FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, among others, statements about our beliefs,
plans, objectives, goals, expectations, estimates and intentions that are
subject to significant risks and uncertainties and are subject to change based
on various factors, many of which are beyond our control. The words "may,"
"could," "should," "would," "believe," "anticipate," "estimate," "expect,"
"intend," "plan," "target," "goal," and similar expressions are intended to
identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those set
forth in our forward-looking statements. Please see the section titled
"Forward-Looking Statements" and Item 1A. Risk Factors of our Form 10-K. Other
factors besides those listed in our quarterly reports or in our Form 10-K also
could adversely affect our results, and you should not consider any such list of
factors to be a complete set of all potential risks or uncertainties. The
following highlights some of these risk factors:
? public health threats, particularly the COVID-19 pandemic, which have impacted
and continue to impact the Company in many ways, including those noted below,
as well as by increasing operating costs to protect the health and safety of
the Company's crew members and others in the industry;
? volatility in supply and demand in the crude oil market worldwide, which could
also affect the nature and severity of certain factors listed below;
? changing economic, political and governmental conditions in the United States
or abroad, and conditions in the oil and natural gas industry, such as the
Russian/Ukraine conflict, reactions to the COVID-19 pandemic, geopolitical
developments, or otherwise;
? the Company's ability to renew its time charters when they expire or to enter
into new time charters, or to replace its operating leases on favorable terms;
? the inability to attract or retain qualified mariners;
? changes in demand in certain specialized markets in which the Company
currently trades;
? the loss of or reduction in business with a large customer, changes in credit
risk with respect to the Company's counterparties on contracts, or the failure
of counterparties to meet their obligations;
? increasing operating costs, unexpected drydock costs or increasing capital
expenses as the Company's vessels age, including increases due to limited
shipbuilder warranties or the consolidation of suppliers, or the refusal of
certain customers to use vessels of a certain age;
? the effect of the Company's indebtedness on its ability to finance operations,
pursue desirable business operations and successfully run its business in the
future or to generate sufficient cash to service its indebtedness and to
comply with debt covenants, allowing it to maintain capital availability;
? the Company's compliance with complex laws and regulations, including those
seeking to reduce the spread of the COVID-19 virus, and environmental laws and
regulations, including those relating to the emission of greenhouse gases and
ballast water treatment;
? the highly cyclical nature of OSG's industry;
? significant fluctuations in the market value of our vessels;
? the Company's compliance with 46 U.S.C. sections 50501 and 55101 (commonly
known as the "Jones Act") and heightened exposure to Jones Act market
fluctuations, as well as stockholder citizenship requirements imposed on us by
the Jones Act which result in restrictions on foreign ownership of the
Company's common stock;
? competition within the Company's industry and OSG's ability to compete
effectively for charters;
? work stoppages or other labor disruptions by the unionized employees of OSG or
other companies in related industries or the impact of any potential
liabilities resulting from withdrawal from participation in multiemployer
plans;
? limitations on U.S. coastwise trade, the waiver, modification or repeal of the
Jones Act limitations, or changes in international trade agreements;
? the inability to clear oil majors' risk assessment processes; and
? the Company's ability to use its net operating loss carryforwards.
The Company assumes no obligation to update or revise any forward-looking
statements, except as may be required by law. Forward-looking statements in this
Quarterly Report on Form 10-Q and written and oral forward-looking statements
attributable to the Company or its representatives after the date of this
Quarterly Report on Form 10-Q are qualified in their entirety by the cautionary
statement contained in this paragraph and in other reports hereafter filed by
the Company with the SEC.
Business Overview
OSG is a publicly traded tanker company providing energy transportation services
for crude oil and petroleum products in the U.S. Flag markets. OSG is a major
operator of tankers and ATBs in the Jones Act industry. OSG's active vessel
fleet, of which 22 are U.S. Flag vessels, consists of three crude oil tankers
doing business in Alaska, two conventional ATBs, two lightering ATBs, three
shuttle tankers, ten MR tankers, and two non-Jones Act MR tankers that
participate in the U.S. Maritime Security Program. The Company also owns and
operates one Marshall Islands flagged MR tanker which trades internationally.
OSG is committed to setting high standards of excellence for its quality, safety
and environmental programs. OSG is recognized as one of the world's most
customer-focused marine transportation companies and is headquartered in Tampa,
FL. Our revenues are derived predominantly from time charter agreements for
specific periods of time at fixed daily amounts. We also charter-out vessels for
specific voyages where we typically earn freight revenue at spot market rates.
13
The following is a discussion and analysis of our financial condition and
results of operations for the three months ended March 31, 2022 and 2021. You
should consider the foregoing when reviewing the condensed consolidated
financial statements, including the notes thereto, and this discussion and
analysis. This Quarterly Report on Form 10-Q includes industry data and
forecasts that we have prepared based in part on information obtained from
industry publications and surveys. Third-party industry publications, surveys
and forecasts generally state that the information contained therein has been
obtained from sources believed to be reliable. In addition, certain statements
regarding our market position in this report are based on information derived
from internal market studies and research reports. Unless we state otherwise,
statements about the Company's relative competitive position in this report are
based on management's beliefs, internal studies and management's knowledge of
industry trends.
All dollar amounts are in thousands, except daily dollar amounts and per share
amounts.
Operations and Oil Tanker Markets
Our revenues are highly sensitive to patterns of supply and demand for vessels
of the size and design configurations owned and operated by us and the trades in
which those vessels operate. Rates for the transportation of crude oil and
refined petroleum products are determined by market forces such as the supply
and demand for oil, the distance that cargoes must be transported, and the
number of vessels expected to be available at the time cargoes need to be
transported. In the Jones Act trades within which the substantial majority of
our vessels operate, demand factors for transportation are affected almost
exclusively by supply and distribution decisions of oil producers, refiners and
distributors based in the United States. Further, the demand for U.S. domestic
oil shipments is significantly affected by the state of the U.S. and global
economies, the level of imports into the U.S. from OPEC and other foreign
producers, oil production in the United States, and the relative price
differentials of U.S. produced crude oil and refined petroleum products as
compared with comparable products sourced from or destined for foreign markets,
including the cost of transportation on international flag vessels to or from
those markets. The number of vessels is affected by newbuilding deliveries and
by the removal of existing vessels from service, principally through storage,
layup, deletions, or conversions. Our revenues are also affected by the mix of
charters between spot (voyage charters which include short-term time charters)
and long-term (time or bareboat charters).
The Russian Ukrainian conflict has resulted in economic sanctions against Russia
which include the banning or limitation of oil imports from Russia by certain
countries and self-sanctioning by many oil companies and traders. It is
uncertain whether these restrictions will continue to tighten. The circumstances
have resulted in the redirection of oil (crude and refined product) trade flows
which are apt to continue, reflecting the need of countries that were large
consumers of Russian oil to obtain other supply sources. Although the United
States was not a major importer of Russian oil, it is impacted by these global
events. Crude and refined products that were previously imported into the United
States from non-Russian sources may not be available in prior quantities. A
potential impact is more movement from domestic producing locations via pipeline
and marine assets, which would have an impact on vessel demand. An increase in
demand could result in higher utilization levels and potentially higher rates
for Jones Act vessels.
The ongoing COVID-19 pandemic has severely impacted global and national
economies. During 2020, lockdown orders, business closures and travel
restrictions among many other events reduced the demand for many products,
including petroleum. 2021 was characterized by the introduction of COVID-19
vaccines, business recovery and two different COVID-19 variants that all
impacted overall business conditions. During the second half of 2021, there were
increases in refinery operations and end user demand for transportation fuels.
Demand is expected to continue to increase in 2022 to levels exceeding
pre-pandemic levels. Although there has been an increase in demand, business
uncertainty for our customers remains, which has resulted in a reluctance to
enter into longer term transportation commitments. Customers currently favor
shorter term agreements. We believe that as their visibility and confidence in
the future returns there will be a resumption of more typical customer behavior
and time charter activity will rebound.
The ongoing pandemic also resulted in the non-renewal of charters for vessels
whose time charters ended late in 2020 and early in 2021. In response to this,
we placed seven vessels in layup for most of 2021. This allowed us to reduce the
operating costs associated with vessels that were without charter. We saw an
increase in demand during the second half of 2021. As a result, two of the seven
vessels came out of layup in September 2021 and operated in the spot market. One
of these two vessels commenced a 26-month time charter in mid-November 2021. A
third vessel came out of layup in December 2021 and operated in the spot market.
In January 2022 and late February 2022, two more vessels came out of layup. We
continued to see an increase in demand during the first quarter of 2022 and as a
result, we expect our two remaining vessels in layup to return to service during
the second quarter of 2022.
As a result of the COVID-19 pandemic, we have implemented procedures to protect
the health and safety of our employees, crew and contractors. These procedures
and protocols are those mandated or recommended by the Centers for Disease
Control and Prevention, the U.S. Coast Guard, local ports and shipyards, and
country- and state-specific requirements. They include such actions as providing
personal protective equipment, managing the locations where crew members board
and depart from our vessels, requiring crew members to disclose symptoms and the
health of those they have been in contact with, mandatory quarantine periods
imposed prior to joining any vessel, sanitization of the vessels, mandating face
coverings when non-crew are on board, social distancing and requiring testing in
certain instances. COVID-19 has also impacted planned shipyard maintenance and
vetting activities, resulting in delays, rescheduling and extensions. These
additional procedures and delays have resulted in increased costs, which at this
point in time, have not been material but are expected to continue and may
increase.
Having our vessels committed on time charters is a fundamental objective of our
chartering strategy. The majority of available vessel operating days are covered
with medium-term charters or contracts of affreightment. However, medium-term
charters may not always be remunerative, nor prove achievable under certain
market conditions. As a result, some of our vessels may operate in the spot
market, which is more volatile and less predictable. In some cases, where
neither time charter nor consistent spot market business is available, layup and
removal of vessels from an actively available status is deemed necessary.
Because shipping revenues and voyage expenses are significantly affected by the
mix between voyage charters and time charters, we manage our vessels based on
TCE revenues and rates, which are non-GAAP measures.
Spot market demand for Jones Act tankers and ATBs rebounded in the fourth
quarter of 2021 and continued into the first quarter 2022. There was an increase
of spot activity in the first quarter of 2022 with 34 spot fixtures versus 30
spot fixtures in the fourth quarter of 2021. For the 34 spot fixtures, 17 were
performed by tankers and the remaining were performed by ATBs. The availability
of tankers and ATBs in the spot market was significantly reduced by the end of
the first quarter of 2022 due to charterers securing term contracts in favor of
relying on the spot market.
Our vessels, excluding vessels in layup, were employed for 98% of available days
during the first quarter of 2022, with 34 of a total 1,583 available days
(available days excludes 49 days vessels were off-hire due to drydock
requirements) seeing vessels idle without employment. Industry-wide, there were
no firm Jones Act vessel orders as of March 31, 2022.
14
Delaware Bay lightering volumes averaged 71,000 b/d in the first quarter of 2022
compared with 66,000 b/d in the first quarter of 2021. Refinery demand for crude
oil has increased from the lower demand levels in the first quarter of 2021
caused by COVID-19. We have contract minimums with our refinery customers that
compensate us for barrels not lightered below those minimum amounts.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates in the application of its accounting policies based on
the best assumptions, judgments and opinions of management. There have been no
changes to the Company's critical accounting estimates disclosed in Note 2,
"Summary of Significant Accounting Policies," to the Company's consolidated
financial statements included in the Company's Annual Report on Form 10-K for
2021.
Results of Vessel Operations
During the three months ended March 31, 2022, shipping revenues increased by
$22,726, or 28.0%, compared to the same period in 2021. The increase primarily
resulted from a 369-day decrease in layup days as we had fewer vessels in layup
during the first quarter of 2022 compared to the first quarter of 2021. During
the first quarter of 2022, we had two vessels in layup for the full quarter and
two additional vessels that came out of layup in January 2022 and late February
2022. During the first quarter of 2021, we had seven vessels in layup.
Additionally, the increase in revenues resulted from five Military Sealift
Command voyages, which were longer international voyages, during the first
quarter of 2022 compared to no such voyages during the same period in 2021 and
an increase in Delaware Bay lightering volumes. The increase was partially
offset by one less MR tanker in our fleet, Overseas Gulf Coast, which was sold
during the second quarter of 2021. We continued to see an increase in demand
during the first quarter of 2022 and as a result, we expect our two remaining
vessels in layup to return to service during the second quarter of 2022.
Reconciliation of TCE revenues, a non-GAAP measure, to shipping revenues as
reported in the consolidated statements of operations follows:
Three Months Ended
March 31,
2022 2021
Time charter equivalent revenues $ 93,925 $ 65,513
Add: Voyage expenses 10,074 15,760
Shipping revenues $ 103,999 $ 81,273
The following table provides a breakdown of TCE rates achieved for the three
months ended March 31, 2022 and 2021 between spot and fixed earnings and the
related revenue days.
2022 2021
Spot Fixed Spot Fixed
Three Months Ended March 31, Earnings Earnings Earnings Earnings
Jones Act Handysize Product
Carriers:
Average rate $ 57,368 $ 58,228 $ 24,467 $ 65,165
Revenue days 411 545 148 477
Non-Jones Act Handysize Product
Carriers:
Average rate $ 44,075 $ 17,469 $ 14,958 $ 7,044
Revenue days 180 90 180 177
ATBs:
Average rate $ - $ 34,854 $ - $ 32,339
Revenue days - 178 - 180
Lightering:
Average rate $ 74,311 $ - $ 92,524 $ -
Revenue days 90 - 73 -
Alaska (a):
Average rate $ - $ 58,996 $ - $ 58,743
Revenue days - 269 - 238
(a) Excludes one Alaska vessel currently in layup.
During the first quarter of 2022, TCE revenues increased by $28,412, or 43.4%,
to $93,925 from $65,513 in the first quarter of 2021. The increase primarily
resulted from a 369-day decrease in layup days as we had fewer vessels in layup
during the first quarter of 2022 compared to the first quarter of 2021. During
the first quarter of 2022, we had two vessels in layup for the full quarter and
two additional vessels that came out of layup in January 2022 and late February
2022. During the first quarter of 2021, we had seven vessels in layup.
Additionally, the increase in TCE revenues resulted from five Military Sealift
Command voyages, which were longer international voyages, during the first
quarter of 2022 compared to no such voyages during the same period in 2021 and
an increase in Delaware Bay lightering volumes. The increase was partially
offset by one less MR tanker in our fleet, Overseas Gulf Coast, which was sold
during the second quarter of 2021. We continued to see an increase in demand
during the first quarter of 2022 and as a result, we expect our two remaining
vessels in layup to return to service during the second quarter of 2022.
Voyage expenses decreased by $5,686, or 36.1%, in the first quarter of 2022 to
$10,074 compared to $15,760 in the first quarter of 2021, primarily related to
no expenses for oil pollution mitigation services for the Alaskan tankers in the
first quarter of 2022 compared to $10,309 of these expenses during the first
quarter of 2021. These expenses were passed through to the charterer each month,
however, the charterer is now paying the expenses directly to the vendor.
Additionally, voyage expenses increased due to increases in fuel and port
expenses related to more voyage charters performed by our vessels during the
first quarter of 2022 compared to the same period in 2021 and freight brokerage
fees due to removing vessels from layup during the first quarter of 2022.
15
Vessel expenses increased by $8,991, or 28.3%, in the first quarter of 2022 to
$40,798 compared to $31,807 in the first quarter of 2021, primarily due to an
increase in crewing costs. The increase in crewing costs was related to fewer
vessels in layup during the first quarter of 2022 compared to the first quarter
of 2021.
Depreciation and amortization increased by $1,174, or 7.7%, to $16,493 in the
first quarter of 2022 compared to $15,319 in the first quarter of 2021. The
increase primarily resulted from an increase in amortization of drydock costs.
Our two U.S. Flag Product Carriers participate in the MSP, which is designed to
ensure that militarily useful U.S. Flag vessels are available to the U.S.
Department of Defense in the event of war or national emergency. We receive an
annual stipend, subject in each case to annual congressional appropriations,
which is intended to offset the increased cost incurred by such vessels from
operating under the U.S. Flag. For 2022, we expect to receive up to $5,300 for
each vessel. During 2021, the stipend we received was $5,250 for each vessel. We
do not receive a stipend for any days for which either of the two vessels
operate under a time charter to a U.S. government agency.
General and Administrative Expenses
During the first quarter of 2022, general and administrative expenses increased
by $573, or 9.0%, to $6,938 from $6,365 in the first quarter of 2021. The
increase was primarily driven by an increase in compensation and benefit costs
due to annual compensation adjustments and increased staff levels.
Loss on Disposal of Vessels and Other Property, Including Impairments, Net
Loss on disposal of vessels and other property, including impairments, net was
$0 for the three months ended March 31, 2022 compared to $5,493 for the three
months ended March 31, 2021. The decrease was primarily a result of a loss of
$5,446 we recorded for the planned disposition of the Overseas Gulf Coast based
on a firm offer we received to sell it during the first quarter of 2021.
Interest Expense
Interest expense was $8,365 for the three months ended March 31, 2022 compared
with $6,370 for the three months ended March 31, 2021. The increase in interest
expense was primarily due to a higher rate of interest on our term loan, due
2028, which we entered into in September 2021, compared to the rate of interest
we were paying during the first quarter of 2021 on our term loan, due 2023. The
term loan, due 2023 was paid off with proceeds from the term loan, due 2028. The
increase was partially offset by a decrease in interest expense related to
prepayments of $16,000 and $3,000 we made on the Alaska tankers term loan, due
2025, and OSG 204 LLC term loan, due 2025, in September 2021 and November 2021,
respectively.
Income Taxes
For the three months ended March 31, 2022 and 2021, we recorded income tax
benefits of $59 and $6,169, respectively, which represented effective tax rates
of 10% and 28%, respectively. The decrease in the effective tax rate for the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 was primarily due to the tonnage tax exclusion and current state discrete
expense. The effective tax rate for the three months ended March 31, 2022 was
less than the statutory rate due to the tonnage tax exclusion and state expense.
The effective tax rate for the three months ended March 31, 2021 was more than
the statutory rate due to the tonnage tax exclusion and state benefit.
Liquidity and Sources of Capital
Our business is capital intensive. Our ability to successfully implement our
strategy is dependent on the continued availability of capital on attractive
terms. In addition, our ability to successfully operate our business to meet
near-term and long-term debt repayment obligations is dependent on maintaining
sufficient liquidity.
Liquidity
Working capital at March 31, 2022 was approximately $(57,000) compared with
approximately $(67,000) at December 31, 2021. Excluding the current portion of
operating and finance lease liabilities, working capital was approximately
$40,000 at March 31, 2022 compared to $37,000 at December 31, 2021. The increase
in working capital was primarily due to an increase in receivables related to
the timing of collection from our customers and a decrease in accounts payable,
accrued expenses and other current liabilities as a result of timing of accounts
payable payments made at March 31, 2022 compared to December 31, 2021.
As of March 31, 2022, we had total liquidity on a consolidated basis comprised
of $76,836 of cash and cash equivalents. We manage our cash in accordance with
our intercompany cash management system. Our cash and cash equivalents, as well
as our restricted cash balances, generally exceed Federal Deposit Insurance
Corporation insurance limits. We place our cash, cash equivalents and restricted
cash in what we believe to be credit-worthy financial institutions. In addition,
certain of our money market accounts invest in U.S. Treasury securities or other
obligations issued or guaranteed by the U.S. government or its agencies.
As of March 31, 2022, we had total debt outstanding (net of deferred financing
costs) of $439,332 and a total debt to total capitalization of 56.5%, compared
to $444,740 and 56.7%, respectively, at December 31, 2021.
16
Sources, Uses and Management of Capital
We generate significant cash flows through our complementary mix of time
charters, voyage charters and contracts of affreightment. Net cash provided by
operating activities during the three months ended March 31, 2022 was $1,785. In
addition to operating cash flows, our other current potential sources of funds
are proceeds from additional issuances of equity securities, additional
borrowings and proceeds from the opportunistic sales of our vessels. In the
past, we have also obtained funds from the issuance of long-term debt
securities.
We use capital to fund working capital requirements, maintain the quality of our
vessels, comply with U.S. and international shipping standards and environmental
laws and regulations and repay or repurchase our outstanding loan facilities. We
may also use cash generated by operations to finance capital expenditures to
modernize and grow our fleet.
© Edgar Online, source Glimpses