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TABLEOFCONTENTS

ABBREVIATIONS

DWT Deadweight

EBITDA Earnings Before Interest Tax Depreciation Amortization

IMO International Maritime OrganizationLR1 Large range 1

LR2 Large range 2

LNG Liquefied natural gas

ABBREVIATIONS 21. COMPANY INTRODUCTION 41.1. THEFREIGHTMARKET 6

2. VULNERABILITIES OF OSG 83. MARKET EXPOSURE 113.1 THEDEMANDFOROILTRANSPORT 11

3.2 THESUPPLYOFOILTRANSPORT 13

4. MACROECONOMIC AND NON-MACRO EXPOSURE 154.1 OILPRICE 15

4.2 EXCHANGERATES 16

4.3 NON-MACROECONOMICEXPOSURE 17

5. PROTECTION 186. CONCLUSIONS AND FORWARD LOOKING 197. REFERENCES 208. APPENDICES 21

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Mbp Million barrels per day

MR Medium Range

NYSE New York stock exchange

TCE Time charter equivalent

ULCC Ultra large crude carrier

VLCC Very large crude carrier

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1. COMPANYINTRODUCTION

Overseas Shipholding Group, Inc. (OSG) is a provider of seaborne energy transportation,

carrying crude oil and petroleum oil products. It owns a fleet of 107 tankers consisting of

38 crude oil carriers, 41 oil product carriers, 21 US Flagged and 4 LNG carriers all of

various sizes from VLCCs to MRs .1OSG was initially incorporated in Delaware of the U.S.A. in 1948. In 1969 the Company

changes name but not field. The Head Office of Overseas Shipholding Group, Inc. is in

New York with many branches all over the world, including Athens, London, Houston,

Singapore etc., and listed in the NYSE under the symbol OSGIQ.

OSG, Inc. is a customer focused company, investing in high quality of services and of

widely good reputation. It promotes strongly the health, safety & environmental protection

culture during all of its activities on board 0#5ashore.

OSG, Inc. is committed to offer

safety in transportation and to be

reliable for her customers through

trust and good co-operation. The

customers of OSG are major and

independent oil companies

seeking a seaborne transport

service for their oil in bulk under

long, medium or short-term

charters. Hence, the main source

of revenue generated by OSG is attributed on voyages performed by its fleet from carrying

petroleum products.

Figure 1: Market Capitalisation of major oil transportcompanies in NYSE as of 08 Oct 2010

(Source Google Finance)

Ship capacities are expressed in deadweight (DWT), which is the total weight (metric tons) of cargo, fuel, fresh water, stores and1

crew that a ship can carry when immersed to its load line. Tanker ships are classified in terms of their capacities as: 10,00024,999DWT: General Purpose tanker, 25,00044,999 DWT: Medium Range tanker 45,00079,999 DWT: Large Range 1 (LR1), 80,000159,999 DWT: Large Range 2 (LR2), 170,000319,999 DWT: Very Large Crude Carrier (VLCC), 320,000549,999 DWT: UltraLarge Crude Carrier (ULCC)

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Its vision is to achieve to preponderate as the leader in both the spot market and in time

chartering, having financial flexibility in order to ensure future expansion, while posing

the gold standards for the industry which is servicing.

Further to its activities as a ship owning company with in-house management, OSG Inc.

deals with charities, while co-operates with non-profit organizations. An example of such

an activity is the great contribution in relieving the Philippines of the destroying typhoons

of 2009, in which a large number of its seafarers come from.

OSG is one of the five largest oil transport companies traded in NYSE as shown in figure

1. The peers of OSG among others include Frontline, Overseas Shipholding Group (OSG),

TeeKay Corp., TEN and General Maritime Corp.

Despite the fact that OSG is not the largest company (in terms of owned fleet) comparing

to its main competitors, it still manages to produce supernormal profits. In Figure 2 below,

the net profit margin and EBITDA for the year 2009 are plotted and with the exception of

General Maritime, all the rest managed to produce net profits on revenues above 5%.

Figure 2: Net profit margin and EBITDA for 2009 (Source: Wikinvest)

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OSG and, the next smaller company, TEN have virtually the same net profit margin

although in 2009 OSG generated revenue of $1.09bn as opposed to the $444.9m generated

by TEN.

As for the operating fleet of the company, OSG has a fleet that can carry both crude oil

and oil products as well as LNG. The best way to compare a fleet is in terms of

deadweight rather than number of vessels.

In Figure 3 it is apparent that OSG has a quite large fleet. In fact today OSG operates 107

vessels of various sizes .21.1. THEFREIGHTMARKET

The freight market is a

marketplace where sea transport is traded. There are several types of charters available

like:

! single voyage charters or spot voyages under which OSG is paid freight on the3

basis of moving cargo from a loading port to a discharging port at a given rate perton .4

! time charters under which OSG is paid hire on a flat per day basis for a given

period of time . Time charters can be for periods of time ranging from one month5

to five years or even more.

! bareboat charters under which the shipowner is paid a fixed amount of hire for a

given period of time .6

Figure 3: OSG fleet (Source: Company data)

For a detailed fleet list refer to Appendix 12

The Baltic exchange is the marketplace for spot voyages and it assures that trading will take place continuously, making rates3

volatile. Freight rates, and subsequently company earnings, are therefore believed to react distinctly to changes in the economicstates of the world.

Under this arrangement, port charges, fuel and other voyage expenses in addition to normal vessel operating expense) are OSGs4

responsibility.

In contrast to the spot voyage, under the time charter arrangement only the vessels operating expenses are incurred by the5

shipowner, while voyage expenses, including fuel and port charges, are for the account of the charterer.

Under a bareboat charter, the charterer is responsible for all the costs of operating the vessel including voyage expenses and vessel6

operating expenses.

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For the year 2009, OSG adopted a strategy for its fleet deployment, as it can be seen in

Figure 4, a bit aggressive and split the fleet to almost 50-50 between the two charters.

Figure 4: OSG Fleet Employment for 2009. (Source: Company data)

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2. VULNERABILITIESOFOSG

Taking a look at OSGs income statements the costs can be classified as follows:7 Administration and General expenses including management fees.

Voyage expenses. Voyage expenses include all expenses unique to a particular

voyage in the spot market. These can be considered as variable costs because will

vary the annual total fleet carrying output.

Vessel expenses (Opex). These are fixed costs that have to do with ship operating

expenses, which include crewing, repairs and maintenance, insurance, stores, lubeoils and communication expenses.

Charter hire expenses. As OSG charters its ships out to other companies, so can it

charter in ships from other owning companies that can be sublet to customers.

These are also fixed costs.

In Figure 6 below, the above cost categories are expressed as a percentage of total costs

for the years 2004-09. Although this is only an approximation , it gives a feel of how the8

costs are structured and how these costs evolve throughout the years.

OSG gradually increased the charter hire costs, indicating that they opted for hiring in

other vessels rather than operating own ones. The voyage expenses are affected heavily by

the cost of fuel price. As mentioned earlier, voyage costs in the spot market are borne by

the owners and an increase in fuel prices will have an impact of the net profits of the

specific voyage. Similarly a decision to steam at a greater speed will affect in the same

manner the profits due to increased consumption by the vessels engine. Hence the voyage

costs, average to about a fifth of total costs.

From the above, it is derived that OSG has managed to limit her exposure by gradually

diminishing the vessel expenses, however it will always be exposed to charter hire

Selected income statements can be found in Appendix 27

Total costs for the purpose of this analysis are the total costs less depreciation and amortization as well as any losses/gains from the8

sale of vessels that the company had.

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expenses, if it wants to benefit from the maximising annual transport capacity in the

opportunistic spot market. Figure 5 below clearly shows that.

Figure 5: Costs categories as a percentage of total costs (OSG)

Companies like OSG tend to outsource manning for their fleets. A typical crew size for an

individual ship is 23 persons i.e. for a fleet of 107 tankers that OSG possesses, they would

require more than 2000 crew members at any

given time plus an additional 1000 to be on

stand-by to change them. In fact OSG lists

3500 total employees of which 3050 are

seagoing employees and the rest shore based.

OSG is fully in-house operated. The fixed

costs will be incurred even if the ships slowsteam or remain idle for prolonged periods. In

extreme cases owners can lay up vessels in

periods of slow markets to diminish opex.

Taking the above into consideration, the short run cost curves can be derived as below.

The fixed costs per unit output (ton-mile) naturally will decrease as more ton-miles are9

produced. Additional ton-miles can be produced either by increasing the speed that the

Figure 6: Short run fixed costs curve

Ton-mile is a common measure of output for shipping companies. It is the product of the distance that freight is earned, measured9

in miles, and the weight of the cargo being transported, measured in tons. Thus, moving one ton for one mile generates one ton-mile.

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cargo is being transported or by the addition of more ships. In both cases fixed costs have

the tendency to reduce as more transport output is generated.

The variable costs (i.e. the voyage costs) will increase exponentially as the speed of the

ship increases. Fuel consumption is the major component of these costs and, up to a

certain speed for a certain freight rate, an optimum speed can be achieved where

economies of scale is achieved. Beyond this point

the costs of increasing speed will overcome the

freight earned. Below this point, the fuel saved

will be less than the potential freight to be earned

should the vessel had more speed.

Thus, the short run average total cost curve will look like a saucer however beyond the

optimum output, the slope of the curve steepens

as the fuel costs increase. Point Qf is the point

where maximum capacity of the fleet is

achieved and no more transport can be

produced.

able costs

Figure 8: Short run average total cost curve

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3. MARKETEXPOSURE

Demand for tankers is influenced by world oil demand and supply, which in turn is

affected by factors such as international economic stability, geographic changes in oil

production and consumption, price levels of oil and inventory policies of major oil trading

companies.

Stopford (1997) argues that the freight market is as close to perfect competition as it gets.

When demand for oil transport exceeds supply, freight rates are driven upwards. Future

prospects are good, leading companies like OSG to order new ships. When the fleet size isgrowing, the level of supply in the tanker segment increases. This means that the growth

in the freight rates will decline, until the point where supply of tonnage exceeds demand.

In a situation like this, freight rates are driven downwards making maritime transport

services less profitable. Less new ships are built and some ships are even laid up.

3.1 THEDEMANDFOROILTRANSPORT

Demand for oil transport is inevitably connected with world oil demand for crude oil and

products. As industrial development

rises globally so does oil production

and thus seaborne oil transport.

For 2003 to 2009, world oil

production has increased rapidly

from 74.53 mbd (a decline

following the events of 9/11) to the

record high of 81.99 mbd in 2008; a

10% increase. Moreover,

from 2000 to 2008, global oil

demand grew by 13% from 76.6 mbd to 86.3 mbd. The decline in oil demand from the

second half of 2008 was mainly driven by a weaker demand in the OECD countries and

the US due to the financial and economic crisis.

Figure 9: World oil production (Source: BP Statistical Review of WorldEnergy - June 2010)

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It follows that oil demand and oil production are closely related with GDP growth (see

Figure 10). As economies expand, people tend to buy cars, travel more, build houses and

all these have an impact on OSGs performance since the more oil being transported to

cover these needs, the more freight is being earned.

Figure 10: Real GDP growth World, USA, OECD (Source: World Bank)

Figure 11: Seaborne trade and economic growth (Source: The Platou Report 2010)

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OSG has capitalised on this during the years 2004-2008. In fact 2008 has been

characterised by many as the best year ever for the tanker market, while 2009 has been a

not so good year, reflecting the global recession.

Figure 12: Voyage Revenues and EBITDA for both companies (Source: Company data)

In Figure 13 below, the average time charter equivalent freight earned per vessel is10

plotted. This is an important measure and it serves as an industry standard for measuring

and managing fleet revenue and comparing results between geographical regions and

among competitors. Notice how the trend follows the GDP growth rate.

Figure 13: Average Time Charter Equivalent freight per vessel (Source: Company data)

3.2 THESUPPLYOFOILTRANSPORT

As discussed before, increased GDP

growth rates will drive the demand for

oil transport hence owners will have an

appetite to build or buy vessels in order

to increase their tonnage and take

advan tage o f the p rosperous

conditions.

However, the market is saturated for11

the subject period with vessels due to

Figure 14: Supply/Demand and utilisation rate for tankervessels (Source: The Platou Report 2010)

Time charter equivalent is a standard industry measure of the average daily revenue performance of a vessel. The TCE rate10

achieved on a given voyage is expressed in US$/day and is generally calculated by subtracting voyage expenses, including bunkers

and port charges, from voyage revenue and dividing the net amount (time charter equivalent revenues) by the round-trip voyageduration.

Refer to Appendix 3 for view of the supply of oil tankers as of January 2010.11

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the bias of owners for new vessels and this coupled with the crisis that erupted in late

2008 has driven freight rates downwards.

Concluding on the demand and supply discussion, while world economic growth and

stability are factors that help OSG to grow as well, it is vulnerable in the same manner by

the particularities of its own market. Vessel oversupply and increased number of

competitors are making the marketplace very difficult and there is need for the Companies

to protect themselves against these situations.

As was made clear, especially after the recent events of the global economic recession, the

demand for tanker transportation is directly related to economic activity in general is

elastic and volatile. Thus, it would be typical to find a global recession during which

manufacturing activity is considerably reduced, negatively affecting the demand for oil

tankers and with the resulting excess supply of shipping capacity suppressing the freight

rates.

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4. MACROECONOMICANDNON-MACROEXPOSURE

OSG is a link to parties engaged in international trade, thus it is inevitable that

macroeconomic forces affect it. Apart from macro, there are also other external factors

that would affect the profits of OSG and the decisions they would make towards the

future.

4.1 OILPRICE

It is undisputable that changes in oil price will affect the supply and demand

characteristics of the oil transport industry.

Looking at the demand side, an increase in the oil price, as discussed before, is a result of

increasing demand for oil. The demand for oil depends on a large number of variables and

events, such as the level of industrial production and world GDP, seasonality in the

northern hemisphere, geopolitical events etc.

This relation is important, because the marginal price of transportation is minimal

compared to the marginal price of oil. This is due to the fact that oil transport costs amount

to only about 5% of the added value of oil hence, the demand for oil transportation is

highly oil price inelastic.

Figure 15: Crude oil spot prices (Source: BP)

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Figure 16: Spot Freight rates for crude carriers (Source: The Platou Report 2010)

To illustrate this, in figure 16 we can observe that the record oil price reached in

June-5July 2008 had been a driving factor pushing tanker rates up for the first half of 2008

(figure 16). During this time, VLCCs were used as storage of oil to help maintain rates at

high levels.

Looking at the oil-related supply side of tank shipping, it is clear that tanker companies

will be affected by high oil prices. Tankers consume large amounts of bunker fuel and the

bunker price is one of factors affecting profitability. Oil prices will also affect spot freight

rates because in periods of increased freight market, owners will demand more freight to

cover their fuel expenses.

4.2 EXCHANGERATES

Substantially all of OSGs revenues are earned in U.S. Dollars, although there might

freight earned in Euros, Australian Dollars and British Pounds under some charters. A

small portion of the opex usually is incurred in currencies other than U.S. Dollars. This

minor mismatch in operating revenues and expenses could lead to fluctuations in net

income due to changes in the value of the U.S. dollar relative to other currencies.

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However, the indirect influences of exchange rate movements may affect freight as well.

Dollar appreciations will lower the demand for dollar-quoted commodities such as oil.

This will lead to decreased international trade. As international trade decreases, the

production decreases, and less oil needs to be transported. Dollar depreciations will have

the opposite effect.

4.3 NON-MACROECONOMICEXPOSURE

Piracy off the coast of Somalia is growing at an alarming rate and threatens to drastically

disrupt international trade. The consequences are not limited only to companies whose

vessels are hijacked and have to pay ransoms to free vessels and crews. A concern exists to

the growth of insurance premiums for ships that need to pass through the Gulf of Aden. In

addition, if the cost of extra insurance becomes prohibitive, or the danger simply too great,

OSG may have to avoid the Gulf of Aden and take the long route to Europe and North

America around the Cape of Good Hope, South Africa. The extra weeks of travel and fuel

consumption would add considerably to the cost of transporting goods.

Other factors include the more stringent IMO regulations for operating ships. Newemission control regulations exist in EU and California forcing OSG to burn marine

distillate fuels, a more expensive fuel.

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5. PROTECTION

OSG operates in a rather turbulent environment and it is affected in several ways by

external shocks as explained before and needs to protect itself against these vulnerabilities.

First of all, they have opted for a modern and technologically advanced fleet with the12 13

diversity to serve different routes and needs. This is very important as Oil Major

Companies requirements and IMO regulations are very strict nowadays and the customers

of OSG are being more and more selective on the vessels carrying their products.

Secondly, as was shown in Figure 5, the largest part of the fleet is employed on long and

medium-term employment with fixed rates or minimum rates plus profit sharing

agreements. This strategy allows for constant cash flows and stability that proves to be

more reliable in the eyes of investors. Furthermore, it allows for high utilization of the

fleet. All this, coupled with the tendency to chartering vessels rather than marketing

owned fleet has proved to be a very prudent stance towards the volatile tanker segment,

especially after the events of the credit crunch.

Although branding does not existper se in shipping, it has to be admitted that OSG is a

well-established company among its peers. It has managed to maintain long relationships

with national, major and other independent oil companies and refineries. Several of the

worlds major oil companies and traders, including ExxonMobil, Vitol, Shell and BP are

among its regular customers. This allows OSG to attract voyage charters from these

companies more easy than its competitors and also to negotiate long term charters at more

profitable rates.

Finally OSG is managing to achieve low operating costs and efficiency by the number of

its vessels.

The average age of OSGs operating fleet is about 6.8 years, compared with the industry average of 9.0 years.12

All of the vessels are double hulled.13

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6. CONCLUSIONSANDFORWARDLOOKING

OSG is not the biggest company around by any means. It is a well-established shipping

company, which manages to be up there with the big boys. It operates in a sector, which is

directly affected by changes in world output, geopolitical events and macroeconomic

forces making it really hard to choose strategies that will protect the company and its

shareholders and at the same time maximise their profits.

So far OSG has managed, after years and years of operation, to control its vulnerabilities

and in some cases outperform its competitors by adopting different strategies and creating

long term relationships with customers and subcontractors.

The tanker freight market has shown considerable strength in 2010 compared to 2009, as

the world economy recovers. Increased oil demand from developing countries like China

and India is being met by long haul exporters such as West African countries and

Venezuela.

The biggest challenges for OSG lie in areas that are beyond its control. Increasing worldtanker fleet size, economic instability and uncertainty are factors that will trouble OSG in

the near future and these are the same factors that will always chase the very existence in

some cases of tanker shipping companies.

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7. REFERENCES

BEGG D., FISCHER S. & DORNBUSCH R. (1994),Economics, Berkshire: McGraw Hill

BEGG D. and WARD D.(2004), Economics for business (2ndedition),Berkshire: McGraw

Hill

BP, Statistical review of energy 2006 to 2010,BP www.bp.com

GRAMMENOS, C. et al (2010), The handbook of maritime economics and business (2nd

Edition), London: Lloyds list

IEA Oil statistics 2010,International energy agency,www.iea.org

IMF, World economic outlook October 2010: Recover, Risk and re-balancing, Washington:

IMF publications, www.imf.org

KUMAR S. (2004), Tanker transportation, Maine: Maine marine academy

LLOYDS, Shipping Economist January 2010, Lloyds list www.lloydslist.com

OSG,Annual reviews 2004 to 2009, www.osg.com

RS PLATOU, The Platou report 2004 to 2010, www.platou.com

STOPFORD M. (1997),Maritime economics (2

nd

edition), London: RoutledgeUNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (2010), Oil

Prices and Maritime Freight Rates: An Empirical Investigation, www.unctad.org

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT,Review of

maritime transport 2006 to 2009, New York: United Nations, www.unctaf.org

Websites

Google finance: www.google.com/finance

Wikinvest Investing simplified: www.wikinvest.com

The world bank: www.worldbank.org

http://www.worldbank.org/http://www.wikinvest.com/http://www.google.com/financehttp://www.unctaf.org/http://www.unctad.org/http://www.platou.com/http://www.osg.com/http://www.lloydslist.com/http://www.imf.org/http://www.iea.org/http://www.bp.com/

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8. APPENDICES

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Appendix 2: Income statements

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Appendix 2: Income statements

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Appendix 2: Income statements

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Appendix 2: Income statements

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Appendix 2: Income statements

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Appendix 2: Income statements

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