Solid insight. Like I have mentioned before there is no question about there being a tough environment where cash flows are negative. This points to higher liquidity needs that can only be met by higher debt levels which is standard and expected. Second, I dont expect things to go back to normal overnight i.e. this year is not going to bring any relief. Operationally I think OSG has seen its worst. For example in their tanker business from 2010 to 2011 the average revenue days per vessel operated went from 270 to 90 days which indicates that they have taken the bulk of the hit to their cash flows. While you are right about declining cash balances and debt increases there are some things that I believe protect the business.
A crucial point is that their market positions gives them much better access to liquidity than other companies in a similar situation. Like I mentioned in my write up they have secured a revolving credit facility for next year of $900m with an accordion provision to increase it to $1.25b. A group of 5 banks have offered this to them. For banks to offer such generous amounts of liquidity on unsecured terms could only be for two reasons: 1) they believe the company’s credit to be solid 2) they have more to loose from the company going under.
Recently, I spoke to a friend who works as an operations manager in a tanker company in the UK. He suggested that rates were high enough to meet operating expenses for most tankers. He went on to say that most banks grant companies holidays on their interest payments as bankruptcy would prove worse for banks than it would for the companies.
It is important to note that this is not the first (or last) trough that has been seen by OSG or the industry in general. OSG has withstood 3 or more cycles atleast since its been a publicly listed company and has come through them.
Another very interesting thing about OSG is their diversification of vessels and business segments. They operate not only oil tankers but LNG gas carriers (some of the highest spot rates currently) and product tankers . Another major segment of operation for them is their US flag segment which is protected by the Jones Act. Apparently, cargo being carried from one port to another in the US must be carried in ships built in the US, flying a US flag, owned by a US entity and crewed by US citizens.
Finally, another thing I mentioned is the implied value that the principles believe the company is worth. Many of them have been buying every since $17 levels. Thats is something you cannot ignore.