Overseas Shipholding Group (OSG)


Overseas Shipholding Group (OSG) grew out of the Maritime Overseas Corporation, founded in 1948. OSG, a Delaware corporation, was incorporated in 1969. The next year it was publicly listed on the American Stock Exchange, before being listed on the New York Stock Exchange in 1973. It is now headquartered in New York. Of its 3,500 staff, 3,050 are seagoing.

SWOT

Strengths

  • OSG has a diversified fleet across all tanker sizes.

  • The company has a large number of Jones Act ships able to operate off the US coast.

  • OSG's product and liquefied natural gas (LNG) carriers will help support its income.

  • Operating its vessels in tanker pools help ensure business and efficiency.

Weaknesses

  • The company made a loss in 2010 and 2011, and started 2012 with a first-half loss.

  • OSG's larger crude tankers all operate on the spot market.

  • OSG's debts have forced it to file for Chapter 11 bankruptcy proceedings.

  • OSG's recent financial statements are not to be relied upon, due to a tax complication.

Opportunities

  • Oil and LNG imports by Japan are expected to continue to grow in the wake of the March 2011 earthquake and subsequent nuclear radiation fears, as the country turns to other means of energy production.

  • Product tankers are projected to rebound in the medium term as refining capacity moves to emerging markets.

Threats

  • If time charter equivalent (TCE) rates drop further then OSG will have difficulties in protecting its bottom line.

  • Overcapacity in the global tanker fleet continues to put downward pressure on tanker rates.

Strategy

OSG has a wide variety of vessel types, running the whole gamut from ultra-large crude carriers (ULCCs) - three out of the four remaining in operation globally, two of which have been converted into floating, storage and offloading (FSO) units - to lightering vessels. The firm does not only operate crude oil tankers but also product tankers and LNG carriers. As of October 31 2012, in OSG's crude oil fleet are 13 VLCCs (plus the ULCC), the two FSOs, three Suezmaxes, eight Aframaxes (plus two on the orderbook scheduled for delivery in 2013), nine Panamaxes and six lightering vessels (Aframaxes).

In terms of product carriers, OSG operates six long-range Panamaxes and 38 medium-range Handysizes. In its fleet of Jones Act US-flagged ships used for coastal shipping, OSG operates 12 Handysizes, seven articulated tug barges (ATBs) for clean products and three lightering ATB vessels used for crude. Further to these tankers there are also four LNG carriers in OSG's fleet. BMI believes that the product tankers and the LNG carriers will help support OSG through 2013, as these are two sectors that we believe will enjoy a strong year while crude oil shipping continues to list. The Jones Act ships also stand to benefit from a strengthening US economy.

Of OSG's 111 vessels, 63 (or 56.7%) are owned by the company. The rest of the vessels are operated on a bare-back lease or time charter basis. BMI believes that this is a good ratio for a successful shipping company, enabling OSG to downsize its fleet more easily should a particularly savage downturn take hold.

OSG's tankers operate in pools with other shipowners, classed by size: 'Internationally, commercial pools are formed by like-minded ship owners of similarly sized, modern, well-maintained vessels. Operating a large number of vessels as an integrated transportation system enables pools to provide greater flexibility, reliability and service to customers on demand. Cargo systems are built around COAs [contracts of affreightment] that guarantee a certain frequency of cargo lift at either fixed or spot rates.'

For example, the non-FSO ULCC and all 15 VLCCs operate in the Tankers International pool with Athenian Sea Carriers, DHT Holdings, and Euronav. These vessels operate on the spot market, trading worldwide on long-haul voyages. Equally, all of OSG's Suezmaxes are also largely traded on the spot market, all participating in the Suezmax International pool in the Atlantic Basin. BMI notes that the spot market can be a volatile place to have all of your largest ships. Companies such as Frontline, whose vessels also predominantly operate on the spot market, have been hard hit by plummeting rates, while others with vessels on time charters have fared better. However, through operating in tanker pools OSG somewhat limits its risk, sharing cargo demand and increasing efficiencies.

OSG also operates its fleet in the most efficient manner possible, reducing any ballast journeys to the bare minimum and thus maximising profits. For example, a tanker will take crude from Venezuela to north-west Europe, ballast to the North Sea, and take cargo thence to the US East Coast.

BMI notes that the company has a large number of US-flagged, Jones Act ships, which comply with the country's strict cabotage laws, giving it an edge in the US market over other tanker companies. OSG's lightering vessels operate primarily in the US. These are ships that take oil from a larger ship to transport it into a smaller port.

Financial Results

2012

OSG Files For Chapter 11

The malaise in the crude oil tanker market claimed its second major scalp as OSG filed for Chapter 11 bankruptcy proceedings in November 2012. The company has been hit by the continuing decline in tanker rates as the crude oil shipping sector, in common with container and dry bulk shipping, has struggled under the weight of an overtonnaged fleet. Barring a fundamental rebalancing of the industry we believe that operators will continue to struggle over the medium term.

OSG is the fifth-largest crude oil tanker operator in the world, and the largest based in the US. In common with most other tanker operators the company has been suffering from losses as the global crude oil shipping sector has struggled to recover from the global economic crisis of 2008. While seaborne oil shipments have recovered they have not kept pace with the growth in the global fleet; vessels ordered during the pre-downturn boom years have continued to come online, exacerbating the imbalance, and rates have suffered as a result. The overcapacity in the very large crude carrier (VLCC) fleet has been such that the low rates, coupled with elevated bunker costs, have pushed daily returns for the supertankers employed on the benchmark Middle East Gulf to Asia route into negative figures for periods of 2012.

Although there has been the traditional September bounce in the Baltic Crude Tanker Index, which is made up of a number of global routes for all tanker classes, we note that it has been more muted than it has been in previous years, and we caution that 2013 will continue to prove difficult for operators through the close of 2012 and into 2013.

In the face of these adverse operating conditions OSG has not reported a profitable period since the first quarter of 2009. The company is struggling to maintain its credit lines, and had been in discussions with its banks (including Nordea, Citibank and DNB) for over a year prior to the Chapter 11 petition with regards to a restructuring of its balance sheet - OSG's current credit facility of US$1.5bn was due to expire in February and it had still not secured the funds it needs.

OSG's position was made even tougher through the announcement that an unspecified tax issue has rendered all its financial reports from the past four years unreliable. OSG is the second major US tanker operator to file for Chapter 11 after General Maritime Corp (Genmar) was forced to do so in January 2012 as it struggled under the weight of its newly expanded fleet ( see our online service, January 16 2012, 'Genmar Unlikely To Be Last Bankrupt Tanker Operator').

We note that the fall out for OSG's investors could be huge. In terms of its debt investors, according to sources quoted by Reuters US$60mn of the US$1.5bn credit facility has already been sold, and another chunk worth over US$100mn is being offered on the market as well. BMI has written previously on how banks are growing increasingly wary of shipping finance ( see our online service, April 11 2012, 'Shipping Finance An Increasingly Rare Commodity As Lenders Sell Portfolios'), and that most European banks are in the process of selling off their shipping portfolios. Further, they are increasingly prepared to seize assets (ie, ships) if operators are unable or unwilling to pay. This is not the ideal solution, however, and OSG's creditors will be hoping for a meaningful restructuring of OSG's debt.

Morten Arntzen, President and CEO, said in a press release regarding the filing in November: 'The last few years have been difficult for everyone in our industry, but OSG has continued to provide safe, incident-free and reliable shipping services for our global client base. Our Jones Act fleet, in particular, has performed very well the last 18 months and has secured a number of notable contract extensions. Over the past two weeks, OSG has continued to fix vessels with our clients. We will use the Chapter 11 process to definitively resolve our financial issues. An orderly restructuring in Chapter 11 will provide stability both to OSG and to the entire shipping industry. We expect to emerge from our Chapter 11 reorganization with a solid financial base and clear path to future success.' He went on to say that business would continue as normal.

Q212

Rates on the Baltic Dirty Tanker Index continued to push down in the second quarter of 2012, and daily returns on benchmark routes on the spot market were frequently negative. The Baltic Clean Tanker Index fared little better, moving sideways at best through the period. The latest results release, from OSG reflect this, with the company having endured a greater loss in the second quarter than it had in the same period in 2011. Although company revenues had grown by 1.3%, from US$207.3mn in Q211 to US$210.0mn in the quarter ended June 30 2012, the loss for the period widened from US$37.3mn to US$55.3mn; bunker costs remained high. This represented the 13th straight quarterly loss for OSG.

President and CEO Morten Arntzen, said of the results: 'Following on the slowdown of the world economy, all our International Flag markets turned down during the second half of the second quarter, with rates in our MR segment being under particular pressure, resulting in a disappointing quarter. Rates remain challenging today.'

Listed in New York, the company's share price closed at US$5.75 on August 3 shortly after the release of the Q212 results, representing a one-year return of -71.7%. The company was underperforming Bloomberg's Tanker Index, which had seen a one-year return of -16.2% by comparison.

Q112

OSG made a net loss in the first quarter of 2012, losing US$34.8mn, slightly worse than the company fared in the first quarter of 2011, when OSG lost US$34.6mn. TCE revenues for the period were US$214.0mn, a 4% gain on the US$206.6mn revenues taken in Q111. Revenue days were up 6% thanks to the delivery of new international and Jones Act product carriers. As with all shipping companies OSG's bottom line has been impacted by high bunker prices through the first three months of the year.

President and CEO Morten Arntzen, said: 'Rates in our International Flag segments continue to be weak and volatile, but have improved from the last six months of 2011, which we believe was the bottom of the tanker cycle. The first quarter results for our International Products business were negatively impacted by an unseasonably warm winter, while the crude market continues to struggle with excess supply. We began this quarter with healthier crude rates and a more balanced products market as the driving season in the US approaches. At the same time, we are getting satisfying contributions from our US flag, LNG and FSO businesses.'

2011

OSG operated at a loss in 2011 for the second year running. Time charter earnings revenues for the year were US$790.2mn, down 8% from the US$853.3 recorded in 2010. This was attributed by the company to the low spot rates secured by its crude carriers. The net loss recorded by the company for the year was US$192.9, or US$6.39 per diluted share. This is an even greater loss than that recorded in 2010 (US$134.2 or US$4.55 per diluted share), and is in keeping with the poor operating environment in which tanker operators once again found themselves in 2011, as excess capacity continued to push down crude oil shipping rates. BMI notes, however, that the Q411 loss of US$50.0mn was less than the US$55.3mn loss in the corresponding period in 2010. Like many other shipping companies, OSG has suspended any dividend payment for the time being.

President and CEO Morten Arntzen, said: '2011 was a challenging year for the global tanker industry and for OSG, primarily because of very depressed spot markets throughout the year and especially the last six months of the year.' Nevertheless the company is optimistic for 2012, not least because of the projected good year product tankers are expected to enjoy, and the continued outperformance of LNG shipping.

2010

OSG operated at a loss in 2010. The company's shipping revenues decreased by 4.3% from US$1.09bn in 2009 to US$1.05bn. The fall in net profit was even greater. While OSG made a profit of US$70.17mn in 2009, a loss of US$134.24mn was recorded in 2010. The Q410 loss was US$59mn.

Arntzen, stated: '2010 was clearly a disappointing year financially as a result of very depressed rates in all tanker segments in the last two quarters of the year. Nevertheless, we made substantial progress on a number of fronts that will benefit the Company in 2011 and beyond.'

It is clear when looking at the TCE results how OSG's loss in 2010 came about. For its crude-oil business unit, the total number of revenue days in 2010 did not see a large change from the previous year: 4,490 as opposed to 4,449 in 2009, including spot and fixed hires.

However, when looking at the TCE rates the cause becomes clear. For Q409 VLCCs earned US$23,876 a day on the spot market, or US$42,419 for fixed-rate; for the same period in 2010 this had dropped by 28.6% and 23.6% to US$17,044 and US$23,876, respectively.

Latest Activity

OSG Extends FSO Africa Contract With MOQ

In October OSG signed a new service agreement with Maersk Oil Qatar (MOQ) for floating storage and offloading service vessel FSO Africa. The new agreement is an extension to the previous FSO Africa contract with MOQ. The new contract has a firm term of five years starting October 1 2012 and will give MOQ an option to extend the term by either one or two years. The agreement stipulates a hike in daily hire rate earned in each year to the same daily hire rate for the current MOQ service contract for FSO Asia.

Chapter 11 Filing

As stated above, after having been unable to come to an agreement with its creditors in time, OSG filed a petition for Chapter 11 bankruptcy proceedings in November 2012. However, the company has continued to operate as usual in the meantime. The company also stated in October that its recent financial statements could no longer be relied on as it was investigating a tax issue.

This article is tagged to:
Sector: Shipping
Geography: Global

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