On November 14, 2012, Overseas Shipholding Group, Inc. ("OSG"), filed chapter 11 petitions for bankruptcy with the United States Bankruptcy Court for the District of Delaware. OSG is a Delaware corporation and describes itself as a world leader in energy transportation. See Declaration of OSG’s Sr. Vice President in Support of Chapter 11 Petitions (the "Decl.") at *2. The company was formed in 1969 as a result of the merger of five private companies. The company’s initial growth focused on delivering oil from Alaska to the western United States and the U.S. Virgin Islands. In the last decade, however, the company has expanded its operations to include floating storage and offloading, as well as transporting liquefied natural gas ("LNG"). Decl. at *4. This post will look at OSG’s business operations and financial structure, why the company filed for bankruptcy and what its objectives are now that its in bankruptcy.
Business Operations and Finances
OSG has offices in North America, Europe and Asia in order to serve as a global shipper in the energy industry. The company’s vessels operate as either U.S. or non-U.S. flagged vessels. The U.S. flagged vessels are built in the United States and maintained by U.S. crews to serve only U.S. ports. The non-U.S. flagged vessels, on the other hand, provide international shipping using international vessels and crews. Decl. at *5. The company provides its customers with vessels through "charters". Under this model, OSG can "charter-in" a vessel owned by another company that provides services for its customers, or it can "charter-out" one of its own vessels to another entity for a specific voyage. Decl. at *6.
OSG operates a fleet of forty-one vessels that cover all of the five major fleet categories for crude oil vessels – VPlus, VLCC, Suezmax, Aframax and Panamax. Decl. at *6. The company’s VPlus carriers are one of the largest tankers available, with a transportation capacity of 3.2 million barrels of crude oil. Id. In addition to transporting crude oil, OSG also provides lightering services. Lightering is the process where crude oil is removed from larger tankers and placed on to smaller tankers which can be transferred in to ports that do not accommodate large tankers. Decl. at *9.
Another major component of OSG’s business is its "U.S. Flag" operations. OSG is one of the largest owner/operators of "Jones Act" vessels. The Jones Act, or Section 27 of the Merchant Marine Act of 1920, requires all goods delivered by water between U.S. ports be transported by ships flagged in the United States, built in the United States and crewed by citizens or permanent residents of the United States. Decl. at *11. OSG considers itself the "only major global tanker organization with a significant U.S. Flag Fleet." Id.
Events Leading to Bankruptcy
OSG attributes its bankruptcy to two factors – (i) a global decline in the demand for oil; and (ii) cash constraints due to maturing debt obligations. Decl. at *25. In recent years, OSG has had to deal with falling oil demand while at the same time experiencing more competition in the petroleum transportation industry. With less demand for oil, there has also been less demand for OSG’s tankers. Changes in the nature of oil consumption are also affecting OSG’s revenues. Countries that import oil from abroad are now relying more on domestic production and existing inventories. This drop in demand for foreign oil further depresses demand for tankers. Decl. at *27.
Aside from weakening demand, OSG has also had to deal with increased supply in the tanker industry. Before the 2008 recession, oil prices continued to rise, leading to additional orders for oil tankers. Once oil demand began to drop, the crude tanker charter rate fell in tandem. For example, in 2009 the charter rate for VLCC tankers was $28,000 per day. Decl. at *28. By 2011, the charter rate for this tanker fell to $14,900 per day, representing a drop of 47 percent. Id.
One of OSG’s credit agreements is maturing in February 2013. Decl. at *29. Under this credit agreement, OSG is able to borrow up to $1.5 billion. Under a second credit agreement, OSG’s borrowing capacity drops from $1.5 billion to $900 million. This $600 million drop in borrowing capacity comes at a time when OSG views the credit and capital markets as "all but closed" to the company. Id.
Objectives in Bankruptcy
OSG filed for bankruptcy hoping to seek protection from its creditors and successfully reorganize. Decl. at *30. The company believes that without filing for bankruptcy, it will face individual creditor actions which will harm its business as a going concern. The company also believes that bankruptcy is necessary in order to restructure its finances and provide it with additional liquidity. The OSG bankruptcy is before Judge Peter J. Walsh. OSG is represented by the Delaware law firm Morris Nichols Arsht & Tunnell LLP.
Jason Cornell is an equity partner with the law firm Fox Rothschild LLP. Jason is a creditors’ rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware. You can reach Jason at 302 427 5512 or firstname.lastname@example.org.
Below are additional posts Jason has written on Delaware bankruptcy litigation: