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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/8/12/2019 OSG
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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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