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

Q4 2018 Overseas Shipholding Group Inc Earnings Call

New York Mar 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Overseas Shipholding Group Inc earnings conference call or presentation Friday, March 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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* George Joachim Sebastian Schultze

Schultze Asset Management, LP - Managing Member, Chairman of Investment Committee and Chairman of Strategy Committee

* John Slater

Paulson & Co. Inc. - Senior VP & Partner

* Ryan Vaughan

Needham & Company, LLC - Principal

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Presentation

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Operator [1]

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Good morning, and welcome to the Overseas Shipholding Group Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Sam Norton, President and Chief Executive Officer. Please go ahead.

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

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Thank you, Phil. Good morning, everyone, and thank you all for joining Dick Trueblood, Molly Arcia, Princeton McFarland and me, for our 2018 fourth 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. In our presentation today, we will be expanding on disclosures made in similar presentations in the past, and an effort to offer more commentary on the future trajectory of our business with a greater focus on the underlying potential.

Prior to beginning our review of the past quarter, I would like to direct everyone to the narrative on Pages 2 and 3 of the PowerPoint presentation available on our website regarding forward-looking statements, estimates and other information, which may be provided during the course of this call.

The contents of this narrative are an important part of this presentation, and I urge everyone to read and consider them carefully. We will be offering you more than just a historical perspective on OSG today, and our presentation includes forward-looking statements, including statements about anticipated future results. These statements are subject to uncertainties and risks.

Actual results may differ materially from projections and could be affected by a variety of risk factors, including factors beyond our control. For a discussion of these factors, we refer you specifically to our annual report on Form 10-K for the fiscal year ended December 2017, our Form 10-Q for the first 3 quarters of 2018, our Form 10-K for the fiscal year ended December 31, 2018, which we anticipate being filed within the next week, 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 GAAP in our fourth quarter earnings release furnished to the SEC and which is also posted on our website.

Before going to the specifics of the fourth quarter, I would like to briefly outline the strategic priorities that we have advanced in recent quarters. It should provide you with greater insights into our areas of focus and some context for some of the specific actions that we're taking, and hopefully highlight just how far we have come to get to this point. After that, I will go into greater depth on recent developments, the market and our expectations moving forward.

I refer you to Slide 5, outlining our strategic priorities. Broadly speaking with respect to both the income statement and the balance sheet, our forward visibility for the coming years stands in marked contrast to the financial and operational uncertainty that we faced at the beginning of 2018. We've made this important progress by refinancing our debt, ensuring the continuity and ongoing renewal of our fleet and earnings power and reducing our spot market exposure by successfully securing time charters for majority of our fleet, throughout much of 2019, shifting utilization risk back to our core customer base.

Our business is characterized by high operating leverage. This is particularly important as following the trajectory of spot market improvements, recent time charter rates for conventional tankers have risen to levels approximately 30% above our 2018 fleet average earnings rate and are well supported by fundamentals.

We have further cemented our leadership position across niche businesses in which we operate, maintaining our foundation strong, stable contracts, while we continue to explore opportunities to grow. Significantly, throughout the past 24 months, we worked hard to reduce costs and improve efficiencies across the organization and have done so without compromising our commitment, safety and quality of operational performance.

Safety and quality remain above all the key focus of our operations. Building a work culture, which places continual progress towards achieving the high standards in both protecting environment and ensuring the health and safety of all of our employees is paramount to our long-term success. We believe real progress has been achieved in all of these efforts, allowing OSG to sustain its good standing in the community of our customers, our peers and our regulators.

Let me touch briefly on the results of the quarter and year recently ended. Today, we reported time charter equivalent earnings for the fourth quarter of $79.9 million, an increase of $7.8 million over comparable third quarter figures and an adjusted EBITDA for the quarter of $21.3 million (sic) [$23.1 million] as compared to the $24.8 million for the fourth quarter of 2017, and an improvement over the $10.9 million reported for last year's third quarter.

Dick will be providing you with more details as for the financial performance for both the quarter and the year. We have seen spot rates progressively -- progressing in a steadily improving trend over the past 2 years. Spot rates for voyages that have been reported recently and that OSG obtained were firmly at the top end of this upwardly sloping range. During the past year, we were also pleased to have secured short- to medium-term time charters that reflect this positive development and give us certainty for much of 2019.

75% of the available vessel days have already been fixed for the year, equating to approximately $280 million of contracted time charter equivalent earnings. At the same time, the fundamentals of this sector remain supportive of this upward trajectory. The relatively short durations of our recent contracts have, therefore, put us in a strong position to capture what we anticipate to be a continued rate strength over the course of 2019 and into 2020.

In addition, and importantly, during the past quarter, we completed the refinancing of our term loan with a new 5-year $325 million facility, obtained $27.5 million of financing for our MSP vessels and extended our revolver, providing us with greater financial stability and strategic flexibility in the coming years.

We have also taken steps to narrow uncertainty regarding the future composition of our revenue generating asset. Exercising options on all 9 of the remaining tankers leased in from American Shipping Company. Following an earlier extension that secured the Overseas Tampa through 2025, these additional extensions secure 4 vessels through December 2020, and a further 5 vessels through December 2022, ensuring that we have full exposure to the current positive market developments. This also gives us the forward visibility and certainty to pursue longer-term contracts, a goal that we feel is now within reach as our customers expressed a growing preference for locking in certainty in an increasingly supply-constrained environment.

Also significantly, early in the new year, we took action to increase our earnings potential by exercising an option to construct the second 204,000 barrel capacity barge at Gunderson Marine and entering into a bareboat charter party agreement with the owner of a 1999 built U.S. flagged product tanker, previously known as the Oregon Voyager. OSG has renamed the vessel the Overseas Key West and intends to use this vessel in the U.S. coastwise trade under the Jones Act. The bareboat charter extends for 10 years into 2029. OSG will undertake the vessel's fourth special survey during March and April and expects the vessel to commence commercial operations during the second quarter of 2019.

In our niche activities, we have also secured during 2018 forward employment commitments for our Maritime Security Program tankers through the end of 2020 and extended lightering commitments at increased minimum volumes, providing greater forward visibility of the cash flows derived from these important niche activities. While we cannot predict with specificity where the market will be in 6 months' time, we considered the fundamentals to be strong and prospects for continued strength in rates to be encouraging.

The next slide on Page 7 accompanies the remarks that I will share in a moment and our intent to provide you with relevant information to understand our future performance expectations. As we have seen in recent quarters, time charter activity at increasing rates is evidence that our customers are prepared to accept a larger exposure to utilization risk in order to secure firm access to transportation capacity. Incremental tightening of the available supply expected over the next 12 months paired with favorable signs of continued demand for both crude oil and refined product movements lead us to be optimistic that the reset of rates for our tanker charters represents an attractive opportunity to realize meaningful earnings expansion. The time charter equivalent earnings for both spot and contracted conventional tankers for all of 2018 averaged $45,658 per day. Given the contract cover in place for 2019, we now expect this average to rise above $50,000 per day for this year.

Taken together with incremental vessel operating contribution expected to be obtained with the entry of the Overseas Key West into our trading fleet in late April, we anticipate that 2019 cash flow contribution from our conventional tanker fleet will improve by approximately $20 million over results achieved in 2018. We believe the continuing revenue potential that remains latent within our conventional tanker fleet beyond 2019 is notable. Considered that our most recent 12-month time charter contract was made at close to $60,000 per day and that all 10 of our conventional tankers will come open for negotiations to reset pricing over the next 12 months, an increase in average earnings of these vessels to $60,000 per day, that is a $10,000 per day increase above the anticipated 2019 averages we have forecasted, would result in a further incremental increase in annual cash flow of close to $35 million.

Such a development [worried] to be successful in realizing it would occur with a minimum amount of variable costs, allowing substantially all of this increased revenue to drop to the bottom line. Operating leverage in a rising market can be extremely powerful.

During 2018, our ATBs provided $12.5 million of vessel operating contribution. As we progress towards introducing the 2 new barges on to construction into our ATB fleet in 2020, we anticipate that 2019 will see a transitional $3 million to $4 million decline in annual operating contribution from our current ATB fleet.

The 2 older units removed from service in December 2018 and the 2 additional units that will leave service during 2019 are the principal drivers behind this forecasted decline. By mid-2020, revenue derived from our older ATB fleet will in all probability have dropped to 0. However, looking further into the future, our 2 new barges, once delivered, should fully compensate for the loss of contribution provided by the 6 operating ATBs active during 2018. By 2021, we expect continuing operating contribution from these 2 new ATB units of $15 million to $20 million a year. We have already secured time charter employment for one of the new barges, commencing upon its delivery, and are in active discussion regarding employment opportunities for the other one.

Let us now turn to our niche market activity shown in Slide 8. We continue to be pleased with the stability of cash flows that these assets provide. Fourth quarter vessel operating contribution from our shuttle tankers, lightering service and MSP tankers once again exceeded $20 million. Full year operating contribution from these niche businesses was $92.2 million. Compared to last year's results, this is down roughly 10%. This change is largely attributed to a repricing at then current market rates for the Overseas Chinook in May, lost revenue days arising from scheduled dry docking of our lightering and MSP assets during the year and a small drop in the effective time charter equivalent returns from our MSP tankers.

Broadly speaking, our niche market activities provide a highly predictable and stable cash flows throughout the year, a trend that we expect will continue for the foreseeable future.

Let me provide you with details supporting these expected results. Shuttle tanker operating days are covered for close to 80% of 2019 at rates averaging in excess of $70,000 per day. We have minimum take-or-pay contracts signed with all 3 of our lightering customers for all of 2019 and committed minimum volumes equal to 95% of actual volumes lifted in 2018. We have extended our contract with the Government of Israel through the end of 2020, providing a minimum of 7 liftings under that contract with Freightman, utilizing our MSP vessels in both 2019 and 2020, putting a floor at a level that will be consistent with our recent yearly workloads. Scheduled dry dock and intermediate surveys for 2 of our shuttle tankers will have a visible impact on overall results for the year.

Notwithstanding this, we expect our niche activities in 2019 to provide us with a similar level of vessel operating contribution as we saw in 2018. An additional feature of our niche market activities, which will enter into the mix during 2019, will be the 2 new MR product tankers, which have ordered from Hyundai Mipo Dockyards for delivery at the end of September this year.

These tankers are being constructed at HMD's Ulsan, Korea shipbuilding facilities and will comply with MARPOL Annex VI Regulation 13 Tier III standards regarding nitrogen oxide emissions with Emission Control Areas. In addition, each vessel will have installed exhaust gas cleaning systems, often referred to as scrubbers, to meet the standards of MARPOL Annex VI Regulation 14 for sulphur oxide emission, as well as ballast water treatment systems to comply with regulations coming into force later this year.

OSG plans that these vessels will ultimately join the U.S. Flag fleet after a period operating under Marshall Islands flag by own delivery. Recent public testimony by MARAD has pointed to a critical shortage of 1,800 mariners necessary to provide adequate support for Military Sealift activities. This shortage is particularly acute for tanker qualified personnel. Broad consensus exist in Washington today that a deeper pool of mariners can only be developed to the extent that additional U.S. Flag vessels are available to provide jobs and training necessary to develop qualified sailors.

OSG views this priority need as an important opportunity. We have unique qualifications to participate in partnership with MARAD, the Transportation Department and the Defense Department in efforts to develop a workable framework to expand the non-Jones Act U.S. Flag tanker fleet. Given the multiple -- multitude of flexible options that exist for short-term employment of our new tankers, we believe they provide a low risk, but highly visible commitment of our support for this initiative, with important growth in revenue expansion implications for OSG, should we succeed in this effort.

Before I hand things over to Dick take you through a more thorough review of the past quarter's financial results, it is useful to recall that as at the end of February 2019, OSG owned and operated an active fleet of 21 vessels. I refer you to Slide 9. Our active fleet includes tankers and articulated tug barges, of which 19 operate under the Jones Act and 2 operate internationally in the U.S. Maritime Security Program. Additionally, we have 2 MR tankers under construction in Korea and 2 204,000 barrel barges under construction at Gunderson Shipyard in Portland, Oregon.

With this picture having been refreshed, I will now turn the call over to Dick to provide additional details on our fourth quarter results for 2018. Dick?

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

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Thanks, Sam. Please turn to Slide 11. During the fourth quarter, we continue to see a positive spread between WTI Houston and Bonny pricing. This continues the performance that was evident through most of 2018 and resulted in an open arbitrage. When the arb is open, this is favorable for Jones Act tankers and encourages the use of domestic crude oil and refinery operations. We saw during the year continually increase in the number of vessels used to transport crude oil. Analysts expect this pricing differential to continue to exist over the medium term.

Please turn to Slide 12. Spot rates continue to steady TCE rate increase throughout the year. They rose from the mid-$30,000 level per day during the third quarter of 2017 to highs in the mid to upper $60,000 per day at times during the year. Currently, spot market day rates are running around $65,000. During the third and fourth quarters, we saw a reduction in spot market activity, as we witnessed the continuing transition of the market back to its historic time charter characteristics with corresponding decreases in spot market volume.

Please turn to Slide 13. As we previously commented, we believe that the supply-demand imbalance that existed during 2017 would correct itself as older vessels were removed from the market. Additionally, we believe that the market was tighter than it appeared and assumingly small changes in demand would have a substantial impact. During 2018, there was a net reduction of 6 vessels, reducing the total vessels in service to 91. We expect the vessel count to continue to decrease as additional older vessels exit the market. We expect to remove 2 of our rebuilt ATBs from the market this year. The continued favorable spread of WTI Houston to Bonny Light has supported an increase in the domestic use of American crude oil. This has resulted in a continued increase in vessel demand for crude oil transportation from the Gulf of Mexico to the northeast refineries.

Please turn to Slide 14. Our niche market businesses continue to provide a strong operating platform for our overall business. In 2018, we entered into a new 2-year contract substantially increasing the minimum barrel commitment with one of our lightering customers. During the year, our customer, PES, emerged from bankruptcy proceedings. Our contract remained in force throughout and after the bankruptcy period without modification.

Our third customer entered into its annual contract renewal in January for 2019. We have committed minimum barrels close to the annual amount actually shipped in 2018. In September 2018, the Government of Israel renewed its contract with us through 2020. The contractual minimum number of voyages remains at 7.

We entered 2018 with 3 shuttle tankers servicing the 2 Gulf of Mexico FPSOs. During the -- during May, the Chinook was redelivered to us and was subsequently time chartered to another customer as a conventional tanker. The Tampa and the Cascade continue under their time charter agreements to provide shuttle tanker service. We extended the charter maturities on all 9 of our chartered-in conventional tankers, 4 of those extensions were for 1 year, through 2020, and the remaining 5 were extended for 3 years, bringing their maturity date to 2022. The 10th chartered-in vessel was previously extended until 2025. We scrapped the INTREPID OSG 254 and the OSG 192 during December, further reducing the number of active rebuilt ATBs still in our fleet to 4.

We expect that during 2019, we'll further remove 2 more rebuilt ATBs from the fleet. As a result, we operated 1 less vessel for all of the quarter and 2 less vessels for part of the fourth quarter this year in comparison to the year ago period.

October continued the seasonal slowdown and relatively low transportation demand that was experienced in the third quarter. However, the quarter ended with no vessels available for spot market charters. We began to realize the benefit of the time charters that we entered into prior to the fourth quarter. Our time charter revenue days for conventional Jones Act tankers increased during the fourth quarter in comparison to both the year ago quarter and the prior quarter of this year.

In the fourth quarter, we refinanced our outstanding $380 million term loan, which was scheduled to mature in August 2019. In accordance with our plan, we obtained 2 term loans. The first for $27.5 million was obtained to finance our U.S. Flag non-Jones Act vessels, the Mykonos and Santorini. The loan term is 8 years with interest at LIBOR plus 400 basis points. Subsequently, we entered into a $325 million term loan. This loan has a 5-year term with a 13-year amortization profile. Interest is at LIBOR plus 500 basis points. We achieved our goal is to both lengthen the maturity profile of our liability and continue to reduce our leverage.

Please turn to Slide 14. 2018 TCE revenues were $327 million compared to $361 million in the prior year, a decline of $34.3 million. More than half of this decline is attributable to the reduction in the size of our rebuilt ATB fleet and the remainder resulted from the increased spot market exposure of the Jones Act conventional tankers during the first through third quarters of 2018.

For the majority of the year, we traded 2 fewer vessels in the prior year and for the latter part of the fourth quarter we traded 4 fewer vessels. During May, the Overseas Chinook was redelivered again to operate as conventional tanker on time charter rather than as a shuttle tanker. Further, as we discussed in prior quarters, 2017 TCE revenues contain the continuing impact of higher rate legacy time charters, which expired as 2017 progressed. We continue to shift to a more spot market-focused business in 2018.

Through the first 9 months of 2018, our spot market days for Jones Act tankers ATBs and non-Jones Act tankers increased by 528 days or 32% compared to the year ago time period. The impact of this change was particularly evident in the third quarter, when there were minimal cargoes available in the spot market and the utilization levels of our spot market vessels was exceptionally low. As 2018 progressed, we expect that shift to a more time charter-focused market began to assert itself at profitable rates and the fourth quarter saw a reduction in spot market days. We ended the year with 8 of our 9 conventional tankers and 3 of our 4 rebuilt ATBs on time charters. For those vessels, this shifts risk of utilization away from OSG.

Full year adjusted EBITDA was $87 million compared to $118.4 million in 2017. The decline principally resulted from the decrease in TCE revenues that were previously discussed. Adjusted EBITDA is defined as net income or loss adjusted for income tax expense or benefit, interest expense, depreciation and amortization, gain or loss on disposable vessels, including impairments, loss on repurchases and extinguishment of debt and noncash stock compensation expense.

Please turn to Slide 15. Q4 TCE revenues were $79.9 million, a 10.8% increase from the third quarter. We experienced revenue increases in our Jones Act tankers, lightering vessels and non-Jones Act tankers. Rebuilt ATB revenues were flat against the third quarter, due in large part to the sale of 2 ATBs during Q4. Substantial drivers of the increase were the improvements in vessels on time charter, which increased the vessel utilization levels. We had 2 voyages for the Government of Israel and an increase in volumes within our lightering business.

Please turn to Slide 16. Our Jones Act conventional tankers saw an increase in time charter revenue days compared to the fourth quarter of 2017, reflecting the impact of the increased number of vessels operating under time charter. The average fixed earnings rate declined slightly to $58,833 a day from $63,163 a day as late 2017 still contained a contribution from higher rate legacy contracts. We experienced an increase in effective spot earnings from $31,397 to $32,420 in the fourth quarter of 2018.

The rebuilt ATB's TCE revenues were approximately flat compared to the 2018 third quarter. Total revenue days increased during the fourth quarter as the OSG 243 returned to service following repairs of the damage after the elution at the end of Q2.

Lightering TCE revenues increased 14% from the 2018 third quarter to $11.8 million from $10.3 million, as revenue days returned to normal following dry dock repair days we incurred during the third quarter. The average fourth quarter TCE rate was $64,400 compared to $65,000 in the third quarter. The results continue to benefit the increased -- the effect of the increased take-or-pay minimums. The total volume later in 2018 was consistent with the amounts lifted in 2017 and revenues were $46 million.

The tankers operating in the Maritime Security Program performed 2 voyages during the quarter under our Government of Israel contract of affreightment. We, however, have limited success in obtaining fill-in voyages. The effective TCE rate increased to $18,427 from $16,541. The Overseas Tampa and Overseas Cascade continued to operating the shuttle tankers.

The Overseas Chinook continued to operate under time charters conventional tanker, which has done since its redelivery in May. Our niche market TCE revenues were $143 million in 2018 compared to $151 million in 2017. The decrease was driven by the transition of the Chinook to conventional tanker operation since May. The rest of the niche businesses performed similarly to 2017.

Please turn to Slide 17. Vessel operating contribution defined as TCE revenues less vessel operating expenses and charter higher expenses at $100.6 million was $33 million lower than 2017. The decrease resulted from the conventional tankers shifting for the full year of 2018 to an increased spot market presence at lower utilization levels, especially during the third quarter, a reduction in the size of our ATB fleet and the previously mentioned redelivery of the Chinook. Vessel operating contribution for the fourth quarter increased to $23.5 million from the third quarter vessel operating contribution of $14.8 million. Our Jones Act conventional tanker vessel operation -- operating contribution recovered from a $6.5 million loss in the third quarter to achieve a breakeven result in the fourth quarter.

Please turn to Slide 18. Fourth quarter adjusted EBITDA was $23.1 million compared to $10.9 million in the third quarter of 2018. The increase resulted from improved Jones Act conventional tanker performance as well as distributions from our Alaskan joint venture. Quarterly adjusted EBITDA declined $1.7 million from the fourth quarter of 2017. The decrease resulted from a lower level of TCE revenues, partially offset by a reduction in operating expenses.

Please turn to Slide 19. Net loss for the fourth quarter was $5.2 million compared to net income of $54 million in 2017's fourth quarter. The 2017 quarter included a $60 million tax benefit, which resulted from recognizing the impact of the reduction in federal corporate income tax rate and its effect on our deferred tax liability. Full year net income was $13.5 million compared to $56 million in 2017. We recognized a tax benefit of $23.4 million in the third quarter of 2018 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.

Please turn to Slide 20. Moving from left to right, we began 2018 with total cash of $166 million, including $200,000 of restricted cash. During 2018, we generated $87 million of adjusted EBITDA. Working capital changes used $5 million of cash. We expended $13 million in dry docking and improvements to our vessels. We invested $22 million in new vessel construction. We incurred $29 million of cash interest expense. And we made debt repayments net of issuance costs of $103 million. The result was we ended the year with $81 million of cash, including $200,000 of restricted cash.

Please turn to Slide 21. Continuing our discussion of cash and liquidity as we mentioned on the previous slide, we have $81 million of cash at December 31, 2018, inclusive of $200,000 of restricted cash. Our total debt was $353 million, representing a $103 million reduction in outstanding indebtedness since December '17. We also have a $30 million revolver, which is presently undrawn. Combining our undrawn revolver with cash, we had $111 million of liquidity at quarter-end. Our 327 -- $325 million term loan has an annual amortization requirement of $25 million. With $329 million of equity, our net debt-to-equity ratio was 0.8x, down from 0.9x since December 31, 2017.

At December 31, 2018, we had aggregate capital commitments of $152.7 million for the construction of 4 vessels. 2 tankers scheduled for delivery in September 2019 and 2 barges scheduled for delivery in the second and fourth quarters of 2020. The contracts for these vessels require progress payment based on the shipyard's achievement of contractual milestones during the construction periods with a final payment due on delivery of each vessel. OSG has made all required progress payments to date and will make the repay -- the remaining payments, including those due on delivery with financing that we will need to obtain, operating cash flow and cash on hand. We are currently in discussions with potential lenders to obtain such financing, but we have not received commitments this time.

This concludes my comments on the financial statements. I'd now like to turn the call back to Sam for his closing remarks.

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

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Thank you, Dick. The encouraging picture that we see for our future is founded on 3 key components of our business. First, stable and profitable platform provided by our niche market activities. Second, a renewed contribution from our new ATB capacity to be added during 2020. And finally, a revenue recovery laid in our conventional tanker fleet that should allow the operating leverage of our business model to become manifest over the next 24 months.

We have with this presentation expanded upon disclosure practices that have characterized similar presentations in the past. We have tried to offer more commentary on the future trajectory of our business with a greater focus on our underlying future potential. We believe our business today is at an important inflection point, with our prior results providing only marginal insight into our expectations for 2019 and beyond. Our decision to expand the scope of commentary was not born out of a newly acquired clairvoyance providing us with unique insight into the events that are yet to unfold. History is littered with humbled forecasters growing too much confidence in their ability to call the markets. We would prefer not to join that list.

Nevertheless, 2 sets of facts about our market give us heightened confidence that we are on the right track. The first is a recognition that the U.S. Flag market, and in particular, the Jones Act market is to a large degree insulated from the heightened uncertainty that can be found in international markets. The barriers to entry are high. New supply is expensive to obtain. Shipyards capable of providing that supply are limited as are the number of qualified companies that can operate tankers in the U.S. coastwise trade. In this context, it is objectively easier than in the case of other shipping markets to conceive of and believe in a market environment that can be balanced rationally and orderly for an extended period of time.

The market disruption that we have experienced in recent years was born out of the sudden change in regulations governing crude oil exports. We have seen that over the past 3 years, a slow progression of supply rationalization and the reemergence of coastwise crude oil transportation demand have combined to restore a healthier balance in our markets. As we have noted often in our recent comments, we see this recovery as having been well-established. The weight of probability indicates that the cycle has turned.

Second, is a simple math that illustrates the powerful force of the operating leverage that underpins our business model. It is true that leverage cuts both ways. But believe in our thesis that the cycle has indeed turned leads to some very positive conclusions. The fundamentals of both supply and demand are for the first time in several years providing strong support to restoring normalized pricing dynamics in our business relationships.

With all of our tankers set to come open for a reset in rates within the next 12 months and 2 new barges capable in restoring the revenue and cash flow streams of ATBs that will soon be phased out, the prospects for the positive effects of the operating leverage to begin to flow through our results are our cause for optimism.

We anticipate that 2019 to see improved cash flow and improved financial results for OSG, with less implied volatility than 2018. The lag effect of charters fixed in 2018 will mask the rebound for a time, but repricing opportunities in the second half of this year should set up 2020 to allow the full benefit of the operating leverage of our business model to begin to be fully expressed.

The new investments in 2 barges will come on stream in 2020 and should contribute to replacing revenue and cash flow that is exiting with the retirement of our older ATB units. Further, our 2 Korean new building tankers offer opportunity to pursue initiatives to work with MARAD in expanding the internationally trading U.S. Flag tanker fleet, while offering interesting optionality to generate incremental revenue in the meantime.

The past 2 years have seen a sharp cyclical downturn in our core tanker and ATB markets. During this period, we have pursued a strategy centered on utilizing the steady contribution of our niche businesses to both strengthen our balance sheet and maximize our ability to benefit from a market recovery. Altogether, we have cause to believe that this commercial strategy remains sound for the long term and we remain confident that the mix of our revenue streams will continue to provide an effective means to capture the benefits of the continuing art of improving fundamentals.

We will now open the call over to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from George Schultze with Schultze Asset Management.

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George Joachim Sebastian Schultze, Schultze Asset Management, LP - Managing Member, Chairman of Investment Committee and Chairman of Strategy Committee [2]

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I'm just curious about your expected CapEx expenditures in 2019 and '20 with the several new builds?

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

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Okay. I mean -- I'm sorry. Was there more to your question, George?

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George Joachim Sebastian Schultze, Schultze Asset Management, LP - Managing Member, Chairman of Investment Committee and Chairman of Strategy Committee [4]

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No. I'm just curious what you expect in terms of outgoing capital expenditures for those several ships in this year and next year?

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

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Yes, I mean, it's $152 million in total. And the majority of that, about $118 million of that will occur in 2019, with the balance in 2020, split between the second and fourth quarters. The principal payments on the 2 Korean new builds are heavily weighted towards September on delivery, with a pricing is -- for those the pricing is 40% during the construction period and 60% on delivery. The barges that are being built in Oregon are a more fully priced commitment as the construction occurs with a relatively smaller payment on delivery in the sort of $5 million-or-so range on delivery for each of those 2 vessels.

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George Joachim Sebastian Schultze, Schultze Asset Management, LP - Managing Member, Chairman of Investment Committee and Chairman of Strategy Committee [6]

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Okay. And then separate from that, do you also expect some level of maintenance capital expenditures for both years?

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Richard L. Trueblood, Overseas Shipholding Group, Inc. - VP & CFO [7]

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No. Absolutely. I talked over you. Yes, -- I mean, yes, there will be maintenance CapEx with a couple of dry docks during the year, Sam mentioned for the Cascade and the Tampa. We'll have a couple of others. We've got the Key West in right now and that sort of in that probably $14 million range.

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George Joachim Sebastian Schultze, Schultze Asset Management, LP - Managing Member, Chairman of Investment Committee and Chairman of Strategy Committee [8]

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For both years, right? For '19 and '20, right?

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Richard L. Trueblood, Overseas Shipholding Group, Inc. - VP & CFO [9]

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For '19.

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [10]

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'19. And '20 -- 2020, George, this is Sam, we will begin making capital investments in ballast water treatment modifications to our ships. Two things to bear in mind for those vessels that we own. 2020 will be a relatively active year. For those vessels that are leased in, the capital expenditures for the ballast water treatment systems will be incurred by American Shipping Company. And then the lease rate over the remaining useful life of the assets will be adjusted to allow recovery of that. So the upfront capital costs for the 10 vessels that we have on lease from American Shipping Company, the investment in ballast water treatment treatments, which, again, roughly is $2 million per vessel that will be borne by American Shipping Company. The other vessels that capital expenditure will be ours. And the period of those expenses for the ballast water treatment extend beginning our first conversion will be at the end of this year and then they extend over 2020 through 2022 with pretty heavy weighting in 2020.

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Operator [11]

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(Operator Instructions) Next question comes from Ryan Vaughan with Needham & Company.

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Ryan Vaughan, Needham & Company, LLC - Principal [12]

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Nice job on positioning the company to capitalize on this much improved market. And also thank you for all the additional disclosure. It's very helpful and looks like the next couple of years are setting up to show really nice year-over-year EBITDA growth. Let me ask you, as far as the vessels that come up for renewal resets throughout the year or later this year, with an improved kind of more palatable rate environment, can you talk about your interest as well as your customer interest in entering into longer-term time charters?

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

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I think, I can, Ryan, it's -- I think that we have tried to articulate in the past that unlike many of the international shipping markets that many people that follow our business also follow, the U.S. Flag markets, and in particular, Jones Act markets are better characterized as being more industrial shipping as opposed to commodity shipping. And I say that in the context of the high level of codependency between our end-users and ourselves in seeking utilization of shipping -- tanker and ATB assets as part of a broader distribution chain. The prevailing structure of that industrial shipping model in the past has seen our end-users recognizing risk management is best served by trying to secure that capacity and ensure their distribution networks with stability over longer periods of time. We think that that perspective lends itself well to discussions around time charters that would -- I would guide on average likely be around 3 years as opposed to sort of the types of durations that we've seen in the past, a year or 2. And so it's our expectation that conversations as we move into resetting the time charter contracts that we currently have over the second half of this year will have as an addition seeking out those kinds of durations in our discussions with our customers. One of the things that gives us some confidence that those conversations will bear fruit is the fact that when looking, particularly at the tanker profiles and that's where I've tried to articulate the most leverage lies within our fleet. The available tankers that are coming off time charters that are controlled by our competitors are few over the next 12 to 18 months. And as such, the opportunities for our existing customers to go out and have conversations with other available tonnage are limited. And so we think that dynamic lend itself well to our ambition and ability to really begin to articulate our desire for and convince our customers that their more stable longer term contractual relationship with respect to many, if not, all of our tankers is appropriate.

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Operator [14]

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The next question comes from Marlaena LeMaitre with Paulson & Co.

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John Slater, Paulson & Co. Inc. - Senior VP & Partner [15]

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This is John Slater from Paulson. Couple of questions for me, please. The -- could you just for the 9 tanker vessels, now 10, could you just run through how many of those were on spot in Q4 and then how many are still on spot in Q1, please?

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Richard L. Trueblood, Overseas Shipholding Group, Inc. - VP & CFO [16]

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Of the 9 -- of the conventional tankers, 1 is currently in the spot market right now. The other -- the newest one, the Key West is -- 9, we're marketing at this point, it's not in the market, it's not -- it's in dry dock at this juncture. The -- in the fourth quarter, we had a couple in the spot market in October and early November, and we ended the -- and then we migrated the rest of that to time charters as we sort of moved through November, ending up the year with that 1 still remaining in the spot market.

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

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And we had 3 ATBs in the spot market during the fourth quarter up until the end of the year and 2 of those have now been removed from service.

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Richard L. Trueblood, Overseas Shipholding Group, Inc. - VP & CFO [18]

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Right.

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

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And so now we have 1 remaining ATB that is principally active in the spot markets.

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John Slater, Paulson & Co. Inc. - Senior VP & Partner [20]

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Okay, that's very helpful. And of the tankers in the spot market in Q4, what was the utilization rate? I know you've sometimes given that before on the call?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [21]

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I'd like to get back to you on that. I can guide you that October was low, November was average and December was a high. So blending that, I would guess that we probably achieved across the spot market available days of something in the order of magnitude of 50% utilization. But I can get back to you with a specific number.

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John Slater, Paulson & Co. Inc. - Senior VP & Partner [22]

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And then just one final question for me. You gave I think some guidance on the blended TCE rate for the tankers in 2019, and you compared it to a number in 2018. 2018 number I think was roughly $45,000 a day, and in 2019, I think, $50,000 or in excess of $50,000. Could you just repeat exactly what those numbers were and what the guidance was for?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [23]

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Sure. So in 2018 when looking at the conventional tankers, the 9 conventional tankers that we're operating for 2019, taking into consideration the runoff of legacy contracts that were at relatively higher rates. The renewal of rates on time charter that we achieved during the year and the spot market returns that we achieved, which are given to you in the earnings release. When you blend all those together, we achieved $45,658 per day on average in fleet time charter revenues for the tankers in 2018. Given the book that we have now established for 2019 and our expectation predominantly in the last quarter of the year in terms of what we expect to earn, we see that rate is rising to above $50,000 per day in 2019 on average and that would then include contribution from the Key West, the Overseas Key West, which we expect to enter into service in the second half of April.

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John Slater, Paulson & Co. Inc. - Senior VP & Partner [24]

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Okay. And like conventional tankers, you're referring to the same 9 or 10 of those -- of the tankers that we were discussing before.

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [25]

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That's correct. We continue to treat the Overseas Chinook as a shuttle tanker and to group those earnings together with our niche market activities even though at present the vessel is trading as a conventional tanker, we continue to believe that in the future, there is cause for optimism that the vessel will be redeployed, at least part of its services will be redeployed in some tanker activities. And so we think for consistency, we continue to treat it as a shuttle tanker even though she is currently trading as a conventional tanker. So when we speak about our conventional tankers, we refer to the 9 other vessels leased in from AMSC and now prospectively including the Overseas Key West will -- which will then get us to 10 vessels.

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Operator [26]

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Okay. 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 [27]

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Thank you, Phil, and thank you, again, all for joining this call. We remain very optimistic that we will be able to show continuing improved results over the quarters ahead, and we look forward to speaking to you again in a couple of months' time. Good morning, everyone.

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Operator [28]

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