Overseas Shipholding Group, Inc.
Q3 2016 Earnings Call Transcript
Published:
- Operator:
- Good day ladies and gentlemen, and welcome to the Overseas Shipholding Group Incorporated Third Quarter 2016 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to your host for today, James Small, General Counsel. Sir, you may begin.
- James Small:
- Thank you. Good morning, everyone, and welcome to OSG’s earnings release conference call for the third quarter of 2016. Before we begin, I would like to start off by advising everyone on the call with us today of the following. During this conference call, OSG’s management may make forward-looking statements regarding OSG or the industry in which it operates, which could include without limitation, statements about the outlooks for the tanker and articulated tug/barge markets, changing oil trading patterns, forecast of world and regional economic activity and demand for and production of oil and petroleum products, OSG’s strategy, expectations regarding revenues and expenses, including both G&A and vessel expenses, estimated bookings and TCE rates for the fourth quarter of 2016 the first half of 2017 and other periods, estimated capital expenditures for 2016 and other periods, projected scheduled drydock and off-hire days, OSG’s consideration of a potential spin-off or other strategic alternatives and its ability to achieve financing and other objectives and economic, political and regulatory developments in the United States and elsewhere. Any such forward-looking statements take into account various assumptions made by management based on its experience and perception of historical trends, current conditions, expected and future developments, and other factors management believes are appropriate to consider in the circumstances. Forward-looking statements are subject to a number of risks, uncertainties and assumptions, many of which are beyond the control of OSG, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. Factors, risks and uncertainties that could cause OSG’s actual results to differ from those expectations include those detailed in OSG’s Annual Report on Form 10-K for 2015, its quarterly report on Form 10-Q for the third quarter of 2016 and in other filings that OSG has made or in the future may make with the U.S. Securities and Exchange Commission. With that out of the way, I would like to turn the call over to our President and Chief Executive Officer, Capt. Ian Blackley. Ian?
- Capt. Ian Blackley:
- Thanks James. Good morning everyone and thank you for joining us for our 2016 third quarter earnings call. On the call today with me are Rick Oricchio, our CFO; Lois Zabrocky, Head of our International Business; Sam Norton, Head of our Domestic Business, James Small, who you just heard from, our General Counsel and Brian Tanner, Head of Investor Relations. I want to start by congratulating Lois and her being named President and Chief Executive Officer for International Seaways, the spinoff of our international business. I've had the pleasure of working with Lois for many years. I am confident of her ability to lead International Seaways forward. James Small will also be joining International Seaways leadership team as General Counsel and Chief Administrative Officer. James has provided invaluable counsel for the organization and been a driving force behind numerous corporate initiatives at OSG. Also joining the team is Jeff Pribor, who we're pleased to announce will become the CFO International Seaways. Jeff brings a wealth of experience in the shipping business and is highly respected in the industry. He will be significant asset to the International Seaways team. This is a very talented and hard-working group and it is the right team to lead International Seaways as it embarks on an exciting new chapter. Before I comment further on the progress of the separation, let me begin on Slide 3 with third quarter 2016 highlights. We reported third quarter results today with adjusted EBITDA in the quarter of $76 million on TCE revenues of $187 million, a strong result in the quarter when market conditions were difficult. We reported a net loss of $99 million reflecting the impact of pre-tax vessel impairment charges of $147.4 million that Rick will discuss in more detail. In the quarter we accelerated the payment of $20 million in the principal amount of our domestic bank debt and prepaid $75 million in principal amount of our international bank debt and we repurchased $37 million of our senior notes. We continue to strengthen the capital structure of our businesses as we position them to be standalone companies by using the access cash generated by operating to de-lever. Also in the third quarter, we made open market purchases of approximately $22 million of Class A warrants. We now completed approximately 60% of our $200 million two-year equity repurchase plan, which we announced in November of last year. Turning back now to the planned separation of our domestic and international businesses by spinning out International Seaways Inc. from the parent OSG. In July we filed its initial Form 10 registration statement with the SEC and in September we filed the first amendment adding Q2 carve out financials and responding to the limited SEC comments on the first filing. In October, the Board approved to spin off and the company was named International Seaways. We've now established the Senior Management team who I introduced earlier and selected the future the future Board of Directors. The Board will be comprised of nine directors including eight members of the currently OSG Board. The new director will be Randy Day, President and CEO of Day & Partners. Randy is a well-known global maritime executive and well-respected in the industry. He has extensive experience in executive leadership, corporate governance, restructuring and maritime finance. So a great addition to the Board. I'm very pleased, she has agreed to join and welcome her to the International Seaways Board. Yesterday we announced the OSG Board established their record date of November 18 and the distribution date of September 30th. We have requested SEC effectiveness for our registration statement on Form 10 and are awaiting no response. Assuming all closing conditions are met, regular way trading for International Seaways will commence on December 1 on the New York Stock Exchange under the trading symbol INSW. The OSG name will continue to be proudly carried by our U.S. business containing to trade on the New York Stock Exchange of OSG. Today we remain focused on the operational aspects of the transition and the business preparation to successfully operate as two separate companies. I've been truly impressed by the entire organization's focus, determination and perseverance through this process. Following the separation, each company and each Board will be able to better focus on their own business and more effectively pursue their distinct operating priorities and strategies. By removing those complexities and limitations associated with the combined international and Jones Act business, each will have more flexibility to capitalize on opportunities for long-term growth and profitability. Both management teams plan to host separate Investor Day Presentations in New York City on December 6. This will provide investors and analysts the opportunity to meet and hear from Senior Leadership of the two companies regarding their respective business strategies. Following this Investor Day, each company will conduct non-deal road shows. Both businesses are committed to transpire and plan to establish a close interaction with investors and analysts as they move forward. Please now turn to Slide 4 and I'll update on each of our segments. In the international crude tankers, the third quarter is typically a slow period. As refineries take advantage of weaker demand to complete refinery turnaround and scheduled maintenance. The seasonal weakness was more pronounced this year due to number of other factors. Global oil supply is no longer growing as it was in 2015. Increased production in the Middle East from country like Iran, Iraq and Saudi Arabia have been largely offset by lower production from the Atlantic Basin. Lower production in Venezuela and Nigeria for example reduce outflows in the Atlantic Basin to Asia impacting ton mile demand. We also saw an easing of port congestion which freed up tonnage at the time when incremental vessel supply has been entering the market. Global oil demand growth is showing signs of slowing from the record-breaking recently play with estimates of growth now at 1.2 million barrels per day for 2016 down from the estimated 1.4 million from the second quarter and closer to long-term trends. China continues to be the main growth driver in the crude market with year-to-date imports running from 14% above the same period in 2015 with crude imports in September just over 8 million barrels per day. More recently China's largest foreign crude supplier in September overtaking both Russia and Saudi Arabia with refinery maintenance in China coming to an end, Nigeria production rebounding the amount of crude oil heading East and West Africa has increased with a positive impact on ton mile demand. China's domestic crude production fell to its lowest level in over six years in August and production is forecasted to continue slipping as the state-owned companies shut down sales that are too expensive to operate under the current pricing environment, guiding increased exports. India oil exports also continue to grow. Year-to-date imports were up 10% to $4.3 million barrels per day compared to the same period last year with crude imports in September rising 18% year-over-year to 4.5 million barrels per day. Indian auto manufacturers reported that vehicle sales were 20% higher in September this year compared to 2015, driving higher gasoline consumption. With 80% of its crude oil requirements met through imports, India remains a bright spot for crude oil demand. As we move into the seasonally stronger winter market, rates typically strengthen. VLCC rates this year are already at attractive levels, reflecting upside from increase in West Africa cargos. There is OPEC meeting later this month to discuss production cuts, but based on recent OPEC discussions in advance of the meeting an implementation of significant production cuts seems unlikely. On the supply side, there's been little new-build ordering this year. The positive trend and the disciplined approach we would like to see continued, which would result in lower fleet growth beyond 2017. However there remains significant new build deliveries to absorb through the end of 2017. Our third quarter VLC spot rates were $25,800 per day, Aframax spot rate was $15,400 per day and Panamax blended rate $16,700 per day. In the product tanker market, our MR spot rate softened in the third quarter to $10,700 per day. We attribute the weakness to elevated global inventories limiting arbitrage trading opportunities. The refined products overproduction from last year that's breaking inventory overhang, but has pressured margins and encouraged refiners to form deeper maintenance which they disowned from last year when margins were stronger. We believe the long-term fundamentals for the product tanker market remain positive; however, with strong underlying demand and a relatively low MR order book. Last week there was a tragic accident in Alabama at the site of the colonial pipeline has caused a number of injuries and loss of life. This unfortunate incident resulted in the gasoline pipeline being shutdown and feel the sharp rally in Atlantic MR rates. The pipeline restarted on Sunday and we would expect rates to normalize over the course of next week but the incident has underscored a growing tightness developing in the Atlantic basin trade. Turn now please to slide five. In our U.S. flag business, the market continues to be impacted by the decline in U.S. crude production. While U.S. crude production did stabilize in the third quarter at 8.5 million barrels per today that is some 845,000 barrels a day below the third quarter of 2015. Specifically Eagle Ford Shale Oil production, a major source of demand for the Jones Act trade declined 470,000 barrels per day in September 2016 from the prior year period. The decreased crude production led to a decline in number of Jones Act vessels transporting crude oil, which has caused increased competition for clean cargos and idling of some Jones Act vessels this year. All of our vessels are currently implied. Additional weakness is being driven by the delivery of new build tonnage. There are 13 vessels remaining in the order book with four deliveries expected in 2016 and the remaining nine in 2017. There are however 18 vessels in the Jones Act fleet that are some 30 years or older. So, we would expect to see some of these vessels being removed from service as the new vessels deliver. While the decline in the U.S. crude production has led to a decrease in demand for coast wise transportation of domestic crude, the narrowed spread between Brent and WTI has made it more attractive for U.S. Northeast refineries import foreign crude. Import of the U.S. Northeast refineries were up 36% in 2016 versus last year with the majority of this coming from West Africa. As a result, we continue to see a pickup in Delaware lightering volume benefiting our modern lightering ATBs. Our lightering volumes averaged 156,000 barrels a day in the third quarter up 32% compared to the same period in 2015. Overall as of today we only have 102 possible remaining open days this year and 68% of our U.S flag revenue day for 2017 are fixed on time charter or COA. Our most recent picture with a five month charter expansion in ATB with contact due to expire at year end. The Colonial incident had an impact on the Jones Act market as well with a number of our ATBs able to secure a new charter at a higher than anticipated rate as a result of the incident. I will now turn the call over the Rick to provide additional details of our third quarter results.
- Rick Oricchio:
- Thanks, Ian. Let’s move directly to reviewing the third quarter results in more detail. Please turn to slide seven. TCE revenues for the third quarter totaled $187 million, a decrease of $47 million or 20% compared with the third quarter 2015. The decrease was primarily driven by lower daily rates earned by the international flag fleet partially offset by an increase in revenue days resulting from fewer drydock and repair days in the current period. TCE revenues for the first nine months of 2016 were $640 million, a decrease of $50 million or 7% compared with the first nine months of 2015. The decrease for the first nine months was primarily due to lower rates in the MR, Aframax and VLCC sectors. Third quarter TCE revenues for the international crude tanker segment totaled $50 million, down 34% compared with the same period a year ago. This decrease was primarily due to a decline in VLCC and Aframax rates with spot rates at $25,800 and $15,400 per day respectively, resulting in a $32 million decline in TCE revenues. This decrease was partially offset by a 145-day increase in VLCC and Aframax revenue days resulting from fewer drydock and repair days, which increased revenue by approximately $6 million. Also helping to mitigate the decline in spot rates were the time charters on the VLCC's and Panamax's that we opportunistically entered into an attractive rate at the end of last year and beginning of this year. TCE revenues were $204 million for the first nine months of 2016, a decrease of only $16 million compared with the first nine months of 2015. The VLCC spot rate was $45,700 per day for the first nine months of 2016. The Aframax spot rate was $23,300 per day and the Panamax blended rate was $21,000 per day. Decline in VLCC and Aframax rates partially offset by increased VLCC and Aframax revenue days also impacted our performance for the first nine months. Also serving to partially offset the decline in rates was our ULCC, the Laura Lynn, exiting layup and commencing a time charter for storage in April 2015, which accounted for an increase in revenue of $5 million in the current year. The charter has been extended through March of 2017. Ian discussed factors that have caused spot rates to soften in the third quarter. In our fourth quarter, we have booked 61% of the available VLCC spot days at an average of approximately $23,500 per day, 40% of the available Aframax spot days at an average of approximately $13,500 per day and 60% of the available Panamax days at a blended average of approximately $19,500 per day. In the International Product Carrier segment, third quarter TCE revenues totaled $27 million down 46% compared with the third quarter of 2015. This decrease resulted primarily from significant period-over-period decreases in average daily spot rates earned by the MR fleet to $10,700 per day. Contributing to the decline was a 73-day decrease in revenue days, resulting primarily from the sale of the Luxmar in July 2015 and a decline in LR2 spot rates to $18,000 per day, resulting in a combined $4 million decrease. TCE revenues in the segment were $99 million for the first nine months of 2016, a decrease of $37 million compared with the first nine months of 2015. The MR spot rate was $13,900 per day for the first nine months of 2016. We have booked approximately 27% of our fourth quarter MR spot days at a rate of $10,300 per day. In the U.S. flag segment, third quarter TCE revenues totaled $110 million an increase of $2 million compared with the same period a year ago. We incurred a $6 million decrease in revenue as a result of lower average daily rates earned by our Jones Act vessels, which was predominately attributable to our rebuild ATB's. This was offset by a 113-day increase in revenue days resulting from fewer drydock and repair days, which accounted for a $5 million increase in TCE revenue and higher daily rates earned by our non-Jones Act tankers contributed a $3 million increase in revenue. TCE revenues were $337 million for the first nine months of 2016, also an increase of $2 million compared with the first nine months of 2015. Moving to slide eight, net loss for the third quarter and first nine months was $99 million and $18 million respectively, compared with net income of 173 million in the third quarter of 2015 and net income of $275 million for the first nine months of 2015. The net loss for the third quarter reflects a pretax vessel impairment charge of $147 million recorded in the quarter that we will discuss in a moment. Net income in the third quarter of 2015 included a one-time non-cash income tax benefit of the $150 million. I wanted to take a moment to discuss the impairment charge. Management concluded that there were number of factors that resulted in significant changes in both the international flag and U.S. flag markets since the second quarter of 2016, which were viewed as impairment trigger events for 28 of our international flag vessels and eight rebuild ATB's in our U.S. flag fleet. We conducted an impairment test in accordance with U.S. GAAP rules resulting in an impairment charge totaling $50 million in the international fleet on two LR1's and Aframax and a Panamax and a charge of $98 million in the domestic fleet on seven of the eight rebuild ATB's. Adjusted EBITDA was $76 million for the third quarter, a decrease of $48 million compared with the third quarter of 2015. Adjusted EBITDA was $315 million for the first nine months of 2016, a decrease of $53 million compared with the first nine months of 2015. Please turn to slide nine, from a liquidity standpoint we ended the quarter with approximately $319 million of cash including $5 million of restricted cash, compared with $522 million at the end of 2015. We also have access to undrawn revolving credit facilities of $125 million bringing our total available liquidity to $444 million. In the quarter, we repurchased and retired $43 million of Class A warrants at an average share equivalent price of $10.22. In the third quarter, we accelerated the payment of $20 million in principal amount of our domestic subsidiary term loans. In addition, in September we prepaid $75 million in principal amount of our international subsidiary term loans. We also repurchased $37 million of our senior notes. Our cumulative de-levering activities along with scheduled amortization will reduce our 2016 cash interest expense that is to approximately $65 million, down $33 million as compared to 2015. Our total gross leverage at the end of the third quarter of 2016 was 2.3 times our last 12 months adjusted EBITDA compared to 3.4 times in the same period a year ago. We began the third quarter with total cash of $461 million, which included $5 million of restricted cash. During the third quarter of 2016 we earned $76 million of adjusted EBITDA, we spent approximately $3 million on dry-docking and improvements to our vessels, $43 million on equity buybacks as well as spending $134 million on de-levering activities. We ended the quarter with total cash of $319 million of which $313 million is unrestricted cash. With that, I would now like to turn the call back to Ian for his closing comments.
- Capt. Ian Blackley:
- Thanks Rick. Please turn to the final page of the presentation on Page 6, so our third quarter cash flow was strong in a seasonally weak quarter. Across our international segments, rates softened in the quarter but our time charter vessels performed well, particularly the Panamax's reaching a significant lift in recent weeks on VLCC rates as we approach the winter market. In our domestic business while we do face challenging markets, due to the decline in U.S. crude production, high inventories and delivery of new-build tonnage we sustained low oil price environment is also driving record U.S. gasoline consumption, helping to offset this impact. Strategically the separation of our international and domestic businesses remains on schedule to the competing on November 30 this year. By creating two independent public companies each with a strong balance sheet and with an increased ability to focus on long-term growth and profitability, we believe each will be better positioned to enhance shareholder value. I am proud to have led these businesses and our combined company and pleased that both are well positioned for future success. We'll now open up the call to questions. Operator?
- Operator:
- We'll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Magnus Fyhr with Seaport Global. Please go ahead.
- Magnus Fyhr:
- Yes, good morning. Just if you could clarify what the, what the rates were for the quarter? I got the nine months rate for the tankers, but I didn't catch what the VLCC Aframax and Panamax rates average for the third quarter?
- Rick Oricchio:
- So the average spot rates for Q3 for the VLCC is $25,800. The Aframax is $15,300, and the Panamax blended rate was around $20,000.
- Magnus Fyhr:
- Okay. And you mentioned the bookings for the fourth quarter pretty much in line with expectations, but the Panamax rates looked very high there. Can you elaborate why you saw strength there?
- Lois Zabrocky:
- We have six of those on time charter Magnus, so Rick was giving the blended rate, which…
- Magnus Fyhr:
- All right. Thank you and Lois, the rates have strengthened here going into the winter market. Tanker stocks in general are discounting I would say VLCC right are close to 20,000 a day for next year. How are you guys thinking about locking up maybe some vessels on time charter here? Is their liquidity in that market or do you prefer to de-spot going into 2017?
- Lois Zabrocky:
- There is limited amount of liquidity on the term market and most of the deals that you see are under one year. So in a lot of cases you're seeing a six-month deal will be done or potentially a nine-month deal. We would look to opportunistically put away some vessels particularly our older ships if we see something that is attractive.
- Magnus Fyhr:
- Right and then how do you see the market developing in 2017? There is a lot of concern that you’re highlighted in the press release about increasing fleet growth and the oil supply not grown as fast as in 2015, but you would think once you get into 2018 that you going to get some positive, more positive comparisons. So how do you look at how the market is developing in 2017?
- Lois Zabrocky:
- It's definitely the case that we have to absorb new buildings, heavier scheduled new buildings that we’ve had in the last five years in 2017. On the flip side, once inventories get pull down, I think worldwide inventories are pretty high right now and then will go back to having a healthier market. So, it's positive that there have been relatively few new building orders and we like to hope that will continue.
- Magnus Fyhr:
- And last question if I may new regulations coming into place with water Ballast Treatment systems, what, how is your fleet rack up as far as dry dockings in 2017 and do you plan to install these, how many you need to have a Water Ballast treatments installed them in.
- Lois Zabrocky:
- So presently our drydock planned expense for 2017 is $24 million our CapEx which is where the Ballast Water you would see is just about $11 million and we're still in the process our technical team reviewing exactly when we will install Ballast Water Treatment systems because it continues to evolve the situation of approved systems, implementation dates, certificates etcetera.
- Magnus Fyhr:
- Okay, great. Well thank you.
- Capt. Ian Blackley:
- Magnus just before you go, just a clarification, we gave you a couple of different numbers on the Panamax's, so for the three months the spot rate was $13,800, the time charter rate was $21,100 and the blended rate is $16,700 in the quarter.
- Magnus Fyhr:
- Would you mind repeating that? A - Capt. Ian Blackley Sure the spot rate in the quarter was $13,800. The time charter rate is $21,100 and the blended rate is $16,700.
- Magnus Fyhr:
- Okay. Thank you.
- Operator:
- Our next question comes from Erik Stavseth with Arctic Securities. Please go ahead.
- Erik Stavseth:
- Good morning guys. Starting right into the Jones Act, your slight part of the business, now that you've spun off international activities could you give us some perspectives on the long term plans for OSG post spin? A - San Martin This is San Martin speaking. I think that the opportunities that are created by the spinoff of the U.S. business have been articulated by a number of occasions. The business will be much more tightly focused on very specific market. We see that the need for Jones Act tonnage for the foreseeable future is likely to continue in the level of OSG in that market will continue to be a significant one. Clearly there is limitations on the desirability of OSG to drive and construct new tonnage and we're mindful of the capacity issues that have been created by the decline of Eagle Ford, particularly Eagle ford crude over the last 12 or 18 months or so. Nonetheless we think that with the operational platform that we have and niche businesses that we operate in Delaware Bay and the shuttle tanker business on the West Cast positions us very well to be able to take advantage of opportunities that will arise as the market transitions its cyclical lows. The balance sheet that we expect to emerge with and the liquidity that will be present on that balance sheet no doubt will strengthen our ability to take advantage of those opportunities.
- Erik Stavseth:
- Okay. Let me follow-up then come 2020 and I know that 2020 is far out in shipping markets, but at that point eight ATBs will likely be scrapped and there is a potential that you can decide to not extend MSC fleet which will leave you with six assets in the Jones Act market, is that a realistic assessment of how OSG could look at that point in time A - Capt. Ian Blackley Eric, I would say as we said in the call out, the 13 new builds delivering but there 18 assets in the Jones Act over 30 years old. So on the timeframe you’re proposing as we look out as far as 2020, we see the Jones Act being back in balance and potentially in quite a positive position. So as you know we have the ability to control these Afra vessels well into the future.
- Erik Stavseth:
- All right, okay, then sort of turning to you mentioned in the report in the 10-Q that you might be scrapping the ATBs in the earlier stage before the scheduled dry-dockings and you also mentioned that you have 68% fixed for 2017. Could you elaborate how quickly the charter backlog for those ATBs expire and also at what rate you're fixed for 2017 on average.
- Capt. Ian Blackley:
- All but one of the eight ATBs and I am excluding the Delaware Bay lightering ATBs because they operate in their own universe, so focusing on the eight ATBs that are not in the Delaware Bay, although one of those vessels will complete their current charter employment contracts during the course of 2017. We don't generally comment on rates on the specific asset that we have. I think their disclosures have pointed to average rates that we have indicated in the past for these vessels we would expect those rates in 2017 to be below their current average rates given current market conditions.
- Erik Stavseth:
- And similar vessels are there non-charters through '17?
- Capt. Ian Blackley:
- They run out over the course of 2017.
- Erik Stavseth:
- Thanks and then finally you have the one Overseas used trading in the call it spot market, but you also say in the report on 10-Q that it has had idle days, what was the rate that you had out the idle days?
- Rick Oricchio:
- I think I can guide you by saying there were about 26 idle days during the period and we fixed two specific short voids contracts for those vessels, one was a coastwise U.S. flag voyage, which was at rates that I would guide you will be slightly above what brokers currently set the market that and the other was a short time charters for the military sealift command which was slightly below what I would consider the currently set broker market valuations are for the market and when you take those revenue streams together and you couple them with the 26 idle days that will give you that $28,000 figure.
- Erik Stavseth:
- Thank you. And the final question for me is you mentioned that regarding the Colonial Pipeline that there was one vessel or barge that have been contracted at a slightly higher rate, was that the Jones Act vessel or an ATB that you have contracted and for what kind of period is that?
- Capt. Ian Blackley:
- For the short term fixture on an ATB, one that it just recently come off charter and it will re-deliver likely be delivered before the end of the year.
- Erik Stavseth:
- Okay. Thank you.
- Operator:
- [Operator Instructions] Our next question comes from Daniel Lupo with Jefferies. Please go ahead.
- Ryan:
- Hi this is Ryan for Dan. Can you hear me?
- Capt. Ian Blackley:
- Yes we can hear you, Ryan.
- Ryan:
- Yes thank you, thanks for taking the question. Once you complete the spin-off, you obviously have two disparate capital structures, one will be more levered than the other, have you given any thought to how you want your balance sheet to be fixed over the next three to four years once you complete the spin-off?
- Capt. Ian Blackley:
- Both entities are going to have pretty healthy balance sheets when they come out, Ryan. So at the end of the third quarter, international business had $110 million of cash, the domestic become OSG had $209 million, we had debt respectively of $439 million and $542 million and we had last 12 months adjusted EBITDA international $254 million and OSG $182 million. So total leverage ratios 1.7 and 3.0 respectively. So these are strong balance sheets and both businesses then are going to have the optionality to develop and grow the business when we come out. So I think that's where we stand today and I think we let the businesses develop their own strategy. We will talk more to that as we move towards the end of the year.
- Unidentified Analyst:
- Yes. And on that note you could make the argument almost that you are under-levered in some respects, would you consider adding to leverage at either entity going forward to effectuate either a dividend or an acquisition? A - Capt. Ian Blackley The business generated almost a $1 billion of adjusted EBITDA over the last two years was de-levered by some $635 million. Over that same period we bought back $122 million of equity and we distributed $31 million in dividends. So we've done that consciously, so those businesses have these healthy balance sheet, we just discussed and so both businesses then have real opportunities when they're independent.
- Unidentified Analyst:
- Okay. And then finally on the bulk ship side, you spoke of time charter rates being lower in 2017, I believe I heard that, what is driving that sort of in your mind is that from new supply coming on or a combination of that plus weakness in oil production?
- Rick Oricchio:
- I think Ian addressed a number of those points in his comments. Looking backwards at what was stimulating Jones Act demand in 2015 and 2014, part of that was very wide WTI Brent spread that was encouraging, East Coast refineries to bring oil from the Gulf up to East Coast and United States. Those movements have been displaced to some extent by imports as the WTI Brent spreads has come in. You've also had a material decline in actual production in the Eagle Ford shale areas and exports have played into that as well given the passage of looking at the export band a year ago. So all of that has driven the demand for crude transportation within the contiguous ports of the United States down over the last 12 months. The product movements have remained relatively static, slight increases over that period of time. Ian also addressed the inventory overhang, which has impeded arbitrage trades within the contiguous United States. So that has probably dampened product movements as well as and when you couple those two with the decline in crude movements up the East Coast, the increase in exports and relative flat lining of product movements, that's resulted in a shift of capacity out of the crude sector into the clean sector without a commensurate increase in demand on that side and that’s led to the softening bridge.
- Unidentified Analyst:
- No, I appreciate that. Thank you. And is there any part of your commentary that linked to just the supply of new ships coming online that are more efficient over the next few years within the Jones Act?
- Capt. Ian Blackley:
- There is undeniably an increase of supply. The data is there for you to see.
- Unidentified Analyst:
- Sure.
- Rick Oricchio:
- I think that the point that I've articulated are probably the key points. That was where at a time when there was an expectation of continued demand in the crude sector and those expectations have now changed. So, the supply needs to be redeployed and adjustments need to be made in the market to change that come in the future. Whether that's an increase in crude supply or an increase in demand for inter-coastal product movements and obviously as Ian has mentioned is also opportunity or potential for supply reduction and aging vessels become competitively squeezed out of the market by terminal restrictions and other restrictions that would likely become more important as we go forward.
- Ryan:
- Got it. Thank you.
- Operator:
- Your next question comes from Warren Kantor with Society Hill Capital. Please go ahead.
- Warren Kantor:
- Yes, I was wondering if you could explain in the 10-Q I guess for the Overseas there being set up was 1,000,350 equities assumed it by U.S, OSG would have $200 million of equity since you had $1.550 as of at least 630 could you explain how you there or why or how you give it up the capital between the two businesses?
- Rick Oricchio:
- We’re here. Why don't you let us get back to you on that, when we have time to think through your, think for the right answer?
- Warren Kantor:
- Okay, the other could you tell me what the outstanding balances on the 8% subordinated debentures as of the 930?
- Rick Oricchio:
- Approximately $80 million.
- Capt. Ian Blackley:
- Just to be clear that senior notes. That’s senior notes. That’s not subordinated notes.
- Warren Kantor:
- I’m sorry senior notes. Also I noticed that you're moving the OSG headquarters down to Tampa, could you just explain why that as compared to staying in New York.?
- Rick Oricchio:
- Yes, the operational aspects of the business have been fairly well separated for a few years and all of the staff that won the domestic business are currently based in our Tampa, Florida offices and that's where Sam Norton is also based who is currently CEO of our domestic business.
- Warren Kantor:
- I see, okay that makes sense. Could you also describe what the status is of the NOL carry-forward? I've seen that staying with OSG is that and could you tell me how much that is?
- Rick Oricchio:
- Yes, we'll be staying with OSG. It’s awfully utilizable as of today. The amount is approximately $390 million.
- Warren Kantor:
- Okay, that’s all of my questions. Thank you.
- Rick Oricchio:
- Thank you.
- Operator:
- And our next question comes from Tim Milton with DFG. Please go ahead.
- Tim Milton:
- Thanks. I think you may have inadvertently swap the cash and then debt position as want to confirm so on the OBS side is $209 of cash and the outstanding, is $439 million is that right?
- Rick Oricchio:
- No on the domestic side cash $209 million and that is $542 million.
- Tim Milton:
- $542 million, so that the old loan balance was I think like $490 million and you mentioned you prepaid $20 million so the balance is that intercompany loan?
- Rick Oricchio:
- No, that includes the public debt that Rick mentioned a moment ago with $82 million -- at the end of the quarter was $82 million.
- Tim Milton:
- I’m sorry, say it again.
- Rick Oricchio:
- That the OSG debt number of $542 million includes the $82 million of public debt that was outstanding at the end of the third quarter.
- Tim Milton:
- And that will stay with the OBS side?
- Rick Oricchio:
- That is correct.
- Tim Milton:
- Okay. And can you I think you mentioned you had LTM on the OBS side was $182 million in terms of EBITDA and in last quarter you gave guidance, I don't know if you're comfortable with that guidance or actually more comfortable after this quarter or can you comment on that at all?
- Rick Oricchio:
- I am not sure what guidance you are talking to?
- Tim Milton:
- Yes, I thought you mentioned 2016 expected guidance in last call at $166 million for EBITDA.
- James Small:
- This is James Small, General Counsel. I don't believe that we made that statement. Apologies if you're referring to something that you may have seen in a analyst report, but I don't believe that the company management team has previously released guidance and our policy is not in fact to provide insight.
- Rick Oricchio:
- So on the domestic side the EBITDA till the end of the quarter was $134 million.
- Tim Milton:
- Okay. Apologies for that, looking at I thought I saw, I’ll just leave that alone and then the last question is on the revolver, post the separation, how will the revolver work? I imagine you have to get that re-fried or to do two separate entities actually be able to still draw on the revolver?
- Rick Oricchio:
- So the debt -- both the term loans on the revolver on the international side and the ABL on the domestic side sit at the two company levels. So we structured it that way couple of years ago. So the remaining debt that we discussed is in the two businesses plus the ABL on the domestic side at $75 million availability to domestic business and $50 million revolver is available to the international business.
- Tim Milton:
- Right. The debt either amendment or basically re-fried up either those post the split or just remain in place?
- Rick Oricchio:
- It will remain in place as there are a number of technical amendments required for the international term loan, which we're working through.
- Tim Milton:
- Okay. That's great. Thanks a lot guys.
- Rick Oricchio:
- Thank you.
- Operator:
- This concludes our question-and-answer session. I would like to turn the call back to Ian Blackley for any closing remarks.
- Capt. Ian Blackley:
- So thank you everyone for your time on the call. As you realize, this is interesting time for the company. We look forward to completing the spin at the end of this month and speaking to all early December. Thank you.
- Operator:
- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Other Overseas Shipholding Group, Inc. earnings call transcripts:
- Q1 (2024) OSG earnings call transcript
- Q4 (2023) OSG earnings call transcript
- Q3 (2023) OSG earnings call transcript
- Q2 (2023) OSG earnings call transcript
- Q1 (2023) OSG earnings call transcript
- Q3 (2022) OSG earnings call transcript
- Q2 (2022) OSG earnings call transcript
- Q1 (2022) OSG earnings call transcript
- Q4 (2021) OSG earnings call transcript
- Q3 (2021) OSG earnings call transcript