Following a collective discussion amongst Infitialis members we have decided to republish our original report on Overseas Shipholding Group (OSGIQ.PK) with a revised model for valuing the company that is more encompassing. Initially we had decided to work from the June 30 figures in order to demonstrate how unlikely any equity recovery would be. In the revised version we account for events reported subsequent to June 30 increasing the cash balance for OSGIQ due to a draw down on a banking facility that was reported on August 1.
Having decided to include subsequent events we felt it also necessary to include Charter In obligations totaling $1.13 Billion (previously excluded for simplicity) as well as make more realistic projections for Receivables and Inventories (whereas we previously chose to treat the June 30 figures as reliable). Keep in mind that there may be significant additional holes in the balance sheet that were not reflected as of June 30. Rarely does an Audit Committee state publicly that financials previously disclosed should not be relied upon without significant charges or discrepancies being uncovered upon a restatement.
We will now complete the same exercise and include the cash balance subsequent to June 30 by relying on a press release issued on August 1, 2012 that discussed an additional draw down. All things being equal we have also included liabilities such as Charter-Ins and Construction Contracts which we chose to ignore for simplicity and as we had originally felt would not be necessary to prove the lack of equity coverage. Finally in order to prove just how worthless the equity is we will project the liabilities and assets three separate times incorporating different variables reflecting a base, bull, and bear case for both debt restructuring and asset recoveries. This sensitivity analysis confirms that equity investors purchasing shares of OSGIQ today are not only playing with fire but are literally burning their hard-earned capital by purchasing this worthless stub.
If equity investors want to be intellectually honest about including post June 30 assets they must also be objective about including liabilities and encumbrances. In the table above we have done just that including Charter-Ins and Construction Contracts. In this revised report we will value the equity three separate times representing three different scenarios (Base, Bear, Bull) for debt reduction and asset recovery.
In the base case table of tangible assets we now include the $343 million cash drawn in July and disclosed in the August 1 press release. From this figure ($550 million) we subtract $45.9 million equating to three months of losses for OSGIQ. All things being equal and as we have made no additional impairment to the cash in the base case (disregarding future losses while in bankruptcy and/or legal fees which are both guaranteed) we impaired the receivables and inventories amounting to an unrealistic $273 million down to $224 million by simply excluding the "other receivables entry" which amounted to $48.9 million.
Under our base case scenario, which completely disregards actual vessel values and does not impair cash by any amount during bankruptcy, there exists a $3 million deficiency when weighing the liabilities against the assets. Realistically this "base case" is really the most optimistic case for OSGIQ equity holders but once again we stress that this projection bears no connection to reality. Each month that bankruptcy drags on will produce at least $15.3 million in negative cash flow for OSGIQ while legal and administrative fees in bankruptcy will amount to additional millions of dollars conservatively speaking.
Under our bull case scenario for (OSGIQ) we reduce the Charter In obligations by a whopping 50%, unrealistically erasing over half a billion dollars in unsecured liabilities. Though unrealistic, the logic employed in this calculation essentially disregarded all charter in obligations past 2014. Ultimately this calculation will prove way too optimistic but we decided to be very aggressive here in order to appease some readers who believe this to be a likely scenario.
Under our bull case for asset recovery we assume that OSG will only burn $100 million in cash while in bankruptcy. This unrealistic amount equates to only two quarters of negative cash flow leaving no room for legal and administrative expenses. Moreover we value the vessels at $2.55 Billion, an amount that is $550 million above our most optimistic valuation of the vessels, a valuation that was completed with the assistance of independent consultants and industry trade publications.
Under the bull case scenario where we pretend that somehow OSG will emerge from bankruptcy within six months, pay no legal or admin fees, liquidate its vessels at a 25% premium over prevailing market prices, and reduce its charter in obligations by 50% ($550 million) there remains a $176 million dollar deficiency when weighing the liabilities against the assets.
Bear Case for Equity Recovery
The purpose of this report is to provide an objective review of why equity is worthless. For that reason even in our bear case projection we reduce the debt load. In every Chapter 11 concessions are made by debt holders but this means little for equity holders as it would be inconceivable that a debt holder - any debt holder - would elect to lose principal or interest for the benefit of the equity holder. Under our bear case scenario we reduce the Charter In obligations by about 35% reducing them from $1.1 Billion to only $700 million. While completely arbitrary we believe that a net reduction of 10% of the debt load may be achievable in bankruptcy ($400 million) so we felt comfortable with this figure. Unfortunately for equity holders this does nothing to change their fate as readers can see by reviewing the bear case asset tabulation.
While we call this the "Bear Case" it is still extremely optimistic. Here we reduce the cash balance by $150 million assuming the company will remain in bankruptcy for 9 months or more and spend at least a few million on legal and administration fees. Next, we impair Voyage receivables by only $35 million (impairing the charter ins will require concessions on both sides of the ledger) and reduce the inventories by $9.3 million assuming about an 80 cents on the dollar recovery. Finally in what is surely not a "bear case" assumption we actually increase the value of the vessels by $100 million from our optimistic valuation of $2.0 billion outlined in the first version of our report. We do so in order to account for some of the US Flag operations which readers believe will command a premium.
Under our bear case recovery scenario a deficiency of $854 million exists when weighing the liabilities against the assets. Realistically, the recoverable assets may fetch only 70% of the figure we estimated which is roughly what bond investors are projecting by valuing the debt at $.41 cents on the dollar.
Weighing All Three Scenarios: Base, Bull, Bear
Weighing all three scenarios provides a snapshot of why we are so certain that OSGIQ equity is worthless with an average deficiency of $344 million amounting to over ten times the current equity value. Put differently before shares of OSGIQ can be worth $.01 (one penny) OSGIQ bonds have to rise by over 150% and the company's assets have to fetch at least $344 million more than what they are worth today.
This was the first time Infitialis ever had to revise one of our reports and we had no qualms about doing so. In fact we enjoyed the process very much. As our ultimate objective is to seek market truth we welcome and even encourage our readers to challenge our views both publicly and privately. With that said the fundamental logic behind our original point has not only remained the same but it has strengthened. While readers may have disagreed with how we arrived at our conclusion in the last report they can now see that no matter through which prism the OSGIQ assets and liabilities are viewed there can be no way for equity holders to receive any value.
Disclosure: I am short OSGIQ.PK.