Overseas Shipholding Group, Inc.
Q1 2020 Earnings Call Transcript

Published: 8 May 2020

[Operator:]

Good day and welcome to the Overseas Shipping Group First Quarter Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.I'd now like to turn the conference over to Sam Norton, President and CEO. Please go ahead.

[Sam Norton:]

Thank you, Jason. Good morning. It's difficult to imagine a time filled with more uncertainty than the period that we are living in today. The circumstances affecting all of us as a result of the COVID-19 pandemic are exceptional in our lifetimes. For all of us, and all of you learning to adapt to the changes and challenges forced on us by this virus are difficult and I'm particularly appreciative that you are joining me on this call today. As usual, Dick Trueblood, Molly Arcia and Princeton McFarland are joining me on this presentation.Prior to beginning our review of the past quarter, I would like to direct everyone to the narrative on pages 2 and 3 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 the 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, 2019. Our Form 10-Q for the first quarter of 2020, which we anticipate being filed shortly and our other filings with the SEC, which are available at the SEC's Internet site www.sec.gov, as well as our own website www.osg.com.Forward-looking statements in this presentation speak only as to the date of these materials and we do not assume any obligations to update any forward-looking statements, except as may be legally required. In addition, our presentation today includes certain non-GAAP financial measures, which we define and reconcile to the most closely comparable GAAP measure in our first quarter earnings release, which is posted on our website.As announced earlier this morning, OSG delivered solid financial results in the quarter just completed, while accomplishing several important objectives that in normal times would have been the principal feature of my remarks today, but these are far from normal times. More than ever, the future inhabits our thoughts as questions abound as to when and how we can move beyond lockdowns, social distancing and the economic chaos that has arisen in the weeks since my last remarks.Celebrating the achievements in the recent past feels distinctly discarded. COVID-19 has changed our lives. In some respects, these changes will be short-lived and we can expect to see a return to normal in the foreseeable future.In other respects, our lives, our work practices, our entire approach to how we interact with each other will be fundamentally and permanently altered. In the face of this uncertainty, focusing our energies on those things over which we have direct control has become our most pressing day-to-day imperative. The overall assessment of these matters has seen that we have managed the aspects of our business well since the onset of COVID-19 with both our Jones Act, and internationally trading vessels able to load transit and discharge cargo without material interruption.This outcome is a testimony to the courage and commitment from the men and women working on our vessels. We've continued to provide essential services critical to maintaining not only OSG's operations, but also the functioning of our broader community. It is important to remember that our business is not one that can be done remotely in all respects.Frontline individuals make what we do possible with the support of those working from home. Expressions of appreciation for what is being done in this respect cannot be made too frequently. Keeping our employees safe remains our number one priority. Recognizing them for the service they provide is our shared responsibility.As Dick will detail more fully in his remarks, the deep book of time charters, which we entered into at the end of last year has provided considerable insulation from exposure to the current market turmoil that has followed not only the outbreak of COVID-19, but as well the extraordinary drop in transportation fuel demand affecting both crude oil and refined product pricing.OSG's vessels were employed at healthy charter rates for close to 100% of available days during the first quarter, with only eight of a total of 1,916 available days seeing vessels idle without employment. Costs were managed to levels consistent with historical performance. And as a result, cash flow from operations was strong. It is gratifying that, the results that we have announced today give credence to the narrative of the strong potential of our businesses that we have be speaking to in recent quarters.Given the high percentage of fixed revenue streams during the first quarter, which will continue for much of the rest of this year, most important management challenges have become sustaining operational readiness at all times and containing the cost of adapting to developing logistical health and safety protocols.Importantly, none of our current employees has yet tested positive for COVID-19. And to date, we have incurred no loss of hire due to virus-related matters. Unlike other sectors of the economy, we have not found it necessary to lay-off or furlough employees as a result of the pandemic. And all of our seagoing and shore-based employees have continued to work full-time for their normal salaries and benefits.Nonetheless, we recognize that the systems within which we operate are under escalating stress presenting new risks and vulnerabilities that have previously not affected our performance. This include to our thinking first and foremost, getting crew to and from our vessels in a manner that both protects their personal safety and endeavors to assure with the highest level of confidence that joining crew member who is not bringing the virus onto a vessel or otherwise affecting the vessel's acceptability and service.Second, working with all relevant constituencies to develop and implement policies and procedures that are consistent from port to port and from company to company to facilitate a common approach to coping with the very real and very difficult problems presented by COVID-19. And finally, planning for the new normal, once this crisis period is passed, so that we can achieve delivery of the critical services that we provide with the least amount of disruption. These are all difficult challenges creating heightened risks in the current environment.We expect increased costs in developing and implementing policies and procedures to deal with these challenges. It is not possible at this time to quantify these costs with precision. Nonetheless, it would be imprudent to expect that the past will be an accurate guide in this area. Heightened risks of all higher periods resulting from managing virus-related delays as well as potential and yet unknowable new costs for testing, cleaning, quarantine, immunization and certifications are to be anticipated.In addition, difficulty in easily accessing critical supplies in particular face masks and other personal protective equipment as well as in some cases spare parts and the services of specialized technicians pose additional operational burdens on our crews. Reliability and effectiveness of testing methodology at PPE in compliance with mandates and recommendations of various regulatory agencies as they seek to react to continuously evolving inflammation also pose significant risks.Whether these systematic stresses ease with time and what cost they ultimately impose on us will only be known with hindsight. As these contingencies become clearer, we will seek in the future to release and provide you with better guidance on their long-term financial impact. As far as the effective recent legislative initiatives on our business, we are not expecting any material impact on either our liquidity position or our financial results arising out of the application of provisions in the CARES Act.Turning now to the impact of the virus on our Jones Act trades, we note reduced cargo volumes and increased idle times of vessels, a derivative of falling refinery runs an unprecedented demand disruption for transportation fuels arising out of stay at home policies in most populated regions. The Energy Information Agency reports refinery runs in the U.S. in recent weeks at less than 70% of capacity and transportation fuel demand at levels ranging from 15% to 60% below normal levels.Over the past four weeks, motor gasoline consumption has averaged 5.5 million barrels per day, a 40% decline from year ago levels. Jet fuel consumption declined to levels 60% below year ago levels as passenger flights in the U.S. operated close to 96% below their normal capacity. Clearly, no forecast models imagine the extended demand destruction that we've witnessed in the wake of this health emergency. A survey of numerous new forecast indicates that a V-shaped recovery is not expected in transportation fuel demand.Even an anticipated swift recovery in gasoline consumption in the United States, should leave year-end levels at an expected 1.5 million barrels per day below normal. Jet fuel will take many more months, if not years to recover to pre-pandemic levels. The shape and speed of jet fuel recovery could prove significant for one of our key customers Monroe Delta. Currently, three of our vessels are contracted to serve Delta's trainer refinery. Delta has stated in their recent earnings call that the trainer refinery remains an important part of their fuel strategy.Nonetheless, a protracted or permanent closure of this refinery would likely have a material impact on both domestic tank vessel demand as well as on OSG's expected forward revenue streams. Importantly for OSG's business however the rebound of gasoline consumption in key states in particular in Florida offers some cause for optimism in the medium term. Well build data indicates that the bottom of the market was seen in second week of April and that mobility and by implication gasoline consumption has begun to recover.In contrast to the broader market expectations, Florida's gasoline consumption levels are forecast to recover to pre-pandemic levels by the end of 2020. Diesel consumption has held up relatively well and is expected to regain near-normal levels for the balance of this year.Given the dominance of Florida's role in the market for Jones Act vessels, improving trends and the demand for marine transportation should just be expected. International tanker rates continue to enjoy record-setting levels as cargoes loaded remain on board either voluntarily by traders playing the forward contango curve or involuntarily by those with no place to put crude and product inventories.Vessels are being used for storage rather than transport resulting in a significant reduction in vessel availability to move new cargo and a spike in rates. A strong international tanker market offers support to rates in the domestic market. And a highly unusual development some Jones Act vessels have completed recently for business in the U.S. Gulf Coast, East Coast, South American trades.Our newly acquired subsidiary Alaska Tanker Company has seen the odd impact of sky-high international rates where last week a cargo of ANS crude was sold to China and shipped on the Alaskan Navigator, a highly unusual move but one enabled by the fact that the TCE rate on the Navigator was $100,000 per day lower and that of an equivalent international Suezmax.The unusually high rates seen in recent international trades are not expected to last. Declining crude oil production coupled with the increase of tonnage released back into the market once product stored is delivered for consumption will likely weigh on future rates. It bears repeating that these developments act only indirectly on domestic market conditions.More significant will be the overall level of crude oil production cuts in the U.S. over the coming months and the impact of these cuts on the relative price differentials between domestic and comparable international crude oil. Three of the biggest oil explorers in the United States; ExxonMobil, Chevron and ConocoPhillips have announced plans to curb as much as 660,000 barrels a day of combined American output by the end of June.Across the country, crude production by oil companies has already tunneled about 1 million barrels per day since mid-March and could fall more than 2 million barrels per day by the end of the year. Wells and fields with high cash production costs are particularly vulnerable to production cuts. We are watching carefully for example, the offshore Gulf of Mexico field served by our shuttle tankers.Time charter commitments on these vessels should in the near term ensure consistent revenue streams to OSG from these contracts. However, should either of these fields be shut-in, in response to persistently low oil prices, the result could be an increase in effective available tanker supply as these shuttles would likely be redeployed as conventional tankers by our charterers.It is too early to know with much certainty, how supply, demand and price of crude oil will unfold in the months ahead. However, as always, relative price remains the critical variable from our perspective. Irrespective of the overall quantity of domestic production cuts. Should we continue to see domestic prices at a sustained discount to international prices as has been the case for most of the past several years.Coastwise transportation of crude oil should continue to be demanded. OSG is well positioned to benefit from what we are anticipating to be improving trends in the markets within which we operate. OSG's 21 vessel U.S. Flag fleet consists of three crude oil tankers operating in the Alaskan crude oil trade, one conventional ATB, two lightering ATBS, three shuttle tankers, 10 MR tankers and two non-Jones Act MR tankers that participate in the U.S. Maritime Security Program.OSG also currently owns and operates two Marshall Islands flagged MR Tankers which trade internationally. In addition to the currently operating fleet, OSG has on ordered two Jones Act-compliant barges scheduled for delivery in May and October of this year.I will now turn the call over to Dick to provide you with further details on our first quarter results for 2020. Dick?

[Dick Trueblood:]

Thanks, Sam. Please turn to Slide 7. During the first quarter we purchased three Alaskan tankers capable of carrying approximately 1.3 million barrels of oil each. They're engaged in transporting crude oil from Alaska to the West Coast refineries. Additionally, we acquired a 62.5% interest of our partners in Alaska Tanker Company.As a result, we now own 100% of ATC. We financed these transactions with a $54 million loan. The loan bears interest at 4.43% fixed rate maturing in March 2025 and has a 12-year amortization schedule.Please turn to Slide 8. In late March, we also completed the financing of the OSG 204 currently under construction in Oregon. We drew $28 million of this loan at closing. This monetizes the excess equity that we had previously invested during construction. The remaining amounts will be drawn and will fund the final construction payments due. We expect barge delivery to occur during the last week of May. This loan has a five-year maturity and amortizes also over 12 years.Please turn to slide 9. The first quarter continued to reflect the positive impact of our fleet principally operating under time charters in an improved rate environment. We classify short-term time charters and contracts of affreightment and spot market activities for presentation purposes.During the first quarter, the Key West operated under a short-term time charter, while the rest of our Jones Act candy-size tankers were on long-term time charters. Our first quarter, TCE revenues grew $14.3 million or 17% when compared to the first quarter of 2019. We benefited from additions to our fleet of the Gulf Coast, Sun Coast, Key West for the full quarter and of the three Alaskan tankers from March 12.Offsetting this was the continued reduction in our rebuilt ATBs from last year to this year. After the quarter end, we completed the sale for scrap of one ATB reducing the operating rebuilt ATBs to 1. Sequentially, TCE revenues were up $3.3 million from the fourth quarter.The fourth quarter included three Government of Israel voyages, while the first quarter didn't include any. We experienced an increase in our higher days as anticipated due to dry dock activities. The Alaskan tankers added late in the quarter were responsible for the increase as all other changes offset one and other.Adjusted EBITDA was $52.8 million for the quarter, a $29.2 million increase from the first quarter of 2019. As part of the transaction acquiring the remaining interest in ATC and three Alaskan tankers, all prior time charter relationships were terminated. This termination of a pre-existing relationship resulted in a $19.2 million net non-cash gain. We recognized this gain in the first quarter.Excluding this gain, we experienced almost a 43% increase in adjusted EBITDA from the first quarter of 2019. We benefited from our increased time charter days and higher rates, the operations of the Gulf Coast, Sun Coast and Key West as well as the late quarter addition of the Alaskan tankers.Excluding the $3.2 million of annual earnings which is recorded in the fourth quarter when it's earned from AT, our adjusted EBITDA sequentially increased by $3.2 million. And again the fourth quarter of 2019 included a concentration of three Government of Israel voyages during the quarter, while we conducted no such purchase for Israel in the fourth quarter.Although the mix of vessels changed, we operated 21 vessels for the full quarter of 2020 and 2019. In the first quarter of 2019, we have reduced the number of operating rebuilt ATBs to two and added the Key West, Gulf Coast and Sun Coast, and in the late third quarter the three Alaskan tankers.Please turn to slide 10. Looking at our TCE revenues on a more granular basis, our lightering business TCE revenues sequentially increased $2.3 million from the fourth quarter of 2019. The OSG 350 operated under time charter in the first quarter of 2020 compared to primarily spot market activity during the fourth quarter. Effective day rates for both the OSG 350 and 351 increased due to higher utilization and increases in contracted rates.The TCE revenues from our rebuilt ATBs increased $1.3 million due to increases in the rate environment. Our non-Jones Act tankers recorded a $2.7 million decrease in TCE revenues during the quarter when compared to the fourth quarter of 2019 this due to the reduction in the Government of Israel voyages that we had from Q4.We operated under international time charters for 182 days, maintaining the effective utilization of our vessels by reducing the number of days of spot market exposure. Our Jones Act tanker fleet TCE revenues decreased $1 million from the fourth quarter to $69.1 million in the first quarter of 2020. This resulted from an increase in off-hire days due to drydock equities. Spot market effective TCE rates increased significantly driven by increased rates.Looking at year-over-year changes lightering revenues were down $700,000 in comparison to the first quarter of 2019. ATB revenues declined from $7.5 million to $4.8 million compared to the first quarter due to the decreased number of operating vessels.The non-Jones Act tanker revenues increased from $3.7 million to $7.3 million driven by the addition of the Gulf Coast and Sun Coast. Conventional tanker TCE revenues increased $10.7 million. This was driven by reduced spot market presence, higher rates higher utilization due to the increased time charter activity. Additionally, our three Alaskan tankers added on March 12 contributed $3.4 million in TCE revenues for the 19 days they were in our fleet.Please turn to slide 11. We continue to see a widening of the spread between fixed and spot earnings as a portion of our fleet operating on time charters continues to increase. With the addition of the Alaskan tankers all of which operate on time charters we expect that this trend will likely continue.Please turn to slide 12, conventional tanker spot market TCE revenues continued to represent a decreasing portion of our total tanker revenues. To classify short-term time charters to spot market activity and in the first quarter of 2020 the spot activity resulted from a single short-term time charter.Please turn to slide 13; our businesses continue to provide earnings stability which serves to underpin our overall operations. This continues to be true as we have been successful in generating business for the OSG 350 in the Gulf of Mexico.Although non-Jones Act tanker revenues decreased from the year ago quarter it decreased from the fourth quarter due to the lack of GOI voyages in the first quarter of 2020. Revenues for our shuttle tankers decreased during the quarter as planned due to the drydock-related off-hire days.Please turn to slide 14. Vessel operating contribution which is defined as TCE revenues less vessel operating expenses and charter higher expenses increased $10.8 million or 39% from Q1 2019 to $38.8 million in the current quarter. The largest contributor to the increase was the $10 million contribution the vessel operating contribution from our conventional Jones Act tankers. This reflects the increased time charter employment as well as higher rates.The overall increase in operating contribution also reflects the addition of three tankers and the late quarter acquisition of Alaska tankers all partially offset by the reduction of our rebuilt at base our remaining ATBs provided a strong quarter due to high utilization at increased rates.The Alaskan tankers provided $1.9 million of operating contribution after they entered our fleet. Vessel operating contribution from our niche market activities decreased $900,000 resulting from an increase in drydock-related off-higher days.Sequentially, vessel operating contribution increased $3.4 million from Q4 2019. The contributors to the increase were higher rates for Jones Act tankers and inclusion of the Alaskan tankers. Niche market activities declined from the fourth quarter primarily due increased off-hire lost revenues.Please turn to slide 15. First quarter 2020 adjusted EBITDA -- sorry for the dog. That's one of the benefits, I guess, of working for home. Anyway first quarter 2020 adjusted EBITDA was $52.8 million compared to fourth quarter adjusted EBITDA of $33.7 million. The first quarter of 2020 included the aforementioned gain associated with the acquisition of the tankers in ATC. The fourth quarter included our annual profit distribution of $3.2 million from ATC.First quarter adjusted EBITDA increased $29.2 million from $23.6 million in Q1 2019. The increase resulted from the previously mentioned gain increased rates across the fleet improved utilization due to the shift to time charters and new vessels that entered service after the first quarter of 2019.Please turn to slide 16. Net income for the first quarter of 2020 was $25.1 million compared to net income of $3.2 million in the first quarter of 2019. Operationally the increased TCE Jones Act tanker revenues new Jones Act -- and new non-Jones Act tankers as well as the addition of the Alaskan tankers drove the increase in net income. Non-operationally, $15 million of the increased earnings came from recognition of the previously described gain.Please turn to slide 17. During each year we performed scheduled maintenance as required by regulation. This slide provides information for scheduled maintenance and ballast water treatment system installations 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-higher even if otherwise employed on a time chart. We work to minimize the number of off-hire days to reduce the revenue sustained. This year because of COVID-19 estimating the timing of drydock activities on a quarterly basis is particularly challenging. Shipyard is a deferring scheduled drydock because of their staffing issues related to COVID-19 lockdown. Technical personnel from third-party vendors necessary to accomplish certain aspects of the maintenance process have been and are unable to travel to repair load agents. This has resulted in a series of backlogs throughout the industry. ETFs has been understanding through this time period, it's likely that they will need to continue their flexibility.This slide presents our best estimates of the timing of drydock activity for the remainder of the year. It is possible perhaps even likely that these estimates would change as to timing. We expect that although the timing of the shift, the annual totals will remain reasonable estimates.2020 will be an active drydock year for us. We estimate which includes the three recently acquired lasting tankers that our investment will be $43.8 million in drydock expenses and $16.1 million for ballast water treatment systems in 2020. We will experience approximately $20 million in lost revenue for the full year resulting from 377 off-hire days. Again, in all cases, we endeavor to work through this process expeditiously to minimize the cost occurred in the number of days of plus higher fee higher lost revenues.Please turn to slide 18. This slide presents the cumulative amount of progress payments made and for future progress payments, the estimated payments we expect to make in each quarter. The timing of actual payments will depend on the date when the shipyard achieves the required milestones. At the end of the first quarter, we had $5.1 million of progress payments remaining on the OSG 204 and $20.1 million of progress payments on the OSG 205.As previously discussed, we financed the OSG 204 during the quarter and all remaining payments will be funded from this loan. OSG's equity in the OSG 204 will be approximately $17.7 million upon delivery. We anticipate obtaining similar financing for the OSG 205.Please turn to slide 19. There has been no change to our estimates as to the timing and future amounts of profit sharing that may occur for the AMSC ships that we bear both. The chart provides information for 2020 through 2023. And as we've previously stated, we do not anticipate any profit sharing obligation will be created in 2020. We look here at what 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 average rate required to result in a profit-sharing obligation in 2020 is $69,000 per day. This would create an aggregate payout of approximately $300,000.Years beyond 2020 assume that the rate earned in the prior year was the market range. Based on the assumptions for trade here, the first year profit sharing obligation would exist is 2022.Given the assumptions used, profit sharing payout would be $8 million. The minimum average rate necessary to achieve any level of profit share in 2022 to be $61,000. And again, using the assumptions here the profit sharing earned in 2023 would be $14 million. Profit share is paid out in the year subsequent to the year earned.Finally, it's worth noting that if certain costs are recovered to minimum rate it will result in profit share declines. The 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 20. We began 2020 with total cash of $42 million including $200,000 of restricted cash. During the first quarter of 2020, we generated $53 million of adjusted EBITDA. During the quarter, we issued $81 million net of issuance costs of new debt to finance the Alaska transaction in the OSG 204.We extended net of cash received $17 million for the acquisition. The $19 million adjustment is to remove the effect of the non-cash gain we've discussed. We extended $3 million on drydocking and improvements to our vessels. We invested $21 million in new vessel construction and other CapEx. We also incurred $6 million in interest expense and made debt repayments of $8 million. The result we ended the quarter with $102 million of cash including $20.1 million of restricted cash.Please turn to slide 21. Continuing our discussion of cash and liquidity as we mentioned on the previous slide, we have $102 million of cash at March 31, 2020 including $20.1 million of restricted cash.Our total debt was $450 million. This represents a net increase of $75 million in outstanding indebtedness since December 2019. A $325 million term loan has an annual amortization requirement of $25 million or $6.25 million per quarter. With $367 million of equity our net debt-to-equity ratio is one times. This represents no change from December 31 2019.As we addressed our capital structure during the first quarter, we planned with one of our lenders for them to sell an interest in one of our term loans. It was expected that they would complete the transaction prior to the March 12 closing of our vessel acquisition. They were not able to complete it in that time frame. The effort was then expected to be completed shortly after the 12th.In order to support the sale process, we established a $20 million escrow that could be used to prepay a portion of that loan if it were not sold within 90 days. COVID-19 has disrupted many financial activities including the proposed transaction. As a result, our escrow is still being pending the sale.This concludes my comments on the financial statements and I'd like to turn the call back to Sam.

[Sam Norton:]

Thanks Dave. Returning to the theme in my opening remarks. The future remains the topic of most interest and majority of those listening in on this call. As noted earlier, the level of uncertainty about the expense, duration and ultimate impact of the forces that are currently unsettling our markets has never been greater. Nonetheless, there are certain things that we can state with some confidence as regards to the immediate future.Our time charter coverage remains substantial for the balance of this year. We've contracted employment covering 95% of available operating days during the current quarter and 86% of available operating days for the balance of the year. The key contributing element of this forward visibility of earnings is the contribution to be made by the Alaskan tanker company vessels purchased at the end of last quarter. The benefits of the contracted employment for these three vessels obtained through this transaction will likely become more apparent as the year progresses. Absent an increase in off-hire days potentially caused by virus-related events. This contract coverage gives us a high degree of visibility into the expected time charter equivalent earnings for the rest of the year.For the second quarter, we expect to achieve time charter equivalent earnings of $100 million. A small sequential gain -- incremental gain over the first quarter results due primarily to the first full quarter of our ATC vessels contribution. Take together with our first quarter results this should put us squarely on track to be within the range of $395 million to $400 million of time charter equivalent earnings on an annualized basis through the first half of this year.Similarly, we expect consolidated adjusted EBITDA through the first half of the year excluding the effects of this quarter's gain related to the ATC transaction accounting to reach $60 million, a level which again tracks closely with our full year expectations provided during our last call. Including the ATC transaction accounting, overall EBITDA for the first half of this year should exceed $80 million. However, beyond the end of the second quarter the picture becomes much less clear.The extent of increased costs incurred in adapting to the new protocols demanded by operating in a COVID-19 active environment is not and cannot be known at this time. While we are hopeful that these costs can be contained, there is simply no way of knowing the full extent of what may be required in the coming months or what the ultimate financial impact may be.Similarly while we are optimistic that recovering trends forecasted by many analysts will serve to underpin continued strengths, spot and time charter rates over the second half of this year, the range of possible outcomes is wide and the possible impact on actual rates achieved unknowable at this time.Again a large percentage of fixed contractual days should serve to deliver solid operating cash flow and profitable results overall. The rate and utilization assumptions for those vessels, which come open to the spot market in the coming months, must cover a wide range of possible scenarios.Providing helpful guidance under these conditions is difficult. Like many, we prefer to stay silent on the topic unless and until we can understand with more certainty key factors that will shape our future.Notwithstanding, the heightened demand uncertainty, we continue to consider that given a normalized demand environment, the fundamentals of our market remain in healthy equilibrium. The barriers to entry for any prospective new entrants are high. And with the exception of our two new barges to be delivered this year, no new capacity is on order or will be delivered within the next several years.Significantly Philly shipyards, one of the few domestic yards capable of building Jones Act tankers has taken on a government contract to build training vessels a contract which could fill the yards for years to come to the exclusion of other work.Another domestic yard Marinette Marine Corporation was recently awarded a contract to design and produce the next-generation of up to 10-guided missile frigates. Detailed design of the ship will start in May and construction on the first frigate for the class will start no later than April 2022, with its delivery schedule to the Navy in 2026 tying up further construction capacity.The supply side picture thus remains very promising. Especially in these difficult times, OSG's ability to sustain its good standing in the community of our customers, our peers and our regulators is a valuable asset. Safety and consistent service quality remain, above all, the key focus of our operations.While commercial success is one measurement of achieving our goals we also place paramount importance on maintaining our established culture of achieving the highest standards in both protecting the environment and ensuring the health and safety of all of our employees.Our acquisition of the Alaska Tanker Company is harmonious with this culture and these standards. Challenges remain as to opportunities. But overall we believe steps taken over the past several years to improve the promise of OSG's future, have positioned the company well to sustain its recent performance and to adapt well to the current environment.We have strengthened our balance sheet, invested in new assets, lengthened our contract cover at profitable rates, reduced costs and achieved material improvements in our key safety and operational performance measures. We are focused on achieving high health and steady performance in the COVID-19 environment.While we foresee greater uncertainty in the immediate future, we remain confident in the long-term success of our business model and of OSG's ability to maintain its position as the leading U.S. Flag tank vessel operator in the years to come.Operator, we can now open up the call to questions.

[Operator:]

[Operator Instructions] The first question comes from J Mintzmyer from Value Investor’s Edge. Please go ahead.

[J Mintzmyer:]

Hi. Good morning, Sam and Dick. Congrats on a fantastic quarter.

[Dick Trueblood:]

Thank you.

[J Mintzmyer:]

Yes, so, I understand your comments about being careful of long-term EBITDA forecast considering the COVID environment. Just to drill down into that a little bit you reported super high EBITDA this quarter, but that was because of the $19 million one-off gain right? So I'm getting about $34 million backed out. And then, you mentioned about $60 million for the first half. So, it looks like quarter-over-quarter the EBITDA goes down even as time charter revenues go up and you get that full Alaska contribution. Can you speak a little bit to that? Is there something we're missing there?

[Sam Norton:]

I'll take that one Dick. There's a couple of things. We have some drydock days in the second quarter that would reduce the revenue. That would have normally been expected to be achieved for vessels that with time charter. But we also have more vessels coming open to the spot market in the second quarter. And we're anticipating some reduction in the lightering volumes that we're seeing in the Delaware Bay. That's really a function of reduced throughput in the refineries there. As an example the trainer refinery from Monro Delta has been operating at about 50% of its capacity since the middle of March. So, just the volume of crude moving through to the refinery has dropped.We do have take-or-pay contract provisions with Monroe delta on that lightering contract that runs through the April of 2021. But the way that we account for that is only at the kind of the makeup at the end of the year. We don't get to accrue the minimal levels through the quarter-to-quarter performances. So we're looking at actual volumes of barrels moved from a revenue point of view for Q2 and there's probably going to be some reduction there.

[J Mintzmyer:]

Okay. That's understandable. And you said make some of that back up in Q4 just on the take-or-pay. Okay. Looking forward for the rest of the year, I understand you didn't want to give full guidance. You mentioned some COVID-19 potential impacts. Is that just you being conservative and saying, we don't really know what's happening? Or are there direct financial impacts that are already happening to your business?

[Dick Trueblood:]

So, we have yet seen other than sort of smaller increased costs related to personal protective equipment and difficulties in kind of logistics of moving people around. We have seen increased costs, but those are not in a broad context largely material to the overall performance. Our greater concerns really relate to how different ports are going to implement their procedures for what happens if a vessel for members on board of vessel test positive or evidence symptoms of COVID-19.There's a lot of discussion in the industry about making sure that the operational readiness of vessels is sustained given the essential nature of the services that they provide. But there is no -- at this time, there is no consistent policy or agreed approach to how to deal with that eventuality should it arrive. So there's -- at the risk of being long-winded there's a recent book written by John K and Ruben King, former Governor of the Bank of England Co. about uncertainty. And they make a distinction between risk and uncertainty and risks are measurable and can be understood in this kind of systematic way. Uncertainty by definition uncertain, and I think the answer to your question is that we see a lot of uncertainty in the next six to 12 months as the country evolves in the COVID-19 environment. And the spectrum of outcome that could unfold given all of the speculation as to what may happen really gives us a reasonably be cautious in trying to provide guidance certainly over the second half of this year.

[J. Mintzmyer:]

Yeah. I think that certainly makes sense. There's been a lot of commentary, of course, about floating storage. There's ton of tankers piled up offshore California. Oxidental Petroleum is contracted to VLCCs. Hess has recently contracted some VLCCs to store back in crude. Have you gotten any of that floating storage action from a Jones Act perspective? Or are you just doing the regular logistics work?

[Sam Norton:]

We haven't seen any -- notwithstanding, the press releases. We haven't seen any Jones Act vessels put into storage. So no we have not. We have seen some activity not on our vessels, but on some other vessels of Jones Act vessels moving into international trades, taking product out of the Gulf of Mexico into South America. But that has been one or two voyages. The baseload of Jones Act business continues to be its normal business.

[J. Mintzmyer:]

Okay, excellent. And then final question for me and then I'll hop in the queue if there's someone else behind me. I saw some headlines and that we've been reading about some of the Alaskan tankers perhaps heading over to Asia first time that trade has happened in a while. My understanding is BP operates those and you're just getting the bareboat charter on those, is that correct? Do you profit in any way from extraneous activities? Or is that all BP?

[Sam Norton:]

We time charter those vessels to BP, but your conclusion is correct. We have a fixed day rate and irrespective of the rate that BP may earn on that voyage, we get paid the fixed day rate that we've contracted for.

[J. Mintzmyer:]

Okay, makes sense. Yes that's a great day rate underlying, it's maybe not the eye-popping rates right that we've seen in the market recently. Thank you gentlemen. I have a few more but I'll jump off in case on one else has questions behind me.

[Sam Norton:]

Okay. Thanks.

[Operator:]

The next question comes from Ryan Vaughan from Needham. Please go ahead.

[Ryan Vaughan:]

Hey, guys. Thanks for taking my call, and glad to hear everyone has stayed healthy and credit to the team for navigating what I'm sure was very challenging logistics with the country shutdown. I guess just jumping over to the balance sheet very, very strong. Cash balance around $100 million. I know you have $20 million of that just in that escrow account.But Dick you had mentioned the 205 funding, I'm just running some rough calc and I completely understand the back half of the year. It's a little bit uncertain as you would say Sam. But it looks like current ops really could more or less fund the drydock in the water ballast and even the remaining 205 payments and even the cash interest payments.So I'm curious, how you're thinking about potentially doing a similar financing to what you did with 204, but also just the $80 million, $100 million cash balance how you're thinking about that going forward?

[Dick Trueblood:]

I think -- we look at this it's sort of cautionary. I think your observation is reasonable in terms of what the cash requirements of the business are over the second half of the year and where we are liquidity wise today plus what we expect to generate from cash for the second half of the year. But I think we would be somewhat remiss if we did at least plan for something different occurring. And so we'll proceed down the path to look at financing the 205. And if the world looks much better than it looks today then we might go in a different direction and not put that kind of financing on the 205. It would be towards possible outcome to have a little less leverage or have a vessel that's unencumbered.

[Sam Norton:]

So Ryan maybe I can just add a little color to that. You've asked the question numerous times in our previous calls. We see a trajectory that moves us towards a cash flow positive. I mean a true free cash flow positive environment. Based on our base case projections at the beginning of the year, we anticipated that that turn coming in the second half of this year. The comments that I made earlier, we have some reason to be cautious about that and therefore marshaling liquidity as many companies are doing before we can get more clarity as to what the future looks like seems to us to be a prudent direction right now.As Dick said, if we move through the second half of this year and things develop in a positive way then I think, you are you are correct in your conclusions that our liquidity position will remain robust and probably improve. So that's all very positive. But again, we're cautious about counting our chickens before their hatch.

[Ryan Vaughan:]

Definitely understand that. And then Sam you -- in your final comments there answered a couple of my questions. So the rest of the year, I think, you said 86% is contracted. Obviously, that makes us feel a lot better. But also maybe just talk, if you can how you're thinking about the remaining 14%. I know the prior caller asked about like the storage stuff. But are you thinking about taking potential available ships to increase your drydocking? Are you thinking about idling in some of those scenarios where they're just not needed right now? Just again, it's quite small, but just that 14% how are you thinking about it where you sit today in early May? Thanks.

[Sam Norton:]

The flexibility to move drydocks around unfortunately has been inhibited by a lack of availability of shipyard services. In general, there are some services that can be made available. But even the yards that are open as Dick mentioned in his comments specialized technicians and service technicians that need to come to complete automation equipment, navigation equipment all kinds of other equipment that needs to be dealt with during these surveys. The technicians can't or will not travel. So that makes completing these things impossible, frankly.So we've been having to actually defer scheduled drydocks with the agreement of ABS getting extensions on statutory drydock days. As we've tried to roll the business forward waiting to see what's going to happen with shipyard availability. So, I mean, ideally in periods of downtime, we would like to take and utilize that downtime to complete maintenance whether planned or unplanned maintenance. I think, realistically over the next at least over the next couple of months that's probably going to be difficult to achieve.The other thing that I'd like to point out is in other circumstances, if we could perceive for instance the summer months are usually slow the demand is usually seasonally low we might in normal circumstances consider laying off a vessel or two and sending crew home and trying to cut our costs in that context. Our thinking right now on that is probably not to be looking to do that.We think that in these times keeping our employees working and providing the stability through a short-term period at least of continued salary and benefit to people that are highly skilled and we want to retain in the long run. We think that's a good investment. And so at least at this juncture even if we see increased idle times where it becomes or at least is visibly clear that there's not a lot of managed market for the vessels I think the lay-up of vessels and reduction of crew expense at this juncture is not in our playbook.So with those two comments, our ability to find employment for these vessels is as it has always been. We rely on transportation of fuels principally across the Gulf. There is some opportunity to maybe trade internationally as I said earlier. The international market is extremely volatile right now. So 10 days ago, the MR market was at $60,000 a day. Today it's kind of below 30. So trying to figure-out whether that's a workable possibility is something that we keep an eye on.There's also disruptions between -- there's arbitrage opportunities. We took a cargo on the Key West last week. That arose directly because of an open arb on diesel between Gulf Coast and New York. Those are the types of things that we're looking for in the spot market to help us out. We're just going to keep looking at that. The rates are -- remain quite strong. The most recent pictures that we did in the spot market were just under $70,000 a day from our tankers and excess of $30,000 a day on ATBs. So we're pretty hopeful that we'll be able to maximize the use of our vessels. But again, the uncertainty overhangs everything and we have to be mindful of that.

[Ryan Vaughan:]

Sounds good. Thanks, guys. And again, great job, navigating through all this, and all the best for next coming quarters rest of the year. Thanks.

[Sam Norton:]

Thank you.

[Operator:]

The Next question is a follow-up from J Mintzmyer from Value Investor’s Edge. Please go ahead.

[J Mintzmyer:]

Thank you for taking the question. I figured Ryan had some good ones in the hopper there. Not a whole lot left. Just a couple of questions. One on the fleet balance of Jones Act you’ve had several good slides showing how the fleet is very balanced when you take out some of those 30-plus right those aging vessels. But we haven't actually seen much demolition in the last year or two and maybe that's just because rates have strengthened right? But what will it take to get those ships to finally leave the fleet? Would it take a drop in rates? Or do you think there's some, sort of, like special surveys and stuff coming up that will knock those out?

[Sam Norton:]

So I'll take a crack at that. Actually, we've contributed to the reduction in fleet significantly. As Dick alluded to we had initially eight older ATBs or rebuild ATBs that are operating. We are now down to one. So over the last two years, we've -- OSG itself has contributed to removing seven large ATBs from the market. When you look at the other vessels that are nominally on the fleet list, a couple of them jump to mind. There are I believe three older ATBs that are owned and operated by Buchard Navigation. Those vessels have been in lay-up for some time, so they have effectively already been removed from the market.What their future is speculation at what may happen, but the general consensus is those vessels are not likely ever to return to the market. So they're already out. There have been a couple of tankers that have been group in the market in the last couple of years. And I think there's one or two tankers that are facing survey and drydock and ballast water treatment decisions in the next 12 months and we're watching those vessels to understand what their future may be. But I think the right understanding is there's probably three or four vessels or if you take the Buchard ATBs that are already in lap there's probably half a dozen vessels that will not feature in the medium- to long-term supply picture for the Jones Act.So we're getting towards the end of the reduction through obsolescence phase that we've been in the midst of over the last two three years. And the fleet as it is after you take those half a dozen or so vessels off the table, the fleet is actually pretty young after that. Most of the ATBs are built 2000 and later. All of the tankers with the exception of two or three that are still aged are built 2007 or later. So unlike -- the common perception of the Jones Act fleet has been -- actually the Jones Act fleet that it's currently constituted is a pretty young fleet.

[J. Mintzmyer:]

Yes, certainly makes sense. It's looking at slide 28 there. And it's seen a tight balance. So it looks like it will work itself out. Good to note that most of those are already drydocked. Final question from me. Look your valuations are compelling. If you look at -- we don't even have to add pro forma cash, but look if we do and we back you out to the end of 2020, you guys are trading around four times enterprise value to EBITDA somewhere around there plus or minus, might even be under that. Normal pure comps in this space. And again, pure comps in better times, but pure comps like core and such and Kinder Morgan has some tankers, is anywhere from seven times to maybe 10 times enterprise value EBITDA.That sort of multiples would get you into the range of anywhere from $0.05 to $0.09 per share right? I mean it's a big range. But look OSG trades, it's trading a little bit better today maybe 250, 260. But in the past, you guys have traded extremely unfairly, right, extremely cheap. I understand that cash balances are important at this time. But is there any actions that you could take to help close some of that gap? Or any thought to maybe announcing or launching a share repurchase program in the near future?

[Sam Norton:]

So that's usually Ryan's question. But I'll answer it the answered Ryan in the past. We consider the transition to being genuinely cash flow positive. I mean free cash flow positive is an important hurdle for us to get over. And as I have said earlier and in earlier calls, we anticipate that we'll reach that milestone in the second half of this year. That will be a truly significant transition for us and with some assumption as to continued favorable health of our business looking beyond the second half of this year, we can anticipate that that the performance of generating free cash flow will improve and get better as 2021 and 2022 unsold. And assuming that to be the case, I am confident in anticipating that the structure and disposition of our capital will become a topic of the Board's conversation. And considerations as to if and if so how to either reduce debt or return capital to shareholders will feature in conversations towards the end of this year and into next year.

[J. Mintzmyer:]

Excellent. Yes. Ryan usually ask good questions, so I figured I picked the baton up from him. Anyway Sam and Dick you guys have done fantastic work really just a remarkable turnaround here at OSG and we're looking forward to the future. Thanks guys.

[Sam Norton:]

Appreciate that.

[Operator:]

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Sam Norton for any closing remarks.

[Sam Norton:]

Thank you again and thanks to everyone for participating in today's call and we look forward as always to speaking with you later again in the year. Have a good day.

[Operator:]

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