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Spring 2009
Overseas Shipholding Group Inc.Equity Analysis and Valuation
Analysis Team
William Newland – william.newland@ttu.edu
Kamil Bachleda – kamil.bachleda@ttu.edu
Jonathan Farrell – jondavidfarrell@yahoo.com
Michael Randell – michael.randell@ttu.edu
Kirby Viktorin – kirby.a.viktorin@ttu.edu
Steffen Schwartz – steffen.schwartz@ttu.edu
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Table of Contents Executive Summary .......................................................................... 7
Business and Industry Analysis ...................................................... 15
Company Overview ........................................................................... 15
Industry Overview............................................................................. 16
Five Forces Model ............................................................................ 17
Rivalry Among Existing Firms ............................................................. 17
Industry Growth ............................................................................. 18
Concentration of Competitors .......................................................... 20
Differentiation ................................................................................ 21
Switching Costs .............................................................................. 22
Economies of Scale ........................................................................ 23
Fixed-Variable Costs ....................................................................... 23
Excess Capacity ............................................................................. 24
Exit Barriers ................................................................................... 26
Threat of New Entrants ..................................................................... 26
First Mover Advantage .................................................................... 27
Distribution Access and Relationships ............................................... 27
Scale Economies ............................................................................ 28
Legal Barriers ................................................................................. 29
Threat of Substitute Products ............................................................. 30
Relative Price and Performance ....................................................... 30
Customers’ Willingness to Switch ..................................................... 31
Bargaining Power of Customers .......................................................... 31
Switching Costs .............................................................................. 32
Differentiation ................................................................................ 32
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Importance of Product for Costs and Quality .................................... 32
Number of Buyers .......................................................................... 33
Volume Per Buyer .......................................................................... 33
Bargaining Power of Suppliers ............................................................ 34
Switching Costs .............................................................................. 34
Differentiation ................................................................................ 35
Importance for Costs and Quality .................................................... 36
Number and Volume of Suppliers ..................................................... 38
Key Success Factors ........................................................................ 40
Cost Leadership ................................................................................ 41
Economies of Scale and Scope ........................................................ 41
Efficient Production ........................................................................ 41
Lower Input Costs .......................................................................... 42
Little Research and Development ..................................................... 42
Differentiation .................................................................................. 43
Superior Product Quality ................................................................. 43
Superior Product Variety ................................................................. 43
Competitive Advantage Analysis ..................................................... 44
Economies of Scale and Scope ........................................................... 44
Lower Input Costs ............................................................................. 45
Superior Product Quality .................................................................... 46
Superior Product Variety .................................................................... 47
Accounting Analysis ......................................................................... 49
Key Accounting Policies ..................................................................... 50
Operating Leases ........................................................................... 50
Goodwill ........................................................................................ 52
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Hedging Activities ........................................................................... 56
Benefits and Pension Plan ............................................................... 58
Assess Degree of Potential Accounting Flexibility ................................. 61
Operating Leases ........................................................................... 62
Goodwill ........................................................................................ 63
Hedging Activities ........................................................................... 63
Benefits and Pension Plan ............................................................... 64
Evaluate Actual Accounting Strategy ................................................... 66
Operating Leases ........................................................................... 66
Goodwill ........................................................................................ 68
Hedging Activities ........................................................................... 68
Benefits and Pension Plan ............................................................... 69
Quality of Disclosure: Qualitative Analysis ........................................... 70
Type 1 Key Accounting Policies .......................................................... 70
Economies of Scale and Scope ........................................................ 70
Efficient Production ........................................................................ 71
Lower Input Costs .......................................................................... 72
Type 2 Key Accounting Policies .......................................................... 73
Operating Leases ........................................................................... 73
Goodwill ........................................................................................ 74
Hedging Activities ........................................................................... 74
Benefits and Pension Plan ............................................................... 75
Quality of Disclosure: Quantitative Analysis ......................................... 76
Sales Manipulation Diagnostics ........................................................ 76
Expense Manipulation Diagnostics ................................................... 81
Identify Potential Red Flags ............................................................... 87
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Undo Accounting Distortions .............................................................. 87
Restating Distortions in Financial Statements .................................... 93
Financial Analysis, Forecast Financials and Cost of Capital Estimation ........................................................................................ 94
Financial Analysis ............................................................................ 94
Liquidity Ratio Analysis ...................................................................... 94
Current Ratio ................................................................................. 95
Quick Asset Ratio ........................................................................... 96
Accounts Receivable Turnover ......................................................... 98
Days Sales Outstanding .................................................................. 99
Working Capital Turnover ............................................................. 101
Conclusion ................................................................................... 102
Profitability Ratio Analysis ................................................................ 104
Gross Profit Margin ....................................................................... 104
Operating Expense Ratio ............................................................... 105
Operating Profit Margin ................................................................. 107
Net Profit Margin .......................................................................... 108
Asset Turnover............................................................................. 109
Return on Assets .......................................................................... 111
Return on Equity .......................................................................... 112
Conclusion ................................................................................... 114
Firm Growth Rate Ratios .................................................................. 115
Internal Growth Rate .................................................................... 115
Sustainable Growth Rate ............................................................... 117
Conclusion ................................................................................... 118
Capital Structure Ratios ................................................................... 119
Debt to Equity Ratio ..................................................................... 119
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Times Interest Earned .................................................................. 121
Debt Service Margin ..................................................................... 122
Altman’s Z Score .......................................................................... 124
Conclusion ................................................................................... 125
Forecasted Financial Statements .................................................. 127
Income Statement .......................................................................... 127
Sales Forecasting ............................................................................ 127
Expense Structure ........................................................................... 129
Income Statement Restated ............................................................. 129
Balance Sheet ................................................................................. 129
Balance Sheet Restated ................................................................... 130
Statement of Cash Flows ................................................................. 131
Cost of Capital Estimation ............................................................. 142
Cost of Equity ................................................................................. 142
Size Adjustment .............................................................................. 145
Alternative Cost of Equity ................................................................ 145
Cost of Debt ................................................................................... 147
Weighted Average Cost of Capital .................................................... 151
Valuation Methods ......................................................................... 154
Method of Comparables ................................................................... 154
Price/Earnings Trailing .................................................................. 155
Price/Earnings Forecast ................................................................ 155
Price/Book ................................................................................... 156
Price/Earnings Growth .................................................................. 157
Price/EBITDA ............................................................................... 158
Enterprise Value/EBITDA .............................................................. 159
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Price to Free Cash Flows ............................................................... 160
Dividends/Price ............................................................................ 160
Conclusion ................................................................................... 161
Intrinsic Valuation Models ................................................................ 161
Discounted Dividends Valuation ..................................................... 162
Discounted Free Cash Flows Valuation ........................................... 164
Residual Income Valuation ............................................................ 167
Abnormal Earnings Growth Valuation ............................................. 170
Long-Run Residual Income Valuation ............................................. 173
Analyst Recommendation ................................................................ 176
Appendices ..................................................................................... 178
A: Sales and Expense Manipulation Diagnostics ................................. 178
B: Restating Financial Statements .................................................... 181
C: Financial Analysis ........................................................................ 183
D: Regressions ............................................................................... 188
E: Method of Comparables ............................................................... 198
F: Valuation Models ......................................................................... 201
Industry Terms Glossary ............................................................... 210
Sources Cited ................................................................................. 217
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Executive Summary
Analyst Recommendation: Buy (Slightly Undervalued) As of April 1st, 2009
2004 2005 2006 2007 2008
Initial Scores 2.59 2.31 1.88 1.83 1.97
Revised Scores 2.32 1.54 1.26 1.16 1.24
As stated Restated$57.79 $64.19
0.17 0.17
0.08 0.05
Estimated R-Squared Beta Size Adj. Ke
3 Month 0.6674 1.897 0.1847
1 Year 0.6651 1.859 0.1821
2 Year 0.6674 1.892 0.1843
5 Year 0.6671 1.885 0.1839
10 Year 0.6665 1.879 0.1834
As Stated Restated
0.1166 0.1612
0.0412 0.0418
0.1048 0.0879
1.7
WACC Upper WACC Lower
0.122 0.0875
Cost of Debt
WACC (BT)
Published Beta
Return on Equity
Book Value Per Share
1.70 Billion
$20.38 - $ 87.79
Backdoor Ke
Long Run Residual Income
Abnormal Earnings Growth
Residual Income
Intrinsic Valuations
Trailing P/E
Forward P/E
Price to Book
P.E.G Ratio
$36.01
$49.71
$49.15
$63.39
$21.76
$27.59
$25.19
$25.59
$9.44 -----
$78.36 -----
EV/EBITDA
Price to FCF
Dividends to Price
$8.91
$27.80
Discounted Dividends
Free Cash Flows
$47.67
$11.22
$16.87 $16.87
OSG ‐ NYSE (04/01/2009) $24.03 Altman Z‐scores
Cost of Capital
Current Market Share Price (04/01/2009) $24.03
$32.51
($47.53)
As Stated Restated
Return on Assets
700.19 Million
39,590,759
52 Week Range
Revenue
Market Capitalization
Shares Outstanding
Financial Based ValuationsRestatedAs Stated
$26.75
$33.38
$47.52
$32.73
$29.91
$39.22
Price to EBITDA
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Industry Analysis
Overseas Shipholding Group is an energy shipping company that takes part in
the transportation of crude oil, petroleum products, and liquefied natural gas. OSG is
one of the largest tanker companies and is competitive both internationally and in the
US Flag markets. OSG’s main competitors include Frontline Ltd, Teekay Shipping
Corporation, and Tsakos Energy Navigation. To remain competitive in this industry, OSG
relies on its diverse fleet of vessels to satisfy customer needs. Below is a table of the
five forces that affect the degree of competition within this industry.
Competitive Force Degree of Competition
Rivalry Among Existing Firms High
Threat of New Entrants Moderate
Threat of Substitute Products Low
Bargaining Power of Customers Low
Bargaining Power of Suppliers High
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Since there is not a significant difference between the types of services that each
of the companies in this industry perform, the companies must compete on price to
attract customers in this highly competitive industry. The rivalry among existing firms is
considered high and leading firms in this industry are diversifying the types of services
that they offer to offset the risk that is associated with relying only on crude oil
transportation and also gain an advantage in other market segments. Transporting
petroleum products, liquefied natural gas, and transporting crude oil within the US Flag
market are just some of the additional market segments that competitive firms are
involved in. One of the ways that companies in this industry grow and diversify is by
acquiring smaller companies and their vessels.
The treat of new entrants is considered moderate since it would not be
considered difficult to enter the industry, but it would be difficult to stay competitive in
the long run with the industry leaders who are involved in multiple market segments to
offset risk. High competition in this industry also exists because of the high bargaining
power of suppliers. The largest shipbuilders decide on which business they would like to
accept and building larger vessels can take years to complete. On the other hand, since
there are limited alternatives to transport products around the world, the shipping
industry has a very low threat of substitute products.
The main key success factors in this industry are cost control and differentiation.
Reducing costs is possible by having low input costs and maintaining tight cost controls.
These are very important in this industry where competing on price is the focus to
attract potential customers. Also, differentiation in the energy shipping industry can
include having the highest quality vessels with updated technology for reliability and
safety.
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Accounting Analysis
Accounting analysis plays a large role in valuing a company because it
determines whether or not the key accounting policies reflect the company’s true value.
Because accounting numbers are man-made, they are subject to errors and
manipulation, which can portray the financial status of a firm inaccurately. When
compared to other energy shipping companies in the industry, Overseas Shipholding
Group was conservative in their accounting policies and, therefore, was effective in
accurately portraying the company. The key success factors for the energy shipping
industry were cost leadership, including: operating leases, goodwill, hedging activities,
and benefits and pension plans; and differentiation, including a mixture of superior
product quality and variety.
Operating leases are an important key success factor in the energy shipping
industry because vessels have high fixed to variable costs, and managing these fixed
assets through operating leases reduces excess capacity. Operating leases also reduce
the firm’s liabilities, assets, interest expense, and depreciation. Overseas Shipholding
Group would be considered moderately aggressive in their reporting of operating leases
because the lease periods are about as long as the life of the vessels. We believe that a
discount rate for capital leases would be useful in capitalizing existing operating leases.
Goodwill is difficult to account for and even harder to measure in terms of
business activities. It can, however, be used to make a firm look more favorable in
investors eyes. Goodwill is only a small portion of OSG’s assets and the company states
that it impairs goodwill on a yearly basis as required by SFAS 142. Total assets would
be overstated if goodwill is left on the balance sheet and not impaired. Companies that
report goodwill on their balance sheets have more accounting flexibility than companies
who do not. OSG’s goodwill represents only 1.74% of total assets. The company is
considered conservative in reporting net income because goodwill is maintained at less
than two percent of total assets.
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Hedging activities are common in the energy shipping industry because of the
unstable nature of the market. OSG participates in hedging activities to reduce future
risks that may be encountered. Many companies enter into Forward Freight Agreements
to reduce exposure to changes in spot market rates. Interest rate swaps are another
hedging activity that allow companies to be unaffected by changing interest rates other
firms may be forced to use. Forwards contracts are yet another hedging activity that
promises a fixed rate in the future, ignoring any fluctuations in the value of foreign
currency. There is a very low degree of flexibility when reporting hedging activities. It is
difficult for a firm to use conservative or aggressive accounting strategies in the area of
hedging because estimates are similar and guidelines are strictly enforced.
Lastly, Benefits and pension plans are recorded on the balance sheet at present
value as liabilities. Because the rates on these plans are primarily created by the firm,
they are subject to human error. OSG has a high disclosure of information regarding
benefit plans when compared with other companies in the industry, which affords OSG
a higher value over its competitors. Because OSG is the only company to disclose its
growth rates, we conclude that they use a conservative approach in presenting this
information.
Financial Analysis, Forecasting Financials, and Cost Estimations
Financial analysis involves examining a firm’s liquidity, profitability, and capital
structure through the use of financial ratios. The numbers computed by using these
ratios assist analysts in comparing a firm to its competitors over a long period of time.
The three types of ratios most used by firms are liquidity, profitability, and capital
structure.
Liquidity ratios measure a firm’s ability to pay off their short term debt
obligations. These liquidity ratios are compared to the ratios of other firms to determine
the credit risk of the individual company. Overseas Shipholding Group’s ratios indicate
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that they are the most capable of all the firms to cover their short-term debt
obligations. Profitability ratios measure how effective a firm has been at generating
revenues to create profit during a given year. Overall, OSG had a mixed profitability
performance. The firm’s ability to control costs, such as voyage expenses, has allowed it
to be an industry leader in gross profit margin measurements. Its operating expense
ratio and operating profit margin, however, is consistently below average because of
high charter hire expenses. OSG’s net profit margin, asset turnover, ROA, and ROE
have all been similar to industry averages and show signs of increasing trends, which is
favorable for the company. Capital structure ratios are used to determine how a firm
raises money to fund its investment and operating activities. The debt to equity ratio is
important because it provides insight to the firm’s default risk which describes the
creditworthiness company. OSG’s debt to equity ratio and debt service margin
consistently outperforms the rest of the industry.
Potential growth rates can be determined using sustainable and internal growth
rates after computing the liquidity, profitability, and capital structure ratios. OSG has
been performing around the same level as its competitors, and when it comes to
potential growth, the firm shows nothing that would give investors a reason to believe it
will grow at a greater rate than its competitors in the future. Due to the nature of the
energy shipping industry and the size of OSG, it seems that the firm will continue to
perform at the industry average in the long run.
The cost of capital estimation measures the opportunity cost of an investment
and is also necessary in valuing a firm. Cost of capital is made up of the weighted
average cost of debt and equity. The cost of equity is the minimum rate of return a firm
must offer shareholders for risk compensation. When using the capital asset pricing
model (CAPM) the cost of equity equals the beta of the firm times the return of the
market minus the risk free rate plus the risk free rate. From our regression analysis, we
found our beta to be 1.897 and stable across the time period; meaning OSG’s
systematic risk is not changing over time. Using the CAPM equation and filling in the
beta, the MRP of 6.8% and the risk free rate of 2.87%, we found the cost of equity to
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be 15.77%. We found the cost of debt by multiplying the weighted average of the
liabilities by the interest rates assigned to the liability. The weighted average cost of
capital (WACC) could then be found using the cost of equity and cost of debt. OSG’s
size adjusted weighted average cost of capital before taxes is 10.48% and, using the
effective tax rate of 35%, is 9.67% after taxes. Because OSG has large amounts of
long-term liabilities such as leases and tankers, we believe the range of eight to twelve
percent of assets to finance future business is an accurate number.
Before we were able to value the current position on this company, it was
necessary to forecast future financial statements based on the expectations. We
forecasted the income statement by starting off with the expected sales until 2018. It
was necessary to have forecasted financial statements for both as stated and restated
numbers. Since the restated statements capitalized the original operating leases, the
financial position would be different. The significant increases in liabilities after restating
would provide an alternative view when valuing the firm. These significant liabilities
would affect the firm if we consider it as overstated, understated, or fairly valued. After
completing the balance sheet, the statement of cash flows was forecasted by using
previously obtained ratios to link these statements with either the balance sheet or
income statement. We used the CFFO/Operating Income ratio to find CFFO since it
proved to be more consistent over time when compared to the CFFO/Net Income and
CFFO/Net Sales ratios. Also, the cash flows from investing were forecasted by taking
the yearly change in vessels at cost, minus accumulated depreciation. Lastly, we
simplified the CFFF by reflecting only the forecasted cash dividends paid to
stockholders.
Valuation Summary
The analysis that has taken place to this point will allow us to complete the final
step: accurately valuing the firm. To do this, we use the method of comparables and
intrinsic valuation models to compute an estimated price per share on the valuation
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date of April 1st, 2009. OSG’s market price per share on that date was $24.03. We used
a 15% margin of safety so if the model price is below $20.43 we considered the current
stock price overvalued and if the model price is above $27.63 we considered the current
price undervalued.
The method of comparables is a simply way of finding an estimated price per
share by using information provided by industry competitors. An industry average is
calculated for various ratios, and then working backwards with OSG’s information it is
possible to find an estimated value for the firm. Based on the P/E trailing, P/E
forecasted, P/B, P.E.G, price/EBITDA restated, and raw EV/EBITDA ratios, OSG is
currently undervalued and based on EV/EBITDA restated, P/FCF and dividends to price
ratios, OSG is currently overvalued. There will not be much weight placed on the
method of comparables because it is not theory-based and not the best way to
accurately value a firm.
Intrinsic valuation models offer theory-based assumptions and provide a more
accurate valuation of a firm. This accurate representation is due to the current
performance of the firm, which is taken into consideration in juncture with industry
trends. Sensitivity analyses are used to explain how changes in the cost of equity or
growth rate affect the time consistent price per share. Forecasted future values were
discounted back to April 1st, 2009 so that we had a time consistence price that could be
compared to the current market price of $24.03. Based on the overall valuations, we
feel that the intrinsic models suggest that OSG is currently a slightly undervalued
company.
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Business and Industry Analysis
Company Overview
Since Overseas Shipholding Group’s (OSG) founding in 1948, they have become
“one of the world’s leading bulk shipping companies engaged primarily in the ocean
transportation of crude oil and petroleum products.” (OSG 10-K) They currently
transport both liquid and dry bulk cargoes to both an international market as well as
within the borders of the United States. Most shipping companies are moving abroad to
cut costs and avoid U.S. regulations, but since OSG is committed to maintaining a
prominent presence in the U.S. shipping industry, they are “the only major tanker
company with a significant U.S. Flag and International Flag fleet.” (OSG.com)
Overseas Shipholding Group is headquartered in New York, New York with 10
other offices located both nationally and internationally. They also have nearly 4,000
employees who are based both onshore and offshore. Since November of 2006, OSG
has acquired three well-established shipping and lightering companies including
Maritrans Inc., Stelmar Shipping Ltd., and Heidmar Lightering. This shows that OSG is
beginning to grow and advance within their industry. Since OSG has a greatly
diversified fleet of vessels, it is difficult to place an exact competitor against them for
shipping in general. The closest competitors at this point in time would be Frontline
Ltd., Tsakos Ltd., and Teekay Shipping Corporation.
In order to transport their products, Overseas Shipholding Group relies on an
extremely diversified fleet of vessels. At the present time, they own and operate a fleet
of 112 vessels of varying sizes and types, which makes them the second largest publicly
traded oil tanker company in the world. Operating that many vessels also allows them
to compete in several different markets of energy transportation. Of the total 112
vessels currently in operation, 93 are used specifically in the international market and
the remaining 19 operate in the U.S. market. In order to stay as competitive as
possible, OSG focuses on four market segments instead of just one. Since their vessels
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are active in the crude oil, refined petroleum products, U.S. flag, and gas markets, they
can stay competitive even if one of the markets is in a downturn.
Industry Overview
Overseas Shipping competes in the energy transportation industry, specifically,
international flag product and crude carriers and U.S. Flag lightering. The industry is
characterized by economies of scale in moving large amounts of crude oil from the
Middle East, North Africa, The North Sea as well as other originates, to the large
industrialized economies of Europe, Asia and the United States. The business involves
arbitrage trades of moving excess diesel, a byproduct of crude oil refining, to Europe
and returning with excess gasoline. In addition, according to the Maritime Marine Act of
1920 (The Jones Act), any military or precious cargo must be transported on a vessel
constructed, owned by a United States corporation and operated by at least 75%
American citizens. This business is referred to the U.S. Flag ship business and involves
lightering (unloading cargo at a neutral destination and reloading to a U.S. Flag vessel)
operations to bring cargo to United States in accordance with the aforementioned act.
Ever since 1886, oil and gas has been transported on large carriers to
industrialized economies. Recent reductions in inventories by oil majors have prompted
increased demand for energy transport services. Middle Eastern oil producers are
located far from the largest consumers, necessitating long voyages, and thus, more
carriers. In addition to transporting oil and gas to refineries, a myriad of consumer
products are fashioned from petroleum products, most notably, plastic products. These
consumer products require the transportation of oil for use as a raw material, as well as
the subsequent exporting activity that utilizes the product carrier market.
Energy shipping firms connect with customers through the spot market for
various transport distances as well as time charter arrangements. Time charters allow
the customer to use a vessel for a specified period of time for a specified price. The
spot market matches owners of vessels with customers on a short-term, per-day basis.
Overall, the energy shipping industry is an undercurrent to economic growth, through
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the needs of transportation, product, heating and other uses, and should be expected
to grow with the world economy.
Five Forces Model
Analysis of a particular firm would be useful for a prospective investor. In order
to effectively value and analyze a firm, a quantitative analysis approach is needed to
consider the industry as a whole. Michael E. Porter’s Five Forces Model allows a
framework for such analysis. The model involves five key components which allow the
analyst to consider the industry’s overall profitability. The first three relate directly to
competition among actual and potential firms. By analyzing the rivalry among existing
firms, threat of new entrants and threat of substitute products, the measure of
competition can be obtained. The last two components of the five forces determine the
industries bargaining power of either suppliers or customers. When all five components
are considered, the firm’s competitive force, and thus, its profitability are valued. The
following table summarizes the degree of competition for each competitive force.
Competitive Force Degree of Competition
Rivalry Among Existing Firms High
Threat of New Entrants Moderate
Threat of Substitute Products Low
Bargaining Power of Customers Low
Bargaining Power of Suppliers High
Rivalry Among Existing Firms
When evaluating a business within an industry of rivals, it is vital to consider the
degree of competition within that industry. In an industry that is highly competitive,
pricing is the differentiating force that sets apart its competitors. In other industries,
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companies compete through other product features such as innovation or brand-image.
In order to determine the aspect that will set apart the firms image, consideration
should be given to industry growth, concentration of competitors, differentiation,
switching costs, economies of scale, fixed-variable costs, excess capacity and exit
barriers.
Industry Growth Rate
The growth rate in an industry is important to comprehend because of the
nature of an expanding firm. If the industry is growing at an increasing rate,
businesses do not need to compete on market share. But in some industries, as in the
energy shipping industry, the primary ways a firm can expand is by attempting to take
market share away from the competition or acquire (buy out) competitors. One way to
analyze market growth is to look at the sales figures of an industry.
Industry Sales (in thousands) Company 2002 2003 2004 2005 2006 2007
Overseas Shipholding
$297,283 $454,120 $810,835 $1,000,303 $1,047,403 $1,129,305
Frontline Ltd. $551,595 $1,161,383 $1,855,666 $1,495,975 $1,558,369 $1,299,927
Teekay Corp. $783,327 $1,576,095 $2,219,238 $1,954,618 $2,013,306 $2,406,622
Tsakos Ltd. $130,004 $241,365 $318,278 $295,623 $427,624 $500,617
Total $1,764,211 $3,432,963 $5,204,017 $4,746,519 $5,046,702 $5,336,471
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Percentage Change in Sales Company 2002 2003 2004 2005 2006 2007
Overseas Shipholding -36.66% 52.76% 78.55% 23.37% 4.71% 7.82%Frontline Ltd. -23.01% 110.55% 59.78% -19.38% 4.17% -16.58%Teekay Corp. -24.61% 101.21% 40.81% -11.92% 3.00% 19.54%Tsakos Ltd. 3.98% 85.66% 31.87% -7.12% 44.65% 17.07%
Total -24.92% 94.59% 51.59% -8.79% 6.32% 5.74%
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
2002 2003 2004 2005 2006 2007
Industry Sales
Industry
Measured In Thousands of Dollars
‐40.00%
‐20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
2002 2003 2004 2005 2006 2007
Industry Sales Growth
Series1
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The above graph indicates that the industry experienced high growth in the early
2000’s, but has since experienced a decreasing growth trend. In the 2007 fiscal year,
the industry only experienced a 6.24% increase in sales compared to the 2003 fiscal
year when it experienced a 79.26% increase. Sales in the industry have stayed at a
steady growth, but significant increases in sales between 2002 and 2004 surpass these
newer growth patterns in comparison. Because of the relative decrease in the market
sales in the past two fiscal years, pricing wars might become more common in the
future.
Concentration of Competitors
According to Palepu and Healy’s Business Analysis and Valuation, “the number of
firms in an industry and their relative sizes determine the degree of competition in an
industry.” If the firms have relatively equal market share, then they will try to follow
pricing patterns of the other companies in the industry. Also, if the industry is
fragmented, then price competition will become rigorous due to multiple companies
competing for better share of the market. If the industry has one dominant firm, then
that business sets prices for the whole market and the rest tend to follow.
Market Share Percentage of Total Industry Sales Company 2003 2004 2005 2006 2007 Overseas
Shipholding 13% 16% 21% 21% 21%
Frontline Ltd. 34% 36% 32% 31% 24% Teekay Corp. 46% 43% 41% 40% 45% Tsakos Ltd. 7% 6% 6% 8% 9%
Total $3,432,963 $5,204,017 $4,746,519 $5,046,702 $5,336,471
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According to the 2007 market share graph, Teekay Corporation is the dominant
firm in this industry. These findings give evidence that there is unequal dominance in
this industry. The energy shipping industry has been around since the early 19th
century which hinders the introduction of large public firms to the industry, but does
not render it impossible. Furthermore the Herfindahl-Hirschman Index, which is a
commonly accepted measure of market concentration on a scale of zero to 10,000, only
measures to 534.14. This indicates a low concentration of firms for an industry of this
size on a global scale. This provides further evidence that, upon entry into the industry,
it is unlikely the new firm would obtain a large share of the market.
Level of Differentiation Differentiation is the company’s ability to enhance or change a product or service
to set itself apart from the competition. If the product or service offered by the
competing firms is similar, there exists a low degree of differentiation. Thus, the
customer chooses the firm on the basis of competitive pricing. The level of
differentiation among competing firms could be determined by several factors. One
such factor in the energy shipping industry could be shipping locations. It would stand
to reason that a potential customer would more readily utilize the services of a
particular company if that company had shipping locations close to the customer. In
21%
24%45%
10%
2007 Market ShareOverseas Shipholding Frontline Ltd. Teekay Corp. Tsakos Ltd.
Page | 22
this industry, most firms participate in a global market minimizing the importance of
differentiation among shipping locations. Another differentiation factor is the use of
commercial pools (i.e. partnerships between firms) to network equipment use across
global locations. However, because many firms in this industry participate in
commercial pools, this aspect would not be a significant determinant of differentiation
among competing firms. Because of a similar service product line, the energy shipping
industry is mainly competitive through its pricing strategy.
Switching Costs
Switching costs determine a firm’s commitment to specialization within an
industry. Low switching costs indicate that a firm can use its production capital or
services for another business activity. Alternatively, high switching costs demonstrate
that companies use customized assets that could not be used in an industry with
differing business activities. Because the energy shipping industry has highly
customized production assets (tankers), they have high switching costs. Energy
shipping tankers are highly customized because they must meet certain regulations,
such as double thick hulls. The only low switching cost conversion would be to use the
tankers as offshore floating storage. Shipping companies presently engage in this
activity when low demand drives petroleum shipping rates up, “the decline in demand
already has pushed millions of barrels of oil into storage terminals and onto tankers
offshore” (WSJ-Oil Price Falls, Inventories Rise). These companies already understand
the risks involved with floating storage. When floating storage is only used during
times of low demand, profits are lost to the high rates and low activity of ships. “Tanker
rates have skyrocketed in the past couple of months, making oil storage more
expensive and wiping out some of the potential profits to be made with floating
storage” (WSJ-Oil Prices). Since these profits are lost during times of low demand,
firms would only engage in storage of oil products when high demand stimulates rates
low enough to realize a profit. This provides evidence that this industry has high
switching costs, but only at times of high demand for their services.
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Economies of Scale
The chart below highlights the total assets of the major shipping firms. The
information was provided by the 10-k’s of each company.
Total Assets (in thousands) Company 2002 2003 2004 2005 2006 2007
OSG $2,034,842 $2,000,686 $2,680,798 $3,348,680 $4,230,669 $4,158,917Frontline $3,034,743 $4,463,535 $4,338,760 $4,454,817 $4,589,937 $3,762,091Teekay $2,723,506 $3,588,044 $5,503,740 $5,294,100 $7,733,476 $10,060,153 Tsakos $694,545 $825,507 $937,938 $1,089,174 $1,969,875 $2,362,776Total $8,487,636 $10,877,772 $13,461,236 $14,186,771 $18,523,957 $20,343,973
According to Palepu and Healey, size is “an important factor for firms in the
industry.” Logistics, relationships with customers, and fleet size are where the
economies of scale lie within the shipping industry. The shipping industry’s market
concentration is high. A select number of companies dominate the market, operating
with large fleets and using commercial pools to gain more market share which make it
harder for the smaller firms to compete on that level.
Fixed-Variable Costs
“If the ratio of fixed to variable costs is high, firms have the incentive to reduce
prices to utilize installed capacity” (Palepu & Healy). Most firms will try to increase
demand to reduce fixed costs. In the shipping industry, the fixed costs of the firm are
high because of things like maintenance, dry-docking fees, and operating leases. The
variable costs of the shipping industry include voyage expenses and tariffs. These
variable costs are not very high, especially when compared to the extremely high fixed
costs. Although the ratio of fixed costs to variable costs is high, the fixed costs can be
managed through charters and commercial pools.
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Excess Capacity
Palepu and Healey state: “If capacity in an industry is larger than customer
demand, there is a strong incentive for firms to cut prices to fill capacity.”
Percentage Change in Sales
Company 2002 2003 2004 2005 2006 2007
Overseas Shipholding -36.66% 52.76% 78.55% 23.37% 4.71% 7.82%
Frontline Ltd. -23.01% 110.55% 59.78% -19.38% 4.17% -16.58%
Teekay Corp. -24.61% 101.21% 40.81% -11.92% 3.00% 19.54%
Tsakos Ltd. 3.98% 85.66% 31.87% -7.12% 44.65% 17.07%
Standard Deviation 17.55 25.36 20.76 18.77 20.35 16.48
The chart above indicates that the industry experiences volatility in sales because
it is dependent on demand of petroleum products which influences spot and charter
rates. The shipping industry has high potential for meeting excess capacity because of
the potential to have too many tankers and not enough oil to ship if demand for oil
decreases. OSG is the only company that discloses any form of excess capacity. This is
measured by revenues compared to owned boats, and revenues compared to chartered
boats. The excess capacity is seen through the total amount of boats (with newbuilds)
compared to total shipping revenues. This excess capacity is displayed in the table
below.
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Relation of Vessels to Revenue Days
Excess Capacity Number of Boats Revenue Days Revenue Days Per
Boat
2002 55 15,199 276.35
2003 53 15,284 288.38
2004 62 17,579 283.53
2005 107 30,645 286.40
2006 137 29,757 217.20
2007 156 35,619 228.33
2008 154 39,709 257.85
As seen in the graph above, the percent of revenue days per boat increases from
2007 to 2008. This is due to the fact that OSG decreases its number of operating
vessels from 2007 to 2008. This percentage can determine the excess capacity for
276 288 284 286
217 228258
0
50
100
150
200
250
300
350
2002 2003 2004 2005 2006 2007 2008
Revenue Days per Boat
Revenue Days per Boat
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OSG, this is because the excess capacity of revenue days shifts from 156 vessels to only
154 vessels. This does not seem significant in the grand scheme, but this does
considerably increase revenue days per boat. The energy shipping industry will cut the
cost of shipping if there is an excess capacity of tankers. When excess capacity is high,
consumers enjoy a reduction in shipping rates and when excess capacity is low,
consumers experience increases in shipping rates. Excess capacity in the shipping
industry is volatile, as is the demand for the oil that it carries.
Exit Barriers
In the energy shipping industry, exit barriers are not high. These company’s
assets are fixed in their tankers, which are in high demand within the market. A
company could easily exit the industry just by selling its fleet. These used tankers are
also selling for the same price as new ones. There is not any strict regulation on exiting
the shipping industry.
Conclusion
Rivalry among existing firms is a critical component of evaluating an industry’s
level of competition. The energy shipping industry has a competitive environment
because the industry experiences entry barriers, but they are not completely prohibitive.
Furthermore, firms experience difficulty differentiating. Because the concentration of
competitors, economies of scale, and fixed to variable costs are all high and industry
growth, differentiation, switching costs, exit barriers and excess capacity are low, the
energy shipping industry can be considered price competitive when considering the
rivalry amongst existing shipping firms.
Threat of New Entrants
In a particular industry, firms should not only focus on rivalry from existing firms
but also from new businesses. High levels of profitability within an industry will attract
new entrants. New entrants will ultimately increase the level of competition and affect
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future profitability for the existing firms. Firms already in an industry benefit if barriers
make is difficult for outside businesses to come in and take part of the market share.
This threat depends on four factors: first mover advantage, distribution access and
relationships, economies of scale, and legal barriers.
First Mover Advantage
In certain industries, existing firms have an advantage over possible new
entrants due to the first mover advantage. First movers are able to set trends in an
industry and move ahead of the competition while everyone else tries to catch up. This
advantage usually takes place in industries where customers that change companies
incur high switching costs. In the energy shipping industry, there is not a significant
first mover advantage because it is easy for customers to switch to a different company
for their shipping needs. Customers mostly look at price and the specific type of vessels
they need when shipping crude oil, oil products, and liquefied natural gas. Existing firms
have gained a reputation with certain customers, but these firms would not have much
of an advantage if a new firm entered the industry with much lower shipping rates or
new bigger vessels. Overall, the relatively low effects of the first mover advantage
increase the threat of new entrants in this industry.
Access to Channels of Distribution and Relationships
Channels of distribution are an important part of every firm’s process to get the
final product out to the customers. Firms currently in the industry have the advantage
of having access to channels of distribution and forming relationships with not only
customers but also with each other. Certain firms have commercial pool agreements
with each other to operate more efficiently and be more cost effective. “Under a pooling
arrangement, different vessel owners pool their vessels, which are managed by a pool
manager, to improve utilization and reduce expenses (TK 10-K). These commercial
pools also allow businesses to provide better service to their customers. Although not all
firms operate under commercial pools, they allow existing firms to be more productive
and utilize the benefits from their relationships. These factors make it more difficult for
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new entrants to enter this industry and have an immediate effect. There are no specific
barriers to prevent new entrants to start commercial pools but forming relationships
within this industry takes time. While access to channels of distribution and forming
industry relationships puts new firms at a slight disadvantage, they do not significantly
lower the threat of new entrants.
Economies of Scale
Operational efficiency improves if there are large economics of scale. This is
another factor that new firms look at to see what they need to do to become
competitive. In the energy shipping industry, there are large economies of scale with
firms that have large total assets. Specifically, firms invest in vessels by buying, leasing,
or building them. In this industry, it is also common for larger firms to acquire smaller
businesses. When a business is acquired, so are all of the vessels and other assets that
were owned by that business. This is one reason it would be difficult for a new entrant
to compete in this industry.
Another reason that new entrants would have a difficult time in this industry
would be because the most successful firms are diversifying the types of vessels they
have to protect themselves from spot markets. Historically, spot markets have been
known to have higher rates of return than other more stable business sectors. Spot
markets have varying rates that can be very risky for firms in the industry that solely
rely on them. Existing firms go into different sectors of the industry to minimize this
risk. For a new entrant to fully compete with an existing firm, they would need to
strongly invest in fixed capital. A new entrant can easily enter this industry and focus on
one sector, but for long term success and the ability to compete with industry leaders,
diversity is very important. For this reason, economics of scale are one of the factors
that decrease the treat of new entrants in the energy shipping industry.
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Legal Barriers
It is important for new firms to understand the legal barriers that exist when
entering an existing industry. The energy shipping industry has laws and regulations
that are getting tougher and constantly changing. New firms have to abide by the laws
in areas in which their vessels operate. This would include local, state, national, and
international regulations. Vessels are also subject to scheduled and unscheduled
inspections by government and private organizations that make sure safety and
environmental standards are being followed (OSG 10-K). Also, the areas in which a new
company’s vessels will operate will determine the required licenses and permits that will
need to be acquired. Firms that fail to meet certain requirements in this industry risk
the possibility of severe fines. Although there are several legal requirements that new
firms need to follow, there are also regulations that every firm in this industry, new or
existing, must comply with. For this reason, legal barriers are not a major factor in the
threat of new entrants.
Conclusion
In the energy shipping industry, the threat of new entrants is moderate. The
biggest barrier that new firms have when entering this industry is obtaining the high
levels of capital that are required to remain competitive with industry leaders. A
company would have to invest in property, plant, and equipment, specifically shipping
vessels because of the large economies of scale. Although new entrants would start off
in this industry at a disadvantage because of the first mover advantage and access to
distribution channels, these are major factors that new entrant would be able to
overcome. Also the laws and regulations that new entrants would need to follow are the
same as existing firms, so there is not an advantage for either side on the legal barrier
issue. Overall, if a new entrant can enter the industry with a large diverse fleet of
vessels and start forming relationship with potential customers by offering lower
shipping rates, they could become a threat to existing firms.
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Threat of Substitute Products
The function that a company performs is the primary factor to consider when
evaluating the threat of substitute products. Since not all companies produce the same
product, it is important to analyze the function that each company or product performs
in order to determine whether or not they can be considered a substitute of one
another. When you consider the shipping of crude oil and petroleum products overseas,
there will not be much variation between companies in the functions they provide.
Therefore, there are a few other key factors to consider when determining substitute
products. “The threat of substitutes depends on the relative price and performance of
the competing products or services and on customers’ willingness to substitute” (Palepu
& Haley).
Relative Price and Performance
Two products can be considered substitutes if they perform the same function
for a very similar price. When two different products perform the same function for the
same price, it makes the customers focus more on the price then the product itself.
This makes a competitive price scheme very important to industries with low product
differentiation.
The energy shipping industry would fall into the low product differentiation
category, so it is important for their prices to stay competitive. Companies that ship
crude oil and other types of energy products provide similar functions. When a potential
buyer is looking for energy shippers, they simply need a vessel that can store and
transport their shipment to its final destination. Since most companies in the energy
shipping industry can satisfy the needs of potential customers, the price is the
differentiating factor. In order for companies to gain a competitive price advantage, to
gain increased revenue, internal costs must be kept at a minimum. If the shipping
company maintains low production costs, it will be able to, in turn, charge a lower fee
to the customer and eventually gain more business.
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It is pivotal for the success of companies in an industry such as this to perform
at a level that is satisfying to their customers. The performance of a company in an
industry with low service differentiation is what could potentially set them apart from
the rest of their competitors. If specific companies continually satisfy their customers
with their performance they could keep those customers for an extended amount of
time, even if their prices vary.
Customers’ Willingness to Switch
When firms are competing in an industry with low product or service
differentiation, buyers are attracted to firms that offer lower prices. This holds true for
the energy shipping industry, for which customer’s switching costs are low. With the
possibility of a high customer switching rate, an energy shipping company must
differentiate itself from the competition in ways other than pricing. Gaining customer
loyalty by providing shipping benefits or rebates are a few ways to earn a competitive
edge.
Conclusion
In order for a company to stay competitive in an industry with low product or
service differentiation, focus must be given on competitive pricing and improving
internal and external performance. If pricing and performance are favorable,
customer’s willingness to switch may not be a threat. Firms must keep internal costs
low so that they can afford to give their customers a lower price. It is also important
for a company to continually provide its customers with satisfying performance to gain
a loyal customer base. Since the threat of substitute products in this type of industry is
low, a company must find alternatives to pricing in order to set itself apart from the
competition.
Bargaining Power of Customers
Petroleum is shipped all over the world on a daily basis creating a large demand
for oil tankers to transport the petroleum from one country to another. In a commodity
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industry like energy shipping, it is important for companies to try and differentiate their
service as much as possible. Companies strive to keep shipping costs at a minimum,
creating price competition within the industry. This price competition gives the
customer control over the industry, allowing them to shop around for the best company
based primarily on price.
Switching Costs
Services in the industry are very similar which cause switching costs in the
industry to be low. There are many competitors in the industry, which creates price
competitions. The customer has the opportunity to compare the prices of each company
and choose the company that has the best price. However, because in the industry
customers ship such large amounts of petroleum, some customers might consider
paying slightly more for a more reliable or familiar company.
Differentiation
In any industry, it is important to differentiate products or services as much as
possible. Services in this industry are very similar, but many companies try to
distinguish their slight differentiations from other companies that they believe make
them a better choice. Some companies advertise the young age of their fleet and
others might advertise the size of their ships. In this industry differentiation can help to
win over a customer and gain their business for many years.
Importance of Product for Costs and Quality
In petroleum shipping price competition is highly important. The industry works
hard to compete on prices because the shipping industry is very homogeneous and
prices are elastic. Many customers are drawn to the lowest possible price because they
are shipping a large amount of petroleum. It is important for companies to keep their
prices in the same range because any company with a price too high will lose business.
When prices are comparable, companies will remain with the same company. Other
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customers will switch according to the lowest price. Product cost is an important
component in competing for customers.
Number of Buyers
The energy shipping industry services a high volume of customers. Most of
these customers are made up of major oil and gas companies, as well as, refiners and
traders (osg.com). Customers include large companies such as, BP, ExxonMobil,
ChevronTexaco, Valero, and ConocoPhillips (osg.com). Although there are many large
clients, a substantial amount of small firms play a part in the entire industry. Since
there are a large number of patrons that ship oil and petroleum products, the shipping
firms retain the bargaining power over the customers.
Volume Per Buyer
Within the energy shipping industry, the amount customers need to ship varies.
Since the shipping volumes vary, the industry incorporates many different kinds of
vessels to meet specific customer needs. These vessels’ volumes range from 500,000
to three million barrels of oil. When demand drops and rates are up, customers decide
to ship less. This causes companies to employ the use of their smaller capacity vessels
such as their 500,000 barrel Suezmax carriers. Volume per buyer in the shipping
industry is volatile since firms can meet the varying needs of the customers. This keeps
the bargaining power of customers low in the energy shipping industry.
Conclusion
In the energy shipping industry, low switching costs allow customers to move
with ease from one shipping firm to another. Such movement is determined by the
shipping firm’s differentiation, which is essentially age of the fleet and sizes of the
ships. The competition generated by such differentiation renders the service cost and
product quality important. Additionally, numerous buyers give bargaining power to the
shipping firm. This balance of competition and demand makes the energy shipping
industry a catalyst to low bargaining power of customers.
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Bargaining Power of Suppliers
The profitability of the sea transportation industry depends on a myriad of
factors like spot rates, charter rates and new ship build costs. In order to understand
the power suppliers have in this relationship, we will need to understand who provides
the inputs in which we add value. The relative power of these suppliers will affect the
profit margins of our business and theirs. When our industry is experiencing rapid sales
growth, as it did in 2006, suppliers want to increase their margins as well. Alternatively,
when our industry is contracting, as it did in 2001, neither suppliers nor users want to
reduce their operating margins. Both parties relative success in this dynamic
relationship will be the topic of the following discussion.
The sea transportation industry has few suppliers. Primarily, the suppliers are
shipbuilders, diesel used to propel the voyage, as well as the crew members on the ship
itself. Understandably, the most significant supplier in this relationship is the shipbuilder
because of their large contribution to our overall costs. For this analysis, we will ignore
the costs of diesel and personnel, because of their miniscule contribution to our costs
structure.
Switching Costs
In the context of supplier relationships, switching costs refer to the propensity
for the company to switch suppliers. If a supplier makes a critical component used in
the company’s product, and a limited number of alternative suppliers exist, the supplier
has significant power through the companies’ unwillingness to switch suppliers.
The sea transportation industry’s primary suppliers are the ship builders. Ship
builders are large, numerous and primarily Asian domiciled companies. Shipping
companies have very little customer loyalty as to who builds their tankers because of
the build-to-order and lengthy build time nature of the industry. Therefore, many
shipping companies have a number of ships made from multiple shipyards. The
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following chart reflects the diversity in shipyards supplying the vessels for the frontline
fleet.
Differentiation
Suppliers have more power over their customers if their products are of a
differentiated nature. The degree to which the inputs for the company are a commodity
or homogeneous nature influences the suppliers bargaining power over the company.
Alternatively, if the product the supplier sells is highly unique and proprietary, the
supplier has more power to dictate pricing over the company because of the lack of
relative substitutes. The following section will discuss the degree in which shipbuilders
build differentiated products and the price premiums warranted for these specialized
tankers. In particular, we will examine the recent trends in ship design and how the
industry is responding to these new products.
Sea transport companies differentiate themselves by how modern and
technologically advanced their fleet is as well as their age. It is imperative to
understand the advantages these modern fleets bring to the shipping company in order
to measure the recoverability and longevity of their assets. Additionally, as ship builders
can be more selective in the ships they build, it is important to determine if these high
10
13
86
6
4
7
Frontline Vessels by Shipyard
Hitachi
Hyundai
Samsung
Daewoo
Jinhaiwan
SWS
Other
Page | 36
value added tankers really warrant the premium charged and the advantages are truly
unique to that shipbuilder.
Ship builders tend to make standardized products with few differences in the way
their products operate. For instance, liquid national gas carriers are seen in the industry
as being a higher-value added product, and thus warrant a price-premium. Similarly,
floating, production, storage and offloading vessels have emerged in recent years as an
“all-in-one” tanker with natural gas liquefaction and refining capabilities onboard.
However, these are unique examples in respect to the industry as a whole. The vast
majorities of tankers are highly similar and are differentiated on dead weight tons
alone. An example of this is the emergence of ULCCs (ultra large crude carriers) which
are tankers over 400,000 DWTs, and V-pluses, which are 50% larger than traditional
VLCCs (200,000+DWT). Due to the industries primary focus on cost, innovation in
tanker technology slants toward making larger ships that can take advantage of
economies of scale.
Daewoo Shipbuilding and Marine Engineering claims their proprietary pre-swirl
stator, which better directs water to the propeller, decreases fuel consumption by
5~6%. Similarly, their Computational Fluid Dynamics hull designs reduce the effect of
waves on the stability of the tankers, thus decreasing fuel consumption and increasing
operating efficiency. Hyundai heavy industries pride itself on its engine technology that
is expected to lower maintenance costs over the life of the tanker. Overall, the
significant differences in tankers are their capacity, with Daewoo Shipbuilding leading
the shift to ULCCs.
Importance for Cost and Quality
In any industry, the nature of the input for cost and quality determines how
powerful a supplier can be to the company as a whole. If it is not important for the
input to be of relatively high quality, cost competition is sure to occur and the
bargaining power of the supplier is diminished. Alternatively, if the input is needed to be
of relatively high quality, a supplier can leverage more power in the relationship. This
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section will analyze how important the ships are for cost and quality, and thus, how
much power the suppliers have in this situation.
The fixed assets of vessels represent a significant portion of the cost structure to
the shipping company. Depreciation and vessel expenses are the primary expense to a
shipping company and understanding the importance of vessel price and quality is
essential to creating a perspective of shipping companies and the relationship they have
with their suppliers.
Vessel cost and quality are critical in the consideration of expense management
and used ship sales revenue. Ship costs have much less to do with the costs of their
inputs, like labor and steel, than they do with expected future freight rates. Considering
how singular the supply chain is to a shipping company, it is very important for a
shipping company to understand the market for ships and freight rates, and therefore
manage their fleet through time-charters and sale and lease backs.
In order to examine the relative importance of ships to the overall cost structure,
we will look at how ship costs affect the income statements of Frontline, Overseas
Shipping and Teekay. For this analysis, we will use vessel expenses, which include all
maintenance and dry-docking expenses, to measure ship quality. Additionally, we will
look at depreciation, amortization and time-charter expenses to measure initial ship
purchase price relative to total expenses.
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As the figure indicates, depreciation and charter expenses represent a significant
portion of the cost structure, ranging from 30-48% of total expenses. This represents
the amortization of the purchase price of the vessels along with “rent” on vessels
owned by another independent operator, or sale-and-leaseback transactions. Vessel
expenses are included to show maintenance, repair and subsequent dry-docking fees
associated with the vessels themselves. In aggregate, these expenses represent 52-
78% of total expenses, placing high importance on ship quality and cost in the
industry’s key success factors.
Number and Volume of Suppliers
The number of suppliers in an industry affects the availability of inputs used for
value creation. For whatever reason, if a limited number of suppliers exist, firms must
manage relationships in order to guarantee continuous supply of raw materials, in this
case, shipping vessels. Similarly, the volume per supplier influences the relative power
of suppliers over buyers in the industry. If the market share of the various suppliers is
highly fragmented, purchasers are more dependent on a handful of suppliers and must
manage these relationships with sustainability in mind. Alternatively, if the market is
flush with firms willing to supply an input and market share is reasonably distributed,
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
OSG Teekay Frontline
Remaining Expenses
Vessel Expenses
Charter Expenses
Depreciation
Page | 39
purchasers have much more bargaining power by being able to auction their upstream
needs.
The shipbuilding industry has numerous suppliers, but market share is highly
fragmented as well. The largest shipbuilders have the luxury of discerning what
business they would like to accept, that is, the high value added, high margin vessels.
Samsung Heavy Industries’ shipbuilding slogan is emblematic of this approach:
“Generating high profits by selectively receiving orders for high technology and high
value added ships.” Backlog for new builds is between 2-3 years across the industry and
build-time is around one year. This constant flow of business allows the suppliers to
manage their capacity and be selective as to which vessels they would like to build.
Although a comprehensive list of shipbuilders would be too elaborate to include
here(over 150), the fragmentation of the industry can be conveyed by showing the
market share of the tanker industry of the main shipyards.
Korean shipbuilders have emerged as the pre-eminent force in the industry with
Hyundai Heavy Industries accounting for 15% of the market, followed by Samsung with
11% and Daewoo with 13%. These shipbuilders have become so influential that they
demand payment in Korean won, instead of the U.S. Dollar, which was common
practice until recently.
Conclusion
A crucial element in valuing the sea transportation industry is determining the
relative bargaining power of the suppliers in the industry. We have discussed how
Korean shipbuilders are commanding more market share and more influence,
concentrating the supply of new vessels. Additionally, we have showed how important
initial purchase price of a vessel is to any shipping company, representing 30-48% of
total expenses, adding in vessel upkeep, and total vessel expenses range from 52-78%
of total expenses. It has been shown that product differentiation is focused primarily on
the size of the ship and its operating efficiency, but by no means, the prevailing
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characteristic of the needs of purchasers. Switching costs remain very low with very
little customer loyalty, as represented by the diversity of shipyards supplying shipping
company’s vessels. In this environment, we can expect increases in shipping rates to
directly correlate with purchase price of new and used crude carriers, necessitating
intelligent and strategic procurement of the more important fixed asset a shipping
company has, the vessel.
Conclusion
The energy shipping industry has been analyzed quantitatively by using Porter’s
Five Forces Model. This analysis revealed high level of rivalry among existing firms
within the industry. Analysis also revealed a moderate threat of first-time entrants to
the industry. The threat of substitute products, (or services as in this specific
industry) is determined to be low. Bargaining power of customers is low, where the
bargaining power of suppliers is high. By analyzing the rivalry among existing firms,
threat of new entrants and threat of substitute products, the measure of competition
can be obtained. The last two components of the five forces determine the industries
bargaining power of either suppliers or customers. When all five components are
considered, the industry as a whole has the potential of fostering highly profitable firms.
Key Success Factors
Within an industry, firms must decide on one of two strategies that create value.
The two most common competitive strategies include cost leadership and
differentiation. Successful companies choose one of these strategies to gain an
advantage against industry competitors. Essentially, firms that focus on cost leadership
“supply same product or service at a lower cost” and the ones that focus on
differentiation “supply a unique product or service at a cost lower than the price
premium customers will pay” (Palepu & Healy Figure 2-2). The key success factors that
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create value within the energy shipping industry include the economies of scale and
scope, efficient production, lower input costs, and superior product quality and variety.
Cost Leadership
Economies of Scale and Scope
Economies of scale and scope refer to the ability of a firm to reduce their
variable (per-unit) costs through heavy investments in capital, often leading to a higher
portion of fixed costs in their expense structure. The energy shipping industry is
emblematic of this approach in that larger, more flexible vessels are necessary for a
firm in the industry to be successful. Most crude oil is transported in very large crude
carriers (VLCCs) that weigh over 200,000 DWT. Such vessels can transport two million
barrels of oil in their hulls and usually have depreciable lives of 25 years.
In addition to large investments in physical assets, successful energy shipping
companies have multiple types of vessels enabling increased flexibility, utilizing
economies of scope. These vessels can travel the Panama Canal, as well as the Suez
Canal. These ships are referred to as Panamax and Suezmax tankers, respectively.
These high investments in physical assets and low industry differentiation lead to
the problems of excess capacity, putting downward pressure on spot rates. This volatile
business environment places heightened importance on energy shipping companies to
diversify their fleet to effectively hedge against these volatile rates.
Efficient Production
Efficient production occurs when a firm uses its available assets to produce the
maximum number of goods and services. In the energy shipping industry, percent
utilization can be used to measure this efficiency. Firms obtain a competitive advantage
if they can utilize their current fleet of vessels more efficiently than their rivals. “Ninety
percent utilization of the world's tanker fleet is considered full use by the industry”
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(Houston Chronicle: World's tanker fleet is 'close to 100 percent utilization). When firms
operate at ninety percent utilization, they can offer optimum shipping rates for their
customers. The remaining percentage accounts for vessel maintenance. Above 90
percent utilization, the shipping rates drastically increase for the customers.
Lower Input Costs
“Input costs are cost of direct material, direct labor, and other overhead items
devoted to the production of a good or service” (allbusiness.com). Reducing input costs
is a key success factor in any industry. The energy shipping industry is highly
competitive and firms that achieve lower input costs can have a strong competitive
advantage. Voyage expenses such as fuel, canal tolls, port charges, and tariffs are
major input costs that the overseas shipping industry strives to reduce. Additionally,
the costs of the vessels significantly impact a firm’s cost structure. The energy shipping
industry is service-based and thus firms cannot reduce input costs through vertical
integration by producing their own inputs (vessels, bunker fuel, etc.). Firms must think
of more creative ways to lower their input costs. Most companies manage these costs
by participating in commercial pools and charters that increase asset utilization through
coordination of resources.
Little Research and Development
Research and Development, or R&D, is the “investigative activities that a
business chooses to conduct with the intention of making a discovery that can either
lead to the development of new products or procedures, or to improvement of existing
products or procedures” (Investopedia.com). The energy shipping industry is a service
industry in which firms do not typically invest in research and development. Therefore,
this is not a cost incurred by an energy shipping firm. It would be very costly for a firm
to start building their own vessels, and it is common industry practice to buy or lease
the vessels they use for shipping. R&D would be much more likely to be seen in the
companies that build the vessels and then sell to firms in this industry.
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Differentiation
Superior Product Quality
In the energy shipping industry, superior product quality is essential to
maintaining a competitive edge. Many of the companies in the industry supply different
characteristics dealing with their products quality. Some companies base their superior
quality on the fact that their ships are new and state-of-the-art. “Others rely on their
innovations, such as, safe tank venting, inert gas systems, crude oil washing,
sophisticated engine room control systems and satellite navigation. The most
significant innovation in recent years has been the double hull design, which became
mandatory from the early 1990’s” (osg.com). Many major companies offer at least one
of these features in order to create a competitive advantage, in terms of quality, over
other companies in the industry.
Superior Product Variety
Companies within this industry must search for ways to provide their customers
with superior product variety in order to stay competitive. Since the basic functions of
each company do not significantly differ from one another, it is essential for companies
to offer a variety of products that set them apart from their competitors. For example,
since a large portion of the industry has begun to participate in the shipping of crude oil
internationally, some companies have started offering their customers other services
such as the shipment of liquefied natural gas. This allows a small portion of the
industry to gain a competitive advantage through an area in which other companies are
not participating. Providing superior product variety in the energy shipping industry will
allow a company to stay competitive and successful.
Conclusion
In the energy shipping industry, firms focus on various strategies that create
value and allow themselves to be competitive with rivals. Cost leadership is the main
strategy that these firms use to have competitive prices for customers. Companies that
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have lower input costs, utilize tight cost control systems, and refrain to focus
predominantly on research and development have been able to succeed. Industry
leaders apply differentiation strategies to stay ahead of a changing industry with an
increased focus on superior product quality and variety. With cost being very similar,
firms that are able to also differentiate have an edge over those that do not.
Competitive Advantage Analysis
Companies within the energy shipping industry compete against one another
using mostly cost leadership strategies. Since there is a relatively low amount of
product differentiation in this industry, companies try and distinguish themselves from
one another based on supplying their service at a lower price. Although cost leadership
is the strategy used to gain a competitive advantage in the energy shipping industry,
some companies use a few differentiation strategies to further set themselves apart.
Overseas Shipholding Group is one company within the industry that operates using
both the cost leadership and some differentiation strategies. OSG applies economies of
scale and scope, lower input costs, and tight cost control systems as cost leadership
strategies, and the use superior product quality and superior product variety as
differentiation strategies to gain a competitive advantage in their industry.
Economies of Scale and Scope
Overseas Ship holding Company excels in maintaining a diversified fleet of
vessels that take advantage of the dynamics of global trade. In particular, their
Aframax, Panamax and Suezmax vessels enable Overseas Shipping Company to ship
through the Panama Canal and the Suez Canal. In addition to allowing passageway
through various canals, the large size of the company’s Very Large Crude Carriers
(VLCC), enable overseas shipping to participate in the spot and charter markets moving
oil from the Middle East, North Sea and North Africa to North America, Western Europe
and Asian industrialized economies. Overseas Shipping also operates two of the four V-
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Plus VLCCs in existence. These ships can transport 3.2 million barrels of oil, opposed to
2 million barrels for a standard size VLCC, and achieve much greater economies of scale
through their reduced bunker (fuel) costs, decreased labor usage per barrel, and
decreased toll and port fees per barrel transported.
As the above graph indicates, Overseas Shipping achieves increased asset
utilization through the flexibility of their fleet. This enables the company to dry dock or
time charter vessels that aren’t being used at full capacity and to combine their large
fleet with others in the industry through commercial pools. Through the aforementioned
strategies, Overseas Shipping is able hedge against the volatile spot market for energy
transportation by diversifying their fleet in order to take advantage of economies of
scale and scope.
Lower Input Costs
The energy shipping industry is service-based, therefore; firms cannot simply use
vertical integration or outsourcing to lower their input costs. They must be more
creative. According to Overseas Shipholding Group’s 10-k, financial flexibility is a big
part of their business strategy. “The Company believes its strong balance sheet, high
credit rating and high level of unencumbered assets give it access to both the
unsecured bank markets and the public debt markets, allowing it to borrow primarily on
an unsecured basis. This, in turn, reduces its financing costs and cash flow breakeven
Aframax
Suezmax
Panamax
VLCC
Handysize
Other
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levels. This financial flexibility permits the Company to pursue attractive business
opportunities” (OSG 10-k). Because OSG excels financially with a high credit rating, it is
able to lower input costs by financing business at a lower interest rate. Low financing
rates save the company money which results in lower cost to the customer. According
to Wikinvest.com, OSG’s cash to market cap ratio was 28% at the end of the third
quarter in 2007. OSG’s “growth and diversification has led to big gains in revenue over
the past four years” (wikinvest.com) Overseas Shipholding Group sometimes pays with
their large amounts of cash-on-hand to avoid interest expenses that could drastically
increase their input costs. In a serviced-based industry such as energy shipping, OSG
has found creative ways to reduce their input costs through efficient financing.
Superior Product Quality
Overseas Shipholding Group holds a competitive advantage over other
companies when it comes to its vessels’ ages and their double hulls. The company’s
VLCC (which includes its two V-Plus vessels) has an average age of seven years. The
Aframax vessel has an average age of 9.2 years and the average age of the world fleet
is 8.9 years. The Panamax has an average age of 4.3 years, while the world fleet
average is 9.1 years. The handysize product carriers have an average age of 6.2 years,
and the average world fleet is 9.4 years. Besides the Aframax every other type of
vessel is considerably younger and more up to date then the average age of the world
fleet. When customers consider the quality of the vessels that will be used to ship their
energy, they want to be assured that the vessels are reliable and up to date (OSG 10-
k).
Another factor that gives OSG a competitive advantage over other companies in
the energy shipping industry is the double hull enclosed in each of their vessels. The
newer ships that contain double hulls have a large advantage over older fleets that
have only single hulls. “A double hull is a ship hull design and construction method
where the bottom and sides of the ship have two complete layers of watertight hull
surface: one outer layer forming the normal hull of the ship, and a second inner hull
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which is somewhat further into the ship, perhaps a few feet, which forms a redundant
barrier to seawater in case the outer hull is damaged and leaks” (Wikipedia.com). It
would stand to reason companies would enjoy having this perk in their shipping vessels
because of the added protection it allows for their valuable energy shipment.
Superior Product Variety
Overseas Shipholding Group is on the leading edge of superior product variety
within the energy shipping industry. Since the energy shipping industry has a low
product differentiation, OSG has reached out and obtained one of the most diversified
fleets in the industry to allow them to compete in several different ways. In order to
distinguish themselves from the industry as a whole, they have developed four distinct
products to offer their customers. By offering their customers significantly more
products than their competitors, it helps them to gain a competitive advantage.
Although OSG’s main form of revenue is still crude oil shipment, their continually
diversifying their sources of revenue more efficiently than their competitors. Much
more diversified than many of their top competitors.
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The most noteworthy aspect of OSG’s company that allows them to gain a
competitive advantage in their industry is their participation in U.S. based shipping.
Although it is a small portion of their overall revenue, in the specific U.S. based market,
they hold an extremely high percentage of the market share. Two of their top
competitors, Frontline Ltd. and Tsakos Energy Navigation, do not even offer this
product to their customers. As you can see from the graph, where OSG is growing the
most is in their revenues from their international product fleet. Even though three of
OSG’s top four competitors also offer this service to their customers, OSG is expanding
their share of that market more than other firms. The last aspect of OSG’s product
variety is the shipment of liquefied natural gas. This makes up the smallest portion of
their overall revenue but, again, OSG is one of the top suppliers of this service relative
to the industry as a whole. One of OSG’s top competitors does not offer this service
while another top competitor has only one ship to supply this service.
Conclusion
In conclusion, Overseas Shipping primarily adheres to a cost leadership strategy
but finds ways to differentiate itself through several elements of the differentiation
strategy. Overseas Shipping positions itself in the market as a diverse shipper and
broker through its extensive product variety. The flexibility of their specialized fleet to
traverse various canals and waterways, as well as their economies of scale in
brokerage, logistics and sheer vessel size, enable Overseas Shipping to reap abnormal
returns relative to the industry.
It is through the aforementioned strategies that Overseas Shipping is able to
manage the “shipping cycle” through time charter arrangements, diverse shipping
destinations, scale/scope of their vessels and diversity of the customers they service.
The higher predictability (smoothing) of the company’s earnings infers a lower than
average cost of capital which further enhances their abilities to manage downturns(rate
backwardation) as well as expand in up markets(rate contagion).
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Accounting Analysis
“The purpose of accounting analysis is to evaluate the degree to which a firm’s
accounting captures its underlying business reality” (Palepu & Healy). Many companies
use accounting to portray an inaccurate view of the financial state of their business.
Therefore, a thorough accounting analysis is key to any financial evaluation. The six
steps required to perform a successful accounting analysis are:
1. Identifying the key accounting policies that directly relate to the firm’s key
success factors. By focusing on these related accounting policies, financial analysts have
a basis to measure the company’s critical components as well as its risks.
2. Assessing flexibility in choosing accounting policies and estimates. The policy
choices managers use have a sizeable impact on the reported performance of a
company and are, therefore, important to assess.
3. Evaluating the strategy managers use to maximize the benefits of the
flexibility in accounting policies. Managers who have accounting flexibility have the
ability to hide poor performance so analysts must pay attention to this.
4. Evaluating a firm’s choice in disclosure of accounting information and whether
the company used the disclosure to its benefit. Analysts must ask whether the
company’s choice of disclosure is helping or hurting the perception of the company.
5. Identifying potential red flags that highlight questionable accounting. Analysts
examine problematic items within the financial statements and gather more information
about them.
6. Undoing accounting distortions that are misleading. To prevent people from
mistakenly valuing the company based on misleading strategies and accounting policies,
analysts must undo misleading distortions.
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Key Accounting Policies
“In accounting analysis…the analyst should identify and evaluate the policies and
the estimates the firm uses to measure its critical factors and risks” (Palepu & Healy).
As previously discussed, the key success factors in an industry play a major role in
determining what a company should do to be successful. Economies of scale and scope,
efficient production, and lower input costs are all type 1 key success factors pertaining
to Overseas Shipholding Group. Accounting policies also contribute to a company’s
success. Overseas Shipholding Group’s type 2 key success factors were cost leadership
and differentiation. The cost leadership success factors included economies of scale and
scope, and lower input costs. Also, the differentiation success factors were a mixture of
superior product quality and variety. When OSG executes its key success factors well, it
is likely to be successful and profitable, but skewed accounting can lead to an
inaccurate valuation. Managers who are willing to distort accounting numbers will most
likely distort important policies to significantly improve their company’s financial
outlook. The smallest distortion in OSG’s accounting could potentially mislead their
customers. The job of an analyst, then, is to review a company’s accounting policies,
which tell whether or not a company is achieving their key success factors.
Operating Leases
In acquiring long-term fixed assets, firms have choices in the structure of their
payments and how these cash flows are reflected on the financial statements. A firm
can purchase the asset outright with cash generated from retained earnings or from
external financing sources. Alternatively, the firm can effectively “rent” the asset
through operating leases, or “rent-to-own” the asset through a capital lease. In the
event the company chooses to lease the asset, the type of lease (operating/capital)
determines whether or not future lease payments are incorporated in the liabilities
section of the balance sheet as well as the subsequent asset of the owned portion of
the asset, less accumulated depreciation. Additionally, the firm will have to recognize
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the interest expense associated with carrying value of the liability in the event a capital
lease is chosen.
Although capital and operating leases are close substitutes, each contractual
arrangement reflects different business realities and the appropriate lease type should
be chosen to reflect the operating life as well as the duration of future lease payments.
Operating leases are appropriate when the usage of a capital is short term, relative to
the life of the asset, and there exists no ownership rights to the asset. The usage of an
operating lease implies the lessee has no stake in capital gains, or losses, of the asset
because the firm lacks ownership rights to take advantage of such gains (or suffer the
associated losses). Operating leases reflect a short-term relationship of future lease
obligations and suggest to the investor that the firm could effectively “back-out” of their
usage of that asset and cease lease payments.
Capital leases are recorded on the balance sheet as a liability (present value of
all future lease payments) as well as the accompanying leased asset (fair value of the
asset or the equivalent present value of future payments, less accumulated
depreciation) at lease signing. This is the significant distinction between the two types
of leases in that future lease payments are recognized as a liability and ownership
rights of asset are effectively transferred to the end-user under a capital lease. The
usage of a capital lease communicates to the user of financial statements that the
duration of future payments better mirrors the useful life of the asset as well as
ownership of that asset and its capital gains or losses. Principally, a capital lease is
appropriate when the firm owns the asset at-risk and will continue to use the asset for
the majority of its useful life.
In the energy shipping industry, managing fixed assets, namely vessels, and
their potential for excess capacity (high fixed to variable costs) is a key success factor
of the industry. Accounting for these fixed assets is important in understanding the
future profitability of the company and its ability to earn abnormal returns on assets.
Accurately reflecting fixed future payments for vessels is important for several reasons.
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First, vessel prices are highly correlated with vessel spot rates and fluctuate greatly.
Reflecting the ownership component of the vessel is very important in communicating
the economic consequences of business activities because the firm will eventually have
to record a gain or loss on the sale of that asset (or adjust its depreciation methods to
write the asset off over time). Secondly, reflecting the binding aspect of future lease
payments, often lasting for longer than 15 years, is useful in determining the potential
for future excess capacity and the accompanying price-competitive environment.
Simply, how will the firm “weather the storm” of prolonged backwardation in spot rates
when they have to pay fixed operating expenses
Goodwill
Goodwill is an intangible asset that arises when a firm pays an excess price for a
certain acquisition. Goodwill gaps the difference between the market value and the
book value of an acquired asset. In the energy shipping industry, this premium a
company pays is due to external selling factors such as long-term customer
relationships or charter-in contracts acquired. This makes goodwill difficult to account
for and even harder to measure in terms of business activities. Though it is difficult to
account for, goodwill can be used to give a firm a more favorable standing with regard
to its financial statements. Goodwill can also be used to determine why the firm
overpaid for a certain asset. According to SFAS 142, “goodwill has to be written down
immediately upon being deemed overvalued.” This means that goodwill cannot be
amortized. Furthermore, SFAS 142 states that goodwill needs to be assessed for
impairment annually. OSG states that it impairs goodwill on a yearly basis as required
by SFAS 142. Yearly impairment is used unless an extreme situation requires the need
to impair it more frequently. Impairment to market value is necessary when the
carrying value is greater than fair value. Companies may leave goodwill on their
balance sheet indefinitely only as long as the goodwill remains valuable. If goodwill is
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left on the balance sheet and not impaired, then total assets will continue to be
overstated.
Assets = Liabilities + Equity Revenues - Expenses = Net Income
O N O N U O
N=No Effect O=Overstated U=Understated
As evidenced by the above table, managers can change the financial position of the
firm by overstating goodwill, not presenting it as impaired, when it should be.
Within the energy shipping industry, firms will acquire other shipping companies
in order to expand their own. Goodwill is recorded as an asset when firms buy these
new subsidiaries. The goodwill of Overseas Shipholding Group and its close competitors
is reported in the table below.
Goodwill (in thousands)
Company 2002 2003 2004 2005 2006 2007
Overseas Shipholding 0 0 0 0 64,293 72,463
Frontline Ltd. 0 0 0 0 0 0
Teekay Corp. 89,189 130,754 169,590 170,897 266,718 434,590
Tsakos Ltd. 0 0 0 0 0 0
OSG and Teekay Corporation are the only two companies that have reported any
goodwill over the past six years. As seen above, goodwill has drastically increased over
the last few years. Though goodwill has increased over the past two years, it is only a
small portion of OSG’s total assets. OSG’s Property, Plant and Equipment for 2007
amount to $4,158,917,000, therefore, goodwill is only 1.74% of total PP&E for this
year.
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Company 2002 2003 2004 2005 2006 2007
Overseas Shipholding 0 0 0 0 2.54% 2.46%
Teekay Corporation 4.62% 5.39% 5.17% 5.26% 5.02% 6.35%
The above table discloses the comparison of goodwill to plant, property, and
equipment. According to the table, goodwill is only a small portion of PP&E for both
Teekay and OSG. Over the last two years, OSG’s goodwill only represents an average
2.5% of PP&E. However, Teekay’s goodwill represents an average 5.3% of its PP&E
over the past six years. These numbers provide evidence that the premium paid on
acquired subsidiaries only represent a small portion of their PP&E.
Goodwill as Percent of Operating Income
Company 2002 2003 2004 2005 2006 2007
Overseas Shipholding 0 0 0 0 16.98% 34.91%
Teekay Corporation 74.73% 44.63% 26.84% 27.05% 63.23% 109.21%
For these close competitors, goodwill represents a large portion of operating
income as evidenced by the table above. Though OSG’s goodwill is a large portion of
its operating income, it is not as significant as Teekay’s reported goodwill. We believe
that OSG needs to impair more goodwill in order to accurately depict the portion of
operating income. To determine if goodwill compared to operating income is accurate
and significant, an amortization of goodwill compared to operating income must be
calculated. The following table depicts an amortization of 2007 goodwill over a five-
year period at twenty percent per year.
Goodwill as Percent of Plant, Property and Equipment
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Once this forecast is determined, the assumed amortized goodwill percentage of
operating income per year must be derived. The following table depicts these
percentages.
Amortized Goodwill as a Percent of Operating Income
Company 2003 2004 2005 2006 2007
Overseas Shipholding 6.44% 2.85% 3.05% 3.81% 6.69%
Teekay Corporation 29.67% 10.58% 13.76% 20.6% 21.84%
If OSG were to amortize its goodwill over a period of five years at twenty percent, it
would significantly decrease the goodwill portion of operating income. Teekay’s
goodwill portion of operating income would still be at a high level. This leads us to
reason that OSG is impairing its own goodwill at appropriate times. This method of
amortizing goodwill, as shown above, could drastically change the financial position of a
firm in this industry. Managers of the firm could use this or other described methods to
hide the true value of goodwill. This leads to the assessment of determining the
flexibility of goodwill relative to the accounting structure.
Goodwill Amortized at 20% (in thousands)
Company 2003 2004 2005 2006 2007
Overseas Shipholding 14,492 14,492 14,493 14,493 14,493
Teekay Corporation 86,918 86,918 86,918 86,918 86,918
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Hedging Activities
In industries that rely heavily on cost control procedures, as in the energy
shipping industry, certain differentiation activities may be used to reduce company
costs. Within the energy shipping industry, there are several factors that could lead to
an unstable market. Fluctuations in interest rates, foreign currency exchange rates,
and energy costs are some major factors that, if not handled properly by a firm, could
lead to unstable costs. In order to minimize and help control future costs in the energy
shipping industry, most companies choose to participate in an activity known as
hedging. “Hedging is a strategy designed to minimize exposure to such business risks
as a sharp contraction in demand for one's inventory, while still allowing the business to
profit from producing and maintaining that inventory” (wikipedia.com). The main
purpose of hedging is to reduce risk in an unstable market.
The energy shipping industry can be greatly affected by fluctuations in shipping
rates. A high majority of revenues earned by firms within the energy shipping industry
are from contracts in the spot market. “The spot market or cash market is a
commodities or securities market in which goods are sold for cash and delivered
immediately. Contracts bought and sold on these markets are immediately effective”
(wikipedia.com). Since such a high proportion of revenues come from the spot market
in the energy shipping industry (as evidenced by the graphs below) it is important for
firms within the industry to attempt as much control of the market rates as possible.
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As Percent of Total Revenue
One way that firms attempt to maintain a stable rate within the industry is by
entering into Forward Freight Agreements. These agreements are an “economic
instrument that reduces a firm’s exposure to changes in the spot market rates earned
by some of its vessels in the normal course of its shipping business” (OSG 10-K).
Firms within the energy shipping industry are also at risk to changing interest
rates. OSG and its top competitors implement a hedging activity known as interest rate
swaps to aid in minimizing this risk. Since the interest rates are constantly fluctuating
within this industry, firms employ interest rate swaps to ensure that a currently floating
rate will remain fixed when implemented. This is an important cost control feature for
firms because it allows them to maintain a steady rate in the future and remain
unaffected by changing interest rates other firms in the industry may be forced to use.
Since a large majority of business is conducted overseas within the energy
shipping industry, the foreign currency exchange rate is a major component that, if not
controlled, could have a damaging effect on a firm. Since some major firms in this
industry are paid in foreign currency, it is important they seek to keep these rates in
check. In order to do this, some firms will enter into forwards contracts that promise a
rate to be paid in the future even if it has fluctuated since the signing of the contract.
29%
71%
FrontlineTime Charter Spot Market
38%62%
Overseas Shipholding Group
Time Charter Spot Market
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Benefits and Pension Plan
Defined benefit pension plans and medical benefits are a firm’s future financial
obligations promised to workers. These obligations are recorded at present value as
liabilities of the future installments owed. The future installments are calculated by
using discount rates created by the firm’s management and outside actuaries. Too high
of a determined rate would understate liabilities, whereas too low of a rate would
overstate the liabilities. Since these numbers are primarily created by the firm, with
outside guidance, they can be subject to human error. These long-term liabilities could
greatly affect the financial position of a company through its financial statements. The
substantiality and validity of these pension plans can be derived from the company’s
10-K or equivalent annual report.
In comparison to Teekay Corp., Frontline Ltd. and Tsakos Ltd., Overseas
Shipholding is the only company that discloses information about discount rates, growth
rates for estimating future benefit costs, estimated asset growth used to pay for benefit
obligation liabilities, and the proportion of benefit plans relative to long-term debt. This
determines that OSG highly discloses information regarding benefit plans relative to
their competitors in the energy shipping industry. OSG’s 10-K indicates that it sponsors
a noncontributory defined benefit pension plan covering substantially all of their
domestic shore-based employees hired prior to January of 2005. The 10-K also
discloses that retirement benefits were based on years of service and compensation
earned during the last years of employment. OSG also provides certain postretirement
health care and life insurance benefits to qualifying domestic retirees and their eligible
dependents. Qualifying employees, according to OSG’s 10-K, are ones hired before
2005, who retire and have met minimum age and service requirements under a formula
related to total years of service (not disclosed). The postretirement health care plan is
contributory, whereas the life insurance plan is noncontributory.
The substantiality of these benefits on OSG’s balance sheet is miniscule
compared to total long-term debts. In 2007, OSG reported total long-term debt as
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1.506 billion when they only reported total benefit obligations (postretirement pensions
and other postretirement benefits) at 48.216 million (OSG 10-K). This proves that,
compared to the rest of their long-term debt, their long-term obligations to employees
only comprise a small amount of liabilities. Further disclosure is provided by OSG
because they report the rates at which to discount the future obligations in order to
determine their present values. OSG’s discount rates from 2002 to 2007 are shown in
the table below:
Defined Benefit Pension Plan Discount Rates
OSG 2003 2004 2005 2006 2007 2008
Discount
Rate 7.4% 6.7% 6.2% 5.75% 5.25% 5.20%
According to the U.S. Department of Labor, the average inflation in 2007 was
2.85%. This inflation rate has been at a decrease over the past few years. Since the
discount rate used by OSG from 2002 to 2007 decreased, these are seen as reasonable
rates compared to the inflation. OSG discounts their post retirement plans at a higher
rate than inflation because any return on an investment would receive this much
interest at a minimum without risk premium. OSG also uses a slightly declining
discount rate for other medical and post retirement benefits. These rates from 2002 to
2007 are shown in the table below:
Other Medical and Post Retirement Benefits
OSG 2003 2004 2005 2006 2007 2008
Discount Rate 7.4% 6.7% 6.2% 6.4% 6.4% 6.2%
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These rates are considered reasonable since they decrease with a relative
decreasing inflation rate. The obligation discount rates are disclosed, but the method
by which they are determined is not.
Assets are needed to pay for future, long-term obligations, such as pensions and
medical benefits. To determine how much a company needs in order to pay off these
liabilities, a formula is used to grow assets at a rate that is expected to be received in
the future. OSG defines the method for calculating these rates in its 10-K by saying
“the expected long-term rate of return on plan assets is based on the current and
expected asset allocations. Additionally, the long-term rate of return is based on
historical returns, investment strategy, inflation expectations and other economic
factors. The expected long-term rate of return is then applied to the market value of
plan assets.” Since many factors determine these rates, they are not an exact measure
of what the company will receive in the future. From 2003 to 2008 the expected return
on the plan assets that were used to pay pensions were set at rates shown in the table
below:
Rate of Return on Assets used to pay Pensions
OSG 2003 2004 2005 2006 2007 2008
Discount
Rate 8.75% 8.75% 8.75% 6.75% 6.75% 6.75%
These rates also follow the decreasing trend in inflation rates over the past
several years. In 2007 OSG determined that they needed 44.476 million to cover
pension benefits and 3.74 million to cover other postretirement benefits. The fair value
of the pension assets at the end of 2007 was 31.314 million, which left 12.762 million
unfunded plans at the end of that year. Furthermore, OSG had other unfunded benefits
of 3.74 million at the end of 2007. But, again, since these pension and other
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postretirement benefits are such a small portion of long-term debt, the amount left
unfunded is almost an inconsequential amount.
Assess Degree of Potential Accounting Flexibility
“Not all firms have equal flexibility in choosing their accounting policies and
estimates. Some firms’ accounting choice is severely constrained by accounting
standards and conventions” (Palepu & Healy). The strictness of accounting policies
varies from industry to industry. Some businesses’ accounting policies are highly
government-regulated while others are only partially regulated depending on their
nature. In certain more regulated industries, activities that are considered important are
sometimes required to be expensed while other industries can freely decide how to
report their business activities. When managers have constrained amounts of flexibility
in choosing accounting policies and estimates concerning their key success factors,
accounting data will not be helpful in trying to understand the firm’s financial status.
However, if managers have substantial amounts of flexibility when considering
accounting policies and estimates; their accounting numbers could potentially be
informative and reliable, as long as the managers have not used this flexibility to
manipulate data. When managers have a lot of flexibility in choosing accounting
policies, they should be monitored closely to determine whether or not they are
presenting inflated profitability or anything else that would mislead their customers. It is
important to determine, not only the level of flexibility but also the significance
associated with the business activity in order to make educated decisions based on the
company’s accounting figures. Analysts must interpret flexible accounting policies
differently than regulated ones. Because all firms have some flexibility regarding policies
such as depreciation, inventory accounting, and pensions, most of the analysts’ focus
should be placed on the flexibility of accounting numbers.
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Operating Leases
There exist several criterion mandated by the Financial Accounting Standards
Board that differentiate the appropriate use of operating and capital leases. Although
the intent of such standards is to accurately characterize the lease, it is often the case
that leases are structured with a designation in mind. We will examine the potential
flexibility a firm has in classifying a lease as operating or capital and the subsequent
effects this flexibility has on the firm’s financial statements.
Operating leases can be more advantageous to a public firm because they
reduce the firms liabilities, the accompanying asset, interest expense and depreciation
recorded on the balance and income statement. In addition, the conversion of an
operating lease to a capital lease tends to push earnings further back in the current
term and in future years through the higher discounting of cash flows in the short term.
This discounting effect occurs because interest expense is higher toward the beginning
of a loan amortization, while depreciation remains constant (strait-line) or is higher in
the near term (accelerated method). Therefore, there exist criterion that mandate the
use of capital leases as opposed to the use of operating leases. The criterion are as
follows:
1. If the leased life exceeds 75% of the life of the asset.
2. If there is a transfer of ownership at the end of the lease term.
3. If there is an option to buy the asset at a “bargain price” at the end of the lease
term.
4. If the present value of future lease payments, discounted at the appropriate discount
rate, exceeds 90% of the fair market value of the asset.
The constraints dictated above give users of financial statements a framework to
examine managers’ decisions to characterize the lease as operating or capital as well as
to shed light on further contractual covenants. The use of qualitative designations in the
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criterion allows significant flexibility in the structuring of leases. Additionally,
shareholders, debt-holders and the SEC are the only users with legal standing and
enforcement powers to challenge this designation.
Goodwill
When analyzing accounting strategies, it is necessary to take into account the
degree of flexibility that firms have on measuring and changing goodwill. GAAP changed
from allowing companies to amortize their assets to ultimately having them impair it, or
write it off, to the fair market value of the asset. This change occurred to keep assets
from being inflated. Goodwill is difficult to measure when trying to find the fair market
value, adding to the potential flexibility.
In the energy shipping industry, it is not common to have any goodwill stated on
financial statements. Therefore, companies that report goodwill, such as Overseas
Shipholding Group, have more flexibility than companies that do not. The reason
goodwill has appeared on OSG’s books in recent years is because of various
acquisitions, such as, the 2007 acquisition of Hiedmar Lightering. Increased flexibility
allows firms to manipulate its accounting and makes it more difficult to value.
Hedging Activities
Flexibility regarding how a firm can account for hedging activities could create
drastic changes in accounting numbers depending on the degree of flexibility allowed.
With regards to hedging activities, there are specific codes set up to provide firms with
detailed instructions on how to account for the exact activities that they have
participated in. The guidelines given by the FASB to account for hedging activities are
located in FAS 133. “FAS 133 states that all derivatives and hedging activities must be
recorded at fair value as an asset or liability” (fincad.com).
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The firm’s rational in applying the hedge accounting method must be clearly
identified in order to decide how to account for the activity. There are two primary
types of hedging activity relationships that affect how the specific activity will be
accounted for by the firm. The first is a fair-value hedge. A fair-value hedge is used
primarily by a firm in order to reduce the future risk that they may encounter. This
type of hedge is related to changes in the fair value of the recognized or unrecognized
asset or liability to which the hedge is linked. In order to account for a fair-value
hedge, the firm must report any gains or losses from the hedged item in the current
period net income. Since the amount of increase or decrease in the fair value of the
hedged asset is based on judgment rather than fact, there is a chance for bias.
The second hedging activity relationship is a cash-flow hedge. “A cash-flow
hedge is a hedge of the exposure to variability in cash flows of a recognized asset or
liability or a highly probable forecasted transaction, attributable to a specified risk”
(camagazine.com). The gains or losses reported from this type of hedge are
recognized on the income statement under other comprehensive income. There is
minimal room for bias in this area since the numbers are calculated by actual gains and
losses.
The FASB standards for reporting hedge activities make it clear that there is a
very low degree of flexibility in this area. The slight degree of flexibility comes from the
biases that could arise in the calculations of fair market values. Since there is such a
low degree of flexibility, it would be difficult for firms to influence their books to
promote healthier hedging activities than what actually is accounted.
Benefits and Pension Plan
Since pension and other postretirement plans are affected by arbitrary discount
and growth rates, they can be subject to human error. The flexibility of these rates,
can allow the firm to use larger than appropriate numbers in order to make the
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liabilities look smaller. Since these rates are flexible, a firm may use them to affect its
financial stability and standings in a manner that make them look more favorable to
potential investors.
OSG discloses most of the information used for these rates, whereas its
competitors do not disclose any. OSG does not, however, provide the expected rates to
determine return on plan assets used to cover other postretirement benefits. OSG does
mention in its 10-K that “the assumed health care cost trend rate for measuring the
benefit obligation included in other postretirement benefits is an increase of 10% for
2008, with the rate of increase declining steadily thereafter by 1% per annum to an
ultimate trend rate of 5% per annum in 2012.” This specifies that these rates are
estimated by the company’s management with opinions from outside actuaries. Since
these rates are estimated, issues of flexibility would arise for a firm. For OSG though,
the 1% increase/decrease effect on total of service and interest cost components in
2007 is only a difference of $62,000. Also, the 1% increase/decrease effect on
postretirement benefit obligation at the end of 2007 is a difference of $583,000. The
increase/decrease of rates determined by the firm are, again, insignificant compared to
the entire long-term debt. Because of this, it may be assessed that there is a high
allowance of flexibility on discount and growth rates.
Even though OSG has a lenient amount of flexibility in determining rates,
management could still allow growth rates that are lower than needed. This would
make the firm’s estimates of future liabilities appear lower. Because these future
liabilities would be lower, the firm’s expenses would be understated and therefore make
the company appear more profitable. The following over/under analysis depicts such
an environment.
Assets = Liabilities + Equity Revenues - Expenses = Net Income
N U O N U O
N=No Effect O=Overstated U=Understated
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This analysis shows the effect of rates on the accounting statements, and how it can
allow the company to appear more valuable. These subjective discount and growth
rates render flexibility on the accounting cycle at the discretion of the company.
Evaluate Actual Accounting Strategy
“When managers have accounting flexibility, they can use it either to
communicate their firm’s economic situation or to hide true performance” (Palepu &
Healy). Flexibility plays a major role in a firm’s accounting strategy. In order to
determine a company’s accounting strategy, an analyst must compare its accounting
policies and the level and quality of disclosure to those of others within the industry. It
can be difficult to recognize the different ways in which companies distort their
accounting numbers, but evaluating trends over time is a common way to detect any
skewed numbers. Exceptional increases or decreases in sales, income, or revenues
without corresponding economic or management changes are a good indicator of
accounting distortion. Analysts must also decide whether a company uses conservative
or aggressive accounting policies by considering market and book value. Understated
market values can lead to big gains for customers in the future while overstated book
values, which can overestimate the value of a company, could prompt less trading.
Operating Leases
A comprehensive equity analysis involves looking beyond the presented
information in annual reports and supplementary data. In order to ascertain the validity
of the information, it is necessary to determine the accounting strategy implemented by
the firms reporting units. Specifically, evaluating estimates, determining degrees of
aggressiveness or conservatism in discretionary items and assessing the relative level of
disaggregation in business segments are some of the processes this analysis will utilize
to gain a more informed perspective of business operations.
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Regarding the accounting strategy for leases (capital and operating), Overseas
Shipholding Group would be considered moderately aggressive in their reporting. The
extensive use of operating leases for vessels, which have operating lives similar to the
lease periods, is a strong signal of aggressive accounting policies. Additionally, OSG
does not provide a discount rate for their capital leases for the purposes of capitalizing
existing operating leases on restated financials. Due to the high similarity in vessels
being leased, a discount rate for capital leases would be highly useful in capitalizing the
existing operating leases. To better convey the relative mix of operating and capital
leases, the following graph shows the proportion of operating and capital leases
payments in future lease obligations.
Although more conservatism in the designation of leases as either operating or
capital would be beneficial, the voluntary disclosures detailing operating days, revenue
days and assets the lease encompasses are provided. Revenue and operating days are
useful in computing a depreciation rate associated with capitalizing the existing
operating leases as well as determining how the operating lease payments are
segmented into office space or vessel expenses. Relative to the industry as a whole,
OSG is very transparent in the performance of their various subsidiaries. Present in the
annual reports are details of revenue, operating vessels, expenses and business
97% 97% 97% 98% 100%
3% 3% 3% 2% 0%
0%10%20%30%40%50%60%70%80%90%100%
2008 2009 2010 2011 2012
Future Lease Obligations
Capital Leases
Operating Leases
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descriptions of the various entities under the OSG parent company. This information is
useful in determining future cash flows, liabilities and service diversification which aid
hedging efforts across all shipping needs and routes.
Goodwill
The amount of goodwill that Overseas Shipholding Group impairs will cause a
change in total assets which, in turn, will affect their expenses. Overseas Shipholding
and Teekay are the only competitors in the energy shipping industry that record
goodwill on their balance sheets. Although OSG’s goodwill only represents 1.74% of its
total assets, reporting it would still overstate the company’s earnings because their
expenses will decrease. The amount of goodwill that OSG is disclosing each year seems
accurate, considering the nature of the energy shipping industry. The company is
maintaining goodwill at less than two percent of total assets, which means OSG is
considered conservative when reporting net income.
Hedging Activities
Overseas Shipholding Group participates in hedging activities in order to reduce
future risks that the firm may encounter. In order to account for these activities, they
are required to follow strict guidelines stated in FAS 133. This statement instructs firms
that take part in hedging activities to calculate the fair value of its assets or liabilities
and record them on the balance sheet. Changes in the fair value of the assets or
liabilities are then computed and recorded in either net income or other comprehensive
income, as discussed in the previous section of hedging activities. Since OSG and its
competitors use market prices to determine fair value and all firms are required to
follow the restrictions given in FAS 133, the items reported on their financial statements
will resemble one another in the hedging area. It is difficult for a firm to implement
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conservative or aggressive accounting strategies in this area since estimates are
relatively similar and guidelines are strictly followed.
Benefits and Pension Plan
Disclosure of information about pension and retirement benefits can be used to
determine the value of a firm. OSG is the only company out of its close competitors
that actually discloses information related to its pension and postretirement benefit
plans. This high level of disclosure affords OSG a higher value over its competitors.
Since OSG discloses almost all information related to discount rates, growth rates,
assets used to pay future retirement liabilities and actual cost of future retirement
debts, this effectively gives more value to its financial statements. This value is
assessed through disclosure because it allows outside investors and entities to
determine the validity of the liabilities reported. Even though these liabilities are a
small portion of overall debt, disclosing information related to postretirement benefits
sanctions this analysis.
Furthermore, with regard to evaluating the accounting strategy, managers, with
well-informed opinions of outside actuaries, are allowed to determine if the discount
and growth rates used will be on a conservative or aggressive basis. Since OSG is the
only firm to disclose this information, we conclude that they use a conservative
approach for determining this information. The conservatism is portrayed through the
decline in growth and discount rates over the last six years. This is relative to the fact
that interest rates have decreased over the past several years as well. These rates can
also be determined as conservative since they do not effect the financial statements
substantially. Lastly, these rates can be determined as conservative on a national basis
since the “S&P 500 companies had a combined pension deficit of $376 billion at the end
of 2008, according to Bank of America. Many companies with defined-benefit plans had
more than half their assets in equities at the end of 2007. If all that was in the U.S.,
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they still lost 40% last year” (WSJ – Pension Deficit Disorder). This provides that actual
rates were falling nation-wide, not just within a particular industry.
Quality of Disclosure: Qualitative Analysis
“While accounting rules require a certain amount of minimum disclosure,
managers have considerable choice in the matter” (Palepu & Healy). Analysts must
evaluate everything from the letter to shareholders to the footnotes in order to decide
whether a company is using such seemingly insignificant things to make their company
look better. Evaluating quality of disclosure is less about looking at accounting policies
and more about reviewing the other ways managers can misrepresent information
concerning their companies. Analysts consider the Management Discussion and Analysis
section of the report, footnotes, letter to shareholders, and the manner in which
management deals with adverse situations. These elements offer subtle clues to the
approach a company takes when considering the subject of disclosure.
Type 1 Key Accounting Policies
It is essential to consider how the quality of supplementary disclosure reflects
upon the key success factors identified in an industry. For the energy shipping industry,
we identified economies of scale and scope, efficient production, and lower input as our
key success factors. In the following subsection we will examine how the quality of
disclosure of operating and capital leases reflects upon the aforementioned key success
factors.
Economies of Scale and Scope
Overseas Shipping Group discloses, quite extensively, the relative ownership of
their leased vessels as well as the expiry of such leases. Additionally, OSG discloses
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such items like revenue days, operating days, average TCE rates in an effort to allow
the investor to examine their operating efficiency and profitability. Many firms in the
industry do not go as far as OSG does in disclosing the nature of the operating leases.
Specifically, what types of boats are leased, the expiry date, and the remaining revenue
days associated with the leased vessels overtime (aggregate contractual obligations).
These items are inherently related to economies of scale and scope as well as lower
input costs.
Users of OSG’s financial statements can compare the type of vessels acquired,
their future lease obligations and the date of expiry to current lease payments found on
the current year’s income statement. This would enable the investor to determine how
much OSG is paying to lease vessels and increase total revenue days. Although OSG
voluntarily discloses more information about their leased vessels than do, for example
Teekay, a less convoluted structure to the way they compute revenue days as well as
further explanation of the computation would be beneficial in determining the ability to
achieve lower input costs. Revenue days are weighted by ownership, but not by vessel
type. For example, a revenue day for an Aframax carries the same weight as does a
revenue day for a VLCC. This presents distortions in calculating how efficiently OSG is
obtaining its vessels.
Efficient Production
The key success factor of efficient production can be best related to the energy
shipping industry in terms of vessels operating in commercial pools. Commercial pools
aggregate vessels of similar size and use and coordinate the logistics to ensure efficient
use of all the vessels as a whole. Independent operators commit their vessels to these
pools and pay management/administrative fees in return for a higher return on their
operating fleet. Although OSG details which vessels are operating in commercial pools,
they leave the majority of the disclosure up to the commercial pools themselves. The
pools don’t report how much they charge for management fees, nor does OSG present
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what kind of revenue these ships can generate if they were employed independently.
Additionally, OSG doesn’t discuss how many revenue days are derived from commercial
pools. This disclosure would aid the calculation of revenue per revenue day. As
discussed earlier, revenue days are calculated indiscriminate to the type of vessel being
operated. Discussion of relative revenue days and the management/administrative fees
would aid investors in determining the competitive advantage afforded through
participation in commercial pools.
Lower Input Costs
Obtaining lower input costs is a key success factor in an industry characterized
by cost leadership. In the context of the energy shipping industry, lower input costs
best relates to the acquisition of the operating fleet. As discussed earlier, OSG employs
operating leases for 53(fy2008) of its vessels, necessitating the calculation of the costs
of these operating leases relative to the vessels obtained. OSG doesn’t disclose the
price per year of an operating lease on a single vessel, but instead, chooses to only
disclose the total amount paid for operating leases in that year. Additionally, OSG
discloses the revenue days and expiry of all vessels allowing the investor to determine
this is information in a dubious manner. As presented, there is no method to determine
if the current years’ lease expenses are related to future vessels, additional current
vessels or a sale-and-leaseback transaction. Therefore, it is very difficult to forecast
future lease obligations beyond the minimum lease payments provided, but more so, it
is difficult to determine if OSG is benefiting from the use of operating leases. Additional
detail is needed to determine if the choice of operating leases opposed to capital leases
or outright purchases is beneficial in participating in the spot market while rates are
high and limiting their capacity when rates are low. Their disclosure of expiry dates
relates to the latter, but actual costs of operating lease contracts related to the specific
vessels employed and their participation in spot and charter out markets would be very
relevant and useful.
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Type 2 Key Accounting Policies
Operating Leases
Previously we evaluated the degree of conservatism or aggressiveness in
reporting financial statements. In regard to operating and capital leases, significant
amount details are needed to calculate the restated depreciation expenses for the life of
the asset, interest expense and discount rates. For this analysis, examining the quality
of disclosure relating to operating and capital leases clarifies the nature of future
contractual obligations.
Overseas shipping group employs a significant amount of operating leases
relative to their capital leases. Since 2003, the company has increased their number of
chartered in vessels from 7.1 (ownership weighted) to 53 in 2007. The company
provides revenue days as well as operating days relative to the future operating lease
obligations. Operating days simply reflect the sum of the future calendar days the ship
is expected to be operational. Revenue days represent operating days minus time in dry
docking, repair and layup, weighted to reflect ownership. In addition, OSG discloses the
expiry dates of operating leases (charter-ins) on every vessel they operate, as well as
percentage ownership of the vessels under capital leases. Opposed to their competitors,
OSG discloses information related to their new build program, their subsidiaries’ fleet
and the date certain vessels will be banned for the lack of double hull construction or
special coating for environmental purposes.
Although we applaud OSG for their levels of supplementary disclosure, there are
several items in which we would like more clarification. First, operating lease obligations
rise year over year (since 2003), however their minimum net lease obligations don’t
reflect the future expansion of their fleet. Additionally, the degree to which the
company is expected to charter-out future vessels impacts their exposure to
overcapacity if shipping rates decline to unprofitable levels. Most significantly, the lack
of disclosure relating to the nature of the sale-and-leaseback transactions is of high
concern. Commonly, operating leases on vessels involve provisions to extend the life of
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the contract at a specified rate, or simply an option to purchase the vessel outright.
This limitation inhibits the transparency of the available information like operating days
and expiry dates of operating lease contracts to determine the intent of the company.
Simply, the current payments and supplementary disclosures may conceal the
company’s strategy to extend, cancel or charter out future vessels under operating
leases.
In conclusion, OSGs quality of disclosure could be considered mixed, moderate
or slightly better than the majority of energy shipping terms. The firm goes beyond
what similar companies disclose, however, their voluntary disclosure raises new
concerns on the details of contractual obligations.
Goodwill
On an absolute basis, the quality of disclosing goodwill in Overseas Shipholding’s
financial statements is fair. Furthermore, OSG’s disclosure of goodwill is above average
when compared to its close competitors. Teekay is OSG’s only competitor that
acknowledges goodwill. This determines that OSG and Teekay are the only firms that
acquire subsidiaries at a premium cost. The information provided by OSG is considered
to add transparency to the financial statements. This transparency is derived from the
company’s reporting of goodwill, which effectively aids in the analysis of the company.
Compared to the rest of the industry, an investor would look highly on reported rather
than unreported goodwill. The investor would see that the company is making an
attempt to expand by acquiring new subsidiaries within the past two years. This
evidence supports our determination that OSG is fair with regard to disclosure of
goodwill.
Hedging Activities
As stated in Hedging Activities section under the Key Accounting Policies, firms
within the energy shipping industry can be greatly affected by fluctuating rates. The
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firms engage in extended contracts that could be affected by changing rates and
therefore cause a firm to lose money. They also engage in shipping overseas which can
cause transactions to be heavily influenced by foreign exchange rates. The hedging
activities executed by firms reduce risk and give an advantage in a cost leadership
industry.
The information disclosed in Overseas Shipholding Group’s 10-K regarding its
hedging activities is adequate. OSG discloses exactly what types of items are hedged
and the reasons why it is thought to be necessary to do so. Under their “Risk
Management” section, the company provides a clear answer to what activities require
hedging. Initially the firm indicates its engagement in interest rate swaps which are an
“agreement to exchange various combinations of fixed and variable interest rates based
on agreed upon notional amounts”. After they discuss interest rate swaps, they
disclose information on implementation of Forward Freight Agreements. OSG states
that by using these agreements, it “manages the financial risk associated with
fluctuating market conditions.” OSG declared that in 2007 their FFA agreements had a
fair value of nearly $6,500,000. OSG recorded this amount as a liability. The last
hedging activity disclosed in OSG’s 10-K is related to foreign exchange rates. In order
to avoid any fluctuations in these rates, OSG uses a functional currency of U.S. dollars
and says that its revenues and costs are accounted for in this currency.
Overseas Shipholding Goup has all of its hedging activities accounted for in its
10-K. Although some of the fair values determined for assets and liabilities can be
affected by biases as discussed earlier, OSG does not leave much in question. The
description and rationale of activities performed is clearly outlined. When comparing
OSG’s 10-K to that of top competitors, it becomes clear that this is the standard amount
of disclosure for firms in the energy shipping industry.
Benefits and Pension Plan
The qualitative disclosure on postretirement benefits for OSG is high relative to
other companies in the energy shipping industry. Close competitors to OSG do not
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disclose any information about postretirement benefits or pension plans. OSG discloses
almost every facet regarding the determination of postretirement costs to the firm. The
transparency of these accounting numbers is better than OSG’s close competitors and
is, therefore, considered fairly transparent. Since OSG does not provide the equation
for determining growth rates of postretirement benefits, its analysis of future costs for
medical plans and other benefits is somewhat indeterminate. Overall the transparency
of the financial statements with regard to postretirement benefits is reasonable.
Quality of Disclosure: Quantitative Analysis
Quantitative analysis is imperative when evaluating and understanding a
company’s financial statements. Analysts use many different ratios to obtain “real
world” numbers from a company’s accounting statements. These ratios are used to
analyze accounting quality and disclosure within the industry. Ratios are useful in
exposing possible distortions and, thus, lead to a more accurate view of the company.
These ratios by themselves, however, are not the final answer in analyzing the
valuation of a company. When used in conjunction with one another, ratios can depict
certain trends not previously apparent.
Sales Manipulation Diagnostics
The sales manipulation diagnostics are used to analyze the financial data of a
firm and to determine if there are any abnormalities that might be caused by distortions
in the way firms report revenue related accounting numbers. Firms may want to
manipulate its sales numbers to either understate or overstate its net income for a
given year. Essentially, we will be assessing the credibility of the sales reported. Data
from the last seven years will be used to calculate ratios for Overseas Shipholding
Group and three other competitors in the energy shipping industry. In the end, we will
determine if there are any potential red flags that show up from possible manipulation
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of financial information or improper discloser. Since there is no unearned revenue,
inventory, or warranty liability in this industry, we will look closer at revenues and how
it compares to cash from sales and accounts receivable. The tables that were used to
create the following graphs can be found in Appendix A.
Net Sales/Cash from Sales
The net sales over cash from sales ratio is used to view the revenues that a firm
is earning and the amount the company is currently making from transactions as
opposed to receiving payment at a later date. The net sales to cash from sales ratio
essentially reveals if a firm’s sales are supported by the amount of cash collected. This
ratio should be close to 1:1 and stay consistent over time. A firm with an increase in
sales should experience an increase in the cash collected from total sales. There could
be a potential red flag if a there is high variability in this ratio because it might mean
that a firm is recognizing too much or not enough sale during a given period.
0.85
0.90
0.95
1.00
1.05
1.10
1.15
2003 2004 2005 2006 2007 2008
Net Sales/Cash from Sales (raw)
OSG
Frontline
Teekay
Tsakos
‐15.00
‐10.00
‐5.00
0.00
5.00
2003 2004 2005 2006 2007 2008
Net Sales/ Cash from Sales (change)
OSG
Frontline
Teekay
Tsakos
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Since 2005, OSG has had consistent net sales to cash from sales ratio close to
1:1. This suggests that the revenues that OSG reports in its 10-K are supported by the
cash collected. The firms in this industry increase and decrease together from year to
year which means there is structural movement in the energy shipping industry. The
change graph also does not suggest any red flags or manipulation of sales. OSG has
maintained a consistent positive change from year to year. There is no concern when
the value of a change graph is greater than zero.
Net Sales/Accounts Receivable
The net sales over accounts receivable ratio is used to access if the revenues
that a firm is earning support the amounts that a firm reports that it expects to receive
at a later date from those sales. There should be a positive correlation in these graphs.
If the revenues of a firm increase, it is expected that the accounts receivable would also
increase. A firm that has abnormal net sales to accounts receivable ratio for a given
year would raise a concern that they may be overstating sales for the purpose of
overstating net income. Cases such as this would result in a potential red flag.
0.00
5.00
10.00
15.00
20.00
2002 2003 2004 2005 2006 2007 2008
Net Sales/ Accounts Recievable (Raw)
OSG
Frontline
Teekay
Tsakos
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According to the raw and change form graphs above, OSGs sales are supported
by the account receivable. Although lower than the rest of the energy shipping industry,
the ratio has remained stable over the last seven year. After analyzing the change form
graph, the same is true except for a positive increase between 2007 and 2008. A
positive value is a good sign and is expected, so OSG does not raise any red flags for
this section of the diagnostic test.
Conclusion
Overall, no potential red flags were found when assessing the credibility of the
revenues that OSG reports. These diagnostics do not raise concerns that OSG
manipulates its sales for the purpose of increasing or decreasing net income during a
given year.
(80.00)
(60.00)
(40.00)
(20.00)
‐
20.00
40.00
2003 2004 2005 2006 2007 2008
Net Sales/ Accounts Receivable (change)
OSG
Frontline
Teekay
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Sales Manipulation Diagnostics
OSG 2002 2003 2004 2005 2006 2007 2008
Sales/Cash from Sales (raw) ‐‐‐‐ 1.02 1.14 1.02 1.03 1.05 1.01
Sales/Cash from Sales (change) ‐‐‐ 0.35 1.33 0.72 1.14 1.55 0.94
Sales/Account Receivables (raw) 5.77 7.62 5.16 5.57 5.04 4.26 6.00
Sales/Account Receivables (change) ‐‐‐‐ 19.38 3.66 8.43 1.67 1.43 29.91
Sales/Inventory N/A N/A N/A N/A N/A N/A N/A
Sales/Unearned Revenue N/A N/A N/A N/A N/A N/A N/A
Frontline 2002 2003 2004 2005 2006 2007 2008
Sales/Cash from Sales (raw) ‐‐‐‐ 1.017 1.05 0.96 1.004 1.00 N/A
Sales/Cash from Sales (change) ‐‐‐ 0.54 1.11 1.76 ‐10.58 1.01 N/A
Sales/Account Receivables (raw) 11.33 17.15 11.18 16.13 15.78 12.63 N/A
Sales/Account Receivables (change) ‐‐‐‐ 31.36 7.81 5.57 10.44 ‐62.35 N/A
Sales/Inventory N/A N/A N/A N/A N/A N/A N/A
Sales/Unearned Revenue N/A N/A N/A N/A N/A N/A N/A
Teekay 2002 2003 2004 2005 2006 2007 2008
Sales/Cash from Sales (raw) ‐‐‐‐ 1.05 1.029 0.971 1.02 1.03 N/A
Sales/Cash from Sales (change) ‐‐‐ 0.53 0.98 1.85 ‐1.47 1.08 N/A
Sales/Account Receivables (raw) 11.05 10.76 10.56 12.88 10.49 9.17 N/A
Sales/Account Receivables (change) ‐‐‐‐ 10.48 10.12 4.53 1.46 5.58 N/A
Sales/Inventory N/A N/A N/A N/A N/A N/A N/A
Sales/Unearned Revenue N/A N/A N/A N/A N/A N/A N/A
Tsakos 2002 2003 2004 2005 2006 2007 2008
Sales/Cash from Sales (raw) ‐‐‐‐ 1.00 1.02 0.98 1.00 1.04 N/A
Sales/Cash from Sales (change) ‐‐‐ 0.46 1.05 2.26 1.06 1.38 N/A
Sales/Account Receivables (raw) 5.3 9.44 10.44 12.99 18.78 11.68 N/A
Sales/Account Receivables (change) ‐‐‐‐ 105.86 15.64 2.93 110002 3.63 N/A
Sales/Inventory N/A N/A N/A N/A N/A N/A N/A
Sales/Unearned Revenue N/A N/A N/A N/A N/A N/A N/A
Page | 81
Expense Manipulation Diagnostics
The expense manipulation diagnostics are used to see if there are any distortions
in the accounting information provided that companies might have manipulated to
either seem more profitable now or in the future. For example, a firm could understate
interest expenses for the purpose of overstating net income during a given year. The
purpose of this would be to seem more profitable in the following year or to decrease
the current tax burden. Information will be used from Overseas Shipholding Group’s
past seven financial statements to see how their ratios compare with other firms in the
energy shipping industry. If any irregularities are found, we will determine if they are
potential red flags. The tables that were used to create the following graphs can be
found in Appendix A.
Asset Turnover
Asset turnover is defined as sales of the current year divided by the assets of the
previous year. This measure is useful in identifying outlying years when an abnormal
amount of sales are generated by a given amount of assets, or vice versa. Additionally,
the metric helps identify a firm’s capital requirements to support future growth in sales.
Simply put, a certain amount of capital must be “put at risk” to generate the next year’s
sales.
0.00
0.10
0.20
0.30
0.40
0.50
2002 2003 2004 2005 2006 2007 2008
Asset Turnover
OSG
Frontline
Teekay
Tsakos
Page | 82
Business firms that have inconsistent revenues, or variable pricing, tend to have
very inconsistent asset turnovers. Conversely, firms that have stable pricing tend to
have much more stable asset turnover ratios because there is a direct relationship
between increasing capacity and increasing sales. For the energy shipping industry,
asset turnovers are highly variable because rates for energy shipping services are highly
variable to say the least. It’s not uncommon to have a five-fold increase or decrease in
shipping rates in a single year. Therefore, examining asset turnover without
consideration to shipping rates is misleading in understanding the relationship to adding
capacity, and receiving proportional higher total revenues.
In order to negate the industry wide effects of changing rates, it is relevant to
examine the yearly change in asset turnover across an industry. If a firm is
experiencing the opposite change as their peers, several things may be occurring. First,
the firm may be operating in a fundamentally different environment and thus subject to
different shipping rates (product vs. oil/U.S. Flag vs. International). Secondly, a firm
may be recording assets that are not yet cash flow-producing, like taking delivery of a
ship that hasn’t been deployed yet. Thirdly, a firm may be changing their fundamental
business model and engaging in a non-related industry. Finally, the firm may be
inaccurately characterizing their expenses and recording higher or lower sales with the
same amount of assets.
(8.00)
(6.00)
(4.00)
(2.00)
‐
2.00
2003 2004 2005 2006 2007 2008
Asset Turnover (change)
OSG
Frontline
Teekay
Tsakos
Page | 83
CFFO/OI
The CFFO/OI ratio is another ratio used to test for potential expense
manipulation by analyzing if the cash flows from operations are supported by the
operating income. There is no concern if a firm’s ratio remains consistent over a long
period of time, in this case seven years.
The raw graph above, which includes OSG and its competitors, illustrates that
there has not been very much variation in CFFO/OI in this industry. Since there are no
major changes over the years, it can be concluded that OSG’s cash flows from
operations support the operating income that is stated on its income statements. In the
change form of the expense diagnostics, a value that is less than zero would be a
reason for concern. OSG remained positive for the entire seven years after looking at
the change form graph.
0.00
0.50
1.00
1.50
2.00
2.50
2002 2003 2004 2005 2006 2007 2008
CFFO/OI (raw)
OSG
Frontline
Teekay
Tsakos
‐5.00
0.00
5.00
10.00
15.00
2003 2004 2005 2006 2007 2008
CFFO/OI (change)
OSG
Frontline
Teekay
Tsakos
Page | 84
CFFO/NOA
The CFFO/NOA ratio is another ratio used to test for potential expense
manipulation by analyzing if the cash flows from operations are supported by the net
operating assets. Net operating assets include property, plant, and equipment minus
the accumulated depreciation. In the energy shipping industry, net operating assets
would mostly account for all the vessels that the firms use for transportation.
The raw form graph indicates that are significant structural movements in this
industry. In most cases, if a firm has considerable increases in this ratio followed by
decreases it would indicate a potential red flag and possible manipulation of expenses.
Since every company in this industry follows this trend, there are no reasons for
concern when analyzing OSG. There is a potential for a red flag when looking at the
0.000.050.100.150.200.250.300.35
2002 2003 2004 2005 2006 2007 2008
CFFO/NOA (raw)
OSG
Frontline
Teekay
Tsakos
‐10.00
‐5.00
0.00
5.00
10.00
2003 2004 2005 2006 2007 2008
CFFO/NOA (change)
OSG
Frontline
Teekay
Tsakos
Page | 85
change form graph. Since 2006, the change form CFFO/NOA falls below zero and into
the negatives which suggests that there is a concern that expense manipulation could
have occurred.
Total accruals/change in sales
The total accruals to change in sales ratio is the final diagnostic ratio used find
the purpose of finding any expense manipulations on the financial statements. Basically,
this ratio is used to see if a firm’s total accruals are supported by the change in sales.
Accruals can be simply calculated by taking cash flows from operations of a given year
and subtracting the operating income of the same year. There are significant structural
movements when analyzing this ratio for the industry as a whole. The variation in this
ratio between 2005 and 2007 would in most cases signal a potential red flag but since
the competitors of OSG also follow this trend no manipulation will be assumed.
Conclusion
When assessing the credibility of the expenses that OSG reports, a few potential
red flags were found from analyzing the graphs and information. The change form
graphs for asset turnover and CFFO/NOA fell below zero which raised concern for
potential manipulation of its expenses. This could have occurred for the purpose of
increasing or decreasing net income during a given year. Overall, there was more
concern that OSG possibility manipulated its expenses when compared to its revenue.
(1.00)
(0.50)
‐
0.50
1.00
1.50
2.00
2003 2004 2005 2006 2007 2008
Total Accurals/Δsales
OSG
Frontline
Teekay
Tsakos
Page | 86
Expense Manipulation Diagnostics OSG 2002 2003 2004 2005 2006 2007 2008
Asset Turnover 0.15 0.23 0.30 0.30 0.25 0.27 0.44Asset Turnover (change) ‐‐‐‐ ‐4.59 0.52 0.28 0.05 ‐1.14 ‐2.14
CFFO/OI (Raw) 0.23 0.99 0.73 0.84 1.11 0.77 1.03CFFO/OI (Change) ‐‐‐‐ 1.24 0.52 6.73 ‐0.09 1.51 1.41CFFO/NOA (Raw) 0.01 0.16 0.25 0.19 0.18 0.06 0.14
CFFO/NOA (Change) ‐‐‐‐ ‐4.04 1.50 0.07 0.05 ‐1.52 ‐6.39Total Accruals/ Sales ‐‐‐‐ ‐0.01 ‐0.38 ‐0.44 0.95 ‐0.60 0.02
Frontline 2002 2003 2004 2005 2006 2007 2008
Asset Turnover 0.18 0.27 0.44 0.34 0.34 0.35 N/AAsset Turnover (change) ‐‐‐‐ 0.48 ‐6.32 ‐1.42 0.46 0.31 N/A
CFFO/OI (Raw) 1.56 1.11 0.81 1.14 1.04 1.05 N/ACFFO/OI (Change) ‐‐‐‐ 1.01 0.58 ‐0.26 2.71 1.01 N/ACFFO/NOA (Raw) 0.05 0.02 0.31 0.30 0.27 0.22 N/A
CFFO/NOA (Change) ‐‐‐‐ 0.01 ‐0.01 0.25 0.80 0.53 N/ATotal Accruals/ Sales ‐‐‐‐ 0.09 ‐0.32 ‐0.35 0.45 ‐0.10 N/A
Teekay 2002 2003 2004 2005 2006 2007 2008
Asset Turnover 0.29 0.44 0.40 0.37 0.26 0.24 N/AAsset Turnover (change) ‐‐‐‐ 0.92 0.34 1.26 0.02 0.17 N/A
CFFO/OI (Raw) 1.50 1.56 0.99 0.96 1.23 0.64 N/ACFFO/OI (Change) ‐‐‐‐ 1.59 0.68 1.09 0.42 11.10 N/ACFFO/NOA (Raw) 0.09 0.19 0.25 0.19 0.11 0.04 N/A
CFFO/NOA (Change) ‐‐‐‐ 0.56 0.42 6.72 ‐0.05 ‐0.27 N/ATotal Accruals/ Sales ‐‐‐‐ 0.21 ‐0.01 0.09 1.69 ‐0.36 N/A
Tsakos 2002 2003 2004 2005 2006 2007 2008
Asset Turnover 0.19 0.29 0.34 0.27 0.22 0.21 N/AAsset Turnover (change) ‐‐‐‐ 0.85 0.68 ‐0.15 0.15 0.19 N/A
CFFO/OI (Raw) 2.28 1.19 1.06 0.95 1.05 0.76 N/ACFFO/OI (Change) ‐‐‐‐ 0.91 0.93 ‐0.72 1.35 ‐0.55 N/ACFFO/NOA (Raw) 0.06 0.13 0.24 0.21 0.15 0.10 N/A
CFFO/NOA (Change) ‐‐‐‐ 0.51 ‐3.78 ‐0.09 0.09 ‐0.06 N/ATotal Accruals/ Sales ‐‐‐‐ 0.12 0.11 0.35 0.07 ‐0.81 N/A
Page | 87
Potential “Red Flags”
“’Red Flags’ suggest that the analyst should examine certain items more closely
or gather more information on them” (Palepu & Healy). When reviewing a company’s
accounting quality, analysts should consider some common “red flags” such as
unexplained changes in accounting that could be used to inaccurately portray a
company’s financial success, and an increasing gap between reported income and cash
flow from operating activities, which would normally have a steady relationship.
Although these “red flags” are a great guideline for an initial evaluation, they each have
many interpretations and should not be used as an end point.
Operating leases are considered a red flag for Overseas Shipholding Group.
Operating leases are like renting ships, with an average life of 20 years and make the
company seem less capital-intense. Therefore, implementing operating leases allows
the company to conceal the actual amount of liabilities reported. Because the present
value of operating leases grossly exceeded 10% of the long term debt, the income
statement and balance sheet over the previous six years had to be entirely restated.
Undo Accounting Distortions
“If the accounting analysis suggests that the firm’s reported numbers are
misleading, analysts should attempt to restate the reported numbers to reduce
distortion” (Palepu & Healy). Because analysts must rely on outside information, they
will never be able to fully undo every distortion. The cash flow statement and financial
statement footnotes, however, provide important information such as performance
based on accrual and cash accounting that can assist in accurately re-valuing a
company. The following tables represent OSG’s Statement of Income from Operations
and Balance Sheet respectively (OSG 10-K).
Page | 88
OSG Income Statement (Raw)
Dollars in thousands at December 31 2004 2005 2006 2007 2008 RevenuesVoyage charter revenues 53,429 83,797 126,029 267,574 431,777 Time and bareboat charter revenues 116,957 309,471 282,409 361,431 366,629 Pool Revenues 640,449 607,035 638,965 500,300 906,291
Total Revenues 810,835 1,000,303 1,047,403 1,129,305 1,704,697
Voyage Expenses (COGS) (21,254) (38,641) (54,586) (90,094) (159,312)
Gross Profit 789,581 961,662 992,817 1,039,211 1,545,385
Ship Operating Expenses:Vessel expenses 108,170 177,349 209,998 267,947 314,553 Time and bareboat charter hire expenses 65,550 120,301 174,817 258,116 429,808 Depreciation and Amortization 100,088 152,311 141,940 185,499 189,163 General and Administrative 51,993 79,667 99,525 127,211 144,063 Goodwill Impairment Charges 62,874 Loss/(Gain) on Sale of Vessels (39,007) (7,134) 59,738
Total Ship Operating Expenses 325,801 529,628 587,273 831,639 1,200,199
Income from Vessel Operations 463,780 432,034 378,544 207,572 345,186 Equity in Income of Joint Ventures 45,599 43,807 22,474 8,876 12,292
Operating Income 509,379 475,841 401,018 216,448 357,478 Other Income/(Expense) 45,781 77,367 52,107 75,434 (28,847)
Net Earnings Before Interest and Taxes 555,160 553,208 453,125 291,882 328,631
Interest Expense 74,146 89,489 (68,652) (74,696) (57,449)
Change in Accounting Principle and Minority Interest 384,473 217,186 271,182 Provision/(Credit) for Federal Income Taxes 79,778 (1,110) 8,187 (4,827) 34,004
Minority Interest (1,049) 12,479
Net Income 401,236 464,829 392,660 211,310 317,665 Cash Dividends Paid (27,532) (27,615) (36,576) (38,038) (44,856)
Addition to Retained Earnings 373,704 437,214 356,084 173,272 272,809
Page | 89
OSG Income Statement (Restated)
Dollars in thousands at December 31 2004 2005 2006 2007 2008 RevenuesVoyage charter revenues 53,429 83,797 126,029 267,574 431,777 Time and bareboat charter revenues 116,957 309,471 282,409 361,431 366,629 Pool Revenues 640,449 607,035 638,965 500,300 906,291
Total Revenues 810,835 1,000,303 1,047,403 1,129,305 1,704,697
Voyage Expenses (COGS) (21,254) (38,641) (54,586) (90,094) (159,312)
Gross Profit 789,581 961,662 992,817 1,039,211 1,545,385
Ship Operating Expenses:Vessel expenses 108,170 177,349 209,998 267,947 314,553 Operating leases payments newly capitalized 24,537 48,624 213,692 280,483 313,914 Depreciation and Amortization 100,088 152,311 141,940 185,499 189,163 General and Administrative 51,993 79,667 99,525 127,211 144,063 Goodwill Impairment Charges 62,874 Loss/(Gain) on Sale of Vessels (39,007) (7,134) 59,738
Total Ship Operating Expenses 284,788 457,951 626,148 854,006 1,084,305
Income from Vessel Operations 504,793 503,711 366,669 185,205 461,080 Equity in Income of Joint Ventures 45,599 43,807 22,474 8,876 12,292
Operating Income 550,392 547,518 389,143 194,081 473,372 Other Income/(Expense) 45,781 77,367 52,107 75,434 (28,847)
Net Earnings Before Interest and Taxes 596,173 624,885 441,250 269,515 444,525
Interest Expense 74,146 89,489 68,652 74,696 57,449
Change in Accounting Principle and Minority Interest 522,027 535,396 372,598 194,819 387,076 Provision/(Credit) for Federal Income Taxes 79,778 (1,110) (8,187) 4,827 (34,004)
Minority Interest (1,049) 12,479
Net Income 442,249 536,506 380,785 188,943 433,559 Cash Dividends paid (27,532) (27,615) (36,576) (38,038) (44,856)
Addition to Retained Earnings 414,717 508,891 344,209 150,905 388,703
Page | 90
OSG Balance Sheet (Raw)
Dollars in thousands at December 31 2004 2005 2006 2007 2008
AssetsCash and cash equivalents 479,181 188,588 606,758 502,420 343,609 Voyage receivables 144,237 157,334 136,043 180,406 219,500 Other receivables 12,815 22,202 71,723 84,627 64,773 Inventories 1,132 1,855 7,002 9,195 6,627 Prepaid expenses 8,252 14,908 23,995 28,105 43,780 Total Current Assets 645,617 384,887 845,521 804,753 678,289
Capital Construction Fund 268,414 296,126 315,913 151,174 48,681 Vessels (At Cost) 1,422,239 2,288,481 2,501,846 2,691,005 2,683,147 Vessels under Capital Leases 24,382 36,267 30,750 24,399 1,101 Deferred Drydock expenditures 19,805 50,774 81,619 79,837 Vessel Held for Sale 9,744 53,975 Investments in Joint Ventures 227,701 269,257 275,199 131,905 98,620 Other Assets 82,701 53,457 53,762 87,522 130,237 Goodwill 64,293 72,463 9,589 Intangible Assets 92,611 114,077 106,585 Total Non-Current Assets 2,035,181 2,963,793 3,385,148 3,354,164 3,211,772
Total Assets 2,680,798 3,348,680 4,230,669 4,158,917 3,890,061
LiabilitiesAccounts payable 3,960 105,173 192,500 178,837 167,615 Sundry liabilities and accrued expenses 76,087 Federal income taxes 90,943 Short-term debt and current installments of long-term debt 25,024 20,066 27,426 26,058 26,231 Current obligations under capital leases 4,729 6,968 7,650 8,406 1,092 Total Current Liabilities 200,743 132,207 227,576 213,301 194,938
Long-term Debt 863,466 923,612 1,273,053 1,506,396 1,396,135 Obligations under Capital Leases 42,717 42,043 33,894 24,938 Deferred Federal Income Taxes 141,334 270,076 281,711 Deferred Credits and Other Liabilities 147,500 233,456 218,759 182,076 474,355 Minority Interest 132,470 101,766 Total Non-Currrent Liabilities 1,053,683 1,340,445 1,795,782 2,127,591 1,972,256
Total Liabilities 1,254,426 1,472,652 2,023,358 2,340,892 2,167,194
Common stock 40,791 40,791 40,791 40,791 40,791 Paid-in additional capital 199,054 199,570 202,712 208,817 224,522 Retained earnings 1,203,528 1,640,742 1,996,826 2,170,098 2,442,907
Stockholders' Equity 1,442,013 1,881,103 2,240,329 2,419,706 2,708,220 Cost of Treasury Stock (17,579) (17,019) (34,522) (583,708) (838,994) Accumulated other comprehensive income/(loss) 1,938 11,944 1,504 (17,973) (146,359)
Total Shareholders' Equity 1,426,372 1,876,028 2,207,311 1,818,025 1,722,867
Total Liabilities and Shareholders' Equity 2,680,798 3,348,680 4,230,669 4,158,917 3,890,061
Page | 91
OSG Balance Sheet (Restated)
Dollars in thousands at December 31 2004 2005 2006 2007 2008
AssetsCash and cash equivalents 479,181 188,588 606,758 502,420 343,609 Voyage receivables 144,237 157,334 136,043 180,406 219,500 Other receivables 12,815 22,202 71,723 84,627 64,773 Inventories 1,132 1,855 7,002 9,195 6,627 Prepaid expenses 8,252 14,908 23,995 28,105 43,780 Total Current Assets 645,617 384,887 845,521 804,753 678,289
Capital Construction Fund 268,414 296,126 315,913 151,174 48,681 Vessels (At Cost) 1,422,239 2,288,481 2,501,846 2,691,005 2,683,147 Vessels Under Capital Leases 24,382 36,267 30,750 24,399 1,101 Vessels Under Operating Leases, Newly Capitalized 222,364 1,207,297 1,584,651 1,924,540 2,032,783 Deferred Drydock Expenditures 19,805 50,774 81,619 79,837 Vessel Held for Sale 9,744 53,975 Investments in Joint Ventures 227,701 269,257 275,199 131,905 98,620 Other Assets 82,701 53,457 53,762 87,522 130,237 Goodwill 64,293 72,463 9,589 Intangible Assets 92,611 114,077 106,585 Total Non-Current Assets 2,257,545 4,170,690 4,969,799 5,278,704 5,244,555
Total Assets 2,903,162 4,555,577 5,815,320 6,083,457 5,922,844
LiabilitiesAccounts payable 3,960 105,173 192,500 178,837 167,615 Sundry liabilities and accrued expenses 76,087 Federal income taxes 90,943 Short-term debt and current installments of long-term debt 25,024 20,066 27,426 26,058 26,231 Current obligations under capital leases 4,729 6,968 7,650 8,406 1,092 Total Current Liabilities 200,743 132,207 227,576 213,301 194,938
Long-term Debt 863,466 923,612 1,273,053 1,506,396 1,396,135 Obligations under Capital Leases 42,717 42,043 33,894 24,938 Obligations under Operating Leases 222,364 1,207,297 1,584,651 1,924,540 2,032,783 Deferred Federal Income Taxes 141,334 270,076 281,711 Deferred Credits and Other Liabilities 147,500 233,456 218,759 182,076 474,355 Minority Interest 132,470 101,766 Plug for Liabilities 161,910 31,784 172,801 339,273 (190,802) Total Non-Current Liabilities 1,237,215 2,438,192 3,283,158 3,977,223 3,814,236
Total Liabilities 1,437,958 2,570,399 3,510,734 4,190,524 4,009,174
Common stock 40,791 40,791 40,791 40,791 40,791 Paid-in additional capital 199,054 199,570 202,712 208,817 224,522 Retained earnings 1,241,001 1,749,892 2,094,101 2,245,006 2,633,709
Stockholders' Equity 1,480,846 1,990,253 2,337,604 2,494,614 2,899,022 Cost of treasury stock (17,579) (17,019) (34,522) (583,708) (838,994) Accumulated other comprehensive income/(loss) 1,938 11,944 1,504 (17,973) (146,359)
Total Shareholders' Equity 1,465,205 1,985,178 2,304,586 1,892,933 1,913,669
Total Liabilities and Shareholders' Equity 2,903,162 4,555,577 5,815,320 6,083,457 5,922,844
Page | 92
OSG Cash Flow (Raw)
2004 2005 2006 2007 2008Net Income 401,236 464,829 392,660 211,310 317,665 Sales 810,835 1,000,303 1,047,403 1,129,305 1,704,697 Operating Income 509,379 475,841 401,018 216,448 357,478
CFFO/Sales 0.49 0.45 0.43 0.15 0.22CFFO/Net Income 0.99 0.97 1.14 0.79 1.15CFFO/Operating Income 0.78 0.95 1.11 0.77 1.03
CFFO 396,825 452,046 445,975 167,624 366,677 CFFI (191,175) 45,259 (256,702) (34,895) (77,022) CFFF 199,528 (787,898) 228,897 (237,067) (448,466)
OSG Cash Flow (Restated)
2004 2005 2006 2007 2008Net Income 442,249 536,506 380,785 188,943 433,559 Sales 810,835 1,000,303 1,047,403 1,129,305 1,704,697 Operating Income 550,392 547,518 389,143 194,081 473,372
CFFO/Sales 0.54 0.52 0.41 0.13 0.28CFFO/Net Income 0.99 0.98 1.14 0.77 1.11CFFO/Operating Income 0.80 0.96 1.12 0.75 1.02
CFFO 437,838 523,723 434,100 145,257 482,571 CFFI 268,289 (37,181) 8,202,194 (6,730,002) (1,710,510) CFFF 199528 (787898) 228897 (237067) (448466)
Page | 93
Restating Distortions in Financial Statements
The purpose of capitalizing the operating lease payments is to accurately reflect
the right to use a vessel for an extended length of time. Similarly, the obligation to pay
future operating lease payments must be accurately reflected in the liabilities section of
the restated balance sheet. The method we employed involves the amortization future
minimum lease obligations using a 5.2% discount rate (see appendix B) and recording
the carrying value as an equally as an asset and a liability. Additionally, we substituted
the operating lease payments on the income statement (starting in 2002) and replaced
them with interest expense (carrying value X 5.2%) and depreciation expense [carrying
value / (Total remaining revenue days/ average yearly revenue days)]. This process is
essentially revenue neutral and reschedules expenses to reflect the nature of the long-
term liability and asset. The net effect is a larger asset and liability account as well as
higher net income in the short-run and lower net income in later years.
Page | 94
Financial Analysis, Forecast Financials, and Cost of Capital
Estimation
In order to fairly evaluate a company, an analyst must analyze ratios, forecast
financial statements, and determine the cost of capital of the entire company.
Calculating ratios is one of the most efficient ways to compare the company to other
companies within the industry. These ratios also play a big role in forecasting Overseas
Shipholding Group’s financial statements. We will be using 6 years of past data from
OSG’s financial statements to forecast financials for the next 10 years. Lastly, we will
calculate the cost of capital using standard formulas to further our evaluation of OSG.
Financial Analysis
Investors, analysts and creditors rely on financial statements when comparing a
company with competitors in their industry. Financial ratios are most commonly used to
produce smaller and more easily comparable numbers across the industry. These ratios
assist in evaluating a firm along with its competitors and the industry as a whole.
Financial ratios measure the profitability, liquidity, and capital structure of firms. The
numbers computed by using these ratios can assist analysts in forecasting and
comparing data over a large span of time. These ratios provide a straightforward way
to compare Overseas Shipholding Group’s overall financial worth to its competitors and
industry.
Liquidity Ratio Analysis
Liquidity is the ability to convert an asset to cash in a short amount of time with
either no difference or a slight difference in the value of the asset. It is important for a
firm to possess enough liquid assets so that they will be able to account for any short-
term obligations that may arise. Investors use liquidity ratios when evaluating
Page | 95
companies to help determine whether or not they will have the ability to pay off
their short-term debt obligations. If analysts discover that a company has high values
for their liquidity ratios, it illustrates that the company has a large margin of safety
when accounting for their short-term debts. The liquidity ratios we will discuss include
the current ratio, the quick asset ratio, accounts receivable turnover ratio, days sales
outstanding ratio, and the working capital turnover ratio. Many industries also include
the inventory turnover ratio and the days supply inventory ratio, but in the energy
shipping industry no inventory is held.
Current Ratio
The current ratio is a measure of a firm’s ability to pay back its short-term
liabilities with its short-term assets. It is calculated by dividing a firm’s current assets by
its current liabilities. In order to indicate that a firm has enough current assets to cover
its short-term obligations, this ratio should be higher than 1. A ratio less than 1
illustrates that at the point in time when the ratio was calculated, the firm would not be
capable of paying off its obligations. Having a ratio under 1 shows the poor financial
health of a firm, but does not necessarily mean that the firm will go bankrupt because
there are many other ways to access financing. (Investopedia)
0
0.5
1
1.5
2
2.5
3
3.5
4
2003 2004 2005 2006 2007 2008
Current Ratio
OSG
OSG restated
Frontline
Teekay
Tsakos
Industry Avg.
Page | 96
2003 2004 2005 2006 2007 2008
OSG 1.44 3.22 2.91 3.72 3.77 3.48
OSG restated 1.44 3.22 2.91 3.72 3.77 3.48
Frontline 3.73 3.38 2.54 2.51 1.8 n/a
Teekay 1.75 2.22 1.36 0.97 1.1 n/a
Tsakos 1.4 1.93 2.1 2.2 1.73 n/a
Industry Avg. 2.08 2.69 2.23 2.35 2.1 n/a
As illustrated in the graph and table above, from 2005 to 2006, OSG reached a
high value of over 3.5 and was able to maintain it over the last three years. This value
is notably larger than its top competitors on this scale. Although OSG does maintain a
significantly larger current ratio than its competitors, all have been able to sustain a
ratio higher than 1. Due to the fact that Teekay was the only energy shipping firm that
fell to a ratio below 1 in 2006, and because it was by such a small margin, we can
conclude that this energy shipping industry posses the ability to cover their short-term
obligations. However, because OSG has produced a current ratio above the industry
average since 2004 they would be able to cover nearly twice as much short-term debt
as their top competitors. These facts make OSG the safest investment based on current
ratios.
Quick Asset Ratio
The quick asset ratio is very similar to the current ratio. The only difference in
the quick asset ratio is that only the most liquid assets are included in the value of the
current assets. To calculate this ratio add cash, cash equivalents, marketable securities,
accounts receivable, and then divide that amount by the firm’s current liabilities. Since
some current assets can be more difficult to liquidate, and may even be worth a
different amount then the books represent, the quick asset ratio is a good indicator of
Page | 97
the most liquid assets being able to cover the firm’s short-term liabilities. The value for
this ratio should be 1 or higher, similar to the current ratio. If it is greater than 1 then
the firm will be able to cover their short-term debt with their most liquid assets, while a
ratio less than 1 implies they cannot.
2003 2004 2005 2006 2007 2008
OSG 1.28 3.11 2.62 3.26 3.2 2.89
OSG restated 1.28 3.11 2.62 3.26 3.2 2.89
Frontline 0.54 0.94 0.7 0.58 0.41 n/a
Teekay 1.6 1.54 0.84 0.69 0.76 n/a
Tsakos 1.2 1.7 1.79 1.87 1.29 n/a
Industry Avg. 1.16 1.82 1.49 1.6 1.42 n/a
The graph and table for the quick asset ratio reiterates the good standing of
OSG’s liquidity. Their quick asset ratio is significantly higher than any of their top
competitors, which is a great advantage for their industry. This shows that OSG would
be much more capable of covering their short-term debts by using only their most liquid
assets. When compared to Frontline’s ratio, which has been below 1 for the last 6
0
0.5
1
1.5
2
2.5
3
3.5
2003 2004 2005 2006 2007 2008
Quick Asset Ratio
OSG
OSG restated
Frontline
Teekay
Tsakos
Industry Avg.
Page | 98
years, and Teekay’s ratio, which has fallen beneath 1 over the last 3 years, OSG has
outstanding financial health in this area. When considering the quick asset ratio, OSG
would be considered the soundest investment.
Accounts Receivable Turnover
A common way for a firm to obtain revenue is to perform a service for their
customer based on the customer’s promise of a future payment. After the agreement is
made and the service is rendered to the customer, the revenue earned by the firm is
known as accounts receivable. The accounts receivable turnover is a calculation that
measures how efficiently a company is extending credit to its customers as well as
collecting its customer’s debts. A high accounts receivable turnover implies that a firm is
able to recover its outstanding receivables in a timely manner. A low rate indicates that
it takes the firm a prolonged amount of time to collect its customer’s debt, which shows
that the firm is remaining in debt for an extended period of time. This ratio is calculated
by dividing the firm’s total net sales by its accounts receivable.
0
5
10
15
20
2003 2004 2005 2006 2007 2008
Accounts Receivable Turnover
OSG
OSG restated
Teekay
Frontline
Tsakos
Industry Avg.
Page | 99
2003 2004 2005 2006 2007 2008
OSG 7.62 5.16 5.57 5.04 4.26 5.99
OSG restated 7.62 5.16 5.57 5.04 4.26 5.99
Teekay 10.76 10.56 12.88 10.49 9.17 n/a
Frontline 17.15 11.88 16.13 15.78 12.63 n/a
Tsakos 9.44 10.44 12.99 18.78 11.68 n/a
Industry Avg. 11.24 9.51 11.89 12.52 9.44 n/a
As seen in the graph and table above, OSG has a much consistently lower
accounts receivable turnover than the rest of the industry. This proves that it takes OSG
a greater amount of time to collect on their customer’s outstanding receivables than
their top competitors. However, because the turnover rate has stayed relatively
consistent for OSG over the last 6 years there should be no major concern. The steady
rate indicates that OSG will still collect on their outstanding receivables, even if it takes
a much longer period of time than the industry average. Though this fact remains, they
are still at a great disadvantage when compared to their competitors. Investors are
much more confident in firms who can quickly realize their accounts receivable.
Days Sales Outstanding
The days sales outstanding ratio is used to indicate the amount of time it takes a
firm to collect its outstanding accounts receivable. By dividing the number of days in a
year by a firm’s accounts receivable turnover, we are able come up with a more
accurate measure of exactly how many days it takes a firm to collect its customer’s
debt. The higher the ratio the longer it takes a firm to collect its short-term debt. It is
better for a firm to have a lower days sales outstanding ratio to prove they can quickly
collect accounts receivable and in turn possess more of their assets.
Page | 100
2003 2004 2005 2006 2007 2008
OSG 47.9 70.74 65.53 72.42 85.68 60.93
OSG restated 47.9 70.74 65.53 72.42 85.68 60.93
Frontline 21.28 30.72 22.63 23.13 28.9 n/a
Teekay 33.92 34.56 28.34 34.8 39.8 n/a
Tsakos 38.67 34.96 28.1 19.44 31.25 n/a
Industry Avg. 35.44 42.75 36.15 37.45 46.41 n/a
As indicated by the graph and table above, OSG has a much higher days sales
outstanding ratio than the rest of their top competitors. Since this ratio is directly
related to the accounts receivable turnover ratio, the information depicted in this graph
falls in line with what was previously determined. When compared to the industry as a
whole, OSG takes a significantly longer amount of time to collect on their outstanding
accounts receivable. If OSG, who has averaged nearly 70 days to collect their
outstanding accounts receivables the last 6 years, were taken out of the industry, the
total average would drastically lower to 30 days sales outstanding. This means that
OSG has accounts receivable for specific customers for nearly 40 days longer than their
0102030405060708090
2003 2004 2005 2006 2007 2008
Days Sales Outstanding
OSG
OSG restated
Frontline
Teekay
Tsakos
Industry Avg.
Page | 101
competitors do. Its takes over twice as much time for OSG to collect cash as the
industry average. This is a drastic difference in the amount of time it takes OSG to
obtain their accounts receivable. Since OSG takes so much more time to collect their
receivables, they have a significantly larger portion of assets held in the accounts
receivable section of their balance sheet. This is not a sign of financial strength for OSG
and could be a concern for potential investors.
Working Capital Turnover
The working capital turnover ratio is used to analyze the relationship between
the money used to fund operations and the sales generated from these operations.
(Investopedia) The working capital of a firm is found by subtracting the firm’s current
assets by their current liabilities. The amount found by performing this equation is
typically what the firm will use to fund operations and purchase inventory. In order to
find the working capital turnover ratio, a firm will divide its net sales by its working
capital. The higher the working capital turnover ratio, the better off a firm is because it
will be generating more revenue from sales then the amount of expenses they are
using to fund the sales.
0
2
4
6
8
10
12
2003 2004 2005 2006 2007 2008
Working Capital Turnover
OSG
OSG restated
Frontline
Teekay
Tsakos
Industry Avg.
Page | 102
2003 2004 2005 2006 2007 2008
OSG 10.51 1.82 3.96 1.69 1.91 3.53
OSG restated 10.51 1.82 3.96 1.69 1.91 3.53
Frontline 1.32 2.24 2.13 2.33 2.75 n/a
Teekay 7.66 4.41 11.80 -147.85 25.29 n/a
Tsakos 7.22 4.26 2.95 3.53 4.29 n/a
Industry Avg. 6.35 2.77 3.01 2.52 2.98 n/a
In order to keep the graph relatively simple, we omitted Teekay’s working capital
turnover because they are inconsistent, with numbers much lower and higher than the
industry average. From 2004 to the present, one can see that OSG’s numbers, and the
numbers of the other two competitors, have remained relatively consistent by keeping
their working capital turnover between the 2:1 and 4:1. Although OSG possessed the
lowest working capital turnover in the industry in 2006 and 2007, we can see that it’s
climbing back up in 2008. Since we do not have any of their competitor’s numbers for
2008 this information is not much help. We can only conclude from the data that the
industry as a whole is relatively consistent and no one firm is at a great advantage in
this area.
Conclusion
Now that we have calculated all of the various liquidity ratios for OSG and its top
competitors in the energy shipping industry, we can accurately compare the level of
liquidity each firm possesses. We concluded from the current ratio that OSG is the most
capable of all the firms to cover its short-term debt obligations. The same information
was derived from the quick asset ratio for OSG. They are the most competent firm in
the industry when it comes to maintaining a high level of liquid assets on their balance
sheet. These two ratios show that OSG is significantly healthier financially when judging
Page | 103
by the liquidity of current assets. This gives OSG a significant advantage over their
competition in the liquidity analysis as a whole.
When we analyzed the accounts receivable turnover ratio and days sales
outstanding ratio for the industry, we concluded that OSG has a much more difficult
time collecting its outstanding receivables compared to their competitors. This puts a
great deal of pressure on their liquidity analysis since it is such a substantial difference
from the industry as a whole. Finally, when we determined the working capital turnover
for the industry we found the OSG and its top competitors all maintain a relatively
similar ratio.
An additional fact that can be concluded from the overall liquidity analysis the
irrelevance of the cash to cash cycle. The cash to cash cycle is the summation of days
sales outstanding and days supply inventory. Since inventory is not relevant to OSG,
their days supply inventory in nonexistent. Since OSG does not possess a days supply
inventory ratio, their cash to cash cycle cannot be calculated since only one component
of the equation is employed.
Ratio Performance Trend
Current Ratio Outperforming Stable
Quick Asset Ratio Outperforming Stable
Accounts Receivable Turnover Underperforming Stable
Days Sales Outstanding Underperforming Decreasing
Working Capital Turnover Average Increasing
Page | 104
Profitability Ratio Analysis
Profitability ratios allow us to analyze how effective a firm has been at
generating revenues to create profit during a given year. Investors use these ratios to
evaluate if a firm’s profits follow a positive and stable trend or if there are reasons to be
concerned. Investors view consistent profitability as a sign of financial health. The most
common ratios used for this analysis include gross profit margin, operating expense
ratio, operating profit margin, net profit margin, asset turnover, return on assets (ROA),
and return on equity (ROE). When comparing these ratios over a five year period and
with industry competitors it is important to note that a high ratio is desirable in most
situations.
Gross Profit Margin
Gross profit margin is calculated by dividing a firm’s gross profit during a given
year by the net sales for the same year. Gross profit is equal to revenues minus the
cost of goods sold. In the energy shipping industry, commission and voyage expenses
are subtracted from revenues to find the gross profit. A high margin indicates that a
firm is making a profit from performing a service and managing the cost related to that
service. Efficient firms consistently achieve high levels of gross profit margin.
0
0.2
0.4
0.6
0.8
1
1.2
2003 2004 2005 2006 2007 2008
Gross Profit Margin
OSG
OSG restated
Frontline
Teekay
Tsakos
industry average
Page | 105
2003 2004 2005 2006 2007 2008
OSG 0.95 0.97 0.96 0.95 0.92 0.91
OSG-restated 0.95 0.97 0.96 0.95 0.92 0.91
Frontline 0.73 0.82 0.83 0.81 0.82 n/a
Teekay 0.75 0.81 0.79 0.74 0.78 n/a
Tsakos 0.75 0.83 0.84 0.80 0.82 n/a
industry average 0.80 0.86 0.85 0.82 0.84 n/a
Since the energy shipping industry is a service industry, the voyages that the
firms take part in will be considered their product. Voyage expenses include fuel, canal
tolls, and port charges. In highly competitive industries such as this one, keeping
product costs down is important to remain profitable and offer competitive rates.
Overseas Shipholding Group has consistently had a gross profit margin above the entire
industry over the past six years with an average of about 95%. OSG’s high margin can
be attributed to its ability to keep voyage expenses low relative to its competitors. The
rest of the industry has also been stable over the same time period with averages under
85%. OSG’s consistent high margin when compared to the industry is very desirable
when evaluating profitability.
Operating Expense Ratio
The operating expense ratio is found by taking operating expenses and dividing
by the net sales. In the energy shipping industry, operating expenses include vessels
expenses, time and bareboat charter hire expenses, and general and administrative
expenses. A low operating expense ratio is desirable because it indicates that a firm is
efficiently controlling cost related to business operations, and ultimately less is taken
away from gross profits.
Page | 106
2003 2004 2005 2006 2007 2008
OSG 0.53 0.40 0.53 0.64 0.82 0.80
OSG-restated 0.54 0.35 0.46 0.60 0.76 0.64
Frontline 0.31 0.20 0.25 0.29 0.42 n/a
Teekay 0.56 0.44 0.46 0.53 0.62 n/a
Tsakos 0.46 0.37 0.32 0.32 0.32 n/a
industry average 0.47 0.35 0.39 0.45 0.54 n/a
According to the graph and table above, OSG’s operating expense ratio has been
above the industry average for each of the past six years. In 2007, OSG had an
operating expense ratio 30% higher than the industry average. One of the reasons for
this is that OSG has a greater amount of charter hire expense relative to its
competitors. Investors will look negatively on this ratio because it shows that OSG has
too many operating expenses when compared to the rest of the industry, and it will
decrease overall profitability. Although this is the case, the restated financial statements
slightly improve this ratio. The restated operating expense ratio is consistently lower
than the original and has a decreasing trend since 2007.
0.00
0.20
0.40
0.60
0.80
1.00
2003 2004 2005 2006 2007 2008
Operating Expense Ratio
OSG
OSG‐restated
Frontlilne
Teekay
Tsakos
industry average
Page | 107
Operating Profit Margin
The operating profit margin is found by dividing operating income by net sales.
This is another measure of operating efficiency that is used to evaluate profitability. “A
healthy operating margin is required for a company to be able to pay for its fixed costs,
such as interest on debt” (Investopedia). It is desirable for a firm to achieve a high
sustainable operating profit margin.
2003 2004 2005 2006 2007 2008
OSG 0.50 0.63 0.52 0.38 0.19 0.21
OSG-restated 0.50 0.63 0.52 0.38 0.19 0.21
Frontline 0.41 0.61 0.57 0.52 0.40 n/a
Teekay 0.19 0.37 0.32 0.21 0.17 n/a
Tsakos 0.29 0.46 0.52 0.48 0.50 n/a
industry average 0.35 0.52 0.48 0.40 0.31 n/a
According to the graph, OSG has followed the industry trend over the last five
years. Although this is the case, since 2006 the operating profit margin has been below
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2003 2004 2005 2006 2007 2008
Operating Profit Margin
OSG
OSG restated
Frontline
Teekay
Tsakos
industry average
Page | 108
the industry average and has been moving in the negative direction. This is not a
positive sign when evaluating profitability. The significant decrease in the operating
margin for OSG is a result of the increase in all operating expenses, especially a 250%
increase in “time and bareboat charter hire expenses” between 2004 and 2008.
Controlling charter hire expenses in future years will be beneficial for OSG to improve
its operating expense ratio, operating profit margin, and ultimately increasing
profitability. Also, OSG’s restated financial statements do not impact operating profit
margin.
Net Profit Margin
The net profit margin is found by dividing the net income by the net sales in a
given year. This ratio measures the actual amount earned for every dollar of revenue.
The higher the net profit margin, the better the firm is viewed by investors. “A higher
profit margin indicates a more profitable company that has better control over its costs
compared to its competitors” (Investopedia).
0
0.1
0.2
0.3
0.4
0.5
0.6
2003 2004 2005 2006 2007 2008
Net Profit Margin
OSG
OSG restated
Frontline
Teekay
Tsakos
industry average
Page | 109
2003 2004 2005 2006 2007 2008
OSG 0.27 0.49 0.46 0.37 0.19 0.19
OSG-restated 0.27 0.49 0.46 0.37 0.19 0.19
Frontline 0.35 0.56 0.41 0.33 0.44 n/a
Teekay 0.11 0.34 0.29 0.13 0.08 n/a
Tsakos 0.24 0.45 0.55 0.46 0.37 n/a
industry average 0.24 0.46 0.43 0.32 0.27 n/a
Overseas Shipholding Group has closely followed the industry trend over the past
six years. Overall, the average for the industry has varied from about 20% to 50%
during this time. This variation is due to the changes in net sales for every company in
the energy shipping industry from year to year. Since 2006, OSG’s margin has slipped
below the industry average and could be a slight concern for investors. There is no
affect on this ratio when considering restated financial statements.
Asset Turnover
Asset turnover, or asset productivity, is calculated by taking the sales of a given
year and dividing that by the total assets of the previous year. This lag is necessary
because the previous year’s assets are used to generate revenue in the current year. A
high ratio indicates that firms are efficiently using their assets to create income.
Page | 110
2003 2004 2005 2006 2007 2008
OSG 0.22 0.41 0.37 0.31 0.27 0.41
OSG-restated 0.22 0.38 0.34 0.23 0.19 0.28
Frontline 0.38 0.43 0.36 0.35 0.28 n/a
Teekay 0.58 0.62 0.36 0.38 0.31 n/a
Tsakos 0.35 0.39 0.31 0.39 0.25 n/a
industry average 0.38 0.46 0.35 0.36 0.28 n/a
Since 2005, the energy shipping industry has been relatively stable when
compared to previous years with averages between 30% and 35%. OSG maintained an
asset turnover ratio slightly below the industry average until 2007. Although Overseas
Shipholding Group is the only company to report their 2008 numbers at this point, it is a
positive sign that it had a significant increase in productivity during that year. This
significant increase in asset turnover can be attributed to 50% increase in revenue
between 2007 and 2008.
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
2003 2004 2005 2006 2007 2008
Asset Turnover
OSG
OSG‐restated
Frontlilne
Teekay
Tsakos
industry average
Page | 111
The asset turnover of OSG using its restated financial statements is lower than
the original turnover for OSG and the rest of the industry. This is due to the fact that
there were more assets added after restating operating leases. It is a positive sign
when analyzing profitability that there was an increase in this ratio since 2007.
Return on Assets
“ROA gives an idea as to how efficient management is at using its assets to
generate earnings” (Investopedia). It is calculated by dividing a firm’s net income in a
given year by the total assets of the previous year. Alternatively, ROA can be measured
by multiplying the firm’s profit margin by the asset turnover. The lag is necessary
because of the asset turnover portion of this equation. A high ROA is desirable for firms
that want to remain profitable.
0.00
0.05
0.10
0.15
0.20
0.25
2003 2004 2005 2006 2007 2008
Return on Assets
OSG
OSG‐restated
Frontlilne
Teekay
Tsakos
industry average
Page | 112
2003 2004 2005 2006 2007 2008
OSG 0.06 0.20 0.17 0.12 0.05 0.08
OSG restated 0.06 0.19 0.16 0.09 0.04 0.05
Frontline 0.13 0.24 0.14 0.12 0.12 n/a
Teekay 0.07 0.21 0.10 0.05 0.02 n/a
Tsakos 0.09 0.17 0.17 0.18 0.09 n/a
Industry Avg. 0.09 0.21 0.15 0.12 0.07 n/a
In the energy shipping industry, the industry average ROA has fluctuated
between 5% and 20% over the past five years. OSG has remained consistent with a
return on assets that closely matches the industry average on a yearly basis. In 2008,
OSG experienced an increase in ROA which was caused by the increase in the asset
turnover during the same year. Since the energy shipping industry has revenues that
vary from year to year, ratios such as this one will be less stable when compared to
other industries. For this reason, it is important for firms to have a ROA that is not
consistently below the rest of the industry.
When taking into account the restated financial statements for OSG, the ROA is
consistently below the industry average and the original OSG ROA. This is caused by
the increase in the amount of assets that were added because of operating leases.
Return on Equity
Return on equity is calculated by taking the net income in a given year and
dividing that by the owner’s equity of the previous year. “ROE is a comprehensive
indicator of a firm’s performance because it provides an indication of how well
managers are employing the funds invested by the firm’s shareholders to generate
Page | 113
returns” (Palepu & Healy). A high ROE ratio is desirable because it means that the firm
is efficiently using equity for profit.
2003 2004 2005 2006 2007 2008
OSG 0.15 0.44 0.33 0.21 0.10 0.17
OSG restated 0.15 0.44 0.33 0.21 0.10 0.17
Frontline 0.33 0.82 0.66 0.72 0.85 n/a
Teekay 0.12 0.46 0.26 0.12 0.07 n/a
Tsakos 0.22 0.46 0.31 0.32 0.24 n/a
Industry Avg. 0.17 0.45 0.30 0.22 0.14 n/a
In the energy shipping industry, ROE ratios vary over time because of the
changes in industry sales from year to year. Overseas Shipholding Group has
consistently stayed with the industry average over the past six years, if Frontline is
omitted from the average as an outlier. However, in 2008, OGS did experience an
increase in ROE due to the significant increases in revenue and net income during that
year. Currently, there are no concerns about ROE when analyzing profitability, but if
00.10.20.30.40.50.60.70.80.9
2003 2004 2005 2006 2007 2008
Return on Equity
OSG
OSG restated
Frontline
Teekay
Tsakos
Industry Avg.
Page | 114
OSG continues to experience similar increases in the future it can positively affect its
position in the industry. Additional, there is no impact to ROE when considering the
restated financial statements.
Conclusion
After comparing OSG’s profitability ratios with its competitors in the energy
shipping industry it can be concluded that its profitability performance is mixed. OSG’s
ability to control cost such as voyage expenses has allowed it to be an industry leader
when measuring the gross profit margin. On the other hand, OSG is consistently below
the average in the areas of operating expenses ratio and operating profit margin
because of the high charter hire expenses that OSG takes on when compared to its
competitors. Recent information from 2008 indicates that OSG is headed in the right
direction in these areas which improve their overall position of profitability. Net profit
margin, asset turnover, ROA, and ROE have all been similar to the industry averages,
but also have an increasing trend since 2007 which is favorable.
Ratio Performance Trend
Gross Profit Margin Outperforming Stable
Operating Expense Ratio Underperforming Decreasing
Operating Profit Margin Underperforming Decreasing
Net Profit Margin Average Decreasing
Asset Turnover Average Increasing
Return on Assets Average Increasing
Return on Equity Average Increasing
Page | 115
Firm Growth Rate Ratios
Understanding and evaluating the growth rates of a particular firm can generate
a good basis for assessing that firm’s potential to maintain its future growth without
having to depend on outside sources of financing. If a firm can rely on its own internal
funds when expanding into the future it will hold an advantage over other firms who
borrow money to expand. When comparing firms by their growth rates you can also get
a better understanding of how well the firm will be able to compete in the future. If a
firm has to rely on outside funds to maintain an increasing profit they will be much
more hesitant to expand and grow when compared to the firms who can finance their
own growth. The two growth rate ratios we will use to evaluate OSG and their top
competitors in the energy shipping industry are the internal growth rate and the
sustainable growth rate.
Internal Growth Rate
The internal growth rate, or IGR, is the maximum level of growth attainable for a
firm without acquiring outside sources of funding. If the IGR is applied to a firm then
the only possibility for a firm to continue to increase in size is by utilizing their cash
flows and retained earnings. The IGR can be calculated by multiplying the firm’s return
on assets, or ROA, by 1 minus the dividend payout ratio (dividends / net income). It is
advantageous for a firm to possess a high IGR to prove that by using only internal
funds they can continue to finance capital and assets.
Page | 116
2003 2004 2005 2006 2007 2008
OSG 0.05 0.19 0.16 0.11 0.04 0.07
OSG restated 0.05 0.19 0.16 0.11 0.04 0.07
Frontline 0.02 0.00 -0.07 -0.03 -0.02 n/a
Teekay 0.05 0.20 0.09 0.04 0.01 n/a
Tsakos 0.07 0.15 0.13 0.14 0.06 n/a
Industry Avg. 0.05 0.13 0.08 0.06 0.02 n/a
As illustrated by the graph and table above, the energy shipping industry has a
relatively stable IGR as a whole. The decline in the industry’s average IGR is due to the
fact that each firm has been consistently paying out more cash dividends. When a firm
earns a profit throughout the year, they can choose to distribute a portion of that
money to their shareholders in the form of dividends. Although paying out dividends to
shareholders can show a firm’s financial health, it can significantly lower their IGR. The
funds used to pay dividends are no longer held by the firm and this reduces the firm’s
retained earnings.
‐0.1
‐0.05
0
0.05
0.1
0.15
0.2
0.25
2003 2004 2005 2006 2007 2008
Internal Growth Rate
OSG
OSG restated
Frontline
Teekay
Tsakos
Industry Avg.
Page | 117
Only one of OSG’s top competitors, Frontline, has had a negative rate over the
past 5 years. This is due to the fact that they did not have enough net income to cover
the amount paid as dividends to their shareholders. If Frontline were taken out of the
industry average, the average would significantly increase and the remaining three
firms would be in much closer relation to it. Since these firms all possess positive rates
with only a slight degree of differentiation among them, no one firm in particular is at
an advantage when judged by their IGR. The majority of the firms used for comparison
here have the ability for potential growth based solely on internal funding.
Sustainable Growth Rate
The sustainable growth rate, or SGR, is a measure of how much growth a firm
can sustain without being forced to borrow money to supplement existing funds. This
growth rate is typically employed to give an idea of a steady maintainable rate for a
firm when they are growing at rapid rates that cannot be upheld. When a firm
surpasses their SGR, they are forced to rely on outside sources of financing to stimulate
their personal financing activities and future growth. The SGR for a firm can be
calculated by multiplying a firm’s IGR by 1 plus their debt over equity.
‐0.60
‐0.40
‐0.20
0.00
0.20
0.40
0.60
2003 2004 2005 2006 2007 2008
Sustainable Growth Rate
OSG
OSG‐restated
Frontline
Teekay
Tsakos
Industry Avg.
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2003 2004 2005 2006 2007 2008
OSG 0.11 0.35 0.29 0.20 0.09 0.15
OSG-restated 0.11 0.38 0.40 0.28 0.14 0.23
Frontline 0.08 -0.02 -0.45 -0.21 -0.16 n/a
Teekay 0.11 0.49 0.22 0.12 0.05 n/a
Tsakos 0.18 0.26 0.24 0.36 0.17 n/a
Industry Avg. 0.12 0.27 0.08 0.12 0.04 n/a
The information provided by the graph and table above shows how closely the
IGR and the SGR are related. It is once again made apparent that the industry, as a
whole, is moderately stable and has a positive sustainable growth rate. Over the past 5
years OSG has stayed close to the industry average, with only minor fluctuations above
and beneath it. When taking into account the restated financial statements, the overall
SGR improves due to the increase in the debt to equity ratio. Even though this is a good
sign for their personal financial health, their top competitors (with the exception of
Frontline) all possess relatively similar rates. It can be concluded once more that there
is no one firm in particular with an advantage from the rest of the industry based on
their SGR. The greater part of the industry holds stable, positive rates with no reason to
predict a change in the near future.
Conclusion
OSG has performed around the same level as the industry average for the last 5
years. Although this is a good sign since the majority of the industry has held steady
and positive growth rates, they are not drastically outperforming their top competition.
These ratios show that there is room for potential growth, but they do not give
potential investors a solid reason to believe OSG will grow at a greater rate than their
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competition in the upcoming years. Based on both the internal growth rate and
sustainable growth rate of OSG, they will continue to perform at the industry average
for several years to come.
Ratio Performance Trend
Internal Growth Rate Average Increasing
Sustainable Growth Rate Average Increasing
Capital Structure Ratios
The capital structure ratios are used to determine how a firm raises money to
fund its assets. Companies have to decide to either borrow from a bank and increase
liabilities or obtain money from the sale of company stock. The decisions that a
company makes can affect its credit rating and future interest rates and expenses. The
ratios that are used to analyze the capital structure of a particular company include
debt to equity ratio, times interest earned, and debt service margin.
Debt to Equity
The debt to equity ratio indicates the firm’s risk at financing its assets and is
found by taking total liabilities and dividing by stockholders equity. Finding the right
combination of liabilities and equity is important for a company to remain competitive in
its industry. Firms with a high ratio have the opportunity to earn more revenue than
firms that rely on internal financing. The downside: credit ratings for these firms will
decrease because too much debt is considered risky. The interest rates to borrow will
grow and it will become more difficult to raise future funds because they will be
considered more likely to default. A low debt to equity ratio is also not preferable. “Too
much equity financing can indicate that you are not making the most productive use of
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your capital; the capital is not being used advantageously as leverage for obtaining
cash” (US Chamber of Commerce).
2003 2004 2005 2006 2007 2008
OSG 1.18 0.88 0.78 0.92 1.29 1.26
OSG-Restated 1.33 1.04 1.43 1.63 2.35 2.44
Frontline 2.44 3.59 5.23 5.87 7.44 n/a
Teekay 1.17 1.46 1.37 2.06 2.74 n/a
Tsakos 1.62 0.81 0.79 1.61 1.76 n/a
Industry Avg. 1.60 1.68 2.04 2.61 3.31 n/a
In the energy shipping industry, having a good credit rating is important because
firms need to finance the shipping vessels that they purchase. Poor credit ratings will
drastically increase interest expenses and hinder a firm’s ability to remain profitable.
According to the graph above, OSG has a debt to equity that has been consistently
stable and at the bottom of the industry. OSG and Tsakos are the only two firms in this
industry to stay below a 2:1 ratio since 2003. The restated financial statements impact
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
2003 2004 2005 2006 2007 2008
Debt to Equity
OSG
OSG‐Restated
Frontline
Teekay
Tsakos
Industy Avg
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this ratio because of the increase of debt when taking into account the operating
leases. This increase is significant and will ultimately affect other areas such as the
sustainable growth rate.
This ratio can explain why one of OSG’s competitive advantages is its high credit
rating. In turn, the high credit rating allows OSG to reduce financing costs and remain
financially flexible when compared to the rest of the industry (OSG 10K). On the other
hand, Frontline has consistently increased over the last six years with a debt to equity
ratio of almost 8:1 in 2007. In a recession, Frontline will have a difficult time paying off
its debt and have high interest expenses and rates.
Times Interest Earned
The ability to obtain low interest rates in the energy shipping industry is very
important because of the amount of interest expense that firms in this industry face.
The times interest earned ratio indicates if a company has the income to cover the
interest expenses that need to be paid. It is measured by taking the net income before
interest and taxes (NIBIT) in a given year and dividing that number by the interest
expense of the same year.
0
5
10
15
20
25
2003 2004 2005 2006 2007 2008
Times Interest Earned
OSG
OSG restated
Frontline
Teekay
Tsakos
Industry Avg.
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2003 2004 2005 2006 2007 2008
OSG 3.62 8.20 8.35 6.46 3.48 5.75
OSG restated 3.62 8.20 8.35 6.46 3.48 5.75
Frontline 6.48 15.17 11.57 10.83 7.00 n/a
Teekay 3.62 10.14 7.80 5.21 4.91 n/a
Tsakos 5.71 11.76 12.51 16.59 20.18 n/a
Industry Avg. 4.86 11.32 10.06 9.77 8.89 n/a
When analyzing the times interest earned there are no concerns in the capital
structure if a firm has a ratio over 4:1. If a company has a ratio of more than 7:1,
banks would be more willing to loan to a particular company because this ratio explains
the firm’s ability to pay off interest expenses. A high ratio is desirable to a point. “A high
ratio can indicate that a company has an undesirable lack of debt or is paying down too
much debt with earnings that could be used for other projects” (Investopedia).
Overseas Shipholding Group has an average ratio of 6:1 over the last six years which is
not a concern. This ratio means that OSG has $6.00 dollars for every $1.00 of interest
expense that needs to be paid. Also, there is no impact to this ratio when taking into
account OSGs restated financial statements.
Debt Service Margin
The debt service margin ratio measures if a firm has enough cash flows to cover
the current payments of long term debt. This ratio is found by dividing the current year
cash flows from operations by the current installment of long term debt for the year
before. The current installment of long term debt appears on most financial statements
under current liabilities as either notes payable current or current portion of long term
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debt. A high ratio is desirable when analyzing the capital structure because the firm has
more cash to cover current debt obligations.
2003 2004 2005 2006 2007 2008
OSG 15.63 26.05 30.46 31.22 11.74 25.67
OSG restated 15.63 26.05 30.46 31.22 11.74 25.67
Frontline 3.19 5.42 5.84 4.96 3.25 n/a
Teekay 5.45 9.74 7.28 6.23 3.05 n/a
Tsakos 2.79 5.08 4.86 7.12 6.31 n/a
Industry Avg. 6.76 11.58 12.11 12.38 6.09 n/a
OSG has a debt service margin that has remained significantly above the rest of
the energy shipping industry over the past six years. This is due to the fact that
Overseas Shipholding Group has less current long term liabilities than their competitors.
This ratio stays the same when taking into account OSG restated financial statements.
In 2007, OSG experienced a decrease in cash flows from operations of over 60% which
can explain the drop in debt service margin during this time.
0
5
10
15
20
25
30
35
2003 2004 2005 2006 2007 2008
Debt Service Margin
OSG
OSG restated
Frontline
Teekay
Tsakos
Industry Avg.
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Altman’s Z-Score
The Altman’s Z-Score is a formula with five financial components that measures
a public company’s likelihood to become bankrupt. “Real world application of the Z-
Score successfully predicted 72% of corporate bankruptcies two years prior to these
companies filing for Chapter 7” (Investopedia). A lower Z-Score results in a greater
probability that a firm is headed towards bankruptcy. If the Z-Score is less than 1.81 for
a company, the model predicts this to be an unhealthy company that is in high danger
of bankruptcy. If the Z-Score is between 1.81 and 2.67, the model predicts a company
in the grey area. Finally, if the Z-Score is more than 2.67, the model predicts a healthy
company that is unlikely to become bankrupt. The Altman’s Z-Score is calculated using
the formula below.
0.000.501.001.502.002.503.003.50
2003 2004 2005 2006 2007 2008
Altman's Z‐Score
OSG
OSG‐restated
Frontline
Teekay
Tsakos
Industry Avg.
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2003 2004 2005 2006 2007 2008
OSG 1.83 2.59 2.31 1.88 1.83 1.97
OSG-restated 1.68 2.32 1.54 1.26 1.16 1.24
Frontline 1.19 1.97 1.43 1.28 1.45 n/a
Teekay 2.57 1.98 1.81 1.16 0.99 n/a
Tsakos 1.48 3.12 2.95 1.76 1.46 n/a
Industry Avg. 1.77 2.42 2.12 1.52 1.43 n/a
The energy shipping industry as a whole is at a high risk of bankruptcy according
to the Altman’s Z-Score. The industry average has been below the 1.61 mark since
2006. The industry is in danger of high interest rates because they will have lower
credit ratings since they will be more likely to default. The ability to loan money and pay
off increasing interest expenses will be increasingly difficult if Z-Scores continue to drop
as they have since 2004. OSG is the only company in the industry to have a Z-Score
that is higher than 1.81 for each of last six years. OSG’s average of 2.07 puts them in
the grey area category. Although this is the case, OSG’s restated financial statements
do not tell the same story. The restated Z-Score is significantly lower with a score of
1.24 in 2008. This is mostly caused by the additional assets that were added in the
restatements due to operating leases. This score would put the company in the danger
zone when predicting bankruptcy for the company at its current state.
Conclusion
Capital structure ratios allow investors to have a better look at how the firm is
structured when it comes to financing. OSG states in its 10-K that its high credit rating
allows the company to be financially flexible and it was determined that this was one of
the company’s competitive advantages. The results of the capital structure analysis
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agree with this statement. OSG has a debt to equity ratio and debt service margin that
is consistently outperforming the rest of the energy shipping industry. The times
interest earned ratio of OSG is average for this industry, but there is no concern about
the capital structure because they have a ratio of over 4:1. A high credit rating will
reduce the future interest rates for OSG and minimize interest expenses relative to the
rest of the industry. A strong credit score will also be beneficial for OSG during this
tough economic climate.
The Altman’s Z-Score results also show that OSG is outperforming the industry
as the only company in the “grey” area with an average of 2.07. Although this is the
case, the restated financial statements bring the new Z-Score of OSG back to the
industry average. In this area, companies have a high risk of becoming bankrupt. The
restated numbers also negatively impacted the debt to equity ratio by going from
outperforming the industry to being average.
Ratios Performance Trend
Debt to Equity Outperforming Stable
Times Interest Earned Average Stable
Debt Service Margin Outperforming Increasing
Altman’s Z-Score Average Stable
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Forecasted Financial Statements
Financial statements reflect the consequences of business activities through the
language of accounting. The purpose of our analysis is to determine if Overseas
Shipping Group is overvalued, undervalued or fairly valued. The prices of equities reflect
future expectations of business activities relative to substitutable investments.
Therefore, it wouldn’t be accurate to simply continue past trends in forecasting what we
believe will happen in the market for energy shipping services. It will be in the context
of our previous industry, accounting and financial analysis that we examine the future
financial consequences of Overseas Shipping’s operations.
Income Statement
The income statement reflects how the company used sales dollars to pay for the
operations that support the cash-to-cash conversion cycle. That is, what does it cost the
company to develop inventory, market and sell the product, service debt obligations
and taxes and realize a profit (or loss). Our first step in this process involved forecasting
future sales.
Sales forecasting
Forecasting future sales is somewhat irregular and problematic for an industry of
this nature. The energy shipping industry derives its sales from a combination of
volume of oil and natural gas transported as well as the prevailing market rate for such
services. Therefore, it was necessary to forecast both volume and price movements to
capture changes in net sales. We utilized a revenue day, that is, days the ship is
operable minus time in dry dock (repairs) and idle time to proxy for the total amount of
operating capacity in terms of volume. Revenue days are measured by OSG and
reported on their 10k and are weighted to reflect ownership stakes in ships not wholly
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owned by OSG and its subsidiaries. In terms of total revenue days, there existed
categorical differences in reporting from 2000-2002. Therefore, we examined total
revenue days post 2002, and international pool revenue days to forecast future growth
in revenue days. The average growth rate of total revenue days was 17.1%, and 14.9%
for the international pool revenue days. As expected, revenue days increase when rates
are experiencing contagion and remain flat (or slightly decrease) in times of rate
backwardation. Assuming rates remain flat; these figures would reflect rapid future
growth of OSG’s total sales and be unrealistic in regard to the total number of large
crude carriers and the accessibility of shipping lanes. In light of OSGs previous rapid
expansion of their fleet, we forecasted a conservative increase in revenue days of 7% in
2009, 8.5% in 2010 and 10% thereafter.
The process of forecasting future rates involved taking a 3-year moving average
of the average time constant equivalent rate OSG had reported in prior years.
Examining total percent changes in rates over a 10 year period is largely an exercise in
reversion to mean. Shipping rates can vary significantly year-to-year and a three year
moving average captured these changes while allowing flexibility (deviation) in rates as
a whole. Inevitably, the rates showed little deviation toward the end of the forecasting
period. This uncertainty regarding future rates is a significant obstacle for the industry
as a whole and we feel the user of this analysis would be better served adjusting their
personal cost-of-equity to reflect a model price more conducive to their risk-tolerances
and expectations for energy shipping rates.
The final part of our sales forecast simply involved adding the year to year
percent changes in rates and revenue days to reflect changes in total sales. Since we
knew what the total amount of sales was for 2008, we could simply apply these
changes and come to a total sales forecast for the following years.
%∆ %∆ %∆
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Expense Structure
In order to forecast future net income, we need to forecast future sales
and expenses. This process involved creating a common-size income statement defined
as every line item as a percentage of total sales. As discussed earlier, changes in sales
may reflect changes in rates alone, not requiring increases in expenses from year to
year. To accommodate this inconsistency, we grew total operating expenses by the
amount of the increase in revenue days. For example, depreciation and amortization
increase 7% in 2009, 8.5% in 2010 and 10% thereafter reflecting the additional
expenses associated with growing OSGs fleet.
Income Statement Restated
The process of restating operating leases had no effect on sales for Overseas
Shipping Group, but had a material effect on the firm’s cost structure. Specifically, the
payments for chartering in vessels was capitalized as an asset as well as the related
liability, with the respective depreciation and interest expense being used as the total
operating lease expense. Essentially, this restatement reallocated the operating lease
payments from an expense to an asset, recognizing depreciation and interest as the
appropriate yearly expense. This perspective is more accurate to the characteristics of
the payments, in that OSG has a long-term liability as well as a long-term asset at their
disposal, and that obligation is reflected in the restatement.
Balance Sheet
The method we used in forecasting the future balance sheets for OSG involved
utilizing a revenue day turnover opposed to an asset turnover. Asset turnover is defined
as sales over asset and is useful in forecasting future total assets as a ratio of total
sales. A stable asset turnover ratio assumes that it requires a certain amount of assets
to support a given amount of sales. As stated earlier, sales in the energy shipping
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industry are a function of volume and price. Therefore, we can’t simply use a constant
asset turnover to reflect the assets necessary to support a given amount of sales.
However, revenue days and shipping rates are independent from one-another on a
micro level and it would be reasonable to assume it takes a certain amount of assets to
support a given amount of revenue days (volume). Disregarding outliers such as years
with large cash positions distorting total assets used for shipping activities, we were
able to estimate a constant revenue day turnover with little deviation. That is, what
dollar amount of assets is necessary to support a single revenue day? This approach
isolated volume in relation to assets and allowed our total dollar amount of sales to be
independent of total assets for the purposes of creating pro-forma statements.
We calculated that for every $1 million dollars in total assets, OSG can support
5.025(4.254 for restated) revenue days, or days the ship is operating minus days in dry
dock for maintenance and repairs. As discussed in the preceding paragraphs, we
forecasted a conservative 7% increase for 2009, 8.5% increase for 2010 and 10%
thereafter (average since 2002: 14.9%).
Balance Sheet Restated
The effect of capitalizing operating lease payments was an increase in assets and
liabilities. As OSG had increased its operating lease obligations over the years, the
carrying value (discounted at 5.1%) of the future lease obligations was capitalized to
reflect the respective obligation and the right to use these cash flow producing assets in
the future. Additionally, the restated total equity was larger in 2008(before forecasting)
because of the larger net income in previous years. The cause of this larger net income
is explained in further detail under the income statement section. The increased liability
reflects OSGs contractual obligation to make payments on its vessels under operating
leases.
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Statement of Cash Flows
The statement of cash flows reflects the consequences of business activities to
the firm’s cash position. In estimating future cash flows, we examined three different
ratios and their consistency over time to accurately reflect cash position. These ratios
are CFFO/Net Income, CFFO/Operating Income and CFFO/Net Sales. CFFO/Operating
Income proved to be the most consistent over time and was used in the estimation of
CFFO in the forecasting periods.
Cash flows from investing activities were measured by taking the yearly change
in vessels at cost, minus accumulated depreciation. The long-term asset of vessels was
increased as a percentage of total assets from 43% to 53.6% to reflect the changes in
the way vessels are acquired or utilized. Overseas Shipping Group employs operating
leases to obtain vessels usually for a 5 year term. This method involves capitalizing
these future lease obligations under restated financial statements. Aggregating the
procurement of vessels to outright purchases simplified the measurement of cash flow
from investing activities and allowed us to accurately estimate OSGs investment in their
fleet as well as the expected expansion of revenue days, cited earlier.
Cash flows from financing activities were simplified to reflect only the cash
dividends paid to stockholders. This assumption was necessary because it is beyond of
our ability as users of financial statements to predict future stock buybacks, issuances
and private placements (like issuances). Therefore, we maintained the stair-step
approach to dividends OSG has employed in the past and paid the same dividend for
two years in a row, increasing it relative to the increase in net income in two year
intervals.
OSG Income Statement (Raw)
Dollars in thousands at December 31 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 RevenuesVoyage charter revenues 53,429 83,797 126,029 267,574 431,777 Time and bareboat charter revenues 116,957 309,471 282,409 361,431 366,629 Pool Revenues 640,449 607,035 638,965 500,300 906,291
Sales Growth -18.52% 12.14% 18.68% 3.60% 11.72% 11.12% 8.71% 10.50% 10.10% 9.77%Total Revenues 810,835 1,000,303 1,047,403 1,129,305 1,704,697 1,388,918 1,557,566 1,848,502 1,915,015 2,139,374 2,377,206 2,584,202 2,855,541 3,144,027 3,451,072
Voyage Expenses (COGS) (21,254) (38,641) (54,586) (90,094) (159,312) (109,684) (123,002) (145,977) (151,230) (168,948) (187,729) (204,076) (225,504) (248,286) (272,533)
Gross Profit 789,581 961,662 992,817 1,039,211 1,545,385 1,279,234 1,434,564 1,702,525 1,763,785 1,970,426 2,189,476 2,380,126 2,630,037 2,895,741 3,178,539
Ship Operating Expenses:Vessel expenses 108,170 177,349 209,998 267,947 314,553 Time and bareboat charter hire expenses 65,550 120,301 174,817 258,116 429,808 Depreciation and Amortization 100,088 152,311 141,940 185,499 189,163 General and Administrative 51,993 79,667 99,525 127,211 144,063 Goodwill Impairment Charges 62,874 Loss/(Gain) on Sale of Vessels (39,007) (7,134) 59,738
Total Ship Operating Expenses 325,801 529,628 587,273 831,639 1,200,199 1,064,753 1,169,916 1,326,077 1,424,395 1,576,355 1,740,914 1,906,103 2,100,457 2,311,352 2,540,355
Income from Vessel Operations 463,780 432,034 378,544 207,572 345,186 Equity in Income of Joint Ventures 45,599 43,807 22,474 8,876 12,292
Operating Income 509,379 475,841 401,018 216,448 357,478 265,411 321,761 444,229 409,610 472,518 535,730 568,781 634,288 699,675 764,728 Other Income/(Expense) 45,781 77,367 52,107 75,434 (28,847)
Net Earnings Before Interest and Taxes 555,160 553,208 453,125 291,882 328,631
Interest Expense 74,146 89,489 (68,652) (74,696) (57,449) 73,877 82,847 98,322 101,860 113,794 126,444 137,454 151,887 167,232 183,563
Change in Accounting Principle and Minority Interest 384,473 217,186 271,182 Provision/(Credit) for Federal Income Taxes 79,778 (1,110) 8,187 (4,827) 34,004
Minority Interest (1,049) 12,479
Net Income 401,236 464,829 392,660 211,310 317,665 181,047 227,154 331,951 293,292 342,572 391,338 411,816 460,842 508,706 555,110 Cash Dividends Paid (27,532) (27,615) (36,576) (38,038) (44,856) (49,590) (49,590) (53,841) (53,841) (65,176) (65,176) (70,843) (70,843) (76,511) (76,511)
Addition to Retained Earnings 373,704 437,214 356,084 173,272 272,809 131,457 177,564 278,110 239,451 277,396 326,162 340,973 389,998 432,195 478,599
Forecasted FinancialsActual Financials
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OSG Income Statement (Restated)
Dollars in thousands at December 31 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 RevenuesVoyage charter revenues 53,429 83,797 126,029 267,574 431,777 Time and bareboat charter revenues 116,957 309,471 282,409 361,431 366,629 Pool Revenues 640,449 607,035 638,965 500,300 906,291
Sales Growth -18.52% 12.14% 18.68% 3.60% 11.72% 11.12% 8.71% 10.50% 10.10% 9.77%Total Revenues 810,835 1,000,303 1,047,403 1,129,305 1,704,697 1,388,918 1,557,566 1,848,502 1,915,015 2,139,374 2,377,206 2,584,202 2,855,541 3,144,027 3,451,072
Voyage Expenses (COGS) (21,254) (38,641) (54,586) (90,094) (159,312) (109,684) (123,002) (145,977) (151,230) (168,948) (187,729) (204,076) (225,504) (248,286) (272,533)
Gross Profit 789,581 961,662 992,817 1,039,211 1,545,385 1,279,234 1,434,564 1,702,525 1,763,785 1,970,426 2,189,476 2,380,126 2,630,037 2,895,741 3,178,539
Ship Operating Expenses:Vessel expenses 108,170 177,349 209,998 267,947 314,553 Operating leases payments newly capitalized 24,537 48,624 213,692 280,483 313,914 Depreciation and Amortization 100,088 152,311 141,940 185,499 189,163 General and Administrative 51,993 79,667 99,525 127,211 144,063 Goodwill Impairment Charges 62,874 Loss/(Gain) on Sale of Vessels (39,007) (7,134) 59,738
Total Ship Operating Expenses 284,788 457,951 626,148 854,006 1,084,305 889,168 984,147 1,134,400 1,202,461 1,335,307 1,478,000 1,614,018 1,780,374 1,959,536 2,152,668
Income from Vessel Operations 504,793 503,711 366,669 185,205 461,080 Equity in Income of Joint Ventures 45,599 43,807 22,474 8,876 12,292
Operating Income 550,392 547,518 389,143 194,081 473,372 361,333 430,429 576,032 543,853 623,167 703,612 750,664 835,531 921,309 1,007,857Other Income/(Expense) 45,781 77,367 52,107 75,434 (28,847)
Net Earnings Before Interest and Taxes 596,173 624,885 441,250 269,515 444,525
Interest Expense 74,146 89,489 68,652 74,696 57,449 131,947 147,969 175,608 181,926 203,241 225,835 245,499 271,276 298,683 327,852
Change in Accounting Principle and Minority Interest 522,027 535,396 372,598 194,819 387,076 Provision/(Credit) for Federal Income Taxes 79,778 (1,110) (8,187) 4,827 (34,004)
Minority Interest (1,049) 12,479
Net Income 442,249 536,506 380,785 188,943 433,559 230,775 284,017 402,273 363,842 422,066 480,155 507,749 567,110 625,770 683,457 Cash Dividends paid (27,532) (27,615) (36,576) (38,038) (44,856) (49,590) (49,590) (53,841) (53,841) (65,176) (65,176) (70,843) (70,843) (76,511) -76510.9611
Addition to Retained Earnings 414,717 508,891 344,209 150,905 388,703 181,184 234,427 348,432 310,001 356,890 414,979 436,905 496,267 549,259 606,946
Actual Financials Forecasted Financials
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OSG Balance Sheet (Raw)
Dollars in thousands at December 31 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
AssetsCash and cash equivalents 479,181 188,588 606,758 502,420 343,609 Voyage receivables 144,237 157,334 136,043 180,406 219,500 142,950 155,101 170,611 187,672 206,439 227,083 249,792 274,771 302,248 332,473 Other receivables 12,815 22,202 71,723 84,627 64,773 38,937 42,246 46,471 51,118 56,230 61,853 68,038 74,842 82,326 90,559 Inventories 1,132 1,855 7,002 9,195 6,627 5,364 5,820 6,402 7,042 7,747 8,521 9,373 10,311 11,342 12,476 Prepaid expenses 8,252 14,908 23,995 28,105 43,780 Total Current Assets 645,617 384,887 845,521 804,753 678,289 508,529 551,754 606,929 667,622 734,384 807,823 888,605 977,465 1,075,212 1,182,733
Capital Construction Fund 268,414 296,126 315,913 151,174 48,681 Vessels (At Cost) 1,422,239 2,288,481 2,501,846 2,691,005 2,683,147 2,865,948 3,119,428 3,442,989 3,798,905 4,190,413 4,621,072 5,094,796 5,615,893 6,189,100 6,819,627 Vessels under Capital Leases 24,382 36,267 30,750 24,399 1,101 Deferred Drydock expenditures 19,805 50,774 81,619 79,837 Vessel Held for Sale 9,744 53,975 Investments in Joint Ventures 227,701 269,257 275,199 131,905 98,620 Other Assets 82,701 53,457 53,762 87,522 130,237 Goodwill 64,293 72,463 9,589 Intangible Assets 92,611 114,077 106,585 Total Non-Current Assets 2,035,181 2,963,793 3,385,148 3,354,164 3,211,772 3,396,607 3,685,318 4,053,850 4,459,235 4,905,159 5,395,675 5,935,242 6,528,766 7,181,643 7,899,807
Total Assets 2,680,798 3,348,680 4,230,669 4,158,917 3,890,061 3,905,136 4,237,072 4,660,779 5,126,857 5,639,543 6,203,497 6,823,847 7,506,232 8,256,855 9,082,540
LiabilitiesAccounts payable 3,960 105,173 192,500 178,837 167,615 Sundry liabilities and accrued expenses 76,087 Federal income taxes 90,943 Short-term debt and current installments of long-term debt 25,024 20,066 27,426 26,058 26,231 Current obligations under capital leases 4,729 6,968 7,650 8,406 1,092 Total Current Liabilities 200,743 132,207 227,576 213,301 194,938 205,051 222,480 244,728 269,201 296,121 325,733 358,306 394,137 433,550 476,905
Long-term Debt 863,466 923,612 1,273,053 1,506,396 1,396,135 Obligations under Capital Leases 42,717 42,043 33,894 24,938 Deferred Federal Income Taxes 141,334 270,076 281,711 Deferred Credits and Other Liabilities 147,500 233,456 218,759 182,076 474,355 Minority Interest 132,470 101,766 Total Non-Currrent Liabilities 1,053,683 1,340,445 1,795,782 2,127,591 1,972,256 1,845,761 1,982,704 2,106,053 2,308,207 2,516,577 2,724,757 2,971,561 3,228,117 3,507,131 3,810,863
Total Liabilities 1,254,426 1,472,652 2,023,358 2,340,892 2,167,194 2,050,812 2,205,184 2,350,781 2,577,408 2,812,698 3,050,490 3,329,867 3,622,253 3,940,681 4,287,768
Common stock 40,791 40,791 40,791 40,791 40,791 Paid-in additional capital 199,054 199,570 202,712 208,817 224,522 Retained earnings 1,203,528 1,640,742 1,996,826 2,170,098 2,442,907 2,574,364 2,751,928 3,030,038 3,269,489 3,546,885 3,873,047 4,214,020 4,604,018 5,036,214 5,514,812
Stockholders' Equity 1,442,013 1,881,103 2,240,329 2,419,706 2,708,220 Cost of Treasury Stock (17,579) (17,019) (34,522) (583,708) (838,994) Accumulated other comprehensive income/(loss) 1,938 11,944 1,504 (17,973) (146,359)
Total Shareholders' Equity 1,426,372 1,876,028 2,207,311 1,818,025 1,722,867 1,854,324 2,031,888 2,309,998 2,549,449 2,826,845 3,153,007 3,493,980 3,883,978 4,316,174 4,794,772
Total Liabilities and Shareholders' Equity 2,680,798 3,348,680 4,230,669 4,158,917 3,890,061 3,905,136 4,237,072 4,660,779 5,126,857 5,639,543 6,203,497 6,823,847 7,506,232 8,256,855 9,082,540
Actual Financials Forecasted Financials
Page | 135
OSG Balance Sheet (Restated)
Dollars in thousands at December 31 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
AssetsCash and cash equivalents 479,181 188,588 606,758 502,420 343,609 Voyage receivables 144,237 157,334 136,043 180,406 219,500 142,950 155,101 170,611 187,672 206,439 227,083 249,792 274,771 302,248 332,473 Other receivables 12,815 22,202 71,723 84,627 64,773 38,937 42,246 46,471 51,118 56,230 61,853 68,038 74,842 82,326 90,559 Inventories 1,132 1,855 7,002 9,195 6,627 5,364 5,820 6,402 7,042 7,747 8,521 9,373 10,311 11,342 12,476 Prepaid expenses 8,252 14,908 23,995 28,105 43,780 Total Current Assets 645,617 384,887 845,521 804,753 678,289 676,667 734,184 807,602 888,362 977,199 1,074,918 1,182,410 1,300,651 1,430,716 1,573,788
Capital Construction Fund 268,414 296,126 315,913 151,174 48,681 Vessels (At Cost) 1,422,239 2,288,481 2,501,846 2,691,005 2,683,147 3,230,753 3,943,609 4,783,132 5,643,354 6,524,320 7,432,426 8,413,659 9,463,888 10,538,425 11,687,535 Vessels Under Capital Leases 24,382 36,267 30,750 24,399 1,101 Vessels Under Operating Leases, Newly Capitalized 222,364 1,207,297 1,584,651 1,924,540 2,032,783 Deferred Drydock Expenditures 19,805 50,774 81,619 79,837 Vessel Held for Sale 9,744 53,975 Investments in Joint Ventures 227,701 269,257 275,199 131,905 98,620 Other Assets 82,701 53,457 53,762 87,522 130,237 Goodwill 64,293 72,463 9,589 Intangible Assets 92,611 114,077 106,585 Total Non-Current Assets 2,257,545 4,170,690 4,969,799 5,278,704 5,244,555 5,350,089 5,804,847 6,385,331 7,023,864 7,726,251 8,498,876 9,348,763 10,283,640 11,312,004 12,443,204
Total Assets 2,903,162 4,555,577 5,815,320 6,083,457 5,922,844 6,026,756 6,539,030 7,192,933 7,912,227 8,703,449 9,573,794 10,531,174 11,584,291 12,742,720 14,016,992
LiabilitiesAccounts payable 3,960 105,173 192,500 178,837 167,615 Sundry liabilities and accrued expenses 76,087 Federal income taxes 90,943 Short-term debt and current installments of long-term debt 25,024 20,066 27,426 26,058 26,231 Current obligations under capital leases 4,729 6,968 7,650 8,406 1,092 Total Current Liabilities 200,743 132,207 227,576 213,301 194,938 205,051 222,480 244,728 269,201 296,121 325,733 358,306 394,137 433,550 476,905
Long-term Debt 863,466 923,612 1,273,053 1,506,396 1,396,135 Obligations under Capital Leases 42,717 42,043 33,894 24,938 Obligations under Operating Leases 222,364 1,207,297 1,584,651 1,924,540 2,032,783 Deferred Federal Income Taxes 141,334 270,076 281,711 Deferred Credits and Other Liabilities 147,500 233,456 218,759 182,076 474,355 Minority Interest 132,470 101,766 Plug for Liabilities 161,910 31,784 172,801 339,273 (190,802) Total Non-Current Liabilities 1,237,215 2,438,192 3,283,158 3,977,223 3,814,236 3,726,852 3,987,270 4,270,493 4,655,313 5,062,726 5,488,479 5,976,380 6,497,400 7,067,157 7,691,128
Total Liabilities 1,437,958 2,570,399 3,510,734 4,190,524 4,009,174 3,931,903 4,209,750 4,515,221 4,924,514 5,358,846 5,814,212 6,334,687 6,891,537 7,500,707 8,168,034
Common stock 40,791 40,791 40,791 40,791 40,791 Paid-in additional capital 199,054 199,570 202,712 208,817 224,522 Retained earnings 1,241,001 1,749,892 2,094,101 2,245,006 2,633,709 2,814,893 3,049,320 3,397,752 3,707,753 4,064,643 4,479,622 4,916,527 5,412,794 5,962,053 6,568,999
Stockholders' Equity 1,480,846 1,990,253 2,337,604 2,494,614 2,899,022 Cost of treasury stock (17,579) (17,019) (34,522) (583,708) (838,994) Accumulated other comprehensive income/(loss) 1,938 11,944 1,504 (17,973) (146,359)
Total Shareholders' Equity 1,465,205 1,985,178 2,304,586 1,892,933 1,913,669 2,094,853 2,329,280 2,677,712 2,987,713 3,344,603 3,759,582 4,196,487 4,692,754 5,242,013 5,848,959
Total Liabilities and Shareholders' Equity 2,903,162 4,555,577 5,815,320 6,083,457 5,922,844 6,026,756 6,539,030 7,192,933 7,912,227 8,703,449 9,573,794 10,531,174 11,584,291 12,742,720 14,016,992
Forecasted FinancialsActual Financials
Page | 136
OSG Cash Flow (Restated)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Net Income 442,249 536,506 380,785 188,943 433,559 264,224 349,663 484,369 526,840 632,667 741,984 836,521 957,604 1,085,159 1,217,026 Sales 810,835 1,000,303 1,047,403 1,129,305 1,704,697 Operating Income 550,392 547,518 389,143 194,081 473,372 394,782 496,074 658,128 706,851 833,768 965,441 1,079,436 1,226,025 1,380,697 1,541,426
AverageCFFO/Sales 0.54 0.52 0.41 0.13 0.28 0.38CFFO/Net Income 0.99 0.98 1.14 0.77 1.11 1.00CFFO/Operating Income 0.80 0.96 1.12 0.75 1.02 0.93
CFFO 437,838 523,723 434,100 145,257 482,571 513,217 644,896 855,567 918,907 1,083,899 1,255,073 1,403,267 1,593,832 1,794,906 2,003,854 CFFI 268,289 (37,181) 8,202,194 (6,730,002) (1,710,510) (547,606) (712,857) (839,523) (860,222) (880,966) (908,106) (981,233) (1,050,230) (1,074,537) (1,149,110) CFFF 199528 (787898) 228897 (237067) (448466) (49,590) (49,590) (53,841) (53,841) (65,176) (65,176) (70,843) (70,843) (76,511) (76,511)
OSG Cash Flow (Raw)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Net Income 401,236 464,829 392,660 211,310 317,665 431,550 483,950 574,347 595,013 664,724 738,620 802,936 887,243 976,879 1,072,281 Sales 810,835 1,000,303 1,047,403 1,129,305 1,704,697 Operating Income 509,379 475,841 401,018 216,448 357,478 515,913 578,557 686,625 711,332 794,669 883,012 959,901 1,060,689 1,167,847 1,281,899
AverageCFFO/Sales 0.49 0.45 0.43 0.15 0.22 0.35CFFO/Net Income 0.99 0.97 1.14 0.79 1.15 1.01CFFO/Operating Income 0.78 0.95 1.11 0.77 1.03 0.93
CFFO 396,825 452,046 445,975 167,624 366,677 670,344 751,739 892,156 924,258 1,032,541 1,147,328 1,247,232 1,378,190 1,517,424 1,665,616 CFFI (191,175) 45,259 (256,702) (34,895) (77,022) (182,801) (253,480) (323,560) (355,916) (391,508) (430,659) (473,725) (521,097) (573,207) (630,527) CFFF 199,528 (787,898) 228,897 (237,067) (448,466) (49,590) (49,590) (53,841) (53,841) (65,176) (65,176) (70,843) (70,843) (76,511) (76,511)
Actual Financials Forecasted Financials
Actual Financials Forecasted Financials
Page | 137
OSG Income Statement (Raw)
Dollars in thousands at December 31 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 RevenuesVoyage charter revenues 7% 8% 12% 24% 25%Time and bareboat charter revenues 14% 31% 27% 32% 22%Pool Revenues 79% 61% 61% 44% 53%
Total Revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Voyage Expenses (COGS) -3% -4% -5% -8% -9% -8% -8% -8% -8% -8% -8% -8% -8% -8% -8%
Gross Profit 97% 96% 95% 92% 91% 92% 92% 92% 92% 92% 92% 92% 92% 92% 92%
Ship Operating Expenses:Vessel expenses 13% 18% 20% 24% 18%Time and bareboat charter hire expenses 8% 12% 17% 23% 25%Depreciation and Amortization 12% 15% 14% 16% 11%General and Administrative 6% 8% 10% 11% 8%Goodwill Impairment Charges 4%Loss/(Gain) on Sale of Vessels -4% -1% 4%
Total Ship Operating Expenses 40% 53% 56% 74% 70% 77% 75% 72% 74% 74% 73% 74% 74% 74% 74%
Income from Vessel Operations 57% 43% 36% 18% 20%Equity in Income of Joint Ventures 6% 4% 2% 1% 1%
Operating Income 63% 48% 38% 19% 21% 19% 21% 24% 21% 22% 23% 22% 22% 22% 22%Other Income/(Expense) 6% 8% 5% 7% -2%
Net Earnings Before Interest and Taxes 68% 55% 43% 26% 19%
Interest Expense 9% 9% -7% -7% -3% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%
Change in Accounting Principle and Minority Interest 37% 19% 16%Provision/(Credit) for Federal Income Taxes 10% 0% 1% 0% 2%
Minority Interest 0% 1%
Net Income 49% 46% 37% 19% 19% 13% 15% 18% 15% 16% 16% 16% 16% 16% 16% Cash Dividends Paid -3% -3% -3% -3% -3% -4% -3% -3% -3% -3% -3% -3% -2% -2% -2%
Addition to Retained Earnings 46% 44% 34% 15% 16% 9% 11% 15% 13% 13% 14% 13% 14% 14% 14%
Actual Financials Forecasted Financials
Page | 138
OSG Income Statement (Restated)
Dollars in thousands at December 31 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 RevenuesVoyage charter revenues 7% 8% 12% 24% 25%Time and bareboat charter revenues 14% 31% 27% 32% 22%Pool Revenues 79% 61% 61% 44% 53%
Total Revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Voyage Expenses (COGS) -3% -4% -5% -8% -9% -8% -8% -8% -8% -8% -8% -8% -8% -8% -8%
Gross Profit 97% 96% 95% 92% 91% 92% 92% 92% 92% 92% 92% 92% 92% 92% 92%
Ship Operating Expenses:Vessel expenses 13% 18% 20% 24% 18%Operating leases payments newly capitalized 3% 5% 20% 25% 18%Depreciation and Amortization 12% 15% 14% 16% 11%General and Administrative 6% 8% 10% 11% 8%Goodwill Impairment Charges 0% 0% 0% 0% 4%Loss/(Gain) on Sale of Vessels 0% 0% -4% -1% 4%
Total Ship Operating Expenses 35% 46% 60% 76% 64% 64% 63% 61% 63% 62% 62% 62% 62% 62% 62%
Income from Vessel Operations 62% 50% 35% 16% 27%Equity in Income of Joint Ventures 6% 4% 2% 1% 1%
Operating Income 68% 55% 37% 17% 28% 26% 28% 31% 28% 29% 30% 29% 29% 29% 29%Other Income/(Expense) 6% 8% 5% 7% -2%
Net Earnings Before Interest and Taxes 74% 62% 42% 24% 26%
Interest Expense 9% 9% 7% 7% 3% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Change in Accounting Principle and Minority Interest 64% 54% 36% 17% 23%Provision/(Credit) for Federal Income Taxes 10% 0% -1% 0% -2%
Minority Interest 1%
Net Income 55% 54% 36% 17% 25% 17% 18% 22% 19% 20% 20% 20% 20% 20% 20% Cash Dividends paid -3% -3% -3% -3% -3% -4% -3% -3% -3% -3% -3% -3% -2% -2% -2%
Addition to Retained Earnings 51% 51% 33% 13% 23% 13% 15% 19% 16% 17% 17% 17% 17% 17% 18%
Actual Financials Forecasted Financials
Page | 139
OSG Balance Sheet (Raw)
Dollars in thousands at December 31 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
AssetsCash and cash equivalents 18% 6% 14% 12% 9%Voyage receivables 5% 5% 3% 4% 6% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%Other receivables 0% 1% 2% 2% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%Inventories 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Prepaid expenses 0% 0% 1% 1% 1% Total Current Assets 24% 11% 20% 19% 17% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%
Capital Construction Fund 10% 9% 7% 4% 1%Vessels (At Cost) 53% 68% 59% 65% 69% 73% 74% 74% 74% 74% 74% 75% 75% 75% 75%Vessels under Capital Leases 1% 1% 1% 1% 0%Deferred Drydock expenditures 0% 1% 1% 2% 2%Vessel Held for Sale 0% 0% 0% 0% 1%Investments in Joint Ventures 8% 8% 7% 3% 3%Other Assets 3% 2% 1% 2% 3%Goodwill 0% 0% 2% 2% 0%Intangible Assets 0% 0% 2% 3% 3% Total Non-Current Assets 76% 89% 80% 81% 83% 87% 87% 87% 87% 87% 87% 87% 87% 87% 87%
Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
LiabilitiesAccounts payable 0% 3% 5% 4% 4%Sundry liabilities and accrued expenses 3% 0% 0% 0% 0%Federal income taxes 3% 0% 0% 0% 0%Short-term debt and current installments of long-term debt 1% 1% 1% 1% 1%Current obligations under capital leases 0% 0% 0% 0% 0% Total Current Liabilities 7% 4% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%
Long-term Debt 32% 28% 30% 36% 36%Obligations under Capital Leases 2% 1% 1% 1% 0%Deferred Federal Income Taxes 0% 4% 6% 7% 0%Deferred Credits and Other Liabilities 6% 7% 5% 4% 12%Minority Interest 0% 0% 0% 3% 3% Total Non-Currrent Liabilities 39% 40% 42% 51% 51% 47% 47% 45% 45% 45% 44% 44% 43% 42% 42%
Total Liabilities 47% 44% 48% 56% 56% 53% 52% 50% 50% 50% 49% 49% 48% 48% 47%
Common stock 2% 1% 1% 1% 1%Paid-in additional capital 7% 6% 5% 5% 6%Retained earnings 45% 49% 47% 52% 63% 66% 65% 65% 64% 63% 62% 62% 61% 61% 61%
Stockholders' Equity 54% 56% 53% 58% 70%Cost of Treasury Stock -1% -1% -1% -14% -22%Accumulated other comprehensive income/(loss) 0% 0% 0% 0% -4%
Total Shareholders' Equity 53% 56% 52% 44% 44% 47% 48% 50% 50% 50% 51% 51% 52% 52% 53%
Total Liabilities and Shareholders' Equity 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Actual Financials Forecasted Financials
Page | 140
OSG Balance Sheet (Restated)
Dollars in thousands at December 31 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
AssetsCash and cash equivalents 17% 4% 10% 8% 6%Voyage receivables 5% 3% 2% 3% 4% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%Other receivables 0% 0% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%Inventories 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%Prepaid expenses 0% 0% 0% 0% 1% Total Current Assets 22% 8% 15% 13% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11% 11%
Capital Construction Fund 9% 7% 5% 2% 1%Vessels (At Cost) 49% 50% 43% 44% 45% 54% 60% 66% 71% 75% 78% 80% 82% 83% 83%Vessels Under Capital Leases 1% 1% 1% 0% 0%Vessels Under Operating Leases, Newly Capitalized 8% 27% 27% 32% 34%Deferred Drydock Expenditures 0% 0% 1% 1% 1%Vessel Held for Sale 0% 0% 0% 0% 1%Investments in Joint Ventures 8% 6% 5% 2% 2%Other Assets 3% 1% 1% 1% 2%Goodwill 0% 0% 1% 1% 0%Intangible Assets 0% 0% 2% 2% 2% Total Non-Current Assets 78% 92% 85% 87% 89% 89% 89% 89% 89% 89% 89% 89% 89% 89% 89%
Total Assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Liabilities 0% 0% 0% 0% 0%Accounts payable 0% 2% 3% 3% 3%Sundry liabilities and accrued expenses 3% 0% 0% 0% 0%Federal income taxes 3% 0% 0% 0% 0%Short-term debt and current installments of long-term debt 1% 0% 0% 0% 0%Current obligations under capital leases 0% 0% 0% 0% 0% Total Current Liabilities 7% 3% 4% 4% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%
Long-term Debt 30% 20% 22% 25% 24%Obligations under Capital Leases 1% 1% 1% 0% 0%Obligations under Operating Leases 8% 27% 27% 32% 34%Deferred Federal Income Taxes 0% 3% 5% 5% 0% Deferred Credits and Other Liabilities 5% 5% 4% 3% 8%Minority Interest 0% 0% 0% 2% 2%Plug for Liabilities 6% 1% 3% 6% -3% Total Non-Current Liabilities 43% 54% 56% 65% 64% 62% 61% 59% 59% 58% 57% 57% 56% 55% 55%
Total Liabilities 50% 56% 60% 69% 68% 65% 64% 63% 62% 62% 61% 60% 59% 59% 58%
Common stock 1% 1% 1% 1% 1%Paid-in additional capital 7% 4% 3% 3% 4%Retained earnings 43% 38% 36% 37% 44% 47% 47% 47% 47% 47% 47% 47% 47% 47% 47%
Stockholders' Equity 51% 44% 40% 41% 49%Cost of treasury stock -1% 0% -1% -10% -14%Accumulated other comprehensive income/(loss) 0% 0% 0% 0% -2%
Total Shareholders' Equity 50% 44% 40% 31% 32% 35% 36% 37% 38% 38% 39% 40% 41% 41% 42%
Total Liabilities and Shareholders' Equity 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Actual Financials Forecasted Financials
Page | 141
OSG Cash Flow (Restated)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Net Income 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%SalesOperating Income 124% 102% 102% 103% 109% 149% 142% 136% 134% 132% 130% 129% 128% 127% 127%
CFFO/SalesCFFO/Net IncomeCFFO/Operating Income
CFFO 99% 98% 114% 77% 111% 194% 184% 177% 174% 171% 169% 168% 166% 165% 165%CFFI 61% -7% 2154% -3562% -395% -207% -204% -173% -163% -139% -122% -117% -110% -99% -94%CFFF 45% -147% 60% -125% -103% -19% -14% -11% -10% -10% -9% -8% -7% -7% -6%
OSG Cash Flow (Raw)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Net Income 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%SalesOperating Income 127% 102% 102% 102% 113% 120% 120% 120% 120% 120% 120% 120% 120% 120% 120%
CFFO/SalesCFFO/Net IncomeCFFO/Operating Income
CFFO 99% 97% 114% 79% 115% 155% 155% 155% 155% 155% 155% 155% 155% 155% 155%CFFI -48% 10% -65% -17% -24% -42% -52% -56% -60% -59% -58% -59% -59% -59% -59%CFFF 50% -170% 58% -112% -141% -11% -10% -9% -9% -10% -9% -9% -8% -8% -7%
Actual Financials Forecasted Financials
Actual Financials Forecasted Financials
Page | 142
Cost of Capital Estimation
A firm’s cost of capital is the opportunity cost of an investment and is also
necessary for valuing a firm. The weighted average cost of debt and cost of equity
make up cost of capital, which is equal to the average required return on the firm. The
weighted average is derived from the firm’s capital structure, or the percentage of
assets financed by debt and the percentage financed by equity. We will use the
information from Overseas Shipholding Group’s 10-K as well as our forecasts of future
performance to estimate OSG’s cost of capital.
Cost of Equity
The cost of equity is the minimum rate of return a firm must offer shareholders
to compensate for waiting for their returns, and for bearing some risk. Because it costs
more to finance equity, the cost of equity is typically higher than the cost of debt. The
Capital Asset Pricing Model (CAPM) is commonly used to calculate the cost of equity:
Cost of Equity = Beta of the Firm (Return of the Market–Risk Free Rate) + Risk Free
Rate
In order to determine the cost of equity for Overseas Shipholding group, we first
had to estimate its beta coefficient. Beta is the measure of systematic risk that can be
explained by the risk of the market. We used regression analysis to calculate the beta
coefficient. Because CAPM does not explain the appropriate riskless return, we had to
test whether the point on the yield curve matters. We used five points on the yield
curve to do this: 3 months, 1 year, 2 years, 5 years, and 10 years. We then performed
regressions using 72 months, 60 months, 48 months, 36 months, and 24 months of
returns for each of the five different points on the yield curve in order to test for beta
stability. These regressions can be seen in Appendix 1.
Next, we broke down the regression output and looked for the beta with the
highest adjusted r2. As a rule, the higher the adjusted r2, the higher the explanatory
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power of the estimated beta. Our highest adjusted r2 was 66.74% with a beta of 1.897
in the 24-month regression using the 3-month T-Bill. OSG’s beta is reasonably stable,
staying within the range of 1.65 to 1.9, and our calculated beta of 1.897 is close to
OSG’s published beta of 1.7.
Against 3 Mo. T‐Bill Yield beta beta
Slice beta adj r squared lower 95% upper 95% mrp rf est ke low ke high ke72 1.783 0.456 1.326 2.241 6.8 2.87 14.997 11.886 18.10960 1.765 0.424 1.234 2.295 6.8 2.87 14.871 11.264 18.47948 1.696 0.503 1.206 2.186 6.8 2.87 14.404 11.074 17.73536 1.714 0.528 1.164 2.263 6.8 2.87 14.522 10.783 18.26124 1.897 0.667 1.324 2.469 6.8 2.87 15.767 11.872 19.662
Against 1 yr. T‐Bill Yield beta beta
Slice beta adj r squared lower 95% upper 95% mrp rf est ke low ke high ke72 1.737 0.447 1.284 2.191 6.8 2.87 14.682 11.598 17.76660 1.702 0.415 1.182 2.222 6.8 2.87 14.444 10.907 17.98148 1.635 0.495 1.156 2.114 6.8 2.87 13.988 10.729 17.24736 1.662 0.524 1.125 2.199 6.8 2.87 14.170 10.520 17.82024 1.859 0.665 1.295 2.424 6.8 2.87 15.514 11.676 19.352
Against 2 yr. T‐Bill Yieldbeta beta
Slice beta adj r squared lower 95% upper 95% mrp rf est ke low ke high ke72 1.780 0.454 1.322 2.239 6.8 2.87 14.976 11.858 18.09360 1.761 0.422 1.229 2.292 6.8 2.87 14.842 11.230 18.45448 1.694 0.504 1.206 2.183 6.8 2.87 14.391 11.068 17.71436 1.707 0.527 1.158 2.256 6.8 2.87 14.480 10.747 18.21324 1.892 0.667 1.320 2.463 6.8 2.87 15.735 11.849 19.620
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Against 5 yr. T‐Bill Yieldbeta beta
Slice beta adj r squared lower 95% upper 95% mrp rf est ke low ke high ke 72 1.775 0.452 1.316 2.234 6.8 2.87 14.937 11.816 18.05960 1.750 0.420 1.220 2.280 6.8 2.87 14.772 11.167 18.37648 1.685 0.503 1.199 2.172 6.8 2.87 14.330 11.020 17.64136 1.699 0.526 1.152 2.246 6.8 2.87 14.423 10.706 18.14124 1.885 0.667 1.315 2.455 6.8 2.87 15.688 11.814 19.562
Against 10 yr. T‐Bill Yield beta beta
Slice beta adj r squared lower 95% upper 95% mrp rf est ke low ke high ke 72 1.768 0.449 1.305 2.230 6.8 2.87 14.889 11.745 18.034
60 1.741 0.418 1.212 2.270 6.8 2.87 14.710 11.113 18.307
48 1.677 0.502 1.192 2.162 6.8 2.87 14.273 10.973 17.572
36 1.691 0.526 1.147 2.236 6.8 2.87 14.371 10.667 18.075
24 1.879 0.667 1.310 2.447 6.8 2.87 15.645 11.779 19.510
After deriving the beta coefficient, we multiplied the beta by the market risk
premium, which is calculated by subtracting the risk free rate from the return of the
market. We derived the risk free rate from the St. Louis Federal Reserve, which is
2.87%, and the return of the market from the S&P 500, which is 9.67%. The market
risk premium is, therefore, 6.8%. We used these numbers to calculate the cost of
equity, using the formula stated above. The cost of equity was determined to be
15.77%. We believe this number is accurate because OSG has a high explanatory
power. OSG’s upper bound cost of equity, using a 95% confidence interval and a beta
of 2.47, was calculated to be 19.66% and the company’s lower bound cost of equity is
11.87% using a 95% confidence interval and a beta of 1.32.
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Size Adjustment
Although CAPM is often used to estimate the cost of capital, the evidence
indicates that the model is incomplete. This is due to the “size effect,” which means
that smaller firms tend to generate larger returns in subsequent periods. The reason
this size effect is an issue is unclear. This size effect could be due to riskier returns
than CAPM indicates or incorrect pricing at the measured point of market capitalization
(Palepu & Healy). Though it can be accounted for through the size effect, this assumed
risk associated with smaller firms is not always correct. The method for estimating the
cost of capital using a size adjustment combines CAPM and a size premium (return in
excess of CAPM) associated with the market cap of the firm. The market cap for OSG is
612 million which includes OSG within the size premium risk bracket of 2.7%. The
method for estimating the cost of equity with the applicable size adjustment is shown in
the following formula:
Since OSG uses a 2.7% size premium, this changes the aforementioned cost of equity
to 18.47%. This is not an unreasonable value because it falls within the original upper
confidence interval cost of equity equal to 19.66%. This size premium accounts for the
relative high risk of the firm since it is involved in shipping a global commodity
dependent on variable rates.
Alternative Cost of Equity
There is also an alternative to finding the cost of equity when valuing a
company. This alternative cost of equity is denoted by the following formula.
1
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Because we are solving for cost of equity, denoted KE, the previous formula can be
rewritten using simple algebra:
Overseas Shipholding Group’s price to book ratio is 0.39. The method used to
determine our forward return on equity rate is to take the average net income
forecasted over the next ten years and divide that by the average stockholder’s equity
forecasted over the next ten years. We used an estimated forward return on equity
rate of 11.87% and a growth rate of 11.998%. Through these estimates, we determine
that the alternative cost of equity is 11.66%. This value passes our “sniff test” because
it is between twelve and fifteen percent when compared to the original estimated cost
of equity. This is an acceptable amount, but not as acceptable as 18.47% due to the
long-term lease liabilities on OSG’s books.
Because our financial statements had to be restated, these versions of the
forecasted financial statements must be used to find a suitable alternative cost of
equity. Using the restated forward return on equity rate of 12.29% and a growth rate
of 9.83%, we determined the alternative cost of equity to be 16.12%. This estimate
also falls within the original cost of equity upper and lower bounds. The regression
analysis provided in the previous cost of equity section determines that the appropriate
cost of equity needs to be between twelve and nineteen percent. This proves that the
alternative cost of equity for the restated financial statements is between these bounds.
Our reasoning stands that the appropriate cost of equity remains around 18.47%.
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Cost of Debt
The cost of debt (Kd) is calculated by the weighted average of short and long
term liabilities over the total liabilities multiplied by each liability’s interest rate.
Overseas Shipholding Group’s liabilities are: current liabilities, obligations under
operating leases, deferred credits and other liabilities, minority interest, and long term
debt, totaling $2,167,194. The interest rates we used in our calculations were taken
from either the St. Louis AA Non-Financial Commercial Paper or the 10-yr. Treasury
Constant Maturity. The tables depicting cost of debt as stated and restated can be seen
on the following pages.
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Liability Structure (2008 RAW)
Short and Long-Term
Liabilities
Amount of
Each
Liability
Percent of
Total
Liabilities
Interest
Rates
Weight x
Rate
Resources for
Interest Rates
Accounts Payable $167,615 4.31% 2.92% 0.126%
St. Louis AA Non-
Financial
Commercial
Paper
Short-Term Debt and
Current Installments
on Long-Term Debt
$26,231 0.67% 2.92% 0.02%
St. Louis AA Non-
Financial
Commercial
Paper
Current Obligations
Under Capital Leases $1,092 0.03% 2.92% 0.001%
St. Louis AA Non-
Financial
Commercial
Paper
Long-Term Debt $1,396,135 35.89% 4.24% 1.522% 10-yr. Treasury
Constant Maturity
Deferred Credits and
Other Liabilities $474,355 12.19% 4.24% 0.517%
10-yr. Treasury
Constant Maturity
Minority Interest $101,766 2.62% 4.24% 0.111% 10-yr. Treasury
Constant Maturity
Total $2,167,194 100% 2.296% =Cost of Debt As Stated
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Total current liabilities listed on OSG’s 10-k totaled $194,938. These current
liabilities consisted of accounts payable, short-term debt and current installments on
long-term debt, and current obligations under capital leases. The interest rate used for
the current liabilities was 2.92%, which is the St. Louis AA Non-Financial Commercial
Paper rate. This commercial paper rate was used because it is the rate of return an
investor would get without taking any risk.
The long-term liabilities have a higher interest rate than short-term liabilities
because there is more risk involved in long-term debts considering the amount of time
associated with them. The largest long-term liability account is the long-term debt
account, which totals $1,396,135, and is 35.89% of total liabilities. The account named
long-term debt is the most substantial liability, and it drives the cost of debt. Other
long-term liabilities were deferred credits & other liabilities and minority interest,
totaling $1,972,256. For each non-current liability, we used the rate of 4.24% from the
10-year treasury constant maturity. Using the information in the previous table, we
added the weighted average short and long-term liabilities to calculate the total cost of
debt (Kd). OSG’s cost of debt is 2.30% which is determined an appropriate amount.
Because our financial statements required restating, we must derive cost of debt
through the restated liability structure. The restated cost of debt calculations can be
seen in the table below:
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Liability Structure (2008 Restated)
Short and Long-Term
Liabilities
Amount of
Each
Liability
Percent of
Total
Liabilities
Interest
Rates
Weight x
Rate
Resources for
Interest Rates
Accounts Payable $167,615 4.18% 2.92% 0.122%
St. Louis AA Non-
Financial
Commercial
Paper
Short-Term Debt and
Current Installments
on Long-Term Debt
$26,231 0.65% 2.92% 0.019%
St. Louis AA Non-
Financial
Commercial
Paper
Current Obligations
Under Capital Leases $1,092 0.03% 2.92% 0.001%
St. Louis AA Non-
Financial
Commercial
Paper
Long-Term Debt $1,396,135 34.82% 4.24% 1.477% 10-yr. Treasury
Constant Maturity
Obligations Under
Operating Leases $2,032,783 50.70% 4.24% 2.150%
10-yr. Treasury
Constant Maturity
Deferred Credits and
Other Liabilities $474,355 11.83% 4.24% 0.502%
10-yr. Treasury
Constant Maturity
Minority Interest $101,766 2.54 4.24% 0.108% 10-yr. Treasury
Constant Maturity
Plug for Liabilities $(190,802) -4.76% 4.24% -0.202% 10-yr. Treasury
Constant Maturity
Total Liabilities $4,009,174 100% 4.176% =Cost of Debt Restated
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Total liabilities on the restated balance sheet total $4,009,174. Because of our
long-term lease obligations, we had to restate OSG’s financials and calculate a restated
cost of debt. We found the restated cost of debt (Kd) to be 4.18% and conclude this is
a more suitable number considering OSG’s large amount of long-term lease obligations.
Weighted Average Cost of Capital
Every firm is financed either by its equity or debt. To value a company’s assets,
an analyst needs to calculate a rate at which to finance the firm. To effectively
determine this rate, “the analyst must discount abnormal NOPAT, abnormal operating
ROA, or cash flows available to both debt and equity holders. The proper discount rate
to use is, therefore, the weighted average cost of capital” (Palepu & Healy). To find the
WACC, the cost of debt is multiplied by the proportion of debt to the sum of debt and
equity. This value is then added to the cost of equity multiplied by the proportion of
equity to the sum of debt and equity. The method for determining the value of WACC
before tax is shown below.
Determining WACC after taxes, however, applies an inverse of the tax rate
multiplied by the debt structure. The formula changes as follows:
1
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RAW MVD/MVA Cost of
Debt
Tax
Rate
Cost of
Equity MVE/MVA WACC
WACCBT 55.71% 2.30% 0 18.47% 44.29% 10.48%
WACCAT 55.71% 2.30% 35% 18.47% 44.29% 9.67%
WACCupper 55.71% 2.30% 0 22.36% 44.29% 12.20%
WACClower 55.71% 2.30% 0 14.57% 44.29% 8.75%
The values used in the calculation of various WACCs are provided above. For
Overseas Shipholding Group, the WACC before tax is 10.48%. This estimates that
before taxes, OSG needs 10.48% of its assets to finance its future business.
Furthermore, when OSG uses the effective tax rate of 35% as provided in its 10K, it is
determined that the WACC after tax is 9.67%.
According to our estimates of the weighted average cost of capital, OSG needs
between eight and twelve percent of assets to cover its capital structure and drive
future business. We believe that this is a reasonable range, since OSG has large
amounts of long-term liabilities in the form of leases on tankers. This assumption is
denoted by the market value of liabilities accounting for 55.71% of the entire
$3,890,061 of total assets. Usually companies try to keep about 60% of their assets
financed through debt, and 40% financed through equity. For the energy shipping
industry, companies require this much capital financed through debt due to the large
expense amounts of their long-term lease liabilities.
Because OSG’s long-term lease liabilities require restating the financial
statements, it also reflects the need for a restated WACC. The restated WACC before
taxes is 8.79% which is a significant decrease from 10.48%. This decrease is due to
OSG’s leases being restated and reflected on the financial statements. Capitalizing
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these long-term leases allows for less of the company’s structure to be financed by its
assets. The numbers used in calculation of the restated WACC are displayed below.
Restated MVD/MVA Cost of
Debt
Tax
Rate
Cost of
Equity MVE/MVA WACC
WACCBT 67.69% 4.18% 0 18.47% 32.31% 8.79%
WACCAT 67.69% 4.18% 35% 18.47% 32.31% 7.80%
According to the estimates provided above, we believe that the restatement of
OSG’s financial statements depicted an accurate value for the weighted average cost of
capital. This is evidenced by the fact that we estimated the cost of debt jumping from
2.30% to 4.18%. This jump is caused because the capital structure is financed by a
larger portion of debt through the restatements. The increase in debt as a proportion
of assets from 67.69% to 32.31% passes our “sniff test” since restating OSG’s financial
statements caused more of its long-term liabilities to finance capital. We feel that
between seven and nine percent is an accurate estimate of assets needed to fund the
company, given our restated financials.
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Valuation Methods
“Valuation is the process of converting forecasts into an estimate of the value of
the firm’s assets or equity” (Palepu & Healy). The two methods included in the
valuation of a company are method of comparables and intrinsic valuations. The
method of comparables compares the firms to its competitors using ratios. This method
has no real theory behind it and is not a good tool to use when valuing a company. The
intrinsic valuation models use forecasted financials in order to get a forward look at the
company. The intrinsic valuation models, unlike the method of comparables, have
theory behind them and therefore, are useful in correctly valuing a company.
Method of Comparables
The method of comparables ratios are used by analysts to determine the value of
a firm by using averages of other firms in the same industry. This is a popular and easy
way to calculate an appropriate price range for a share of stock by using information
available to the public. The problem with this method is that not all industries have
ratios that are comparable. These ratios do not measure if a particular firm is creating
value differently than its competitors or if a firm is creating value in areas that are not
taken into account by these ratios. Therefore, we will not put too much weight on the
method of comparables when valuing the firm later on.
The comparables that we will be using include trailing and forecast price to
earnings ratio, the price to book ratio, the price to earnings growth ratio, the ratio of
price to EBITDA, enterprise value to EBITDA, the price to free cash flows, and the
dividend to price ratio. A model will be considered fairly valued if it falls within a 15%
margin of safety on the valuation date. OSG’s closing price on April 1st, 2009, valuation
date, was $24.03. Therefore, a model price between $20.43 and $27.63 will be
considered fairly valued.
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Price/Earning Trailing
The price to earning trailing ratio is calculated by using the stock price of a firm
on April 1st, 2009 and the earnings of the previous year. The industry average price to
earning trailing ratio was found by adding the ratios found on Yahoo Finance and
dividing by the number of competitors. The energy shipping industry average P/E
trailing ratio was calculated to be 3.38. After multiplying that number by the earnings
per share for OSG (original and restated), we ended up with the computed price per
share. Both the $36.01 and $49.15 per share for the original and restated earnings of
OSG suggests that the current price is undervalued.
Price /Earnings Forecast
This ratio is similar to the previous one except that the forecasted earnings for
the following year are needed. The current price per share is divided by the future
P/E Trailing PPS EPS P/E Trailing Computed Price OSG 24.03 10.65 36.01 OSG (Restated) 24.03 14.54 49.15 Frontline 17.55 1.93 Teekay 14.51 5.76 Tsakos 14.42 2.45 Average 3.38
Forecasted P/E PPS EPS 1yr
Out P/E
Forecast Industry Avg.
P/E Computed
Price OSG 24.03 6.07 8.19 49.71 OSG (Restated) 24.03 7.74 8.19 63.39 Frontline 17.55 8.36 Teekay 14.51 9.44 Tsakos 14.42 6.78
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earnings per share to find the forecasted price to earnings ratio. The problem with this
ratio is that different analysts will have a different amount of earnings forecasted
because there are many factors that influence future earnings. For example, the current
recession leaves many questions for investors to consider. The impact of the current
economy on a particular industry and the length of the economic downturn are two
areas that investors may have differing opinions on which could ultimately affect the
estimated earning of the following year.
The industry average forecasted P/E that was calculated from information
provided by Yahoo Finance is 8.19. This number is than multiplied by the earning for
the following year, for both the original and restated future earnings, to find the model
price per share for OSG. The model prices of $49.71 and $63.39 for OSG (original and
restated) suggests that the current price per share of stock is undervalued.
Price /Book
Price/Book
PPS BPS P/B Industry Avg. OSG PPS
OSG 24.03 57.79 0.42 .52 29.91 OSG (Restated) 24.03 64.19 0.37 .52 33.38 Frontline 17.55 5.96 2.94 Teekay 14.51 36.94 0.39 Tsakos 14.42 22.45 0.64
The price to book ratio is found by dividing a firm’s current price per share by the
book value of equity per share. To obtain the industry average, it is once again
necessary to add the given P/B ratios of OSG’s competitors from Yahoo Finance and
divide by the number of competitors. The value of this average turns out to be .52 after
omitting Frontline’s number as an outlier. After multiplying this average by the book
value per share for OSG (original and restated), we end up with the model price per
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share for OSG. The model prices of $29.91 and $33.38 are above the 15% margin of
safety on April 1st, 2009 and suggest that the current price of OSG is undervalued.
Price Earnings Growth (P.E.G.)
P.E.G
P/E Growth PEG Industry Avg. OSG PPS OSG 2.26 0.222 16.59 39.22 OSG (Restated) 1.84 0.197 16.59 47.52 Frontline 1.93 0.127 15.20 Teekay 5.76 0.252 22.86 Tsakos 2.45 0.209 11.72
The price earnings growth model uses the price to earnings ratios that was
previously calculated and divides it by the expected growth in earnings. The P.E.Gs for
OSG’s competitors were found on Yahoo Finance and this information was used to
calculate the industry average P.E.G as 16.59. The model price per share is then
calculated by multiplying the industry average by OSG’s growth and earnings for both
original and restated financial statements. According to the model, OSG’s price per
share should be valued at $39.22. This is above the 15% margin of safety, suggesting
that the current price is undervalued. Since earnings and growth information changed in
the restated financial statements, the model price per share is also affected when using
the new numbers. The model price for OSG using the restated information is $47.52.
Since this is above the 15% margin of safety, this model also suggests that the current
price is undervalued.
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Price/EBITDA
The price/EBITDA model is a comparable that is calculated by taking the market
capitalization rate and dividing it by the earnings before interest, taxes, depreciation,
and amortization (EBITDA). The market capitalization rate is simply the current market
price per share times the number of shares outstanding. The market capitalization and
EBITDA for OSG’s competitors are found on Yahoo Finance, and are needed to find the
industry average. The model price per share is then found by taking the industry
average price/EBITDA and multiplying it by the EBITDA per share for OSG (original and
restated). The model price for the raw financials is $26.75 which is within the 15%
margin of safety which means the current price is fairly valued. The model price for the
restated financials is $32.73 which is above the 15% margin of safety, suggesting that
the current price is undervalued.
Price/EBITDA Market
Cap (billions)
EBITDA (billions)
P/EBITDA Industry Avg.
EBITDA/ Share
OSG PPS
OSG 0.72 0.52 1.54 17.37 26.75OSG (Restated)
0.72 0.63 1.54 21.25 32.73
Frontline 1.45 0.93 1.56 Teekay 1.1 0.84 1.31 Tsakos 0.58 0.33 1.76
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Enterprise Value/EBITDA
EV/EBITDA
EV (Bil) EBITDA (Bil)
EV/EBITDA Industry Avg.
OSG PPS
OSG 2.54 0.52 6.24 47.67 OSG (Restated)
4.38 0.63 6.24 8.91
Frontline 4.34 0.93 4.65 Teekay 7.08 0.84 8.44 Tsakos 1.85 0.33 5.64
The EV/ EBITDA ratio is calculated by dividing the enterprise value by the
earnings before interest, taxes, depreciation, and amortization. Enterprise value is
found by adding the market value of equity, or market capitalization, with the book
value of liabilities and then subtracting cash and investments. Analysts use this
comparable model because it ignores the firm’s capital structure. The industry average
used was found with enterprise value and EBITDA information available on Yahoo
Finance. The industry average of 6.24 is multiplied by OSG’s EBITDA to find the new
enterprise value for OSG. After adding back cash, subtracting book value of liabilities,
and dividing by the number of shares outstanding, the model price per share is found.
The model price per share for OSG is $47.67 and the restated price per share is
$8.91. Using a 15% margin of safety, the model suggests that the current price is
undervalued based on the original financial statements and overvalued based on the
restated financial statements. The reason behind the significant difference is because
the liabilities are larger after restating the operating leases of OSG.
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Price to Free Cash Flows (P/FCF)
Price/Free Cash Flows
Market Cap FCF P/FCF Industry Avg. OSG PPS
OSG 709.3 290 1.154 11.22
OSG restated 709.3 (1,228) 1.154 (47.53)
Frontline 1,453.60 797 1.82
Teekay 1,016.90 2099 0.48
Tsakos 590.3 (185) (3.19)
*market cap and FCF in millions
The price to free cash flows model is also used to find an estimated market price
per share by dividing the market capitalization by the free cash flows. Free cash flows
are simply cash flows from operations plus/minus the cash flows from investing
activities. The industry average for is found by taking the average P/FCF for OSG’s
competitors found on Yahoo Finance, excluding any outliers. In this case, Tsakos was
excluded from the industry average and the resulting average is 1.154. From there it is
necessary to move backwards to find the model price. The average is multiplied by
OSGs free cash flows and then dividing by the number of shares outstanding. The
resulting model price per share turns out to be $11.22 and -$47.53 (original and
restated), which is below the 15% margin of safety. This model suggests that the
current price of OSG is overvalued.
Dividends/Price
Dividend/Price
PPS DPS D/P Industry Avg. OSG PPS OSG 24.03 1.5 0.06 0.089 16.87 OSG-restated 24.03 1.5 0.06 0.089 16.87 Frontline 17.55 8.3 0.47
Teekay 14.51 0.99 0.07
Tsakos 14.42 1.58 0.11
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The dividend to price model is the final comparable model used to measure an
estimated price per share for a firm. To find the D/P ratio, dividends per share is
divided by the current market price per share. An industry average D/P is found with
information provided by Yahoo Finance to find the competitors D/P. Frontline was not
included in the industry average calculation because it is an outlier. To find the model
price, dividends per share of OSG are divided by the calculated industry average or
.089. The computed price of $16.87 falls below the 15% margin of safety which
suggests that the current price of OSG is overvalued.
Conclusion
When taking into account a 15% margin of safety, the P/E trailing, P/E
forecasted, P/B, P.E.G, price/EBITDA restated, and original EV/EBITDA models suggest
that the current price per share of OSG is undervalued. The original P/EBITDA model
suggests that the current price is fairly value and the EV/EBITDA restated, P/FCF, and
dividend to price models suggest that the current price per share of OSG is overvalued.
As previously stated, we will not put too much weight in the method of comparables
since this is not the best way to accurately value a firm. To do this, we will focus on the
intrinsic valuation models.
Intrinsic Valuation Models
The intrinsic valuation models, when compared to the method of comparables,
offer a more accurate valuation of a firm. Unlike the method of comparables, the
intrinsic valuation models offer theory-based assumptions, making it easy to compute a
current stock price estimation for the firm. The discounted free cash flow model, the
residual income model, the dividend discount model, the abnormal earnings growth
model, and the long run residual income model are all included in the intrinsic
valuations. Sensitivity analysis can be used in order to explain how small changes in the
cost of equity or changes in the growth rate affect the time consistent price per share.
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We believe that the intrinsic valuation models are the best way to present an accurate
overall value of Overseas Shipholding Group.
Discounted Dividends Valuation
“Finance theory holds that the value of any financial claim is simply the present
value of the cash payoffs that the claimholders receive” (Palepu & Healy). Since the
stockholders receive cash payments through dividends, the discounted dividends
valuation model computes all present values of future dividends paid to stockholders.
This present value gives the current estimated stock price for the firm. The two inputs
for this valuation are expected dividends and the cost of equity. These expected
dividends are derived from future earnings growth rates and payout ratios.
The discounted dividends model is theoretically consistent; however, investors
buy shares at a rate higher than D1, which determine the inconsistency in theory. The
difference between theory and reality is because of expensive forecast errors in the
early part of the model. The forecast errors are because theory states that
Dividends/Net Income stays constant, which is not always the case for firms. The most
significant error with this theory is incorrectly computing growth rates. Since this model
is supposed to continue forever, a small change in the growth rate has a significant
impact on the present value. In theory firms have a constant growth for all future
dividends which is not always the case. Firms tend to set a dividend amount and
change it periodically. These dividend payouts usually stay consistent for a certain
period, and change at the firms’ discretion.
To calculate the present stock value for a firm, first the present value of the ten-
year forecasted dividends must be calculated. Then in the eleventh year, a perpetuity
present value must be derived for dividends expected to last forever. We estimated the
present value of OSG’s dividends per share at $6.19 until 2018. After 2018, we
estimate the present terminal value of the terminal value perpetuity to be $2.86. This
was discounted to be time consistent at 12/31/08 using the appropriate size-adjusted
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cost of equity of 18.47% and average dividend growth rate of 5.15%. These two
present values are then added together to equal $9.05 which is the stock price as of
12/31/08. However, since we are valuing OSG at 4/1/09, we grew the stock price three
months by multiplying the price times one plus the cost of equity raised to the (3/12)
exponential power (3/12 for growing the price three months). This final time consistent
price is then compared to the 4/1/09 observed stock price of $24.03 to determine if the
company is over, under, or fairly-valued. The estimated stock prices are seen in the
sensitivity chart below.
Growth > 0 1.72 3.44 5.15 6.87 8.59 10.310.0862 20.13$ 22.81$ 27.28$ 36.09$ 62.35$ N/A N/A0.1014 16.79$ 18.42$ 20.89$ 25.03$ 33.56$ 52.22$ N/A0.1167 14.34$ 15.39$ 16.88$ 19.13$ 23.02$ 31.26$ 60.31$ 0.1457 11.19$ 11.70$ 12.36$ 13.26$ 14.57$ 16.63$ 20.35$ 0.1612 12.00$ 10.36$ 10.82$ 11.41$ 12.23$ 13.43$ 15.33$ 0.1847 8.61$ 8.83$ 9.10$ 9.44$ 9.88$ 10.48$ 11.33$ 0.2236 6.98$ 7.09$ 7.22$ 7.37$ 7.56$ 7.79$ 8.09$
Discounted Dividends Model
Undervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
At a 15% Analyst Position
Restated Backdoor KeKe
Upper Ke
Backdoor KeLower Ke
Our calculated size-adjusted cost of equity was 18.47% and average dividend
growth rate of 5.15%. These estimates gave us a stock price of $9.44, which would
imply that OSG is overvalued when compared to the observed stock price of $24.03.
The lack of comparability, even at a 15% analyst position, is due to the variability in the
cost of equity and growth rates used. Though there is a lack of comparability, this does
not render the model useless. We determine this model accurately portrays what it is
designed to measure. When investors decide to purchase stock in a company, they are
not solely concerned with the dividends a company will pay out. Investors analyze
many other facets of a firm such as capital gains. This model is only designed to
portray the portion of stock price supported by firm dividends. Although there is
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variability in this model, which is seen with a wishful-thinking cost of equity, we
recommend that this determines that OSG is overvalued.
Discounted Free Cash Flows Valuation
The discounted free cash flows model is one of the valuation models used to
help determine the intrinsic value of a firm’s equity. This model is determined using the
present value of the free cash flow perpetuity and the present value of a firm’s year-by-
year free cash flow. To begin this model, both the present value of forecasted free cash
flows and the present value of the perpetuity must be calculated.
To find the present value of forecasted cash flows take the firm’s cash flows from
operations (CFFO) and subtract the firm’s cash flows from investments (CFFI). Both of
these figures can be found on the firm’s statement of cash flows. This calculation must
be done for each of the forecasted years. Once this new figure is produced from the
above calculation, it must then be multiplied by the present value factor to determine
the present value for each year forecasted. Now that every year has been discounted
back to its present value, we have the present value of equity starting in time 1 all the
way through time 10. These values are summed to get the total present value of the
year by year free cash flows.
In order to calculate the present value of the perpetuity we must use the
weighted average cost of capital before taxes (WACCBT). It is imperative to use the
before tax figure to avoid double taxation within the model. Net income has already
been taxed in the cash flows from operations figure used in the calculation for the
present value of the year by year free cash flows.
Now that both the present value of forecasted free cash flows and the present
value of the perpetuity have been calculated we must add the two figures together.
This value represents the total market value of assets within the firm. Since we are
valuing the firm’s equity, we must take the market value of assets and subtract book
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value of debt and preferred stock to get the firm’s market value of equity. Take the
firm’s market value of equity and divide it by the firm’s total number of shares
outstanding to get a price per share.
A time consistent price is needed for comparability within the model, so we used
the same method to find this number as in the discounted dividends model. Once a
time consistent price is found, it is then used to compare the actual market price found
on April 4, 2009 to the forecasted results.
The sensitivity analysis for the discounted free cash flows model is based on the
relationship between the growth rate and the weighted average cost of capital.
Manipulating the rates in this formula yields an outcome that can be compared to the
time consistent price. These numbers are then used to determine whether the firm is
under-valued or over-valued. The table uses the upper and lower bounds for Overseas
Shipholding Group’s weighted average cost of capital.
The growth rate must be greater than one as well as less than the cost of capital
in order for the model to work. This model also assumes that the perpetuity growth rate
stays constant to infinity, which is unrealistic. A company can only sustain a high
growth rate for a short amount of time. Eventually the company will attain a sustainable
growth rate. The tables below depict the sensitivity analysis for Overseas Shipholding
Group’s discounted free cash flows.
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Growth > 0 0.0174 0.0348 0.0523 0.0697 0.08700.0746 172.34$ 225.33$ 324.64$ 580.85$ 2,649.96$ N/A0.0875 123.61$ 156.22$ 210.38$ 318.85$ 638.15$ 22,987.90$ 0.0879 122.34$ 154.50$ 207.74$ 313.78$ 621.40$ 12,719.09$ 0.1048 78.36$ 96.94$ 124.75$ 171.33$ 263.68$ 534.50$ 0.1220 47.15$ 58.54$ 74.46$ 98.50$ 138.35$ 217.24$ 0.1385 25.24$ 32.70$ 42.66$ 56.73$ 77.82$ 112.92$ 0.1585 5.52$ 10.20$ 16.19$ 24.20$ 35.30$ 51.68$
Discounted Free Cash Flows
Upper WACC
Overvalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63At a 15% Analyst Position
Backdoor WACCLower WACC
Before Tax WACCRestated WACC
When implementing Overseas Shipholding Group’s initial weighted average cost
of capital before taxes and a 0% growth rate, the firm is fairly valued within a 15%
analyst’s view at a price of $24.56. When utilizing a margin of safety of 15%, only 4
fairly valued prices were produced within the free cash flows analysis. The majority of
the values created within the sensitivity analysis show Overseas Shipholding Group as
being undervalued.
We can gather from this table that this model is particularly sensitive to growth
rates because of the effect is has on the terminal value perpetuity. This is common
within the free cash flows model due to the fact that the cash flows are extremely
difficult to accurately forecast. Since free cash flows are such a difficult value to
forecast, this model becomes much less accurate than other intrinsic valuation models.
Since this model is one of the least accurate valuation models calculated, the results will
not hold much significance in our overall valuation.
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Residual Income Valuation
When compared to most other valuation models a firm can implement, the
residual income model is traditionally much more effective. Since this valuation model is
the least sensitive to growth rates, it is the most reliable and contains the highest
percent of explanatory power. This is due to the fact that the residual income model is
based on a firm’s book value of equity instead of terminal value like the previous two
models discussed. When a terminal value is used, there is a much higher risk of
calculating errors in the long run. Since the residual income model avoids terminal
values, it is the most accurate.
The first step to begin the computation of the residual income valuation model is
finding the forecasted net income figures and forecasted dividend figures on both the
forecasted income statement and statement of cash flows respectively. Next, find the
firm’s most recent book value of equity given in their most recently published 10-K.
Once these figures are found, the firm’s book value of equity can be forecasted through
the same amount of years as the net income and dividends. This is done by taking the
previous year’s book value of equity and adding the difference between the current
year’s net income and dividends.
After the firm’s book value of equity has been forecasted, the annual normal
income, or “benchmark” figure, must be calculated. This is done by taking the firm’s
initial cost of equity and multiplying that number by the current year’s book value of
equity. Once these figures have been calculated, the firm’s residual income can be
found. To find the residual income for the firm, the “benchmark” figure is subtracted
from the net income for a final value.
Since the residual income was forecasted over a 10 year time period, it is
necessary to calculate a present value factor for each year. The present value factor
can be computed by using the equation 1/ (1+Ke) ^ time. Once the present value
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factor is found, the residual income in present value terms can be found. This is done
by multiplying the annual residual income by the present value factor for that year. A
total figure for the present value of the year by year residual income can then be
calculated by summing up all the values just computed.
The next step in the computation of the residual income valuation model is
calculating the terminal value of the perpetuity. To begin this calculation, the annual
residual income in the year the perpetuity begins must be forecasted. This can be done
by finding a percentage change in the annual residual income each year and then
applying that change to previous year’s residual income figure.
Once the annual residual income in the year of the perpetuity is found then the
terminal value of the perpetuity can be easily calculated. Simply take the residual
income estimate in the year of the perpetuity and divide it by the initial cost of equity
(Ke) minus the perpetuity growth rate.
After the terminal value of the perpetuity is found, it can be added to the book
value of equity and the total present value of the year by year perpetuity to get the
firm’s market value of equity. Once the market value of equity is found, divide that
value by the firm’s total number of shares outstanding to get a model price. In order to
obtain a time consistent model price, the 3 months difference from OSG financial year
end must be reflected. This can be done by multiplying the model price by (1 + Ke) ^
(3/12).
The growth rate and initial cost of equity can now be manipulated within this
formula to obtain various time consistent price values. As a 15% analyst starting with
an observed share price of $24.03 on April 1, 2009, a fairly valued price could range
from a low of $20.43 to a high of $27.63. This means that any price calculated under
$20.43 would be overvalued as well as any price over $27.63 would be undervalued.
We also calculated the restated figures due to the capitalization of operating leases.
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Growth > -0.1 -0.2 -0.3 -0.4 -0.50.1014 62.08$ 60.33$ 59.44$ 58.91$ 58.56$ 0.1167 52.11$ 51.51$ 51.20$ 51.01$ 50.89$ 0.1457 38.22$ 38.76$ 39.06$ 39.24$ 39.37$ 0.1612 32.74$ 33.55$ 34.01$ 34.30$ 34.51$ 0.1847 26.23$ 27.22$ 27.80$ 28.18$ 28.45$ 0.2236 18.77$ 19.74$ 20.34$ 20.75$ 21.04$ 0.2600 14.17$ 15.01$ 15.55$ 15.92$ 16.20$
Backdoor KeLower Ke
Restated Backdoor KeKe
Residual Income - RAW
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Upper Ke
Growth > -0.1 -0.2 -0.3 -0.4 -0.50.1014 74.02$ 71.75$ 70.61$ 69.92$ 69.46$ 0.1167 61.93$ 61.10$ 60.67$ 60.40$ 60.22$ 0.1457 45.13$ 45.71$ 46.03$ 46.24$ 46.38$ 0.1612 38.51$ 39.44$ 39.96$ 40.30$ 40.54$ 0.1847 30.67$ 31.83$ 32.51$ 32.95$ 33.27$ 0.2236 21.70$ 22.86$ 23.57$ 24.06$ 24.41$ 0.2600 18.95$ 20.05$ 20.74$ 21.22$ 21.56$
Residual Income - Restated
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Backdoor KeLower Ke
Restated Backdoor KeKe
Upper Ke
The two charts shown above represent the sensitivity analysis of the residual
income and restated residual income growth models. Negative growth rates are used in
the sensitivity analysis based on the fact that in realistic markets, it is impossible for a
firm to consistently outperform their cost of capital. With a positive residual income as
well as a positive growth rate, OSG will continue to outperform their cost of capital
which is impossible.
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In order to restore equilibrium, a growth rate less than zero must be
implemented. If the growth rate continues to increase, there will be a much slower
return to equilibrium and vice versa. Since we feel that OSG will have a moderate return
to equilibrium, the most relevant growth rates will be the middle values.
When using the raw values in the sensitivity analysis a fairly valued price is
produced when both the initial cost of equity and a small growth rate of -0.1 or -0.2 is
implemented. Fairly valued prices are also produced when the upper bound for the cost
of equity and a bigger growth rate of -0.4 and -0.5 is used. As seen by the raw residual
income table, the majority of the analysis produced undervalued prices.
The restated table had somewhat similar results to the raw table, only that no price was
fairly valued when the initial cost of equity was used. Only when the upper bound cost
of equity, or a higher cost of equity, were implemented into the analysis was fairly
valued prices produced. The greater part of the restated analysis still resulted in
undervalued prices for Overseas Shipholding Group. Therefore, after subjecting the
observed share price to the various growth rates and costs of equity in both the raw
and restated figures, we find that OSG is undervalued.
Abnormal Earnings Growth Valuation
The abnormal earnings growth model is based on finding a forward price to
earnings per share ratio. The abnormal earnings are equal to forecasted net earnings,
plus dividend reinvestment earnings, minus the “benchmark” of normal earnings. Other
factors such as dividend reinvestment, cumulative dividend income, and normal
earnings are needed to estimate firm value. In order to calculate dividend
reinvestment, or DRIP, dividends from the previous year must be multiplied by the cost
of equity. This DRIP calculation assumes that investors will reinvest cash dividends paid
in a company’s stock with a return based on the cost of equity. Cumulative dividend
income is computed by adding net income to the calculated DRIP.
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Furthermore, normal earnings are calculated by multiplying net income from the
previous year by one plus the cost of equity. After computing normal earnings and
cumulative dividend income, AEG can be calculated. AEG year by year is derived by
subtracting normal income from cumulative dividend income for each year. To ensure
that AEG is correctly calculated, we compared it to residual income for each year. Since
these numbers matched for each year, we determine that our AEG is correctly valuated.
Next, the present value factor needs to be calculated to state AEG in 2009
dollars. This is simply done by multiplying AEG for each year by [1/(1+Ke)t]. Finding
the total present value of AEG is done by adding the present value of each year. The
next step in AEG valuation is to find the present value of the terminal value perpetuity.
The terminal value of the perpetuity is calculated by multiplying AEG for 2018 by a
growth rate. This growth rate is found by determining the year by year change in AEG,
then analyzing where this rate converges. Once the AEG perpetuity is calculated, we
multiplied this by the present value factor for 2018. Finally, to calculate the total
average net income of the perpetuity, we added the core net income, total present
value of AEG, and the present value of the terminal value of the perpetuity.
Computing the average net income allowed us to find the EPS of the perpetuity.
By dividing the total average net income of the perpetuity by the total shares
outstanding of 39,590,759, we calculated the earnings per share of the perpetuity to be
$3.85 as stated and $4.46 restated. Next we calculated the intrinsic value per share by
dividing the EPS of the perpetuity by the cost of equity and found the intrinsic value per
share to be as $20.86 stated and $24.15 restated. Next, these values needed to be
grown to show the price on a time consistent basis. To do this we took our intrinsic
value per share price times one plus the cost of equity to the 3/12 power. The graphs
below show the sensitivity analyses on an as stated and restated basis.
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Growth > -0.1 -0.2 -0.3 -0.4 -0.50.1014 69.48$ 69.05$ 68.84$ 68.71$ 68.63$ 0.1167 53.60$ 53.05$ 53.28$ 53.42$ 53.52$ 0.1457 33.43$ 34.37$ 34.89$ 35.22$ 35.45$ 0.1612 27.10$ 28.05$ 28.59$ 28.93$ 29.18$ 0.1847 20.41$ 21.26$ 21.76$ 22.09$ 22.32$ 0.2236 13.77$ 14.39$ 14.78$ 15.04$ 15.23$ 0.2600 11.94$ 12.48$ 12.81$ 13.05$ 13.22$
Backdoor Ke
Abnormal Earnings Growth - RAW
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Lower KeRestated Backdoor Ke
KeUpper Ke
Growth > -0.1 -0.2 -0.3 -0.4 -0.50.1014 82.89$ 82.57$ 82.41$ 82.32$ 82.25$ 0.1167 62.34$ 63.05$ 63.42$ 63.65$ 63.80$ 0.1457 39.12$ 40.37$ 41.06$ 41.50$ 41.80$ 0.1612 31.48$ 32.72$ 33.43$ 33.88$ 34.20$ 0.1847 23.45$ 24.55$ 25.19$ 25.61$ 25.91$ 0.2236 15.54$ 16.33$ 16.82$ 17.15$ 17.39$ 0.2600 13.38$ 14.05$ 14.48$ 14.77$ 14.99$
Backdoor Ke
Abnormal Earnings Growth - Restated
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Lower KeRestated Backdoor Ke
KeUpper Ke
By using negative growth rates we are able to drive earnings back to equilibrium
and ensure that OSG will provide return based on capital in the future. The above
sensitivities show that our company is fairly-valued using the original size-adjusted cost
of equity. On both an as-stated and restated basis, the models prove that OSG has a
fairly-valued stock price. However, using the alternative backdoor cost of equity, OSG
is deemed undervalued. This information derived from our sensitivity analyses
determine that an investor would want to purchase shares of OSG due to the backdoor
calculation of cost of equity.
Page | 173
Long Run Residual Income Valuation
The long run residual income model utilizes many of the same components as
the original residual income model previously performed on the firm. The residual
income model incorporates the firm’s dividends to calculate the firm’s market value of
equity and these values are much too difficult to forecast in the long run. Since this
model is focused on the long run, a new formula to compute the firm’s market value of
equity must be used.
We begin calculating the long run residual income model by solving for the firm’s
forecasted average return of equity. This figure is found by dividing the net income for
the current year by the previous year’s book value of equity. Since our firm did not
produce values that we felt are stable around an average figure, we computed the
convergence value to get a more accurate number. Once we performed this calculation,
a convergence value of 12.95% was produced.
YEAR 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ConvergenceROE 10.51% 12.25% 16.34% 12.70% 13.44% 13.84% 13.06% 13.19% 13.10% 12.86% 12.95%
After subtracting our convergence value of the firm’s return on equity from our
initial cost of equity value for each year forecasted, we came to a growth rate
convergence value of 4.4%. Now that the convergence values of the firm’s return on
equity and growth rates have been computed, the firm’s market value of equity can be
calculated. In order to find the firm’s market value of equity, we must implement our
initial cost of equity of 18.47%, convergence return on equity of 12.95%, convergence
growth rate of 4.4%, and book value of equity of 1,722,870,000 into an equation. The
equation used is MVE = BVE (1+(ROE – Ke)/(Ke – g)).
Now that the market value of equity of 1,046,950,000 for the firm has been
computed, we can solve for the initial share price. This is done by dividing the market
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value of equity by the firm’s number of shares outstanding. Once we performed this
calculation, we found the firm’s initial share price to be $26.44. We can now take this
initial share price and multiply it by (1+ Ke) ^ (3/12) to find the firm’s time consistent
price of $27.58.
Growth> -0.1656 0.0255 0.0440 0.0782 0.16050.1167 46.75$ 51.00$ 52.60$ 59.60$ 31.66$ 0.1457 42.67$ 38.95$ 37.84$ 34.21$ 94.29$ 0.1612 40.78$ 34.61$ 32.95$ 27.92$ N/A0.1847 38.24$ 29.65$ 27.59$ 21.87$ N/A0.2236 34.70$ 24.02$ 21.78$ 16.15$ N/A
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Upper Ke
ROE Constant at .1295
Lower KeRestated Backdoor Ke
Ke
Backdoor Ke
ROE> 0.1051 0.1152 0.1295 0.1447 0.16340.1167 37.59$ 43.80$ 52.60$ 61.95$ 73.46$ 0.1457 27.04$ 31.51$ 37.84$ 44.57$ 52.85$ 0.1612 23.55$ 27.44$ 32.95$ 38.81$ 46.01$ 0.1847 19.71$ 22.97$ 27.59$ 32.49$ 38.52$ 0.2236 15.57$ 18.14$ 21.78$ 25.66$ 30.42$
Growth Constant at .0440
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Upper Ke
Backdoor KeLower Ke
Restated Backdoor KeKe
Growth> -0.1656 0.0255 0.0440 0.0782 0.16050.1051 35.08$ 22.70$ 19.71$ 11.47$ N/A0.1172 36.65$ 26.15$ 23.62$ 16.62$ N/A0.1295 38.24$ 29.65$ 27.59$ 21.87$ N/A0.1447 40.21$ 33.99$ 32.49$ 28.34$ N/A0.1634 42.63$ 39.32$ 38.52$ 36.31$ 5.44$
Ke Constant at .1847
Return on Equity
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Page | 175
Growth> -0.1786 0.03294 0.06279 0.1068 0.24070.1167 46.67$ 51.56$ 55.35$ 102.56$ 40.11$ 0.1457 42.77$ 38.55$ 36.22$ 26.27$ 52.69$ 0.1612 40.95$ 34.01$ 30.62$ 18.85$ 63.18$ 0.1847 38.50$ 28.89$ 25.59$ 13.23$ 90.14$ 0.2236 35.05$ 23.18$ 18.98$ 8.89$ 297.58$
Restated Backdoor KeKe
Upper KeAt a 15% Analyst Position
Overvalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Lower Ke
Restated - ROE Constant at .1315
Backdoor Ke
ROE> 0.1050 0.1206 0.1315 0.1510 0.17270.1167 35.02$ 47.96$ 57.01$ 73.19$ 91.20$ 0.1457 22.91$ 31.39$ 37.30$ 47.89$ 59.68$ 0.1612 19.37$ 26.53$ 31.53$ 40.48$ 50.44$ 0.1847 15.71$ 21.52$ 25.59$ 32.84$ 40.92$ 0.2236 12.01$ 16.45$ 19.55$ 25.10$ 31.28$ At a 15% Analyst Position
Overvalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Upper Ke
Restated - Growth Constant at .0628
Backdoor KeLower Ke
Restated Backdoor KeKe
Growth> -0.1786 0.03294 0.06279 0.1068 0.24070.1050 35.43$ 21.56$ 15.71$ N/A 110.00$ 0.1206 37.38$ 26.22$ 21.52$ 8.04$ 97.35$ 0.1315 38.75$ 29.48$ 25.59$ 14.39$ 88.52$ 0.1510 41.18$ 35.32$ 32.84$ 25.76$ 72.71$ 0.1727 43.89$ 41.80$ 40.92$ 38.40$ 55.12$ At a 15% Analyst Position
Overvalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Restated - Ke Constant at .1847
Return on Equity
Since this model incorporates the firm’s return on equity and the firm’s book
value of equity it was necessary to perform a restated sensitivity analysis that took the
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restated net income and equity into consideration. After the restated figures were
implemented, both the growth rate and the return on equity grew to larger values. As
shown from the tables above, Overseas Shipholding Group is fairly valued at the initial
Ke and convergence values of growth and ROE in both the raw and restated analysis.
After varying the values of all three variables within the analysis we find Overseas
Shipholding Group’s prices to be undervalued a majority of the time. Overall, this is
consistent with the previous valuations performed.
Analyst Recommendation
Our analysis of the intrinsic valuation models leads us to deem Overseas
Shipholding Group as slightly undervalued. Our recommendation to potential investors
is to buy shares in this company in hope of long-term positive returns. Although most
of OSG intrinsic valuation models determine that it is undervalued, the discounted
dividends model suggests that OSG is overvalued. This model, though accurate, is not
the best measure because of the inability to forecast dividends exactly. Other than
discounted dividends, each intrinsic valuation model provides sufficient evidence that
OSG is slightly undervalued. We believe that these models are accurate because of the
high explanatory power of our beta coefficient, which determines that two-thirds of
each model is accurately explained. A large portion of OSG’s financial structure is
attributed through operating leases, for this reason, we needed to restate OSG’s
financial statements. Through these restated financials, we ran the intrinsic valuations
again and found OSG to be unanimously undervalued.
The discounted free cash flows model, abnormal earnings growth model, and the
long-run residual income model suggest that OSG is slightly undervalued. Also, in each
case that we used our estimated Ke of 18.47%, which we estimated using the backdoor
method, a growth rate equal to 9.99% (but the appropriate percent to use was 8.7%,
since 9.99% is too close to the WACC of 10.48%), which was the average future
earnings growth rate, and an ROE of 12.95%, we generated a price that was slightly
Page | 177
undervalued. The energy shipping industry has been experiencing consolidation with
large public shipping corporations acquiring smaller independent operators. Through
this, we have also determined that OSG is in a position to expand in future years due to
firm mergers and acquisitions. OSG holds enough of the market share in the energy
shipping industry to compete with companies such as Tsakos, Teekay and Frontline.
Because of these future expansion opportunities, we would recommend that investors
should buy shares in Overseas Shipholding Group.
Page | 178
APPENDICES
Appendix A: Sales and Expense Manipulation diagnostics
Net Sales/ Accounts Receivable (change) 2003 2004 2005 2006 2007 2008
OSG
19.38
3.66
8.43
1.67
1.43
29.91
Frontline
31.36
7.81
5.57
10.44
(62.35) n/a
Teekay
10.48
10.12
4.53
1.46
5.58 n/a
Tsakos
105.86
15.64
2.93
11,002.58
3.63 n/a
Net Sales/Cash from Sales (raw)
2003 2004 2005 2006 2007 2008
OSG 1.02 1.14 1.02 1.03 1.05 1.01
Frontline 1.02 1.05 0.96 1.00 1.00 n/a
Teekay 1.05 1.03 0.97 1.02 1.03 n/a
Tsakos 1.00 1.02 0.97 1.00 1.04 n/a
Net Sales/ Accounts Receivable (Raw)
2002 2003 2004 2005 2006 2007 2008
OSG 5.77 7.62 5.16 5.57 5.04 4.26 6.00
Frontline 11.33 17.15 11.88 16.13 15.78 12.63 n/a
Teekay 11.05 10.76 10.56 12.88 10.49 9.17 n/a
Tsakos 5.30 9.44 10.44 12.99 18.78 11.68 n/a
Page | 179
Net Sales/ Cash from Sales (change)
2003 2004 2005 2006 2007 2008
OSG 0.35 1.33 0.72 1.14 1.55 0.94
Frontline 0.54 1.11 1.76 -10.58 1.01 n/a
Teekay 0.53 0.98 1.85 -1.47 1.08 n/a
Tsakos 0.46 1.05 2.26 1.06 1.38 n/a
Asset Turnover
2002 2003 2004 2005 2006 2007 2008
OSG 0.15 0.23 0.30 0.30 0.25 0.27 0.44
Frontline 0.18 0.27 0.44 0.34 0.34 0.35 n/a
Teekay 0.29 0.44 0.40 0.37 0.26 0.24 n/a
Tsakos 0.19 0.29 0.34 0.27 0.22 0.21 n/a
Asset Turnover (change) 2003 2004 2005 2006 2007 2008
OSG
(4.59)
0.52
0.28
0.05
(1.14)
(2.14)
Frontline
0.48
(6.32)
(1.42)
0.46
0.31 n/a
Teekay
0.92
0.34
1.26
0.02
0.17 n/a
Tsakos
0.85
0.68
(0.15)
0.15
0.19 n/a
CFFO/OI (raw)
2002 2003 2004 2005 2006 2007 2008
OSG 0.23 0.99 0.73 0.84 1.11 0.77 1.03
Frontline 1.56 1.11 0.81 1.14 1.04 1.05 n/a
Teekay 1.50 1.56 0.99 0.96 1.23 0.64 n/a
Tsakos 2.28 1.19 1.06 0.95 1.05 0.76 n/a
Page | 180
CFFO/OI (change)
2003 2004 2005 2006 2007 2008
OSG 1.24 0.52 6.73 -0.09 1.51 1.41
Frontline 1.01 0.58 -0.26 2.71 1.01 n/a
Teekay 1.59 0.68 1.09 0.42 11.10 n/a
Tsakos 0.91 0.93 -0.72 1.35 -0.55 n/a
CFFO/NOA (raw)
2002 2003 2004 2005 2006 2007 2008
OSG 0.01 0.16 0.25 0.19 0.18 0.06 0.14
Frontline 0.05 0.02 0.31 0.30 0.27 0.22 n/a
Teekay 0.09 0.19 0.25 0.19 0.11 0.04 n/a
Tsakos 0.06 0.13 0.24 0.21 0.15 0.10 n/a
CFFO/NOA (change)
2003 2004 2005 2006 2007 2008
OSG -4.04 1.50 0.07 0.05 -1.52 -6.39
Frontline 0.01 -0.01 0.25 0.80 0.53 n/a
Teekay 0.56 0.42 6.72 -0.05 -0.27 n/a
Tsakos 0.51 -3.78 -0.09 0.09 -0.06 n/a
Total Accruals/Δ sales 2003 2004 2005 2006 2007 2008
OSG
(0.01)
(0.38)
(0.44)
0.95
(0.60)
0.02
Frontline
0.09
(0.32)
(0.35)
0.45
(0.10) n/a
Teekay
0.21
(0.01)
0.09
1.69
(0.36) n/a
Tsakos
0.12
0.11
0.35
0.07
(0.81) n/a
Page | 181
Appendix B: Restating Financial Statements
2003
2003 245372004 2005 2006 2007 2008 Thereafter26,268$ 24,813$ 22,502$ 22,521$ 22,619$ 51,244$
forecastI‐rate 5.20% t Year Payment PV Factor Pay PV Ending Balance Depreciation Interest Principle Red
1 2004 26268 0.9505703 24970 119568 17328 7209 190592 2005 24813 0.903584 22421 100973 17328 6218 185953 2006 22502 0.8589201 19327 83721 17328 5251 172514 2007 22521 0.816464 18388 65554 17328 4353 181685 2008 22619 0.7761065 17555 46343 17328 3409 192106 2009 17081 0.7377438 12602 31672 17328 2410 146717 2010 17081 0.7012774 11979 16238 17328 1647 154348 2011 17081 0.6666135 11387 1 17328 844 16237
169967 Total 138,627$ 31340 138627
2004
2004 486242005 2006 2007 2008 2009 Beyond63691 52250 42848 38690 30595 30461
I‐rate 5.20% t Year Payment PV Factor Pay PV Carrying Value Depreciation Interest Principle Red1 2005 63691 0.95057 60543 170236 37061 11563 521282 2006 52250 0.903584 47212 126838 37061 8852 433983 2007 42848 0.85892 36803 90586 37061 6596 362524 2008 38690 0.816464 31589 56606 37061 4710 339805 2009 30595 0.776106 23745 28955 37061 2944 276516 2010 30461 0.737744 22472 0 37061 1506 28955
Total 222,364$ 222365
2005
2005 2136922006 2007 2008 2009 2010 Beyond
173890 194821 212309 208125 206655 503358
I‐rate 5.20% t Year Payment PV Factor Pay PV Carrying Value Depreciation Interest Principle Red1 2006 173890 0.95057 165295 1096187 150912 62779 1111112 2007 194821 0.903584 176037 958367 150912 57002 1378193 2008 212309 0.85892 182356 795893 150912 49835 1624744 2009 208125 0.816464 169927 629155 150912 41386 1667395 2010 206655 0.776106 160386 455216 150912 32716 1739396 2011 167786 0.737744 123783 311101 150912 23671 1441157 2012 167786 0.701277 117665 159492 150912 16177 1516098 2013 167786 0.666613 111848 0 150912 8294 159492
Total 1,207,297$ 1207297
Page | 182
2006
2006 2804832007 2008 2009 2010 2011 Beyond
232000 265517 275352 278997 239355 675531
I‐rate 5.20% t Year Payment PV Factor Pay PV Carrying Value Depreciation Interest Principle Red1 2007 232000 0.95057 220532 1435053 198081 82402 1495982 2008 265517 0.903584 239917 1244159 198081 74623 1908943 2009 275352 0.85892 236505 1033503 198081 64696 2106564 2010 278997 0.816464 227791 808248 198081 53742 2252555 2011 239355 0.776106 185765 610922 198081 42029 1973266 2012 225177 0.737744 166123 417513 198081 31768 1934097 2013 225177 0.701277 157912 214047 198081 21711 2034668 2014 225177 0.666613 150106 0 198081 11130 214047
Total 1,584,651$ 1584651 1584651
2007
2007 $313,9142008 2009 2010 2011 2012 Beyond
341962 371991 368418 320325 238399 730636
I‐rate 5.20% t Year Payment PV Factor Pay PV Carrying Value Depreciation Interest Principle Red1 2008 341962 0.95057 $325,059 $1,682,654 $213,838 $100,076 $241,8862 2009 371991 0.903584 $336,125 $1,398,161 $213,838 $87,498 $284,4933 2010 368418 0.85892 $316,442 $1,102,447 $213,838 $72,704 $295,7144 2011 320325 0.816464 $261,534 $839,450 $213,838 $57,327 $262,9985 2012 238399 0.776106 $185,023 $644,702 $213,838 $43,651 $194,7486 2013 182659 0.737744 $134,756 $495,567 $213,838 $33,525 $149,1347 2014 182659 0.701277 $128,095 $338,678 $213,838 $25,770 $156,8898 2015 182659 0.666613 $121,763 $173,630 $213,838 $17,611 $165,0489 2016 182659 0.633663 $115,744 $0 $213,838 $9,029 $173,630
Total 1,924,540$ $1,924,540
20082008 308983
2009 2010 2011 2012 2013 Beyond410283 371337 364101 314714 261652 781852
I‐rate 5.20% t Year Payment PV Factor Pay PV Carrying Value Depreciation Interest Principle Red1 2009 410283 0.95057 390003 1728204 203278 105705 3045782 2010 371337 0.903584 335534 1446734 203278 89867 2814703 2011 364101 0.85892 312734 1157863 203278 75230 2888714 2012 314714 0.816464 256953 903358 203278 60209 2545055 2013 261652 0.776106 203070 688681 203278 46975 2146776 2014 211000 0.737744 155664 513492 203278 35811 1751897 2015 201725 0.701277 141465 338469 203278 26702 1750238 2016 181000 0.666613 120657 175069 203278 17600 1634009 2017 108127 0.633663 68516 76046 203278 9104 9902310 2018 80000 0.602341 48187 0 203278 3954 76046
Total 2,032,783$ 2032783 2032783
Page | 183
Appendix C: Financial Analysis
Liquidity Ratios
Current Ratio 2003 2004 2005 2006 2007 2008
OSG 1.44 3.22 2.91 3.72 3.77 3.48
OSG restated 1.44 3.22 2.91 3.72 3.77 3.48
Frontline 3.73 3.38 2.54 2.51 1.80 n/a
Teekay 1.75 2.22 1.36 0.97 1.10 n/a
Tsakos 1.40 1.93 2.10 2.20 1.73 n/a
Industry Avg. 2.08 2.69 2.23 2.35 2.10 n/a
Quick Ratio 2003 2004 2005 2006 2007 2008
OSG 1.28 3.11 2.62 3.26 3.20 2.89
OSG restated 1.28 3.11 2.62 3.26 3.20 2.89
Frontline 0.54 0.94 0.70 0.58 0.41 n/a
Teekay 1.60 1.54 0.84 0.69 0.76 n/a
Tsakos 1.20 1.70 1.79 1.87 1.29 n/a
Industry Avg. 1.16 1.82 1.49 1.60 1.42 n/a
Accounts Receivable Turnover 2003 2004 2005 2006 2007 2008
OSG 7.62 5.16 5.57 5.04 4.26 5.99OSG restated 7.62 5.16 5.57 5.04 4.26 5.99
Teekay 10.76 10.56 12.88 10.49 9.17 n/aFrontline 17.15 11.88 16.13 15.78 12.63 n/aTsakos 9.44 10.44 12.99 18.78 11.68 n/a
Industry Avg. 11.24 9.51 11.89 12.52 9.44 n/a
Page | 184
Days Sales Outstanding 2003 2004 2005 2006 2007 2008
OSG 47.90 70.74 65.53 72.42 85.68 60.93OSG restated 47.90 70.74 65.53 72.42 85.68 60.93
Frontline 21.28 30.72 22.63 23.13 28.90 n/aTeekay 33.92 34.56 28.34 34.80 39.80 n/aTsakos 38.67 34.96 28.10 19.44 31.25 n/a
Industry Avg. 35.44 42.75 36.15 37.45 46.41 n/a
Working Capital Turnover 2003 2004 2005 2006 2007 2008
OSG 10.51 1.82 3.96 1.69 1.91 3.53OSG restated 10.51 1.82 3.96 1.69 1.91 3.53
Frontline 1.32 2.24 2.13 2.33 2.75 n/aTeekay 7.66 4.41 11.8 -147.9 25.29 n/aTsakos 7.22 4.26 2.95 3.53 4.29 n/a
Industry Avg. 6.68 3.18 5.21 2.52 2.98 n/a
Profitability Ratios
Gross Profit Margin 2003 2004 2005 2006 2007 2008
OSG 0.95 0.97 0.96 0.95 0.92 0.91OSG restated 0.95 0.97 0.96 0.95 0.92 0.91
Frontline 0.73 0.82 0.83 0.81 0.82 n/aTeekay 0.75 0.81 0.79 0.74 0.78 n/aTsakos 0.75 0.83 0.84 0.80 0.82 n/a
industry average 0.80 0.86 0.85 0.82 0.84 n/a
Operating Expense Ratio 2003 2004 2005 2006 2007 2008
OSG 0.53 0.40 0.53 0.64 0.82 0.80OSG-restated 0.54 0.35 0.46 0.60 0.76 0.64
Frontline 0.31 0.20 0.25 0.29 0.42 n/aTeekay 0.56 0.44 0.46 0.53 0.62 n/aTsakos 0.46 0.37 0.32 0.32 0.32 n/a
Industry Avg. 0.47 0.35 0.39 0.45 0.54 n/a
Page | 185
Operating Profit Margin 2003 2004 2005 2006 2007 2008
OSG 0.50 0.63 0.52 0.38 0.19 0.21OSG restated 0.50 0.63 0.52 0.38 0.19 0.21
Frontline 0.41 0.61 0.57 0.52 0.40 n/aTeekay 0.19 0.37 0.32 0.21 0.17 n/aTsakos 0.29 0.46 0.52 0.48 0.50 n/a
Industry Avg. 0.35 0.52 0.48 0.40 0.31 n/a
Net Profit Margin 2003 2004 2005 2006 2007 2008
OSG 0.27 0.49 0.46 0.37 0.19 0.19OSG restated 0.27 0.49 0.46 0.37 0.19 0.19
Frontline 0.35 0.56 0.41 0.33 0.44 n/aTeekay 0.11 0.34 0.29 0.13 0.08 n/aTsakos 0.24 0.45 0.55 0.46 0.37 n/a
Industry Avg. 0.24 0.46 0.43 0.32 0.27 n/a
Asset Turnover 2003 2004 2005 2006 2007 2008
OSG 0.22 0.41 0.37 0.31 0.27 0.41OSG-restated 0.22 0.38 0.34 0.23 0.19 0.28
Frontline 0.38 0.43 0.36 0.35 0.28 n/aTeekay 0.58 0.62 0.36 0.38 0.31 n/aTsakos 0.35 0.39 0.31 0.39 0.25 n/a
Industry Avg. 0.38 0.46 0.35 0.36 0.28 n/a
Return on Assets 2003 2004 2005 2006 2007 2008
OSG 0.06 0.20 0.17 0.12 0.05 0.08OSG-restated 0.06 0.19 0.16 0.09 0.04 0.05
Frontline 0.13 0.24 0.14 0.12 0.12 n/aTeekay 0.07 0.21 0.10 0.05 0.02 n/aTsakos 0.09 0.17 0.17 0.18 0.09 n/a
Industry Avg. 0.09 0.21 0.15 0.12 0.07 n/a
Page | 186
Return on Equity 2003 2004 2005 2006 2007 2008
OSG 0.15 0.44 0.33 0.21 0.10 0.17
OSG restated 0.15 0.44 0.33 0.21 0.10 0.17
Frontline 0.33 0.82 0.66 0.72 0.85 n/a
Teekay 0.12 0.46 0.26 0.12 0.07 n/aTsakos 0.22 0.46 0.31 0.32 0.24 n/a
Industry Avg. 0.17 0.45 0.30 0.22 0.14 n/a
Firm Growth Rate Ratios
Internal Growth Rate 2003 2004 2005 2006 2007 2008
OSG 0.05 0.19 0.16 0.11 0.04 0.07OSG restated 0.05 0.19 0.16 0.11 0.04 0.07
Frontline 0.02 0.00 -0.07 -0.03 -0.02 n/aTeekay 0.05 0.20 0.09 0.04 0.01 n/aTsakos 0.07 0.15 0.13 0.14 0.06 n/a
Industry Avg. 0.05 0.13 0.08 0.06 0.02 n/a
Sustainable Growth Rate 2003 2004 2005 2006 2007 2008
OSG 0.11 0.35 0.29 0.20 0.09 0.15OSG-restated 0.11 0.38 0.40 0.28 0.14 0.23
Frontline 0.08 -0.02 -0.45 -0.21 -0.16 n/aTeekay 0.11 0.49 0.22 0.12 0.05 n/aTsakos 0.18 0.26 0.24 0.36 0.17 n/a
Industry Avg. 0.12 0.27 0.08 0.12 0.04 n/a
Capital Structure Ratios
Debt to Equity 2003 2004 2005 2006 2007 2008
OSG 1.18 0.88 0.78 0.92 1.29 1.26OSG-Restated 1.33 1.04 1.43 1.63 2.35 2.44
Frontline 2.44 3.59 5.23 5.87 7.44 n/aTeekay 1.17 1.46 1.37 2.06 2.74 n/aTsakos 1.62 0.81 0.79 1.61 1.76 n/a
Industry Avg. 1.60 1.68 2.04 2.61 3.31 n/a
Page | 187
Times Interest Earned 2003 2004 2005 2006 2007 2008
OSG 3.62 8.20 8.35 6.46 3.48 5.75OSG restated 3.62 8.20 8.35 6.46 3.48 5.75
Frontline 6.48 15.17 11.57 10.83 7.00 n/aTeekay 3.62 10.14 7.80 5.21 4.91 n/aTsakos 5.71 11.76 12.51 16.59 20.18 n/a
Industry Avg. 4.86 11.32 10.06 9.77 8.89 n/a
Debt Service Margin 2003 2004 2005 2006 2007 2008
OSG 15.63 26.05 30.46 31.22 11.74 25.67OSG restated 15.63 26.05 30.46 31.22 11.74 25.67
Frontline 3.19 5.42 5.84 4.96 3.25 n/aTeekay 5.45 9.74 7.28 6.23 3.05 n/aTsakos 2.79 5.08 4.86 7.12 6.31 n/a
Industry Avg. 6.76 11.58 12.11 12.38 6.09 n/a
Altman's Z-Score 2003 2004 2005 2006 2007 2008
OSG 1.83 2.59 2.31 1.88 1.83 1.97OSG-restated 1.68 2.32 1.54 1.26 1.16 1.24
Frontline 1.19 1.97 1.43 1.28 1.45 n/aTeekay 2.57 1.98 1.81 1.16 0.99 n/aTsakos 1.48 3.12 2.95 1.76 1.46 n/a
Industry Avg. 1.77 2.42 2.12 1.52 1.43 n/a
Page | 188
Appendix D: Regressions
3 month
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.680674303R Square 0.463317507Adjusted R Square 0.455650615Standard Error 0.07797254Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.367402992 0.367402992 60.43093629 4.76735E‐11Residual 70 0.425580192 0.006079717Total 71 0.792983184
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.020113469 0.009219895 2.181529201 0.032504642 0.00172497 0.038501969 0.00172497 0.038501969X Variable 1 1.783420949 0.229416264 7.773733742 4.76735E‐11 1.325864645 2.240977253 1.325864645 2.240977253
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.658239175R Square 0.433278812Adjusted R Square 0.423507757Standard Error 0.082012967Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.298257275 0.298257275 44.34309431 1.09312E‐08Residual 58 0.390115355 0.006726127Total 59 0.68837263
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.018223934 0.010855305 1.678804411 0.098570561 ‐0.00350532 0.039953189 ‐0.00350532 0.039953189X Variable 1 1.764924668 0.26504107 6.659061068 1.09312E‐08 1.234387329 2.295462007 1.234387329 2.295462007
Page | 189
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.716746858R Square 0.513726058Adjusted R Square 0.503154885Standard Error 0.072097395Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.252608279 0.252608279 48.59688467 1.00671E‐08Residual 46 0.239109583 0.005198034Total 47 0.491717863
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.008769147 0.010813646 0.810933487 0.421579893 ‐0.012997592 0.030535887 ‐0.012997592 0.030535887X Variable 1 1.696207055 0.243318231 6.971146582 1.00671E‐08 1.206432866 2.185981244 1.206432866 2.185981244
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.735630343R Square 0.541152002Adjusted R Square 0.527656472Standard Error 0.076257561Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.233182076 0.233182076 40.09861247 3.19891E‐07Residual 34 0.19771733 0.005815216Total 35 0.430899406
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.01916017 0.01351358 1.417845604 0.165336275 ‐0.008302728 0.046623068 ‐0.008302728 0.046623068X Variable 1 1.713527037 0.270599063 6.332346522 3.19891E‐07 1.16360358 2.263450495 1.16360358 2.263450495
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.825772375R Square 0.681900016Adjusted R Square 0.667440925Standard Error 0.071988496Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.24440266 0.24440266 47.16064469 6.74588E‐07Residual 22 0.114011557 0.005182343Total 23 0.358414217
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.027636982 0.016530204 1.671908089 0.108706875 ‐0.006644563 0.061918526 ‐0.006644563 0.061918526X Variable 1 1.896660592 0.276184788 6.867360824 6.74588E‐07 1.323888402 2.469432783 1.323888402 2.469432783
Page | 190
1 YearSUMMARY OUTPUT
Regression StatisticsMultiple R 0.674307961R Square 0.454691226Adjusted R Square 0.4469011Standard Error 0.078596682Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.360562496 0.360562496 58.36763923 8.40438E‐11Residual 70 0.432420688 0.006177438Total 71 0.792983184
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.020191678 0.009295132 2.172285207 0.033222968 0.001653122 0.038730234 0.001653122 0.038730234X Variable 1 1.737069643 0.227368955 7.639871676 8.40438E‐11 1.283596566 2.19054272 1.283596566 2.19054272
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.652051649R Square 0.425171353Adjusted R Square 0.415260515Standard Error 0.082597519Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.292676323 0.292676323 42.89963388 1.66488E‐08Residual 58 0.395696307 0.00682235Total 59 0.68837263
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.017344555 0.010908647 1.589982288 0.117275402 ‐0.004491474 0.039180584 ‐0.004491474 0.039180584X Variable 1 1.702006385 0.259856983 6.549781208 1.66488E‐08 1.181846122 2.222166647 1.181846122 2.222166647
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.71148945R Square 0.506217237Adjusted R Square 0.495482829Standard Error 0.072651911Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.248916058 0.248916058 47.15837546 1.44187E‐08Residual 46 0.242801805 0.0052783Total 47 0.491717863
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.007541107 0.010855201 0.69469991 0.490737567 ‐0.014309279 0.029391493 ‐0.014309279 0.029391493X Variable 1 1.635047253 0.238095337 6.867195604 1.44187E‐08 1.155786204 2.114308301 1.155786204 2.114308301
Page | 191
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.733451438R Square 0.537951011Adjusted R Square 0.524361335Standard Error 0.07652309Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.231802771 0.231802771 39.58527091 3.60992E‐07Residual 34 0.199096635 0.005855783Total 35 0.430899406
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.018610812 0.013535794 1.374933137 0.178145833 ‐0.008897231 0.046118856 ‐0.008897231 0.046118856X Variable 1 1.661769089 0.264121567 6.291682677 3.60992E‐07 1.125009488 2.198528691 1.125009488 2.198528691
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.824431241R Square 0.679686871Adjusted R Square 0.665127183Standard Error 0.072238487Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.243609438 0.243609438 46.68279189 7.291E‐07Residual 22 0.11480478 0.005218399Total 23 0.358414217
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.029292514 0.016705776 1.753436339 0.093451095 ‐0.005353144 0.063938173 ‐0.005353144 0.063938173X Variable 1 1.859427888 0.272145357 6.832480654 7.291E‐07 1.295032964 2.423822812 1.295032964 2.423822812
Page | 192
2 Year SUMMARY OUTPUT
Regression StatisticsMultiple R 0.679303941R Square 0.461453844Adjusted R Square 0.453760327Standard Error 0.078107805Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.365925139 0.365925139 59.97957407 5.39257E‐11Residual 70 0.427058046 0.006100829Total 71 0.792983184
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.020762683 0.009243244 2.246254873 0.027845119 0.002327613 0.039197752 0.002327613 0.039197752X Variable 1 1.780264671 0.229870312 7.744648092 5.39257E‐11 1.321802797 2.238726546 1.321802797 2.238726546
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.656889746R Square 0.431504138Adjusted R Square 0.421702485Standard Error 0.082141278Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.297035638 0.297035638 44.02360978 1.19916E‐08Residual 58 0.391336992 0.00674719Total 59 0.68837263
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.018774779 0.01089203 1.723717248 0.090086112 ‐0.003027987 0.040577545 ‐0.003027987 0.040577545X Variable 1 1.760639028 0.265355137 6.635028996 1.19916E‐08 1.229473015 2.291805041 1.229473015 2.291805041
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.717112481R Square 0.514250311Adjusted R Square 0.503690535Standard Error 0.072058521Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.252866064 0.252866064 48.69897979 9.81577E‐09Residual 46 0.238851799 0.00519243Total 47 0.491717863
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.009059047 0.01081877 0.83734539 0.406727933 ‐0.012718007 0.030836101 ‐0.012718007 0.030836101X Variable 1 1.694249306 0.242782503 6.978465433 9.81577E‐09 1.205553481 2.18294513 1.205553481 2.18294513
Page | 193
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.735026627R Square 0.540264142Adjusted R Square 0.526742499Standard Error 0.076331303Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.232799498 0.232799498 39.95551035 3.30825E‐07Residual 34 0.198099908 0.005826468Total 35 0.430899406
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.019154569 0.01352763 1.415958983 0.16588381 ‐0.008336882 0.046646019 ‐0.008336882 0.046646019X Variable 1 1.707350767 0.270106113 6.321037126 3.30825E‐07 1.158429106 2.256272429 1.158429106 2.256272429
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.825752828R Square 0.681867733Adjusted R Square 0.667407176Standard Error 0.071992148Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.24439109 0.24439109 47.1536267 6.75356E‐07Residual 22 0.114023127 0.005182869Total 23 0.358414217
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.027703545 0.016535567 1.675391334 0.10801435 ‐0.006589121 0.061996211 ‐0.006589121 0.061996211X Variable 1 1.891851812 0.275505051 6.866849838 6.75356E‐07 1.32048931 2.463214314 1.32048931 2.463214314
Page | 194
5 Year
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.67770956R Square 0.459290248Adjusted R Square 0.451565823Standard Error 0.078264546Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.364209443 0.364209443 59.45947378 6.21876E‐11Residual 70 0.428773741 0.006125339Total 71 0.792983184
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.021549538 0.009271813 2.324198914 0.023022559 0.00305749 0.040041586 0.00305749 0.040041586X Variable 1 1.774630959 0.230142869 7.710996938 6.21876E‐11 1.315625486 2.233636432 1.315625486 2.233636432
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.655429268R Square 0.429587526Adjusted R Square 0.419752828Standard Error 0.082279626Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.295716295 0.295716295 43.68080574 1.32484E‐08Residual 58 0.392656335 0.006769937Total 59 0.68837263
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.019246838 0.010928205 1.761207715 0.083474019 ‐0.00262834 0.041122016 ‐0.00262834 0.041122016X Variable 1 1.750259841 0.264823919 6.609145614 1.32484E‐08 1.220157177 2.280362505 1.220157177 2.280362505
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.716607713R Square 0.513526614Adjusted R Square 0.502951106Standard Error 0.072112179Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.252510209 0.252510209 48.55810195 1.01643E‐08Residual 46 0.239207654 0.005200166Total 47 0.491717863
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.009319538 0.010837761 0.859913538 0.394296292 ‐0.012495744 0.03113482 ‐0.012495744 0.03113482X Variable 1 1.685335594 0.241855263 6.968364367 1.01643E‐08 1.198506208 2.172164979 1.198506208 2.172164979
Page | 195
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.734771706R Square 0.53988946Adjusted R Square 0.526356797Standard Error 0.076362402Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.232638048 0.232638048 39.8952861 3.35544E‐07Residual 34 0.198261358 0.005831216Total 35 0.430899406
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.019458698 0.013550134 1.436052094 0.160125142 ‐0.008078487 0.046995883 ‐0.008078487 0.046995883X Variable 1 1.699041619 0.268994392 6.316271535 3.35544E‐07 1.152379247 2.245703991 1.152379247 2.245703991
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.825554406R Square 0.681540078Adjusted R Square 0.667064627Standard Error 0.072029212Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.244273654 0.244273654 47.08247624 6.83192E‐07Residual 22 0.114140564 0.005188207Total 23 0.358414217
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.028317492 0.016586135 1.707298962 0.101842702 ‐0.006080048 0.062715031 ‐0.006080048 0.062715031X Variable 1 1.884931628 0.274704614 6.861667162 6.83192E‐07 1.31522913 2.454634126 1.31522913 2.454634126
Page | 196
10 Year
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.676217703R Square 0.457270382Adjusted R Square 0.449404735Standard Error 0.078920341Observations 71
ANOVAdf SS MS F Significance F
Regression 1 0.36209001 0.36209001 58.13512893 9.7051E‐11Residual 69 0.429760992 0.00622842Total 70 0.791851001
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.022089711 0.009429093 2.342718558 0.022034008 0.003279185 0.040900236 0.003279185 0.040900236X Variable 1 1.767543249 0.231819908 7.624639594 9.7051E‐11 1.305075192 2.230011306 1.305075192 2.230011306
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.654330884R Square 0.428148905Adjusted R Square 0.418289404Standard Error 0.082383318Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.294725988 0.294725988 43.42500478 1.42747E‐08Residual 58 0.393646642 0.006787011Total 59 0.68837263
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.019796707 0.010962929 1.805786332 0.076141793 ‐0.002147979 0.041741394 ‐0.002147979 0.041741394X Variable 1 1.741175922 0.264224275 6.589765154 1.42747E‐08 1.212273575 2.270078269 1.212273575 2.270078269
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.715982174R Square 0.512630473Adjusted R Square 0.502035483Standard Error 0.072178568Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.252069561 0.252069561 48.3842351 1.06124E‐08Residual 46 0.239648302 0.005209746Total 47 0.491717863
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.009719508 0.010864651 0.894599125 0.375658582 ‐0.012149901 0.031588916 ‐0.012149901 0.031588916X Variable 1 1.676869702 0.241072337 6.955877737 1.06124E‐08 1.191616263 2.162123141 1.191616263 2.162123141
Page | 197
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.734446296R Square 0.539411362Adjusted R Square 0.525864637Standard Error 0.076402065Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.232432036 0.232432036 39.81858168 3.41658E‐07Residual 34 0.198467371 0.005837276Total 35 0.430899406
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.019924341 0.013583393 1.466816229 0.151615449 ‐0.007680434 0.047529116 ‐0.007680434 0.047529116X Variable 1 1.691371804 0.268037892 6.310196644 3.41658E‐07 1.146653273 2.236090334 1.146653273 2.236090334
SUMMARY OUTPUT
Regression StatisticsMultiple R 0.825248627R Square 0.681035296Adjusted R Square 0.666536901Standard Error 0.072086276Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.244092733 0.244092733 46.9731489 6.95428E‐07Residual 22 0.114321485 0.005196431Total 23 0.358414217
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.029104534 0.016654066 1.747593273 0.094479987 ‐0.005433885 0.063642953 ‐0.005433885 0.063642953X Variable 1 1.878618829 0.274103028 6.853696003 6.95428E‐07 1.310163944 2.447073714 1.310163944 2.447073714
Page | 198
Appendix E: Methods of Comparables
Price/Earning Trailing
Price /Earnings Forecast
Price /Book
Price/Book
PPS BPS P/B Industry Avg. OSG PPS
OSG 24.03 57.79 0.42 .52 29.91OSG restated 24.03 64.19 0.37 .52 33.38
Frontline 17.55 5.96 2.94Teekay 14.51 36.94 0.39Tsakos 14.42 22.45 0.64
P/E trailing PPS EPS P/E Trailing Computed Price
OSG 24.03 10.65 36.01OSG restated 24.03 14.54 49.15
Frontline 17.55 1.93Teekay 14.51 5.76Tsakos 14.42 2.45
Average 3.38
Forecasted P/E
PPS EPS 1yr
Out P/E
Forecast Industry Avg.
P/E Computed
price OSG 24.03 6.07 8.19 49.71
OSG restated 24.03 7.74 8.19 63.39Frontline 17.55 8.36Teekay 14.51 9.44Tsakos 14.42 6.78
Page | 199
Price Earnings Growth (P.E.G.)
P.E.G P/E Growth PEG Industry Avg. OSG PPS
OSG 2.26 0.222 16.59 39.22OSG restated 1.84 0.197 16.59 47.52
Frontline 1.93 0.127 15.20Teekay 5.76 0.252 22.86Tsakos 2.45 0.209 11.72
Price/EBITDA
Enterprise Value/EBITDA
EV/EBITDA
EV (Bil) EBITDA
(Bil)
EV/EBITDA Industry
Avg. OSG PPS OSG 2.54 0.52 6.24 47.67OSG
restated 4.38 0.63 6.24 8.91Frontline 4.34 0.93 4.65 Teekay 7.08 0.84 8.44 Tsakos 1.85 0.33 5.64
Price/EBITDA
Market Cap
(billions) EBITDA
(billions) P/EBITDAIndustry
Avg. EBITDA/shareOSG PPS
OSG 0.72 0.52 1.54 17.37 26.75OSG
restated 0.72 0.63 1.54 21.25 32.73Frontline 1.45 0.93 1.56 Teekay 1.1 0.84 1.31 Tsakos 0.58 0.33 1.76
Page | 200
Price to Free Cash Flows (P/FCF)
Price/Free Cash Flows
Market Cap FCF P/FCF Industry Avg. OSG PPS
OSG 709.3 290 1.154 11.22
OSG restated 709.3 (1,228) 1.154 (47.53)
Frontline 1,453.60 797 1.82
Teekay 1,016.90 2099 0.48
Tsakos 590.3 (185) (3.19)
*market cap and FCF in millions
Dividends/Price
Dividend/Price PPS DPS D/P Industry Avg. OSG PPS
OSG 24.03 1.5 0.06 0.089 16.87
OSG-restated 24.03 1.5 0.06 0.089 16.87
Frontline 17.55 8.3 0.47
Teekay 14.51 0.99 0.07
Tsakos 14.42 1.58 0.11
Appendix F: Valuation Models
All Items in Millions of Dollars 1 2 3 4 5 6 7 8 9 10 Perp.2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Net Income 181.05 227.15 331.95 293.29 342.57 391.34 411.82 460.84 508.71 555.11 Total Dividends -49.59 -49.59 -53.84 -53.84 -65.18 -65.18 -70.84 -70.84 -76.51 -76.51 -82.18BV Equity 1722.87 1854.33 2031.89 2310.00 2549.45 2826.85 3153.00 3493.98 3883.98 4316.18 4794.78CFFO 670.34 751.74 892.16 924.26 1032.54 1147.33 1247.32 1378.19 1517.42 1665.62CFFI -182.80 -253.48 -323.56 -355.92 -391.51 -430.66 -473.73 -521.10 -573.21 -630.53CFFF -49.59 -49.59 -53.84 -53.84 -65.18 -65.18 -70.84 -70.84 -76.51 -76.51Dividends per share (39,591 issued) 1.25$ 1.25$ 1.36$ 1.36$ 1.65$ 1.65$ 1.79$ 1.79$ 1.93$ 1.93$ 2.08$ Dividend Growth 0.0000 0.0857 0.0000 0.2106 0.0000 0.0868 0.0000 0.0800 0.0000Average Growth 0.0515PV factor 0.8441 0.7125 0.6014 0.5077 0.4285 0.3617 0.3053 0.2577 0.2175 0.1836PV Dividends 1.06$ 0.89$ 0.82$ 0.69$ 0.71$ 0.60$ 0.55$ 0.46$ 0.42$
Dollars RelativePV YBY Dividends 6.19$ 68%
TV perpetuity 15.58$ PV TV perpetuity 2.86$ 32%Model Price 9.05$ 100%Time consistent Model Price 9.44$ Observed Share Price (4/1/09) 24.03$ Initial Cost of Equity 0.1847Perp Growth Rate (g) 0.0515
Growth > 0 1.72 3.44 5.15 6.87 8.59 10.310.0862 20.13$ 22.81$ 27.28$ 36.09$ 62.35$ N/A N/A0.1014 16.79$ 18.42$ 20.89$ 25.03$ 33.56$ 52.22$ N/A0.1167 14.34$ 15.39$ 16.88$ 19.13$ 23.02$ 31.26$ 60.31$ 0.1457 11.19$ 11.70$ 12.36$ 13.26$ 14.57$ 16.63$ 20.35$ 0.1612 12.00$ 10.36$ 10.82$ 11.41$ 12.23$ 13.43$ 15.33$ 0.1847 8.61$ 8.83$ 9.10$ 9.44$ 9.88$ 10.48$ 11.33$ 0.2236 6.98$ 7.09$ 7.22$ 7.37$ 7.56$ 7.79$ 8.09$
PV10 of DPS Perp.
Discounted Dividends Model
Discounted Dividends Model
At a 15% Analyst Position
Restated Backdoor KeKe
Upper Ke
Backdoor KeLower Ke
Page | 200
All Items in Millions of Dollars0 1 2 3 4 5 6 7 8 9 10 Perp.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019CFFO (Millions) 670.34 751.74 892.16 924.26 1032.54 1147.33 1247.32 1378.19 1517.42 1665.62 1,725.500 CFFI (Millions) -182.801 -253.480 -323.560 -355.916 -391.508 -430.659 -473.725 -521.097 -573.207 -630.527 -650.000Yearly Growth Rate 0.1214 0.1868 0.0360 0.1172 0.1112 0.0872 0.1049 0.1010 0.0977 0.0360FCF Firm's Assets 487.543 498.259 568.596 568.342 641.033 716.669 773.595 857.093 944.217 1,035.093 1,075.500 PV Factor 0.9051 0.8193 0.7416 0.6712 0.6075 0.5499 0.4978 0.4505 0.4078 0.3691 0.3341PV YBY Free Cash Flows 441.295 408.214 421.651 381.483 389.459 394.109 385.060 386.152 385.052 382.070 Average 10 yr. Growth Rate 0.0999 % ValueTotal PV YBY FCF (millions) 3,592.475$ 14%FCF Perp 22,302.511$ 86% 60,421 Market Value of Assets (12/31/08) 25,894.985$ Book Value Debt & Preferred Stock 4,199.977$ 20.43$ 27.63$ Market Value of Equity 21,695.009$ Divide by Shares to Get PPS at 12/31 547.98$ Time Consistent Model Price (4/1/09) 534.50$ Oberved Share Price (4/1/09) 24.03$
WACC(BT) 0.1048 Growth > 0 0.0174 0.0348 0.0523 0.0697 0.0870Perp Growth Rate 0.0870 0.0746 172.34$ 225.33$ 324.64$ 580.85$ 2,649.96$ N/A
0.0875 123.61$ 156.22$ 210.38$ 318.85$ 638.15$ 22,987.90$ 0.0879 122.34$ 154.50$ 207.74$ 313.78$ 621.40$ 12,719.09$ 0.1048 78.36$ 96.94$ 124.75$ 171.33$ 263.68$ 534.50$ 0.1220 47.15$ 58.54$ 74.46$ 98.50$ 138.35$ 217.24$ 0.1385 25.24$ 32.70$ 42.66$ 56.73$ 77.82$ 112.92$ 0.1585 5.52$ 10.20$ 16.19$ 24.20$ 35.30$ 51.68$
Discounted Free Cash Flows
Upper WACC
Overvalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63At a 15% Analyst Position
Backdoor WACCLower WACC
Before Tax WACCRestated WACC
Discounted Free Cash Flow
PV10 FCF of Assets15% analyst between
Less than $20.43Greater than $27.63
Page | 201
All Items in Millions of Dollars21.83 72.00 -90.03 5.05 -2.47 -39.76 -13.95 -24.17 -33.42 19.05
0 1 2 3 4 5 6 7 8 9 10 Perp.2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Net Income (Millions) 181.05 227.15 331.95 293.29 342.57 391.34 411.82 460.84 508.71 555.11Total Dividends (Millions) 49.59 49.59 53.84 53.84 65.18 65.18 70.84 70.84 76.51 76.51 82.18Book Value Equity (Millions) 1,722.87 1,854.32 2,031.89 2,310.00 2,549.45 2,826.84 3,153.00 3,493.98 3,883.98 4,316.18 4,794.78
Annual Normal Income (Becnhmark) 318.214 342.494 375.290 426.657 470.884 522.118 582.359 645.338 717.371 797.198Annual Residual Income -137.17 -115.34 -43.34 -133.36 -128.31 -130.78 -170.54 -184.50 -208.66 -242.09 -223.04PV Factor 0.844 0.712 0.601 0.508 0.429 0.362 0.305 0.258 0.218 0.184YBY PV RI -115.78 -82.18 -26.06 -67.70 -54.98 -47.30 -52.07 -47.55 -45.39 -44.45Percent Change in RI -0.1591 -0.6243 2.0773 -0.0379 0.0192 0.3040 0.0818 0.1310 0.1602 0.2169Average percentage change in RI 0.2169
% Value % Backdoor KeBook Value Equity (Millions) 1,722.87 163% 87% 20.43$ 27.63$ -460.151Total PV of YBY RI -583.47 -55% 11%Terminal Value Perpetuity -84.4922 -8% 2%MVE 12/31/08 1,054.90 100% 100%Divide by Shares 39.591Model Price on 12/31/08 26.65Time Consistent Price 27.80$ Growth > -0.1 -0.2 -0.3 -0.4 -0.5Observed Share Price (4/1/2009) $24.03 0.1014 62.08$ 60.33$ 59.44$ 58.91$ 58.56$ Initial Cost of Equity 0.1847 0.1167 52.11$ 51.51$ 51.20$ 51.01$ 50.89$ Perpetuity Growth Rate (g) -0.3 0.1457 38.22$ 38.76$ 39.06$ 39.24$ 39.37$
0.1612 32.74$ 33.55$ 34.01$ 34.30$ 34.51$ 0.1847 26.23$ 27.22$ 27.80$ 28.18$ 28.45$ 0.2236 18.77$ 19.74$ 20.34$ 20.75$ 21.04$ 0.2600 14.17$ 15.01$ 15.55$ 15.92$ 16.20$
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Upper Ke
Backdoor KeLower Ke
Residual Income - RAW
Restated Backdoor KeKe
15% analyst between
Less than $20.43Greater than $27.63
PV10 FCF Perp.
Residual Income - RAW
Page | 202
All Items in Millions of Dollars19.78 74.96 -102.79 0.97 -7.83 -49.05 -21.34 -33.00 -43.79 22.41
0 1 2 3 4 5 6 7 8 9 10 Perp.2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Net Income (Millions) 230.78 284.02 402.27 363.84 422.07 480.16 507.75 567.11 625.77 683.427Total Dividends (Millions) 49.59 49.59 53.84 53.84 65.18 65.18 70.84 70.84 76.51 76.51 82.18Book Value Equity (Millions) 1,913.67 2,094.85 2,329.28 2,677.71 2,987.72 3,344.60 3,759.58 4,196.49 4,692.76 5,242.02 5,848.93
Annual Normal Income (Becnhmark) 353.455 386.920 430.218 494.574 551.831 617.748 694.394 775.091 866.752 968.200Annual Residual Income -122.68 -102.90 -27.95 -130.73 -129.77 -137.59 -186.64 -207.98 -240.98 -284.77 -262.36PV Factor 0.844 0.712 0.601 0.508 0.429 0.362 0.305 0.258 0.218 0.184YBY PV RI -103.55 -73.32 -16.81 -66.37 -55.61 -49.77 -56.98 -53.60 -52.42 -52.29Percent Change in RI -0.1612 -0.7284 3.6781 -0.0074 0.0603 0.3565 0.1143 0.1587 0.1817Average percentage change in RI 0.4058
% Value % Backdoor KeBook Value Equity (Millions) 1,913.67 155% 81.90% 20.43$ 27.63$ -541.287Total PV of YBY RI -580.71 -47% 15.85%Terminal Value Perpetuity -99.3902 -8% 2.25%MVE 12/31/08 1,233.57 100% 100.00%Divide by Shares 39.591Model Price on 12/31/08 31.16Time Consistent Model Price 32.51$ Growth > -0.1 -0.2 -0.3 -0.4 -0.5Observed Share Price (4/1/2009) 24.03$ 0.1014 74.02$ 71.75$ 70.61$ 69.92$ 69.46$ Initial Cost of Equity 0.1847 0.1167 61.93$ 61.10$ 60.67$ 60.40$ 60.22$ Perpetuity Growth Rate (g) -0.3 0.1457 45.13$ 45.71$ 46.03$ 46.24$ 46.38$
0.1612 38.51$ 39.44$ 39.96$ 40.30$ 40.54$ 0.1847 30.67$ 31.83$ 32.51$ 32.95$ 33.27$ 0.2236 21.70$ 22.86$ 23.57$ 24.06$ 24.41$ 0.2600 18.95$ 20.05$ 20.74$ 21.22$ 21.56$
Residual Income - Restated
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Backdoor KeLower Ke
Restated Backdoor KeKe
Upper Ke
15% analyst between
Less than $20.43Greater than $27.63
PV10 RI Perp.
Residual Income - Restated
Page | 203
All Items in Millions of DollarsWACC(AT) 0.0651 Kd 0.042 Ke 0.158
0 1 2 3 4 5 6 7 8 9 102008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Net Income (Millions) 181.05 227.15 331.95 293.29 342.57 391.34 411.82 460.84 508.71 555.11 575.50Total Dividends (Millions) 49.59 49.59 53.84 53.84 65.18 65.18 70.84 70.84 76.51 76.51 82.18Dividends Reinvested at 18.07% (Drip) 9.16 9.16 9.94 9.94 12.04 12.04 13.08 13.08 14.13Cum-Dividend Earnings 236.31 341.11 303.24 352.52 403.38 423.85 473.93 521.79 569.24Normal Earnings (Benchmark) 214.49 269.11 393.26 347.46 405.85 463.62 487.88 545.96 602.66Abnormal Earning Growth (AEG) 21.83 72.00 -90.03 5.05 -2.47 -39.76 -13.95 -24.17 -33.42 -30.00
PV Factor 0.844 0.712 0.601 0.508 0.429 0.362 0.305 0.258 0.218PV of AEG 18.42 51.30 -54.14 2.57 -1.06 -14.38 -4.26 -6.23 -7.27Residual Income Check Figure 21.83 72.00 -90.03 5.05 -2.47 -39.76 -13.95 -24.17 -33.42
Market Value (added/destroyed) 99.75 277.75 (293.14) 13.89 (5.73) (77.87) (23.06) (33.72) (39.36)49.2% -163.0% 94.1% -8.5% -38.3% 24.8% -11.2% -10.3%-81.50
Core Net Income 181.05Total PV of AEG -15.05 15% analyst between -61.8845PV of Terminal Value -13.4619 20.43$ 27.63$ Total Average Net Income Perp (t+1) 152.53 Less than $20.43Divide by Shares to Get Average EPS Perp 3.85$ Greater than $27.63Intrinsic Value Per Share 20.86$ Time Consistent Implied Price 21.76$ Observed Share Price (4/1/2009) 24.03$ Ke 0.1847 Growth > -0.1 -0.2 -0.3 -0.4 -0.5g -0.3 0.1014 69.48$ 69.05$ 68.84$ 68.71$ 68.63$
0.1167 53.60$ 53.05$ 53.28$ 53.42$ 53.52$ 0.1457 33.43$ 34.37$ 34.89$ 35.22$ 35.45$ 0.1612 27.10$ 28.05$ 28.59$ 28.93$ 29.18$ 0.1847 20.41$ 21.26$ 21.76$ 22.09$ 22.32$ 0.2236 13.77$ 14.39$ 14.78$ 15.04$ 15.23$ 0.2600 11.94$ 12.48$ 12.81$ 13.05$ 13.22$
Overvalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Lower KeRestated Backdoor Ke
KeUpper Ke
AEG Valuation - RAW
Backdoor Ke
% Change in AEG
Abnormal Earnings Growth - RAW
At a 15% Analyst Position
Page | 204
All Items in Millions of DollarsWACC(AT 0.0651 Kd 0.042 Ke 0.158
0 1 2 3 4 5 6 7 8 9 102008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Net Income (Millions) 230.78 284.02 402.27 363.84 422.07 480.16 507.75 567.11 625.77 683.43 725.50Total Dividends (Millions) 49.59 49.59 53.84 53.84 65.18 65.18 70.84 70.84 76.51 76.51 82.18Dividends Reinvested at 18.07% (Drip) 9.16 9.16 9.94 9.94 12.04 12.04 13.08 13.08 14.13Cum-Dividend Earnings 293.18 411.43 373.79 432.01 492.19 519.79 580.19 638.85 697.56Normal Earnings (Benchmark) 273.40 336.47 476.57 431.04 500.02 568.84 601.53 671.86 741.35Abnormal Earning Growth (AEG) 19.78 74.96 -102.79 0.97 -7.83 -49.05 -21.34 -33.00 -43.79 -38.63
PV Factor 0.844 0.712 0.601 0.508 0.429 0.362 0.305 0.258 0.218PV of AEG 16.69 53.41 -61.82 0.49 -3.35 -17.74 -6.51 -8.50 -9.53Residual Income Check Figure 19.78 74.96 -102.79 0.97 -7.83 -49.05 -21.34 -33.00 -43.79 22.41
Market Value (added/destroyed) 90.38 289.15 (334.69) 2.66 (18.16) (96.06) (35.27) (46.05) (51.58)54.2% -178.7% 102.8% -9.8% -42.2% 26.7% -12.7% -11.8%
Core Net Income 230.78 -199.61Total PV of AEG -36.87PV of Terminal Value -17.3361 -79.6944Total Average Net Income Perp (t+1) 176.57 20.43$ 27.63$ Divide by Shares to Get Average EPS Perp 4.46$ Intrinsic Value Per Share 24.15$ Time Consistent Implied Price 25.19$ Observed Share Price (4/1/2009) 24.03$ Ke 0.1847g -0.3 Growth > -0.1 -0.2 -0.3 -0.4 -0.5
0.1014 82.89$ 82.57$ 82.41$ 82.32$ 82.25$ 0.1167 62.34$ 63.05$ 63.42$ 63.65$ 63.80$ 0.1457 39.12$ 40.37$ 41.06$ 41.50$ 41.80$ 0.1612 31.48$ 32.72$ 33.43$ 33.88$ 34.20$ 0.1847 23.45$ 24.55$ 25.19$ 25.61$ 25.91$ 0.2236 15.54$ 16.33$ 16.82$ 17.15$ 17.39$ 0.2600 13.38$ 14.05$ 14.48$ 14.77$ 14.99$
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Lower KeRestated Backdoor Ke
KeUpper Ke
AEG Valuation - Restated
Backdoor Ke
Abnormal Earnings Growth - Restated
15% analyst between
Less than $20.43Greater than $27.63
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Numbers In Millions 0.1847 Ke 0.1167 KeROE ROE‐Ke ROE ROE‐Ke
%change in spread %change in spreadROE 0.1295 1 0.105085 ‐0.0796155 1 0.105085 ‐0.01162Ke 0.1847 2 0.122499 ‐0.0622006 ‐0.218738 2 0.122499 0.005799 ‐1.49929G 0.0440 3 0.163370 ‐0.0213295 ‐0.657085 3 0.163370 0.04667 7.047425
BVE 1,722.87 4 0.126966 ‐0.0577339 1.7067588 4 0.126966 0.010266 ‐0.780035 0.134371 ‐0.0503293 ‐0.128254 5 0.134371 0.017671 0.7212666 0.138436 ‐0.0462637 ‐0.080779 6 0.138436 0.021736 0.230072
MVE 1,046.95 7 0.130611 ‐0.0540893 0.1691516 7 0.130611 0.013911 ‐0.36002Divide by shares 39.59 8 0.131896 ‐0.052804 ‐0.023763 8 0.131896 0.015196 0.092398Model Price at 12/31/08 26.44$ 9 0.130975 ‐0.0537246 0.0174348 9 0.130975 0.014275 ‐0.06058Time Consistent Price 27.59$ 10 0.128611 ‐0.0560885 0.0440004 10 0.128611 0.011911 ‐0.16559Observed Share Price 24.03$ Converge 0.129500 Converge 0.129500
0.044 ‐0.16559
ROE ROE‐Ke ROE ROE‐Ke ROE ROE‐Ke%change in spread %change in spread %change i
1 0.105085 ‐0.040615461 1 0.105085 ‐0.056115 1 0.105085 ‐0.118522 0.122499 ‐0.02320057 ‐0.42877491 2 0.122499 ‐0.038701 ‐0.31034033 2 0.122499 ‐0.1011 ‐0.146943 0.163370 0.017670476 ‐1.761639729 3 0.163370 0.0021705 ‐1.05608383 3 0.163370 ‐0.06023 ‐0.404264 0.126966 ‐0.018733876 ‐2.060179481 4 0.126966 ‐0.034234 ‐16.7725195 4 0.126966 ‐0.09663 0.6044275 0.134371 ‐0.011329268 ‐0.395252324 5 0.134371 ‐0.026829 ‐0.21629476 5 0.134371 ‐0.08923 ‐0.076636 0.138436 ‐0.007263736 ‐0.358852165 6 0.138436 ‐0.022764 ‐0.15153348 6 0.138436 ‐0.08516 ‐0.045567 0.130611 ‐0.015089319 1.077349661 7 0.130611 ‐0.030589 0.34377412 7 0.130611 ‐0.09299 0.0918898 0.131896 ‐0.013803996 ‐0.085180973 8 0.131896 ‐0.029304 ‐0.04201868 8 0.131896 ‐0.0917 ‐0.013829 0.130975 ‐0.014724625 0.066692913 9 0.130975 ‐0.030225 0.03141649 9 0.130975 ‐0.09262 0.01003910 0.128611 ‐0.017088529 0.160540911 10 0.128611 ‐0.032589 0.07821122 10 0.128611 ‐0.09499 0.025521
Converge 0.129500 Converge 0.129500 Converge 0.1295000.160541 0.078211 0.025521
0.1612 Ke 0.2236 Ke0.1457 Ke
Long‐ Run Residual RAW
Page | 206
Growth> -0.1656 0.0255 0.0440 0.0782 0.16050.1167 46.75$ 51.00$ 52.60$ 59.60$ 31.66$ 0.1457 42.67$ 38.95$ 37.84$ 34.21$ 94.29$ 0.1612 40.78$ 34.61$ 32.95$ 27.92$ N/A0.1847 38.24$ 29.65$ 27.59$ 21.87$ N/A0.2236 34.70$ 24.02$ 21.78$ 16.15$ N/A
ROE> 0.1051 0.1152 0.1295 0.1447 0.16340.1167 37.59$ 43.80$ 52.60$ 61.95$ 73.46$ 0.1457 27.04$ 31.51$ 37.84$ 44.57$ 52.85$ 0.1612 23.55$ 27.44$ 32.95$ 38.81$ 46.01$ 0.1847 19.71$ 22.97$ 27.59$ 32.49$ 38.52$ 0.2236 15.57$ 18.14$ 21.78$ 25.66$ 30.42$
Growth> -0.1656 0.0255 0.0440 0.0782 0.16050.1051 35.08$ 22.70$ 19.71$ 11.47$ N/A0.1172 36.65$ 26.15$ 23.62$ 16.62$ N/A0.1295 38.24$ 29.65$ 27.59$ 21.87$ N/A0.1447 40.21$ 33.99$ 32.49$ 28.34$ N/A0.1634 42.63$ 39.32$ 38.52$ 36.31$ 5.44$
ROE Constant at .1295
Lower KeRestated Backdoor Ke
Backdoor Ke
Overvalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Growth Constant at .0440
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Upper Ke
Backdoor KeLower Ke
Restated Backdoor Ke
Long Run Residual RAW
Ke Constant at .1847
Return on Equity
At a 15% Analyst Position
Upper Ke
Ke
Ke
Page | 207
Numbers In Millions 0.1847 Ke 0.1167 KeROE ROE‐Ke ROE ROE‐Ke
%change in spread %change in spreadROE 0.1315 1 0.120593 ‐0.060107 1 0.120593 0.003893Ke 0.1847 2 0.135578 ‐0.045122 ‐0.249313 2 0.135578 0.018878 3.849443G 0.0628 3 0.172703 ‐0.007997 ‐0.822759 3 0.172703 0.056003 1.966496
BVE 1,722.87 4 0.135878 ‐0.044822 4.6045803 4 0.135878 0.019178 ‐0.657565 0.141267 ‐0.039433 ‐0.120237 5 0.141267 0.024567 0.2810166 0.143561 ‐0.037139 ‐0.058177 6 0.143561 0.026861 0.09338
MVE 970.97 7 0.135055 ‐0.045645 0.2290417 7 0.135055 0.018355 ‐0.31668Divide by shares 39.59 8 0.135139 ‐0.045561 ‐0.00185 8 0.135139 0.018439 0.0046Model Price at 12/31/08 24.53$ 9 0.133348 ‐0.047352 0.0393139 9 0.133348 0.016648 ‐0.09714Time Consistent Price 25.59$ 10 0.130375 ‐0.050325 0.0627901 10 0.130375 0.013675 ‐0.17859Observed Share Price 24.03$ Converge 0.131500 0.06279 Converge 0.131500 ‐0.17859
ROE ROE‐Ke ROE ROE‐Ke ROE ROE‐Ke%change in spread %change in spread %change in spread
1 0.120593 ‐0.025107108 1 0.120593 ‐0.040607 1 0.120593 ‐0.103012 0.135578 ‐0.010121643 ‐0.596861469 2 0.135578 ‐0.025622 ‐0.3690355 2 0.135578 ‐0.08802 ‐0.145483 0.172703 0.027002575 ‐3.667805662 3 0.172703 0.0115026 ‐1.4489398 3 0.172703 ‐0.0509 ‐0.421764 0.135878 ‐0.009822209 ‐1.363750811 4 0.135878 ‐0.025322 ‐3.2014382 4 0.135878 ‐0.08772 0.723515 0.141267 ‐0.004432939 ‐0.548682069 5 0.141267 ‐0.019933 ‐0.2128278 5 0.141267 ‐0.08233 ‐0.061446 0.143561 ‐0.002138866 ‐0.517506131 6 0.143561 ‐0.017639 ‐0.1150896 6 0.143561 ‐0.08004 ‐0.027867 0.135055 ‐0.010645215 3.977037084 7 0.135055 ‐0.026145 0.48225032 7 0.135055 ‐0.08855 0.1062788 0.135139 ‐0.010560775 ‐0.007932145 8 0.135139 ‐0.026061 ‐0.0032296 8 0.135139 ‐0.08846 ‐0.000959 0.133348 ‐0.012351949 0.169606274 9 0.133348 ‐0.027852 0.06873064 9 0.133348 ‐0.09025 0.02024810 0.130375 ‐0.015325184 0.240709819 10 0.130375 ‐0.030825 0.10675143 10 0.130375 ‐0.09323 0.032944
Converge 0.131500 0.24071 Converge 0.131500 0.106751 Converge 0.131500 0.032944
0.2236 Ke0.1457 Ke 0.1612 Ke
Long Run Residual Restated
Page | 208
Growth> -0.1786 0.0329 0.0628 0.1068 0.24070.1167 46.67$ 51.56$ 55.35$ 102.56$ 40.11$ 0.1457 42.77$ 38.55$ 36.22$ 26.27$ 52.69$ 0.1612 40.95$ 34.01$ 30.62$ 18.85$ 63.18$ 0.1847 38.50$ 28.89$ 25.59$ 13.23$ 90.14$ 0.2236 35.05$ 23.18$ 18.98$ 8.89$ 297.58$
ROE> 0.1050 0.1206 0.1315 0.1510 0.17270.1167 35.02$ 47.96$ 57.01$ 73.19$ 91.20$ 0.1457 22.91$ 31.39$ 37.30$ 47.89$ 59.68$ 0.1612 19.37$ 26.53$ 31.53$ 40.48$ 50.44$ 0.1847 15.71$ 21.52$ 25.59$ 32.84$ 40.92$ 0.2236 12.01$ 16.45$ 19.55$ 25.10$ 31.28$
Growth> -0.1786 0.0329 0.0628 0.1068 0.24070.1050 35.43$ 21.56$ 15.71$ N/A 110.00$ 0.1206 37.38$ 26.22$ 21.52$ 8.04$ 97.35$ 0.1315 38.75$ 29.48$ 25.59$ 14.39$ 88.52$ 0.1510 41.18$ 35.32$ 32.84$ 25.76$ 72.71$ 0.1727 43.89$ 41.80$ 40.92$ 38.40$ 55.12$
Lower Ke
Restated - ROE Constant at .1315
Backdoor Ke
Long Run Residual Restated
Upper Ke
Restated Backdoor KeKe
Upper KeAt a 15% Analyst Position
Overvalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Restated - Growth Constant at .0628
Backdoor KeLower Ke
Restated Backdoor KeKe
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
At a 15% Analyst PositionOvervalued < $20.43 $20.43 < Fairly Valued > $27.63 Undervalued > $27.63
Restated - Ke Constant at .1847
Return on Equity
Page | 209
0 1 2 3 4 5 6 7 8 9 10 11
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Net Income 431.55$ 483.95$ 574.35$ 595.01$ 644.72$ 738.62$ 802.94$ 887.24$ 976.88$ 1,072.28$
Total Dividends 49.59$ 49.59$ 53.84$ 53.84$ 65.18$ 65.18$ 70.84$ 70.84$ 76.51$ 76.51$ 82.18$
BV Equity 1,722.87$ 2,104.83$ 2,539.19$ 3,059.70$ 3,600.87$ 4,180.41$ 4,853.85$ 5,585.95$ 6,402.35$ 7,302.72$ 8,298.49$
ROE 0.2505 0.2299 0.2262 0.1945 0.1790 0.1767 0.1654 0.1588 0.1526 0.1468
ROE - K 0.2236 0.0269 0.0063 0.0026 -0.0291 -0.0446 -0.0469 -0.0582 -0.0648 -0.0710 -0.0768
Restated
Net Income 230.78$ 284.02$ 402.27$ 363.84$ 422.07$ 480.16$ 507.75$ 567.11$ 625.77$ 683.43$
BV Equity 1,913.67$ 2,094.86$ 2,329.28$ 2,677.72$ 2,987.72$ 3,344.60$ 3,759.58$ 4,196.49$ 4,692.76$ 5,242.02$ 5,848.93$
ROE 0.1206 0.1356 0.1727 0.1359 0.1413 0.1436 0.1351 0.1351 0.1333 0.1304
-0.1030 -0.0880 -0.0509 -0.0877 -0.0823 -0.0800 -0.0885 -0.0885 -0.0903 -0.0932
Industry Terms Glossary (Directly from OSG 10-K)
Aframax—A medium size crude oil tanker of approximately 80,000 to 120,000
deadweight tons. Because of their size, Aframaxes are able to operate on many
different routes, including from Latin America and the North Sea to the U.S. They are
also used in lightering (transferring cargo from larger tankers, typically VLCCs, to
smaller tankers for discharge in ports from which the larger tankers are restricted).
Modern Aframaxes can generally transport from 500,000 to 800,000 barrels of crude oil.
Articulated Tug Barge—ATB is the abbreviation for Articulated Tug Barge, which is a
tug-barge combination system capable of operating on the high seas, coastwise and
further inland. It combines a normal barge, with a bow resembling that of a ship, but
having a deep indent at the stern to accommodate the bow of a tug. The fit is such that
the resulting combination behaves almost like a single vessel at sea as well as while
maneuvering.
Bareboat Charter—A Charter under which a customer pays a fixed daily or monthly
rate for a fixed period of time for use of the vessel. The customer pays all costs of
operating the vessel, including voyage and vessel expenses. Bareboat charters are
usually long term.
CAP—The Condition Assessment Program of ABS Consulting, a subsidiary of the
American Bureau of Shipping, which evaluates a vessel’s operation, machinery,
maintenance and structure using the ABS Safe Hull Criteria. A CAP 1 rating indicates
that a vessel meets the standards of a newly built vessel.
Capesize Bulk Carrier—A large Dry Bulk Carrier (any vessel used to carry non-liquid
bulk commodities) with a carrying capacity of more than 80,000 deadweight tons that
mainly transports iron ore and coal.
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Charter—Contract entered into with a customer for the use of the vessel for a specific
voyage at a specific rate per unit of cargo (‘‘Voyage Charter’’), or for a specific period of
time at a specific rate per unit (day or month) of time (‘‘Time Charter’’).
Classification Societies—Organizations that establish and administer standards for
the design, construction and operational maintenance of vessels. As a practical matter,
vessels cannot trade unless they meet these standards.
Compressed Natural Gas or CNG—CNG is the abbreviation for compressed natural
gas. CNG is a gas that has been compressed for transportation in pressurized containers
and can be transported on ships, barges or trucks. In many parts of the world, gas
fields that cannot be readily connected by pipeline or are not large enough to support
the cost of developing LNG facilities are excellent candidates for CNG development.
Commercial Management or Commercially Managed—The management of the
employment, or chartering, of a vessel and associated functions, including seeking and
negotiating employment for vessels, billing and collecting revenues, issuing voyage
instructions, purchasing fuel, and appointing port agents.
Commercial Pool—A commercial pool is a group of similar size and quality vessels
with different shipowners that are placed under one administrator or manager. Pools
allow for scheduling and other operating efficiencies such as multilegged charters and
Contracts of Affreightment and other operating efficiencies.
Condition Assessment Scheme—An inspection program designed to check and
report on the vessel’s physical condition and on its past performance based on survey
and IMO’s International Safety Management audit reports and port state performance
records.
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Contract of Affreightment or COA—COA is the abbreviation for Contract of
Affreightment, which is an agreement providing for the transportation between
specified points for a specific quantity of cargo over a specific time period but without
designating specific vessels or voyage schedules, thereby allowing flexibility in
scheduling since no vessel designation is required. COAs can either have a fixed rate or
a market-related rate. One example would be two shipments of 70,000 tons per month
for the next two years at the prevailing spot rate at the time of each loading. Another
example is lightering services that are provided to the Company’s customers in the
Delaware Bay region pursuant to contracts under which it commits to provide such
services using a vessel of the Company’s choice. When choosing the vessel, the
Company takes into account vessel positioning and capacity at the time the inbound
vessel is ready to discharge its cargo.
Consecutive Voyage Charters or CVC—CVC is the abbreviation for Consecutive
Voyage Charter, which are used when a customer contracts for a particular vessel for a
certain period of time to transport cargo between specified points for a rate that is
determined based on the volume of cargo delivered. The Company bears the risk of
delays under CVC arrangements.
Crude Oil—Oil in its natural state that has not been refined or altered. Cubic Meters or
cbm—cbm is the abbreviation for cubic meters, the industry standard for measuring the
carrying capacity of a LNG Carrier.
Deadweight tons or dwt—dwt is the abbreviation for deadweight tons, representing
principally the cargo carrying capacity of a vessel, but including the weight of
consumables such as fuel, lube oil, drinking water and stores.
Demurrage—Additional revenue paid to the shipowner on its Voyage Charters for
delays experienced in loading and/or unloading cargo that are not deemed to be the
responsibility of the shipowner, calculated in accordance with specific Charter terms.
Page | 213
Double Hull—Hull construction design in which a vessel has an inner and an outer side
and bottom separated by void space, usually two meters in width.
Drydocking—An out-of-service period during which planned repairs and maintenance
are carried out, including all underwater maintenance such as external hull painting.
During the drydocking, certain mandatory Classification Society inspections are carried
out and relevant certifications issued. Normally, as the age of a vessel increases, the
cost of drydocking increases.
Handysize Product Carrier—A small size Product Carrier of approximately 29,000 to
53,000 deadweight tons. This type of vessel generally operates on shorter routes (short
haul). Also, may be referred to as an MR Product Carrier.
IMO—IMO is the abbreviation for International Maritime Organization, an agency of the
United Nations, which is the body that is responsible for the administration of
internationally developed maritime safety and pollution treaties, including MARPOL.
International Flag vessel—A vessel that is registered under a flag other than that of
the U.S.
Jones Act—U.S. law that applies to port-to-port shipments within the continental U.S.
and between the continental U.S. and Hawaii, Alaska, Puerto Rico, and Guam, and
restricts such shipments to U.S. Flag Vessels that are built in the U.S. and that are
owned by a U.S. company that is more than 75% owned and controlled by U.S.
citizens.
Lightering—The process of off-loading crude oil or petroleum products from deeply
laden inbound tankers into smaller tankers and/or barges.
Page | 214
LNG Carrier—A vessel designed to carry liquefied natural gas, that is, natural gas
cooled to _163_ centigrade, turning it into a liquid and reducing its volume to 1/600 of
its volume in gaseous form. LNG is the abbreviation for liquefied natural gas.
MARPOL—International Convention for the Prevention of Pollution from Ships, 1973,
as modified by the Protocol of 1978 relating thereto. This convention includes
regulations aimed at preventing and minimizing pollution from ships by accident and by
routine operations.
OPA 90—OPA 90 is the abbreviation for the U.S. Oil Pollution Act of 1990.
Panamax—A medium size vessel of approximately 53,000 to 80,000 deadweight tons.
A coated Panamax operating in the refined petroleum products trades may be referred
to as an LR1.
Product Carrier—General term that applies to any tanker that is used to transport
refined oil products, such as gasoline, jet fuel or heating oil.
Pure Car Carrier—A single-purpose vessel with many decks, designed to carry
automobiles, which are driven on and off using ramps.
Scrapping—The disposal of vessels by demolition for scrap metal.
Special Survey—An extensive inspection of a vessel by classification society surveyors
that must be completed within five years. Special Surveys require a vessel to be
drydocked.
Suezmax—A large crude oil tanker of approximately 120,000 to 200,000 deadweight
tons. Modern Suezmaxes can generally transport about one million barrels of crude oil.
Page | 215
Technical Management—The management of the operation of a vessel, including
physically maintaining the vessel, maintaining necessary certifications, and supplying
necessary stores, spares, and lubricating oils. Responsibilities also generally include
selecting, engaging and training crew, and arranging necessary insurance coverage.
Time Charter—A Charter under which a customer pays a fixed daily or monthly rate
for a fixed period of time for use of the vessel. Subject to any restrictions in the
Charter, the customer decides the type and quantity of cargo to be carried and the
ports of loading and unloading. The customer pays all voyage expenses such as fuel,
canal tolls, and port charges. The shipowner pays all vessel expenses such as the
Technical Management expenses.
Time Charter Equivalent or TCE—TCE is the abbreviation for Time Charter
Equivalent. TCE revenues, which is voyage revenues less voyage expenses, serves as
an industry standard for measuring and managing fleet revenue and comparing results
between geographical regions and among competitors.
U.S. Flag vessel—A U.S. Flag vessel must be crewed by U.S. sailors, and owned and
operated by a U.S. company.
Vessel Expenses—Includes crew costs, vessel stores and supplies, lubricating oils,
maintenance and repairs, insurance and communication costs associated with the
operations of vessels.
VLCC—VLCC is the abbreviation for Very Large Crude Carrier, a large crude oil tanker
of approximately 200,000 to 320,000 deadweight tons. Modern VLCCs can generally
transport two million barrels or more of crude oil. These vessels are mainly used on the
longest (long haul) routes from the Arabian Gulf to North America, Europe, and Asia,
and from West Africa to the U.S. and Far Eastern destinations.
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Voyage Charter—A Charter under which a customer pays a transportation charge for
the movement of a specific cargo between two or more specified ports. The shipowner
pays all voyage expenses, and all vessel expenses, unless the vessel to which the
Charter relates has been time chartered in. The customer is liable for Demurrage, if
incurred.
Voyage Expenses—Includes fuel, port charges, canal tolls, cargo handling operations
and brokerage commissions paid by the Company under Voyage Charters. These
expenses are subtracted from shipping revenues to calculate Time Charter Equivalent
Revenues for Voyage Charters.
V-Plus—A large crude oil tanker of more than 350,000 deadweight tons. Modern V-
Pluses can transport three million barrels of crude oil and are mainly used on the same
long haul routes as VLCCs.
Worldscale—Industry name for the Worldwide Tanker Nominal Freight Scale published
annually by the Worldscale Association as a rate reference for shipping companies,
brokers, and their customers engaged in the bulk shipping of oil in the international
markets. Worldscale is a list of calculated rates for specific voyage itineraries for a
standard vessel, as defined, using defined voyage cost assumptions such as vessel
speed, fuel consumption and port costs. Actual market rates for voyage charters are
usually quoted in terms of a percentage of Worldscale.
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Sources Cited
1. Wall Street Journal – Marketplace. January 26, 2009. Page B1
2. Wall Street Journal. Crude Slides 9.1% to $45. Brian Baskin. January 28, 2009.
http://online.wsj.com/article/SB123305551487219113.html
3. Wall Street Journal. Oil Tankers Will Slide on Fears OPEC’s Cuts Will Slow 2009
Demand. David Benoit. December 22, 2008. http://online.wsj.com/article/BT-CO-
20081222-707359.html
4. Wall Street Journal. Pension Deficit Disorder. John Jannarone. February 12,
2009. http://online.wsj.com/article/SB123438982726574581.html
5. Wall Street Journal. Oil Prices: Have They Bottomed Out? A Hint on the Seas.
Keith Johnson. January 28, 2009.
http://blogs.wsj.com/environmentalcapital/2009/01/28/oil-prices-have-they-
bottomed-out-a-hint-on-the-seas/
6. Wall Street Journal. Oil Price Falls 9.1% as inventories are expected to rise. Brian
Baskin. January 28, 2009.
http://online.wsj.com/article/SB123309785807621723.html
7. Wall Street Journal. Oil Traders Do a Little Contango. Liam Denning. January 9,
2009. http://online.wsj.com/article/SB123143754965364993.html
8. Wikinvest Website – Overseas Shipholding Group Page.
http://www.wikinvest.com/stock/Overseas_Shipholding_Group_(OSG)
9. Business Analysis & Valuation 4e. 2008. Palepu & Healy. Thompson South-
Western. Mason, OH.
10. Houston Chronicle - “World's tanker fleet is 'close to 100 percent utilization.”
11. All Business Website. www.allbusiness.com
12. Investopedia Website. www.investopedia.com
13. Wikipedia Website. www.wikipedia.com
14. OSG’s website. www.osg.com
15. Teekay’s website. www.teekay.com
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16. Tsakos’ website. www.tnn.gr
17. Frontline’s website. www.frontline.bm
18. OSG 10-K, annual report as of 2007, 2004, 2002
19. Teekay’s 10-K, annual report as of 2007, 2004, 2002
20. Tsakos’ 10-K, annual report as of 2007, 2004, 2002
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