Overseas Shipholding Group Inc. (OSG), the second largest independent oil tanker company in the world, reported disappointing financial results for the second quarter of 2011. The company suffered losses for the ninth straight quarters. The spot rate of its very large crude carriers (VLCC) fell 54% in the previous quarter. Unfortunately, Overseas Shipholding has significant spot exposure.
Management cited several reasons for this poor performance. Some of them are (1) the closure of Japanese refineries in the aftermath of the March earthquake and tsunami reduced crude imports into Japan (2) high refinery maintenance activity across the Atlantic basin (3) release of 60 million barrels of oil from the U.S and European strategic petroleum reserves and (4) political unrest in Libya.
Dividend Slashed
Overseas Shipholding provided a gloomy near-term picture for the global oil tanker industry. An oversupply of tankers in the industry resulted in spot rates, which are even below the break-even level of the tankers. This depressive situation is expected to prevail in the rest of 2011 due to weaker demand for long-haul routes and rates at below operating expenses. To cope up with this, management has decided to reduce its annual dividend rate by a massive 50% to 87.5 cents per share from $1.75 per share.
Second-Quarter 2011 Results in Detail
Quarterly Shipping revenue was nearly $271.7 million, down 4.3% year over year. Second quarter Time Charter Equivalent (TCE) revenue was $207.3 million, down 11% year over year, also below the Zacks Consensus Estimate of $214 million. TCE revenue represents Shipping revenue less Voyage expenses.
Quarterly GAAP net loss was $37.3 million or a loss of $1.24 per share compared with a net loss of $37.9 million or $1.26 per share in the prior-year quarter. However, second-quarter 2011 adjusted EPS of a loss of $1.20 was narrower than the Zacks Consensus Estimate of a loss of $1.29.
Segment Wise Shipping Revenue
Quarterly Pool revenue was $69.6 million, down 37.3% year over year. Time and bareboat charter revenue was $64.2 million, down 5.4% year over year. Voyage charter revenue was $137.9 million, up 31.3% year over year.
TCE Revenue in Details
Quarterly TCE revenue for the International Crude Oil Tankers segment was $76.2 million, down 39% year over year. This was mainly due to massive fall in spot rates for VLCC, Suezmax, Aframax and Panamax vessels. International Product TCE revenue was $51.2 million, up 13% year over year, reflecting higher revenue days. U.S. Flag TCE revenue was $75.8 million, up 31% year over year.
Operating Expenses
Total operating expenses, in the second quarter of 2011, was $295.8 million, down 1.8% year over year. Voyage expenses increased 23.3% year over year. Vessel expense inched up 1.3% year over year. Charter hire expenses upped 11.8% year over year. General & Administrative expense was down 8.4% year over year.
Cash Flow
During the first half of 2011, Overseas Shipholding generated $6.6 million of cash from operations compared with $12.6 million in the prior-year period. Free cash flow, in the reported period, was a negative $102.2 million compared with a negative $164.4 million in prior-year period.
Liquidity
At the end of the second quarter of 2011, Overseas Shipholding had $230 million of cash & marketable securities compared with $273.7 million at the end of fiscal 2010. Total debt, at the end of the reported quarter, was $2,083.3 million compared with $1,986.2 million at the end of fiscal 2010. At the end of the second quarter of 2011, debt-to-capitalization ratio was 0.54 compared with 0.52 at the end of fiscal 2010.
Operating Metrics
Quarterly total revenue days were 9,878 compared with 9,284 in the year-ago quarter. Within this, total Crude oil revenue days were 4,433 compared with 4,529 in the prior-year quarter. Total Refined Petroleum Products revenue days were 3,399 compared with 3,050 in the prior-year quarter. Total U.S. Flag revenue days were 1,864 compared with 1,595 in the year-ago quarter. Other revenue days were 182 compared with 110 in the year-ago quarter.
Our Recommendation
Overseas Shipholding mainly competes with Frontline Ltd. (FRO) and Teekay Corp. (TK). We maintain our long-term Neutral recommendation on Overseas Shipholding. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.
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