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Edited Transcript of OSG earnings conference call or presentation 8-Nov-19 2:00pm GMT

Q3 2019 Overseas Shipholding Group Inc Earnings Call

New York Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Overseas Shipholding Group Inc earnings conference call or presentation Friday, November 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Richard L. Trueblood

Overseas Shipholding Group, Inc. - VP & CFO

* Samuel H. Norton

Overseas Shipholding Group, Inc. - President, CEO & Director

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Conference Call Participants

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* Knut Borsheim

* Ryan Vaughan

Needham & Company, LLC - Principal

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Presentation

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Operator [1]

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Good day, and welcome to the Overseas Shipholding Group Third Quarter 2019 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.

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [2]

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Thank you, Sarah. Good morning, everyone. I'm joined today by Dick Trueblood, Molly Arcia, and Princeton McFarland for OSG's 2019 third quarter earnings call. As always, we welcome the opportunity to provide added depth and perspective to our press release and other disclosures and appreciate your taking 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 2 and 3 of the PowerPoint presentation available on our website regarding forward-looking statements, estimations 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 an historical perspective on OSG today, and our presentation includes forward-looking statements, including statements about anticipated future results. These statements are subject to uncertainties and risks. Actual results may differ materially from projections and could be affected by a variety of risk factors, including factors beyond our control. For a discussion of these factors, we refer you specifically to our annual report on Form 10-K for the fiscal year ended December 31, 2018, our Form 10-Q for the quarters ending March 31, 2019, and June 30, 2019, and our other filings with the SEC, which are available at the SEC's Internet site, www.sec.gov as well as on our own website, www.osg.com.

Forward-looking statements in this presentation speak only as of the date of these materials, and we do not assume any obligation to update any forward-looking statements except as may be legally required for the reasons why actual results could differ. 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 third quarter earnings release furnished to the SEC and which is also posted on our website.

Overall, we are pleased with our fleet's performance during the third quarter and continue to see clear strength and fundamentals that underpin our expectations for meaningful earnings growth, which has begun and is expected to continue developing over the coming years. I will leave it to Dick to take you through the specifics of the financial performance of our fleet during the past quarter. I would like to share with you highlights of progress towards achieving our strategic objectives.

We set out at the beginning of this year with an objective of securing stable cash flows for the near term while maintaining short-term market exposure so as to position ourselves to benefit from what we believe to be an emerging recovery in the Jones Act tanker and ATB trades. A defining element to that success of our strategy was to attain key commercial targets across the second half of 2019. In this context, we are pleased to have been able to secure time charter contracts for a total of 10 of our vessels since we ended the second quarter. Each of the 10 fixtures made were at rates higher than last done, and together, they have increased our forward revenue cover for 2020 to 75% of available vessel days. 6 of the 10 completed fixtures on our conventional Jones Act tankers achieved rates averaging $58,500 per day. Additionally, 2 of the remaining 3 vessels open for renewal before the end of December are now in active discussions for extensions with their existing charterers.

As disclosed in our last quarterly release, we have also secured time charter commitments for our 2 newly-delivered Korean-build MR tankers, the second of our 2 new barge units and our shuttle tanker Overseas Chinook, which is now trading as a conventional tanker.

Slide 6 provides you with a picture of the updated maturity profile of our current time charter book. With all of our conventional ATBs and the OSG division also currently committed on short-term time charters, we have, at this time, no spot availability in the Jones Act fleet. With these contractual commitments, several of which are for periods of greater than 1 year, we have achieved our principal objective of increasing the duration of our charter book at higher charter rates. We consider this result to be evidence that our customers are responding to an increasingly supply-constrained market, an outcome that we have been anticipating.

For our principal customer base, the marine link between production and distribution points is not easily replicated. As such, charter's acceptance of a large exposure to utilization risk in order to secure firm access to system critical transportation capacity is a strong signal of improved fundamentals. It is worth repeating that the normalized market in which our vessels trade is one characterized by stable, longer-term chartering relationships with our core customer base. A return to this normalized profile and what are now profitable rates to allow achievable, predictable, higher-quality cash flows is worth noting.

Reducing the number of available vessel days in the spot market at consistently remunerative rates, thus marks a significant turning point in the continuing improvement to the health of our business. I will talk to this point in more detail following Dick's review of the most recent quarter.

In the last quarter, our decision to sell the OSG 242 Columbia and remove her permanently from the Jones Act petroleum trade has contributed to the progressive reduction in overall available supply in our core markets. This leaves us with only 2 active conventional ATB units in service, both of which we are planning to retire in 2020. These remaining units, once retired, will be replaced with 2 new barges currently under construction to be delivered in May and November of next year. Both of these new barges are already committed on 1-year time charter contracts upon their delivery.

At the end of September, we took delivery of 2 MR tankers, the Overseas Sun Coast and Overseas Gulf Coast, built at Hyundai Mipo dockyards in Korea. Both vessels are now trading internationally under Marshall Islands Flag on 1-year charters at rates that should provide an incremental operating contribution of about $3.5 million for each vessel during the first year following their delivery.

We are awaiting final disposition of the proposed Tanker Security Program in the pending National Defense Authorization Act. As previously disclosed, if this program is made law substantially in the form approved by the House of Representatives, we intend to nominate both of these MR tankers to participate in the new Tanker Security Program and we flag each vessel to the U.S. Flag registry. For presentation purposes, beginning with our next quarterly report, we will include the Overseas Gulf Coast and Overseas Sun Coast earnings in our niche business segment, grouped together with our existing MSP tankers, the Overseas Santorini and Overseas Mykonos.

Our active fleet of tankers and articulated tug barges now consists of 17 Jones Act qualified vessels, 2 U.S. flag vessels operating internationally in the Maritime Security Program and 2 MR tankers trading internationally under Marshall Islands flag. In addition, two 204,000-barrel barges under construction at Gunderson Shipyard in Portland, Oregon will be delivered in 2020.

With this picture having been refreshed, I will now turn the call over to Dick to provide you with the details of our third quarter results for 2019. Dick?

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Richard L. Trueblood, Overseas Shipholding Group, Inc. - VP & CFO [3]

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Thanks, Sam. Third quarter is seasonally slower than the other quarters during the year. In 2019, the majority of our fleet was under time charter, reducing the impact of third quarter seasonality. We had 2 conventional Jones Act tankers in the spot market during the quarter, and they had only limited utilization.

Please turn to Slide 10. During the third quarter and for virtually all of this year, we continued to see a positive spread between WTI Houston and Bonny pricing. This was a consistent theme in 2018 and that has continued in 2019. This price relationship supports the use of domestic crude oil and refinery operations. As a result, we continue to see crude oil movement from the Gulf of Mexico, up the East Coast of the United States and the related employment of Jones Act tankers in this trade. Analysts expect that the spread will continue to favor domestic crude oil.

Please turn to Slide 11. Since 2017, the mix of vessels in our fleet has changed significantly. In the third quarter of 2017, we operated 24 vessels, 1/3 of which were rebuild ATBs. Rebuild ATBs now represent less than 10% of our 21-vessel fleet. By the end of 2020, the rebuild ATB component will be 0. We added 1 conventional tanker during the second quarter of 2019. And on the last day of the third quarter, we added 2 new build tankers to our non-Jones Act fleet.

Please turn to Slide 12. During the quarter, we operated 19 vessels compared to 22 vessels in the year-ago quarter. Since the third quarter of 2018, we have reduced the number of operating ATBs from 6 to 2 and also added the Overseas Key West. The impact of our increased time charters is evident in the results for the 2019 third quarter when compared to the year-ago quarter. Seasonality impacted vessel demand during both quarters as we saw a reduction in spot market activity. Nevertheless, our conventional tanker business posted significant improvement in vessel operating contribution during the third quarter of 2019.

TCE revenues for the third quarter were $76.5 million compared to $72.1 million in the year-ago period, and adjusted EBITDA was $16.1 million compared to $10.9 million last year. TCE revenues increased 6.1% in the 2018 third quarter despite the reduction in operating assets from 22 to 19. Adjusted EBITDA increased almost 48%, reflecting the high degree of operating leverage inherent in our business, which results in incremental revenue principally dropping to the bottom line.

Sequentially, TCE revenues decreased $5.6 million and adjusted EBITDA decreased $2.1 million. Q2 adjusted EBITDA included the impact of the $4.3 million receivable reserves resulting from the PES bankruptcy. $3.5 million of the TCE decline resulted from the reduction in the number of operating rebuilt ATBs and a $1.3 million reduction in lightering TCE revenues. Excluding the 2 vessels in the spot market, our conventional tankers increased their revenues in the third quarter. There were no dry dock days in the third quarter of 2019.

Please turn to Slide 13. Looking at our TCE revenues on a more granular basis. Our Delaware Bay lightering business revenues sequentially decreased $1.4 million, reflecting the net impact of the PES bankruptcy and subsequent relocation of the OSG 350 to the Gulf of Mexico. This resulted in a decrease of $11,297 in the average TCE daily rate when compared to the second quarter of 2019, resulting from approximately 1 month in which 1 barge was effectively not utilized due to a combination of insufficient demand to support 2 barges and the time to reposition her to the Gulf of Mexico.

The TCE revenues from our rebuilt ATBs declined from $7.1 million to $3.6 million, solely as a result of the decreased number of ATBs in the third quarter. Our non-Jones Act tankers recorded a $1.5 million increase in TCE revenues during the quarter when compared to the second quarter of 2019. We performed 1 MSC voyage this quarter which augmented the revenues earned. We operated under international time charters for 91 days this quarter, increasing the effective utilization of these vessels by reducing the number of days of spot market exposure.

Our Jones Act tanker fleet TCE revenues decreased $2.2 million from the second quarter to $58.5 million in the third quarter of 2019. We had 2 vessels in the spot market during the quarter, and the low seasonal demand resulted in these vessels earning minimal revenues during the quarter. The remainder of the conventional tankers generated 2% TCE revenue increase. This was driven by the increase in time charter days and the resulting impact of effectively 100% utilization, coupled with increased rates.

Looking at year-over-year chart changes. Lightering revenues were flat in comparison to the third quarter of 2018. ATB revenues declined from $8.6 million to $3.6 million compared to the third quarter of 2018 due to the decreased number of operating vessels. The non-Jones Act tanker revenues increased from $3 million to $4.2 million. As mentioned, the third quarter of 2019 benefited from a reduction in spot market days and 1 MSC voyage. Conventional tanker TCE revenues increased $8.3 million. This was driven by reduced spot market presence, higher rates and higher utilization due to the increased time charter activity.

Please turn to Slide 14. The third quarter of 2017 had TCE revenues of $84.9 million, of which $28 million or 33% were earned in the spot market. Since then, spot market TCE earnings peaked at $34.9 million or 39% of our total TCE revenues in the first quarter of 2018. Spot market TCE revenues have generally been on a continuous decline since then to $13 million or 17% of our TCE revenues in the third quarter of 2019. Fixed TCE revenues hit their highest level of $63.5 million during this time period in the third quarter of 2019.

Please turn to Slide 15. Conventional tanker spot market TCE revenues peaked at $13.9 million or 35% of conventional tanker revenues in the first quarter of 2018. Since Q3 2017, fixed TCE revenues have increased 49% from $25.8 million to $38.4 million. This continuing reduction in the importance of spot market activity results in lower TCE revenue volatility and increased predictability as we look forward.

Please turn to Slide 16. Our niche businesses continue to provide earnings stability, which serves to underpin our overall operations. This continues to be true even after considering the impact of the PES bankruptcy, net of the revenues we generate as the OSG 350 operates in the Gulf of Mexico.

Looking at quarterly revenue performance by the 3 components of our niche operations. Our niche market operations have produced stable revenue contribution throughout this period with revenues remaining within a relatively tighter and narrow band. Variability is created for all of our activities by market conditions, dry dock requirements and repairs. As can be seen, although there are fluctuations, the outcomes stay within a fairly narrow range. The PES bankruptcy will introduce a higher level of variability but this business will continue to be a stable platform.

Please turn to Slide 17. Vessel operating contribution, which is defined as TCE revenues less vessel operating expenses and charter higher expenses, increased $4.6 million from Q3 2018 to $19.7 million in the current quarter. The largest contributor to the increase was the $4.9 million reduction in negative vessel operating contribution from our conventional Jones Act tankers. During the current quarter, we reduced the number of tankers operating in the spot market from last year and increased at higher rates our tankers under time charter. The days of spot market exposure for our tankers decreased to 184 from 276 in the prior year.

Our rebuilt ATB's contribution decreased by $1.5 million as the number of ATBs being created was reduced to 2. 92% of ATB revenue days in the quarter were on time charter. Vessel operating contribution from our niche market activities increased $1.2 million, driven by increased contributions from the MSP anchors of $2.5 million. This was offset by a slight decline in the shuttle tanker and lightering barge performance.

Vessel operating contribution decreased $7.3 million from Q2 2019. The decrease was driven by our 2 tankers in the spot market as well as the reduction in our ATB fleet. Since the end of the quarter, both of those tankers, which were in the spot market, have entered into time charters, one for 1 year and the other through the end of the current year.

Please turn to Slide 18. Third quarter 2019 adjusted EBITDA was $16.1 million compared to second quarter adjusted EBITDA of $18.2 million, after giving effect to the PES receivable reserve. The primary contributing factors to the decrease were the impact of the slower summer season and select demand for transportation services as well as the continuing reduction of the number of rebuilt ATBs we operate. Third quarter adjusted EBITDA increased $5.2 million from $10.9 million in Q3 2018. The increase resulted from a reduction in the number of vessels trading in the spot market, the impact of rising rates, the effective increase in utilization and one MSC voyage in the current quarter. The magnitude of the increase was somewhat mitigated by the reduction in our rebuilt ATB fleet.

Please turn to Slide 19. Net loss for the third quarter of 2019 was $3.8 million compared to net income of $11.9 million in the third quarter of 2018. In 2018, we recognized a tax benefit of $23.4 million in the third quarter upon completion of the IRS audit of our 2012 through 2015 tax returns. We had previously reserved the beneficial effect of losses recognized in connection with the disposition of 2 vessels in earlier years. The audit results permitted us to recognize those tax benefits in 2018.

Net loss for the 2019 third quarter increased by $2 million from the second quarter due to the 2-vessel spot market exposure in an inactive market coupled with the previously mentioned reduction in a number of our rebuilt ATBs.

Please turn to Slide 20. During each year, we perform scheduled maintenance as required by regulation. This slide provides information for scheduled maintenance at ballast water treatment system installations. It does not include unplanned repairs which, should they occur, could impact the schedule. While vessels are in dry dock or otherwise unavailable for use, they're off-hire even if otherwise employed on our time charter. We work to minimize the number of off-hire days to reduce the revenue loss we sustain. However, there will be and we will experience a revenue disruption.

Maintenance capital expenditures, which are required, are tied to the vessel's original build date. And the result is that this makes our capital expenditures lumpy, with some years requiring more resources than others. 2020 will also require the installation of ballast water treatment systems on vessels undergoing dry dock.

In addition to the cost of the dry dock, vessels are off-hire and nonearning revenues during transit time, 2 in front of the dry dock, as well as the time actually spent in dry dock, 2020 will be an active year for us. We estimate our investment will be $27.7 million in dry dock expenses and $11.4 million for ballast water treatment systems. We expect to incur an estimated 294 off-hire days with a loss of revenue of $14.3 million.

By way of comparison, 2021 will have an estimated total dry dock cost of $6.5 million and no ballast water treatment systems. We estimate that during 2021, we will incur 83 off-hire days. In all cases, we endeavor to work through this process expeditiously to minimize the costs incurred in the number of days off-hire.

Please turn to Slide 21. This slide shows 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 dates when the shipyard achieves the required milestones. At the end of the third quarter of 2019, we had made $30.6 million of progress payments on the OSG 204 and $10.2 million of progress payments on the OSG 205. The total progress payments at quarter end were $40.8 million.

So far, during the fourth quarter, we have made additional progress payments of $9.4 million, bringing the total payments to date to $50.2 million. The financing that we are working on for the barges will provide construction financing converting into permanent financing. We believe that we will secure approximately $33.15 million of financing for each barge. This will result in OSG's equity in each barge being $17.7 million or $35.4 million in total.

Please turn to Slide 22. We began the third quarter of 2019 with total cash of $54 million, which included $200,000 of restricted cash. During the 2019 second quarter, we generated $16 million of adjusted EBITDA. We issued $50 million of debt secured by the Overseas Sun Coast and Overseas Gulf Coast. Vessel sales generated $1 million of cash during the quarter, and working capital changes provided $15 million of cash. We expended $2 million on dry docking and improvements to our vessels. We invested $71 million in new vessel construction.

Further, we incurred $6 million of cash interest expense and made debt repayments of $7 million, $1 million of which represented proceeds from the vessel sales which were used to reduce debt. The result was we ended the quarter with $50 million of cash, including $200,000 of restricted cash.

Please turn to Slide 23. Continuing our discussion of cash and liquidity, as we mentioned on the previous slide, we have $50 million of cash at September 30, 2019. Our total debt was $383 million, which represents a $42 million increase in outstanding indebtedness since June 2019. Our $325 million term loan has an annual amortization requirement of $25 million or $6.25 million per quarter.

With $330 million of equity, our net debt-to-equity ratio is 1x compared to 0.9x at June 30, 2019. This concludes my comments on the financial statements. I'd like to turn the call back to Sam.

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [4]

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Thank you, Dick. With the success achieved in charter fixtures of the past several months, we'd like to shape expectations for the remainder of 2019. Please refer to Slide 24 for a useful summary of my discussion on this point. As noted in my opening remarks, we have realized success in obtaining renewed time charter coverage for the substantial portion of our conventional tankers and ATBs. This has given us time charter coverage for over 95% of available operating days for the fourth quarter of this year. This coverage gives us confidence in projecting a material improvement in fourth quarter results, both in comparison with the quarter just completed as well as with last year's financial quarter.

We now expect fourth quarter TCE for our conventional tankers to increase by approximately $9 million over Q3 results. Time charter equivalent earnings for our 2 remaining conventional ATBs should remain consistent with what was earned in the third quarter, with both active units fully fixed for the balance of the year.

Additional visibility in the anticipated fourth quarter results can be found in our expectations for our niche business. Our 2 contracted shuttle tankers are each fixed into the first half of 2025 and will be fully operational during the fourth quarter, as the planned dry dock for the Overseas Cascade has now been deferred into January of 2020. Our third shuttle tanker, the Overseas Chinook continues to be reported in our niche business segment for consistency purposes. But we note that she is now being utilized as a conventional tanker with her time charter extended at increased rates to the end of 2020. We anticipate that the performance of these 3 vessels during the fourth quarter should largely track what was achieved during the third quarter.

Our 2 existing MSP vessels will be paid for 3 voyages under our contract of affreightment with the Government of Israel, an unusual concentration of this activity in 1 quarter. Time charter equivalent earnings for each vessel are thus expected to exceed $27,000 per day for the quarter, which should add approximately $1 million of additional TCE when compared to third quarter results. In addition, the Overseas Sun Coast and Overseas Gulf Coast will collectively add approximately $3 million of time charter earnings to our fourth quarter results.

Turning to our 2 lightering vessels. In response to the reduction of lightering volumes caused by the shutdown of PES's refinery in June, the OSG 350 Vision has been repositioned to the Gulf of Mexico. We have, in recent weeks, fixed this unit on time charter for a substantial portion of Q4. Given expectations for lightering volumes performed under remaining contracts of affreightment for the OSG 351 Horizon, we now expect TCE contribution from these 2 units to reach approximately $10.5 million for the fourth quarter, an increase from guidance given in August of between $8.5 million and $9.5 million for the quarter.

Finally, we anticipate we will recognize a distribution of approximately $3.2 million from our participation in Alaska Tanker Company during the fourth quarter. From these time charter equivalent levels, we have provided in Slide 24 more detail of the components to allow a reconciliation of adjusted EBITDA and the actual results achieved during the first 3 quarters as well as the results that we are now anticipating for Q4.

Overall, we see conditions in our spread of businesses as indicating TCE levels rising to above $89 million for the fourth quarter with a corresponding adjusted EBITDA of about $30 million. This will represent a near doubling of adjusted EBITDA when compared with Q3, as the effect of many of our new tanker time charter begins to become apparent. The full year adjusted EBITDA performance should now increase from our previous guidance of a range of between $82 million and $85 million to approximately $88 million.

As illustrated by this picture, we see the final quarter of this year, we consider the fundamentals of our market to have reached a healthy equilibrium with limited availability of free tonnage indicative of market balance.

The barriers to entry for any prospective new entrants are high. And with the exception of our 2 barges to be delivered next year, no new capacity is on order which will be delivered within the next several years. The prospects for continued strength in rates appears to be very promising.

Looking further forward into 2020, the encouraging picture that we see for our future is valid of what we believe to be well-established and readily quantifiable market fundamentals as well as 4 key components of our business: first is the stable and profitable platform provided by our niche market activities. While events at PES have somewhat altered the trajectory of our niche lightering business, it does not fundamentally alter our game plan for our specialized assets. Given the unique attributes of these assets, the infrastructural role that they play and the sound industrial foundation, the businesses in which they participate, we expect that the stability that has characterized this portion of our earnings stream will continue to be a reliable component of our future earnings profile.

Second is a renewed contribution from our new ATB capacity expected to be added during 2020. As we have said in the past, we expect the revenue contribution from the retirement of our older ATBs to be replaced on a more efficient basis on the 2 new build barges that will be delivered during 2020. We are projecting an incremental EBITDA contribution from these 2 new units of $4 million during 2020 and $15 million during 2021. Starting in 2021, the 2 new barges are expected to effectively replace the vessel operating contribution of the older ATBs that we have removed from service during the past 1.5 years.

Third, the revenue recovery latent in our conventional tanker fleet, which now can be under visibility, should allow the operating leverage of our business model to manifest over the next 2 years. Finally, opportunities for consolidation among existing participants in the Jones Act and expansion of internationally trading U.S. flag opportunities such as the Tanker Security Program remain areas of focus. OSG's ability to sustain its good standing in the community of our customers, our peers and our regulators is a valuable and differentiating feature of our business model and positions us well to pursue growth opportunities within U.S. Flag markets.

Safety and consistent service quality remain, above all, the key focus of our operations, and results achieved on this front are widely recognized by our key constituents. We place paramount importance on maintaining our established culture of continued progress towards achieving the highest standards in both protecting the environment and ensuring the health and safety of all of our employees.

Altogether, we have cause to believe that our commercial strategy remains sound for the long term. We are ever more confident that the mix of our revenue streams positions OSG to dependently generate stable revenues from our niche businesses, increasingly capture the upside of the ongoing market recovery while continuously assessing a range of U.S. Flag growth opportunities.

Operator, we can now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Ryan Vaughan with Needham & Company.

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Ryan Vaughan, Needham & Company, LLC - Principal [2]

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Sam and Dick, let me ask you -- sorry, my phone cut out there for a part when Sam was talking about Slide 24. So if I look at 4Q 2019, a huge step-up from 3Q. You did say you're going to get the Alaska JV in there. But just as we think about going into 2020, if I strip out that $3.5 million, I mean, do you think that's a pretty good run rate to -- a quarterly run rate as I start to look into 2020, given 75% of the fleet is contracted with some more to come?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [3]

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I think that would align with our expectations. As I said, the success in obtaining a charter -- fixed charter cover through much of 2020 on now a substantial portion of our fleet gives us a pretty good visibility on the assumption of execution, operational execution of these charters. So yes, we're going to be pretty confident in understanding what our quarterly run rate for 2020 will look like.

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Ryan Vaughan, Needham & Company, LLC - Principal [4]

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Excellent. And let me ask you, on the Slide 21, the remaining barge milestone payments, you've paid so far about $40 million, leaves about $60 million. And Dick, if I heard you correctly, you'll get about $33 million of financing per barge. So let me ask you this, how much actual cash payment is left to be made here if you do have $66 million coming back with financing?

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Richard L. Trueblood, Overseas Shipholding Group, Inc. - VP & CFO [5]

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Virtually 0. I mean, it will be a timing issue -- not an issue, would be a timing item because of the timing of closing loans versus the timing on which we have to make some of the progress payments. But if you look at it, we funded, as we speak, about $40 million against the first barge and with the acquisition cost of about $50.1 million. So again, assuming that we're 35% equity, 65% debt, we will recover, depending on timing, as much as $28 million of what we've already invested.

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Ryan Vaughan, Needham & Company, LLC - Principal [6]

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Okay. I just want to make sure I understood that. That's what I thought. So you're kind of making upfront cash and then you'll get some of that back. Great. That leads me to my third question. You're sitting on $50 million. You're going to get some cash back here. Granted, you do have some -- a little bit elevated dry dock next year that drops significantly in 2021. Just talk to us about how you're thinking about utilizing that free cash flow. Just going forward, anything -- any opportunities that you think, especially with the stock kind of sitting here at this $1.70 level for really -- for what seems like 9 months of the year?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [7]

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Well, I'll take that one, Ryan. I think that Dick and I both look at free cash flow as really the driving -- determining of the timing and/or acceleration of altering capital structure of our business. As you have rightfully pointed out, we have some pretty significant cash commitments that we need to make over the next 6 to 12 months for not only the dry dock and ballast water installations that we're looking at but also the continuing payments on our barge installments and until we actually have money in the bank from the financing that we anticipate to receive. We think it prudent to maintain necessary levels of liquidity not to jeopardize the balance of our business.

That being said, if our business proceeds and we execute to the operational standards that we expect, we would expect free cash flow to turn positive in the second half of next year and to accelerate after that. And so the timing of decisions as to what we might do with that free cash flow is really something that we would come into a current conversation in the second half of next year.

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Ryan Vaughan, Needham & Company, LLC - Principal [8]

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Well, great. Yes, it's just been -- it's been good to see you've made a lot of great wins, executing well. And it's just, as I'm sure you would agree, not really being reflected or rewarded. So that's where I'm coming from.

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Operator [9]

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(Operator Instructions)

Our next question comes from Knut Borsheim with CF Partners.

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Knut Borsheim, [10]

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It's exciting to see the strong guiding for Q4. That's good stuff. So I just want to touch base on the spot fleet. You mentioned briefly that there was no available spot capacity in the market. As you look towards your fleet next year, do you expect the whole fleet to be on contract through the year? Or are you keeping something in the spot? What's your strategy there?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [11]

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As we speak, so at this time, we have 3 tankers and 1 ATB that would be open in the spot market in the first quarter of next year, and we have a further tanker that is up for renewal in March of next year. So I think that's still in the first quarter. So you have 4 tankers that potentially could return to the spot market -- excuse me, 3 tankers and 1 ATB that could potentially return to the spot market in the first quarter of next year.

Our assessment right now is the market is pretty tight. And we are feeling a pretty high level of inquiry into securing time charter coverage through much of next year. And our disposition of those 4 vessels in the first quarter of next year is dependent upon how that plays out. I would point out that at rates that we're currently seeing as the market levels for time charters, it's pretty difficult to foresee that we would achieve spot market rates that could equate to the same effective time charter returns, unless the spot market rates were to significantly increase due to the impact of utilization.

I'll remind you that in the Jones Act, if you have a vessel in the spot market, the voyages are pretty short. So even if you do very well, if you're doing a 5- or 6-day voyage and you take a day or 2 in between voyages before your next cargo can load, that reduces your effective utilization rate down into the sort of 70% to 80%. And to achieve time charter equivalent returns in the low 60s on a 70% or 80% utilization rate means you're going to be up in the 80s or 90s on a spot market rate. And we're not yet there. We could get there but we're not yet there.

So a long way of saying, our bias would be if the time charter interest is there, we would lean towards fixing vessels to achieve higher utilization rates and therefore effectively better time charter returns than to take spot market exposure.

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Knut Borsheim, [12]

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Yes. So that if you're looking at a little bit on the dynamics on the East Coast, you see the distillates levels are at all-time low. And with Europe being short, the distillate in South Africa can be a short distillate. Do you think there's a scenario where we will see more dual set cargo moving these volumes?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [13]

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I think that there are opportunities to see distillates moving up the East Coast. A lot of the competitive economics that would drive that depend upon the level of MR charter rates in the international market, which have been up and down over the last year. So I remind you to bear that in mind, right, that even if you have a shortage of distillates in Europe and a surplus in the Gulf Coast of the United States, if international tanker markets are low, as they have been over the last year, there are odd trades that can wind up seeing distillate moving one way across the Atlantic and coming back across the other way due to the low cost of transportation that might be available to MR tankers. I'm not saying that that's the case, but the transportation dynamics and economics can sometimes make trading of products take odd shapes.

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Knut Borsheim, [14]

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Yes. No, totally. But it seems that the general consensus out there is that with 2020 coming up, MR tankers should be rather strong than weaker probably, right?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [15]

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And if that were the case and if that...

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Knut Borsheim, [16]

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See if that thesis plays out.

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [17]

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Then that would support increased utilization of Jones Act tankers moving distillate up to the East Coast of the United States. I think that's our current read of the market. We think that as you pointed out, there's been a significant draw of distillates in the Northeast following the PES shutdown in June. I would venture to say a historic draw. The latest stats that I've seen see the distillate level, inventory levels in the Northeast well below their 10-year averages. And that would suggest to me, as the weather is getting colder, to replenish those inventories.

And as you pointed out, the IMO 2020 factor is going to raise a lot of questions as to where that distillate is going to come from. And just last week, we saw one cargo already moving out of Gulf Coast with the declared discharge port being Rhode Island.

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Knut Borsheim, [18]

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Interesting. And just a last thing on the supply side. What is the latest you guys are hearing, I mean, on a new build cost? Has there been any updates there lately or what's the view you guys have there?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [19]

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It's kind of speculative, too. I don't think there are any -- we certainly are not engaged in any active discussions about building new vessels. I think that the industry kind of reports that we've seen are targeting those rates at $150 million to $160 million at the Philly shipyard, based on the base series of orders. So that's sort of a minimum 4 vessel order at $150 million to $160 million.

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Knut Borsheim, [20]

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No. Okay, okay. Again, great to see the strong Q4 guidance, right? It kind of shows the series starting to play out, so that's great to see.

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Operator [21]

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This concludes our question-and-answer session. I would like to turn the conference back over to Sam Norton for any closing remarks.

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [22]

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Thank you, Sarah, and thanks again to everyone for participating in today's call, and we look forward to speaking with you again later next year with hopefully even better news than what we've been able to give you today. Wish you all well for the holiday season. Thank you.

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Operator [23]

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