Overseas Shipholding Group, Inc.
Q2 2019 Earnings Call Transcript

Published: 9 Aug 2019

[Operator:]

Good morning and welcome to the Overseas Shipholding Group Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Sam Norton. Please, go ahead.

[Sam Norton:]

Thank you, Ben. Good morning, everyone. I'm joined today by Dick Trueblood Molly Arcia and Princeton McFarland for OSG's 2019 second quarter earnings call. As always, we welcome the opportunity to provide added depth and perspective to our written public disclosures and appreciate you are taking the time to listening on this call.Our objective remains to provide all constituents listening in on this call with a means to clearly understand the recent developments in our business, as well as to offer helpful insight into its future trajectory. It is our hope that the additional information provided will bring into sharper focus the potential that we see in OSG's business model.Prior to beginning our review of the past quarter, I would like to direct everyone to the narrative on pages two and three of the PowerPoint presentation available on our website regarding forward-looking statements, estimates and other information which may be provided during the course of this call. The contents of this narrative are an important part of this presentation and I urge everyone to read and consider them carefully.We will be offering you more than just a historical perspective on OSG today, and our presentation includes forward-looking statements, including statements about anticipated future results. These statements are subject to uncertainties and risks. Actual results may differ materially from projections and could be affected by a variety of risk factors, including factors beyond our control.For a discussion of these factors we refer you specifically to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, our Form 10-Q for the first quarter ended March 31, 2019 and our other filings with the SEC, which are available at the SEC's Internet site, www.sec.gov, as well as at our own website www.osg.com.Forward-looking statements in this presentation speak only as of the date of these materials, and we do not assume any obligation to update any forward-looking statements, except as may be legally required, or the reasons why actual results could differ. In addition, our presentation today includes certain non-GAAP financial measures, which we define and reconcile to GAAP in our second quarter earnings release furnished at the SEC, and which is also posted on our website.Overall, we are pleased with our fleet's performance during the second quarter and continue to see clear strengthening fundamentals that underpin our expectations for meaningful earnings growth to develop over the coming years. With one important exception, which I will address in a moment, we also saw continued stability across our niche businesses.In addition to the ongoing market improvement and the promise of growth and the four new buildings that are scheduled to be delivered through the end of 2020, we are looking at a number of additional opportunities to capitalize on our unique position as the leader in the blue water U.S. Flag space.Before going into the specifics of the second quarter, I would like to address the issue of the recent Chapter 11 filing made by our lightering customer Philadelphia Energy Solutions, or PES, and the impact of that event on OSG. On June 21, 2019, PES suffered an explosion at the alkylation unit of the Girard Point refining facility in Philadelphia, causing material damage to that refinery's facilities.Subsequent to this event, on July 21, PES filed for protection from its creditors under Chapter 11 of the United States bankruptcy code. In that filing, PES articulates a need to preserve liquidity and restrict payments to preposition creditors, as it considers its plans and options for restoring damaged units to operating status.OSG has an unsecured claim for receivables due from PES amounting to $4.3 million. PES has also announced that it may cease operations at its Point Breeze refining complex after the runoff of remaining inventories, unless satisfactory arrangements can be made with its insurers and financiers that will allow us to rebuild the damaged infrastructure and restart operations.Due to the high degree of uncertainty as to the viability and timing of any plan for continuing operations at the damaged PES facilities, we consider it prudent to reserve the full amount of this receivable in our second quarter earnings. Dick will speak more specifically to the impact of this in his remarks.But it should be noted that any decision to fully reserve this receivable does not diminish in any way our commitment to pursuing recovery of this asset. In this context, OSG has been appointed to the unsecured creditor committee of PES and we'll, through this will committee, actively participate in the continuing resolution of the bankruptcy process at PES.Of equal importance is the impact on our future earnings and results arising from the loss of the significant customer for our lightering services. Historically, PES is accounted for roughly 60% of the barrels lightered in the Delaware Bay each year, yielding a time charter equivalent of approximately $6 million each quarter.The average total quarterly TCE contribution of our lightering business from all customers over the past two years has been about $11.5 million per quarter. OSG continued to serve the two remaining customers in the Delaware Bay with one of our specialized lightering ATBs.The other ATB, the OSG 350 vision has been repositioned to the Gulf of Mexico to pursue alternative employment opportunities and the strengthening market for conventional tankers and ATBs. To-date, we have secured two spot voyages transporting crude oil into the Gulf of Mexico, with indications of a continuing demand in this market. Looking at Q3 considering the lightering volumes that we have already listed. Expected liftings for August and September and the expected TCE contribution from the OSG 350/Vision, we expect TCE revenues from the two lightering bars units to range from $8.5 million to $9.5 million for the third quarter. The $2 million to $3 million drop is from the average quarterly contribution over the past two years.It is difficult to forecast the longer-term impact of reduced lightering volumes without having greater clarity as the future viability of PES or a successor operator of its refineries. We believe that any outcome to see continuing refining operations at either or both of PES facilities will involve an important continuing role for OSG in the longer-term.Regarding the broader impact, the market adjustments to the loss of the refining capacity in the important Northeast corridor, the general view is that the loss of gasoline production of approximately 125,000 barrels per day will largely be made up with imports from Europe.On the other hand, it is unclear how and from where loss of middle distillate production will be replaced. PES produced about 80,000 barrels per day of diesel fuel prior to its filing. Given capacity constraints and the colonial implantation pipeline systems, we consider the prospects for an increase in demand for Jones Act tanker shipments of middle distillates to the New York harbor area over the course of the winter to be an interesting opportunity in support of our long-term strategic objectives.I will now turn to the performance of our business over the last quarter. We have continued to make progress towards achieving our strategic objectives. We have secured stable and visible cash flows for the near term, while maintaining short-term market exposure. Our actions are allowing us to benefit from a recovery in the Jones Act tanker and ATB trades, which we now see is well underway.Focusing on the heightened stability and visibility of our cash flow, our conventional tanker fleet realized a utilization rate of 95% during the second quarter, clearly reflecting the positive impact on utilization from our increased entering into time charters. Our ability to secure this continuous employment at higher charter rates is evidence that our customers are prepared to accept the larger exposure to utilization risk in order to secure firm access to crucial transportation capacity and an increasingly supply-constrained market.Time charter equivalent earnings the conventional tankers reached $41.5 million for the quarter, an increase of $1.5 million as compared to the first quarter. The addition of the Overseas Key West to the trading tanker fleet contributed to this increase in TCE revenue. Furthermore, this increase in TCE earnings occurred in spite of two dry docks during the quarter, which resulted in 42 vessel days out of service and approximately $2.3 million of loss revenue associated with these regulatory maintenance activities.We have secured firm time charter contracts for our conventional tankers covering over 75% of the remaining available operating days this year. This coverage gives us confidence that the performance of our conventional tanker fleet will unlike recent years provide a positive lift to our overall results for the year.For the 10 vessels in our fleet that are leased from American Shipping Company, we continue to view the prospect of a payout of profit share obligations to AMSC as being a relatively distant consideration. Nevertheless, as we did last quarter we will provide guidance of how and when we may expect payouts to arise. Dick will elaborate on this point in his comments.As we move into the second half of this year, our chartering objectives of obtaining higher charter rates and extending charters that are expiring on our conventional tankers will come clearly into focus. To-date, we have secured time charter commitments for effectively all of 2020 on two of our conventional tankers at rates close to $60,000 per day.In addition, we are currently engaged in active negotiations on two further vessels for charter extensions of two and three years respectively also at rates close to $60,000 per day. Each incremental $1,000 per day in average TCE translates to a revenue gain across our fleet of 10 conventional tankers of approximately $3.5 billion per annum. Due to minimal amount of additional variable costs associated with these gains, substantially any increase in average TCE revenue drops to the bottom line.We are optimistic that progress on securing charter extensions at higher rates will continue as we move into the latter part of this year and that the opportunity to reset rates at higher levels represents an attractive path to realizing meaningful earnings expansion in the quarters ahead. Our confidence is based on our expectation that the incremental tightening of available supply will continue along with favorable signs with continued demand for both crude oil and refined product movements.Our conventional ATB has performed the expectation during the just completed quarter achieving utilization rates and TCE contributions consistent with the first quarter. The OSG 209/Honour was removed from service in June and sold for demolition reducing our currently active conventional ATB fleet to three units.We also sold for demolition the OSG 214 enterprise, a unit which had been in layup since June of 2017. We plan to remove the OSG 242/Columbia from service and sell it for demolition towards the end of this quarter. This will leave only two active conventional ATBs in service in the fourth quarter. These demolitions highlight the ongoing restoration of the supply-demand balance, which has been occurring over the past two years through the permanent removal of supply via scrapping of older tonnage not only us, but throughout the sector.We anticipate that several of the remaining 30-plus year old vessels still operating the Jones Act space are likely to be retired over the next one to two years resulting tightening of supply as a major factor in our confidence in an improving rate environment in the future.As we have said in the past, we expect the revenue contribution from the retirement of our older ATBs to be replaced on a more efficient basis by the two new-build barges that would be delivered during 2020. Recall that, we have already placed the one-year charter on the first barges to be delivered. We have now recently entered into a one-year charter for the second barge commencing upon delivering the fourth quarter of next year. This chart is now secured for both of the newly-built barges. We have good visibility of the contribution that these units will make once delivered.We expect operating contribution from these two units to be about $4 million during 2020 and about $15 million during 2021. With these results the two new barges are expected starting in 2021 to effectively replace the vessel operating contribution in the older ATBs that we've had in service during the past year and half.I'd like now to turn your attention to our niche businesses. Notwithstanding the developments with PES, we expect our niche businesses to continue to provide a strong foundation of earnings and cash flow. Given the unique attributes of these assets that serve our niche businesses, the infrastructural role that they play and the sound industrial foundation of the businesses in which they participate we expect that the stability that has characterized this portion of our earnings stream will continue to be a reliable component of our future earnings profile.Supporting this belief is the five-year contract extension for the shuttle tanker overseas cascade agreed during the second quarter with Murphy Oil to serve their cascade in Chinook field developments. With this expansion two of our shuttle tankers are now under contractual agreements through the first half of 2025 at rates averaging above $80,000 per day over that period. Another of our shuttle tankers the Overseas Chinook continues for the time being to trade as a conventional tanker. Although, I want to point out that we reported results in our niche business segment for consistency purposes.We remain optimistic that the Overseas Chinook will find additional work as a specialized shuttle tanker with the promise of earning premium rates in performing those services at some point in the future.For the second quarter in a row our MSP vessels performed only one voyage under our contracted affreightment with the Government of Israel. This is a rather unusual development as the contractual terms call for a minimum of seven voyages a year approximately evenly spaced. We have agreed with the Government of Israel that roughly 50% of the activity under this contract will now be concentrated in the fourth quarter.Accordingly, we expect our MSP tankers to underperform contribution averages during the third quarter as has been the case during the first half of this year, but to contribute significantly during the fourth quarter compensating for the revenue shortfall experienced year-to-date.Full year TCE earnings for each of our MSP tankers should thus improve to approximately $22,000 per day for the full year from the $17,798 per day figure earned during the first half of the year.As we look to future opportunities in this particular niche business, the second quarter saw an important still provisional development as the U.S. House of Representatives approved language in its Annual National Defense Authorization Act to augment current Maritime Security Program with a new tanker security program. The tanker security program as conceived would have made law to freed up fleet up to 10 U.S. Flagged MR tankers in a program effectively replicating the structure of the current MSP program. It is proposed that the act will provide an annual readiness stipend of $6 million for participating vessel commencing the fiscal year beginning October 1, 2020.Vessels participating in the program would also have priority access under MARAD's Cargo Preference Program. Cargo Preference Program works to promote and facilitate a U.S. Maritime Transportation System and oversees the administration and compliance with U.S. cargo preference laws and regulations. Those laws require shippers to use U.S. Flag vessels to transport government impelled ocean borne cargoes.We have announced that we are building two MR tankers at Hyundai Mipo Dockyards in Korea to be delivered this September. These vessels will be named the Overseas Gulf Coast and Overseas SunCoast.If the NDAA is made law substantially in the form as approved by the House of Representatives, we intend to nominate these vessels to participate in the new tanker security program. If approved participation by MARAD, we would expect to reflag each vessel into the U.S. Flag registry during October 2020.In the meantime, the Overseas Gulf Coast and Overseas SunCoast will trade internationally under the Marshall Islands flag registry, while awaiting final disposition of the pending National Defense Authorization Act. For both vessels, we have an agreement at this time on main terms pending only finalization of charter party details for one-year charters commencing from delivery at rates, and if fully fixed should provide an incremental operating contribution of about $3.5 million for each vessel during the first year following delivery. We support the consensus view that the tanker security program is a critical strategic priority for the United States. It is as well an important growth and revenue expansion opportunity for OSG. Given OSG's current participation as the only tanker operator in the MSP program, we have unique qualifications to participate in partnership with MarAd, the transportation department and the defense department in developing these efforts to provide a workable framework to expand non-Jones Act U.S. Flag tanker fleet on a sustainable long-term basis.For presentation purposes, we will in future quarters include the Overseas Gulf Coast and Overseas SunCoast earnings in our niche business segment grouped together with our existing MSP tankers Overseas Santorini and Overseas Mykonos.With the tanker security program as a backdrop, it is worth highlighting again that understanding of OSG's future potential should not fail to include the possibility of future growth through acquisitions in both the Jones Act, the internationally trading U.S. Flag market growth opportunities for which OSG is uniquely well-positioned.Opportunities for consolidation among participants in the Jones Act also remain a constant focus. OSG's ability to sustain a good standing in the community of our customers our peers and our regulators is a valuable and differentiating feature of our business model and positions us well to pursue growth opportunities within the Jones Act market.Safety and consistent service quality remain above all the key focus of our operations and results achieved on this front are widely recognized by our key constituents. We place paramount importance on maintaining our established culture of continued progress towards achieving the highest standards in both protecting the environment and ensuring the health and safety of all of our employees.Before turning this presentation over to Dick for a more detailed review of the past quarter's results, I would like to shape expectations as to the remainder of 2019. We consider the fundamentals to be strong, the barriers to entry for any prospective new entrants to be high and the prospects for continued strength in rates to be encouraging.The time charter equivalent earnings for both spot and contracted conventional tankers for the first half of this year averaged $49,252 per day. The current contract cover in place for the final two quarters of 2019 amounts to 75% of vessel available days with specific expiry details provided in slide 6.Allowing for some seasonal weakness affecting utilization rates for spot trading vessels during the third quarter given the visibility of existing forward contract cover, we expect average time charter earnings for the second half of this year to decline slightly from the first half. The addition of the Overseas Key West to the conventional tanker fleet no days lost to drydocking during the final two quarters and three more operating days overall will increase total operating gains for the second half by 164 days as compared with the first half of 2019. As such, we expect TCE revenues for the conventional tankers during the second half to rise approximately $7.5 million versus first half results.For our ATB fleet, we anticipate the second half of 2019 will see a transitional $6 million to $8 million decline in time charter earnings from the current ATB fleet, the result of the progressive removal of several of the older ATBs from service. By mid-2020, we anticipate that revenue derived from our legacy ATB fleet will have dropped to zero. However, as noted earlier the two new barges currently under construction once delivered should fully compensate for the loss of contribution provided by our ATB fleet during each of 2018 and 2019.For our niche businesses, a reset of some expectation is required due to the PES bankruptcy. Assuming the status quo and the disposition of our lightering vessels, we currently anticipate a drop of between $6 million to $8 million in lightering vessel time charter equivalent earnings in the second half of 2019 versus revenue booked in the first half of 2019.Conversely, we expect second half contribution from our MSP segment including the two new deliveries from Korea to add $5 million to $6 million of TCE revenue versus what was achieved during the first half of the year. The scheduled drydock of the overseas cascade in December will cause the contribution from shuttle tankers to be about $1 million below that of the first half.All told, we expect our niche businesses during the second half of 2019 to experience a net revenue decline of about $2 million. A summary of first half actual and expected second half reconciliation of adjusted EBITDA has been provided on slide 10.Overall, we see conditions in our spread of business as indicating a full year adjusted EBITDA performance of between $82 million and $85 million. It is useful to recall that as of the end of July OSG-owned or operated an active fleet of 20 vessels. I refer you to slide 11. Our active fleet includes tankers and articulated tug barges of which 18 operate under the Jones Act and two operate internationally in the U.S. Maritime Security Program.Additionally, we have two MR tankers under construction in Korea with a scheduled delivery in September this year and two 204,000 barrel barges under construction at Gunderson Shipyard at Portland, Oregon which are contracted for delivery in 2020.With this picture having been refreshed, I will now turn the call over to Dick to provide additional details on our second quarter results for 2019. Dick?

[Dick Trueblood:]

Thanks, Sam. Our Delaware Bay Lightering customer Philadelphia Energy Solutions operated two refineries in Philadelphia, which have capacity of processing 335,000 barrels per day.As Sam discussed the larger of the two refineries experienced a major explosion on June 21 and a month later PES filed the Chapter 11 bankruptcy proceeding. At filing they announced that they have $100 million of difference and available to support existing operations, undertake the work necessary to ensure the refinery complex is safely positioned for rebuilding and restart and to complete its reorganization process.PES went onto say they expect to work expediently with its insurer’s stakeholders and third parties toward a goal reaching a consensual plan regarding the damaged infrastructure and resuming refining operations.We have not provided any services to PES since the explosion. They continue to operate the 85,000 barrel per day refinery and it appears that they are able to operate a small portion in the other refinery. It's not clear what their intentions are concerning the duration of ongoing operations.The bankruptcy is in its initial stages and the legal process has just begun. Creditor and other committees have been formed with initial meetings being scheduled. The case will be complex and can be expected to have significant competing interests. The outcome of the bankruptcy cannot be predicted at this time.At the time of the filing we had outstanding receivables from PES of $4.3 million. We considered the high degree of uncertainty surrounding the future of PES and the current lack of available information as well as the very significant amount of secured claims that exist when we were evaluating the collectibility of our receivables.We believe that prudence dictated that we fully reserve the amount that we are owed for services already performed. Our take-or-pay contract with PES which matures in April 2020 requires them to lighter 3 million barrels per month or paid for any shortfall. We will have a claim under the contract for any quantity shortfalls that occur.TCE revenues from PES in 2018 were $25.3 million. Total TCE lightering revenues from all customers were $50.7 million in 2018. For the first half of 2019 PES represented 7.8% of our consolidated TCE revenues and in 2018 it was approximately 7%.Looking only at the lightering business PES contributed 60% of the 2018 volume and 50% of both 2018 lightering and TCE revenues. We can service the business of the other 2 lightering customers with 1 lightering barge.Accordingly we have relocated the OSG350/Vision to the Gulf of Mexico, where she is currently employed in the spot market at profitable rates. We estimate that we will experience a $3 million to $8 million reduction in cash flows due to the expected rate differential between previous and current employment.Please turn to slide 13. During the second quarter we continue to see a positive spread between WTI Houston and Bonny pricing. This was a consistent theme in 2018 and has been continuing in 2019. This price relationship supports the use of domestic crude oil and refinery operations.As a result, we continue to see crude oil movement from the Gulf of Mexico and the related employment of Jones Act tankers in this trade. Recent international volatility has resulted in a compression of the spread between WTI and Bonny pricing. However the spread continues to be widen up to support the movement of crude oil from the Gulf of Mexico to the Northeast refineries.Please turn to slide 14. Spot rates on a TCE basis continued in the upper $50,000 to mid $60,000 per day range during the quarter. We currently have 4 vessels operating in the spot market including the redeployed OSG350/Vision. The spot market in June was relatively quiet as we experienced the advent of slower seasonal demand. We did however see an uptick in voyages during the month of July.Please turn to slide 15. During the second quarter we sold 2 of our rebuilt ATBs, one of which had been in layup for scrap. This represents a 3-vessel reduction in earning ATB assets compared to the second quarter of 2018. Compared to the first quarter of 2019 this is a reduction of one earning ATB asset.We expect to dispose of an additional rebuilt ATB during the third quarter. Our contract of affreightment with the Government of Israel is for a minimum of 7 voyages annually. We performed 1 voyage for them in the second quarter compared to 2 voyages in the year-ago quarter.We expect that our Government of Israel revenues for the remainder of this year will be concentrated in the fourth quarter. My comments from this point forward will focus on comparisons to the current quarter excluding the impact of the $4.3 million PES receivable reserved and focus on the operating results of our business.OSG's performance during the second quarter of 2019 continued to reflect the substantial improvements in our business due to the improved supply and demand balance resulting from the reduction in the Jones Act fleet. This has resulted in an improving rate structure and an increase in profitable time charter rates that are available.The shift to time charters that began in late 2018 has provided stability and visibility to our fleet performance. TCE revenues for the second quarter were $82.1 million, with adjusted EBITDA of $22.5 million, excluding the impact of the PES reserved. Sequentially, TCE revenues were approximately flat and adjusted EBITDA declined $1.1 million.As we discussed in our presentation last quarter the scheduled drydock days increased. And as a result, our revenues lost due to off-hire increased by $1.8 million to a total of $2.3 million during the quarter.Absent the increase in off-hire days, during the quarter, we would have seen a sequential improvement in TCE revenues resulting from a higher proportion of our fleet operating under time charters as well as increased levels of EBITDA. Compared to the year-ago quarter, TCE revenues and adjusted EBITDA, excluding the PES reserves declined by $5.9 million and $2.4 million respectively.Comparing the second quarter of 2019 with the second quarter of 2018, the reduced revenues and adjusted EBITDA results from trading fewer vessels, shift to the Overseas Chinook from shuttle tanker operations to conventional tanker operations, as well as an increase in off-hire days and one fewer GOI voyage in the current quarter.Please turn to slide 16. Looking at our TCE revenues on a more granular basis, our Delaware Lightering business experienced a $1.5 million TCE revenue decrease from the first quarter of 2019.During the first quarter, one of our lightering customers increased their liftings due to repair work, which required vessels to be fully lighter during the first quarter with a resultant increase in revenues.Volumes returned to historic norms during the second quarter and our revenues declined accordingly. This resulted in a decrease of $4,685 in the average daily TCE rate when compared to the first quarter of 2019 due to the impact of decreased utilization.Our rebuilt ATBs performed consistently with the first quarter of 2019. Our non-Jones Act tanker recorded a modest decrease in TCE revenues during the quarter when compared to the first quarter of 2019.We operated under international time charters for 83 more days this quarter increasing the effective utilization of these vessels by reducing the number of days of spot market exposure.Our Jones Act tanker fleet, TCE revenues increased $2.3 million in the first quarter to $60.7 million in the second quarter of 2019. This change was driven by the increase in time charter days and the resulting impact of higher utilization rates, which during the quarter was partially offset by the increase in off-higher days.Additionally, the increased rates available in the spot market and the addition of the Key West to our operating fleet in late April resulted in an increase in spot market TCE rates and increased TCE revenues.Looking at the year-over-year changes, lightering revenues were flat in comparison to the second quarter of 2018. ATB revenues declined from $11.6 million to $7.1 million compared to the second quarter of 2018, principally due to the decrease in the number of operating vessels.The non-Jones Act tankers, revenues declined from $5.3 million to $2.7 million. The 2018 second quarter had one more Government of Israel voyage as well as the completion of an extensive MSC voyage.Please turn to slide 17. From the start of 2017, our TCE revenues have decreased due to the retirement of older rebuilt ATBs and the evolution of higher-time charter rates in a tight supply market to low-spot market rates in an oversupplied market.Beginning in 2018, rate recovery began, although the benefit was impacted by volatility in the spot market, which hurt utilization levels and effective rates. Since the beginning of 2017, we have reduced the number of operating ATBs from eight to three.ATB revenues have declined from $18.5 million 83% of which was from time charters to $7.2 million in the second quarter of 2019. We will be removing one more ATB from service in 2019 at the end of the third quarter.Further, we will remove the last two rebuilt ATBs from service during 2020. The majority of the revenue line is associated with rebuilt ATBs has already occurred. The balance will continue to reduce over the next 18 months and our two new barges will enter service at the end of the second quarter of 2020 and during the fourth quarter of 2020. This will begin the replacement of lost ATB revenues.Conventional tankers spot market revenues represented 17 -- a 7% of our conventional tanker TCE revenues in the first quarter of 2017 and we continue to benefit from legacy time charters that were still then in effect. Since that time spot revenues reached a maximum of 35% of total conventional tanker revenues.The most recent quarter spot market revenues have declined to 14% of conventional tanker revenues as our business has shifted back to a time-charter focus. During the second quarter, eight of our 10 conventional tankers were under time charter arrangements increasing the stability and predictability of our tanker TCE revenues.We continue to see a reduction in vessel supply coupled with increasing demand and a corresponding increase in rates. The rebalancing of the supply/demand relationship has increased demand for committed tonnage by shippers and we believe this will support an increase in time charter duration as shippers seek to add to their longer term supply visibility.Please turn to Slide 18, looking at quarterly revenue performance by the three categories and the three components of our niche operations, our niche market operations have produced a relatively stable revenue contribution throughout this period with revenues remaining in a relatively narrow band.Variability is created for all of our activities by such market conditions, dry dock requirements, and repairs. This can be seen although there are fluctuations the outcome stay within a fairly tight range. This underpins our business and has permitted us to transit the low rate low utilization oversupplied market. The PES bankruptcy will introduce a higher level of variability. This business is expected to continue to be a stable platform for us.Please turn to Slide 20. Vessel operating contribution which is defined as TCE revenues less special operating expenses and charter hire expenses decreased $1 million to $27 million from Q1 2019 to Q2 2019. The decrease was driven by the higher level of off-hire days and the related $1.4 million increase in lost revenue.Additionally, the return to historical volumes related to one of our Delaware Bay customers reduce that contribution. Total time charter revenue days were 1,294 compared to 1,315 revenue days in the first quarter.Conventional tanker spot market exposure increased from 90 days to 157 days due to the entry of the Key West into the fleet in late April. Vessel operating contribution decreased $4.7 million from the prior year comparable quarter. The year ago quarter included two GOI voyages the culmination of an extensive MSC voyage and the Chinook operating as a shuttle tanker through May. Our tanker fixed revenue days increased from 720 days during the first quarter of 2018 to 982 days this year.Please turn to Slide 21, second quarter adjusted EBITDA excluding the PES reserve was $22.5 million compared to the first quarter adjusted EBITDA of $23.6 million. Primary contributing factor to the decrease was the increase in off-hire days. This stability reflects the higher proportion of our vessels operating under time charters over the recent quarters.Second quarter adjusted EBITDA decreased $2.4 million from $24.9 million in Q2 2018. The decrease resulted principally for a reduction in a number of operating vessels the effective higher rate legacy time charters still in effect in early 2018, one less GOI voyage and the transition of the Chinook from its shuttle tanker activities to service as conventional tanker.Please turn to slide 22. Net loss for the second quarter of 2019 was $1.7 million including the TES reserve compared to net income of $3.2 million in the first quarter of 2019 and net income of $3.1 million in 2018 second quarter.Excluding the PES reserve, we would have recorded net income of $1.2 million. We recognized a tax benefit of $23.4 million in the third quarter of 2018 upon completion of the IRS audit of our 2012 to 2015 tax returns.We had previously reserved beneficial effect of losses recognized in connection with the disposition of two vessels and the audit results permitted us to recognize those tax benefits in 2018.Please turn to slide 23. During each year, we perform scheduled maintenance as required by regulation. During 2019, we are performing these activities on four of our vessels. This slide provides information and serving that scheduled maintenance. It does not include unplanned repairs which should they occur could impact the schedule.While vessels are in drydock or otherwise unavailable for use, they are off-hire even if otherwise employed on a time charter.During this year's second quarter, we experienced 42 off-hire days which equated to a revenue loss of $2.4 million. We diligently work to minimize the number of off-hire days to reduce the revenue loss we sustained. However, we will still experience a revenue disruption. The impact as we looked forward to the balance of this year will be much smaller and there will be one vessel for which drydock activities will be performed.Please turn to slide 24. As our operations continued to improve, we want to provide information concerning the profit sharing arrangement that exists for the 10 vessels we bareboat charter charters from AMSC. The chart provides information for 2020 through 2022. As we previously stated, we do not anticipate any profit-sharing obligation will be created this year. We look here at what the profit-share picture might be for assumed average TCE rates based on estimated future market rates.In 2020, if we were to achieve an average TCE rate of $62,000 across the 10 AMSC vessels, there would be no profit sharing. The minimum rate required to result in a profit-sharing obligation in 2020 is estimated to be $67,500. This would create an aggregate payout of $300,000. Years beyond 2020, assume that the rate earned in the prior year was the market rate. Based on the assumption for the trade here, there would be a modest profit-sharing obligation of $807,000 for 2021. And if the average rate in 2022 was $65,000 that would produce a profit share of $10.7 million.The minimum average rate necessary to achieve any level of profit sharing in 2022 would be $59,000 per day. Profit share is paid out in the year subsequent to the year earned. Finally, it is worth noting that as certain costs to recover the minimum rate, it will result in profit share declines. Calculations are complex and have a variety of factors involved. This chart is meant to be indicative of possible outcomes based on the assumptions made.Please turn to slide 25. We began the second quarter of 2019 with total cash of $76 million, which included $200,000 of restricted cash. During the 2019 second quarter, we generated $18 million of adjusted EBITDA inclusive of the PES reserve. Vessel sales generated $2 million of cash during the quarter.Working capital changes provided $5 million of cash. We expended $8 million on dry dock improvement and improvements to our vessels. We invested $24 million in new vessel construction. And we incurred $7 million of cash interest expense. We made debt repayments of $8 million, $2 million of which represented proceeds from vessel sales which we used to reduce debt. The result was we ended the quarter with $54 million of cash including $200,000 of restricted cash.Please turn to slide 26. Continuing our discussion of cash and liquidity as we mentioned on the previously -- on the previous slide, we have $54 million of cash at June 30, 2019 including $200,000 of restricted cash. Our total debt was $341 million. This represents an $8 million reduction in outstanding indebtedness since March 2019. Our $325 million term loan as an annual amortization requirement of $25 million or $6.25 million per quarter.With $333 million of our -- of equity, our net debt-to-equity ratio is 0.9 times compared to 0.8 times at March 31, 2019. Subsequent to the end of the quarter, we entered into loan agreements to finance the Overseas Gulf Coast and Overseas SunCoast. The funding will occur on vessel delivery which is expected to occur in late September. At June 30, 2019, OSG had aggregate capital commitments of $122.7 million for the construction of four vessels, two tankers scheduled for delivery in September 2019 and two barges scheduled for delivery at the second quarter and fourth quarter of 2020.Contracts for these vessels require progress statements based on the shipyard's achievement of contractual milestones during the construction periods with a final payment due on delivery of each vessel. We've made all required progress payments to date and we will make the remaining payments including those due on deliver. The remaining amount required on delivery of the two new tankers will be fully funded from the proceeds of the laws. We are currently in discussions with potential lenders to secure financing for the two barges still under construction.This concludes my comments on the financial statements. Sam, I'll turn the call back to you.

[Sam Norton:]

Thanks for that, Dick. Then, I think we can open the call now for questions if participants wish to ask?

[Operator:]

Sure. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ryan Vaughan with Needham & Company. Please go ahead.

[Ryan Vaughan:]

Thank you. Hey guys, thanks for all the detail today. Sam just a quick clarification. I heard that you locked in two vessels, Jones Act vessels already for 2020. Then you said something after that. It sounded like you're close on a couple of others, you said two to three years. Can you just clarify that comment please?

[Sam Norton:]

Sure. As we've indicated throughout the conversations that we've had over the last six months or so. The third and fourth quarter is really -- are important for us in terms of affecting rate increases and extending charters with the customers that we have. It has been our perspective that as the market tightens we should be seeing not only increased rates, but also increased duration of the charters that our customers are looking for.And we are as I noted in my comments we are currently engaged in discussions on two specific vessels that would reflect that perspective, i.e. we would see higher rates and longer periods. And those are active discussions right now. I know -- I have to qualify they're not done yet, but I can say that the conditions around, which the commercial terms of those discussions are as I had indicated.

[Ryan Vaughan:]

Excellent. And then Dick just on the CapEx, another $24 million of vessel contribution this quarter. By my math it looks like there's about $120 million remaining. You announced that you have $50 million funding from Korea. And then I think toward the very end of your comments you mentioned that you're working on the barge financing as well. Can you just fill as to what should we expect from a cash perspective back half of this year for that growth CapEx?

[Dick Trueblood:]

I mean, the majority of it will be the one -- the payments that are due on delivery so that's roughly $50 million. The balance, which we'll fund out our operating cash flow for the barges will be in the $12 million range between now and the end of the year.

[Ryan Vaughan:]

No, no. I was just going to say, so you have -- if I'm right on the $120 million you have the $50 million already for the Korean. You're working on the barge. So should we expect something $30 million, $40 million of actual growth cash -- CapEx for the rest of the year and next year I guess for -- upon delivery? I'm just trying to get an idea what you expect roughly for the cash contribution. What you'll use your EBITDA and free cash flow for?

[Dick Trueblood:]

I think the probable leverage on the two new barges by the time we get all done with it, it will be in the 55% to 65% of the contract price, which is $100 million. So I think we'll be at a $15 million more of our own cash over this period of time.

[Ryan Vaughan:]

You said 15%?

[Dick Trueblood:]

Yes.

[Ryan Vaughan:]

Perfect. Okay, great. So as I think about -- clearly you're generating a lot of free cash. And clearly you have any -- you're able to make a lot of those payments pay down, your debt amortization et cetera, et cetera. As we think about $54 million of cash today, is there a certain level you want to maintain at the end of the year that we should be thinking about?

[Sam Norton:]

So I think -- Ryan this is Sam. I think that we'd look at comfortable cash balances in the $20 million to $30 million range. And that we would expect to be above those levels given success in our financing activities. But we don't see that level as being in the picture any time in the near-term.

[Ryan Vaughan:]

Great. And then just one last one. Just given this is a relatively small industry, we did see some -- we do have an M&A data point. I believe it was earlier this week that I think it was your C corp that announced that they are purchasing the other 49% of their Jones Act business. Sam anything -- I think it was done at 6.5, 6.7times EBITDA. Anything that you could just say qualitatively, how those assets compare to OSG's assets? Is this a good comp for us? Or there's kind of nuances between the two businesses? Thank you.

[Sam Norton:]

So the C corp fleet consists primarily of tankers. They have one articulated tug barge relatively modern. The others are all tankers, some of which are older, some of which are younger. I think from the tanker perspective it's a relatively good comp from the tankers perspective. They don't have any niche businesses. They don't really have much of the ATB exposure that we do.I think more importantly, remember this was a 49% minority interest. So whether or not the price truly reflects an open market open bidding situation, that's something that one should consider when you're looking at the valuation perspective. And I think that's the more interesting aspect as opposed to the actual mix of the asset.

[Ryan Vaughan:]

Okay. It make sense. Okay, thank you guys.

[Operator:]

Our next question comes from J. Mintzmyer with Value Investor's Edge. Please go ahead.

[J. Mintzmyer:]

Pretty good results on the call. I'm considering the up and down of the market and understandably you got to track down that receivable for a bit. Just to clean up the last questions. Excellent stuff on the CapEx there.I heard you say about $12 million on the barges for the rest of the year and then $15 million. So is that $12 million and $3 million? Or is that $12 million and $15 million? Just to clarify that point?

[Sam Norton:]

This is Sam again. The $50 million is for the two tankers that are delivering in September. Actually I think the actual number is $47.5 million and then the $12.5 million is for the barges over the balance of the year. So that's -- I do the math right that's about $60 million in total over the course of the year -- balance of the year.

[J. Mintzmyer:]

Excellent, tracking that. And then what kind of commitment do we have on the barges for 2020? Is it just that payment at the end of 2019? Or is it going to be another cash outlay in 2020?

[Sam Norton:]

We have -- the total barge investments for the two barges is a little over $100 million. And roughly speaking we will have funded a little over half of that by the end of this year.So there's still $40 million to $50 million of CapEx and we're hedging a little bit because the timing of payments on the barges, unlike the Korean vessels which are you can kind of time them to the day, the barge contracts have in fact something like 18 or 20 progress payments that are all keyed off of milestones that are reached during the construction process. Those are much harder to pin down and the volatility of those payments versus what was originally scheduled tends to be much higher than with the case with Korea.But again, I think from a modeling point of view we will make a $47.5 million payment to the yard in Korea at the end of September. We expect about $12.5 million on our barge payments through the balance of this year and then roughly $40 million to $50 million of additional payments on the barges in 2020.

[Dick Trueblood:]

That's probably just a little bit high.

[J. Mintzmyer:]

A little high?

[Dick Trueblood:]

Yes. We price between $37 million and $40 million in 2020.

[J. Mintzmyer:]

And just to clarify one more time sorry to keep going back and forth on this, but is that before you're financing the cash back out of that? Or is that $40 million in cash plus the amount that you're hoping to finance, I think you said around 50% leverage?

[Dick Trueblood:]

Yes. That's the total. So that's unfinanced cash, if you will or...

[J. Mintzmyer:]

Excellent. Okay. Excellent. The point of driving that is I'm trying to get to kind of your walk forward to see your cash balances because right now you talked about having a comfortable balance of between $20 million to $30 million. And I'm seeing your $15 million in cash CapEx.But it looks like 2020 is looking quite good on the cash front and with the Jones Act rates slowly improving and it seems like each of the new charters you're doing are at pretty decent rates.How do you think about returns to shareholders at these levels? I mean you're trading at a significant discount to NAV. And if you look at a replacement value adjusted NAV you're at like 30% of that value. How do you think about repurchases in this environment?

[Sam Norton:]

So I think that we will be prudent stewards of our capital over time. I think that our current focus has been rebuilding the balance sheet, rebuilding the visibility and predictability of our cash flows.Clearly, we've made some commitments to new replacement assets. We want to get those assets funded. We want to see the benefits of the cash that's latent in those capital investments begin to flow through to us.But once that comes into focus, I think you're right that, clearly our expectation is that this business will start to generate particularly in 2021 and beyond considerable excess cash flow going to plan. And I think as we get into that time range that uses of capital will be an active discussion amongst the Board and its shareholders.

[J. Mintzmyer:]

Excellent. It's good to see that on the table with your stock trading around $1.70, I mean just last year alone. I think the company is honestly in better shape today, but just last year alone it was almost $4.And you look at NAV and the replacement cycle and it's just an incredible discount. So hopefully you can act on that. Last question, just as far as getting more interest in the stock right because it's not very well followed. The name OSG I mean I know that's legacy Overseas Shipholding Group, but you're not overseas right you're Jones Act.And this overseas and shipholding are probably the two worst words that you can put on the market today for a stock? So has there been any considerations or talks about potentially renaming the company to something that more accurately reflects the dynamics and strength of your business?

[Sam Norton:]

We talked about it. I can say that it's -- it doesn't feature as a high priority, as the things that we work on very day. But it is not escaped or attention that, that there is some dislocation between the, legacy name, of our company and the activities that we're engaged in.That being said, we mostly just refer to our business by the abbreviated letters OSG and its Overseas Ship holding Group is awful for most people to say. So I'm not certain that it has -- in the long run has that greater an impact on what we do. But your comments are noted. And we do talk about it from time-to-time.

[J. Mintzmyer:]

Excellent, I do miss if I enter that one in. All right, thank you gentlemen for your time today.

[Sam Norton:]

All right, Jay.

[Operator:]

[Operator Instructions] Okay. With that, I think, that concludes our question-and-answer session. I would like to turn the conference back over to, Sam Norton for any closing remarks.

[Sam Norton:]

Thanks Ben. In conclusion, encouraging picture that we see for our future is founded on well-established and readily-quantifiable market fundamentals, as well as three components of our business.First, a stable and profitable platform provided by our niche market activities. Second, a renewed contribution from our new ATB capacity to be added during 2020 and finally, a revenue recovery late in our conventional tanker fleet, that should allow the operating leverage of our business model to become manifest, over the next 18 months.While events at PES, have altered somewhat the trajectory of our lightering niche business. We don't consider the longer-term effects of this development are having fundamentally altered the game plan for our specialized assets.Like most competitive endeavors, it is often the in-game adjustments, made that lead to ultimate success. We are still well positioned to utilize all of our niche business assets and the premium trades within which they operate. And certainly have options for alternative employments while the future of the PES refinery complex, is sorted out.In the meantime the additional revenue which will come from the Overseas Gulf Coast and Overseas Sun Coast should help fill the gap of revenue longer -- no longer available from the PES contracting affreightment.We continue to believe our business today, is at an important inflection point, with our prior results, providing only marginal insight into our expectations for 2019 and beyond.I believe comments made earlier this year, about factors that underpin our optimism bear reiterating. First, is the recognition that the U.S. Flag market, and in particular the Jones Act market is to a large degree insulated from the heightened uncertainty that can be found in international markets.The barriers to entry are high. New supply is expensive to obtain. Shipyards capable of providing that supply are limited. As are the number of qualified companies that can operate tankers in the U.S. coastwise trade.In this context, it is objectively easier than in the case of other shipping markets to conceive of and believe in the market environment that can be balanced, rational and orderly for an extended period of time.The market disruption that we have experienced in recent years was born out of a sudden change in regulations governing crude oil exports. We have seen that over the past three years, the slow progression of supply rationalization. And the reemergence of coastwise crude oil transportation have combined to restore a healthier balance in the supply and demand of our markets.As we have noted, often in our recent comments, we see this recovery as now having been well-established. The weight of probability indicates that the cycle has well-turned.Second is the powerful force of the operating leverage that underpins our business model. The fundamentals of both supply and demand are for the first time in several years providing strong support to restoring normalized pricing dynamics in our business relationships.We have begun the process of repricing and extending charter contracts applicable to 2020 and beyond. With rates achieved to date meeting our expectations. With still more of our tankers set to come open, for a reset of rates within the next 12 months. And two new barges already contracted on time charter at attractive rates which should fully restore the revenue and cash flow streams, of ATBs that are being phased out.The prospects for the positive effects of operating leverage to flow through to our bottom-line results, offers cause for considerable optimism. Our first half results both squarely within our expectations for 2019, lag effect of charters fixed in 2018 will continue to mask the extent of the rebound for a time.But repricing opportunities in the latter part of this year should set up 2020 to allow the benefit of the operating leverage of our business model, to be more fully expressed in our results.Further, our two Korean new-build tankers offer an opportunity to pursue, initiatives to work with MARAD in expanding the international tanker U.S. Flag tanker fleet. While offering interesting optionality to generate incremental revenue in the meantime as modern, scrubber-fitted MR tankers and what is anticipated, to be a strong winter market bolstered by the implementation of IML 2020 regulations.Altogether we have cause to believe, that this commercial strategy remains sound for the long-term. And we remain confident that the mix of our revenue streams position OSG to dependently generate, a foundation of stable revenues from our niche businesses, while increasingly capturing the upside of the ongoing market recovery and continuously assessing a wide range of U.S. Flag growth opportunities.Thanks, again, to everyone, for participating in today's call. And we look forward to speaking with you again, later in the year. That's it.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.