes from Omar Nokta with Clarksons Platou Securities. Your line is open.
- Omar Nokta:
- Thank you. Hi, Craig and Kevin.
- Craig Stevenson:
- Hi, Omar.
- Omar Nokta:
- Good morning.
- Kevin Kilcullen:
- Hi, there.
- Omar Nokta:
- Good morning and thanks for that overview and in the quote, Craig of your super optimism for the next two years.We share that view. Just wanted to maybe kind of circle back to – this is maybe a two-part question, but on the last earnings call, you mentioned you are needing to address the age profile of your MRs. Since then, you sold the two vessels, two older ships. How are you seeing things now with that? And how do you balance monetizing the market today versus monetizing the ships?And then, also, so that’s one part and then, maybe the other part is, obviously the – from looking at your guidance for the fourth quarter, this looks Suezmax were at ranges pretty strong. MRs seemed a little bit lower than what we would have expected. So, a nice improvement from the prior quarter.But just wondering, is that age profile impacting the earnings power of these vessels or is it more just a timing thing?
- Craig Stevenson:
- Yes, I mean, I would start off and say this. We always monitor values and we always monitor relative earnings and we’ve seen near-term spot earnings take off quite briskly and it was sort of after the quarter it started, but, certainly earnings for both MRs and Suezmaxes have been quite strong. And we – there is a lag effect in asset value and so you continue to monitor that and so, we started the process of selling some ships.But right now, it appears that you are going to have to have some period of time both significant cash flows and then, ultimately it drags up value. And so, we are going to continue to monitor that and for the time being, we want to maximize the cash flow all the while monitoring what asset values are doing.The second part of that question, I’d probably break down this way. I think we are very pleased with our Suezmax performance in the fourth quarter. The number that we gave you actually is a number that sort of talks about all of our Crude Fleet. If you look to just the spot business, the spot business is more or less $47,000 a day.And we got a couple of really, really good voyages in there and by the way, we missed a number of voyages that were quite high. And so, the result is , I think we are quite pleased with. I think on the product side of the business, products side of the business is complicated and so, we had a number of voyages that were more or less fixed before the market took off in the fourth quarter.But the last – actually, the last eight voyages are in excess of $20,000 a day. And so, we were sort of out of position. But by and large, I think we are capturing that value and I think our value proposition is unit leverage and cash breakevens. That’s what’s super important to us.
- Omar Nokta:
- Okay. Thanks, Craig for that color. So, just to make sure I have it right. You said $47,000 is the spot revenue that booked thus far on the Suezmaxes?
- Craig Stevenson:
- Correct.
- Omar Nokta:
- Okay. And then, obviously, you mentioned your latest eight MR cargos have been above 20. So it looks like you are capturing definitely where the market is today.
- Craig Stevenson:
- That’s correct.
- Omar Nokta:
- Yes. And maybe just one more for me, then. Sorry. Just maybe thinking about now, as you mentioned, the markets improved, the cash flows are coming in and you want to start harness that. What’s your sense of timing now for considering dividends and share buybacks?
- Craig Stevenson:
- I think, on dividends, buybacks, I’ll let Kevin say a little – a few things about this. But I mean, they are relatively – if your price is super, super cheap, then, your buyback is something that you are going to give serious consideration to, to the extent that your stock trades up. It’s different. And so, you have all of these needs.You’ve got cash needs within the company. You’ve got – I think shareholders would typically always like a dividend for excess cash needs. But I mean, I think it’s competition amongst all of those things. Not to mention that you got fleet replacement issues at some point, so.
- Kevin Kilcullen:
- Yes, Craig – Craig definitely hit the highlights there. I think in the very short-term, there is a bit of additional delevering that we could do on the balance sheet, particularly paying down some lines of credit. So, it’s not to lose that leverage capacity enabling us to be opportunistic as we move into next year.But the focus quickly shifts to how do we return money in an efficient way to our shareholders given the elevated market that we all expect next year. And Craig gave a very good overview about how we are approaching that thought process.
- Omar Nokta:
- Yes. Very good. That’s really helpful. Thanks, Kevin and Craig.
- Craig Stevenson:
- You bet.
- Operator:
- And your next question comes from Randy Giveans with Jefferies. Your line is now open.
- Randy Giveans:
- How are you gentlemen? How is it going?
- Craig Stevenson:
- Yes, it’s okay.
- Kevin Kilcullen:
- Very good.
- Randy Giveans:
- Hey, so, chart 7 and 8, as you mentioned are showing you to buy the older vessels. So, we see as you sold two of your 2008 MRs a few months ago, are there any plans for further fleet expansion at DSSI? And which segment is more attractive? Is it your Suezmax or your MRs?
- Craig Stevenson:
- I think, when you – so we got 66 ships. We got 16 vessels in the Crude side and the balance in the Products. I think, in general, we are more of the Products side, we are more of an MR player, obviously, by definition. But I think in general, going forward, I think we focus on the MR side of the business. You need scale in both businesses.But at the same time, there is a competition for where do you put those marginal dollars? And so, I think at this point, I don’t think there is a burning demand to have additional scale today. You always look at time chartering of certain opportunities. But right now, we are just not seeing anything that is – that’s super desirable to charter in.We are more or less focused on taking the existing fleet and ensuring that we capture as much cash flow. Ultimately, that cash flow will lead to additional value and that’s how we want to capture that.
- Kevin Kilcullen:
- You know, Craig – Randy, Craig hit the nail on the head there talking about scale. I mean, we really see Diamond S as a top-tier owner/operator of any tanker vessel. But when we think exactly how and where growth will come, it needs to be a sub-segment that we have scale in. So, we have a scaled MR business.We have a scaled Suezmax business. Those are clearly the most obvious. But if there was a interesting M&A opportunity, where we could enter the Aframax or the VLCC space, in a scaled way, we would absolutely look at that. And so, we are pretty opportunistic with how we approach the question of fleet growth.
- Randy Giveans:
- Okay. And then, Craig, you mentioned, time chartering in vessels, maybe not at these levels. We are hearing one year MRs at $16,000 a day Suezmaxes at maybe $33,000 $35,000 a day. Have you got any base for your vessels at those rates and we look to kind of lock away a few more of your vessels on time charter outs, since you are saying the kind of time charter ins aren’t very attractive at these levels?
- Craig Stevenson:
- Yes, we actually have had some interest and it’s turning a conversation into a charter is always an interesting sort of thing. And so, we’ve had some interest at some much higher levels and then, the market is certainly a fluid marketplace. And so, the market really took us like a rocket on the Crude side and then the Products side followed behind it and then it settled and it’s still more or less settling and it looks like, it might actually settle – start to move in the opposite direction.There are lot of cargos that just have not come to the market yet and I think most people in the industry are aware of that. But, I would say, by and large, we haven’t seen anything that we are ready to fix – add a number today.And I would agree with your numbers that it’s more or less $16,000 a day on the MR and this is a non-eco type number and it’s more or less in the mid-30s on a Suezmax. So, we’ve not seen anything. We just can’t – we can’t hit on bid on today.
- Kevin Kilcullen:
- And we’ve got roughly 20% of the Crude Fleet is on time charter for 2020. The Products Fleet time charter portfolio rolls off pretty quickly. So, I think, when you are thinking about where we might add additional cover, it’s in that MR fleet. We definitely see the benefit of having a base load of time charter income. And hopefully, with the tailwinds in the market, it will be the opportune time to add to that.
- Randy Giveans:
- Perfect. Well, hey, thank you for the time and I will talk soon.
- Kevin Kilcullen:
- Thanks Randy.
- Craig Stevenson:
- You bet.
- Operator:
- Your next question comes from Ben Nolan with Stifel. Your line is open.
- Ben Nolan:
- Hey, good morning guys. First, I want to start, I appreciate the guidance that you gave on Page 13. I just read through and in general, I think the presentation is well thought out here with some unique things that we haven’t seen from other people. So, good job on that. But, I do want to follow-up on a couple things.You have now put a few scrubbers on your vessels and Craig, you mentioned that was one of the things that was leading you to be optimistic for – into 2020 was that, scrubber installations are going to be a little bit more protracted. They won’t maybe people have thought. How was your experience? Did, - from what you’ve done thus far, they – things gone to plan or were there unforeseen issues?
- Craig Stevenson:
- So we did two ships and those ships were – we were obligated to actually put the two ships good scrubbers on, because they were on charter to BT. They took longer than anticipated. The way it sort of – it will just exit the end of the day the two ships basically arrive the DR. They were supposed to arrive significantly apart and they arrived the day apart.And so, you had some logistic issues that you couldn’t start on one until you fit it. Basically, you’ve made some progress on the other one. And so, it did take a lot more time to do those two ships and we did those basically at the end of the summer. And, but some people have – they anticipated 30, 35 days and it’s 45 days and 50 days.And so, I think the scheduling of ships and the weighting to put scrubbers on is very real. It’s going to go into the first quarter. There is – I don’t think there is any way around it quite frankly, so.
- Kevin Kilcullen:
- Yes, Ben, I think we were initially thinking each one of those installs to something like a 45 day project and you can see we’ve significantly upped that in the guidance we are giving for the length of time on the three that are coming up in 2020.
- Ben Nolan:
- Got you. Okay. And I appreciate that color. And then, secondly, really lastly for me, Craig, you just mentioned a little bit ago that the – or maybe Kevin that you are open to M&A opportunities and building scale maybe in other categories. You, Craig in particular, going back to you – has been pretty involved and active on M&A, probably much more so than most of the people in the industry.How are you seeing that market? Given sort of the improved rate dynamics and everything else. So, are there – is there an increased opportunity in your view for that happening?
- Craig Stevenson:
- Yes, I mean, that’s always, for the last four, five years it’s been damn elusive. I mean, everyone has been talking to everyone, all kinds of different stages. I think, the industry should continue to consolidate and you need to have multi-billion dollar market cap companies out there. And so, I really don’t have a good answer for why it doesn’t occur faster than others.I mean, some people out there have consolidated in a meaningful way. I think, liquidity is a great beneficiary of that consolidation. Ultimately, systems and people will be satisfied with real scale. And so, we are certainly very open minded. We continue to look at opportunities there. There are some opportunities out there and so, we are optimistic at some point that we can continue to be a consolidator.
- Ben Nolan:
- Okay. Great. Well, I appreciate it. Thanks again.
- Craig Stevenson:
- Okay.
- Operator:
- [Operator Instructions] Your next question comes from Liam Burke with B. Riley FBR. Your line is open.
- Liam Burke:
- Thank you. Good morning, Craig. Good morning, Kevin.
- Craig Stevenson:
- Hi, Liam.
- Kevin Kilcullen:
- Good morning.
- Liam Burke:
- Kevin, your operating cash flow is very strong for the first nine months of the year. Is that giving you additional flexibility when looking at your options on refinancing debt?
- Kevin Kilcullen:
- Yes, I think, that combined with the recent market strength and the additional cash that’s expected to be delivered to the balance sheet in the fourth quarter of this year, first quarter of next year, absolutely opens up a variety of options. Given the overall relatively modest LTV across the fleet, we are taking a hard look as I think I said in my remarks at the 2021 maturities.And I think we have a number of different approaches and we’d hope to get something done there well in advance of that debt coming due.
- Liam Burke:
- Would that reduce your overall interest expense or rates, how it will be looking?
- Kevin Kilcullen:
- It’s a balance. I think we have a leverage and scale today that Diamond S did not had in the past enabling us to drive relatively attractive debt terms. I’d say, on the other hand, the shipping bank debt market certainly hasn’t gotten any better and particularly the lower cost traditional senior secured ship mortgage debt market has been in decline for a number of years.So you have a couple of balancing factors that move either direction. I would expect there might be a small incremental ability to drive interest expense lower. But not terribly meaningful.
- Liam Burke:
- Great. Thanks very much, Kevin.
- Kevin Kilcullen:
- No problem, Liam.
- Operator:
- There are no further questions came up at this time. I’ll turn the call back over to management.
- Craig Stevenson:
- Well, I think, - I think it’s an exciting time in the shipping business. I mean, we’ve never seen – I don’t think we’ve ever seen rates like this. In real dollars, it probably gets back into the 70s and so, the market is tight. Lot of things are going on in the industry and certainly, the fourth quarter and the next few quarters will be quite strong relative to all the IMO 2020 issues and scrubbers and how that affects things.And so, I think, we are as excited as you can get about those opportunities and really in collecting cash flow. And so, our cash breakevens is a competitive advantage to the company and our unique leverage. And so, we’ve got a lot of ships. We’ve employed very little capital to control those ships and super low cash breakevens.And so, hopefully, we’ll see the market respond accordingly. So, with that I appreciate your time. Stay tuned. Thank you very much
- Kevin Kilcullen:
- Thank you,
- Operator:
- This concludes today’s conference call. You may now disconnect.