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Diamond S Shipping Inc. (NYSE:DSSI)
Q3 2019 Earnings Call
Nov 13, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Diamond S Shipping Third Quarter 2019 Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions].

I would now like to hand the conference call over to Craig Stevenson, President and CEO. Thank you. Please go ahead.

Craig H. Stevenson, Jr. -- Chief Executive Officer

Good morning and welcome to the Diamond S third quarter 2019 earnings call. Thanks for dialing in this morning. Before I begin the call, I'd like to draw your attention to our forward-looking statements disclosure. We'll be making several statements about the future, which may or may not happen in the manner in which we described. Please read page 2 of of its entirety for those disclaimers.

If you can now turn to slide 4, and I'd like to review the third quarter operating performance. In quarter three, we earned $18,175 a day in our crude fleet on the spot market, and about $12,750 a day in the product's spot market, which include our MRs at $12,945 today. All in TCE was $18,940 per day and $13,140 per day in the crude fleet and product fleets respectively.

We also would like to look at our operating earnings of our fleet, in which we calculate TCE less OpEx less G&A, because we think its important to highlight, given the various ways these expenses get classified in our industry. Our crude fleet generated about $11,000 of operating earnings. While our products fleet, which includes Handysize vessels generated about $5,600 a day.

We sold two vessels during the quarter, it added a net of about $11 million and brought our total liquidity to $87 million at the end of the quarter. Excluding a non-cash loss on the sale of vessels, our net loss was $7.6 million or a loss of $0.19 per share.

We're off to a great start in the fourth quarter, benefited from great timing with ships, when rates on Suezmaxes spiked over $100,000 a day. Thus far, we booked 62% of the available days, at close to $43,000 a day. We expect the products market to follow suit over the quarter. But thus far, we fixed about 63% at $13,500 a day, where more recent voyages are in excess of $20,000 a day.

Diamond S is well positioned to capitalize on expected upside in the tanker markets. We have scale of 66 ship fleet, with low cash breakevens and 80% of our fleet on the spot market.

You can turn to slide 5. This is sort of an interesting slide. We've highlighted some factors we would ordinarily expect to produce a weak rate environment. Against the backdrop of the current rate environment, the absence of these positive drivers is actually quite curious. We include a graph on the left hand side of the page that reflects the continued downward revisions to oil demand growth by IEA, EIA and OPEC. Combined with the backwardation in the marketplace, inventories at 10-year averages, production limits by OPEC plus and another spike in refinery maintenance during the autumn season, these factors typically trend toward a weaker rate environment.

The tanker market is telling you an entirely different story. The graph on the right tells us, that many scrubber installations are not happening on schedule, and thus absorbing tanker supply. According to Clarksons, over 10% of the crude oil tanker fleet has pending retrofits, which suggests it is still likely to continue for some time.

We also saw how tightly balanced the market is, when recent sanctions of Chinese owned vessels created a panic, exponential rise in crude oil tanker rates. While these rates have settled, they are still well above seasonal expectations. LRs are increasingly moving toward 30 barrels and arbitrages are opening. This is all happening before we see really any impacts of the winter market or the IMO 2020 story.

Please turn to slide 6; the fundamentals in the tanker market are indeed very promising. On the supply side, the charts at the top of this page shows a gap in the natural tanker replacement cycle. The number of vessels on order at both Suezmax and MR segments is about the same number of vessels that are 20 years or older. When this occurs near the end of their useful lives, the potential for a sustained period of historically low fleet growth is very real.

Looking at the bottom of this slide, the tanker demand growth in both crude in the product segments is forecasting a very-very strong 2020. Both segments are expected to see greater demand, as we continue to see widening distances between oil supply growth in the West, and oil demand growth, predominantly in the East.

Please turn to slide 7, please; slide 7 and slide 8 basically talk about asset values. The Suezmax slide, I think there is additional upside compared in the value with a 10-year absolute price range. And you can even see vessels between 5 and 10 years old, look to be in the sweet spot for returns on capital employed. The 10-year-old chart on the left compares to a 20% discount to a straight-line depreciation on the right chart, which basically tells you to be buying the older vessel.

You can turn to slide 8. Slide 8 reflects the same analysis under the MRs, and here again, we see a lot of value is in the older vessel or a 10-year-old vessel.

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

Kevin M. Kilcullen -- Chief Financial Officer

Thanks Craig. Diving right into the third quarter of 2019, when you remove the loss on sale of 2 MRs sold in September, Diamond S had a net loss of $7.6 million, which equates to about $0.19 per share for the quarter.

Craig covered the TCE performance upfront, but I want to point out the 2019, already through the third quarter, represents a huge improvement over the same period in 2018. The Q4 bookings of $43,000 a day on Suezmaxes and $13,500 on MRs on product carriers include the results from our time charters. If we remove the time charter days fixed, we have approximately 50% of the spot days fixed for the quarter on both fleets. Recent spot fixtures, as Craig mentioned on both fleets have been well above these levels.

$30 million in EBITDA for the quarter was slightly lower than anticipated due to fewer revenue days in the clean fleet with the vessel sales and then the crude fleet with two scrubber installations that were completed in the quarter. Cash flow was enhanced by the proceeds from the vessel sales, added about $11 million to cash flow for the quarter.

Continuing on slide 11, the balance sheet remains very strong. Net LTV of approximately 48%. This number is headed even lower, as vessels appreciate due to the enhanced rate environment. Cash position is solid, $31 million above bank required minimum liquidity at the end of the quarter and our debt-capital is entirely comprised of low cost senior secured ship mortgage debt. We have a number of 2021 maturities, with our bank facilities, and the company is currently examining opportunities in the market for refinancing.

Cash break-evens on the fleet remain extremely competitive. Even if you add $1,000 per day normalized annual drydocking CapEx to these figures, with under $20,000 on a Suezmax crude fleet and under $15,000 on a predominantly MR product fleet, these remain some of the most competitive cost breakevens in the industry.

Moving on to slide 12; CapEx outlook for the fourth quarter of 2019 and beyond; we've got one vessel in drydock this quarter, followed by five in 2020. All of those will have ballast water treatment systems installed as part of the drydock. Two of the five scrubber installs on the Suezmax fleet were completed in the third quarter. The remaining three are expected to enter to the yard in the first quarter of 2020 or at the beginning of the second quarter.

CapEx outlook is largely unchanged from what we announced in August and the good news for Diamond S moving into 2020, is that we are maximizing available revenue days for our fleet in the coming year.

Before I turn it back over to Craig, we'd like to give some initial guidance for where we see Diamond S coming out in 2020. OpEx of $7,500 a day on the crude fleet and $7,000 a day in the product fleet. This is a little bit higher than what we've delivered so far in 2019, but we expect the fourth quarter to be higher than Q2 and Q3, and this guidance for 2020 is in line with where we expect the fourth quarter to come in, on the OpEx side.

Depreciation is down, basis previous guidance numbers based on the two sold vessels in September. Drydock amortization is roughly $3 million a quarter for next year. Cash G&A of $1,100 a day, a little bit higher than initial figures from this year, as we've added to the platform, post merger in March. All in, SG&A per day for 2020 will likely be between $1,250 and $1,300 per day.

Off-hire drydocks and capital upgrades; we have five drydocks scheduled for next year. Three to take place in Q1, one in Q2 and one in the third quarter. Note, there is always some element of unpredictability with the exact timing of drydocks and where those days fall. As I mentioned on the previous slide, we have three scrubber installs. Right now we see those going to the yard toward the end of the first quarter. So its highly likely that some of these off-hire days overlap, both the first and second quarter of 2020.

And finally, as disclosed in our documentation from March, we have a management agreement with Capital Ship Management. These OpEx and advisory services are included in the guidance numbers that we have given above.

Finally, I'd like to point out the tremendous operating leverage that exists with the Diamond S fleet. Every $1,000 increase in TCE, which is a very modest number given the spikes we've seen in very recent months, translates into approximately $20 million in revenue and EBITDA. We're tremendously well positioned to maximize available earnings in 2020.

And with that, I'll turn it back over to Craig.

Craig H. Stevenson, Jr. -- Chief Executive Officer

Thanks Kevin. Before we open it up to Q&A, I just want to reiterate how super optimistic we are about the next couple of years. The tanker market is going to be a great place to be. A growing distance between the supply of oil in the west of Suez, and the demand for oil East of Suez, is expected to drive an increase in demand for tankers.

Additionally, as oil demand continues to rise over 100 million barrels a day, global inventories are expected to actually decrease, creating further demand for tankers. And the orderbook for new tanker supply is at historic low levels. We're also excited about the 2020 year. We expect the tanker supply to be relatively inefficient for at least a year, as vessels are taken out of service to install scrubbers, prepare for compliant fuel, as well as storage opportunities, all of which are expected to increase tanker earnings.

With that I'd like to open the call up to Q&A. Operator?

Questions and Answers:

Operator

[Operator Instructions]. Your first question comes from Omar Nokta with Clarksons Platou Securities. Your line is open.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Thank you. Hi, Craig and Kevin.

Craig H. Stevenson, Jr. -- Chief Executive Officer

Hi Omar. Good morning.

Kevin M. Kilcullen -- Chief Financial Officer

Hi, there.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Good morning. Yeah, thanks for that overview and to quote Craig of your super optimism for the next two years. We share that view. Just wanted to maybe kind of circle back to -- this is maybe a two part question, but on the last earnings call, you mentioned needing to address the age profile of your MRs. Since then you sold the two vessels to your older ships. How are you seeing things now with that, and how do you balance monetizing the market today, versus monetizing the ships? And then also, so that's one part, and maybe the other part is, obviously the -- from looking at your guidance for the fourth quarter, looks like Suezmax where rates are pretty strong. MR seemed a little bit lower than what we would have expected, still a nice improvement from the prior quarter. But just wondering, is that age profile impacting the earnings power of these vessels, or is it more just a timing thing?

Craig H. Stevenson, Jr. -- Chief Executive Officer

Yeah, I mean I would start off sand say this. We always monitor values and we always monitor relative earnings and we've seen near term spot earnings take off quite briskly and it was sort of -- after the quarter it started, but certainly earnings for both MRs and Suezmaxes have been been quite strong. And we -- there is a lag effect to an asset value, and so you continue to monitor that, and so we started the process of selling some ships. But right now, it appears that you're going to have to have some period of time of significant cash flows, and then ultimately, it drags up value. And so we're going to continue to monitor that, and for the time being, we want to maximize the cash flow, all the while, monitoring what asset values are doing.

The second part of that question, I'd probably break down this way. I think we're very pleased with our Suezmax performance in the fourth quarter. You know, the number that we gave you actually is a number that sort of talks about all of our crude fleet. If you looked just at the spot business, the spot business is more or less $47,000 a day. And we got a couple of really, really good voyages in there and by the way, we missed it. We missed a number of voyages that were quite high and so the result is, I think we're quite pleased with.

I think on the product side of the business, product side of the business is complicated. And so, we had a number of voyages that were more or less fixed before the market took off in the fourth quarter. But the last -- actually last eight voyages are in excess of $20,000 a day and so, we were sort of out of position. But by and large, I think we're capturing that value and I think our value proposition is unit leverage and cash breakevens. That's what super important to us.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Okay. Thanks, Craig for that color. So just to make sure I have it right, you said $47,000 is the spot revenue that's booked thus far on the Suezmaxes?

Craig H. Stevenson, Jr. -- Chief Executive Officer

Correct.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Okay. And then obviously you mentioned -- your latest eight MR cargoes have been above $20,000. So it looks like you are capturing definitely where the market is today?

Craig H. Stevenson, Jr. -- Chief Executive Officer

That's correct.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Maybe just one more for me then, sorry, just maybe thinking about now, as you mentioned, the markets improved, the cash flows are coming in, you want to start to harness that. What's your sense of timing now for considering dividends and share buybacks?

Craig H. Stevenson, Jr. -- Chief Executive Officer

Yeah, I think I dividends, buybacks. I'll let Kevin say a little -- a few things about this. But I mean they're all relative, if your price is super-super cheap, then your buyback is something that you're going to give serious consideration to, to the extent that your stock trades up. It's different, and so you have all of these needs. You've got cash needs within the company. You've got I think shareholders who would typically always like a dividend for for excess cash needs. But I mean, I think I think its competition among all of those things. Not to mention that you've got fleet replacement issues at some point.

Kevin M. Kilcullen -- Chief Financial Officer

Craig definitely hit the highlight there, I think in the very short term, there is a bit of additional delevering that we could do on the balance sheet, particularly paying down some some lines of credit. So as not to lose that leverage capacity, enable us to be opportunistic as we move into next year. But the focus quickly shifts to how do we return money in an efficient way to our shareholders, given the elevated market that we all expect next year. And Craig gave a very good overview about how we're approaching that thought process.

Omar Nokta -- Clarksons Platou Securities -- Analyst

Yeah. Very good. That's really helpful. Thanks Kevin and Craig.

Operator

Your next question comes from Randy Giveans with Jefferies. Your line is open.

Randy Giveans -- Jefferies -- Analyst

Howdy gentlemen, how is it going?

Craig H. Stevenson, Jr. -- Chief Executive Officer

Hey Randy.

Randy Giveans -- Jefferies -- Analyst

Hey. So chart 7 and 8, as you mentioned are telling you to buy the older vessels. So we see that you sold two of your 2008 MRs a few months ago. Are there any plans for further fleet expansion at DSSI, and which segment is more attractive? Your Suezmax or your MRs?

Craig H. Stevenson, Jr. -- Chief Executive Officer

I think I think when you -- so we've got 66 ships. We've got 16 vessels in the crude side and the balance in the products. I think in general we are more of the -- on the product side, we're more of an MR player, obviously, by definition. But I think in general going forward, I think we focus on the MR side of the business. You need scale in both businesses. But at the same time, there is a competition for where do you put those marginal dollars. And so I think at this point, I don't think there is a burning demand to have additional scale today. You always look at time chartering in of certain opportunities. But right now, we're just not seeing anything that's super desirable to charter-in. We're more or less focused on taking the existing fleet and ensuring that we capture as much cash flow. Ultimately, that cash flow will lead to additional value, and that's how we want to capture that.

Kevin M. Kilcullen -- Chief Financial Officer

Randy, Craig hit the nail on the head there, talking about scale. I mean we really see Diamond as a top tier owner operator of any tanker vessel. But when we think exactly how and where growth will come, it needs to be a sub-segment that we have scale in. So we have a scale MR business. We have a scale Suezmax business. Those are clearly the most obvious. But if there was a interesting M&A opportunity where we could enter the Aframax or the VLCC space, in a scale way, we would absolutely look at it. And so we're pretty opportunistic with how we approach the question of fleet growth.

Randy Giveans -- Jefferies -- Analyst

Okay. And then Craig, you mentioned time chartering-in vessels, maybe not at these levels. We're hearing one year MRs at $16,000 a day. Suezmaxes that maybe $33,000, $35,000 a day. Have you got any bids for your vessels at those rates, and when you look to kind of lock away a few more of your vessels on time charter outs, since you're saying that kind of time charter-ins aren't very attractive at these levels?

Craig H. Stevenson, Jr. -- Chief Executive Officer

Yeah. We actually have had some interest and you know, its turning a conversation into into a charter is always an interesting sort of thing. And so we've had some interest at some much higher levels and then, the market is certainly a fluid marketplace. And so the market really took off like a rocket on the crude side, and then the product side followed behind it and then it's settled, and it is still more or less settling, and it looks like it might actually settle -- start to move in the opposite direction there. There are a lot of fixed -- a lot of cargos that just have not come to the market yet. And I think most people in the industry are aware that. But I'd say by and large, we haven't seen anything that we're ready to fix at a number today. And I would agree with your number that it's more or less $16,000 day on MR and this is a non-eco-type number, and it's more or less in the mid 30s on a Suezmax. So we not seen anything we just can't -- we can't hit the bed on today.

Kevin M. Kilcullen -- Chief Financial Officer

And we've got, you know, roughly 20% of the crude fleet is on time charter for 2020. The product fleet time charter portfolio rolls off pretty quickly. So I think when you're thinking about where we might add additional cover in that MR fleets, we definitely see the benefit of having a baseload of time charter income, and hopefully, with the tailwinds in the market, it will be the opportune time to add to that.

Randy Giveans -- Jefferies -- Analyst

Perfect. Well hey, thank you for the time and I will talk soon.

Craig H. Stevenson, Jr. -- Chief Executive Officer

You bet.

Operator

Your next question comes from Ben Nolan with Stifel. Your line is open.

Benjamin Nolan -- Stifel -- Analyst

Hey, good morning guys. First I want to start. I appreciate the guidance that you gave on page 13, that was really thorough. And in general, I think the presentation is well thought out here with some unique things that we haven't seen from other people. So good job on that. But I did want to follow up on a couple of things. You've now put a few scrubbers on your vessels and Craig, you mentioned that was one of the things that was leading me to be optimistic for -- into 2020 was that scrubber installations are going to be a little bit more protracted, than what maybe people thought. How is your experience more did -- from what you've done thus far, they -- have things gone to plan or are there unforeseen issues?

Craig H. Stevenson, Jr. -- Chief Executive Officer

So we did two ships and those ships were -- we were obligated to actually put the two ships, put scrubbers on, because they went on charter to BP. They took longer than anticipated. The way it's sort of -- it's logistics. At the end of the day the two ships basically arrived at the yard. They were supposed to arrive significantly apart, and they arrived a day apart. And so you had some -- you had some logistic issues that you couldn't start on one, until you -- basically, you have made some progress on the other one. And so it did take a lot more time to do those two ships, and we did those basically at the end of the summer. But some people have -- the anticipated 30, 35 days and it's 45 days and 50 days. And so I think the scheduling of ships and the waiting to put scrubbers on is very real, it's going to go into the first quarter. There is -- I don't think there's any way around it, quite frankly.

Kevin M. Kilcullen -- Chief Financial Officer

Yeah Ben, I think we were at the initially thinking each one of those installs was something like a 45 day project. And you can see, we've significantly upped that in the guidance we're giving for the length of time on the three that are coming up in 2020.

Benjamin Nolan -- Stifel -- Analyst

Got you. Okay and I appreciate that color. And then secondly, and really, lastly for me. Craig, you just mentioned a little bit ago that you -- or maybe Kevin, the you're open to M&A opportunities and building scale maybe in other categories. Craig, in particular, going back to even [Indecipherable], have been pretty involved and active on M&A, probably much more so than most other people in the industry. How are you seeing that market, given sort of the improved rate dynamics and everything else, so are there -- is there an increased opportunity in your view for that happening?

Craig H. Stevenson, Jr. -- Chief Executive Officer

Yeah, I mean it's always for the last four or five years, it has been damn elusive. I mean, everyone has been talking to everyone. All kinds of different stages. I think the industry should continue to consolidate, and you need to have multi-billion dollar market cap companies out there. And so, I really don't have a good answer for why it doesn't occur faster than others. I mean, some people out there have consolidated in a meaningful way. I think liquidity is a great beneficiary of that consolidation. Ultimately systems and people will be satisfied with with real scale, and so we're certainly very open minded. We continue to look at opportunities there. There are some opportunities out there and so you know, we're optimistic at some point that we can continue to be a consolidator.

Benjamin Nolan -- Stifel -- Analyst

Okay, great. Well, I appreciate it. Thanks again.

Operator

[Operator Instructions]. Your next question comes from Liam Burke with B. Riley FBR. Your line is open.

Liam Burke -- B. Riley FBR -- Analyst

Thank you. Good morning Craig. Good morning Kevin.

Craig H. Stevenson, Jr. -- Chief Executive Officer

Hey Liam.

Liam Burke -- B. Riley FBR -- Analyst

Kevin, your operating cash flow is very strong in the first nine months of the year. Is that giving you additional flexibility when looking at your options on refinancing that?

Kevin M. Kilcullen -- Chief Financial Officer

Yeah. I think that combined with the recent market strength and the additional cash that's expected to be delivered to the balance sheet in the fourth quarter of this year, first quarter of next year, absolutely opens up a variety of options. Given the overall relatively modest LTV across the fleet. We're taking a hard look as I think I said in my remarks, at the 2021 maturities. And I think we have a number of different approaches and we'd hope to get something done there, well in advance of that debt coming due.

Liam Burke -- B. Riley FBR -- Analyst

Would that reduce your overall interest expense or rates kind of be we what we are looking at?

Kevin M. Kilcullen -- Chief Financial Officer

You know it's a balance. I think we have a leverage and scale today that Diamond did not have in the past, enabling us to drive relatively attractive debt terms. I'd say on the other hand, the shipping bank debt market certainly hasn't gotten any better, and particularly the lower cost, traditional senior secured ship mortgage debt market has been in decline for a number of years. So you have a couple of balancing factors that move either direction. I would expect there might be a small incremental ability to drive interest expense lower, but not terribly meaningful.

Liam Burke -- B. Riley FBR -- Analyst

Great. Thanks very much, Kevin.

Kevin M. Kilcullen -- Chief Financial Officer

No problem, Liam.

Operator

There are no further questions queued up at this time. I'll turn the call back over to management.

Craig H. Stevenson, Jr. -- Chief Executive Officer

Well, I think its an exciting time in the shipping business. I mean we've never seen -- I don't think we've ever seen rates like this, in real dollars. It probably gets back into the 70s. And so the market is tight. A lot of things are going on in the industry, and certainly the fourth quarter and the next few quarters will be quite strong, relative to all the IMO 2020 issues and scrubbers and how that affects things. And so I think we're as excited as you can get about those opportunities. And really in collecting cash flow. And so our cash break-evens is a competitive advantage to the company and our unit leverage. And so we've got a lot of ships. We've employed very little capital to control those ships and super low cash break-evens. And so hopefully we'll see the market respond accordingly. So with that, I appreciate your time. Stay tuned. Thank you very much.

Kevin M. Kilcullen -- Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks].

Duration: 33 minutes

Call participants:

Craig H. Stevenson, Jr. -- Chief Executive Officer

Kevin M. Kilcullen -- Chief Financial Officer

Omar Nokta -- Clarksons Platou Securities -- Analyst

Randy Giveans -- Jefferies -- Analyst

Benjamin Nolan -- Stifel -- Analyst

Liam Burke -- B. Riley FBR -- Analyst

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