Overseas Shipholding Group, Inc.

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Overseas Shipholding Group, Inc.

1114 Avenue of the Americas
New York, New York 10036-1222
U.S.A.
(212) 869-1222
Fax: (212) 536-3776

Public Company
Incorporated: 1969
Employees: 2,060
Operating Revenues: $420.1 million
Stock Exchanges: New York Pacific
SICs: 4412 Deep Sea Foreign Transportation of Freight;
4424 Deep Sea Domestic Transportation of Freight; 4481
Deep Sea Passenger Transportation, Except Ferry

Overseas Shipholding Group, Inc. is one of the largest independent bulk shipping companies in the world. The company owns and operates a diversified fleet of over 60 domestic and international oceangoing tankers and bulk carriers, as well as 16 U.S. flag tankers (used in “flag trade” or coastal commerce among U.S. ports) and dry cargo vessels. The firm serves three segments: the international tanker markets (for both crude oil and oil products); the international dry bulk markets (primarily iron ore, coal, and grain); and the unsubsidized U.S. flag markets (mainly Alaskan crude). At the end of 1993, 51 percent of Overseas Shipbuilding’s global bulk fleet consisted of oil tankers, 43 percent transported dry goods, and the remainder were combination carriers capable of transporting either wet or dry cargoes. Two-thirds of Overseas Shipholding’s shipping revenues came from transporting petroleum and its derivatives in 1993. Although its domestic business often receives the most media attention, the shipper’s international fleet is one of the largest in the world and contributed the majority (about 61 percent) of annual revenues on average in the 1990s.

Overseas Shipholding is one of only three oil tanker companies that are publicly traded in the United States. The company operates on a contract rather than common carrier basis, meaning that its vessels are not bound to specific ports of schedules. Freight rates are negotiated through a closely related brokerage firm, Maritime Overseas Corporation. Overseas Shipbuilding’s domestic fleet consists entirely of “Jones Act” vessels. Established in 1920 to promote a national merchant marine and shipyard capacity in case of national emergencies, the Jones Act required ships involved in U.S. flag trades to be built in American shipyards and without government subsidy, as well as to be owned and operated by Americans. The capital and operating costs resulting from these conditions nearly tripled international levels. Until the late 1980s, companies that met these criteria operated in a market largely protected from foreign and subsidized competition.

Created in 1969 through the merger of the ship holdings of five private businessmen, Overseas Shipholding Group (OSG) became the only publicly traded pure ocean shipping company in the United States. The union of Overseas Bulk Ships, Inc., Transoceanic Bulk Carriers, Inc., and United Steamship Corp. boasted a fleet of 32 ships at its founding. The owners sold one-third of their new company public at $12 per share and elected Morton P. Hyman, a 35-year-old attorney, as president. The early 1970s were boom years for the tanker business, and OSG’s revenues doubled from $85 million to nearly $169 million between 1972 and 1974. Profits increased even faster, from $15.6 million to $38.4 million during the same period.

During this time, Hyman proved adept at anticipating demand; he had an enviable knack for ordering ships before they were needed and then contracting them before they even came into service. Mid-decade, however, recession and widely fluctuating shipping rates brought what Forbes magazine called “one of the stormiest periods ever in the bulk shipping business.” Some of the United States’s biggest public and private fleets were “crippled or sunk” during this difficult period. Still, while OSG’s revenues declined seven percent, its profits rose almost 40 percent. Analysts attributed this market-defying performance to Hyman’s commitment to reliable, but relatively low-return, long-term contracts (some of which would last until 1989). By 1977, Hyman had expanded the fleet to 49 ships—the largest independent fleet of U.S. flag tankers in operation. The fleet was modern as well as large, as, in 1977, the average ship age was seven years. Moreover, the opening of the Alaska pipeline in the late 1970s gave OSG’s domestic tankers their first major source of consistent business: transporting crude oil from the West Coast terminus of the pipeline to the East Coast.

OSG recorded outstanding performance during its first ten years of business, as operating profits increased at an average compounded rate of over 20 percent per year. By 1979, sales reached $268 million, and profits neared $66 million. The company also achieved a 20 percent return on equity during that period, a rate almost unheard of in the shipping industry. Debt-to-equity, which averaged 2-to-l for the high-overhead global shipping business, decreased to 1.2-to-l at OSG from 1969 to 1980. With 15 tankers and two dry bulk carriers in domestic service in 1979, OSG held a ten percent share of all Jones Act tankers in operation at the time. In a 1980 Barron’s profile, Hyman attributed OSG’s growth to “a willingness to sacrifice the chance to maximize profits in periods of unusually high spot rates for long-term charters, assuring a steadier stream of rising earnings.”

The 1980s, however, saw OSG’s earnings decline sharply from $65.9 million in 1979 to a low of $31 million in 1985. The Iran-Iraq war brought years of unprecedented losses for OSG’s international fleet, resulting in the destruction and damage of over 40 million tons of oil-transporting capacity. In fact, the Persian Gulf became known in the industry as “Exocet Alley” after the missiles that terrorized tanker fleets there. Ironically, however, Financial World referred to the war “a drastic solution to the tanker glut”; in the late 1980s, the tanker supply tightened enough to encourage higher rates. Other factors in the last half of the decade helped OSG’s revenues and earnings steadily recover to $349.9 million and $51.1 million, respectively, in 1989. Mid-decade, OSG garnered an auto transport contract with Toyota that extended until 1994. During the late 1980s, oil imports rose and aging ships throughout the industry were retired, further boosting OSG’s recovery. Although the firm was not performing as well as it had in the 1970s, a 1987 Financial World profile noted that OSG still had “the strongest balance sheet in the business.”

In the mid-1980s, the U.S. Maritime Administration reversed the policy that sheltered flag trade from foreign and subsidized competition. New policies began to allow several oil carriers built with construction subsidies to enter the Alaskan coastal trades after they repaid their subsidies. Finding that the competition presented by these carriers depressed freight rates and forced some smaller tanker operators out of business, OSG and other Jones Act tanker owners challenged the Maritime Administration’s decision in the courts. In spite of judgments in their favor, the subsidized carriers were allowed to remain in the U.S. flag trades pending appeal.

Protection of the U.S. flag trades suffered another blow in the early 1990s, when a debate emerged over the interpretation of the Merchant Marine Act of 1936, which prohibited a recipient of government financial assistance from participating in domestic markets for its “full operational life.” Subsidized tanker owners contended that the 1936 law referred not to the full life of the ship, but to its “economic life,” 20 to 25 years. If the latter interpretation applied, subsidized tankers could potentially increase the total carrying capacity of the domestic tanker fleet by 12.3 percent from 1993 to 1996. The entry of the group of tankers on which subsidy contracts expired in the early 1990s threatened to erode shipping rates, especially since those vessels had inherently lower capital investments. OSG requested a review of the policy by the U.S. Department of Transportation in 1993, and the issue remained unresolved in 1994.

In 1990, following the massive oil spill on the Alaskan coast from the Exxon Valdez, Congress enacted the Oil Pollution Act, which phased in a requirement that all oil tankers entering U.S. waters have double-hulls by the year 2015. The Act also significantly increased the potential liability of tanker owners for environmental accidents in U.S. waters. OSG favored this legislation, as the company’s commitment to ongoing fleet modernization put it in the vanguard of technology. In 1993, OSG focused on obtaining certification from the International Standards Organization to further bolster its reputation for quality.

OSG’s annual report called 1992 “the most difficult year since the Company’s formation in 1969.” The global recession and overcapacity in the industry adversely affected all of the firm’s business segments, bringing about the first pre-tax net loss in OSG’s public history. From 1991 to 1992, revenues declined by over 15 percent, from $452 million to $383 million, and net income (after taxes) plummeted over 72 percent, from $56 million to $16 million.

In light of these competitive, regulatory, and market factors, OSG made its first major move to diversify in order to offset the effects of the cyclical shipping industry. In 1992, the firm formed a joint venture with The Chandris Group, a business with over 30 years of experience in the cruise market. OSG’s $220 million investment earned it a 49 percent share of The Chandris Group, which operated two lines: Celebrity and Fantasy cruises. Celebrity’s three ships catered to the upscale segment of the market, while the Fantasy line’s two ships were positioned in the budget market. In its relatively brief four-year history, the Celebrity line had earned numerous industry awards. Readers of Condé Nast Traveler ranked the line as one of the world’s top ten in 1991, 1992, and 1993. Berlitz gave the entire line its coveted five-star rating, and the International Cruise Passenger Association named it “Cruise Line of the Year.” OSG’s capital infusion was used to double the Celebrity line’s capacity with the addition of three new ships before the end of the century. With average growth of ten percent per year from 1984 to 1993, the North American cruise industry offered OSG a relatively steady stream of income to offset the vagaries of the shipping industry.

OSG’s key markets improved only slightly in the mid-1990s, as recession in Japan and Europe continued and total world oil demand remained flat. OSG’s financial fortunes followed suit, as sales and profits rebounded slightly from the previous year to $420.1 million and $17.9 million, respectively.