On October 19, 2012, Overseas Shipholding Group Inc ("OSG") issued a statement that it was in negotiations with its bank creditors and that it was evaluating its strategic options, including the potential voluntary filing of a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. The Partnership has three IMO II/III Chemical/Product tankers (M/T Alexandros II, M/T Aristotelis II and M/T Aris II) on long term bareboat charter to subsidiaries of OSG. These charters are scheduled to terminate in February, July and September of 2018, respectively, and are at rates that are substantially above current market rates. In the event OSG files for relief under the U.S. Bankruptcy Code or otherwise restructures its affairs, it may seek to terminate or seek to restructure or modify its charter arrangements for the three IMO II/III Chemical/Product tankers and, depending on various factors, including prevailing market conditions, such actions could have an adverse effect on our future revenues from the three vessels.
Overall, product tanker average spot earnings for the third quarter of 2012 remained soft, as sluggish economic growth in the US, weak demand in Europe and few arbitrage opportunities failed to support a higher spot rate environment. The month of September saw a more active transatlantic market as increased demand from West Africa coincided with the opening up of the gasoline arbitrage between the US and Europe.
The product tanker period charter market remained active albeit with fewer fixtures and at lower levels compared to the first half of 2012 due to the softer rates prevailing in the spot market.
On the supply side, the product tanker order book continued to experience substantial slippage during 2012, as approximately 45% of the expected MR and handy size tanker newbuildings were not delivered on schedule. Analysts expect that net fleet growth for MR and handy size product tankers for 2012 will be in the region of 3.1%, while overall demand for product tankers for the year has been revised downwards to 2.8% as European and US demand for seaborne oil products continues to decline. We believe the current low product tanker order book is amongst the lowest in the shipping industry and given the demand fundamentals and the order book slippage, it should positively affect spot and period charter rates going forward.
The crude tanker spot market dropped sharply in July and remained at depressed levels for most of the remaining summer months as a result of a number of factors including low fixture activity due to seasonal weakness, the build-up of commercial crude inventories that occurred during the first half of the year, the shutdown of the Motiva refinery in the US Gulf as well as high bunker prices and increased tonnage supply.
Slippage for the crude tanker order book as of the end of September 2012 continued to affect tonnage supply as approximately 26% of the expected crude newbuildings were not delivered on schedule. Industry analysts expect the crude tanker order book slippage and cancellations to increase going forward due to the historically weak spot market, the soft shipping finance environment and downward pressure on asset values. Crude tanker deadweight demand is expected to grow by 2.6% in the full year 2012.
Quarterly Common and Class B Unit Cash Distribution
On October 23, 2012, the Board of Directors of the Partnership declared a cash distribution of $0.2325 per common unit for the third quarter of 2012, in line with management's annual guidance. The third quarter common unit cash distribution will be paid on November 15, 2012, to unit holders of record on November 8, 2012.
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