| OVERSEAS SHIPHOLDING GROUP INC ITEM 1A RISK FACTORS The following important risk factors could cause actual results to differ materially from those contained in the forward-looking statements made in this report or presented elsewhere by management from time to time |
| If any of the circumstances or events described below actually arise or occur, the Company’s business, results of operations and financial condition could be materially adversely affected |
| Industry specific risk factors: The highly cyclical nature of the tanker industry may lead to volatile changes in charter rates and vessel values, which may adversely affect the Company’s earnings Factors affecting the supply and demand for tankers are outside of the Company’s control, and the nature, timing and degree of changes in industry conditions are unpredictable and may adversely affect the values of the Company’s vessels and result in significant fluctuations in the amount of charter hire the Company may earn, which could result in significant fluctuations in OSG’s quarterly results |
| The factors that influence the demand for tanker capacity include: · demand for oil and oil products, which affect the need for tanker capacity; · global and regional economic and political conditions which among other things, could impact the supply of oil as well as trading patterns and the demand for various types of vessels; · changes in the production of crude oil, particularly by OPEC and other key producers, which impact the need for tanker capacity; · developments in international trade; · changes in seaborne and other transportation patterns, including changes in the distances that cargoes are transported; · environmental concerns and regulations; · new pipeline construction and expansions; · weather; and · competition from alternative sources of energy |
| The factors that influence the supply of tanker capacity include: · the number of newbuilding deliveries; · the scrapping rate of older vessels; · the number of vessels that are out of service; and · environmental and maritime regulations |
| An increase in the supply of tankers without an increase in demand for tankers could cause charter rates to decline, which could have a material adverse effect on OSG’s revenues and profitability Historically, the tanker industry has been cyclical |
| The profitability and asset values of companies in the industry have fluctuated based on changes in the supply and demand of tankers |
| The supply of tankers generally increases with deliveries of new vessels and decreases with the scrapping of older vessels |
| The newbuilding order book equaled 24dtta6prca of the existing world tanker fleet as of December 31, 2005 and no assurance can be given that the order book will not increase further in proportion to 30 ______________________________________________________________________ the existing fleet |
| If the number of new ships delivered exceeds the number of vessels being scrapped, tanker capacity will increase |
| If the supply of tanker capacity increases and the demand for tanker capacity does not, the charter rates for the Company’s vessels could decline significantly |
| A decline in charter rates could have a material adverse effect on OSG’s revenues and profitability |
| Charter rates may decline from their current level, which could have a material adverse effect on OSG’s revenues and profitability Because many of the factors that influence the supply of, and demand for, tanker capacity are unpredictable and beyond the Company’s control, the nature, timing and degree of changes in charter rates are unpredictable |
| OSG’s revenues are subject to seasonal variations OSG operates its tankers in markets that have historically exhibited seasonal variations in demand for tanker capacity, and therefore, charter rates |
| Charter rates for tankers are typically higher in the fall and winter months as a result of increased oil consumption in the Northern Hemisphere |
| Because a majority of the Company’s vessels trade in the spot market, seasonality has affected OSG’s operating results on a quarter-to-quarter basis and could continue to do so in the future |
| Terrorist attacks and international hostilities can affect the tanker industry, which could adversely affect OSG’s business Additional terrorist attacks like those in New York on September 11, 2001 and in London on July 7, 2005, the outbreak of war or the existence of international hostilities could damage the world economy, adversely affect the availability of and demand for crude oil and petroleum products and adversely affect the Company’s ability to re-charter its vessels on the expiration or termination of the charters and the charter rates payable under any renewal or replacement charters |
| The Company conducts its operations internationally, and its business, financial condition and results of operations may be adversely affected by changing economic, political and government conditions in the countries and regions where its vessels are employed |
| Moreover, OSG operates in a sector of the economy that is likely to be adversely impacted by the effects of political instability, terrorist or other attacks, war or international hostilities |
| The market value of vessels fluctuates significantly, which could adversely affect OSG’s liquidity, result in breaches of its financing agreements or otherwise adversely affect its financial condition The market value of vessels has fluctuated over time |
| The fluctuation in market value of oil tankers over time is based upon various factors, including: · age of the vessel; · general economic and market conditions affecting the tanker industry; · number of vessels in the world fleet; · types and sizes of vessels available; · changes in trading patterns affecting demand for particular sizes and types of vessels; · cost of newbuildings; · prevailing level of charter rates; 31 ______________________________________________________________________ · competition from other shipping companies; · other modes of transportation; and · technological advances in vessel design and propulsion |
| Declining vessel values of the Company’s tankers could adversely affect its liquidity by limiting its ability to raise cash by refinancing vessels |
| Declining vessel values could also result in a breach of loan covenants or trigger events of default under relevant financing agreements that require the Company to maintain certain loan-to-value ratios |
| In such instances, if OSG is unable to pledge additional collateral to offset the decline in vessel values, its lenders could accelerate its debt and foreclose on its vessels pledged as collateral for the loans |
| Shipping is a business with inherent risks, and OSG’s insurance may not be adequate to cover its losses OSG’s vessels and their cargoes are at risk of being damaged or lost because of events such as: · marine disasters; · bad weather; · mechanical failures; · human error; · war, terrorism and piracy; and · other unforeseen circumstances or events |
| In addition, transporting crude oil creates a risk of business interruptions due to political circumstances in foreign countries, hostilities, labor strikes, port closings and boycotts |
| OSG currently maintains one billion dollars in coverage for each of its vessels for liability for spillage or leakage of oil or pollution |
| OSG also carries insurance covering lost revenue resulting from vessel off-hire due to vessel damage |
| Nonetheless, risks may arise against which the Company is not adequately insured |
| For example, a catastrophic spill could exceed OSG’s insurance coverage and have a material adverse effect on its operations |
| In addition, OSG may not be able to procure adequate insurance coverage at commercially reasonable rates in the future, and OSG cannot guarantee that any particular claim will be paid |
| In the past, new and stricter environmental regulations have led to higher costs for insurance covering environmental damage or pollution, and new regulations could lead to similar increases or even make this type of insurance unavailable |
| Furthermore, even if insurance coverage is adequate to cover the Company’s losses, OSG may not be able to timely obtain a replacement ship in the event of a loss |
| OSG may also be subject to calls, or premiums, in amounts based not only on its own claim records but also the claim records of all other members of the P & I Associations through which OSG obtains insurance coverage for tort liability |
| OSG’s payment of these calls could result in significant expenses which would reduce its profits or cause losses |
| 32 ______________________________________________________________________ Because OSG conducts its business on a worldwide basis, OSG faces a number of significant risks that could result in losses or higher costs The Company’s vessels operate all over the world, exposing it to many risks, including: · changing economic, political and social conditions in the countries where OSG does business or where its vessels are registered or flagged; · the imposition of increased environmental and safety regulations by international organizations, Classification Societies, flag states and port states; · the imposition of taxes by flag states, port states and jurisdictions in which OSG or its subsidiaries are incorporated or where its vessels operate; · currency fluctuations; · terrorism, piracy and war, including the possible outbreak of hostilities that could reduce or otherwise affect the movement of oil from the Middle East; and · expropriation of its vessels |
| As a result of these risks, OSG may incur losses or higher costs, including those incurred as a result of the impairment of its assets or a curtailment of its operations |
| Compliance with environmental laws or regulations may adversely affect OSG’s business The Company’s operations are affected by extensive and changing international, national and local environmental protection laws, regulations, treaties, conventions and standards in force in international waters, the jurisdictional waters of the countries in which OSG’s vessels operate, as well as the countries of its vessels’ registration |
| Many of these requirements are designed to reduce the risk of oil spills and other pollution, and OSG’s compliance with these requirements can be costly |
| These requirements can affect the resale value or useful lives of the Company’s vessels, require a reduction in carrying capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in, certain ports |
| Under local, national and foreign laws, as well as international treaties and conventions, OSG could incur material liabilities, including cleanup obligations, in the event that there is a release of petroleum or other hazardous substances from our vessels or otherwise in connection with its operations |
| OSG could also become subject to personal injury or property damage claims relating to the release of or exposure to hazardous materials associated with its current or historic operations |
| Violations of or liabilities under environmental requirements also can result in substantial penalties, fines and other sanctions, including in certain instances, seizure or detention of the Company’s vessels |
| OSG could incur significant costs, including cleanup costs, fines, penalties, third-party claims and natural resource damages, as the result of an oil spill or other liabilities under environmental laws |
| OPA 90 affects all vessel owners shipping oil or hazardous material to, from or within the United States |
| OPA 90 allows for potentially unlimited liability without regard to fault for owners, operators and bareboat charterers of vessels for oil pollution in US waters |
| Similarly, the International Convention on Civil Liability for Oil Pollution Damage, 1969, as amended, which has been adopted by most countries outside of the United States, imposes liability for oil pollution in international waters |
| OPA 90 expressly permits individual states to impose their own liability regimes with regard to hazardous materials and oil pollution incidents occurring within their boundaries |
| Coastal states in the United States have enacted pollution prevention liability and response laws, many providing for unlimited liability |
| 33 ______________________________________________________________________ OPA 90 provides for the scheduled phase out of all non double hull tankers that carry oil in bulk in US waters |
| IMO and the European Union also have adopted separate phase out schedules applicable to single hull tankers operating in international and EU waters |
| These regulations will reduce the demand for single hull tankers, force the remaining single hull vessels into less desirable trading routes, increase the number of ships trading in routes open to single hull vessels and could increase demands for further restrictions in the remaining jurisdictions that permit the operation of these vessels |
| As a result, single hull vessels are likely to be chartered less frequently and at lower rates |
| In addition, in complying with OPA, IMO regulations, EU directives and other existing laws and regulations and those that may be adopted, shipowners may incur significant additional costs in meeting new maintenance and inspection requirements, in developing contingency arrangements for potential spills and in obtaining insurance coverage |
| Government regulation of vessels, particularly in the areas of safety and environmental requirements, can be expected to become more strict in the future and require the Company to incur significant capital expenditures on its vessels to keep them in compliance, or even to scrap or sell certain vessels altogether |
| As a result of accidents such as the November 2002 oil spill from the Prestige, a 26 year old single hull tanker unrelated to the Company, OSG believes that regulation of the shipping industry will continue to become more stringent and more expensive for the Company and its competitors |
| In recent years, the IMO and EU have both accelerated their existing non double hull phase out schedules in response to highly publicized oil spills and other shipping incidents involving companies unrelated to OSG Future accidents can be expected in the industry, and such accidents or other events could be expected to result in the adoption of even stricter laws and regulations, which could limit the Company’s operations or its ability to do business and which could have a material adverse effect on OSG’s business and financial results |
| For additional information concerning a pending government investigation of the Company’s handling of waste oils, see the Company specific risk factor with such heading on Page 37 |
| The market value of OSG’s vessels, which are at or near historically high levels, may be depressed at a time and in the event that it sells a vessel Tankers values have generally experienced high volatility and values are currently at or near historically high levels |
| The fair market value of the Company’s tankers can be expected to fluctuate, depending on general economic and market conditions affecting the tanker industry and competition from other shipping companies, types and sizes of vessels and other modes of transportation |
| In addition, although OSG has a modern fleet, as vessels grow older, they generally decline in value |
| These factors will affect the value of the Company’s vessels at the time of any vessel sale |
| If for any reason, OSG sells a tanker at a time when tanker prices have fallen, the sale may be at less than the tanker’s carrying amount on its financial statements, with the result that the Company would also incur a loss on the sale and a reduction in earnings and surplus |
| Company specific risk factors: The Company’s substantial debt could adversely affect our financial condition OSG has substantial debt and debt service requirements |
| At December 31, 2005, the Company’s consolidated total debt, including capital lease obligations, was dlra993 million and its unused borrowing capacity under revolving credit facilities was dlra1dtta15 billion |
| The amount of the Company’s debt could have important consequences |
| For example, it could: · increase OSG’s vulnerability to general adverse economic and industry conditions; · limit OSG’s ability to fund future capital expenditures, working capital and other general corporate requirements; 34 ______________________________________________________________________ · require the Company to dedicate a substantial portion of its cash flow from operations to make interest and principal payments on its debt; · limit OSG’s flexibility in planning for, or reacting to, changes in its business and the shipping industry; · place OSG at a competitive disadvantage compared to competitors that have less debt; and · limit OSG’s ability to borrow additional funds, even when necessary to maintain adequate liquidity |
| When OSG’s credit facilities mature, it may not be able to refinance or replace them When OSG’s indebtedness matures, the Company may need to refinance it and may not be able to do so on favorable terms or at all |
| If OSG is able to refinance maturing indebtedness, the terms of any refinancing or alternate credit arrangements may contain terms and covenants that restrict OSG’s financial and operating flexibility |
| The Company is highly dependent upon volatile spot market charter rates OSG depends on spot charters for a significant portion of its revenues |
| In 2005, 2004 and 2003, OSG derived approximately 69prca, 85prca and 79prca, respectively, of its TCE revenues in the spot market |
| Although chartering a significant portion of OSG’s vessels on the spot market affords it greater opportunity to increase income from operations when rates rise, dependence on the spot market could result in earnings volatility |
| OSG may not be able to renew time charters when they expire or enter into new time charters for newbuilds There can be no assurance that any of the Company’s existing time charters will be renewed or that it will be successful in entering into new time charters on certain of the newbuilds that the Company is chartering-in; or if renewed or entered into, that they will be at favorable rates |
| If, upon expiration of the existing time charters or delivery of newbuilds, OSG is unable to obtain time charters or voyage charters at desirable rates, the Company’s profitability may be adversely affected |
| OSG is dependent on the creditworthiness of its customers As OSG increases the portion of its revenues from time charters, it increases its reliance on the ability of time charterers to pay charter hire, especially when spot market rates are less than previously agreed upon time charter rates |
| Historically, the Company has not experienced any material problem collecting charter hire |
| Termination or change in the nature of OSG’s relationship with any of the pools in which it participates could adversely affect its business All of the Company’s VLCCs participate in the Tankers International pool |
| All but one (which is operating on time charter) of OSG’s Aframaxes participate in the Aframax International pool |
| Five of its Panamaxes participate in Panamax International |
| Participation in these pools enhances the financial performance of the Company’s vessels as a result of the higher vessel utilization |
| Any participant in any of these pools has the right to withdraw upon notice in accordance with the relevant pool agreement |
| The termination of any of these pools or the withdrawal of any participants could adversely affect OSG’s ability to commercially market the respective types of vessels |
| 35 ______________________________________________________________________ OSG may not be able to grow its fleet One part of OSG’s strategy is to continue to grow its fleet on an opportunistic basis |
| The Company’s ability to grow its fleets will depend upon a number of factors, many of which the Company cannot control |
| These factors include OSG’s ability to: · identify acquisition candidates and joint venture opportunities; · consummate acquisitions or joint ventures; · integrate any acquired vessels or businesses successfully with its existing operations; · hire and train qualified personnel; and · obtain required financing |
| OSG’s strategy of growing its business in part through acquisitions is capital intensive, time consuming and subject to a number of inherent risks Part of OSG’s business strategy is to opportunistically acquire complementary businesses or vessels such as the Company’s acquisition of Stelmar Shipping Ltd |
| If the Company fails to develop and integrate any acquired businesses or vessels effectively, its earnings may be adversely affected |
| In addition, the Company’s management team will need to devote substantial time and attention to the integration of the acquired businesses or vessels, which could distract them from their other duties and responsibilities |
| Operating costs and capital expenses will increase as the Company’s vessels age In general, capital expenditures and other costs necessary for maintaining a vessel in good operating condition increase as the age of the vessel increases |
| Accordingly, it is likely that the operating costs of OSG’s older vessels will increase |
| In addition, changes in governmental regulations and compliance with Classification Society standards may require OSG to make additional expenditures for new equipment |
| In order to add such equipment, OSG may be required to take its vessels out of service |
| There can be no assurance that market conditions will justify such expenditures or enable OSG to operate its older vessels profitably during the remainder of their economic lives |
| OSG’s purchase of second hand vessels carries risks associated with the quality of those vessels OSG’s expansion strategy includes the opportunistic acquisition of quality second hand vessels |
| Second hand vessels typically do not carry warranties with respect to their condition, whereas warranties are generally available for newbuildings |
| While the Company generally inspects all second hand vessels prior to purchase, such an inspection would normally not provide OSG with as much knowledge about vessel condition as the Company would possess if the vessels had been built for it |
| In the highly competitive international tanker market, OSG may not be able to effectively compete for charters with companies with greater resources The Company’s vessels are employed in a highly competitive market |
| Competition arises from other tanker owners, including major oil companies, which may have substantially greater resources than OSG does |
| Competition for the transportation of crude oil and other petroleum products depends on price, location, size, age, condition, and the acceptability of the vessel operator to the charterer |
| The Company believes that because ownership of the world tanker fleet is highly fragmented, no single vessel owner is able to influence charter rates |
| To the extent OSG enters into 36 ______________________________________________________________________ new geographic regions or provide new services, it may not be able to compete profitably |
| New markets may involve competitive factors which differ from those of the Company’s current markets, and the competitors in those markets may have greater financial strength and capital resources than it does |
| OSG is being investigated by the US Department of Justice relating to the handling of waste oils On October 1, 2003, the US Department of Justice served a grand jury subpoena directed at our International Flag Product Carrier, the Uranus, and our handling of waste oils and maintenance of books and records relating thereto |
| The US Department of Justice has subsequently served related subpoenas requesting documents concerning the Uranus and other vessels in the Company’s fleet and a number of witnesses have appeared before grand juries |
| In 2004 and the first quarter of 2005, the Company made a total provision of dlra10 million (including dlra4 million in the first quarter of 2005) for anticipated fines and contributions to environmental protection programs associated with a possible settlement of the investigation |
| The Company has been cooperating with the investigation, including self-reporting to the government beginning in the second half of 2005 of possible additional violations of applicable environmental laws |
| Currently, management cannot reasonably estimate a range of such fines and contributions, which fines and contributions could be higher than the amount accrued |
| Negotiations with the US Department of Justice are continuing but there can be no assurance that a satisfactory settlement can be achieved |
| OSG’s vessels call on ports located in countries that are subject to restrictions imposed by the US government, which could negatively affect the trading price of the Company’s common stock From time to time, vessels in OSG’s fleet call on ports located in countries subject to sanctions and embargoes imposed by the US government and countries identified by the US government as state sponsors of terrorism, such as Libya, Syria and Iran |
| Libya currently is not subject to economic sanctions imposed by the US government, but continues to be identified as a state sponsor of terrorism |
| Although these sanctions and embargoes do not prevent OSG’s vessels from making calls to ports in these countries, potential investors could view such port calls negatively, which could adversely affect the Company’s reputation and the market for its common stock |
| OSG depends on its key personnel and may have difficulty attracting and retaining skilled employees OSG’s success depends to a significant extent upon the abilities and efforts of its key personnel |
| The loss of the services of any of the Company’s key personnel or its inability to attract and retain qualified personnel in the future could have a material adverse effect on OSG’s business, financial condition and operating results |
| In addition, of the Company’s ten executive officers, seven have served in their current positions for less than one year and two of the remaining three officers have served in such positions for less than two years |
| The Company may face unexpected drydock costs for its vessels Vessels must be drydocked periodically |
| The cost of repairs and renewals required at each drydock are difficult to predict with certainty and can be substantial |
| In addition, vessels may have to be drydocked in the event of accidents or other unforeseen damage |
| OSG’s insurance may not cover all of these costs |
| Large drydocking expenses could significantly decrease the Company’s profits |
| 37 ______________________________________________________________________ Maritime claimants could arrest OSG’s tankers, which could interrupt its cash flow Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or damages |
| In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings |
| The arrest or attachment of one or more of the Company’s vessels could interrupt OSG’s cash flow and require it to pay a significant amount of money to have the arrest lifted |
| In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel that is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner |
| Claimants could try to assert “sister ship” liability against one vessel in the Company’s fleet for claims relating to another vessel in its fleet |
| Governments could requisition OSG’s vessels during a period of war or emergency without adequate compensation A government could requisition one or more of OSG’s vessels for title or for hire |
| Requisition for title occurs when a government takes control of a vessel and becomes her owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes her charterer at dictated charter rates |
| Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances |
| Although OSG would be entitled to compensation in the event of a requisition of one or more of its vessels, the amount and timing of payment would be uncertain |
| Government requisition of one or more of OSG’s vessels may negatively impact its revenues |