Thursday, March 3, 2011

Blue chip tanker operator OSG posts big losses

US-listed tanker owner Overseas Shipholding Group (OSG) suffered sizeable losses in the final half of 2010 . The net deficit to 31 December was US $134.2 mio, against a profit of US$ 70.2 mio in 2009. The FFA market currently expects VLCC rates in the low 20’s the next two years, yet equity analyst consensus expectations indicate a recovery of the tanker market. It appears that the analyst consensus underestimated the supply side.

OSG is diversified with both crude and product tanker exposure in addition to its specialized US Flag business. 110 ships are operated of which 43% are chartered-in.

The OSG time charter equivalent (TCE) earnings dropped 10% to US$ 853.3 mio over the full year, due to increased spot exposure combined with lower average spot rates. VLCCs and MRs were most badly hit. Average VLCC spot rates were only $17,000 per day in the final quarter, down from $23,900 in the same three months of 2009. Fleet revenue days decreased 2% or 861 days.

CEO Morten Arntzen said: that 2010 was clearly a disappointing year financially but he pointed to debt reduction, a focus on keeping ship operating costs in check and long term charters for two FSOs operated in joint venture with Euronav as reasons to be more optimistic for 2011. He also said the US-flag business has secured new contracts combined with a lower cost base, which should return it to profit.

OSG has high spot exposure and large fixed costs as almost half of the fleet is leased. OSG will struggle with weak cash flows in a low market scenario the next two years. Like most mature companies, OSG suffers from comparatively low returns ratios.

On the other hand, with its strong financial strength, the company could take advantage of new growth opportunities, something that it very much needs to maintain investor interest by improved profitability. OSG had by the end of Q3’10 cash equivalents of US$ 351 mio and a remaining capex of US$ 375 mio which is fully funded. Total liquidity, including undrawn bank facilities was US$ 1.5 bn. In a weaker tanker market, the company could use the opportunity to expand its owned fleet.

Earnings forecasts in the tanker sector are likely to come down as weak market conditions continue to prevail.

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