OSG - Overseas Shipholding: Performance Potentials And Risks

2023-04-13 11:19:43 ET

Summary

• OSG’s current ratio improved slightly and reached 0.74x in 2022 compared with its level of 0.62x in 2021. Also, the cash ratio hit its highest level of 0.54x since 2019.
• Albeit the company’s debt-to-assets and debt-to-equity did not change very much in 2022 as compared with 2021, OSG’s debt-to-EBITDA level dropped to 5.7x versus its 24.3x in 2021.
• Due to changing trade patterns and higher renewable diesel production, Jones Act tanker rates may increase further.
• The stock is a buy.

Overseas Shipholding Group (OSG) stock price increased by 80% in the past twelve months, as the company's non-Jones Act Handysize carrier rates increased. Also, its lightering operations in 2022 were significantly higher than in 2021. In 2023, the rates are expected to remain high, and the company's lightering operations can continue making strong contributions. Also, due to the increasing demand for renewable diesel, Jones Act rates may increase. The stock is a buy. However, some risks should be considered, including OSG's high indebtedness and decreased operating leases that can hurt its cash generation.

Financial results

In its fourth quarter and full year 2022 financial results, Overseas Shipholding Group reported 2022 shipping revenues of $467 million, compared with $359 million in 2021, driven by higher time and bareboat charter revenues and increased voyage charter revenues. Due to the favorable market condition for tanker shipping companies in 2022, which resulted in hiked TCE rates, OSG's loss of $46 million in 2021 turned into a net income of $27 million in 2022. Also, the company's net cash used in operating activities of $12 million, changed into net cash provided by operating activities of $73 million. In 2021, the company had to sell its properties to make enough money for expenditures for its vessels and vessel improvement. However, in 2022, due to the positive cash generation, OSG purchased $15 million worth of investment security and made $29 million worth of stock repurchases.

"Strong contributions during the quarter from our lightering and non-Jones Act assets were instrumental in achieving this performance. We are particularly gratified by the full year adjusted EBITDA figure, which at $142.8 million reflected an over 200% improvement over 2021 adjusted EBITDA," the CEO commented .

Operations and market

OSG has 21 U.S. Flag fleets consisting of 3 Suezmax crude oil tankers doing business in Alaska, 2 conventional ATBs, two lightering ATBs, 3 shuttle tankers, 7 MR tankers, and three non-Jones act MR tankers. The major part of the company's revenues is linked to the operations of its Jones Act Handysize tankers (see Figure 1 ). For the year ended 31 December 2022, OSG's Jones Act Handysize product carries average spot average rate and fixed average rate were $51565/d (up 47% YoY) and $60732/d (down 47% YoY), respectively. The company's Jones Act Handysize product carrier fixed revenue days increased from 1856 in 2021 to 3628 in 2022. On the other hand, its Jones Act Handysize product carrier spot revenue days decreased from 843 in 2021 to 637 in 2022. The average spot earnings and average fixed earnings for OSG's non-Jones Act Handysize product carriers increased to $45562/d (up 47% YoY), and $31290/d (up 211% YoY), respectively. The company's non-Jones Act Handysize product carriers' spot and fixed revenue days decreased from 735 and 520 in 2021 to 730 and 361 in 2022, respectively.

However, it is important to know that despite high revenues from Jones Act Handysize product tankers, as the expenses of these tankers are relatively high for OSG, the operating contribution (TCE revenues minus vessel expenses and charter hire expenses) of Jones Act Handysize product tankers is not significant. On the other hand, the operating contribution of the company's niche market activities is relatively high (see Figure 2). OSG's niche business consists of lightering ATBs, non-Jones Act Handysize product tankers, and Jones Act Handysize shuttle tankers.

Figure 1 - OSG's TCE revenues

Figure 2 - OSG's vessel operating contribution

As a result of Ukraine's invasion of Russia, followed by EU sanctions against Russian oil and products and Russia's self-sanctioning, the trade patterns changed. Thus, due to availability issues, the amount of crude and refined products that were previously exported to the United States may decrease. Also, according to EIA's short-term energy outlook , U.S. petroleum and other liquids consumption is expected to increase from 20.08 million barrels per day in 2022 to 20.36 million barrels per day in 2023, and to 20.69 million barrels per day in 2024. The U.S. crude oil supply from the Gulf of Mexico is expected to increase from 1.74 million barrels per day in 2022 to 1.88 million barrels per day in 2023 and decrease to 1.81 million barrels per day in 2024. Thus, the rates for OSG's Jones Act vessels may increase. Also, the U.S. Gulf Coast renewable diesel production accounts for U.S. renewable diesel. Driven by the policies implemented to encourage renewable diesel production, the production of this fuel in the United States is increasing. Under the Low Carbon Fuel Standard and its economic benefits, California is the main consumer of renewable diesel. According to Figure 3 , U.S. domestic renewable diesel capacity could more than double by 2025. Higher renewable diesel production in the U.S. Gulf Coast means more demand for OSG's Jones Act vessels, as marine transportation is considered to be the most cost-effective way to move finished products to the U.S. West Coast.

Figure 3 - U.S. renewable diesel production capacity

OSG performance

In this section, I analyzed OSG's performance outlook across the board of liquidity and leverage ratios. Liquidity ratios are worthy for indicating a good picture of the company's capability to keep its balance between the ability to safely cover its obligations and improper capital allocations. In this regard, I investigated OSG's current and cash ratios to be more accurate compared with previous years.

It is observable that OSG's both current and cash ratios increased during 2022. Since 2019, the company has improved its liquidity condition, and ultimately, its current ratio reached 0.74x at the end of 2022. Also, the cash ratio increased roughly during recent years and sat at 0.54x in 2022 compared with the previous year of 0.47x. This record indicates that about 87% of the company's liabilities can be paid off directly by its cash and cash equivalents. In minutiae, albeit the company's cash balance slightly declined, its current liquidity fell by 17% to $146 million in 2022 versus its previous level of $176 million at the end of 2021 (see Figure 4).

Figure 4 - OSG's liquidity ratios

Furthermore, I analyzed how OSG's assets and business operations are financed by investigating its leverage ratios. Looking back at the last 5 years, Overseas Shipping's average debt-to-asset ratio was 0.54x from the fiscal years ending 2018 to 2022. The company's ratio sat at 0.58 at the end of 2022. Additionally, OSG's debt level increased slightly to $657 million in 2022, while its equity level remained almost unchanged at $339.7 million. Thus, the debt-to-equity level, which indicates how the company's capital structure is titled, whether toward debt or equity financing increased roughly and sat at 1.93x in 2022 as compared to 1.89x in 2021. Meanwhile, the company's debt-to-EBITDA level dropped deeply to 5.7x in 2022, which is far lower than the level of 24.3x in 2021. This decline was for the sake of Overseas Shipping's jump in EBITDA level from only $26 million in 2021 to over $113 million in 2022. This ratio indicates how long the company would need to operate at its current level to pay off its debt. Overall, Overseas Shipholding Group has a moderate level of leverage as of the end of 2022 (see Figure 5).

Figure 5 - OSG's leverage ratios

Risks

According to the company's explanation, one of the main risks related to OSG is that due to the increasing demand for maritime transportation, bigger companies can recrew experienced mariners. Thus, there might not be enough qualified mariners for OSG, then can meet the standards of experience set by its customers. Also, a significant part of the company's operating leases has ended and OSG may not be able to replace them with new favorable leases. Thus, OSG's cash flow generation ability may get hurt. Furthermore, the company may not be able to benefit from the higher demand for maritime transportation. It is important to know that as of 31 December 2022, OSG had $423 million of outstanding indebtedness. With a lower cash flow generation ability, the company may not be able to expand its operations and remain its current operations. With a weaker market condition, OSG would face a serious challenge to pay its obligations.

Summary

Due to better market conditions in 2022, OSG was able to turn its loss from vessel operations of $29 million into an income from vessel operations of $63 million. The market outlook is in favor of OSG's Jones Act and non-Jones Act vessels, and the company may be able to lower its debt and improve its leverage and cash ratios. The stock is a buy. However, some challenges can limit the company's potential to remain profitable. Thus, you should keep an eye on the company's news and operations.

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