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Overseas Shipholding Group Inc (OSG) Q3 2020 Earnings Call Transcript

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Overseas Shipholding Group Inc (NYSE:OSG)
Q3 2020 Earnings Call
Nov 6, 2020, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Overseas Shipping Holding Group Third Quarter 2020 Earnings Release Conference Call. [Operator Instructions]

I would now like to turn the conference over to Sam Norton, President and Chief Executive Officer. Please go ahead.

Samuel H. NortonPresident and Chief Executive Officer

Thank you, Jordan. Good morning. I thank you all for joining this call for the presentation of our 2020 third quarter results and for allowing us to provide additional commentary and insight into our current state of our business and the opportunities and challenges that lie ahead. As usual, Dick Trueblood, Molly Arcia and Princeton McFarland are joining me on this presentation. To start, I would like to direct everyone to the narratives on Pages two and three 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.

We will be offering you more than just an historic perspective on OSG today, and our presentation includes forward-looking statements, including statements about anticipated future results. These statements are subject to uncertainties and risks. Actual results may differ materially from projections and could be affected by a variety of risk factors, including factors beyond our control. For a discussion of these factors, we refer you specifically to our annual report on Form 10-K for the fiscal year ended December 31, 2019. Our Form 10-Q reports for the first and second quarters of 2020, our Form 10-Q for the third quarter of 2020, which we anticipate being filed later today and our other filings with the SEC, which are available at the SEC’s internet site, www.sec.gov as well as on our 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 obligations to update any forward-looking statements, except as may be legally required. 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 third quarter’s earnings release, which is also posted on our website. As announced earlier this morning, OSG delivered solid financial results in the quarter just as needed. We continue to benefit from a high percentage of fixed revenue streams and have managed pandemic related logistical, health, safety and other costs in line with expectations.

As a result, cash flow from operations continued to be strong, particularly when considering the nearly 200 revenue days lost during the quarter to plan the drydock operations. Even signs of a stalling recovery in the main fuels markets in which we are active, we’ve taken steps to preserve value and to strengthen our liquidity in anticipation of heightened volatility in the months that lie ahead. With a strong balance sheet and prospects for a sustained economic recovery in 2021, we remain confident in our long-term strategy and the fundamentals of our business. Our niche businesses provided the core strength to our diversified portfolio. Our shuttle tanker, lightering and MSP vessels all operated at or above expectations during the quarter, once again demonstrating the stabilizing impact on period-to-period performance of these specialized vessels.

This quarter, the vessel’s operating contribution from our niche market activities provided $22 million. Adding to the solid foundation of niche vessel contributions is the emerging importance of our ATC tanker fleet in the makeup of our earnings base. As we expected, the acquisition — this acquisition is proving to have been an important development for OSG. With $16 million in TCE revenue earned and $8.1 million of vessel operating contribution from these assets, our ATC tankers saw utilization rates of 100% of available days during the quarter just ended. Given the multiyear time charter commitments remaining for these vessels, we expect they will continue to provide a stable and solid cash contribution base.

In delivering these results, our most important management challenges have been and will remain sustaining operational readiness at all times. Since the one shipboard case of a positive COVID-19 test experienced in early July, we have not experienced any further shipboard outbreaks and have seen no loss of revenue days or extraordinary expenses incurred as a result of COVID-19 on board any of our vessels. However, maintaining a virus free environment, onboard operating vessels will be a continuing important focus. As the spread of the virus expands within our community, we remain prepared for all higher periods resulting from managing virus related delays and for increased costs associated with testing, cleaning, quarantine and immunization and certification.

COVID-19 continues to affect all operations and to impose risks and hardships for those charged with delivering the services that our communities rely upon us to perform. The face of these challenges, it is gratifying to highlight that our vessels operated for 93% of the available operating days during the quarter, a testimony to the continued response of all of our employees in meeting the elevated operational challenges that we currently face. Our businesses cannot function without the dedication of the individuals who bear the burden of ensuring its continued safe operation. A particular note was work done in completing several planned out of service periods for drydock and surveys, work that is particularly challenging in a pandemic affected environment.

The sense of responsibility shared by OSG’s mariners and shore-based support team in meeting the essential need to supply transportation fuel to the markets that we serve is commendable. We are managing our operations, very much aware of the systems within which we operate are under stress with risks and vulnerabilities that have previously not affected our performance. Contribution made by all of our employees, and in particular, our seekers in realizing the strong financial results reported this morning should thus be applauded. Although widely available vaccines appear to be a more reasonable expectation in the coming months, the bridge to normalcy will still require some work.

We are monitoring several legislative proposals that could present opportunities to recover some COVID-19 related costs or receive some assistance and adjusting to the disruptions caused by the continuing pandemic. The prospect for further fiscal stimulus acting to accelerate demand is also of interest. While we are not expecting any material impact on either our liquidity position or our financial results arising out of the application of already enacted provisions, we are hopeful that post-election developments will be more supportive. Turning now to the impact of the virus on our conventional Jones Act trades. It is becoming apparent that the glide path afforded us by the strong time charter book achieved at the end of last year, aided by the tailwinds of the successful completion of our ATC acquisition about to encounter some turbulence.

These factors have to date kept us largely immune from the pandemic related business shocks experienced by others. Yet as we approach the end of what has been one of the most unusual years of our lifetimes is becoming more apparent that the demand destruction arising out of behavioral changes caused by the COVID pandemic is lingering longer than had been initially anticipated. Our principal customers, U.S. based refiners and distributors continue to be heavily impacted by reduced levels of domestic transportation fuel demand, which having picked up in the summer months has sagged again as we have moved into the fall. Ethylene consumption has retreated back to levels 10% to 12% below year ago norms, and jet fuel consumption remains about 50% below year ago levels. The EIA statistics released this past week show refining operation capacity still below 70% in PADD one and just over 75% in PADD III.

Recovery of global oil demand is nearly four million barrels per day lower than expectations issued in early July. In addition to flagging demand, middle distillate blood has been the biggest obstacle to the recovery of refining margins, increased output and improved crude demand. That blood and weak middle distillate spreads have reduced refining margins, undermining crude demand and crude oil prices. Refiners and distributors of transportation fuel have felt the sting of these energy market developments. Layoffs at our principal customers are widespread. Marathon and Shell, PBF and Phillips 66 have already or will soon reduce U.S. operating refining capacity. Cost-cutting in the face of reduced demand, inflated inventories and poor refining margins is foremost in our customers’ minds.

In these circumstances, we consider the pendulum of our customers’ risk aversion as having swung to an extreme. Focus is concentrated only on the immediate future with one outcome being the reluctance to commit a long-term time charters. Notwithstanding these sobering data points, we and many analysts that we follow continue to see the demand shock as being virus codependent and that a sharp recovering on the back of a vaccine availability can be reasonably expected. The timing of this recovery is to our mind the only material variable. Independent of vaccine news, there has been an encouraging recent trend in inventory reductions across the board with notable continuing draws in both domestic crude oil and distillate stocks in recent weeks. Even a gradual demand recovery in an environment of reduced inventories should positively impact chartering demand.

Our short-term forward planning takes this into consideration and anticipates a return of increased demand for time charter transportation capacity during the first half of next year. As we have noted frequently in comments in past quarters, our principal end user base is vulnerable to any potential marine transportation supply shortage, as the marine length between production and distribution points is not easily replicated. This is particularly true in the market for refined product distribution. Obtaining the stability of cash flow offered by time charters and multiyear contracts of affreightment remains a fundamental objective of our chartering approach. A material demand recovery in a supply constrained market should encourage our customer base to secure greater visibility of access to forward transportation capacity.

A return to normal in this context would be a favorable development in helping us achieve our long-term chartering objectives. In awaiting this development and in response to the sharp curtailment of immediate activity by our customers, we have kept two of our Jones Act tankers and one lightering ATB currently trading as a conventional ATB in layup. We consider it likely that at least one more vessel will enter layup prior to the end of this year. At this time, we continue to maintain the operational availability of the Overseas Martinez for potential spot market moves. Future developments and the demand for coast wide crude oil transportation will continue to feature the balancing of available supply in our conventional Jones Act trades.

As always, relative price of domestic versus international crudes remains a critical variable from our perspective. Relative price differentials should not be looked at in isolation however. International shipping rights also factor into the equation, looking at comparable delivery cost economics. It bears repeating that although rates in the international markets act only indirectly on domestic market conditions, lower international rates have the marginal effect of creating more competition for our vessels when considering cargo movements on a delivered cost per barrel basis.

Before handing things over to Dick to take you through the numbers, I would like to note that our current fleet profile consists of three actively trading large crude oil tankers being operated by ATC, one conventional ATP, two lightering ATBs, three shuttle tankers, 10 MR tankers and two non-Jones Act MR tankers that participate in the U.S. Maritime security program. OSG also currently owns and operates two Marshall Island Flags MR tankers, which trade internationally. OSG has on order one Jones Act-compliant barge scheduled for delivery at the end of this month, which will be paired with one of our existing tugs. A one-year time charter for this ATB has been secured upon its delivery.

I will now turn the call over to Dick to provide you further details of our third quarter results for 2020. Dick?

Richard TruebloodVice President and Chief Financial Officer

Thanks, Sam. If we can turn to Slide seven, please. We were pleased with our third quarter operating results, which were in line with our expectations. Year-to-date, adjusted EBITDA exceeds $104 million. As is typical, the third quarter is a slow period, which this year was exacerbated by the COVID-19 pandemic. Thus, there were even fewer than usual spot cargo movements, and those were for ATBs. The Overseas Long Beach was redelivered to us during the quarter and shortly thereafter, we performed our required drydocking and survey. In recognition of the lack of spot market activity, we decided to play sure and layup. As we’ve discussed in prior quarters, we had a significant amount of drydock activity this quarter.

We had 193 days in which we were offhire resulting in $9.9 million in lost revenues during the quarter. In 2019’s third quarter, there was no drydock activity. Year-over-year, TCE revenue grew 21% to $92.3 million, while adjusted EBITDA increased 35% from $16.1 million to $21.8 million. Sequentially, TCE revenues decreased $8.1 million. Please turn to Slide eight. Although dampened by our drydock activity, we continue to realize the positive impact of our fleet operating principally under time charters in an improved great environment. We operated 24 vessels for the full third quarter of 2020 and 19 in the third quarter of 2019. During the quarter, we sold the OSG 244, our final rebuilt barge for scrap.

RAGS, the tug formerly coupled with the OSG 244 has completed her drydock and is in Oregon awaiting the delivery of the OSG 205. Since the third quarter of last year, we added the three Alaskan tankers as well as the Gulf Coast, Sun Coast, Key West and the OSG 204. We did not operate any rebuild ATBs in the current quarter. The Alaskan tanker acquisitions contributed $16.2 million in TCE revenues during their second full quarter of operations. Revenues from our Jones Act Handysize tankers decreased $8.8 million. The decrease was principally driven by lost revenue due to drydock related offhire days. Also contributing were the layup of the Key West and very late in the quarter, the Long Beach.

Effective daily rate for fixed earnings increased over $3,900 per day from last year. TCE revenues from our four non-Jones Act tankers increased $4.8 million from last year’s quarter. Gulf Coast and Sun Coast, both of which were on long-term time charters contributed $2.9 million of the increase. We conducted two voyages for the government of Israel this year compared to one last year. Revenue days approximately doubled in comparison to last year. Effective day rates for fixed earnings increased slightly less than $3,000, while spot market rates were almost flat in comparison to last year. ATB TCE revenues decreased by $0.9 million from 2019’s third quarter. The OSG 204 in its first full quarter of operations contributed all of the third quarter 2020 revenues. Last year, two rebuilt ATBs operated in our third quarter. Total revenue days decreased from 180 during last year’s quarter to 146 in this year’s quarter. Lightering revenues decreased $2.8 million from the third quarter of 2019.

Both of our lightering ATBs were a drydock during the third quarter of 2020 for a combined 90-odd higher days. Service demand continued to be lower than the prior year as refinery runs remained at reduced levels. Effective day rates during the quarter increased from 2019. Sequentially, TCE revenues decreased $8.1 million, principally due to a net $8.2 million increase in offhire lost revenues over the second quarter. Jones Act Handysize tanker revenues decreased approximately $12.7 million. The decline was driven by increased drydock related offhire days and to a lesser extent, the impact of the Key West and layup during the quarter. Lightering ATBs and the non-Jones Act tankers all reflected increases in revenues when compared to the prior quarter. Non-Jones Act tankers had additional revenue days as their drydocks were completed during Q2. The ATB operations reflect the first quarter impact from the OSG 204. Lightering revenues were low in the prior quarter due to reduced volumes.

Please turn to Slide nine. The spread between fixed and spot earnings narrowed slightly as the portion of our fleet operating on time charters declined somewhat during the quarter due to both drydock activity and the redelivery of the Long Beach. Please turn to Slide 10. Conventional tankers spot market TCE revenues represented a de minimis portion of our total tanker revenues in the quarter. The decrease in fixed revenues during the quarter were, as previously discussed driven by increased drydock offhire days. We classify short-term time charters as spot market activity.

Please turn to Slide 11. Our niche businesses continue to provide earnings stability, which serves to underpin our overall operations. During the third quarter of 2020, lightering revenues increased for the reasons previously described. During the quarter, both the OSG 350 and 351 went through required drydocking. And during the time, when the OSG 351 was in the shipyard, the 350 operated in the Delaware Bay to meet our service commitments. Non-Jones Act tanker revenues increased from both the prior year due to an increase in revenue days and Q3 2019 when we operated only two ships. Shuttle tanker revenues were essentially flat from the prior quarters.

Please turn to Slide 12. Vessel operating contribution, which is defined as TCE revenues less vessel operating expenses and charter higher expenses increased 34.5% from Q3 ’19 to $26.5 million in the current quarter. Our Alaskan tanker provided $6.2 million of the increase. The Jones Act tanker loss increased $2.6 million from the year ago quarter, primarily due to drydock activity. Our niche market contribution increased $1.7 million from last year as we added the Gulf Coast and Sun Coast to our fleet. ATB vessel operating contribution during the quarter results solely from the introduction of the OSG 204 and her initial time charter, which commenced in early July. We will take delivery of the OSG 205 later this month, at which time she will commence for initial time charter. Sequentially, vessel operating contribution decreased $9.8 million from Q2 2020. Contributing to the decrease was an $8 million increase in offhire lost revenues and the Key West layup. This was partially offset by a $6.6 million increase in contribution from our Alaskan tankers.

Please turn to Slide 13. Third quarter adjusted EBITDA increased $5.7 million from 18 — from $16.1 million in the third quarter of 2019 to $21.8 million. The increase resulted from an increase in the number of vessels operated, including the Alaskan tankers, effective increased rates across the fleet and improved utilization due to the shift to time charters. This was partially offset by 193 offhire days due to drydock activities in the current quarter compared to none last year. Adjusted EBITDA was $21.8 million in the quarter compared to $29.8 million in the prior 2020 quarter. Quarterly decrease was driven by the significant increase in lost higher revenues.

Please turn to Slide 14. Net loss for the third quarter of 2020 was $700,000 compared to a net loss of $3.8 million in the third quarter of 2019. Operationally, the increased TCE Jones Act tanker revenues and new non-Jones Act tankers as well as the addition of the Alaskan tankers drove the reduction in net loss. Please turn to Slide 15. During each year, we perform scheduled maintenance as required by regulation. Vessel maintenance requirements are based on the original construction date at intervals of approximately 2.5 years. As a result, we have years in which the volume of drydock activities are substantially greater than other years. This slide provides information for scheduled maintenance and ballast water treatment system installations.

It does not include unplanned repairs, which should they occur could impact the schedule. While vessels are in drydock or otherwise unavailable for use, they are offhire even if otherwise employed on the time charter. We work to minimize the number of offhire days to reduce the revenue loss we sustain. This year because of COVID-19, estimating the timing of drydock activities on a quarterly basis has been particularly challenging. Shipyards are deferring scheduled drydocks because of staffing issues related to COVID-19 lockdowns. Technical personnel from third-party vendors necessary to accomplish certain aspects of the maintenance process have been and are unable to travel to repair locations. This has resulted in a series of backlogs throughout the industry.

Slide presents our best estimates of the timing of drydock activity for the remainder of the year, which has changed from prior estimates. It is possible that these estimates will continue to change as to timing. We expect that although the timing may shift, the annual totals will remain reasonable estimates. Please turn to Slide 16. This comparative graphical detection of 2020 and 20,000 — or 2019 drydock activities shows how active a drydock year 2020 is. We estimate, which includes the three recently acquired Alaskan tankers that our investment will be $34.7 million in drydock expenses and $18.6 million for ballast water treatment systems in 2020. We will experience approximately $19 million in lost revenue for the full year resulting from 392 offhire days.

Changes from prior quarter estimates result from both actual costs that were completed and timing differences. In all cases, we endeavor to work through this process expeditiously to minimize the costs incurred in the number of days offhire. As you can see, there were no drydock days in either the third or fourth quarters of 2019. Our estimate is that in total, we will experience 266 offhire days in the second half of 2020 with a related revenue loss of approximately $14 million. Please turn to Slide 17. The OSG 205 is scheduled to deliver in late November. We have invested through the end of the third quarter $45.9 million in the 205. Remaining payments including those due on delivery total $5.1 million. We have secured a financing commitment for the OSG 205, which we expect to close in the next two weeks.

We will capture approximately $28 million of our equity currently invested in the barge. Please turn to Slide 18. At the beginning of the third quarter, we had total cash of $94 million, which included $20.1 million of restricted cash. During the third quarter of 2020, we generated $22 million of adjusted EBITDA and working capital provided another $3 million of cash. We expended $11 million in dry docking and improvements to our vessels, and we invested $16 million in new vessel construction and other capex. We expended $24 million of cash to fully repay the loan secured by the Overseas Gulf Coast. $20 million of that was the previously restricted cash. We incurred $5 million in interest expense and made debt repayments of $9 million. Result was we ended the quarter with $54 million of cash, including $100,000 of restricted cash.

Please turn to Slide 19. Continuing our discussion of cash and liquidity as we mentioned on the previous slide, we have $54 million of cash at September 30, 2020 including $100,000, which was restricted. Our total debt was $412 million, and this represents a decrease of $34 million in outstanding indebtedness since the end of June. Our $325 million term loan has an annual amortization requirement of $25 million or $6.25 million per quarter. With $374 million of equity, our net debt-to-equity ratio is 1 times. Finally, we haven’t included the AMSC profit share slide in this presentation. We do not expect any profit share obligation to AMSC in connection with our bareboat charters will be created in either 2020 or 2021.

This concludes my comments on the financial statements, and I’d like to turn the call back to Sam. Sam?

Samuel H. NortonPresident and Chief Executive Officer

Thank you, Dick. Largely speaking, we can be pleased with the financial results achieved thus far in 2020. Looking ahead to the fourth quarter, we do anticipate that the turbulence experienced during the third quarter will likely pick up. We will benefit from fewer planned dry docking days, and we anticipate improvement in our niche business performance. We are thus anticipating TCE revenues of between $86 million and $90 million [Technical Issues]. These expectations aren’t bad, then we will deliver a full year adjusted EBITDA of between $120 million and $125 million essentially at the high end of the full year guidance we provided in our first quarter earnings call.

Although our forward planning contemplates layup of several vessels in the immediate future, we consider the prospects for a sharp and robust demand recovery during the first half of next year to be a reasonable expectation, assuming continued progress on vaccines and other measures to contain the spread of the virus. Although a restoration of jet fuel demand will likely lag other transportation fuels, a return of a healthy gasoline market spurred by stimulus and a return to more normalized levels of mobility is to be considered more likely than not. Demand for crude oil marine movements domestically remain difficult to predict. Price differentials, pipeline developments, refinery operating conditions and the politics all act to constantly modify the decision trees that ultimately influence crude price and production outcomes.

Current crude price differentials are at the low end of recent spreads and are not overly supportive of substituting international crews with domestic sources. Conversely, if the multiple variables affecting refinery sourcing decisions shift to favor domestic over international crude purchases, additional crude transportation demand could serve to significantly tighten the market with favorable implications on employment prospects for our conventional tankers. Above all, we take comfort in the strong contributions that we can expect next year from the ATC vessel on charter as well as the expected revenue streams from our niche businesses, in particular, our two active shuttle tankers in our existing MSP vessels.

We have extended our contract of affreightment with the government of Israel for another year in 2021 and have taken steps to enhance the utilization rates of all of our international trading tankers. In 2021, we will have committed revenue streams for the full year from the OSG 204, OSG 205 and the ATC vessels that were only partially present during 2020. These cash flow stabilizers coupled with our healthy levels of available liquidity provide confidence that we will ride out the short-term market weakness and carry through to what we believe to be fundamentally promising medium and long-term futures.

Challenges remain as new opportunities. We have a strong balance sheet and a renewed fleet profile of assets, which has reduced the average age of our fleet substantially. We continue to achieve lower costs and material improvements in our key safety and operational performance measures. We are focused on achieving high health and safety performance in the COVID-19 environment. While we foresee greater uncertainty in the immediate future, we remain confident in the long-term success of our business model and of OSG’s ability to maintain its position as the leading U.S. flag vessel operator in the years to come.

Jordan, we can now open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Joe Ringham with Arctic [Phonetic]. Please go ahead.

Joe RinghamArctic — Analyst

Hi. Thanks for taking my question. How are you?

Samuel H. NortonPresident and Chief Executive Officer

Very well. Thank you.

Richard TruebloodVice President and Chief Financial Officer

Good. How are you?

Joe RinghamArctic — Analyst

Yeah, thanks. So I have a couple of questions regarding rates. Could you give us any data on the most recent spot market fixtures in terms of rate levels? And also, you have a few vessels coming off contracts in the coming months. Could these be chartered out on new TCE contracts? And if so, what would be the current level, let’s say, medium to long-term charters?

Samuel H. NortonPresident and Chief Executive Officer

Joe, this is Sam. It’s really difficult to answer that question for two reasons. The first is that, there has been virtually no spot movements that are in the open market for the — probably the last four or five months. The underlying cause of that, I addressed in my initial comments regarding sort of operational levels at refineries and large inventory levels that have been withdrawing down over the course of that period. What we’ve seen in the spot market are largely ATB fixtures, one or two a month to virtually no spot market fixtures to be able to pay any kind of rates, at least from looking at available empirical data. There are brokers that try and make assessments of where the spot market rates may be.

To my opinion, those are educated guesses. But you can probably pick that if you have access to some of the broker assessments. As far as next year is concerned, my allegorical response is analogous to the election activity that’s going on here in the United States. Everybody wants to know what the answer is. But frankly, it’s impossible to determine what that will be at this time. We just simply have to wait and see how the market develops. As I indicated in my initial comments, we think that the general attitude of our customers right now is extreme risk aversion. That’s understandable in the context of what’s going on inside many of the oil companies. Refineries are being shut down, people are being laid off. There’s tremendous cost-cutting pressure being put. The major integrated oil companies have been losing a lot of money. That creates an environment of extreme uncertainty. In our view, that’s a short-term phenomenon.

We — I look at China, for instance, as an example of what a post-COVID economy might look like. The recent data out of China has shown that both economic activity and sort of normalized mobility data is — has already recovered at levels beyond where they were last year. So that’s maybe a unique example in a world where COVID continues to spread. But it is heartening to us to look at that as an example of the likelihood of pay return to normalcy and a recovery of prior year’s activities once we get to a post-COVID environment. When that will be, that’s something that I’m not able to forecast, but it’s something that available information certainly gives us confidence that it’s really a matter of when, not if, and we’ll just position ourselves to respond once that development occurs.

Joe RinghamArctic — Analyst

That’s fair. And thanks for explaining. And then one other for me. The ATB new build, could you provide any terms on that financing?

Richard TruebloodVice President and Chief Financial Officer

Not yet. I mean, it’ll be a seven-year period, about 16.5 year amortization profile. Rate isn’t set yet.

Joe RinghamArctic — Analyst

All right. Thanks for that.

Richard TruebloodVice President and Chief Financial Officer

It’ll be a competitive rate in relationship to today’s environment.

Joe RinghamArctic — Analyst

Yeah, I see. That’s all for me. Have a great Friday.

Richard TruebloodVice President and Chief Financial Officer

Thank you, Joe. Our next question comes from Ryan Vaughan with Needham. Please go ahead.

Ryan VaughanNeedham — Analyst

Thank you. Hey, Sam. Hey, Dick.

Samuel H. NortonPresident and Chief Executive Officer

Hello, Ryan.

Richard TruebloodVice President and Chief Financial Officer

Good morning.

Ryan VaughanNeedham — Analyst

Good morning. Hey, so just kind of thinking back over the last couple of years, obviously, you guys were all set up and excited going into the year for 2020. And a lot of that was just because the industry was finally right sized, as far as kind of supply and demand. So no one really saw this come in, and it certainly had a major effect and kinda pushed things out.

But my question is really, just along those industry fundamentals, as far as, call it, seven, eight months into this, not really gonna even ask what the right equilibrium is, it’s probably too unknown. But do you have a strong fleet? You retired a lot of your old vessels. I’m just wondering, are you seeing out there? Are you expecting more retirements just for some of those, particularly older vessels that — or even companies that don’t have a strong of liquidity and cash flow profile and diversification like you guys have? Just more vessels coming out of the system. I have a few others, but if you don’t mind, we can start there.

Samuel H. NortonPresident and Chief Executive Officer

Yeah. I’ll take that one, Dick.

Richard TruebloodVice President and Chief Financial Officer

Okay.

Samuel H. NortonPresident and Chief Executive Officer

I think our current assessment is absent, a material change in what we currently know. Further removal of capacity is unlikely in the foreseeable future. There is — from our perspective, disappointingly, there has been a move by some customers to extend older vessels. That’s clearly related to the fact that older vessels can deeply discount the market. We have a view on that. Obviously, we think that maintaining younger vessels, meeting current environmental and safety requirements is a responsibility of OSG and our industry competitors. Apparently, not everybody thinks the same way.

So specifically, there are three older tankers that we are aware that will likely continue to operate for the foreseeable future. And that, I would say, was a bit of an unexpected development, but one that we’re adapting to. Older ATBs, it’s too early to say. We had the lion’s share of the older ATBs that came out of the market. The other cohort of ATBs were owned by a company called Bouchard. As you probably are aware, that company is currently reorganizing under Chapter 11, and the view is that the older cohort of the ATBs in that fleet will not likely come back to the market. So they are already out of the market in essence, and so that factor is already priced into what we’re seeing in the supply demand.

Ryan VaughanNeedham — Analyst

Got it. That’s helpful. On the Jones Act tankers, you said two in lay-up, expect another. We have been kinda expecting three ourselves. But just for the remaining — I know you have several time charters coming up. Yeah. Just wondering, should we expect that — obviously, totally understand your customers with a lot of uncertainty. Should we expect those to be on some sort of time charter, whether it’s a very short term or what you have been doing on the one years? Or do you expect to just run the others on spot?

Samuel H. NortonPresident and Chief Executive Officer

I think the right way to answer that question is to, again, emphasize that the immediate future is clouded to an extraordinary degree. Now if you look at recent refinery runs — refinery, I saw the statistic on Wednesday. Gulf Coast refineries were running at about 75% of installed capacity. A year ago, they were running at 96%. The sort of average normalized levels of refining output are in the upper 80s for the PADD 1, PADD 3. The East Coast refineries are running 60%, 65%. That has two implications. One, is that you have less crude oil moving to supply those refineries. And secondly, you have less product output that needs to be moved around.

All of that is influenced by two factors. One is a real reduction in demand across the barrel slate of products. And that’s something that is observable. The — our feeling is that the lower refinery levels, some of it was hurricane-impacted. Some of it was intentional to try and see a draw of inventories, and that we’ve started to see. So logically, as inventory levels get drawn down, and if there is then a subsequent pickup in demand, which we — as I said, we anticipate, we just don’t know when. Then that should result in a pretty sharp return to shipping needs across the principal Jones Act markets. That could happen tomorrow, it could happen two or three months from now. I don’t know, and I’m not gonna speculate on that. But it is our firm belief that, both from a consumption point of view, that the levels of transportation fuel consumptions are not likely to remain at the levels that they are now in the face of a more normalized economic level of activity.

And more importantly, it is highly unlikely that operating — refinery operating capacity will remain in the sort of 60% to 70% range. And once those factors shift, then it’ll be a lot easier to be able to understand what the — what I would call it, that the real signal of medium-term demand is. Right now, there’s just a lot of noise. And it’s just not responsible for us to try and predict where that, let’s call it, supply demand balance will fall out. The other thing that is — there’s a factor here, is international crude oil price differentials to — relative to the U.S. prices, have come in quite a bit. We also don’t think that’s sustainable. U.S. production is continuing — probably has bottomed, and is continuing to show signs of recovery. And logic into — pipeline takeaway capacity from Midland, for instance, has increased. And so the price differentials in Houston versus Midland has come in. And there’s more oil that’s going to be available on the water in the U.S. Gulf Coast.

In order to move that around the world, it’s logical to assume that the discount to international prices were widened. And there’s a lot of variables in trying to look at that in terms of what OPEC will do, whether they sustain their price — their production cuts. What happens in Libya, what happens in Venezuela, all of these things ultimately have an impact. But if we look back again, six, nine, 12 months ago, for the preceding 24 months, there was a sustained and a visible discount of domestic crude oil to international crude prices. And we think that we go back to that level. If not tomorrow, we think in the near term. And then that will, again, stimulate more movement of crude oil along the coast of the United States. Now both those factors, particularly if they come together, will result in a significant increase in demand for Jones Act transportation, and we think will then stimulate a very active chartering market.

Ryan VaughanNeedham — Analyst

That makes sense. And just when that recovery that you talk about — just the timing, whether it’s — however many months away it is, but do you expect those laid up vessels to return? Is that — when you say sharp recovery, are you talking about having all of your vessels back in? Or are you talking about the existing fleet, and then kind of assess, call it midyear, that would bring some of those other ones back in?

Samuel H. NortonPresident and Chief Executive Officer

Okay. I think I can help guide you on that. We have taken a decision for the vessels that have gone into — either gone in recently or anticipate going into lay-up. We’ve taken the decision to take those vessels through dry docking, special survey, even though we know that there’s no immediate demand for them. And we’ve done that because we want those vessels to be ready to be reactivated and put back into service on short notice. Because we think the timing and, let’s call it, the slope of that recovery will likely be sharp, we don’t wanna be in a situation where there’s a turn in the market, and we then have to arrange for, and take a vessel through a drydock, and then the availability of that vessel would be 45, 60, 75 days forward. We think that would be a mistake.

And so, although there would be an argument to say, well, you can defer your drydocks until later and save the cash and capital expenditure, our decision to expend that cash, take the vessels through drydock now, and have them ready on a short notice to be available for responding to the turn in demand that we anticipate, I think is indicative of our attitude as to where we think things are going to go. I remind you that nine months ago, every single Jones Act tanker was on time charter. It wasn’t three or four or five vessels that were laid-up waiting to come. Every single vessel was on time charter. And that was in an environment where — I wouldn’t call it extraordinary, right? It was an environment of normalized distribution demand for both crude and product.

Ryan VaughanNeedham — Analyst

Right.

Richard TruebloodVice President and Chief Financial Officer

The other thing, Ryan.

Ryan VaughanNeedham — Analyst

Yup.

Richard TruebloodVice President and Chief Financial Officer

The other thing we probably wanna consider is that, roughly half of our revenue days for next year are committed at this point for time charters that will continue through next year.

Ryan VaughanNeedham — Analyst

Right.

Richard TruebloodVice President and Chief Financial Officer

Including the — so it’s — we can’t lose sight of what’s already on the books for next year, as well as looking at what the uncertainties may be with those vessels that are coming off of time charter late this year.

Ryan VaughanNeedham — Analyst

Yup. With you. Just, the last one for me, just this was obviously a big capex year. You had the OSG 205, the water expenses. Just, Dick, for next year, plus or minus $25 million, $30 million of interest, and then I want to say there is what $25 million, maybe $30 million or so, plus or minus, of — maybe a little bit more, of amortization. Those are, maybe a little bit of capex. Can you just help clarify that, call it, $60 million plus or minus of fixed cash obligations for 2021?

Richard TruebloodVice President and Chief Financial Officer

I’m not quite sure what your question is honestly, Ryan.

Ryan VaughanNeedham — Analyst

I’m just trying to get to what your fixed cash obligations look like for 2021. This was a big capex year for you guys. And I think it steps down meaningfully next year. So I’m just trying to get a better idea where you sit today with cash interest, and cash amortization in capex. Thanks.

Richard TruebloodVice President and Chief Financial Officer

Right. Amortization next year, low $30-ish million, $30 million, $32 million. Interest expense, you got right, it’ll be about that number. Capex next year will be significantly lower than this year, probably $20-ish million in total.

Ryan VaughanNeedham — Analyst

Great. Sound so good.

Samuel H. NortonPresident and Chief Executive Officer

The other thing there to remember is the reduction of drydock days is gonna — is going to fall away next year as well. So, I think Dick said, this quarter alone, we had 193 days of revenue days that were not realized, not because of anything that we did wrong or any mistake. This is planned regulatory surveys that we need to do. Dick highlighted the fact that last year in the third quarter, we had zero days. And even in spite of that, we saw a year-on-year increase in our cash flow, right? So as we move into next year, not only do we have a reduced capital expenditure burden, but we have more active revenue days implicitly from the fact that we’re gonna be in a lighter drydock on survey year.

Ryan VaughanNeedham — Analyst

Thank you very much.

Operator

[Operator Instructions] Our next question comes from Alexander Jose with Arctic [Phonetic] Please go ahead.

Alexander JoseArctic — Analyst

Hi. Thank you for taking my questions. I have a couple of ones on the dry docking expenses. Did you postpone any capex? Or was it simply cheaper to drydock the vessels compared to your initial estimates? And also, with regards to the vessels that you’re laying-up, what kind of opex should we expect for those vessels?

Samuel H. NortonPresident and Chief Executive Officer

I’ll take the second question first, Dick, and you can think about the first one.

Richard TruebloodVice President and Chief Financial Officer

Okay.

Samuel H. NortonPresident and Chief Executive Officer

So when we lay-up a vessel, the principal cost savings that we would look to achieve would be a reduction of crew costs. We still have to ensure the vessels. There are costs associated with basically paying for the key side rental that we need to be able to put vessels alongside. There is some maintenance that we continue to do on the vessels when they’re in lay-up. And the other thing is consideration for the type of lay-up that we’re looking at, whether it’s to look at a complete reduction of crew costs to — in essence, leave the vessel totally unmanned, or whether we have a skeletal crew on board, which, for example, on the Key West and Long Beach that have been in lay-up this past quarter, we kept the skeletal crew onboard the vessel in light of the fact that it was hurricane season, and we wanted to have available people on board and respond.

A good thing that we did because we’ve laid those vessels up in Eastern Texas. And it’s been an active hurricane season. So it’s been a good decision for us to keep some people around to manage the vessels during high wind and rain and surge — tide surge, etc. So there’s a little bit of a — it’s a little bit of a variable or whatever. There’s a range of costs that we can anticipate. And then there is also the period of lay-up that you’re looking at in the initial periods. The sort of costs that flow through to the income statement are gonna be higher because we have costs associated with preparing the vessel for lay-up and onetime costs that we book at that time. Also, when you bring a vessel out of lay-up, you have some reactivation costs. So it’s hard to kind of pick a real — if you wanted to have a day rate, if you will.

Because the longer the period in lay-up, the lower that rate gets. I would — if you’re looking for a number, I think it’s something that we should work on in the next presentation if it continues to be something that features, as I said, in my earlier comments. We’ve guided you on fourth quarter results that we can — that can see right now, and those incorporate lay-up assumptions. If those lay-ups continue beyond the fourth quarter, I think we’ll have a better sense of being able to give you kind of day rates there. But as I said, if you wanted to start, the principal cost reduction is looking at the crew component cost as we reduce the manpower onboard vessels.

And that number — that cost reduction number gets — or increases the longer the layout period because there is — whatever, there is costs associated with laying people up and sending them home, and bringing them back, and other one-off type expenses that might artificially, or not artificially, that might optically inflate that number on a day rate basis in the initial month or two, but we flatten out over time. Dick, I think there was a first question on whether we deferred capex or whether there was just differences in estimate versus actual returns?

Richard TruebloodVice President and Chief Financial Officer

Yeah. I mean, I think it’s really sort of twofold. One is, obviously, we have the experience of looking at the actual costs, which, on a net basis were lower than what we had anticipated and budgeted. We have a little bit that will trickle into very early next year just because of timing considerations with the shipyards. So a little bit will drift into next year that we had thought we would spend this year. That’ll be a few million dollars. And I mean, sort of sub five, but it will nevertheless to be in, probably the month of January next year. Those — that’s really the sort of principal difference between the estimates that we had made when we did our Q2 call, and where we see ourselves today.

Samuel H. NortonPresident and Chief Executive Officer

There is a little bit of marginal shifting. I’ll give you an example, the ballast water treatment installation. It’s a capital expenditure; we go out and we buy the equipment that needs to be installed. We have to construct deckhouses and make the modification, the piping for the vessels to allow this new system to work. Largely speaking, we were able to complete most of that work during the scheduled drydocks that we did. But for virtually all the systems that we’ve installed in the last six months, the commissioning of these systems has not yet been completed. That’s a function of the fact that the technicians that are necessary to do the commissioning work and to certify the operational suitability of these new systems.

They’ve been unable to travel, either because there have been travel restrictions from Europe to the United States or there have been travel restrictions from the United States to places within and outside of the United States where we have done drydocks. So there is a, I’ll call it, anticipated additional costs that will be associated with ultimately commissioning those systems. But as Dick has alluded to, those numbers are not material in the context of the size of our business. Just to give you a rough indication, I would say, order of magnitude to a couple of $100,000 of additional costs that would be associated with commissioning those drydock — excuse me, those ballast water treatment systems.

And there are a handful of analogous situations where, again, technicians have been unable to travel and where we have done work that could be done, but there remains a small scope of, let’s call it, scope of repairs, mostly associated with technician attendance to verify or commission or install new software, these types of things that have not yet been recognized. But again, order of magnitude, not large numbers. But there have been logistical hurdles to completing drydocks that should not be ignored. The work that, and I alluded this in my comments, the work that has been done to allow us to actually get vessels in drydock, get them completed and get them back in service in an environment of severe resource constraint has been, I think, a really good job by our team. And as you can see, the out-of-service days have been contained very well in my opinion.

Alexander JoseArctic — Analyst

Thank you for those questions. That was all for me.

Operator

There are no more questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Sam Norton for any closing remarks.

Samuel H. NortonPresident and Chief Executive Officer

Thank you, Jordan, and thanks, everyone, for joining in. It’s a challenging period for us. But as I have said, we consider the results that we’ve been able to achieve in the logistically and operationally difficult environment to be really something that we’re quite proud of. We look forward to a return to normalcy, as I’m sure everybody does. We’re optimistic that we’re closer to the end than we are to the beginning, and we think we’re well positioned to benefit from positive developments in the pandemic environment. And we look forward to talking to you again in the early part of next year, and hopefully, we’ll have better visibility of how next year will shape up in the context of positive developments in the virus. Thanks again, everybody, and we’ll be in touch.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Samuel H. NortonPresident and Chief Executive Officer

Richard TruebloodVice President and Chief Financial Officer

Joe RinghamArctic — Analyst

Ryan VaughanNeedham — Analyst

Alexander JoseArctic — Analyst

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