OMI Corporation

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OMI Corporation

1 Station Place
Stamford, Connecticut 06902
U.S.A.
Telephone: (203) 602-6700
Fax: (203) 602-6701
Web site: http://www.omicorp.com

Public Company
Incorporated: 1968 as Ogden Marine, Inc.
Employees: 48
Sales: $199.1 million (2002)
Stock Exchanges: New York
Ticker Symbol: OMM
NAIC: 483111 Deep Sea Freight Transportation

Operating out of Stamford, Connecticut, OMI Corporation owns and operates a fleet of 39 international crude oil and petroleum transport vessels, with another four new builds scheduled for delivery in 2004. Of those 39 ships, 23 are product carriers and 16 are crude oil tankers, at least half of the latter being double-hull Suezmax carriers (approximately 160,000 deadweight tons). The company also owns one massive, single-hull ULCC class tanker (approximately 322,000 deadweight tons). OMI makes its vessels available for charters on a time charter, bareboat, or voyage basis. Under a time charter basis, an OMI vessel is at the disposal of a customer for a specific period of time at a set price but it is operated by OMI. A bareboat arrangement gives customers possession of the vessel; customers are then responsible for the vessel's operation and management. Under a voyage, or "spot market," basis, OMI makes a vessel available for a single voyage at a price determined by current market conditions. While spot market arrangements have the potential to be quite lucrative, they are not without risk. In order to maintain some stability in cash flow in the highly cyclical shipping industry, OMI tries to strike a balance between spot and long-term chartering. OMI maintains one of the youngest fleets in the industry.

Founding the Company in 1968

The origins of OMI can be traced back to a shipping company named Oriental Exporters Inc. Assets of Oriental Exporters were sold to Ogden Marine, Inc., established as a Manhattan-based business in July 1968 by Ogden Corporation. One of the founders of Oriental Exporters, Michael Klebanoff, then became president of Ogden Marine in 1969. Over the next dozen years, Ogden Marine's parent company was involved in a variety of activities in addition to oil transport, which was actually a distant second in importance to shipbuilding. Some of Ogden's other businesses during this period included scrap and metal fabrication, leisure services, and a food products division that lost nearly $9 million in 1978 and another $10 million in 1979. Ogden was originally created in 1939 as a holding company for the reorganized Utilities Power & Light Corp. after its bankruptcy. In 1962 Ralph Ablon, who had married a woman set to inherit a controlling interest in an Ogden subsidiary, was named president and became instrumental in turning Ogden into a diverse conglomerate. Over the ensuing decades, Ogden entered and exited any number of businesses—childcare, building maintenance, electronics design, ferrous recycling, architectural design, and biomedical research—generally producing lackluster results for its shareholders.

Shipping, which had been in a slump in the 1970s, made a robust comeback in the 1980s, inducing Ogden Marine and others to bolster their fleets. In 1982 the subsidiary generated revenues of $226 million, a third of the parent company's turnover for the year, and recorded a net profit of $20.6 million. In September 1983 Ablon announced that it would spin off Ogden Marine to its shareholders on a one-for-one share exchange basis. Ogden at this stage was pursuing a servicesoriented strategy, involved in businesses that were neither capital intensive, debt intensive, or cyclical in nature. Because shipping clearly did not fit this mold, management decided to divest itself of Ogden Marine and in the process removed more than $275 million in long-term debt from its balance sheet. In preparation for the spinoff, the subsidiary changed its name to OMI Corporation in December 1983, with the spinoff to Ogden shareholders completed on January 4, 1984. OMI stock then began to trade on the over-the-counter market, and two years later was listed on the NASDAQ. In 1989 OMI moved to the American Stock Exchange. At the time of the spinoff, OMI operated 29 oceangoing vessels totaling 1.78 million deadweight tons. They included 18 tankers, five bulk carriers, three car-bulk carriers, two liquefied petroleum gas vessels, and an ore-bulk-oil carrier.

Troubles Mounting in the Mid-1980s

Not only did OMI start off its existence as an independent company burdened with an excessive level of debt, its fleet was aging and would soon be in need of replacement. Moreover, there was an excess of capacity in the ocean shipping market and most of the company's fleet was scheduled to soon finish long-term charter agreements. It was unlikely that the deals would be renewed. OMI's troubles mounted in February 1986 when company President and CEO John J. Davin died in his sleep. But his successor, however unlikely a candidate, would prove to be the company's savior. In April 1986 47-year-old Jack Goldstein succeeded Davin, with Klebanoff serving as chairman. Goldstein, who earned an M.A. in economics at New York University, had no experience running a company, but knew the shipping industry after spending 15 years as the chief economist for Overseas Shipholding Group. According to a 1992 Forbes article, when Goldstein took over OMI, the "company was about to report a $27 million loss. And maybe worse. 'We had a company,' recalls Goldstein, 'close to bankruptcy.' " The company's banks informed him that OMI would be short of cash by $300 million within five years.

With OMI heavily in debt, Goldstein's first act was to issue nearly $55 million in new stock to retire some of the company's high-interest debt as well as to begin buying new replacement ships. He also brought some creativity to the shipping industry, in particular by forging joint ventures with foreign shipowners, which expanded OMI's fleet at a reasonable cost. Moreover, these joint ventures, in which OMI was a 49 percent owner, brought with them a tax benefit. In essence, OMI was able to invest pretax earnings to buy an interest in new ships. Derick Betts, a maritime tax lawyer, was quoted in a 1992 Crain's New York Business profile, maintaining, "Jack was really the first person in the industry to see the value of joint ventures. Before he did this, people in the shipping industry liked to hold on to their trade secrets. Jack pushed all that history aside. It was instrumental to OMI's turnaround." Goldstein told Forbes, "These joint ventures give us a worldwide reach that is unusual. We spread the risk, we stretch our capital, and we get expertise in areas where we may be weak."

Goldstein's expertise as an economist helped to make him a savvy trader. As explained by Crain's, "His forecasts helped OMI make a number of timely purchases, allowing the company to reap handsome profits off the sales of ships." One of his first deals, in 1986, involved a three-year-old international tanker, the Settebello, which had never been paid for. According to Forbes, "Goldstein took her off the builder's hands for $15 million, about equal to the Settebello's scrap value. His timing was perfect. The shipping market was beginning to turn. Within two years Goldstein was able to sell a 51% interest in the ship to Norway's Bergesen group for $23 million." In 1990 Goldstein sold a tanker the company had on order from Mitsubishi Shipbuilding and turned a $15 million profit. A year later, he took delivery on another tanker, paying $33 million. After one voyage he was able to sell it for $47 million. Goldstein also proved adept at buying ships at reasonable prices.

Goldstein enjoyed mixed success in his attempts to diversify OMI beyond ocean shipping. Under his leadership, OMI paid $15 million for a 14 percent interest in Chiles Offshore Corp., an oil rig drilling company; bought an 88 percent interest in Petrolink, which unloaded oil from large tankers in the Gulf of Mexico; and bought a company that managed vessels for the U.S. Navy. OMI also became involved in the business of cleaning up oil spills. The Chiles investment was especially troublesome. "It's put a bit of a cloud over OMI," according to industry analysts James Winchester, as quoted by Crain's. Overall, however, Goldstein received high marks for the job he did in resurrecting OMI. In a matter of five years, OMI saw its revenues improve almost 65 percent to $284.8 million in 1991, while posting net earnings of nearly $30 million, a jump of 83 percent over the previous year. In 1992 OMI began trading on the New York Stock Exchange.

From 1988 until early in 1991, more of OMI's fleet was chartered for extended periods of time, providing a certain level of predictability. Yet in 1991, as many of OMI's charters expired, the rates for time charter agreements declined, forcing OMI to shift the vessels to the spot market, which because of a number of factors offered highly fluctuating rates. Demand for petroleum products was soft in the aftermath of the Persian Gulf War of 1991, a situation exacerbated by poor worldwide economic conditions. Moreover, a slate of new tankers came on line at the same time that oil demand dropped. The spot market rate for a tanker before the war was in the $28,000-a-day range, but when the market collapsed the rate fell below $10,000 a day.

Not only did OMI see its revenues reduced, it also faced higher operational costs due to new environmental laws and other regulatory changes that led to much higher insurance costs. Revenues for 1992 fell to $265.5 million and the company posted a loss of $11.4 million. Over the next two years, revenues stagnated and OMI lost an additional $8.7 million in 1993 and nearly $37.9 million in 1994. OMI lost another $31.9 million in 1995 on revenues of nearly $240 million before improving economic conditions brought with it improvement to the company's balance sheet.

Company Perspectives:

OMI Corporation provides seaborne transportation services for crude oil and petroleum products in the international shipping markets.

Changing Course in the Mid-1990s

In November 1995 Klebanoff stepped down as chairman, although he remained a director and retained the title of chairman emeritus. Goldstein replaced him as chair, while COO Craig H. Stevenson, Jr., was named president. Stevenson came to OMI following a stint as president of Ocean Specialty Tankers Corp. After serving little more than a year as OMI's president, he succeeded Goldstein as CEO, effective January 1, 1997.

Although OMI returned to profitability, recording net earnings of $3.4 million in 1996 and $19.8 million in 1997, management decided that the company needed a course correction. Joint ventures had served OMI well for more than a decade, but now it was decided to concentrate on particular classes of vessels as well as to separate the U.S. operation from the international business. As a consequence, interests in joint ventures were reduced and a number of noncore vessels were sold. A key part of this shift in strategy involved the June 1998 merger with Marine Transport Lines, Inc., the oldest shipping company in the United States. A new OMI entity was then spun off, consisting solely of international assets, leaving Marine Transport with the U.S. flag vessels, the Gulf of Mexico oil unloading business, and OMI's ship management company. In this way, OMI could avoid paying U.S. corporate taxes and also garner the attention of foreign investors, who had previously been prevented from buying OMI's stock because of federal regulations. Moreover, the company overcame regulations that actually made it less profitable to enter an American port with a U.S.-owned vessel. OMI's revamped fleet consisted of 24 vessels, one of the most modern in the industry, with the average age of its ships less than eight years. As part of its restructuring OMI also moved the corporate headquarters from its Manhattan Park Avenue address to Stamford, Connecticut.

OMI took steps to sell stock to private investors and secure bank financing to support an expansion and upgrade of its fleet and thus become a premier product tanker company. In 1999 and 2000 it sold off its interests in several joint ventures, and then in 2001 it asked banks for $280 million to support a ten-ship building program. As larger, newer vessels entered the fleet, OMI sold off noncore ships, in the process further lowering the average age of its fleet. OMI dabbled in the Internet, forming SeaLogistics.com, which was intended to serve the shipping industry with content and services, in particular online chartering for the shipment of crude oil and petroleum products. But the core thrust of OMI remained the growth of its fleet of international oil tankers and product carriers. The company prospered in 2000 and 2001, posting net profits of $53 million and $82.3 million, before losing some momentum in 2002, when revenues declined by 5 percent and net income slumped to less than $15.5 million. The winter of 2003 proved to be especially lucrative to OMI, due to a number of factors. Cold weather, low oil inventories, and talk of war with Iraq all combined to spur demand for oil and allow OMI to increase day rates of its vessels. In the first quarter of 2003 alone, OMI earned $25.7 million, well above the company's profit for all of 2002.

OMI looked increasingly to the spot market to boost earnings, adopting an approach encapsulated by CEO and now Chairman Craig Stevenson: "We have a two-prong Strategy: to grab the maximum upside while making sure we cover our backsides." OMI appeared to be well positioned to take advantage of high future demand for tankers, which was expected to be dominated by one simple fact: while global consumption of oil was expected to grow by 1.2 percent to 2 percent per year, oil storage capacity would be unable to keep pace. As a result, the oil market would need to be replenished by tankers at an increasing rate, making OMI's prospects quite promising.