August 4, 2005
OSG reports record results
Overseas Shipholding Group, Inc. (NYSE:OSG) reported net income for the quarter ended June 30, 2005 of $114.2 million, or $2.89 per share, an increase of over 150% compared with net income of $45.4 million, or $1.15 per share, in the second quarter of 2004. EBITDA for the second quarter rose by 55% to $176.3 million from $113.6 million in the second quarter of 2004 and TCE revenues for the quarter were $228.6 million compared with $157.1 million, an increase of 46% year-over-year.
For the six months ended June 30, 2005, OSG reported net income of $279.1 million, or $7.08 per share, more than double the net income of $121.6 million for the first half of 2004. EBITDA for the first six months rose by 48 percent to $399.7 million and TCE revenues for the first six months of 2005 increased by 4 3 percent to $495.8 million.
"OSG's financial and operating results clearly demonstrate the success and execution of our expansion strategy,'' said president and CEO Morten Arntzen. "This outstanding performance reflects the significant benefits from our acquisition of Stelmar, through which we added 40 vessels to our fleet, added over 3,500 revenue days in the second quarter and increased the proportion of TCE revenues from time charters to 37 percent. Our product and U.S. flag segments deliver steady revenue from time charters and our crude tankers--which trade primarily on the spot market--allow us to capitalize on the premium, albeit volatile, spot market rates."
OSG says that integration of Stelmar Shipping "continues to exceed expectations" and says that "synergies of the combination in areas of insurance, financing, purchasing, drydocking and crewing are expected to result in annualized savings of $8 million in 2005 rising to $20 million within three years."
OSG is the only public tanker company with both an International flag and U.S. flag fleet and recently announced its recommitment to the niche U.S. flag market. On June 3, 2005, OSG announced that it signed definitive agreements to bareboat charter ten Veteran MT-46 class Jones Act Product Tankers to be constructed by Kvaerner Philadelphia Shipyard, Inc. (KPSI). Following construction, KPSI will transfer the vessels to leasing subsidiaries of American Shipping Corporation, an affiliate of KPSI, which will in turn bareboat charter the vessels to subsidiaries of OSG for initial terms of five or seven years, with extension options for the life of the vessels. The vessels are scheduled to be delivered between 2006 and 2010. OSG says the transaction has been approved by the Boards of vaerner ASA and OSG and by the U.S. Coast Guard. The bareboat charters will commence upon delivery of the vessels.
As previously announced, OSG was awarded four slots in the U.S. Maritime Security Program. In the third quarter 2005, OSG plans to transfer three international flag product carriers (the Overseas Ambermar, the Overseas Luxmar and the Overseas Maremar) to the U.S. flag to fulfill the requirements for three of these slots.
Fleet Asset Management
During the second quarter,OSG became the sole owner of the TI Oceania and the TI Africa, two of the only four V Plus tankers in the world. In addition, since March 31, 2005, the Bravery, Eclipse, Compass I and Overseas Chicago were sold, and the Overseas Polys and Overseas Cleliamar were sold and bareboat chartered back for 50-month terms generating aggregate proceeds of approximately $145 million.
OSG's wholly-owned International flag tanker fleet is 100 percent double hull.
LNG Vessel Financing
On July 27, 2005, OSG Nakilat Corporation, the joint venture between OSG and Qatar Gas Transport Company Ltd., closed an $869 million secured credit facility which will be used to partially finance the purchase of four Q-Flex LNG carriers. The financing, which is non-recourse and off balance sheet to OSG, represents approximately 85% of the delivered cost of the vessels and has a 15-year term from delivery. Essentially all of this debt has been swapped into fixed rate debt at under 6%.
OSG has been able to trade on a level playing field with its foreign competitors since January 1, 2005 when the Jobs Creation Act of 2004 restored the indefinite deferral of taxation on the company's foreign shipping income. This benefit, in conjunction with the strong market, the Company's significantly increased revenues from its enlarged fleet, and its sales of older vessels, has enabled the Company to reduce its cash adjusted debt by approximately $217 million during the first six months of 2005, pro forma for the Stelmar acquisition at the end of 2004, even while adding approximately $119 million of debt to the company's balance sheet as a result of the change in ownership of the TI Oceania and TI Africa. Liquidity adjusted debt to capital was 42.1 percent at June 30, 2005, a reduction of more than 8 percent from a pro forma 50.3 percent, as of December 31, 2004, adjusted to reflect the Stelmar acquisition and the sales of product carriers in January 2005.
During the first six months of 2005, shareholders' equity increased by $262 million to $1.69 billion and liquidity, including undrawn bank facilities, increased to $930 million.
At June 30, 2005, OSG was the second largest publicly listed oil tanker owner in the world as measured by number of vessels. OSG's operating fleet totals 95 vessels aggregating 12,413,989 dwt. Adjusted for OSG's participation interest in joint ventures and chartered-in vessels, the fleet totals 88.8 vessels aggregating 10,778,999 dwt.
OSG has ten U.S. flag Jones Act product carriers aggregating 460,000 dwt on order at Kvaerner Philadelphia Shipyard which are scheduled for delivery between late 2006 and early 2010. In addition, OSG has on order four 216,200 cubic meter LNG tankers, two at Hyundai Heavy Industries, Ltd. and two at Samsung Heavy Industries, Ltd. scheduled for delivery in late 2007 and early 2008.
As of June 30, 2005, the average ages of OSG's International flag VLCC, Aframax, Panamax and Handysize fleets were 5.6 years, 6.9 years, 3.8 years and 10.1 years, respectively, compared with world fleet averages in these sectors of 8.4 years, 9.3 years, 12.0 years and 12.7 years, respectively.
OSG says that freight rates generally softened in the second quarter partly as a result of seasonal patterns but also as growth in world oil demand slowed from the unsustainably high levels achieved in 2004. During the quarter, demand in China declined as artificially low domestic prices stunted oil product imports. Despite this decline, total global oil demand in the quarter exceeded the comparable 2004 level. In anticipation of stronger demand in the fourth quarter and in response to a pronounced contango (when futures prices exceed spot prices) in international oil prices, refiners and utilities built oil inventories during the quarter, accommodated by increased output from both OPEC and non-OPEC sources.
Crude Oil Sector
International Flag VLCCs
During the second quarter of 2005, says OSG, rates for modern VLCCs trading out of the Arabian Gulf averaged $32,200 per day, 48 percent lower than the previous quarter and 50 percent lower than the second quarter of 2004. Significant first quarter volatility was replaced by somewhat steadier rates in the second quarter of 2005, which ranged between $35,000 and $55,000 through mid May, then declined in late June to a low of $13,100. Rates have recovered dramatically since then, approaching the highs of the second quarter.
During the quarter, the VLCC market was negatively affected by a shift in trade flows. Reduced Iraqi exports and extended refinery maintenance in the United States, contributed to a temporary reduction in long haul voyages from the Arabian Gulf to western destinations. The reduction in cargoes to western destinations forced modern double hull vessels to compete directly with older single hull vessels that are generally restricted to voyages to eastern destinations, putting additional temporary downward pressure on rates.
The world VLCC fleet grew to 466 vessels (135.9 million dwt) at June 30, 2005 from 456 vessels (132.7 million dwt) at the beginning of the year as 14 VLCCs (4.4 million dwt) delivered in the first six months of 2005, while only four VLCCs were deleted. Twenty newbuilding orders (6.0 million dwt) were placed during the first six months of 2005. As a result, the orderbook increased to 93 vessels (28.2 million dwt) at June 30, 2005, equivalent to 20.8%, based on deadweight tons, of the existing VLCC fleet.
International Flag Aframaxes
Starting from a low of $17,000 in early April, Aframax freight rates rose to a high of $49,000 in mid May. For the entire quarter, rates averaged $28,400 per day, 23% less than the previous quarter but 8 percent more than the second quarter of 2004.
In April, Aframax lightering activity picked up in the U.S. Gulf with the arrival of a sizable number of VLCCs from the Middle East. Most of these vessels were fixed in February, at a time when U.S. refiners were seeking to rebuild inventories of crude oil. A collision between two tankers in the Dardanelles in early April and the grounding of a vessel in the Bosphorus later in the same month caused delays, reducing available tonnage in the region and causing rates to rise. U.S. refinery throughput accelerated in the latter part of the quarter as maintenance drew to an end. Non-OPEC oil production growth has been driven in recent years by the Former Soviet Union, where production reached an estimated 11.5 million b/d in the second quarter, 3.4 percent more than the second quarter of 2004. Russian exporters had an incentive to increase seaborne exports before June 1 in order to avoid a sharp increase in the crude export duty. Consequently, Russian seaborne exports rose to a record 2.6 million b/d in May. Second quarter seaborne exports were 3.6 percent over first quarter levels and 9.3% over levels in the second quarter a year ago.
The world Aframax fleet increased to 647 vessels (65.0 million dwt) at June 30, 2005 from 627 vessels (62.5 million dwt) at December 31, 2004, as Aframax deliveries exceeded deletions. As newbuilding orders fell behind the rate of deliveries, however, the orderbook decreased to 164 vessels (17.9 million dwt) at June 30, 2005, equivalent to 27.6%, based on deadweight tons, of the existing Aframax fleet.
International Flag Panamaxes
Rates for Panamaxes trading in crude and residual oils averaged $32,700 per day during the second quarter of 2005, 19 percent less than the previous quarter, but 16 percent more than the second quarter of 2004. Similar to the first quarter, says OSG, both U.S. crude and residual fuel oil imports outpaced year-ago levels, boosting demand for quality double hull Panamaxes that operate in the Caribbean and the west coast of Central America. As U.S. refiners adjusted their output mix in favor of lighter products, thus producing less fuel oil, some power utilities resorted to fuel oil imports. In addition, the significant freight premium applied to double hull as opposed to single hull Panamaxes operating in the Atlantic Basin led to the migration of some single hull vessels to the intra-Asian trade, lending further support to Panamax rates in the region by reducing available tonnage.
The world Panamax fleet rose to 302 vessels (20.0 million dwt) at June 30, 2005 from 290 vessels (19.1 million dwt) at December 31, 2004 as deliveries exceeded deletions. Twenty-four Panamaxes (1.4 million dwt) were ordered in the first half of 2005. The Panamax orderbook now stands at 183 vessels (12.1 million dwt), equivalent to 60.7%, based on deadweight tons, of the existing Panamax fleet.
Product Tanker Sector
International Flag Handysize Product Carriers
Rates for Handysize Product Carriers operating in the Caribbean trades averaged $20,300 per day during the second quarter of 2005, 26 percent less than the previous quarter, but 2 percent more than the corresponding quarter in 2004. The higher price of gasoline in the U.S. ensured the arbitrage window with Western Europe was open in the second quarter, resulting in higher gasoline imports relative to the first quarter and the comparable year-ago period. U.S. refiners geared their throughput for distillate production mainly to rebuild inventories of heating oil which began the quarter at a low level. Substantial domestic output of distillates precluded an increase in imports of diesel fuel even as trucking demand remained strong. Europe, which is becoming increasingly dependent on diesel fuel for its automobile fleet, continued to source part of its diesel requirements from the Caribbean boosting ton mile demand for product carriers.
The world Handysize fleet expanded to 536 vessels (22.2 million dwt) at June 30, 2005 from 524 vessels (21.5 million dwt) at December 31, 2004, as deliveries exceeded deletions. The Handysize orderbook increased to 201 vessels (9.2 million dwt) at June 30, 2005, equivalent to 41.4%, based on deadweight tons, of the existing Handysize fleet.
U.S. Flag Sector
Jones Act Product Carriers
This market remained strong in the second quarter due to a combination of stable demand and limited availability of suitable tonnage. Rates for the second quarter were at a level which equates to $39,000 for OSG's existing Jones Act Handysize Product Carriers, maintaining the level of the previous quarter, and 31 percent higher than rates in the same period of 2004.
The total Jones Act Product Carrier fleet consists of 43 vessels, totaling 1.8 million dwt. Some 60 percent of this fleet is not double hulled and will be phased out over the next ten years as a result of OPA 90 regulations. One vessel will be removed from the fleet at the end of 2005 and two vessels will be phased out in 2006.