Diamond S Shipping Inc. (DSSI) Q1 2019 Earnings Call Transcript

Diamond S Shipping, Inc. (DSSI)
Q1 2019 Earnings Call
May 14, 2019, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Ladies and gentlemen, thank you for standing by. Welcome to the Diamond S Shipping, Inc. First Quarter 2019 Earnings Conference Call. With me on the line today is Chief Executive Officer Craig H. Stevenson, Jr. and Chief Financial Officer Kevin M. Kilcullen.

Before I turn the call over I would like to draw your attention to the forward looking statement disclosures on page 2 of the presentation. Mr. Stevenson, I'd like to hand the call over to you now. Thank you.

Craig H Stevenson, Jr -- Chief Executive Officer

Thanks very much. If you can turn to slide 4 of the presentation, the highlights, and we'll talk a little bit about the first quarter. Obviously the highlight of the quarter was the conclusion of our merger with CPLP, and as a result of that, which occurred on March 27, we have a company with 68 ships, 75% of which are in the product side of the business and 25% are in the crude side of the business. Estimated gross value of $1.6 billion. It's a very attractive fleet.

We have a strong balance sheet that enables us to navigate through the cycles in the business. Our asset value to net debt is 51% basis of broker valuations, and we have a balanced fleet with 20% time charter cover. When we look at the actual results, we only had four days of results for the new company. The vast majority of the quarter was reflective of the private company Diamond S Shipping, LLP.

Just a few points we wanna get out of the way about the quarter. We had a number of charters, short-term time charters, last year that actually bridged the gap into the first quarter, some of which actually went into the second quarter as well, and so there were some repositioning cost as it relates to those.

In addition, we'd also like to point out sort of our point of view, how we look at time charter equivalencies, you know, the three biggest ways of expensing that. We tend to take RTC and then we strip out our op-ex and we strip out our G&A out of those numbers. And as you can see on the crude side of the business for the quarter, we did $12,600.00 a day, and on the product side of the business we did about $6,900.00 a day on that basis. We have $81 million in cash today, and we had a net loss of $1 million or $0.04 per share.

If you can turn to the next slide, please, slide 5. The combination of the business resulted in 68 ships. We have an average age of 8.8 years. It's actually one of the larger shipping companies in the tanker space today, but the more important aspect is it's at the right time. And that is from an asset value standpoint, we're at the bottom of the cycle. It's very attractive from the investing side of the business. We have an experienced management team and board with deep roots in the business and know what to do throughout the cycle. We expect to grow the company in a disciplined manner to ensure that we return shareholder value to our shareholders, and currently we have 80% of the fleet today on the spot market.

If you can turn to slide 6, please. This is more or less the slide on the macro trends in the industry. Oil demand is expected to be 100 million barrels a day this year. OPEC continues to be a very significant factor in the oil business. We expect that later on this year, after their meeting in June, that they'll add additional supply to the marketplace, creating additional ton miles.

On the bottom left, it's actually an interesting slide for the industry. There is a growing disconnect between the location of the supply growth in the oil industry from areas that are consuming that oil, and so we see markets moving from one to the other. And so it's quite significant.

In the bottom right hand corner, inventories do play an interesting role in the business, creating arbitrages. You can see from 2016 until now there's been a steady decline in days forward of demand, and so we think that will continue to drive rates as well.

Please turn to slide 7. This is an interesting slide because this has certainly changed over the years, but there's a -- This is all about US exports of crude oil, and so right now it's between 3 and 3.5 million barrels a day. It basically goes to long haul movements. It's a significant driver of crude oil ton mile demand. When we look at the capacity going forward, there's an additional 2 to 3 million barrels that are under construction and anticipated to come online early in 2020, all very supportive to ton mile demand.

In the bottom left, we look at the Suezmax age profile, and 21% of the fleet today is 15 years or older, quite significant. But what's really unusual is the next slide just next to it, and that is we have under 6% of the Suezmax fleet on order today. And those two slides produce a compelling story for the Suezmax side of the business.

When we look at the far right, bottom right slide, we have the blue line that represents the 4% decline curve on new buildings, and the line under that represents the vessels existing on the water. And so there's a material difference between those two, and we expect that those two lines to...get much closer, and that is the value of secondhand ships will go up in value.

If you can turn to slide 8 now. On the product side of the business there are significant new refineries in the East for export to the West, and so grass root refineries are building in the East and will absorb tonnage to the West.

At the bottom side of this, we look at the profile of...MRs today, and roughly 17% of the MRs are 15 years or older. And you have 9% of those vessels on order today. And so both of those numbers still are bullish as well, not quite as bullish as the Suezmax side, but still bullish nonetheless. When we look at the new building decline curve and we look at the existing ships, here again we find the cheapest vessels out there are the existing ships on the water, and we expect that to narrow into the future.

If you can turn to the next slide. I guess the most talked about issue in the industry over the last two years has been IMO 2020 and going from 3.5% sulfur fuel to 0.5%. It's a very significant event for the industry, and it's super positive for our business. Demand for medium and heavy crudes, crude oil, is stronger, because it will yield more distillate products. That's what's needed to produce the compliant fuel. This will continue to drive ton miles given the disconnect between these oils and the location of complex refineries. About 3 to 4 million barrels a day of high sulfur fuels will be displaced by this light oil or even gas/oil blends. Refineries are expected to change their feedstock slates in order to supply this compliant fuel.

The industry is also investing in scrubbers to try to get a cost advantage over the ships that will just buy compliant fuel. Today about 16% of the tanker fleet is investing in scrubbers. Diamond S is a participant in this. We have five scrubber contracts, and we're gonna evaluate two others. And we expect in the second half of 2019 we'll see scrubber tonnage going offline to install these systems, creating the opportunity for the shipping market to capture stronger returns.

At this time, I'd like to turn the presentation over to Kevin Kilcullen, our CFO, for the financial presentation.

Kevin Kilcullen -- Chief Financial Officer

Thanks, Craig.

Continuing on slide 11, as was mentioned up front, it's important to remember as we look at the first quarter there are only four days of combined 68 vessel activity in the financial statements. The comparative period from 2018 includes only the historical 43 vessel DSS fleet.

With a small net loss for the quarter, the company was close to breakeven on a PNL basis. Moving into the TCE results, as Craig has already discussed, Q1 TCE on the crude fleet was impacted by the unfavorable positioning of ships redelivering from short-term time charters signed in 2018. The earnings hit from repositioning voyages carried over into the second quarter on a number of the vessels as well. With respect to the Q2 book-to-date numbers, these include the full quarter impact of time charter covered days. TC rates on the time chartered vessels are generally higher than those achieved in the spot market to date in the second quarter.

Turning to the product side, it's important to note that Q2 and onwards includes 45 MR2s and 6 MR1 or handysize vessels, while the comparative historical periods contain MR2s, the larger vessels, only.

EBITDA generation for the quarter evidences the much stronger tanker market, especially on the crude side, and for cash movement in the quarter, the transaction net of borrowings was roughly cash neutral. Company did experience an increase in working capital due to the prefunding of our commercial manager and an increase in bunker inventories as vessels came off time charter.

Moving on to slide 12, accounting for the merger that Craig mentioned earlier was the single largest event in the quarter. The company accounted for it as an asset acquisition, resulting in a very streamlined pro forma balance sheet with no goodwill. The cash consideration and transaction cost were funded by $345 million of borrowings on a $360 million senior bank facility secured by 28 vessels.

Focusing in on the balance sheet on page 13, coming out of the transaction Diamond S has a very healthy balance sheet. With net loan to value of 51%, there's substantial equity value in our fleet. Our debt capital structure is entirely financed by senior secured ship loans, leading to a very attractive cost of debt. With a weighted average margin of 270 basis points over LIBOR, at current LIBOR rates we pay approximately 5.5% on our entire $940 million of debt.

This leads to a reasonably healthy liquidity situation. At the close of the first quarter we maintained a $42 million cushion above bank-required minimum cash, and that's inclusive of $15 million of availability on our $60 million revolver.

We maintain extremely competitive cash break-evens, with $18,000.00 a day on the crude fleet and $13,000.00 on products. Even factoring in estimated capex for 2019, that only adds about $2,000.00 a day on the crude fleet and $1,500.00 on the products. All in breakeven below $20,000.00 and $15,000.00 a day respectively are extremely healthy and competitive daily cash break-evens.

Moving on to 14 and the capex program. There's a significant amount of capex in 2019, roughly $27.5 million is yet to be incurred. We are installing 15 ballast water treatment systems and 5 scrubbers this year. The scrubbers are all going on vessels in the crude fleet, and as Craig mentioned before two additional scrubber installations are under evaluation.

Fifteen gives the future outlook for capex from where we're sitting today. I think two of the big takeaways from this slide are that future capex is a very light drydocking year in 2020. This is enables the company to maximize revenue days in what we believe will be a strong tanker market. The other important takeaway here is that approximately $60 million or half of the estimated capex in this four year period relates to ballast water and scrubber installations, and these are one-time regulatory-driven expenditures.

Finally, on page 16 we attempt to address a question that we were often asked by investors, which is when will more shares be available in the market? We financed one registration statement that was declared effective last Friday, increasing the amount to freely tradeable shares to 55% of the total and leading to a very healthy flow. As disclosed in our transaction documents, the remaining lockups expire in September 2019 and March 2020.

With that I will turn it back over to Craig for a summary.

Craig H Stevenson, Jr -- Chief Executive Officer

Thanks, Kevin. Before we go to the Q&A, I just want to remind everyone that we have a significant fleet in two classes of ships, and they're 100% owned. So we didn't do any leverage lease transactions. We have two bets. We have a crude oil bet, and we have a product bet. Importantly, we're well capitalized with low operating leverage as Kevin has pointed out, and we're excited about where we are in the industry today and how we can grow the business.

Operator, I'd like to turn it back to you to go through questions, please.

Questions and Answers:

Operator

Thank you very much, indeed, sir. We now begin the question and answer session. If you wish to ask a question, please press *1 on your telephone keypad and wait for the automated message advising your line is open. Please then state your first and last name before you ask your question...Thank you very much. We have some questions for you.

We'll now take our first question. Please go ahead. Your line is now open.

Randy Giveans -- Jefferies -- Analyst

Howdy, gentlemen. This is Randy Giveans from Jefferies. How are you?

Craig H Stevenson, Jr -- Chief Executive Officer

Great.

Randy Giveans -- Jefferies -- Analyst

Good. All right. So a few quick questions from me. The presentation was pretty robust, so that answered a lot of them, but you mentioned in your prepared remarks you're looking to quote-unquote "grow the company in a disciplined manner." So would that be through new buildings, I guess more likely secondhand ships, or possibly even chartering in ships? And also would it be within Suezmaxes and MRs? Or are you open to looking at kind of BLCCs and other asset classes?

Craig H Stevenson, Jr -- Chief Executive Officer

You know, I don't think we're too limited in that sense. We want to do accretive transactions that make sense for all the shareholders. I think the most obvious places to look first would be the two existing classes you have today, but for instance I don't think I would look at it in a limiting way. And that is I think other types of tankers we would certainly look at it, and to the extent that it's an accretive transaction for us I think we would absolutely evaluate that.

Randy Giveans -- Jefferies -- Analyst

But with a preference for secondhands over new buildings?

Craig H Stevenson, Jr -- Chief Executive Officer

New buildings, I always sort of thought that was sort of the last thing that you thought about, and that is you first look for high quality younger ships on the water. You're constantly looking to...to bring down your average age, and so it's only once you exhaust that do you look at new buildings. Now obviously if someone comes to you, a major customer comes to you and wants you to build a new ship and offers you a long-term transaction, that's something different. But barred that, I think you would first look for high-quality secondhand ships.

Randy Giveans -- Jefferies -- Analyst

Okay. And then looking at your kind of chartering strategy, you have some vessels on charter expiring soon. Do you plan on keeping most of your vessels in the spot market or looking at kind of locking in new time charters on those ships for the back half of this year and 2020?

Craig H Stevenson, Jr -- Chief Executive Officer

Yeah. You know, we have 20% today. I think when we look out over the next couple of years, it looks like a super attractive market. The charter rate would have to be quite significant to convince us to time charter out ships today.

Randy Giveans -- Jefferies -- Analyst

Excellent. And then I guess just touching on that attractive market coming here later this year, 2020, as an owner/operator of both crude and refined product tankers, which kind of sector do you see benefiting the most with IMO 2020 kind of on the demand side?

Craig H Stevenson, Jr -- Chief Executive Officer

We get that question all the time, and...and typically markets sort of lead with the crude side of the business and then the product side of business follows afterwards. I think both classes of ships are poised to -- I think it's a tough call. I mean, normally you would say the crude side of the business probably has more upside, but today the math sort of says the product side of the business looks fantastic.

Randy Giveans -- Jefferies -- Analyst

Sure. I will -- Hey, congrats again, and thanks for the time.

Craig H Stevenson, Jr -- Chief Executive Officer

Yeah, I appreciate the questions. Thank you.

Operator

Thank you. We'll now take our next question. Please go ahead. Your line is now open.

Liam Burke -- B Riley FBR -- Analyst

Liam Burke, B. Riley FBR...

Craig H Stevenson, Jr -- Chief Executive Officer

Yep. Yes?

Liam Burke -- B Riley FBR -- Analyst

Oh. Good morning, Craig. Morning, Kevin.

Kevin Kilcullen -- Chief Financial Officer

How you doing? 

Liam Burke -- B Riley FBR -- Analyst

Craig, you talked -- you spoke earlier about the disciplined growth strategy. How do you balance that with the rest of your capital allocation? It looks like your cash flows stepped up pretty well this quarter, even though you had some significant working capital needs. Do you expect as we go through the year -- As Kevin talked about capital requirements are limited this year, how are you looking at capital allocation over and above disciplined growth?

Kevin Kilcullen -- Chief Financial Officer

You know, in terms of how we're looking to grow the company and how we're gonna transform the existing asset base, as I think I touched on one of my slides, there's tremendous equity value in our ships today. So particularly as a source of capital to fund attractive opportunities, it wouldn't be unheard of to see us take capital out of certain vessels and redeploy it into other ones that we think drive higher returns in our system. I think we're also looking at the smaller universe of larger opportunities that entail a combination on a nav-nav basis with others owners and operators of similar tonnage. I think that could be a big growth driver for the Diamond S platform moving into next year.

Liam Burke -- B Riley FBR -- Analyst

Okay. And you touched on scrubbers. You've got a schedule. Is there any change to your view on installation? Or are you pretty much set on which vessels or which class of vessels you're gonna maintain the installation program?

Craig H Stevenson, Jr -- Chief Executive Officer

Yeah. It's basically the Suezmaxes, and so it makes more sense on vessels that have more sea ton quite frankly.

Liam Burke -- B Riley FBR -- Analyst

And you don't see any need to go down to the product side?

Craig H Stevenson, Jr -- Chief Executive Officer

You know, it's just a difficult argument. Those ships have so much port time, it takes the payback period and it can push it up to four, four and a half years, depending on what you think the delta's gonna be.

Liam Burke -- B Riley FBR -- Analyst

Great. Thank you, Craig. Thank you, Kevin.

Craig H Stevenson, Jr -- Chief Executive Officer

Thank you.

Kevin Kilcullen -- Chief Financial Officer

Thanks, Liam.

Operator

Thank you very much. And our next question -- We'll now take our next question. Please go ahead. Your line is now open.

Eric Hovey -- Clarksons -- Analyst

Eric Hovey, Clarksons. Hi, guys. So you mentioned the rate, so adjusted for your repositioning are you guys seeing rates in line with the market? And are you expecting to close the gap in the second half?

Craig H Stevenson, Jr -- Chief Executive Officer

Yeah, I think we are seeing rates in line with market. I mean, what we had is, as we said earlier, we had a number of ships on short-term time charters that bled over into this year, and as a result of those fixtures...it puts pressure on those rates. And so obviously we are keenly focused on having the fleet in such a way that it sort of maximizes the near-term earnings outlook, and so we're trying to campaign our ships in such a way to not take long voyages but anticipate markets that are gonna rise and be on shorter term voyages so as we can capture that when markets do pick up.

Eric Hovey -- Clarksons -- Analyst

Thanks. And on the active side, so RSNP guides tells about their secondhand market being fairly tight now for modern tonnage. Buyers have quoted values and a lack of sellers. So you being in the market, are you experiencing the same? And what considerations do you have the regarding the FNT market at the moment?

Craig H Stevenson, Jr -- Chief Executive Officer

Yeah, I mean, I think that we're always active. I mean one of the things that you always have to do is you have to look at your fleet and continue to turn your fleet, and so we're always an active participant looking forward to...basically reduce the age of your fleet. And so we have some ships, some 2006s, that we're certainly looking at, and...we'll compare that against what the marketplace gives. But it looks like the marketplace is moving up, and we're not surprised that asset values are starting to firm. So I'm not sure that you...aggressively do anything at this point, more or less in a watch-and-wait mode.

Eric Hovey -- Clarksons -- Analyst

Okay, thanks. That's it for me, and again congrats on the listing and first official quarter publicly.

Kevin Kilcullen -- Chief Financial Officer

Thank you.

Craig H Stevenson, Jr -- Chief Executive Officer

Thanks.

Operator

Thank you very much indeed, and as there are no further questions we'll now pass back for closing remarks.

Craig H Stevenson, Jr -- Chief Executive Officer

Okay. Well, I -- It's fantastic to be public again, and so, you know, you've got a new excited team trying to...to grow the business. And we think we're at a fantastic place in the cycle, so we're optimistic about what the future for Diamond S. So thanks very much for your time today. Thank you.

Operator

Thank you very much indeed, and with many thanks to both our speakers today that does conclude our conference. Thank you all for participating, you may now disconnect. Thank you, gentlemen.

Craig H Stevenson, Jr -- Chief Executive Officer

Thank you, Jenny. Thanks so much.

Operator

All the very best to you. Thank you.

Craig H Stevenson, Jr -- Chief Executive Officer

Okay. Thank you.

Duration: 27 minutes

Call participants:

Craig H Stevenson, Jr -- Chief Executive Officer

Kevin Kilcullen -- Chief Financial Officer

Randy Giveans -- Jefferies -- Analyst

Liam Burke -- B Riley FBR -- Analyst

Eric Hovey -- Clarksons -- Analyst

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