Sinking Ships on Troubled Waters

10/31/2012 8:30 am EST


The oil tanker industry is in for rough seas, as haulage rates drop and forecasts fall further, writes David Black of The National.

The oil tanker industry is steaming into choppy economic waters. A global glut in capacity has claimed two more major victims in the past week.

Overseas Shipholding Group (OSG) is preparing to file for bankruptcy protection in the United States, while Euronav in Belgium is poised to sell off part of its fleet after posting a third-quarter loss.

Analysts had predicted OSG was about to fall out of compliance with covenants in its credit agreements. Standard & Poor's cut the New York-quoted shipowner's rating to CCC-minus from CCC-plus, and placed the company on credit watch because of what the firm said was a "high probability of default."

Euronav, meanwhile, reported a net income loss of $34.9 million, versus a loss of $40.5 million in the same period last year, stoking analysts' fears that some of its peers may be about to reveal deep deficits of their own in the weeks to come.

The two companies join at least three other tanker groups in trouble as the slump in shipping rates reduces the values of the vessels in their fleets.

In December, Frontline, an owner based in Bermuda, split its company in two because of the slump. General Maritime, which operates to more than 230 ports in more than 70 countries, filed for bankruptcy in November, and this month Torm, a Danish owner, was saved from bankruptcy by a new debt deal.

Meanwhile, Jefferies, a global securities and investment banking group, again cut its crude tanker spot forecasts, blaming continued fleet growth for depressing the market.

Jefferies analyst Doug Mavrinac predicts that very large crude carriers (VLCCs) will earn just $7,000 a day in the final three months of this year, less than half his previous $15,000 daily rate estimate. His prediction for Suezmax tankers—tankers capable of navigating the Suez Canal—has been halved to $5,000 a day.

At the same time, the crude tanker fleet is expected to grow by another 3% to 4% next year, according to international ship brokers Clarksons, which also notes that rates for VLCCs—each able to haul 2 million barrels of oil—have plunged 55% to $14,320 a day so far this year.

"Unfortunately though, even limited fleet growth can exacerbate an already oversupplied market when demand growth is flat or contracting," says Mavrinac.

OSG's problems came to a head last week, when in a statement to US regulators, it said the company was "evaluating its strategic options, including the potential voluntary filing of a petition for relief to reorganize under Chapter 11 of the bankruptcy code."

OSG, which operates a fleet of 111 ships, including 13 VLCCs, blamed a "significant tax issue" arising from its US and international operations and provisions in its loan agreements. The problem has already claimed the head of the board director G. Allen Andreas III, who resigned last month as a result of disagreements over the tax issue, said the company.


OSG is heading for a cash-flow shortfall of $170 million over the next 12 months, writes Jonathan Chappell, an Evercore Partners analyst. It also faces the February maturity of its $1.5 billion credit facility.

Last week, OSG shares slumped 62% to $1.23. It has spent 13 successive quarters in the red, which has led to a $192.9 million deficit for last year, on top of a $134.2 million loss in 2010.

"The company is still in the process of resolving a liquidity problem coming up in February when the existing $1.5 billion revolving credit facility is replaced by a smaller $900 million credit facility," says Natasha Boyden, an analyst at Global Hunter Securities, who has suspended coverage of OSG. "In July, OSG drew down the entire amount available under the existing facility."

In filing for bankruptcy protection, OSG would follow its fellow tanker major General Maritime, which handed in papers to a US bankruptcy court in November and has since emerged from a restructuring period with the aid of the major investor Oaktree Capital.

Torm was also long considered a Chapter 11 candidate, but recently locked up a restructuring deal that gave banks most of its stock. With charterers also taking a slice of the company, its existing shareholders were left with only 10% of the pie. Torm has admitted bankruptcy documents had been drafted as a contingency.

Euronav, which has 30 tankers on its books, blamed its larger than expected losses on a fall in demand for crude oil, particularly from the Arabian Gulf, caused by the worldwide economic slowdown and seasonal refinery turnarounds. As a result, the list of ships available for any given cargo lengthened and the wait before loading increased.

The company immediately moved to boost its bank balance with the sale of the Algarve, a VLCC with a 289,900-metric-ton capacity, built in 1999 for $35.8 million.

This is just one step in the right direction, says Nikolay Dyvik, an analyst at the Norwegian investment bank DNB.

"We argue Euronav has started to sell assets to improve the liquidity position in a challenging tanker market but more sales of assets are needed to avoid issuance of [more] shares as the company will still be in breach of its cash covenant in Q4 2013," said Dyvik.

So far in the fourth quarter, the Euronav VLCC fleet has earned $11,100 per day, but just 57% of available days have been fixed.

"These rates remain extremely low for this time of the year," said the company.

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