Overseas Shipholding Group Inc. (OSG), a leading energy products transportation company, recently suffered a setback as Moody’s Investor Service downgraded its credit ratings. Primary reason for this downgrade is the continuously falling oil tanker rates attributable to significant increase in supply of tankers.
Moody’s downgraded the corporate family and default ratings of Overseas Shipholding to “B1” from “Ba2.” At the same time, the rating agency also lowered the senior unsecured debt to “B2” from “Ba3.”
Overseas Shipholding reported mounting losses in the fourth quarter of 2010. The company has a massive 70% spot exposure. The average spot rate of oil tanker fell 55% in the last quarter, which significantly eroded the company’s bottom line.
The oil tanker industry is highly competitive and fragmented. Overseas Shipholding competes with large U.S. and international flag tankers. Its major competitors include Frontline Ltd. (FRO) and Teekay Corp. (TK).
Also, spot freight rates are extremely volatile. Fuel is the largest expense in shipping operations when vessels are under spot charter and increase in fuel prices may hurt profitability.
Nevertheless, Overseas Shipholding maintains a state-of-the-art fleet of vessels with major emphasis on quality, safety, and environmental issues.In late 2010, Overseas Shipholding completed an organizational restructuring.
Management decided to focus on three core areas: crude oil, international products, and U.S. Flag. The company shifted its standalone LNG carrier management business to its International Product Carrier and Gas Strategic business unit.
As a result of global economic improvement, we believe fundamentals of the oil tanker industry remain compelling. Recent political turmoil in the Arab countries may also raise demand for oil tankers at least for the short term.
Importantly, in the previous quarter, the U.S. Flag business rose 12% year over year. The company now expects this segment to contribute positively in 2011 compared with an operating loss of $35 million in 2010.
We maintain our long-term Neutral recommendation on Overseas Shipholdong. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.
FRONTLINE LTD (FRO): Free Stock Analysis Report
OVERSEAS SHIPHO (OSG): Free Stock Analysis Report
TEEKAY CORP (TK): Free Stock Analysis Report
Zacks Investment Research
