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OSG Overseas Shipholding

Participants
Sam Norton President and Chief Executive Officer
Dick Trueblood Chief Financial Officer
Ryan Vaughan Needham
J Mintzmyer Value Investor’s Edge
Alexander Jost Arctic Securities
Call transcript
Operator

Good day and welcome to the Overseas Shipholding Group Fourth Quarter and Full Year 2020 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sam Norton, President and Chief Executive Officer of Overseas Shipholding Group. Please go ahead.

Sam Norton

Thank you, Sarah. Good morning, everyone. Thank you for joining us for this call on the presentation of our 2020 fourth quarter and full year results and for allowing us to provide additional commentary and insight into the current state of our businesses 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 narrative on Pages 2 and 3 of the PowerPoint presentation available on our website regarding forward-looking statements, estimates and other information that maybe 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 a historical perspective on OSG today, and our presentation includes forward-looking statements including statements about anticipated future results. These statements are subject to uncertainties and risks. Actual results may differ materially from projections and could be affected by a variety of risk factors, including factors beyond our control.

For a discussion of these factors, we refer you specifically to our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and our other filings with the SEC, which are available on the SEC internet site, www.sec.gov as well as on our own website, www.osc.com.

Forward-looking statements in this presentation speak only as of the date of these materials and we do not assume any obligation to update any forward-looking statements, except as maybe 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 fourth quarter earnings release, which is posted on our website. The full year financial results delivered by OSG during 2020 met expectations in what was clearly one of the most difficult operating environments in recent memory. Demand for petroleum products across the barrel was severely impacted throughout the year by the ongoing pandemic. Global crude movements were constrained by coordinated OPEC production cuts. Transportation fuel demand, in particular, demand for jet fuel fell well below normal levels.

In addition, global fuel inventory builds were observed during much of the year, acting to further suppress transport demand for oil products. OSG’s performance in 2020 offers clear insights into the earnings potential of the operating platform and vessel assets that we have today.

As highlighted in our communications during the past year, OSG’s high percentage of fixed revenue streams during much of 2020 and a stable performance from our niche businesses resulted in strong cash flow from operations, particularly when considering the nearly 400 revenue days lost in the year to plan drydock operations as well as only partial year revenue contributions from both our ATC acquisition and our investments in two new barges.

During the course of 2020, we were gratified to be able to realize the fruits of these investments and our chartering strategies that laid the groundwork for the full year results achieved. The chartering strategy also served to insulate us from much of the market demand destruction that hit the industry in 2020.

Our most important management challenges have been and will remain sustaining operational readiness at all times.

Just the one shipboard case of a positive COVID-19 test experienced early in July, we have not experienced any further shipboard outbreak, have seen no loss of revenue days or extraordinary expenses incurred as a result of COVID-19 on board any of our vessels. We should not take these results for granted. COVID-19 continues to affect our industry and operations and it imposed risk and hardships for those charged with delivering the services that our community do rely upon us to perform. Once again, recognition needs to be given to the individuals on board vessels with personal commitment to a safe and virus free environment has proven to be the essential element in keeping it. The successes of 2020 however are now firmly in the past. The continuing pandemic has remained as a significant drag on transportation fuels demand as we have moved into 2021. Unlike last year, OSG’s book of time charter contracts has not been as deep entering 2021, leaving us less insulated from the observable consequences of COVID-19. Domestic refiners and distributors have been hard hit by the pandemic driven demand disruption for transportation fuels.

Although much of the past year – throughout much of the past year, fuel refining economics, high inventory levels and reduced domestic crude production have collectively served to suppress near-term demand for tanker transport.

In addition to flagging demand, the middle distillate glut has been the biggest obstacle to the recovery of refining margins, increased output and improved crude demand. That glut and weak middle distillate spreads have reduced refining margins, undermining crude demand and crude prices. Refiners and distributors of transportation fuel have felt the sting of these energy market developments. Cost-cutting in the face of reduced demand, inflated inventories and poor refining margins has caused the pendulum of our customers’ risk aversion to have swung to the extreme. Focus is concentrated only on the immediate future, with the outcome being reluctant to commit to long-term time charters. The situation has caused OSG to place 7 of our vessels in lay-up in order to conserve costs until demand returns.

We are not alone in making such decisions.

Within the Jones Act segment of the industry, fully one-third of the Jones Act tanker and ATB fleet is or will soon be without committed employment. Lay-ups of available surplus capacity have been observable in recent months and the list of laid up tonnage is set to expand. One large Jones Act ATB operator entered Chapter 11 protection during the second half of last year.

All of its ATBs are currently laid up as the administrator works to find a way to develop a satisfactory recovery plan. The lack of committed employment for such a large percentage of the available Jones Act fleet is a function of missing demand and not, as in years past, a reflection of a fundamental excess of supply. A high level explanation on the cause of the current lack of demand for our ships can be summarized as follows. COVID-19 and the restrictions on mobility imposed in an effort to restrain its spread dramatically impacted transportation fuel demand across much of 2020 and into the early 2021. This was true across the barrel of refined products, but especially true for jet fuel and to a lesser extent, gasoline. Further, low end use demand resulted in a large build in refined product inventories into the summer of 2020. That large product inventory has impeded normalized operating conditions for our refinery distributor customers for two reasons.

First, high inventory levels are already available in consuming markets, making new production runs unnecessary until those inventories are run down. Refinery utilization rates have thus been running well below normalized levels.

Second, low demand for high-margin products was particularly affected, causing the crack spread on products already produced to be low from much of last year and creating a disincentive for refiners to up their production route. We look at data from a variety of sources, including the Department of Energy and its data as presented on Bloomberg to frame our outlook regarding the indication of when normalized levels of demand will return, including the following: refinery utilization rate, product inventory, both in relationship to their historical averages as well as in the context of specific geographical distribution of where those inventories are located, implied gasoline demand data, and finally, trends in crack spreads and the implications that those margins have on refining profit margins. In looking at the recent trends in all of these data points, our conclusion is that we are still very much in the early stages of a recovery. A low level of demand for vessels would be consistent with this view. In particular, the sharp drop in refinery output caused by the February Texas freeze has impacted short-term demand transportation – transportation demand. But the recent data show a substantial reduction in inventories from the highest seen in the peak last summer, improving crack spreads and high and rising end-user demand. These set the stage from an uptick in refinery utilization rates as the summer approaches. I will walk you through our analysis of this trend and how it supports the outlook we see for a return to pre-pandemic demand levels.

First, let’s start with refinery utilization rate. The lower the rate the less product is being produced. Less product produced means less demand for shipment. Normalized domestic refinery utilization rates are seasonal, but should range between 85% and 95% of installed capacity. Refinery utilization has been consistently below 80% since the onset of COVID and recently fell below 60% during the Texas freeze. According to the EIA, refinery utilization rates, specific to PADD 1, 2 and 3 in the week ending March 26 were 83.9%. The graph on Slide 5 indicates from the perspective of the utilization rates we are still emerging from a depressed market environment. The impact of the Texas freeze on recent demand is in particular observable. When viewed in the context of inventory levels depicted in the charts on the next slide, trend line of improving refinery rates should continue to meet rising demand. A return to normalized levels in the low to mid-90s percentage utilization should be favorable for our business. Slide 6 presents historical refined product inventory data from two perspectives. The chart on the left presents overall product inventories in the U.S. The chart on the right is gasoline inventories in PADD 1c, which is the lower Atlantic state sub-index that includes Florida and is in the main market served by the Jones Act tankers. These pictures illustrate the problem refineries faced during the second half of 2020 as the inventory level ballooned. More recently, they suggest the promise that rising demand will need to be met by increased production rather than a further drawdown of inventory.

Looking specifically at the gasoline sub-index in PADD 1c, inventory levels have fallen nearly 7.3 million barrels in recent weeks or nearly 25%.

While falling inventories in recent weeks are clearly related to the reduction in domestic refinery utilization rates, we have also been impacted by the rise of implied consumption rates. The Bloomberg Index has implied gasoline demand depicted in Slide 7 shows a sharp rise in gasoline demand in recent season. We see this as being driven by widespread and accelerated vaccine penetration rate and a swiftly emerging return to normalized mobility levels across the country. From our observation here in Florida, we would say this is particularly true given the lack of restrictions being currently imposed at the state level. Gasoline demand has been impacted by work from home, school closures and importantly, reduced long distance car travel, all continuing – all the continuing results of COVID restriction.

As depicted in this chart, on the right on Slide 7, recent data show an encouraging uptick in commuting and mobility, suggesting real signs of recovery after a slow start to this year.

Finally and perhaps the most important leading indicator of spurring refineries to ramp up production back to levels that we would consider normal are the profit margins available to refineries in their core business.

As shown on Slide 8, refinery margins have been steadily improving in recent weeks and the current levels are a clear market signal that more products should be produced to meet current and future demand. We see this indicator as a positive signal for future transportation demand and one that should favorably impact our business in the coming weeks and months. One final point to consider is the impact of foreign product tanker rates on demand for domestic Jones Act vessels. At very low day rates, international product tankers can compete in delivering product imports into the state of Florida. We calculate the breakeven rate, which competes with Jones Act tanker rates of about $60,000 per day at around $12,000 per day for standard median marines product tanker. Encouragingly, international product tanker rates east of Suez have risen in recent weeks to levels above that $12,000 a day breakeven rate and market analysts are expressing optimism that these rates will continue to strengthen over the second half of this year. Price improvements in the East augur well for the rates to improve in the West in the coming months, reducing the competitive pressures on Jones Act markets that result from low international. Even with vaccines becoming widely available in the coming months, the bridge to normalcy will still require some work. The Biden Administration’s recently enacted American Rescue Plan is widely viewed as a powerful accelerator of demand and growth, which will likely become more apparent in the weeks ahead. This prospect of further fiscal stimulus is also of interest. Analysts that we follow continue to see the lingering transport fuels demand shock as being virus codependent and that a recovery on the back of the combination of fiscal stimulus and vaccine availability can be reasonably expected. The timing of recovery to online remains the only material variable.

Our short-term forward planning anticipates a return of increased demand for time charter transportation capacity during the second half of this year. In awaiting this development, we have kept 6 of our Jones Act tankers and 1 lightering ATB currently trading as a conventional ATB in lay-up. We consider it likely that at least 1 more vessel under lay-up in the coming weeks. At this time, we are maintaining the operational availability of the Overseas Houston for potential spot market moves. Vessels and lay-up reflect COVID-19’s continuing direct impact on our business and in particular, the surge of virus cases seen during the early months of this year.

As reported by the company in its Form 12b-25 filing made on March 17, we proactively sought and obtained modifications to certain of our financial covenants in our vessel financing facilities in response to these conditions. Dick will cover this topic in more detail in his remarks and I will now turn the call over to him to provide you with further details on our fourth quarter and full year results for 2020. Dick?

Dick Trueblood

Thanks, Sam.

During the latter part of the fourth quarter of 2020 and continuing in the first quarter of 2021, we and other owners experienced redeliveries of vessels that had been on time charter throughout 2020. The severe petroleum market demand destruction that started in March 2020 with the onset of lockdowns continued as the COVID-19 virus experienced a resurgence over the winter. Widespread lockdowns and restrictions on business activities continued to take a toll on the consumption of transportation fuels. Refineries operated at limited capacities. Inventory levels remained above their 5-year averages. Recently however, we have begun to see reductions in refined product inventories.

During this time, the spot market was close to nonexistence with very limited moves over a period of months. The shipments that did occur were small and were accommodated on ATBs. We did see an increase in March 2021 in a number of spot market shipments, but again, all were accommodated on ATBs.

Our customers cut costs by reducing their transportation commitments until they had much higher visibility of sustained fuel demand increases. Owners, including OSG, responded by removing ships from operations and placing them in lay-up, thereby reducing [Technical Difficulty]. Lay-up reduces our daily per vessel operating cost for an MR tanker by approximately $15,000. At the end of the first quarter 2021, we had 7 vessels in lay-up.

We have 1 vessel operating under a short-term time charter through September 1, 2021, with two 3-month extensions available to the charterer. 1 vessel was redelivered in late March and is currently available in the spot market.

We have an additional vessel scheduled for redelivery in mid-April from a short-term time charter. We were and are confident that the market will, except for jet fuel, return to more normal levels during 2021. The principal question surrounds the timing of the sustained recovery. This will be influenced by the availability and distribution of COVID-19 vaccines and the level of opening in society at large.

As 2021 began to unfold, there were extremely few inquiries concerning transportation requirements.

Our expectations are that late in the second quarter we will begin to see the reemergence of a more normal market and that that will continue to strengthen during the second half of 2021. We began discussions with our lenders in January to talk about our 2021 performance expectations given the state of the economy. We anticipated a difficult first half of the year.

We expected breakeven adjusted EBITDA in the first quarter with a very modest improvement during the second quarter. Adjusted EBITDA is expected to strengthen substantially as the second half of 2021 unfolds.

Our goal was to identify appropriate covenants and standards to apply as metrics under our various loan agreements, which reflected the current lack of demand in the marketplace and considered the expected market recovery during 2021. It is important to note that we have made our loan payments on a timely basis and expect to continue to do so. We and our lenders work diligently to arrive at agreements that all believe are appropriate under the present circumstances. All parties involved were focused on getting it right rather than getting it done quickly.

As a result, we experienced a 1-day delay beyond the 10-K filing date of March 31, 2021.

We have been advised that this means that we will be unable to use a Form-S3 registration statement until we subsequently have completed 1 year of timely filings.

During late 2019, we took delivery of 2 new build MR tankers, the Overseas Gulf Coast and Overseas Sun Coast, acquiring the 2 ships as part of our strategy to have 2 vessels that we can place in the tanker security program. The TSP at that time was under consideration as a program to support the transportation fuel needs of the U. S. Military during times of national emergency. The legislative process moved more slowly than expected, and the program was not signed into law until December 2020.

However, no funding was authorized.

Although we are hopeful that funding will be authorized in the U.S. government fiscal 2022 budget, this is not certain. The Overseas Gulf Coast is unencumbered, and we have viewed her as a potential source of liquidity as needed. We, in agreement with our lenders, have chosen to sell her currently and secure this liquidity.

We are working through customary terms and conditions and expect that we will close the sale in late May.

We continue to believe in the tanker security program is an important program for the United States and of our abilities to be a meaningful part of this program.

We expect that we will be one of several program participants. If the program obtains funding for fiscal 2022, which begins in October ‘21, we will offer the Overseas Sun Coast for participation as previously planned.

We will make an assessment at the time that program funding occurs as to our additional involvement, if any. The market for MR tankers is liquid, and it is reasonable to expect that an additional vessel suitable for TSP participation could be obtained.

During 2021, our estimated capital expenditures are $33 million, a substantial reduction from 2020 levels. Approximately one-third of these costs were incurred during the first quarter. And by the end of the second quarter, we will have completed approximately two-thirds of the work.

We are as always intensely focused on these costs and holding them to the lowest levels possible, consistent with the task that need to be accomplished. Please turn to Slide 11. TCE revenues declined 8.2% when compared to the fourth quarter of 2019 and sequentially declined 6.7% from 2020’s third quarter. The decreases result from vessels redelivered during the fourth quarter, 2 vessels placed in lay-up in the third quarter of 2020 and 1 vessel trading in the spot market, collectively causing a reduction in vessel utilization. At the end of the fourth quarter, we had 6 vessels in lay-up. Full year EBITDA was $124.9 million. We experienced a reduction in drydock days from 193 in the third quarter to 74 in the fourth quarter. Please turn to Slide 12.

Although declining as vessels were redelivering, we continue to realize the benefit of our active vessels, principally operating under time charters during the fourth quarter. The TCE revenue change was most notable in our Jones Act MR tankers where we experienced a year-over-year 25% decline in revenues. Sequentially, the decline was 8%. We started the quarter with 2 vessels laid-up. And during the quarter, the Chinook and Texas City were both redelivered.

During the quarter, the Martinez was available in the spot market, but was not employed. At the end of the quarter, the Anacortes was redelivered, but with no impact on Q4 revenues. The MR tankers represent most of the vessels that we have currently laid-up. Lightering revenues declined from both the third quarter of 2020 and the year ago period due to the decreased lightering volumes reflecting our customers’ reduced demand for crude oil, resulting from reduced refinery operations. The fourth quarter is the first quarter in which both of our new build ATBs were in operation, and all of our rebuilt ATBs had been retired from service. We took delivery of the OSG 205 in December, and she started on a 1-year time charter on delivery and contributed to TCE revenues for the month.

We will operate both the OSG 204 and 205 under time charters for 2021 compared with partial year operations for each in 2020. We operate 4 non-Jones Act MR tankers, the Overseas Gulf Coast and Sun Coast, completed in their 1-year time charters at the end of the third quarter. And since then, they have operated in an international MR pool on a time charter arrangement. The Mikonos and Santorini continue to participate in the maritime security program and provided services to the Government of Israel.

During the quarter, we performed 2 GOI voyages compared to 3 in the fourth quarter of 2019.

Our Alaskan tankers, all of which operate on long-term time charters continued to perform in line with our expectations. The fourth quarter of 2020 contained the first month of an approximately 2 months drydock period, which extended into 2021 for the Alaskan Navigator. The resulting December 2020 off-hire period accounted for the decline in revenues for these vessels. We acquired them as a reminder in late March 2020. Please turn to Slide 13. The spread between fixed and spot earnings continued to narrow as the portion of our fleet operating on time charters decreased in the 2020 fourth quarter. Please turn to Slide 14. Conventional tanker spot market TCE revenues represented a de minimis portion of our total tanker revenues in the quarter. There were no available cargoes for the 1 vessel we had available in the spot market. The decrease in fixed revenues during the quarter were, as previously discussed driven principally by the increase in vessels in lay-up that started in the third quarter. Drydock off-hire days continued to negatively impact revenues, but to a much lesser extent than earlier in 2020. Please turn to Slide 15.

Our niche businesses revenues declined compared to Q4 2019 due to reduced customer demand for lightering services as a result of the pandemic, coupled with the decrease in GOI voyages during the current year’s quarter.

During the fourth quarter of 2020, lightering revenues decreased for the reasons previously described. We put the OSG 350 in lay-up during the fourth quarter. Non-Jones Act tanker revenues were flat with the prior quarter and down from the year ago quarter. In the current quarter, we performed 2 voyages for the Government of Israel, in comparison to 3 in the last year’s fourth quarter. Shuttle tanker revenues were – reflecting their long-term charters were essentially flat from the prior quarter and year. Please turn to Slide 16. Vessel operating contribution, which is defined as TCE revenues less vessel operating expenses and charter hire expenses, declined 31.8% from Q4 2019 to $24.2 million in the current quarter. The Jones Act tanker swung from a contribution of $9.4 million to a loss of $2.5 million in the fourth quarter. The niche market contribution decreased $6.4 million from last year due to the decline in lightering revenue, lower international rates and the reduction in GOI voyage between the periods. The $18.3 million combined reduction in Jones Act tanker niche market vessel operating contribution overshadowed the $7 million contribution from our Alaskan tankers. Sequentially, vessel operating contribution decreased $2.3 million from Q3 2020. The increase in laid-up vessels, reduction in demand by our lightering customers in the Delaware Bay and the commencement of the drydock period for one of our Alaskan tankers contributed to this decrease. Please turn to Slide 17. Fourth quarter adjusted EBITDA decreased $13.2 million from $33.7 million in Q4 2019 to $20.5 million. The decrease resulted from lower utilization levels in Q4 2020 for our MR tankers resulting from vessels in lay-up and undergoing required drydocking. Decreased demand for lightering services, due to the pandemic-reduced demand for transportation fuels, fewer GOI voyages in the current quarter as well as lower international tanker rates. The impact of this was partially offset by our Alaskan tanker operations acquired in early 2020. Adjusted EBITDA was $20.5 million in the quarter compared to $21.8 million in the prior 2020 quarter. The quarterly decrease was driven by an increase in non-employee days as additional vessels were laid-up during the quarter as well as the reduction in Delaware Bay lightering utilization. Please turn to Slide 18. Net loss for the fourth quarter of 2020 was $800,000 compared to a net income of $11 million in the fourth quarter of 2019. The change was driven by lower vessel utilization, decreased lightering demand, fewer GOI voyages and the partial offset by our Alaskan tanker acquisition. Please turn to Slide 19.

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, were substantially greater than other years. This slide provides information for maintenance and ballast water treatment system installations in 2020.

While vessels are in drydock or otherwise unavailable for use, they are off-hire even if otherwise employed on a time charter. We work to minimize the number of off-hire days to reduce the revenue loss we sustain. This year, because of COVID-19, the timing of drydock activities continually shifted. Shipyards deferred 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 often were unable to travel through repair locations.

During 2020, we spent $43.7 million for drydock expenses and ballast water treatment system installations.

We also experienced a $19.3 million revenue loss due to the off-hire days. Please turn to Slide 20. This comparative graphical depiction of 2020 and 2019 drydock activities shows how active a drydock year 2020 was.

Our drydock expenditures made in 2020, including the 3 recently acquired Alaskan tankers were $30.7 million and $13 million for ballast water treatment systems. Comparatively, in 2019, we had 50 drydock days in comparison to 393 in 2020 and $2.9 million of off-hire lost revenue compared to $19 million in 2020. There were no drydock days in either the third or fourth quarters of 2019. Please turn to Slide 21. At the end of 2019, we had total cash of $42 million, which included $200,000 of restricted cash.

During 2020, we generated $125 million of adjusted EBITDA, and we borrowed $144 million in connection with the acquisition of the Alaskan tankers, financing the OSG 204 and OSG 205 as well as replacing the financing on the Courageous tug. Working capital used $2 million of cash. We expended $31 million on drydocking and improvements to our vessels as well as investing $63 million in new vessel construction and other CapEx. We expended $17 million in conjunction with the ATC acquisition. Further, we have recognized a $19 million gain in connection with that acquisition.

During the year, we incurred $23 million in interest expense and repaid $45 million of debt. We expended $41 million of cash to fully repay the loan secured by the Overseas Gulf Coast and the Courageous tug. The result was we ended the year with $70 million of cash, including $100,000, which was restricted. Please turn to Slide 22. Continuing our discussion of cash and liquidity, as we mentioned on the previous slide, we had $70 million of cash at December 31, 2020.

Our total debt was $436 million, which represents an increase of $61 million in outstanding indebtedness since December 2019.

Our $325 million term loan has an annual amortization requirement of $25 million or $6.25 million per quarter.

Additionally, we will amortize $13.6 million of the currently outstanding amount of our other loans in 2021. With $380 million of equity, our net debt-to-equity ratio is 1x. This concludes my comments on the financial statements. I’d like to turn the call back to Sam. Sam?

Sam Norton

Thank you, Dick. Largely speaking, we can be pleased with the financial results achieved in 2020.

I think it’s important to particularly call out the efforts of the men and women that continued to provide operational availability of our vessels through outlook was clearly one of the most difficult years that we have faced in our lifetimes from an operational perspective.

All of these lockdowns, constraints, impediments that were placed on day-to-day business coming in a year when we had an unusually high level of operational needs from the drydock and vessel construction, vessel delivery perspective.

All of these things were achieved and accomplished without skipping the [indiscernible]. And I would be remiss if I didn’t call out – thank all of those who contributed to that goal, which was remarkable in my mind.

Although our forward planning contemplates the continued lay-up of several vessels for the immediate future, we consider the prospects for demand recovery during the second half of this year to be a reasonable expectation. A lower restoration of jet fuel demand will likely lag other transportation fuels. A return of healthy gasoline markets spurred by stimulus and return to more normalized levels of mobility is to be considered more likely than not. Demand for crude oil and marine movements domestically remain difficult to predict. Price differentials, pipeline developments, refinery operating conditions, the politics, all act to constantly modify the decision trees that ultimately influence crude price and production outcomes. Above all, we expect continuing strong contributions from the APC vessels on charter as well as the expected revenue streams from our niche businesses, in particular, our two active shuttle tankers on our existing MSP vessels.

In addition, during 2021, we have committed revenue streams for the full year for the two new barges, the OSG 204 and OSG 205. These cash flow stabilizes provide confidence that we will ride out the market weakness and carry through what we believe to be a fundamentally promising medium and long-term future. Bounces remain as do opportunities.

Our renewed fleet provides us the profile of assets with the reduced average age of our fleet.

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. 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 tank operator in the years to come. Sarah, we can now open up the call to questions.

Operator

Thank you. [Operator Instructions] Our first question comes from Ryan Vaughan with Needham. Please go ahead.

Ryan Vaughan

Hi, Sam. Hi, Dick. Thanks for the additional disclosure charts and credit to the team for – challenging 2020 and being in a position to benefit or be there for the recovery that you expect later this year.

So, a couple of questions for me.

First, it certainly looks like the worst is behind. And a lot of those charts, the key indicators are pointing upward.

Just talking about the – Sam just talking about the second half recovery, what would you say, just one or two things in particular, that give you the most confidence that their demand will return to either, kind of, more normal levels, and there will be some need for tankers? And then number two, for Dick.

Just on the balance sheet, coming out of 4Q, $70 million of cash. It’s April 7.

So 1Q is done.

You sold the Gulf Coast.

Just how should we think about trough cash coming out of, what, second quarter, let’s say, just those two questions? Thanks.

Sam Norton

So maybe Dick, I’ll take the first question first. We’ve tried to present in the graphical slides that we gave you, the indicators that we’re watching.

As you noted, they are all pointing in the right direction. I would point out that operating refinery and capacity utilization rates are still in the low to mid-80s. They should be 10% plus higher than that. It kind of translates into gasoline demand of probably 1 million barrels per day, below normalized levels. Jet fuel demand is still running at 60%, 70% of normalized demand. Diesel is at normal levels already. The analysts that – we expect gasoline demand to recover a sort of full normalized levels by the summer. And we think that will spur refinery utilization rates and much, much higher levels than we’re seeing today. That, coupled with the drawdown in inventory that we’ve seen over the last several months. That’s what gives us the primary cause of optimism. Because as mobility improves and gasoline consumption increases across the summer, the math just suggests that more product needs to move out of higher operating refining – higher utilization rates of refineries into the consumption markets. It would be wrong to say that we’ve seen it happening yet. But the Texas freeze, I think, set us back probably a couple of months. But you can see the trend lines of, kind of, restored back to where we were headed before the freeze, and we think that trend line is the right one to be looking at. Dick, do you want to take the second question?

Dick Trueblood

Sure.

So we ended the year at $70 million, as you mentioned, Ryan. I will tell you that at the end of first quarter, we had about $45 million of cash on hand. And that’s before the sale of the vessel, which we expect to occur in late May. Pricing there, probably net proceeds to us, low to mid-30s. The thing to keep in mind in the first quarter is out of that $30 million of – roughly of CapEx for this year, we spent about $11 million of it so far. We’ll spend another $10 million or $11 million in the second quarter.

So most of that will be behind us by the time we get to Q2. From an operating standpoint and where does cash bottom out, I mean, I think it’s somewhat dependent on the speed of the recovery and the timing of it sooner, obviously that we can put ships back to work, the less or the higher that profit amount will be.

I think we look at it.

I think we’re – have sufficient liquidity to work through the year easily on the pace that we foresee the recovery of the economy and the demand for our services occurring.

Sam Norton

Maybe I’ll just toss one other thing for you, Ryan, to think about the differential between a vessel and layout and the vessel operating at what we think are market rates is roughly $3 million to $4 million a quarter per vessel.

So if we’re looking at eight-plus vessels right now being without long-term commitment, every one of those vessels that we put out on charter is going to have a positive impact of, as I said, $3 million to $4 million per vessel per quarter in terms of cash flow generation.

So there is – we’ve spoken to the point many times before there is a lot of operating leverage in our business. That – it’s not a great thing to have when you have 7, 8 ships in lay-up. But as those ships come back and find employment, the return to financial health accelerates very quickly.

Ryan Vaughan

Thanks.

Operator

Our next question comes from J Mintzmyer with Value Investor’s Edge. Please go ahead.

J Mintzmyer

Hi. Good morning, Sam. Good morning, Dick. Thanks for taking my questions today. I really appreciated.

Sam Norton

Good morning.

Dick Trueblood

Good morning.

J Mintzmyer

Yes.

So first question, obviously, a lot of work on those covenant renegotiations. It caused a delay in the filings, clearly, a little bit down to the wire on those. Can you talk a little bit about some of the structure of those covenant renegotiations? Were there any requirements like debt prepayments or any other concessions that you had to make?

Dick Trueblood

There is no debt prepayment requirement.

So the amortization of the various loans will continue based on the original contracts. Negotiations are – always compromises made by everybody. But the primary focus was to recognize the first 6 months of the year were like – likely to be really difficult for us. And that some of the sort of conventional metrics that are often in loan agreements would not work well under our present circumstances so that with the lenders, we reached agreement on a set of metrics that would service measurement points to look at the progress of our business over the next 12 months and the restoration of its good health. And in terms of actual hard congestions, I would say it was very amicable and set of negotiations, and nothing was accelerated in terms of timing or anything else.

J Mintzmyer

Alright. That’s good to hear it.

Sam Norton

And so, just jump in, I’d like – Dick and his team worked really hard on trying to get that done. Clearly, in an ideal where we would have like to have gotten done sooner rather than later, but I just want to amplify Dick’s comments earlier that – all involved want to make sure we got it right rather than got it fast. And in the big picture consequences of being a day or two late versus getting it right and getting ourselves in a position where we feel confident that we have sufficient runway to be able to work with our financial partners for the balance of the year, I think that was the key objective, and I think we achieved it.

J Mintzmyer

Yes. It’s certainly good to see that was completed. And hopefully, your lenders understand that second half of ‘21 is hopefully back to more business as usual, and you’ll be in good shape then.

Looking at Slide 19, you have a really good breakdown of the 2020 drydock and cost for CapEx for the past year. But I don’t see one on your presentation for the upcoming year in 2021. Do you mind walking me through a little bit about the expected expenses in ‘21 on those line items, specifically drydock expenses, ballast water treatments and days-off hire?

Dick Trueblood

I would expect that total for the year would be about $19 million. It would be categorized as drydock. Ballast water treatment system is about $11.6 million and then other vessel-related CapEx, about $1.4 million and then some corporate/vessel CapEx in technology areas, somewhat just a little bit north of $1 million.

One of the things about the current year is that some of the drydock expenses, because we’re doing it on a cash basis here, J, is because of the sort of shifting timing and ability of various vendors to complete things, approximately out of this $30 million plus that we’ll spend this year, roughly $2.5 million to $3 million was work that was committed last year and finished up either very late in the year or very early in 2021.

And so that was probably – again, that’s probably $3 million of the total.

So if you look at it as newly originating CapEx for the current year, the number is about $30 million. That’s...

J Mintzmyer

Right. Yes, I think that’s helpful.

You mentioned $33 million on the call, and I was kind of wondering what the breakdown was for that. Also on the call, and in the recent questions you answered, you mentioned the vessel sale and some net liquidity coming off that. I don’t see the vessel sale posted in your filings, press release or the presentation.

So I was wondering if you mind talking a little bit more about which vessel it is and what kind of the reasoning and rationale behind that sale?

Sam Norton

So maybe I’ll take a little bit of that, Dick, and then you can amplify. The vessel, it’s actually in our 10-K. We’ve disclosed it.

If you look in the footnotes, the vessel is the Overseas Gulf Coast. She’s one of the two inland depot vessels that we contracted to build and took delivery of in 2019. And as Dick said, the strategy at that time was to position these vessels to participate in what we thought was going to be an imminent approval of a Tanker Security Program, parallel to the Maritime Security Program with the Transportation Department.

As Dick mentioned, the vessel is debt-free.

So, it is – represents a pretty significant source of liquidity for us and frankly, is the least strategic asset that we have of all the assets that we have.

And so in order to give us ample liquidity to get us through the period of uncertainty that we’re currently competing, the decision was taken to sell that vessel. And we have concluded terms of the sale under a standard, what I would call standard Norwegian sales form – MOA terms. The provisions of that call for the vessel to be delivered sometime in the second half of this quarter.

So we would expect that liquidity inflow before the end of the second quarter, and that will obviously add to our current liquidity position substantially.

As Dick indicated, the price is confidential. But as Dick indicated, the net cash proceeds that we would realize out of the sale would be in the low to mid-30s.

J Mintzmyer

Yes, certainly makes sense the pivot there, based on the – it sounds like legislative right delays and funding delays for that Tanker Security Program. I noticed it was written into the NDAA, but as you mentioned, there wasn’t funding, right? So we’re push back a little bit, and hopefully, you can get the second one next year. Yes I’m seeing market values in the mid-30s.

So that’s a good sale.

Sam Norton

I just want to touch on the Tanker Security Program.

Our decision to sell the vessel was no way indicative of our disappointment or retreat from commitment to try and see that program of success. It’s just a timing issue again. Things take longer than you want them to. And we have to make sometimes difficult choices as to how we position our assets to achieve the various objectives that we set out for ourselves.

So we are still committed to that program. And as Dick mentioned, we still have the Overseas Sun Coast. And if we feel there is room for additional participation in the program, we think that this type of asset is readily available.

J Mintzmyer

Yes. We’ll keep our fingers crossed there. A final question for you, a little bit more of a strategic one, I suppose. But your share price has been languishing along with COVID-19 headwinds and whatnot. We just saw privatization of one of your peers. Actually, they just hit the two-thirds tender required it looks like this morning, on SEACOR Holdings getting taken out by AIP. And if you apply a similar EBITDA multiple to OSG, you get valuations in $6, $7, $8 share range.

Of course, that’s normalized EBITDA, so maybe not first half this year. But if you look back last year, maybe 2022 normalized, you also have a major shareholder who keeps adding to their position getting up in 16%, 17% range. We had a lot of volume Monday, so we have to see if they added more there. Is there any sort of consideration to – like a poison pill or some sort of move that you can do to protect shareholder value? Because it just seems like OSG is trading at such a ridiculously low valuation, and it could be subject – especially with things like the filing delay that just happened, it could be subject to a takeover offer, which does not properly value this company.

So can you talk about that at all? Any sort of big picture strategic views on stuff the company can do to make sure you’re getting proper valuations?

Sam Norton

I think you’ve touched on some of the things that are clearly part of an ongoing discussion at the Board level.

In terms of protecting shareholder value, I would respond to that question by pointing out a couple of things. One, the Board of OSG is made up of a group of very experienced and very professional, very intelligent people. They would agree with your assessment that the share price of OSG is undervalued. And they would also comment probably that it’s not really up to the Board to figure out on day-to-day trading value, how that stock price moves. Their interests are in the longer term realization of the value of the business. I would point out as well that among the Board members is one of the larger – it’s actually the largest shareholder, representative from Cyrus Capital. They clearly have an interest in seeing that shareholder value is realized over the long-term, and are active participants in Board discussions and Board decisions around strategic issues.

So I think the balance of considerations that the Board is working on in their regular discussions about these things is very heavily weighted towards making sure that the right outcome for all shareholders is achieved. And of the other shareholders that you mentioned that are expressing interest in the business, I think they are probably mindful of the fact that, that’s the case. I can’t really speak to other than what has been publicly filed. I can’t speak to the intent or the ambition of other shareholders that are cumulating positions. But I can say that the Board is very much aware of its obligations to ensure that the proper value of the business is realized in the long run, and in the context of the other shareholders outside of the principal large shareholder that sits on the Board.

J Mintzmyer

Yes. That’s good to hear. Thanks for answering kind of a tough question there. Q1 – this is a final question, but Q1 results, hoping we not to wait till June or July for those. Are we hoping to get back to the normal time schedule maybe like middle of May, early May, is that reasonable for Q1?

Dick Trueblood

I would expect that we will be in the normal cadence of things, so…

J Mintzmyer

Okay, excellent. I will see both of you all in May then. Thanks for your time today.

Dick Trueblood

Alright, J. Thank you.

Operator

[Operator Instructions] Your next question comes from Alexander Jost with Arctic Securities. Please go ahead.

Alexander Jost

Hi, thank you for taking my question. I have two short ones. One is how much would you say lay-up is costing you per day? Q1 if – sorry.

Sam Norton

Yes, I’ll take that one first. And as Dick indicated in his comments that we save about $15,000 per day per vessel with a vessel in lay-up as compared to its normal operating costs, I think that’s the best guidance that we can give you.

You can derive what our operating costs are by looking kind of historically at that.

Alexander Jost

Right, thank you. And my second question is – so the new amended terms of your debt, so just minimum liquidity of $30 million in the monthly testing. And I’m just wondering what kind of headroom to that covenant, are you comfortable with? And what measures may you employ to sort of strengthen the liquidity if, for some unfortunate event, the recovery is delayed?

Dick Trueblood

The $30 million is a liquidity level that exists subsequent to the actual sale and delivery of the vessel in late May, so that will by itself provide an additional $30 million plus of liquidity.

I think clearly, you can concoct a scenario that if the recovery was delayed into very late 2021, we would have some pressure on meeting that requirement. But I think for the foreseeable future, that we expect that we’ve got reasonable headroom at any month end above that based on the projections and our view of how the business starts to perform as the year unfolds. And as Sam mentioned putting vessels back to service changes very dramatically and very quickly the amount of liquidity that we generate.

Alexander Jost

Alright. Thank you very much.

Dick Trueblood

Okay.

Operator

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

Sam Norton

Thank you, Sarah. Thanks again to everyone for participating in today’s call. We look forward to speaking to you again a little over a month, and hopefully have continuing signs of improvement to be able to share with you at that time. Good day to everyone.

Operator

The conference has now concluded. Thank you for attending today’s presentation.

You may now disconnect.