Overseas Shipholding Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the Overseas Shipholding Group First Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sam Norton, President and CEO.

Operator

Please go ahead.

Speaker 1

Thank you, Danielle. Welcome and thank you for joining our presentation with G's Q1 2024 financial results and for allowing us the opportunity to comment in more depth on those results and to provide additional context to the current state of our business and the opportunities and challenges that lie ahead. As usual, I am joined in this presentation by our CFO, Dick Trueblood. To start, I would like to direct everyone to the narrative on Slides 23 of the PowerPoint presentation available on our website regarding forward looking statements, estimates and other information that may be provided during the course of this call. The contents of that narrative are an important part of this presentation, and I urge everyone to read and consider them carefully.

Speaker 1

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, performance and opportunities. These statements are subject to uncertainties and risks. Actual results may differ materially from those contemplated by our forward looking statements and could be affected by a variety of factors, including factors beyond our control. For a discussion of these factors, we refer you to our SEC filings, particularly our Form 10 ks for 2024 and our Form 10 Q for the Q1 of 2024, which we anticipate filing later today, both of which can be found 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 today, and we do not assume any obligation to update any forward looking statements except as may be legally required.

Speaker 1

In addition, our presentation today includes certain non GAAP financial measures, which we define and reconcile to the most closely comparable GAAP measures in our earnings release, which is posted on our website. Before discussing our financial results for the Q1 of 2024, I would like to address the status of the unsolicited non binding indication of interest submitted to our Board by Solchuk Resources in January 2024 to acquire the OSG shares it does not already own for $6.25 per share in cash. Our Board continues to carefully consider Saltchuk's indication of interest in consultation with our outside financial and legal advisors and is committed to acting in the best interest of our stockholders. Because the Board's work is ongoing, we do not intend to comment further on this call or address questions regarding Solchuk's indication of interest or the possibility of any potential transaction. We respectfully ask that your questions be focused on the company's recent financial results and its ongoing business activities.

Speaker 1

We kicked off 2024 sustaining our strong performance in 2023. Our cash flow and profitability continued to steadily improve. We are particularly gratified to report a more than 35% growth in earnings per share when compared with the Q1 of 2023, rewarding our shareholders with value derived from the combined effects of the numerous initiatives that we've undertaken over the past 12 months. We delivered significant increases from the prior year's Q1 and financial metrics that we believe are important in measuring our performance, TCE revenues and adjusted EBITDA. Dick will be sharing with you later on this call details of these as well as our other financial results for the period.

Speaker 1

Our cash flow from operations continues to build at a pace that has met our expectations and as a result, our Board declared and the company paid in April our 2nd successive quarterly dividend of $0.06 per share, demonstrating confidence in our business plan. Our retained cash flow reflects the realized benefits of charter parties that we have fixed at escalating rates over the past several quarters, providing us with the means to make continued progress in meeting our key capital allocation goals. I spoke at length in our year end earnings call about the events and circumstances that have contributed to strong market demand for our Jones Act vessels. The persistent influence of geopolitical tensions outside of the United States continues to severely disrupt historical trading patterns for crude oil and its refined products. Hostilities in the Red Sea, growing geopolitical tensions in the Persian Gulf and the continuing war in Ukraine have kept international freight markets at or near historical highs.

Speaker 1

Most analysts consider this market strength to be durable with positive implications for our Jones Act vessels. High international freight rates indirectly stimulate domestically sourced fuel consumption and by extension Jones Act transportation demand since import substitution is constrained by comparatively high freight costs for products shipped over longer distances on foreign flying vessels. So long as international freight rates remain high, Buy America when it comes to fuels will have economic as well as rhetorical justifications. Added to these disrupted forces, U. S.

Speaker 1

Government policies and state regulations have stimulated a growing market for transporting renewable diesel and its feedstock components from production sources along the Gulf Coast to markets along the U. S. West Coast. According to the Energy Information Agency, quarterly shipments of renewable diesel from PADD 3 to PADD 5 have more than doubled over the past 2 years, with marine transport of renewable diesel recently approaching 50,000 barrels per day. The EIA currently expects renewable diesel production to increase by approximately 30% annually in both 2024 2025, a development which is likely to add further demand for tankers to move renewable diesel from the U.

Speaker 1

S. Gulf to the West Coast in the coming quarters. The strong demand signals evident in the Jones Act trades have led our core customers to seek out extensions to vessels on charter for both longer periods and well in advance of contractual renewal dates. This has allowed us to extend our committed charter book with increasingly attractive rates. Examples of this trend during the Q1 include the Overseas Nikishke being extended to its current charter for 3 years from October 2024 and the OSG 205 Courageous being extended for 3 years from December 2024.

Speaker 1

During the Q1, we also exercised an option to extend the bareboat charter of the Overseas Tampa with its vessel owner for a period of 5 years commencing June 2025 until June 2030. Updating on the progress of bringing the Alaskan Frontier, sister to our other 3 ATC operated crude oil tankers into service, we still anticipate the vessel being ready for service in the Q4 of 2024. This week, we have signed a towage contract to move the vessel from Labuan, Malaysia to Singapore. The vessel is scheduled to enter a shipyard in Singapore during early June, where we will carry out both the comprehensive reactivation scope of work as well as previously announced lifecycle upgrades on each of her 4 engines. The engine upgrades will improve performance and fuel efficiency and also prepare the engines for possible use of methanol fuel in the future.

Speaker 1

In parallel to shipyard activities, we are currently fielding employment inquiries for the vessel and are optimistic that we will fix the vessel on time charter at attractive rates in the next couple of months. I will now turn the call over to Dick to provide you with further details on our Q1 results for 2024. Dick? Thank you, Sam.

Speaker 2

If you could turn to Slide number 7, please. Vessel demand continues to be strong and during the quarter we extended 2 charters and entered into 1 new charter for vessels whose existing charters were scheduled to end during 2024. Customers continue to show interest in longer term time charters and entering into new contracts and direct continuation of their existing contracts, often well in advance of scheduled maturities. Rates currently are in the mid $80,000 per day for Jones Act MR Tankers, while ATB rates are in the upper $50,000 per day. At this time, we are working on obtaining business for the Alaskan Frontier when she returns to service in Q4 and for the Explorer when her current time charter is completed.

Speaker 2

Sources of earnings variability at this point are vessels that participate in the tanker security program, who by design trade in the spot market internationally. And our lightering ATB, whose earnings can fluctuate upwards when volumes exceed the contract minimums. Taking into account the 2 contract extensions and one new contract, we have continued to extend the maturities of our book of business. 2024 is essentially fully booked. Looking at the chart in 2024, we have 2 vessels with charters entering before Twelvethirty Onetwenty 4.

Speaker 2

One of these, the Mykonos, has a series of 1 year options with the military sealift command, which if all are exercised, will keep her on charter through August 2028. 2 vessels becoming available at the end of 2024 participate in the tanker security program. The Alaskan Legend and Alaskan Natick by Gator are subject to extension options that if exercised will continue their charters for years into the future. The Frontier, a sister ship to our 3 Alaskan tankers, will shortly be towed from Malaysia where she has been in cold layup for approximately 5 years to Singapore to commence her drydock period in June. In addition to preparing her to return to service, we will also perform engine lifecycle upgrades and install a ballast water treatment system.

Speaker 2

Our total resource commitment, including the purchase price is expected to be $50,000,000 If we could turn to Slide 8, please. We have 7,134 available days in 2024, of which 96% are currently contracted. This gives us a very high degree of visibility into our operational and financial performance and represents a continuous improvement from a low point of 21. Years prior to 2023 include the 3 vessels that were redelivered at the end of 2022. Please turn to Slide 9.

Speaker 2

Our quarterly performance continued the performance trends of 2023 and we are very pleased with our start in 2024. All elements of our fleet continue to perform well. We had some fluctuations in the quarter due to planned drydock days and vessel repositioning prior to commencement of a new time charter. First quarter revenues increased to $110,700,000 from $110,100,000 in the 4th quarter. During the quarter, we repositioned the Alaskan Explorer from Alaska to the Gulf of Mexico for her to commence her new time charter in late February.

Speaker 2

This off hire period coupled with off hire days to a dry dock to dry dock schedules moderated the revenue increase. Revenue increased 5.7% from the year ago quarter as the impact of higher rates for contracts entered into after Q1 2023 have benefited the Q1 of 2024. First quarter adjusted EBITDA was $43,900,000 compared to the prior year's Q1 of 40,900,000 dollars Our trailing 12 month adjusted EBITDA was $178,800,000 Please turn to Slide 10. Jones Act Handysize Tanker revenues decreased $1,700,000 from the prior quarter. ATV revenues increased $400,000 and specialized business revenues increased $1,900,000 dollars Please turn to Slide 11.

Speaker 2

Lightering volumes increased substantially from the 4th quarter with a corresponding increase in revenues. Non Jones Act tanker revenues decreased $2,000,000 from the 4th quarter due to lower utilization during this quarter. Jones Act Shuttle Tanker revenues increased $1,200,000 as both vessels were in service during the quarter. The Chinook scheduled drydock was completed in December 2023. Alaskan tanker revenues decreased $700,000 as the Alaskan Explorer was off hire until mid February due to her repositioning.

Speaker 2

Partially offsetting this was the Alaskan Legends return to service for the full quarter after her scheduled drydock. Please turn to Slide 12. Vessel operating contribution was 51,800,000 dollars a $1,600,000 increase from the 4th quarter. Shownsak, Candysize Tankers contribution decreased $2,400,000 due to increased drydock days during the quarter. Specialized business vessel operating contribution increased $3,200,000 The increased lightering volumes coupled with the completion of the Chinook's 4th quarter drydock period drove the increase, which was moderated by the repositioning off hire of the Explorer.

Speaker 2

The contribution from our ATVs increased $800,000 as the impact of higher rates continued to be felt. Please turn to Slide 13. 1st quarter adjusted EBITDA was $43,900,000 up from $40,300,000 in 2023's Q1. If we turn to Slide 14, 1st quarter net income was $14,600,000 up $2,500,000 from the Q1 of 2023. Fully diluted earnings per share increased from $0.15 to $0.20 per share in the current quarter.

Speaker 2

The increase was driven by improved operating results, coupled with a reduction in the outstanding shares from last year. Turning to Slide 15. We had total cash of $76,000,000 at December 2023. During the first quarter, we generated $44,000,000 of adjusted EBITDA and working capital used $11,000,000 of cash. We invested $14,000,000 in vessel drydock and other capital costs and we paid $13,000,000 in debt service.

Speaker 2

As a result, we ended the quarter with $82,000,000 of cash plus $15,000,000 of liquid investments resulting in total liquidity of $97,000,000 Please turn to Slide 16. Continuing our discussion of cash and liquidity, as mentioned on the previous slide, we had $82,000,000 of cash at the end of the quarter. Our total debt was $398,000,000 This represents a decrease of $6,000,000 in outstanding indebtedness since December 2023. With $363,000,000 of equity, our net debt to equity ratio is 0.9 times. This concludes my comments on the financial statements and I'd like to turn the call back to Sam.

Speaker 2

Sam?

Speaker 1

Thank you, Dick. I would now like to take a few minutes to review some key developments in our efforts to lead OSG to a more sustainable future. First, we will be publishing next week our 2023 Sustainability Report. This will be the 4th iteration of this report and I am pleased to highlight elements of that report, which reflect ongoing efforts OSG has made to invest in our collective future. I ask that you turn to Slide 18.

Speaker 1

Reducing greenhouse gas emissions produced by our vessels continues to be a driving force in how we operate and maintain our fleet. OSG is focused on achieving efficiencies in our fleet operations, including those potentially obtained through mechanical and operational improvements, new fuels and decarbonization systems such as onboard carbon capture. Rapidly growing economic, social and public policy pressure to reduce the human impact on climate change underpin these efforts. In 2022, we made a commitment to reduce our fuel use by 10% by 2025 and reduce our overall emissions by 15% by 2,030 as compared to 2018 levels. Over the past 2 years, we have been testing a number of ways to improve our fleet's operational efficiency, working diligently to achieve these targets by testing and implementing cost effective measures to attain incrementally measurable enhancements to our fleet performance.

Speaker 1

For example, we are using more efficient and environmentally friendly robotic hull cleaning methods to reduce drag. We are installing graphene based coatings to our propellers and silicon based paints to our hulls to improve resistance to fouling and enhance durability. We participate in voluntary speed reduction programs that minimize the risk of our vessels harming endangered species and also reduce our emissions. We are leveraging voyage optimization software and working with our customers to reduce port wait times, which can measurably improve the vessel's carbon intensity indicator. We've also invested considerable time and effort to join the emerging alternative fuel transportation market with 4 of our vessels transporting renewable diesel and renewable diesel feedstocks.

Speaker 1

While these smaller incremental improvements are the central component of OSG's near term environmental sustainability strategy, we have also made investments that I consider to represent a much larger commitment to achieving our CO2 emissions goals. In 2023, we committed over $60,000,000 to install lifecycle engine upgrades to our largest vessels, the Alaskan class fleet, with the Alaskan Frontier, as previously mentioned, being the 1st vessel to undergo these upgrades. With expected 15% to 20% fuel savings as compared to these vessels' current engine performance, this investment will go much further in reducing our carbon output while continuing to provide quality services to our customers. We expect that these engine upgrades will allow us to operate these vessels for longer periods of time and with lower maintenance costs. Sustainability driven investments are a critical component of our future and we believe no greater asset exists than the men and women who serve on our behalf.

Speaker 1

Over the past 2 years, we have pledged and awarded a combined total $240,500 in scholarships focused on supporting women in our industry. Women will likely play a meaningful role in addressing the seafarers shortage that our industry faces and we hope that by reducing financial barriers to entry, we will build a stronger, more inclusive pool of mariners for We have also made strides in enhancing our policies on sexual assault and sexual harassment, also known as SASH, to bring more awareness to the issues and increased training to identify and prevent SASH onboard our vessels. Please now turn to Slide 19. Turning to our longer term vision for contributing to mitigating the effects of climate change, I would like to spend some time describing in more detail the projects we are calling T RICH, the Tampa Regional Intermodal Carbon Hub and COAST-twenty for carbon ocean storage and transport. Through T Rich and Coast 20, we are evaluating the opportunity to expand OSD's transportation business, which has historically focused on liquid bulk petroleum cargo to other liquid bulk cargoes emerging in the new energy economy.

Speaker 1

Our focus on achieving efficiencies in our fleet operations in those areas that I highlighted for OSCE sustainability efforts, along with T Ridge and Coast 20 projects, all reflect the rapidly changing policy, economic and technology environment within which the current transportation sector and the global economy must operate. Please turn to Slide 20. Let me back up a moment to provide some background on what led us to begin development of these projects. Our evaluation of the forces shaping the future of energy led us to conclude that there is a real and potentially substantial business opportunity in the emerging carbon emissions reduction industry, a confluence of technological developments, economic support, global political acceptance and increasing recognition that carbon capture is a necessary part of any plan to successfully mitigate the effects of anthropogenic climate change has led to a rapid acceleration of interest in the capture, transportation, geological sequestration and storage of CO2, known as CCS. CCS starts with the capture of carbon emissions before they leave the smokestack from power generation and other industrial emitters.

Speaker 1

The carbon captured must then be transported from the emitters capture location to a permanent storage location. There are 2 basic segments to this transportation phase, the movement of captured carbon to a location where it can be combined with other emitters captured carbon and the shipment of the aggregated captured carbon a permanent storage location. The final stage of CCS is the placement of captured carbon into permanent geological storage locations underground. Now please turn to Slide 21. The CO2 emissions are a primary contributor to global warming.

Speaker 1

Finding solutions to reduce these emissions is a priority for governments across the globe. CCS is one of the 3 principal strategies that has been adopted to reduce carbon emissions. It is believed that CCS could account for 30% of the CO2 emission reductions needed to achieve net 0 by 2,050. United States, following international agreements, which include the Paris Agreement and the Kyoto Protocol, entitled Tackling the Climate Crisis at Home and Abroad and Executive Order 14,057 titled Catalyzing Clean Energy Industries and Jobs Through Federal Sustainability. These orders state that the climate crisis is placed at the center of U.

Speaker 1

S. Foreign policy and national security, establish a national climate task force to deploy a government wide approach to combating the climate crisis and set the goal to achieve net zero emissions by 2,050. The Infrastructure Investment and Jobs Act appropriated $62,000,000,000 to the Department of Energy for use in emission reduction programs, including $2,100,000,000 for CO2 transport infrastructure to connect industrial sources of CO2 emissions with permanent underground geologic storage locations. We believe these energy based domestic and international policies are generating an increasingly reasonable commercial opportunity for early adopters in the storage and transportation of captured carbon. The U.

Speaker 1

S. Government through 3 successive administrations has on a bipartisan basis approved more than $25,000,000,000 to support the technological and commercial development of all parts of the CCS industry. In addition to grants and federal loans, in 2022, the U. S. Government adopted a direct cash subsidy payment of $85 per ton for the capture, transport and geological storage of CO2 through provisions in the Inflation Reduction Act.

Speaker 1

This subsidy is intended to de risk part of the supply chain cost for the permanent disposal of carbon and is the start, but not likely the end of the development of the U. S. Carbon price structure. This cash subsidy known as the Section 45Q tax credit has stimulated considerable private sector commercial investment in CCS and directly encouraged our initial steps towards designing a carbon storage and transport system. Please turn to Slide 22.

Speaker 1

With this context, we have been focused on how best to leverage OSG's skill sets in transporting liquid bulk commodities to gain 1st mover advantage to play a leading role in Florida in this emerging industry. This has led us to the creation of the T RICH and Coast 20 projects with a vision of developing a viable end to end takeaway capacity serving industrial emitters of CO2 in the state. Key rich, the Tampa Regional Intermodal Carbon Hub will collect captured carbon from large emitters across the state of Florida for temporary storage at Port Tampa Bay. The captured carbon would then be transported by our newly designed CO2 vessel, Coast 20, across the Gulf where the geology has been confirmed safe for injection into well sites. Vessel Project Coast 20 envisions a 20,000 deadweight ton capacity design to serve as the marine transport medium for this system.

Speaker 1

Now please turn to Slide 23. Last year, OSG submitted applications for grants available from the U. S. Department of Energy to assist with designing large scale infrastructure projects for the storage and transport of captured CO2. In December 2023, the DOE selected OSB to receive a 400 dollars grant for the Key Ridge hub site.

Speaker 1

And then in April of 2024, the DOE notified OSB that it had been selected to receive a further $3,000,000 grant for design of Coast 20 dedicated CO2 vessel and the load and discharge terminal designs. These projects have allowed OSG to further explore the CCS market as well as collaborate with other parties such as the Port of Tampa Bay, and are excited to be a leader and participate in this promising business and look forward to sharing more with you on this topic in the future as these projects that are now underway become more mature. Danielle, we can now open up the call to questions.

Operator

The first question comes from Ryan Vaughan from Needham. Please go ahead.

Speaker 3

Thank you. Hi, Sam. Hi, Dick. Hope you guys are doing well. Good morning.

Speaker 3

Good morning. So I think first things, it was great to hear about the Nikiski, 205. I think Dick said 2024 is essentially fully booked. You guys are always very good about this. About where are we at for 2025 and even if you want to stay into 2026 that would be helpful.

Speaker 3

As far as days booked, it just looks like most of it is spoken for, but any sort of percentages would be helpful. Number 2, Sam, can you just update us on where things stand, how things are going with the Alaska frontier? I know you had initially targeted to have everything completed by the Q4. That's still on track. And then I know it's early, but any sort of thoughts on use cases for the Frontier?

Speaker 3

And then, yes, just lastly, thanks for all the carbon capture, transportation information. Very interesting. Thank you.

Speaker 1

Thanks, Ryan. Percentages of forward cover, I don't have the exact numbers, you have the chart in front of you. From the last time I looked at it, we're effectively 70%, 75% covered for 2025 and probably on like 50% for 2026. We can get back to you on the exact percentages on that. You have to look at dry dock days and other factors to try and run those numbers.

Speaker 1

But I think the general feeling is that we're extremely comfortable with the forward book that we have. And frankly, we could be extending that forward book even now as I mentioned in my comments. We've been fixing ships the year in advance pretty much has been the program over the last 6 months or so. And so as our as the renewal dates of ships that come open in 2025 begin to fall within that kind of 1 year window, I think we're pretty optimistic that we'll be able to fix those ships 12 to 12 months in advance of the renewal days. As far as the Alaska Frontier is concerned, we're super optimistic on that shift right now.

Speaker 1

I just came back from Alaska. Alaskan production looks going forward. It looks very promising. In the medium term, the Santos Repsol project is slated to come on stream in the Q4 of 2025 or early 2026, ramping up to about 80,000 barrels per day. 80,000 barrels per day is equivalent of 1, it's a little bit more than 1 Alaska tanker class vessel on a consistent round voyage basis.

Speaker 1

So we see that the medium term is being an attractive increase in demand for crude oil transportation out of Alaska. And we also believe that our Alaskan tanker vessels offer the most cost effective transport method for moving north slope crude out of Valdez even in comparison to shipments internationally, given the size benefit that our ships have at 1,300,000 barrels versus the conventional 1,000,000 barrel ship that would be doing international voyages as well as a shorter duration of the voyage to the West Coast. So we think medium term, there's a lot of demand for these ships. The Willow project that Conoco has on is scheduled to come on in 2028. I spoke to the Director of the Alaska Pipeline on Alaska, and they feel quite strongly that current production out of the North Slope is about 480,000 barrels per day.

Speaker 1

By the end of this decade, that should be up close to 700,750,000 barrels per day. So medium term, that looks like really supportive data to give us confidence that these ships will have a role to play and continue a role to play in moving Alaskan crude oil. In the shorter term, as we now know, we moved the Alaska Explorer to the Gulf Coast of Mexico. She's regularly now trading from Texas to the Delaware Bay. We think is other demand for Gulf Coast, the East Coast operations.

Speaker 1

We have 2 or 3 conversations ongoing right now surrounding those kinds of opportunities. And particularly given a lot of the geopolitical uncertainty and I would characterize a shrinking availability of Atlantic basin crudes that production of U. S. Crude and availability of U. S.

Speaker 1

Crude at attractive prices, I think, is stimulating quite a bit of inquiry into how to move that crude to production centers outside of PADD V excuse me, PADD III. So as I said, we're optimistic that in the next month or 2 as the date for availability become narrowed to a matter of weeks rather than or days rather than a month or 2, we'll be able to fix that ship with a specific window to be able to start to trade.

Speaker 3

That's great. Thank you,

Speaker 1

guys. Thank you.

Operator

The next question comes from Clement Mullins from Value Investors Edge. Please go ahead.

Speaker 4

Good morning. Thank you for taking my questions. I wanted to start by asking about the overall Jones Act market. Could you provide some insight on recent trends in the renewable diesel trade and on your expectations going forward? And secondly, there are no Jones Act MRs in order, but could you provide any indication of how much it would cost to order 1?

Speaker 1

I'll take the second question first. There is only speculation about what a new MR Tanker might cost. I understand that indications for new construction and not even firm office that indications have been in excess of $200,000,000 and that the earliest delivery dates that are being indicated for U. S. Built MR Tankers is in the 2028 to 2029 range.

Speaker 1

I am not aware of any active discussions ongoing about construction of new MR tankers. But those are the levels that the market has tended to talk about when looking at possible replacement capacity. Renewable diesel, there is a considerable amount of data that is out there now talking about renewable diesel. The EIA is producing quite a bit of granulated data. The levels of production have grown considerably from sort of the low of 2018.

Speaker 1

And I think are scheduled to reach as much as 7,200,000 gallons a year. I can't remember the actual number. I can look those up. But if you go to the EI website, you can find a lot of data on that. The most important element that we look at are the production centers in the Gulf of Mexico and existing and expansion programs that are announced and underway for Gulf of Mexico production will take renewable diesel production in the Gulf Coast to about 100,000 barrels per day by the end of this year.

Speaker 1

100,000 barrels per day were it all to go on ships would be the equivalent of roughly 10 MR tankers. It doesn't all go on ships. The data provided by the EIA suggests that it's between 15,000 and 20,000 barrels per day has historically moved by rail. But the increase of marine transport over the last 12 months to 18 months has gone from roughly 20,000 barrels per day to, as I said, close to 50,000 barrels per day in the latest data point. My expectation is across the industry, it's likely that between 68,000 and possibly as many as 10 vessels we'll ultimately be committed to the renewable diesel transport trade.

Speaker 1

That's significant in the context of an overall market for of Josact MR tankers of roughly 45 vessels. So again, it's been a very strong stimulative factor in the recovery of the Jones Act market and I think will continue to be a strong demand force for the foreseeable future.

Speaker 4

That's very helpful. Thank you. Turning to international MRs. The real light spot average was a bit weaker than expected considering how strong the market has been over the past few months. Was this attributable to vessel repositioning?

Speaker 1

For our tanker security vessels, is that your comment?

Speaker 4

Exactly. What exposure on these vessels?

Speaker 1

Yes.

Speaker 4

The principal

Speaker 1

factors that contributed to maybe less than optimal earnings on our CNG vessels. We had the Overseas Suncoast

Speaker 5

on a

Speaker 1

time charter to the MSC in the Q4 of last year. That time charter ended and then gave redelivery of the overseas Suncoast on the West Coast of the United States. So we had to reposition that vessel from the West Coast of the U. S. Into the Gulf of Mexico in order to do a scheduled lifting under our Government of Israel contract, the fuel costs and effectively zero earnings of that voyage from the West Coast to the Corpus Christi loading area, that depressed earnings to some extent.

Speaker 1

And then the second event has been, we have seen a relatively concentrated number of voyage nominations under the Government of Israel contract during the first half of this year. That is probably related to stuff that's going on in Israel in terms of military activity. And so for at least 1 and I think a couple of the voyages that may have been accounted for in the Q1, we had the ballast back from Israel in order to meet the lay can for this next subsequent voyage. And normally we're able to pick up a cargo and then get backhaul on those types of front haul voyages. But the timing of those voyages necessitated that we actually ballast back.

Speaker 1

And then the last thing is that has contributed to less let's say, the decline in earnings as to compared with previous quarters, we didn't do any MSC preference cargoes during the quarter. And there's been a relative lack of opportunity for those types of cargoes, which is something that is a topic of conversation amongst those OSG and other companies that are participating in the tanker security program, looking for ways to understand why cargo availability has been relatively low and ways to stimulate that cargo availability in the future.

Speaker 4

Makes sense. Thank you. Final question from me. General and administrative expenses increased quite significantly quarter over quarter. What were the key drivers behind that?

Speaker 4

I'm assuming it's a mixture of fees to assess Saltchuk's offer and higher spending on CO2 feasibility studies. But how should we think about the run rate going forward?

Speaker 1

You should think that the Q1 G and A expenses are not likely to be the go forward level. We had a couple of relatively unique circumstances in the Q1. First of all, compensation payment, the way that we account for employee compensation is we accrue at 100% of target during the year. But if there is a premium to target that's accounted for when the awards are made due to the strong performance of OSG last year, a number of the beneficiaries of performance based compensation, including principally the executive officers, attained performance at above target and therefore the compensation the performance compensation was paid out at above 100% of target and that then was expensed in the Q1 of 2024 as per our policy. So you won't see that repeated in the second, third, Q4 of this year.

Speaker 1

The second contributing factor, as you have noted, there have been professional fees that have been incurred in the evaluation of the non binding indication of interest received in January. The continuation of those fees is subject to the outcome of those conversations, but they are not related to our, I would call it, our ongoing business expenses in terms of running the business. The quantum of those fees and the impact of that going forward is still a little bit up in the air. But I would suggest that as a modeling function and leaving those kinds of transaction fees out for the balance of this year, you can look to last year's figures and there's probably a 3% to 5% increase in last year's figures that we would be expecting for the balance of the year.

Speaker 4

Thanks for the color. That's all for me. Thank you for taking my questions.

Operator

The next question comes from Josh Kehoe, a private investor. Please go ahead.

Speaker 5

Yes. Hi, Sam. Hi, Deck. Thanks for taking call. Just to follow-up a little bit on the renewable diesel.

Speaker 5

I know Vertex in Mobile, Alabama yesterday announced they were no longer going to be producing renewable diesel. They're going to take that unit and move it back to traditional petroleum refining. If I remember correctly, OSG Martinez is contracted or chartered to do renewable diesel and there's just been

Speaker 1

a lot of movement in

Speaker 5

the renewable diesel markets and for a number of reasons. And I'm just seeing if curious if you're hearing anything from, number 1, your charterers about continuing to do that business, whether it's going up or down. And number 2, if there's going to be any effects on what Martinez is going to do. I know I think believe it's chartered out through February of 2026. And that's the end of the question.

Speaker 5

Sorry, more of a statement. Apologies.

Speaker 1

Look, our charter is an intermediate with Vertex. And so they have an obligation to continue to charter the vessel. And I would say to you, Josh, there's tremendous demand for MR tankers right now. So I believe that if they're not going to find use for the vessel themselves, they'll be able to sub charter that vessel out. I can also share you that the customers that we do business with right now that are involved in the renewable diesel trade, they still seem to want more capacity.

Speaker 1

So that gives me some indication or some insight into the fact that there's no retreat from their commitment to being in this business. And for now, the ships that we have on charter that were intended to be utilized in these trades, they don't come in for a year or 2 years in the future. So we're watching it. But again, the sort of feedback that we're getting is there is no retreat from commitment at this juncture.

Speaker 5

All right. Thank you. That's very useful to hear. And then my second question kind of relates to that having to do with California and California Air Resources Board and this we've discussed before the commercial harbor craft rules. I'm just and you may not even be able to answer this, but just say for instance, the car doesn't back down and suddenly the Jones Act ATVs operating in PADD V suddenly have to relocate to the Gulf Coast.

Speaker 5

Obviously, that would create quite a bit of consternation for at least a short time. Do you get a sense of how flexible the MR tanker fleet might be to move to the West Coast to replace those ATVs should this happen or would pad 5 just suddenly find itself dramatically short Jones Act tonnage? Sorry, I know sort of a complicated question. That's No, no. But thank you very much.

Speaker 1

I believe that if the scenario that you painted, which is that CARB doesn't back down on insisting that ATBs that currently operate on the West Coast have Tier 4 engines. I think those vessels will reposition to the Gulf Coast and I think that will create sufficient capacity to allow repositioning of MR tankers to the West Coast to backfill that the vacancy or the void that those repositioning ATBs will create. I think what's interesting is in the medium term that will in the short term that will create some certainly some inefficiencies. Cargo lot sizes on the West Coast have tended to be smaller than full MR capacity vessels. That's one of the it may be a chicken and egg.

Speaker 1

It may be because the ATBs are smaller and lot sizes are smaller. Once the or if the tankers replace ATBs on the West Coast, I think it will take some a little bit of time for the traders to readjust to having more capacity in the form of larger ships. In a similar way, the repositioning of those ATBs to the Gulf Coast will be a reduction in efficiency because smaller lot sizes will be moving and the implied cost of transportation on a unit basis will probably go up. But I think the market solves that problem over time. In the short term, yes, there will be some disruptions as ships reposition from one place to another.

Speaker 1

But the market signals, I think, will direct a solution to that over time with, as I said, probably a decline in efficiency and maybe increase in unit cost deliveries.

Speaker 5

Great. Thank you very much.

Operator

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

Speaker 1

Thank you, Danielle, and thanks everybody for joining in today. We appreciate your participating and your continuing interest in OSG, and we look forward to speaking to you again soon. Have a good morning.

Operator

The conference is now concluded. Thank you for attending

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Earnings Conference Call
Overseas Shipholding Group Q1 2024
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