OSG was under bankruptcy protection from November 14, 2012 through August 4, 2014. Prior to and during that time period, shipping rates were at much lower levels than they stand today. A renewed and prolonged drop in shipping rates would have a devastating effect on the company. Tanker rates hit a three year low in August, but have since recovered somewhat. INSW discusses “Positive Industry Fundamentals” in its Form 10
Freight rates in tanker market surged higher in 2015 and continued to be firm in the opening months of 2016. Four major factors led to the firmness in tanker earnings in 2015 and the first half of 2016 — strong growth in global oil trade, sluggish expansion of the fleet, a sharp increase in floating storage and lower bunker prices. After subdued growth during 2011-14, global crude oil trade surged in 2015 as a steep decline in oil prices ensured high refinery margins which in turn kept refinery runs high. In addition to this, low oil prices also kept global oil demand and stocking activity high. On the other hand, the pace of global oil trade growth during 2011-14 was hurt by weakness in global economy and decline in US imports due to rising domestic production. Drewry estimated that total ton mile demand for crude tankers increased from 8.6 trillion ton miles in 2011 to 8.8 trillion ton miles in 2014, before jumping by 3.3% to 9.3 trillion ton miles in 2015. The refined petroleum products market, which represented about 25% of total 2015 worldwide tanker trade measured by ton mile demand, grew by a compound annual growth rate of 3.5% from 2.6 trillion to 3.0 trillion ton miles between 2011 and 2015. During this period the United States became the largest refined product exporter in the world, with most U.S. product exports moving on MR tankers into South America and Europe. The annual growth rate of the world tanker fleet, which has moderated since peaking at 9% in 2009, dropped off significantly to approximately 3% to 4% a year through 2012, and had net increases below 2% in 2013 and below 1% in 2014 before finally increasing by 3% in 2015 and 5% in the first nine months of 2016. Monthly contracting volumes in the 10 years ended December 31, 2015 averaged approximately 3.2 million dwt while the monthly average for the first nine months of 2016 was only 0.7 million dwt. This decline indicates that fleet growth in the 2017 to 2018 period could start to moderate. Vessel earnings in both the crude and product markets are, however, highly sensitive to changes in the demand for, and supply of, shipping capacity, which has historically caused these markets to be cyclical and volatile in nature. Tanker earnings in the third quarter of 2016 have been softer than rates in the first half of 2016 reflecting normal seasonality factors as well as high crude oil inventory levels and increased vessel deliveries.
INSW has significant indebtedness of over $520 million as of June 30, 2016. This is nearly equivalent to the market capitalization of the combined company prior to the split. This debt will leave little margin for error. However, if market conditions continue to allow the company to match or exceed recent profitability, the company will be able to service its debt comfortably. While profitability was quite weak in the third quarter, pricing has since improved meaningfully.
To be honest, we don’t really have a good handle on the intricacies of the US flag business. It appears that there are subsidy benefits as well as protections that mandate US flag vessels for certain routes and cargoes. Revenues have increased slightly in this business, but this business has significant debt as well. Earnings were down slightly in the third quarter as compared to the prior year, but this business appears to be less subject to market fluctuations.
INSW has appointed Lois K. Zabrocky as CEO.
Following the spin-off, Lois K. Zabrocky will become president and chief executive officer of International Seaways, while Jeffrey D. Pribor will join International Seaways as chief financial officer. Mr. Pribor will report to Ms. Zabrocky.
“Lois is a talented executive who has been with OSG almost 25 years,” said Captain Ian T. Blackley, OSG’s president and CEO. “I have worked closely with Lois for many years, and I am confident in her ability to lead International Seaways forward. As President of OSG’s International Flag Strategic Business Unit, Lois has had P&L responsibility and played a major part in its strategic decision making. We are confident that she is the ideal executive to lead International Seaways as it embarks on an exciting new chapter.”
“It is an honor and privilege to lead International Seaways as it begins its journey as an independent public company,” said Zabrocky. “I am delighted to be part of such an incredible team with a long history of providing safe, efficient and reliable transportation to our customers. With this as our platform, we are well positioned for continued success and I am committed to working with our Board and employees to maximize revenue, drive down costs and capture growth opportunities as we provide the highest quality service to our customers and deliver value for our shareholders.”
Zabrocky continued, “We are pleased to welcome Jeff as the chief financial officer of International Seaways. Jeff’s extensive operational and financial management experience as CFO for a leading shipping company coupled with his wealth of maritime banking experience will complement and enhance our management strengths and capabilities. We are fortunate to have such a seasoned executive in this important role as we continue to drive International Seaways’ global business.”
As chief financial officer of International Seaways, Inc., Mr. Pribor will be responsible for directing and supervising all of the financial functions of International Seaways. This includes accounting, financial planning and analysis, tax, treasury and investor relations.
“This is an exciting time to be joining International Seaways, a financially strong company with both a rich history and a compelling future,” Pribor said. “I look forward to working with Lois and the entire International Seaways team to advance the company’s strategy and drive shareholder value.”
Completing the senior leadership team of International Seaways is James D. Small III who will become chief administrative officer, secretary and general counsel following the spin-off, and reporting to Ms. Zabrocky. Mr. Small joined OSG in March 2015 after almost 20 years with Cleary Gottlieb advising on transactional and governance matters.
“James has provided invaluable counsel to the organization and has been a driving force behind numerous corporate initiatives at OSG,” said Zabrocky. “He will be a critical part in helping to drive the future success of International Seaways.”
The company’s nine member Board will have eight members who also serve on the OSG board and one new director. A previous spinoff of a Jones Act shipper, Matson(MATX) in 2012, has moved around a bunch but is basically back where it started. It did, however, not come close to bankruptcy as so many international shippers did.
Disclosure: The author holds no position in any stock mentioned, although he used to do business with the last company to have the INSW ticker
I think the risk factors included on page 21 of their 10/12 filing should not be overlooked.