Diamond S Shipping Inc. (DSSI) Q2 2019 Earnings Call Transcript

Diamond S Shipping, Inc. (DSSI)
Q2 2019 Earnings Call
Aug. 7, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Suzanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Diamond S Shipping Q2 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press * and the number 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Mr. Craig Stevenson, CEO, you may begin your conference.

Craig H Stevenson, Jr. -- Chief Executive Officer

Good morning, and welcome to the Diamond S Second Quarter 2019 Earnings Call. I want to thank you for dialing in this morning. As you know, the shipping industry is a seasonal business and summers are quite slow, and this is a typical summer. I'd like to start off on slide four to begin our comments on the second quarter and beyond.

In the second quarter, the first full quarter of all 68 ships, we earned $15,500.00 a day on our crude fleet in the spot market, and about $12,800.00 a day in the products spot market. Oil in TCE was $16,200.00 a day on the Suezmaxes and $13,120.00 a day in the product fleet. We also look at TCE less OPECs and G&A, and as you know in our industry, some people classify expenses differently. The crude fleet generated $8,000.00 a day in the operating earnings, while in the product fleet it generated $5,400.00 per day. Our liquidity for the quarter is $80 million, and our overall net loss is $0.21 a share.

If you turn to slide five, we had updated some basic oil market factors. Oil demand is going to be in excess of 100 million barrels a day this year, and both sources are pointing to a stronger growth in the second half of this year. OPEC has reaffirmed their current throughput down from peak levels back in 2015. On the bottom left hand of the page, inventories play a major role in the industry. Geographical lower inventories create shipping arbitrages where the industry can capitalize on available tonnage at higher margins. The best way to measure inventories is days forward of current demand.

On the bottom right side of the page, refinery maintenance has been skewed more toward the first half of the year, and we expect the second half of the year to be unusually lower. This also explains somewhat a weakness in rates today, as well as represents a positive signal for the future tanker earnings.

You can turn to slide six. Here we have fleet statistics in the top part of this slide. A time-charter/spot differential is growing this summer as we've seen certain customers trying to fix into next year. Asset values are holding. We wanted to highlight the difference between older vessel values, as we expect older vessel values to close the new building parity gap. The orderbook is the lowest we've seen in years. Though Suezmax's end-product anchors are about 9%, the Suezmax number actually includes shuttle ships. And so, if you actually take out shuttle ships out of that number, it actually is below 6% orderbook, incredibly bullish for the industry on the long term.

If you turn to slide seven, here we have a picture of one of the scrubbers we're installing. We're installing five scrubbers on our Suezmax fleet. Overall, the industry is just beginning to retrofit scrubbers on the world fleet, and we're seeing installation delays. Instead of being 25-30 days, it's an additional 15 days longer than anticipated. It's actually causing a backlog and will create further inefficiencies than we originally anticipated. According to Clarkson's, about 60% of the world's fleet will be installing scrubbers, most of which is coming in the second half of '19 into 2020.

And lastly, the world prepares to comply with IMO 2020. We expect uncertainty of pricing, quality of fuel, retrofitting of scrubbers will create significant inefficiencies in the marketplace and therefore create higher demand for tankers. And now, at this time, I'd like to turn it over to our CFO, Kevin Kilcullen, and he'll go through the financials. Kevin.

Kevin Kilcullen -- Chief Financial Officer

Thank you, Craig. Starting on slide nine, as Craig mentioned, the second quarter of each year is generally the beginning of the seasonally weak market for tankers. The company delivered a net loss for the quarter. Rates began to slide in April and have bounced around annual lows for much of the summer. For Diamond, our spot crude fleet achieved a TCE of $15,500.00 in the second quarter. In the product fleet, $12,800.00. Time charters brought the overall achieved TCE up on both fleets.

The encouraging aspect is that year over year the overall market has improved, especially on the product side. We believe this is an encouraging sign for future improvements throughout the second half of 2019.

Our coverage of the third quarter is reflective of the weak spot environment and is as of now substantially similar to the second quarter. We currently have approximately 50% of the crude fleet base booked at $17,300.00 a day, and 60% of the product fleet booked at $13,000.00. This coverage number includes our time-chartered ships, and in today's environment, those time-charter rates are generally higher than what our spot ships are achieving. EBITDA for the quarter is up sharply due to the full earnings contribution of all 68 vessels. For the first time as a public-reporting company. Of note on the cash flows, we've had an uptick on working capital, as much of the crude fleet has rolled off of short-period time-charters and bunker inventories and accounts receivable have moved upward.

Moving to the balance sheet on slide 10, Diamond S maintains a generally healthy, cyclically reasonable level of leverage. Our debt is approximately 50% loan-to-value on our vessel assets. We have a low overall cost of debt, and today we are currently only financed with senior secured shipping loans. We continue to evaluate the optimal capital structure for Diamond S. We believe the company has access to numerous sources of capital in the marketplace. Cash break-evens are very close to current TCEs, even in this depressed freight rate environment. Maintaining vessel break-evens designed to survive throughout the volatile shipping cycle is a focus at Diamond S.

Continue along to slide 11 with our Capex. The downside of a heavy drydock year like 2019 is the increased capital demand and loss of current revenue days. The upside is that we will be maximizing available revenue days in what is anticipated to be a stronger market in 2020. Of note, our first two Suezmaxes to be retrofitted with scrubbers, as in the pictures that Craig pointed out earlier, are in the shipyard now and are expected to exit in late August. Capex numbers have shifted a bit in timing since our last update. However, we are still expecting 2019 Capexpend to be in the mid-30s.

Finishing up on slide 12 with the forward Capex outlook. Substantially similar numbers to what the company has shown in the past. The one thing to note here is three scrubbers that we had originally anticipated to begin install in the fourth quarter of 2019 have now been officially moved to the first quarter of 2020, and the resulting shift in Capex expenditures. With that, I will turn it back over to Craig for a summary.

Craig H Stevenson, Jr. -- Chief Executive Officer

Okay. Thanks, Kevin. Before we open it up to Q&A, I would just like to say that generally, we're excited about the opportunity of IMO 2020, and on a long-term basis, we're excited where the orderbook is today; 9% for both classes of ships is an incredibly long-term bullish stat to support the industry. So, at this point, operator, we'd like to turn it back to you for questions.

Questions and Answers:

Operator

Thank you very much, gentleman. And again, a reminder: in order to ask a question, simply press * then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Our first question comes from the line of Liam Burke of B. Riley FBR. Your line is open, please go ahead.

Liam Burke -- B. Riley FBR -- Managing Director

Thank you. Good morning, Craig.

Craig H Stevenson, Jr. -- Chief Executive Officer

Good morning.

Liam Burke -- B. Riley FBR -- Managing Director

Craig, as you look at the cash flows, your operating cash flows are growing. How are you looking at capital allocation in the light of your scrubber investments, and could you give a sense of if there are any adjustments you'd like to make to the fleet?

Craig H Stevenson, Jr. -- Chief Executive Officer

Yeah, I think one of the things that I think we said on the last call is that we do look at the age profile, and at some point in time, we have to start addressing the age profile on the product side of the business. And so, that's something that we actively have talked about, and anticipate that taking place sometime this year, at least starting that. It's a long process, but it's a process that we need to start.

Liam Burke -- B. Riley FBR -- Managing Director

Okay. And you mentioned in the press release about your net asset value to debt levels. Are you comfortable there? Would you like to improve them? Or how are you looking at your current leverage?

Craig H Stevenson, Jr. -- Chief Executive Officer

I think current leverage is actually quite good. It's not to say the industry, I think, typically doesn't have a problem with borrowing money. And so, it typically has a lot of leverage. And so, we're toward the lower end of that range. But if it went a little lower, it wouldn't be a problem to us. And so, I think when you start to talk about leverage, you also need to talk about contract cover. We've got 20% contract cover right now in sort of the bottom of the market. And to the extent that we would have more spot activity, we would probably like some lower leverage.

Liam Burke -- B. Riley FBR -- Managing Director

Great. Thank you, Craig.

Operator

And our next question comes from the line of Erik Hovey of Clarksons. Your line is open.

Erik Hovey -- Clarksons -- Analyst

Hi guys. So, going back to... you talked about the MRs going back to the new build parts here. So, since August last year, the MR resale value has increased 8% to $39 million and the 10-year-old has moved 27% to $90 million, or 49% now of the resale value versus 42% in August last year. So, in theory, 10-year-old should be roughly 60% of the resale, but it also peaks at almost 80% in the height of the market. So, my question is what relative values do you find attractive to modernize your fleets?

Craig H Stevenson, Jr. -- Chief Executive Officer

Yeah, I think that we're all doing what everyone is doing. We're waiting for the IMO 2020 and the low orderbook to work its way into spot rates and long-term rates. Long-term rates, it's certainly gone up. I think you're also seeing values trickle up as well as a result of those time-charter rates. The spot rates have been the laggard here, and that's what quite frankly everyone wants to know when 2020 sort of kicks in. And so, we've seen a few nuggets in the marketplace. We've seen inventories starting to draw down, we've seen discussions about cleaning of tanks. But activity levels, certainly on the MR side and quite frankly somewhat on the Suezmax side, it's still been very lackluster.

Now, when you start to draw down tanks, you don't need as much transportation as you used to. And so, that's one of the explanations why the work rates are sort of weak today.

Erik Hovey -- Clarksons -- Analyst

That is interesting. So, how would you see the value proposition for a resale versus a 10-year-old vessel?

Craig H Stevenson, Jr. -- Chief Executive Officer

Yeah, I mean, I think what we look at our fleet, the MR fleet is the fleet that we're probably more concerned with on an age profile basis. And we need to start to turn that. We've had many, many discussions on that, but there's a relative number that sort of starts with the new building costs, all-in costs for new building. But practically speaking, I think we first look at existing ships on the water that are high-quality ships, and that's where we would start to turn first. And it is only once that we can get into either a long-term contract that someone wants a brand-new ship that we would be aggressively pursuing new buildings.

But I would tell you that something else that makes a lot of sense today is to look at someone else's order that's already been placed, and it's in line. And so, that's another attractive way to rebuild your fleet. But you should this, a narrowing of the value between the 10-year-old ships and a recent new building or resale, if you will.

Erik Hovey -- Clarksons -- Analyst

So, I agree. So, that's really helpful. That's it for me. Thanks.

Operator

And again, that is * then the number 1 on your telephone keypad if you'd like to ask another question. I have no further questions in the queue. I turn the call back to the presenters for closing remarks.

Craig H Stevenson, Jr. -- Chief Executive Officer

Thanks very much. Appreciate your time. It's a slow time of year, but I think the opportunities look quite great. One of the things that I think if you were just to look at the orderbook and you didn't even have IMO 2020, it would be a very bullish signal for the industry. You add 2020 on top of it, and it gets super attractive. And so, continue to follow this base. We're optimistic about what the latter half of this year represents. Thanks very much for your time.

Operator

And this concludes today's conference call. You may now disconnect.

Duration: 16 minutes

Call participants:

Craig H Stevenson, Jr. -- Chief Executive Officer

Kevin Kilcullen -- Chief Financial Officer

Liam Burke -- B. Riley FBR -- Managing Director

Erik Hovey -- Clarksons -- Analyst

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