Overseas Shipholding Group Management Discusses Q2 2012 Results - Earnings Call Transcript

Overseas Shipholding Group (OSG)

Q2 2012 Earnings Call

August 01, 2012 11:00 am ET

Executives

James I. Edelson - Senior Vice President, Secretary and General Counsel

Morten Arntzen - Chief Executive Officer, President and Director

Myles R. Itkin - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Chief Executive Officer of OSG America LLC and President of OSG America LLC

Robert E. Johnston - Senior Vice President and Head of the U S Flag Strategic Business Unit

Lois K. Zabrocky - Senior Vice President and Chief Commercial Officer of International Flag Strategic Business Unit

Analysts

Michael Webber - Wells Fargo Securities, LLC, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

Urs M. Dür - Clarkson Capital Markets, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

David E. Beard - Iberia Capital Partners, Research Division

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Overseas Shipholding Group Inc. Second Quarter 2012 Investor Conference Call. [Operator Instructions]

At this time, I'd like to turn the conference over to Jim Edelson, General Counsel. Please go ahead, sir.

James I. Edelson

Thank you. Before we start, let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker and articulated tug barge markets; changing oil trading patterns; anticipated levels and timing of newbuilding and scrapping; prospects for certain strategic alliances and investments, including OSG's U.S. Flag business unit; estimated TCE rates achieved for the third quarter of 2012 and estimated TCE rates for the fourth quarter of 2012; projected scheduled drydock and off-hire days for the third and fourth quarters of 2012; projected locked-in charter revenue and locked-in time charter days for the remaining 6 months of 2012 and for 2013 through 2016 and thereafter; OSG's ability to achieve its liquidity-raising objectives, including satisfactory long-term financing; estimated revenue and expense items, levels of equity income and capital expenditures for 2012; the profitability in 2012 of certain business units and OSG's LNG and FSO joint ventures; OSG's ability to access capital markets, raise additional debt financing and sell assets; OSG's projected compliance with financial covenants in 2012 and 2013; OSG's ability to further reduce general administrative expenses and vessel expenses; prospects of OSG's strategy of being a market leader in the segments in which it competes; the project the growth of the Jones Act in world tanker fleets; and the forecast of world economic activity and world oil demand.

These statements are based on certain assumptions made by OSG management based on its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Forward-looking statements are subject to a number of risks, uncertainties and assumptions, many of which are beyond the control of OSG, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. Factors, risks and uncertainties that could cause the actual results to differ from the expectations reflected in these forward-looking statements are described in OSG's annual report on Form 10-K for 2011 and in other reports OSG files with the Securities and Exchange Commission.

For this conference call, we have prepared and posted on OSG's website supporting slides that supplement our prepared remarks. The supporting presentation can be viewed and downloaded from the Investor Relations Webcasts and Presentations section on osg.com.

With that out of the way, I'd like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?

Morten Arntzen

Thanks, Jim. Good morning, everyone, and thank you for joining us on our second quarter call. With me in New York are Myles Itkin, our CFO; Lois Zabrocky, Chief Commercial Officer for all International Flag businesses; Janice Smith, our Chief Risk Officer; Jim Edelson, General Counsel; Jerry Miller, our Controller; and John Collins, Head of Investor Relations. Joining us from Newcastle is Captain Ian Blackley, Head of our International Flag Shipping Operations; and from Tampa, Captain Bob Johnston, led the U.S. Flag Unit.

Please turn to Page 3 of presentation. When we spoke last May -- back in May, activity in our international flag markets was relatively healthy, especially in the larger crude classes and for MRs. Not long thereafter, demand's fell off in these segments as seasonal and technical factors reversed. Spot rates fell throughout May and then spent June at levels well below when the quarter opened, and that levels in some trade lanes close to operating cost breakeven levels.

We were still able to generate another $10 million operating cash flow in Q2 despite this, about the same as the first quarter with products. After booking April at a respectable $15,500 a day, rates fell through the $10,000 level and finished the quarter at operating cost breakeven levels.

Activity in Atlantic fell off as product pricing fell on weak pre-summer demand on both sides of the Atlantic, and the arbitrage window closed in both directions. As weak as the Atlantic was, the Far Eastern markets were even weaker. This prompted many Eastern owners to reposition vessels to the Atlantic basin where our MRs are focused. This added competition and a loss of rate discipline exacted a heavy price on our MR spot market. So after an encouraging start to the quarter, our MR has averaged just about $10,000 a day with crude.

The same pattern materialized in the larger crude classes as market players scrambled to build crude inventories before the Iran embargo kicked in on July 1. This was completed towards the end of May just as the typical pre-summer select was setting in. Then in June, the mishap of Motiva occurred, which took 10 to 15 VLCCs out of the AG-West trade. Suezmax spot rates followed VLCCs fairly closely, while Aframax activities remain subdued with spot rates similar to the past 12 months or so. Rates in International Crude and Products remain weak today.

Read the rest of this transcript for free on seekingalpha.com

More from Stocks

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Flashback Friday: Amazon, Chip Stocks, Memorial Day

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Dow and S&P 500 Decline, Energy Shares Fall as U.S. Crude Oil Slides 4%

Dow and S&P 500 Decline, Energy Shares Fall as U.S. Crude Oil Slides 4%

Replay: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

Replay: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

UAW Officially Files Complaint on Tesla Thanks to CEO Elon Musk

UAW Officially Files Complaint on Tesla Thanks to CEO Elon Musk