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Diamond S Shipping Inc. (DSSI)
Q3Â 2020 Earnings Call
Nov 16, 2020, 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 2020 Conference Call. [Operator Instructions]
It is now my pleasure to hand the conference over to the speakers today at Diamond S Shipping, Craig Stevenson, Jr., Chief Executive Officer. Please go ahead.
Craig H. Stevenson -- Chief Executive Officer, President and Director
Good morning, and welcome to the Diamond S's third quarter 2020 earnings call. Thanks for dialing in this morning.
Before we begin the call, we'd like to draw your attention to our forward-looking statement disclaimer. We'll be making statements about the future that may or may not happen in the manner in which we describe. Please read page 2 in its entirety for our disclaimer about forward-looking statements.
Please turn to slide 4. Here we have our operating performance. In the third quarter of 2020, our spot crude fleet earned approximately $20,225 per day. The spot product fleet earned approximately $10,375 per day, which includes our pool MR tankers earning about $12,000 per day and our Handy vessels earning about $5,800 per day. All-in TCE, which includes spot and time charters, was $21,400 a day and $11,100 a day in our Crude Fleet and our Product Fleet, respectively. At Diamond S, we look at operating earnings of our fleet, which we calculate as TCE less opex less G&A because we think it's important to highlight, given the various ways these expenses get classified in the industry.
The Crude Fleet generated $12,300 per day in operating earnings, while the Product Fleet, which includes our Handysize vessels, generated about $3,000 a day.
Our reported net loss was $9.7 million and an EPS loss of $0.24 per share. EBITDA was approximately $27 million, and we've maintained our cash position of over $120 million with $60 million in available lines of credit.
On the lower half of this slide, you can see spot earnings volatility during the second half of the year in relationship to the 10 year range and last year. As you can see, rates are currently at the very bottom of the range. So far in the fourth quarter, we have booked approximately 58% of spot revenue days in the Crude Fleet at an average rate of just under $7,000 a day and 60% of the spot revenue days at the MR fleet are fixed at approximately $9,500 a day and 53% of our Handy fleet is booked at about $6,000 a day. Approximately 15% of DSSI's fleet is booked on fixed time charters which provides downside protection in the near term. Ironically, these charters were once seen as a negative and capping our upside. They're all above breakeven levels today. Details from those time charters can be found in the appendix.
On slide 5, we show the impact of the global pandemic on the seaborne trade of crude oil and refined products. While global demand is expected to decline 10% in 2020 from the prior year, the chart on the left shows a decline in seaborne crude and product volumes declining about 6% on the year. Inventories have been drawing, which is positive, an average of estimated 72 days forward demand, down from 80 days during our last call. On the other hand, decrease in inventories is accompanied by historic lows in refinery throughputs and utilization.
As we indicated since the beginning of the year, the storage play pulls our business away from historical tanker market fundamentals, and we're seeing some slight increases and recently in floating storage during the fourth quarter, and thus far are likely to be connected to extremely low rate environment. On the graph on the right-hand side of page 5, we're showing another way to look at how low the order book is relative to an aging fleet. As of today, the order book is equal to 7% of the fleet compared to 9% of the fleet that is comprised of vessels that are 20 years or older. In my entire career, I've never seen this. Without a big pickup in orders, there could actually be zero net fleet growth over the next few years. But experience tells me that's probably not going to happen, but it certainly is inching closer to a real possibility. We continue to see restraint on the tanker supply side as well. As the pandemic continues to linger into 2021, owners of older ships will have tough decisions to make whether to put vessels through another drydocking.
On slide 6, we show statistics relative to Diamond S's fleet in Suezmax and MR Class of supply and demand. With barriers to entry on newbuilding orders, particularly in financing capacity and uncertainty around environmental regulation, growth looks to be limited in our segments. Seaborne trade shown on page 6 is forecast to rebound in 2021 both in crude and oil products. While demand for crude oil and refined products is not expected to rebound to 2019 levels in 2021, we expect to see an incremental benefit from longer haul voyages both in crude and products.
The last point we would like to make on slide 7, as we've shown, asset values relative to 10-year average for both Suezmax and MR fleet. There is no doubt that pricing has decreased in 2020. We were close to the bottom, particularly in the older tonnage. We believe with continued disparity in values of older tonnage, particularly on the crude side, there is upside potential in asset values from here. Likewise, we expect that a large fleet of middle-aged vessels can generate better cash flows than from a smaller younger fleet, especially when considering the amount of capital employed to purchase assets at today's prices. And this is amplified by lower bunker prices.
I'll turn it over to Kevin, our CFO, to go through the financials.
Kevin M. Kilcullen -- Chief Financial Officer
Thanks, Craig.
I'm continuing on slide 9. The third quarter marked a major turning point in the tanker market as both the Crude and Product fleets delivered sharply lower results than the first half of the year. The carryover of rates from [Technical Issues] environment helped keep the quarter in balance, but product tanker rates and the transition of 28 of our vessels into the Norient Pool arrangement impacted the results on that side.
Crude TCE ended at $21,300 a day for the quarter with MRs at $11,100. Our six Handysize vessels have been considerably underperforming the rest of our Product Fleet.
Third quarter EBITDA totaled $27.1 million, down from $34 million last year, with $15 million contributed by the Crude Fleet and $12.1 million coming from the Product side. The fourth quarter outlook is sharply lower. We have 58% of Suezmax spot days booked at a historically low $6,800 per day and 60% of MR spot days booked at $9,400 per day. Given the rate outlook for the fourth quarter, we do expect to be considerably below cash breakevens for the remainder of the year. In terms of this quarter, cash flow generation was slightly negative. The negative fleet cash flow contribution after debt service and capex was offset by lower working capital employed due to the lower overall rate environment and movement of vessels into the pool.
Continuing on slide 10. The third quarter was relatively neutral overall for the balance sheet. Total debt declined by our scheduled amortization amount of approximately $34 million. Gross debt outstanding at the end of the quarter was $735 million. As previously mentioned, working capital employed in the business declined in the quarter. The liquidity situation at quarter end was solid, with approximately $124 million in free liquidity available to the Company after restricted cash and bank required minimum cash. Net debt to asset values as of our latest broker valuations provided at the end of June is approximately 39%.
Moving on to slide 11. Overall on capital expenditures, we are reiterating a very similar guidance to what we have previously provided to market regarding cost of capital events. To answer a question I've received from several investors, the cost guidance that we give on our equipment projects is an all-in number that includes the cost of the equipment, cost of engineering and design work, the cost of installation of the equipment and all ancillary costs related to the project. These estimates may not be comparable to the figures provided by other tanker companies. Due to the tighter-than-anticipated spread between HFO and compliant fuel, we have postponed the scrubber installation that was initially planned for the first quarter of next year. Due to contractual obligations, we will be purchasing the equipment and moving it into storage. We may elect to install the scrubber on a Suezmax vessel in the future.
Finally, for me, on slide 12, we'd like to take this opportunity to update the market on our cost guidance going forward. The global pandemic continues to impact our operating costs. Our internal estimates are that opex was increased by approximately $400 per vessel day in the third quarter for the safe transition of crew and purchase of additional vessel stores due to the increased logistical complications associated with the pandemic. For 2021, we estimate daily opex to be approximately $7,700 per vessel day on the Crude Fleet and $7,300 per day on the Product Fleet. Depreciation and amortization figures are slightly higher than previous as we have the amortization of new capital projects. On G&A, the overall number will be down relative to 2020 due to a reduction in shore-side staff as a result of the commercial outsourcing of product tankers. Off-hire guidance has been updated with the latest estimates for capital and equipment projects.
I will now turn the call back over to Craig for summary.
Craig H. Stevenson -- Chief Executive Officer, President and Director
Before we open it up to Q&A, I'd briefly like to summarize our priorities during this unprecedented market environment to give a sense of how Diamond S is positioned and our management philosophy.
First, commercial scale is critical. While we're happy with the size of our fleet, in June, we announced a strategic partnership with Norden, where about 28 of our MR2 product tankers will be commercially managed by Norient Product Pool. Including ships owned by Norden and others, the pool manages around 150 tankers and is one of the largest operators of MR tankers in the world. We believe this enhances our commercial scale without forcing consolidation of assets. We're certainly in a position to grow our fleet, but we will do so under certain circumstances. We are of course focused on maintaining our cash breakeven levels, which are highly competitive in both Crude and Product fleets. Maintaining a lean profile provides strong operating leverage in good markets and more importantly, acts as a buffer in weaker markets. This brings us to our balance sheet.
In a weaker market in Q3 2020, we were still able to maintain strong cash positions without using our revolver capacity. We have a high-quality debt under a traditional loan structure and a maturity profile through 2024. We have a modest capex program to maintain our ships and to comply with regulations. While we expect some challenges ahead as the tanker market is impacted by the global pandemic, we believe Diamond S is well positioned with strong liquidity, modest leverage, industry-leading breakeven levels to support the downturn and prepare for when the markets return. With the natural limitations of fleet supply and the need for tankers due to regional imbalances of oil, we expect the tanker market to return to fundamental supply and demand as we work through the current inventory levels. Diamond S remains exposed to the volatility in the spot market, and we will utilize our disciplined capital allocation in order to maximize our return to shareholders while maintaining a healthy balance sheet.
With that, I'd like to open up the call to questions. Operator?
Questions and Answers:
Operator
[Operator Instructions] Omar Nokta with Clarksons Platou, your line is open.
Omar Mostafa Nokta -- Clarksons Platou -- Analyst
Hi, thank you. Hi, Craig, and Kevin.
Craig H. Stevenson -- Chief Executive Officer, President and Director
Hey, Omar.
Omar Mostafa Nokta -- Clarksons Platou -- Analyst
Hi guys. I just wanted to maybe touch on one of the last points you were making just about the balance sheet: asset sales, use of capital. Last quarter, you really slowed down the buyback, given the uncertainty in the broader markets, not to mention, obviously, the weakness we're seeing in tanker rates today. You sold an MR I'd say at a fairly good price relative to what we've seen recent assessments coming in at. How are you guys thinking about the use of those net proceeds after you pay down debt? Does that cash start to get put toward a share buyback again, especially given the wide variance between the stock price and the NAV as confirmed at least by the ships there?
Craig H. Stevenson -- Chief Executive Officer, President and Director
Omar, I would say that -- I'd say that you need to have a clear view of what the future sort of looks like on the spot market. And right now it's -- the reality is, it's in cash burn mode. And so once we can feel comfortable that there would, at least -- at least on the -- on the backside of COVID and an air travel starts to pick up -- a lot of issues are sort of tied to travel, and so travel probably represents something like 8%. And so, without much travel around the world, it's a very, very difficult thing. But I think it -- I think the sale represents this very well, and to the extent that we can see other sales at relatively similar values, I think that that's a very smart thing to do in light of this market. We do have some vessels that are '06s and '07s and '08s that would be good candidates for sale.
Kevin M. Kilcullen -- Chief Financial Officer
Omar, from my perspective, I'll just point out that our repurchase basket under our debt agreements is tied to the Company's net income, and therefore we don't have a basket currently given the third quarter results. We're in constant dialog with our bank group, though, and I think if there were additional asset sales that materialize, as Craig mentioned, there would be a dialog with them about perhaps loosening up that for some of that excess capital. But as of now, certainly with the sale of the MR, we're going to keep the capital on balance sheet.
Omar Mostafa Nokta -- Clarksons Platou -- Analyst
Yeah. Okay. No, I appreciate that. That's fair. And then just the -- Craig, you touched on -- I was going to ask about further asset sales, and you mentioned the '06s, '07s, '08s. I was going to maybe ask if you could -- if you guys have identified whether there are certain characteristics or number of ships that you guys were looking to dispose of. I know you're not sellers per se, but when you can think about, say, the next six months and selling ships, is there a number of sales that you have kind of in your head thought about looking to dispose of here in terms of number?
Craig H. Stevenson -- Chief Executive Officer, President and Director
Yeah, Omar, I mean, I wouldn't say it's a number per se. I would say that we do need to transition the fleet and the older ships we have in the fleet in the '06s, and they're Handys and they're not particularly desirable. The other issue is we've got a number of ships that are -- that are ice-class that are not really not utilized in ice and so you're not getting any value there. And so -- and then we've got a Suezmax that is super-high-cost in operating cost and it's got about every -- every extra that you can put on a Suezmax. But the reality is, it's -- we struggle with that ship on performance. And so those are the obvious ones. But I would say -- I'd say in this marketplace, I mean, I think -- I think you always -- I mean, we're ship owners. Most ship owners, just about every asset they have, are always for sale at the right price. And so it's all about price.
Omar Mostafa Nokta -- Clarksons Platou -- Analyst
Got it. Thank you. I'll leave it there and jump back in the queue. Thanks a lot.
Kevin M. Kilcullen -- Chief Financial Officer
Thanks, Omar.
Operator
Randy Giveans with Jefferies, your line is open.
Randy Giveans -- Jefferies -- Analyst
Howdy gentlemen, how's it going?
Craig H. Stevenson -- Chief Executive Officer, President and Director
Hey, Randy.
Randy Giveans -- Jefferies -- Analyst
So I guess just looking at your fourth quarter '20 quarter-to-date rates, your forward guidance still a little bit below your peers. So around the Norient Product Pool, has that provided any utilization or rate benefit here in the last few months?
Craig H. Stevenson -- Chief Executive Officer, President and Director
Absolutely. We moved 28 ships in there. We've got one more to deliver into it after it comes off of time charter that -- somewhere around May, I think. But the performance of that decision relative to the industry as absolutely achieved what we expected it to achieve, actually a little bit more, quite frankly. And so it's very much put us back into -- into that -- sort of that tight band of top performers. And in some cases, though, those other competitors actually have a much, much higher degree of [Indecipherable] ships and scrubbers and all kinds of things, whereas we don't. So we're very, very pleased with that.
The Handys are the Handys, and that's a totally different market, and is ice. And so the performance of those is more or less -- it sort of gets back to Omar's question about asset sales. And then the performance that we're looking at very closely today is our Suezmax performance which is substandard. And so we are basically taking the same type of approach that we took when we -- we looked at fixing our MRs, and so we'll look at any and all opportunities to improve that performance.
Randy Giveans -- Jefferies -- Analyst
Got it. And then you mentioned there that your Handysizes were certainly the laggard in that. Do you view those as kind of core to your business or are you purely -- or do you want to be purely a Suezmax MR operator?
Craig H. Stevenson -- Chief Executive Officer, President and Director
Yeah, I think right now, we'd like to be known as MRs and Suezmaxes, and so we've got some Handys and we've got -- we've got some Aframaxes. I mean, I will -- I will say that our older Suezmaxes basically performing sort of negative numbers relative to the other ships. And so when you have some ships acting as negatives, I mean, your average is just going to get crushed, and clearly, it was crushed. And so I think -- I think a lot of those things sort of gets your -- get your mind completely focused on performance. And so, we -- we clearly are -- I mean, I feel like the decision we made with Norian has been a great one, and they -- they have an enormous footprint. And so I think they have 82 today MRs, and so 28 of those are ours. And so we perform -- the performance is basically what we had hoped it would be.
Randy Giveans -- Jefferies -- Analyst
Got it. All right. And then I guess last question here. There's certainly been some discussion around the crude tanker market versus the product tanker market, which one is better positioned here in the near term. So as you operate in both the crude and products tanker market, which market are you more bullish on here in the coming months?
Craig H. Stevenson -- Chief Executive Officer, President and Director
I mean, it changes. I think in previous quarterly call, I would say the Crude business was the place to be. Both businesses are generating cash losses today in the spot market. And certainly on a ship basis, they're hiring in the crude side. Tough to call. I think -- I think almost all the answers that -- that the shareholders want and the analysts want are when are you going to get on the other side of COVID because until -- until you get a handle on COVID, it's very, very difficult to sort of predict what markets are going to do, what they're not going to. So somebody ask you today what do you think the winner is going to do freight rate-wise. I don't think anybody has a clue, quite frankly.
And so -- Europe is absolutely going through lockdown. The United States is talking about, tightening its, if you will, of what the population can do. And so it's very difficult to predict that. So -- I don't know -- I would say, some people predict that the spot market on the products is actually going to pick up first. It's hard to tell. I don't think I'd venture to pick one over the other. I think they are both [Phonetic] linked, as we all know. And so I think we need to get back to a more normalized market. You see that -- you see days forward of inventory levels are starting to get in line. They still have a long way to go. I think -- I think if you look at India's consumption today and you look at China's consumption today, they're back to pre-COVID levels, super-positive, but we need the rest of the world to follow suit. So...
Randy Giveans -- Jefferies -- Analyst
Perfect. Well, thanks for the robust answer there.
Kevin M. Kilcullen -- Chief Financial Officer
Thanks, Randy.
Craig H. Stevenson -- Chief Executive Officer, President and Director
Thank you.
Operator
[Operator Instructions] Ben Nolan with Stifel, your line is open.
Benjamin Joel Nolan -- Stifel, Nicolaus & Company -- Analyst
Hey, good morning. So, Craig, I'm interested by one of your responses there, specifically around -- maybe to Omar question around the Suezmaxes. It could just be me, but it seems like that's always been a little more dear to your heart, I guess, than the product side. Am I reading your words incorrectly and that you're possibly looking at doing a pool arrangement there similar to what you've done on the MRs given the performance that you've had there? Is that sort of what you're saying at least that you're open to?
Craig H. Stevenson -- Chief Executive Officer, President and Director
Well, we're certainly going to look at it is the way I would put it. But I would not say that there has been any decision -- we've actually talked to a number of people about it. It's -- it's not as big of a marketplace and opportunity as the Product side of the business. So you had a lot of choice and competition. And we -- we had a very robust competition among all the pools. So some pools fit you well and other pools don't fit you well. For instance, it's all about your net-net-net at the end of the day. And so there are a handful of people that do that for a living in the Suezmax side, but I don't think there is -- I would say it's not as obvious, but we are committed to improve the performance of the Suezmaxes, period.
Benjamin Joel Nolan -- Stifel, Nicolaus & Company -- Analyst
Okay. Well, it will be interesting to see how it plays out. Hey, Kevin, I wanted to ask you real quick, the $66 million facility is coming due next year. Obviously, I assume you're looking to refinance that. But as you sort of think through that process on how much you might be willing to draw down or leave outstanding versus maybe even pay a whole lot of it down, how are you thinking about sort of that process on refinancing and cash retention and the balance of interest rates and all that sort of thing?
Kevin M. Kilcullen -- Chief Financial Officer
Yeah, it's a good question. A couple of nuances to that. This is a facility on our two vessels owned by our joint venture. So we actually only control half of the equity interest in this and we do have a partner that is -- will be involved in this decision-making. It's also makes it a little more difficult for us to give corporate guarantees on the facility, which impacts its attractiveness relative to some of our other debt with the mainline shipping banks. That being said, there has been pretty good dialog so far with -- with the existing banks there. We're relatively confident that at a baseline we can replicate what's in place today. I'd say those are two extremely attractive assets too. They're very modern Suezmaxes with scrubbers installed both on time charters through 2022 with an oil major. So if there was the need or the desire to increase the leverage there, probably not with -- not at the same cost that some of our other facilities are at. But we believe that's possible as well.
Benjamin Joel Nolan -- Stifel, Nicolaus & Company -- Analyst
Okay. And then lastly for me, and, Craig, you've talked a lot about asset sales, and the ones that really jump off the page are sort of -- there has been mention of those Handysize vessels. But I noticed that five of them are subject to or scheduled for drydocking next year with ballast water treatment. You're saying you're through the maybe the timing or sort of how it works best. I mean, from your perspective, is it better to sell those prior to going through the drydocking process or do you give something up in terms of the retail value -- or resale value if a buyback is just needed on the front end?
Craig H. Stevenson -- Chief Executive Officer, President and Director
Yeah. I mean, I think all of us are sort of -- we're caught by this COVID deal, and so COVID basically shut down your ability to sell for the last -- in large part, for the last six, nine months. And so, I would say, go ahead and sell those assets now. I think they are not strategic to our effort, and so they're smaller there, in large part, ice-class. And so those ships really don't fit with what we -- what we want to do.
Benjamin Joel Nolan -- Stifel, Nicolaus & Company -- Analyst
Okay. So that would obviously, let's say, some on your future capex commitments [Indecipherable] so that you kind of get to full benefit there.
Craig H. Stevenson -- Chief Executive Officer, President and Director
Yeah, fingers crossed. So we'll see what happens there.
Benjamin Joel Nolan -- Stifel, Nicolaus & Company -- Analyst
All right. Sounds good. Appreciate, guys.
Craig H. Stevenson -- Chief Executive Officer, President and Director
Thank you.
Kevin M. Kilcullen -- Chief Financial Officer
Thanks, Ben.
Operator
There are no further questions at this time. I will now turn the call back over to CEO, Craig Stevenson, Jr., for final remarks.
Craig H. Stevenson -- Chief Executive Officer, President and Director
Hey, thanks, everyone. It's tough -- tough time for shipping. I think every -- every answer that we -- we, the management team, we, the shareholders, want to have is, when do we get back to a more or less a normal world. And in the meantime, we need to be super-sensitive to hanging on to as much cash as we can, and that's difficult in the freight rate environment that we have today. I can say to everyone that we are super-sensitive about that, and so we'll continue to do as much as we can to retain cash and still maintain optionality going forward. I think once we come on the other side of this, the order book is incredibly bullish. And so we -- the next quarter or two is going to be tough, and we'll just have to get it -- get it up. So thanks for your support. I really appreciate it. And we'll do the best for you. Thank you.
Kevin M. Kilcullen -- Chief Financial Officer
Thanks, everyone.
Operator
[Operator Closing Remarks]
Duration: 31 minutes
Call participants:
Craig H. Stevenson -- Chief Executive Officer, President and Director
Kevin M. Kilcullen -- Chief Financial Officer
Omar Mostafa Nokta -- Clarksons Platou -- Analyst
Randy Giveans -- Jefferies -- Analyst
Benjamin Joel Nolan -- Stifel, Nicolaus & Company -- Analyst
