Overseas Shipholding Group, Inc.
Q1 2018 Earnings Call Transcript

Published: 13 May 2018

[Operator:]

Good morning, and welcome to the Overseas Shipholding Group First Quarter 2018 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Sam Norton, President and CEO. Please go ahead.

[Samuel Norton:]

Thank you, Danielle. Good morning, everyone, and thank you all for joining Dick Trueblood, Molly Arcia, Princeton McFarland and me for our 2018 first quarter earnings call. We welcome the opportunity to provide added depth and perspective to our written public disclosures and appreciate your taking the time to listen in on this call. Prior to beginning our review of the past quarter, I would like to direct everyone to the narrative on Pages 1 and 2 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 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, 2017, and our other filings with the SEC, which are available at the SEC's Internet website, www.sec.gov, as well as our own website, www.osg.com. Forward-looking statements in this presentation speak only as of the date of these materials, and we assume no obligation to update forward-looking statements or 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 first quarter earnings release furnished to the SEC and which is also posted on our website. Turning now to the specifics of the recently completed quarter. We saw marked improvement in our financial performance on a sequential comparison with the fourth quarter of 2017. Rising spot market rates, a renewal of time charter activity and the rebound in our niche market businesses to historical norms all contributed to the results achieved and reported this morning. These results give us ever greater confidence that we have seen the bottom of the market for spot and time charter rates and that a sustained recovery in our conventional Jones Act trades is now well underway. Consistent with the narrative of recent quarters, the presence of what we believe to be three key stimulative catalysts continued to provide support from improving market conditions. Among these catalysts, the most significant was the persistence of domestic crude oil price discounts to comparable international prices when compared on a landed cost basis. Please turn to Slide 4. The blue line on the chart in Slide 4 traces the price differential between Bonny Light and WTI Houston. The red and green shaded areas beneath the blue line illustrate the landed price differentials when taking into consideration transport costs. Periods shown in green indicate periods favoring domestic purchases on a landed cost basis. The red shaded areas indicate periods of disfavor. While the chart clearly illustrates that these relationships are quite volatile, nonetheless, consistent with market conditions which prevailed during the fourth quarter of 2017, the landed price differentials at Delaware Bay largely favored domestic crude purchases over foreign ones. Of note, the arbed remained open, notwithstanding a roughly 30% increase in Jones Act spot market freight rates in the first quarter of 2018 as compared to the rates seen during the fourth quarter of 2017. Please turn to Slide 5. As depicted in the graphic presented in Slide 5, the time charter equivalent rates for round voyage calculations on Jones Act tankers have risen steadily over the past 10 months. While fourth quarter 2017 rates can be seen to have clustered around the $50,000 per day levels, rates in the most recently completed quarter have trended into the mid-60s. Importantly, we have seen second quarter fixtures to date continuing the strong trend. The combined picture of Slides 4 and 5 underlines our conviction that incremental demand for coastwise transport of domestic crude oil is an important factor in gauging both speed and the extent of market recovery in Jones Act petroleum trades. Significantly, rising crude oil prices across the board should be stimulative to continued expansion of domestic crude oil production, and general expectations are that prevailing discounts to international prices will continue as a result. A by-product of a widening oil price spread is to make crude oil available at U.S. Gulf Coast marine terminals a cost-effective option for Gulf Coast and East Coast refiners with what we have seen to be favorable implications on Jones Act freight rates. In addition to the positive demand developments in the crude oil trade, episodic but important spikes in demand for refined product movements, created by weather events, system disruptions and the lack of surge capacity in the Colonial and Plantation Pipelines to respond quickly to such episodes, provide further support for a building recovery. Finally, capacity removal is supporting a gradual rebalance of supply and demand. In addition to the 2 OSG ATBs removed from service during the second half of 2017, we count 4 other older ATBs and 2 Jones Act tankers that have been removed from the market over the past 9 months. We consider it highly likely that further reduction in available supply will occur over the remainder of 2018. As noted in the past, nominal round voyage time charter equivalent rates need to be understood in conjunction with utilization rates to fully reconcile market rates with our financial statements. We have seen improvements in utilization rates accompanying the rise in spot rates, a development which we see as a strong indicator of a tightening market. Our conventional tankers traded a total of 337 days on the spot during the most recent quarter, an increase from 284 days in the fourth quarter of 2017. Effective earnings from these spot trading tankers increased from $31,000 to $41,000 per day, reflecting both higher nominal freight rates as well as improved utilization rates for these tankers, which rose to about 75% during the first quarter. Increased employment activity for our ATB fleet has also been evident, with spot utilization rates rising to 60% during the quarter. At the end of April, 3 of our 9 conventional tankers were trading in the spot market. Two rebuilt ATBs were also trading spot. Considerations about the appropriate amount of capacity to remain active in the spot market are a regular management discussion point. While increased spot market exposure has been the trend over the past year, a transition of our vessel assets away from legacy time charter contracts of the past is, we believe, a transitional condition. Obtaining the stability of cash flow offered by time charters and multiyear contracts of affreightment remains a fundamental objective of our chartering approach. While firming spot rates are a positive development, short voyages in the Jones Act trade make achieving high utilization rates a challenge. We consider the normalized market in which our vessels trade to be one that should be characterized by stable, long-term chartering relationships with our customer base. Our principal end-user base is vulnerable to any potential marine transportation supply shortage as marine length -- as the marine length between production and distribution points is not easily replicated. In a market environment where diminishing supply surplus becomes more evident, we expect competitive forces to likely serve to encourage our customer base to secure greater visibility of access to forward transportation capacity through extended time charter contracts. Time charter contracts shift the risk of optimizing utilization from the owner to the charterer and are thus favorable to OSG when considering anticipated bottom line results. As such, the importance of the reemergence of longer-period contract activity to the long-term value proposition of OSG cannot be overstated. During the first quarter, we fixed one of our tankers on time charter to an oil major for delivery early April for up to 18 months. Subsequent to quarter end, 2 additional vessels have been fixed with important long-term customers for extended periods at time charter rates firmly above levels last done. In 2017, we have made the deliberate choice to accept increased spot exposure with the belief that committing vessels for long periods at sustained loss-making rates was an unattractive option when measured against the upside of being positioned to benefit from a recovery in rates. We are heartened by these recent time charter fixtures, which have served to strengthen our convictions as to the wisdom of that position. Please turn to Slide 6. Commencing in the third quarter of 2017, we have elected to provide additional disclosure to assist you in understanding the importance of our niche businesses and giving us the confidence to accept heightened volatility in our conventional tanker and ATB markets. While the fourth quarter of 2017 saw a dip in the contribution margins of these niche businesses, we are pleased to report that the performance of these businesses has stabilized once again. Most apparent in this mix has been the recovery of time charter equivalent earnings of our lightering business, which were restored to nearly $71,000 per day in the quarter. Importantly, we have during the first quarter agreed with one of our refiner customers to a 3-year lightering contract, commencing April 1 at minimum annual volumes more than twice the levels previously agreed. The other annually renewable contract with the third of our refining customers has also been renewed for 2018. With minimum take-or-pay volumes now established at higher level than has historically been the case, we are confident that the financial performance of this activity will now track, if not exceed, historical norms for the balance of the year. Our two tankers operating in the Maritime Security Program continue to provide quality cash flows for our business. Our MSP vessels derived a substantial percentage of revenues earned from transporting cargoes reserved for U.S. Flag vessels under MARAD's Cargo Preference Program. The Cargo Preference Program works to promote and facilitate a U.S. maritime transportation system and oversees the administration of and compliance with U.S. cargo preference laws and regulations. Those laws require shippers to use U.S. Flag vessels to transport any government-impelled ocean-borne cargoes. Among the currently available government-impelled cargoes are fuel movements carried out by the Military Sealift Command on behalf of various branches of the Armed Forces. OSG secured 2 such cargoes during the first quarter, which, when combined with regular movements made under the contract of affreightment serving the government of Israel, drove time charter equivalent earnings for these 2 vessels to increase nearly $1.5 million as compared to the fourth quarter of 2017 and over $2 million when compared with the first quarter of 2017, a good start of the year for these vessels secured 19% of our niche market vessel operating contribution for the quarter. OSG's contract with the government of Israel to deliver fuel has historically been funded with grants from the U.S. government and so is, as well, a government-impelled cargo movement. OSG has been nominated to perform a minimum of 7 voyages under this contract during 2018, providing committed employment at attractive rates with the equivalent of approximately 1 ship year. The government of Israel holds options to extend this contract for 2 years beyond October 2018, and OSG is working towards a successful outcome that would ensure the exercise of these options under conditions favorable to the company. Finally, OSG remains the only provider of Jones Act shuttle tankers in the U.S. Gulf today. One of our vessels, the Overseas Chinook, which is outfitted to operate as a shuttle tanker, will return in the short term at least to trading as a conventional tanker following redelivery from Petrobras in mid-May. Two remaining shuttle tankers are expected to continue to provide high-quality earnings for the foreseeable future. Please turn to Slide 8. Before I hand things over to Dick to take you through a review of the past quarter's financial results, it is useful to recall that as of the end of April 2018, OSG owned or operated an active fleet of 22 vessels. Our active fleet includes tankers and articulated tug barges, of which 20 operate under the Jones Act and two operate internationally in the U.S. Maritime Security Program. With this picture now having been refreshed, I will turn the call over to Dick to provide additional details on our first quarter results for 2018. Dick?

[Richard Trueblood:]

Thanks, Sam. Now let's review the first quarter of 2018 results in more detail. Please turn to Slide 9. TCE revenues for the quarter totaled $89 million, a decrease of $14 million or 13% compared with the first quarter of 2017. Pretax profit decreased $4 million in the same comparable time periods. The decline was primarily driven by the shift from fixed-rate, long-term time charters to spot market activities that occurred throughout 2017. Our spot market days exposure increased 73% compared to Q1 of 2017. During the first quarter of 2018, we operated two fewer rebuilt ATBs, which reduced our total ATB revenue days by 174. Additionally, the increased emphasis on the age of vessel being considered for voyages resulted in lower utilization and effective day rates for our rebuilt ATBs compared to the prior year. The decline in rebuilt ATB performance during the quarter in comparison to Q1 2017 represented 68% of the total year-over-year TCE decline. Jones Act tankers revenue contribution decreased $5 million, principally due to the increase in spot market activities. Our Delaware Bay lightering revenues decreased $1.2 million, and our non-Jones Act tanker revenues increased $2 million. Sequentially, TCE revenues increased $6 million or 7% from the fourth quarter of 2017. And pretax profit increased from a $6 million loss to a $5 million pretax profit. The increases in TCE revenues and profits from the fourth quarter of 2017 were driven by a strengthening market, and spot market rates increased for tankers and ATBs. Our niche business activities returned to historical norms in the first quarter of 2018. The volumes lightered by our Delaware Bay lightering activities increase from low levels experienced in the fourth quarter of 2017. The lower fourth quarter 2017 volumes resulted from crude oil movements from the Gulf of Mexico on MR tankers and the persistence of seasonal offshore lightering. Our business is characterized by a high level of operating leverage, which could result that increased revenues translate directly into increased earnings. Moving to Slide 10, let's take a more granular look at the TCE revenues. During the first quarter 2018 compared to the 2017 first quarter, as previously discussed, we experienced revenue declines across most elements of our business. However, more importantly, this slide demonstrates the trends we've experienced during the last 5 quarters. Lightering revenues, other than the fourth quarter of 2017, have remained relatively consistent, while our non-Jones Act tankers have increased during this time period. The ATB revenues have declined consistently due to a decrease in the number of ATBs we operate from 8 to 6 and spot market conditions that exerted downward pressure on rates and utilization. ATB spot market rates have recently improved, but continued challenges in utilization levels have moderated the effect of those increases. Our Jones Act Handysize product tankers experienced revenue declines during the second and third quarters of 2017 as they shifted from long-term time charters to spot market voyages. Spot market days increased from 72 to 337 days in comparison to the first quarter of 2017. TCE revenues have been increasing during the most recent 2 quarters. Spot market TCE rates have firmed during this time period. Moving to Slide 11. Our first quarter 2018 adjusted EBITDA was $26 million, down 28% from $36 million in Q1 2017. The decrease was driven primarily by the decline in TCE revenues discussed previously. Looking at sequential adjusted EBITDA. The first quarter of 2018 represented a 16% increase over the fourth quarter of 2017 as revenues increased 7% from Q4 of 2017. Moving to Slide 12. Net income was $3.7 million in the first quarter of 2018, down $1.7 million from the first quarter of 2017. Net income in 2017's fourth quarter reflected a tax benefit of $60 million, resulting principally from recording the impact of the Tax Cuts and Jobs Act, which was enacted into law in December 2017. Excluding this tax benefit, first quarter 2018 reflects a solid return to profitability, with net income approaching amounts achieved in the first quarter of 2017 on lower revenues. Please turn to Slide 13. Moving from left to right, we began 2018 with total cash of $166 million, which included $300,000 of restricted cash. During the first quarter, we generated $26 million of adjusted EBITDA. We expended $2 million on dry docking and improvements to our vessels. We incurred $7 million of interest expense. During the quarter, we repaid $75 million of our term loan, continuing the deleveraging of our balance sheet. The result was we ended the quarter with $112 million of cash, including $200,000 of restricted cash. Turn to Slide 14, please. Continuing our discussion of cash and liquidity, as we mentioned on the previous slide, we have $112 million of cash at March 31, 2018, including the $200,000 of restricted cash. Our total debt was $381 million. This represents a $142 million reduction in outstanding indebtedness since March 2017. Additionally, we have a $75 million revolver, which is presently undrawn. Combining our undrawn revolver with cash, we had $187 million of liquidity at quarter end. We are not subject to any amortization on our term loan. We do remain subject to the excess cash flow sweep provisions of this loan. However, considering the $47 million prepayment we made in March, we do not anticipate having to make a cash flow sweep payment in February 2019. With $317 million of equity, our net debt-to-equity ratio is 0.8x compared to 1.3x at March 31, 2017. This concludes my comments on the financial statements. I would like now to turn the call back to Sam for his closing remarks.

[Samuel Norton:]

Thank you, Dick. To summarize the views we have expressed during this presentation, we are encouraged by recent spot market rate developments, which give us confidence that the supply overhang that existed during much of 2017 is dissipating. Time charter inquiry for both our conventional tankers as well as some of our barges has been on the rise, and the willingness for our customers to accept the larger exposure to utilization risk is evidenced by 3 important period fixtures secured during the first several months of this year. Our niche market businesses have recovered well from the unusual dip witnessed at the end of last year and are on track to provide us with a stable platform to accept the consequences of the continuing transition back to a healthy, normalized market. We continue to view latent catalysts to demand-side surprises as supportive of our view to stay the course of our current strategy for employment of our vessels. Generally, we consider the market in real terms to be tighter than what it appears on a static analysis. A predictable progression towards a rebalance of supply is expected to occur over the coming quarters as tightening age restrictions imposed by our core customer base progressively limit the acceptability for use in service of vessels exceeding 20 years of age. The preference for younger tonnage will no doubt continue to impact our older ATB fleet. But as highlighted in Dick's presentation, the financial contribution of these rebuilt ATBs has already been marginalized. Conversely, the largely uncontracted status of our conventional tanker fleet leaves us well positioned to benefit from the emerging tightness in available supply. These developments give us reason to be optimistic that a restoration of sustainable spot and longer-term charter rates for Jones Act vessels is now well underway. Favorable fundamentals indicate that this trend should strengthen over the foreseeable future, a development which, were to occur, would allow the unrealized potential of the operating leverage of our business model become more readily visible in the quarters that lie ahead. We will now open the call to questions. Operator?

[Operator:]

[Operator Instructions]. The first question comes from George Schultze of Schultze Asset Management.

[George Schultze:]

Just a couple of quick questions. What was the amount of capital expenditures for the quarter?

[Richard Trueblood:]

It's about $2 million. Principal CapEx for us is really dry docking related.

[George Schultze:]

Okay. And the company used to break out the average time charter equivalent for its entire fleet. What is that amount for the quarter?

[Samuel Norton:]

We provide the average time charter on the sector or different types of asset classes, but I'm not certain that we blend them. We could do that in the future if you would like.

[Richard Trueblood:]

I mean, our view has been that it's probably more helpful to understand how the business is performing by looking at the TCE rates across the classes of assets.

[George Schultze:]

Okay, that's fine. And I'm wondering if you can give us guidance on your expectation for capital expenditures for this entire year as well as for next year.

[Richard Trueblood:]

I mean, generally speaking, there -- our CapEx tends to be relatively lumpy and tied to the original build dates of our vessels. The principal years are really going to be sort of 2019 and 2020, not so much this year. And I would expect that during that time period, '19 and '20, it probably will be in the $40 million range.

[Samuel Norton:]

Across that two-year period.

[Richard Trueblood:]

Yes, right.

[Samuel Norton:]

Included in that, George, we do have ballast water treatment investments that must be made for our tankers at least. Those capital expenditures, under the terms of our leases with AMSC, impose the upfront capital costs on the owners of the vessel with an attendant adjustment to the lease rates that would amortize the capital cost investment over the remaining useful life of the assets. And so we would expect to see, for the leased tankers that we have, a slight increase in the lease rates that we pay following installation of the ballast water treatment systems. But the capital expenditure for those will not be directly from our cash reserves upfront. By way of guidance, our expectation is the cost of installing ballast water treatment systems, including the cost of the system as well as the modifications needed to be made to the vessel itself, will be in the order of magnitude of $1.5 million to $2 million per vessel. Another question that comes up frequently is whether or not we're considering scrubbers in the context of changing fuel standards that come into effect in 2020 as a result of IMO regulations. It's our current view at this time that for our Jones Act tankers, we will not pursue installation of scrubber facilities or equipment. We are already using 0.1% -- or we must comply with 0.1% sulfur regulations along the coast of the United States. And we have for some time been using marine gas oil in preference to heavier fuel oils in order to make -- to comply with those requirements. We could potentially consider scrubbers for the 2 vessels that trade under the Maritime Security Program. At this time, we have not made any decision given the start date for those regulations is only in 2020, and that's still some way off in the future for us to assess whether or not the capital investment in scrubbers would be a good investment. Other than that, as Dick said, we do have capital expenditures are concentrated in periodic survey and dry dock requirements that we have, which are on 3 and 5 year cycles for intermediate and special surveys, respectively.

[George Schultze:]

And is any of that CapEx offset by scrap sales? Because I understand the scrap sale values are up because the price of steel has increased, but I'm -- I don't know if that's relevant for the business anymore.

[Samuel Norton:]

In the context of the barges, it's really a domestic market for scrap because it doesn't make economic sense to take them to India, Pakistan or the other principal international markets for scrap. So the scrap values are not material in the broader picture, I would say. We have commented in the past and I would repeat that we consider the tug and barge pair of our rebuilt ATBs to be physically in quite good condition. It's not the physical condition of the vessels that are limiting their useful trade. It is rather the preference of our customer base or the prejudice of our customer base against older vessels. So we continue to pursue ideas about how we might repurpose these ATBs and realize economic value above their scrap value, but those projects are long in development. And really, we see them as option -- I mean, more in option terms in terms of maybe recognizing greater value than scrap. And clearly, our act in the past quarters to substantially write down those ATBs to their scrap values would be indicative of the more prudent approach from an accounting point of view.

[George Schultze:]

Okay. And I just have one last question about the term loan. I know that you paid off a chunk of it in the quarter, and the company was previously looking to refinance it. I guess it's due now in almost a year. So what's your plan? Is it to refinance it or to keep paying down term loan chunks in the next couple of quarters? Or what will be the expectation there?

[Richard Trueblood:]

We are actively engaged now and looking at what the alternatives are to refinance that loan. I would not anticipate necessarily that we'll make additional principal payments over the next couple of quarters, but I wouldn't preclude it either. But the goal was to -- it's due in August 19, so the goal was to -- over the next few months to get that refinanced and move forward from there.

[Operator:]

The next question comes from Mark Kaufman of Ramirez & Co.

[Mark Kaufman:]

Nice to see how things are turning around, and it's the opening to my question. How do you see the capital structure looking over the long term? In other words, where do you see the base amount of debt that you should be carrying? Never mind just, okay, refinancing this loan that comes up next year in light of sometimes obviously some cyclicality in the business. Where's the level that you're actually comfortable with? And thinking about in the past how the excess cash flow you were using to reduce the amount of shares outstanding, so I think somehow those obviously play together, so I wonder if you could comment on that.

[Samuel Norton:]

That's a good question, Mark. And let me try and guide you a little bit. First of all, the amount of debt and the amount of cash on the balance sheet obviously have an impact on each other in terms of maintaining sufficient levels of liquidity to anticipate unforeseen disruptions in our normal cash flow stream as well as to position us to be able to take advantage of new investment opportunities. So to some extent, when we think about debt, we think about net debt. But it's not always just the net debt number because the amount of cash and undrawn availability we have on our revolver is also an important number that we follow. As regards the appropriate amount of leverage in this type of business, it really largely depends upon how much forward visibility we have contracted and the quality of credit that, that forward contractual book looks like in terms of our ability to accept higher levels of leverage or, conversely, to accept lower levels of liquidity in managing the right-hand side of the balance sheet. Largely speaking, if we were to have a 10-year contract with a high-quality credit, that clearly could accommodate a higher level of financial leverage given the high quality of forward earnings stream. Conversely, if we were to have every ship that we own on the spot market and exposed to the volatility of the spot market, I would argue that, that would require both a higher level of real liquidity in terms of cash and undrawn availability as well as a lower level of leverage simply to be able to accommodate that volatility in the near term. So I don't think there's any magic number as to what the right level of leverage would be, but there is a spectrum across which we would move, depending on the forward visibility of cash flow cover as well as the quality of credits that we would see in that portfolio.

[Mark Kaufman:]

Right. I guess I was wondering about a base case where you could term something out that you could be comfortable -- a low leverage level is what I'm saying, a piece that you could term out, I think you could offset against your gas and really thinking about that working that way, if there is something in your mind to...

[Samuel Norton:]

I would look kind of at conventional shipping companies if there is such a thing. Typically, you'll see leverage in the sort of 50% to 60% range as being generally a comfortable level of leverage. Companies that exceed 60% of financial leverage either are characterized by a long book of time charter earnings or are more volatile. And so I would guide you in that range as kind of a normalized basis.

[Mark Kaufman:]

Okay. I think that's -- personally, I think that's too high. I've been doing bankruptcies for 25 years, and I've seen too much of that show up in my bailiwick. So hopefully, you don't reach out to that level. Anyway, I appreciate your comments.

[Operator:]

Next question comes from Robert Jensen of CF Partners.

[Robert Jensen:]

Sam, you mentioned in your prepared remarks that you are seeing renewal of time charter activity, including two new TCE fixtures that you secured in the quarter. Can you give some color on sort of the terms and duration that you're seeing currently, including the ones you just signed?

[Samuel Norton:]

Generally speaking, we have limited the duration of our charters to be coincident with the expiry of our current leases. And until we have greater clarity as to what we might do with the extension options that we hold on those leases, we have been limiting discussions to periods that would expire prior to December of 2019. I would say that our charterers' appetite for longer periods was evident during the past quarter, but we have limited our commitments, as I said. So we now have several charterers that are fixed out until that period in December of 2019. As to rates, we've seen rates firmly in the 50s, which to me is, given the utilization rates that we're talking about, is appropriate given the spot market levels that we've seen. So from our perspective, the trade-off between earnings on spot when adjusted for utilization rates, we're seeing comparable returns now on time charter to give us the security of effectively 100% utilization once we're on time charter.

[Robert Jensen:]

Right. But so is it fair to say that the clients are asking for longer term now than compared to a quarter or two ago?

[Samuel Norton:]

I would certainly agree with that comment.

[Richard Trueblood:]

That's fair.

[Robert Jensen:]

Right. And I also wanted to ask you about the potential impact from U.S. sanctions on Iran. I mean, because if you look back at the pre-2015 situation, a lot of the Nigerian and Angolan crude was pulled from -- to the Far East rather than to the U.S. So do you see any other sort of -- any substitute for U.S. crude for East Coast refineries if that were to happen?

[Samuel Norton:]

It's a little bit -- I've said in the past that's a multivariable calculus to try and figure out all of the trade permutations for oil. I would reiterate what we've said in our comments, which is that there are underlying, unexpressed catalysts for demand across the board on both the clean and the crude oil spectrum. This would be potentially one of them where widening spreads because of factors, whether it was Iran or otherwise, that would draw West African crude to other markets, would theoretically result in the continuing or further widening of the spread versus domestic crude prices and further incentivize East Coast refineries to source their crude oil domestically rather than through international sources. That's been the trend over the last six months. If that trend were to continue, that would be favorable to the Jones Act, no doubt.

[Robert Jensen:]

Did you see any sort of beyond the -- do you see anything that could change the spread, that could narrow it, that basically would sort of jeopardize the current spread?

[Samuel Norton:]

I'm not an expert in that area, I don't know.

[Robert Jensen:]

You don't have a crystal ball.

[Samuel Norton:]

What I can tell you is that certainly, the published information that's available indicates that crude oil production in the United States will continue to increase significantly over the foreseeable future. I believe the figures for 2017 are in the order of magnitude of additional -- excuse me, 2018 are additional 1 million barrels per day production over 2017 comparable figures. And I've seen some reports that suggest that 2019 would be a further gain of 1 million barrels per day. And as long as oil prices are high, from my understanding, the economics down in the oil patch in Texas, that's very stimulative to continue to see increases in production. So more production in the United States likely leads to increased need to seek foreign markets for that increased production. And the need to seek foreign markets likely leads to a discount in the price vis-a-vis alternatives for the foreign market buyers. That's been sort of the fundamental driver for the last 6 to 8 months. And we're encouraged, as I said in my comments, that fundamentals suggest that, that trend should continue.

[Robert Jensen:]

Yes, no, we fully agree. Another -- I mean, one of the positives of the Jones Act market is a lack of newbuilds coming into the market or right now at least. It appears, as far as we understand, that the Philly shipyard may or may not but ultimately, it may shut down, effectively taking away 15% of the capacity. How do you think that will impact the sort of the Jones Act market going forward? Is there any immediate effect out of that, you think?

[Samuel Norton:]

I'll have two comments here. Number one, it's been my experience that shipyards tend to have more lives than cats. The facilities don't go away very quickly, and labor force, regional labor force or localized labor force also doesn't go away. So often it's a question of capital structure rather than demand that drives the continuation of shipyards. So I would caution you, on the one hand, from just assuming that a lack of robust financial performance at a shipyard necessarily takes that capacity out of the market. The second thing is, frankly, I don't really see significant demand for newbuilding tankers for a while. The -- absent some new catalysts that would stimulate significant increase in demand, it is our view that the clean petroleum or the refined petroleum trades in the United States are pretty stable and relatively low growth. And as we've said in our comments, it's really the crude market of the margins that is creating the incremental demand that is moving our markets right now. And we think that's probably the picture for the foreseeable future, but it's -- we will be in a relatively narrow range of supply/demand balance. And in that circumstance, we don't really see the need for many more tankers against what there is right now. And remember that the current tanker fleet is largely built within the last 10 years, so there's not much of a renewal demand there. There are some tankers that are approaching 20 years of age, and there are a handful that are more than 30 years of age. So there's incremental demand around the margins for 1 or 2 per year tankers for, let's say, the next 5 years. So I don't really believe that even if the Philly shipyard were shut down, I don't foresee right now that that's going to create any kind of panic in the market that there's not access to new supply. I could be wrong, but that's my view.

[Robert Jensen:]

Just one final. I mean, you've obviously seemed to be a bit more optimistic on the market now than you perhaps were six months ago. And a large part of sort of your leverage to that market will obviously come through the leasing capacity. So how far away are -- what do you think in terms of what should we expect in terms of news on the American Shipping Company renewals, if you can say anything about that?

[Samuel Norton:]

Our contractual option declaration dates are at the end of the year, in the middle of December of this year. And clearly, we'll make a decision before that.

[Robert Jensen:]

Right. No further comments on that. You're in a dialogue? Or do you think you have any leverage to sort of alter the agreement?

[Samuel Norton:]

There's a lot of speculation about what those agreements look like and how they may be played out. It's been our position, and I think you probably have access to management at AMSC, the market right now is evolving, and the factors that lead to how far that market may go or whether the marginal crude oil demand is sustained or not, that's very much a story that is in development. I would say to you that we consider our position on these leases to be quite favorable in that we have the option to extend for 1, 3 or 5 years at our option on that declaration date and that we have that option on each of the 9 vessels for which the leases mature in 2019. So we think that gives us an extremely broad spectrum of flexibility to position our fleet going forward to appropriately match what we see as the medium-term health of the market.

[Operator:]

The next question comes from Jeffrey Stein of Morgan Stanley.

[Jeffrey Stein:]

Just a couple of quick questions regarding the spot market. And I heard you alluded to it with some challenges in utilization, but wouldn't the market be tighter if you scrapped the ATBs in the spot market? And I'm also curious, it didn't sound as though it is, but is the market as strong today as it was 30 days ago? I know you talked about some challenges in utilization, but I'm curious if you could address that.

[Samuel Norton:]

So take one of those one at a time. I guess in the big picture, a scrapping of our ATBs leads to a tighter market strictly from a numbers point of view. So yes, I would agree with you that as we would -- if and as we bring those ATBs out of the market, there will be tightening in the market. How that directly affects the spot market, I'm less clear about because our ATBs, frankly, right now are serving niche markets. They don't really trade actively. Okay, we do a bit from time to time in the spot market. But as we said, we only have 2 of the ATBs in the spot market. The others are tucked away in the niche businesses. How those niche businesses would be addressed once we pull those ATBs out, that's a point of discussion, but I'm not certain that it would have a leveraged effect in terms of driving the market even higher. There is -- the sort of the inverse understanding of less than 100% utilization is there is an implicit inefficiency in the market in the trading of cargoes. That inefficiency is expressed mostly in terms of the scheduling of cargoes. And that's why I say that trading in the Jones Act market is difficult to achieve high utilization rates when you're trading spot because our voyages are in order of magnitude between -- a short voyage is three days, and a long voyage is 14, and the average is probably seven So if we're running the spot and we do a 7-day voyage and we take two days, we lose two days between when we are back at the next load port and when that cargo is ready, then we're basically -- are down to 70% utilization. So it's really that 1 or 2 day differential is enough to make that utilization rate quite volatile. So the question is whether -- if there's a tightening market, whether the leverage -- let me call it the leverage, the leverage of the owners to be able to drive the shippers to shift their dates for loading in order to make the transportation system itself more efficient, whether we would be able to achieve that -- and ultimately, as I've said in my remarks in the past, the fear of the distribution customers that we have ultimately of being unable to access capacity in the spot market does tend to drive them towards taking ships on time charter and accepting that utilization inefficiency themselves or now once it's within their system and they're paying the bill every day, structuring their cargo movements to be more efficient, given the date movements or the specific dates in which vessels are available for loading. My belief is that the transition towards that environment is underway, that we are seeing increased utilization rates indicating tightening availability, which is likely to lead to our end-user customers to shift their thinking away from a reliance on the spot market to one which would favor or would emphasize availability on time charter. And the trade-off for them would be to accept that utilization risk. That's the trend that we see.

[Jeffrey Stein:]

In terms of -- just going back to the -- you mentioned the timing of the cargo, I guess, one quick follow-up. How much time is needed to wait between getting cargo for the spot vessels?

[Samuel Norton:]

Our ideal is we want to load what we call back-to-back, right, which is that we finish -- I'll just use your geographical rotation. We load in Houston, we discharge in Tampa. It's another two days back from Tampa to Houston, 2.5 days that when we arrive back in Houston, there's another cargo waiting for us. But we don't control the scheduling of the cargoes. So it may be that the next available cargo is a day or two days away or could be a week away. And that's where you see the loss of utilization when we're trading in the spot market. Obviously, the longer the voyages that we do, the less impact those gaps in scheduling have on us, which is why I've emphasized in the past that the crude oil movements up to the Delaware Bay have a much greater impact on our ultimate financial results than, say, a refined product movement from Houston to Brownsville, which is a 3-day voyage just because a 14-day or a 16-day round voyage to the Delaware Bay, we're being fully utilized over 16 days. And if you had a day at the end, then obviously, the percentage over the broader voyage would be much lower than on the Brownsville-Houston voyage, which is if you add a day on a 3-day voyage, that's 25% you lost already.

[Operator:]

[Operator Instructions]. The next question comes from Sean Kelley of OFS.

[Sean Kelley:]

Just a quick question with the -- again, with the leases with American Shipping. You mentioned that you have customers that want to fix charters beyond the lease expiration. What needs to happen before you'd get comfortable extending the leases individually on vessels where you can already fix a charter on them under a new lease term? I'm just trying to understand what would actually need to happen to drive your decision to extend the leases on individual vessels.

[Samuel Norton:]

I think the simple answer is if we saw extension rates that would ensure that we're profitably trading the vessels at the option extension rates that we currently hold, that would certainly be a factor.

[Sean Kelley:]

So at the current rates you're seeing, it wasn't profitable to extend under the extension terms?

[Richard Trueblood:]

I think there's sort of a marginality question in there, Sean.

[Samuel Norton:]

Yes. And in our view that rates likely will -- I'll refute what I said. We see the trend as a shift away from confidence in the spot market availability to one that would be characterized more by a lack of confidence in continuing access to spot market availability, which would lead people to want to take vessels on time charter. In a market environment where more people are seeking time charter coverage, we see that being supportive of a progressive increase in time charter rates. Therefore, fixing today for, let's say, 5 years at what is available in the market today, on the one hand, probably takes us out of what we think is a firmer market in the future and, on the other hand, locks us into a rate which, given the current lease structure that we have, would not materially contribute to our financial results. And so we see in balance that the variables that go into that equation are not sufficient right now for us to confidently extend those leases beyond their current expiry.

[Operator:]

There's a follow-up question from George Schultze.

[George Schultze:]

So I have a two-part question. I'm trying to figure out if you folks believe that the stock for this company, our company, is undervalued versus our own prospects for the business. And if so, what steps are you taking to reduce that valuation discount?

[Samuel Norton:]

George, once -- somebody once said, you can never be too rich or too thin. I think it was one of the actresses in the '60s. And your question triggers, Never ask an executive whether their stock is undervalued. They're always going to say it's undervalued, right? That's just given. Our view is that a couple of things probably impact the short-term movement of our stock price. One is that our market capitalization is relatively small, and therefore, the broader market audience for our stock is probably not as deep as others in our industry. And that's something that we can affect probably over the long term but is difficult to affect in the short run. The other aspect or the other element is that we think that gaining some degree of analyst coverage -- today, we have none. But gaining some average analyst coverage to be able to broaden the audience of people that might look at our stock in the future as we recover and as the market capitalization increases to levels that attract more interest from managed funds and mutual funds, that would be something that would be helpful in extending the audience for our stock and potentially allowing a fuller valuation to be expressed. We are working on trying to develop analyst coverage, and it's something that we hope to be able to see some progress on in the near term. Hello?

[Operator:]

That concludes our question-and-answer session, and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.