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Faisal Humayun
Faisal Humayun
Articles (681)  | Author's Website |

Overseas Shipholding Looks Appealing After Deep Correction

Weak near-term spot rates but strong fundamentals to drive long-term growth

August 25, 2017 | About:

Overseas Shipholding Group (NYSE:OSG) is a provider of energy transportation services delivering crude oil and petroleum products under the Jones Act fleet. Overseas Shipholding stock has been under pressure and has declined by 48%.

This decline has been primarily due to relatively challenging industry conditions that have translated into weak quarterly numbers. After the big decline, the stock trades at attractive levels and can be considered for the medium term.

It is important to mention at the onset that broad markets are stretched, and I would advise only limited exposure to any high-risk stock.

Strong balance sheet

Even as spot rates and time charter rates remain a matter of concern, Overseas Shipholding Group has maintained strong fundamentals. This is one of the key reasons to believe that the stock has the potential to bounce back from current levels.

Overseas Shipholding had a cash balance of $210 million in June even as the company’s market capitalization stood at $150 million.

The company had total debt of $519 million in June, and this translated into net debt to equity ratio of 1.2. With no scheduled debt amortization, robust liquidity position and continued repayment of debt, I see no balance sheet concerns for Overseas Shipholding Group.

To elaborate on the company’s credit health, Overseas Shipholding reported cash interest expense of $9.5 million for the second quarter. This translates into an annualized cash interest expense of $38 million.

The company’s quarterly adjusted EBITDA declined to $29.6 million in the second quarter as compared to $46.0 million in second-quarter 2016. But even after the steep decline in EBITDA, the annualized EBITDA came to $118 million.

Considering the EBITDA and cash interest expense, the EBITDA interest coverage ratio comes to 3-1. Debt servicing is likely to remain smooth, and with no capital expenditure, the company’s free cash flow will allow for further deleveraging.

Even with strong fundamentals, the business condition needs to be discussed as it is the key factor in the stock downside.

Challenging market conditions and opportunities

Overseas Shipholding reported revenue of $91.1 million in the second quarter as compared to second-quarter 2016 revenue of $114.7 million. On looking deeper into the numbers, the following factors contributed to the steep decline in revenue:

  • The total revenue days for fixed earnings declined from 1,838 in second-quarter 2016 to 1,479 in second-quarter 2017. For the same period, the exposure to spot markets increased to 648 days as compared to 331 days in the comparable period.
  • While fixed rates remained relatively resilient, the spot rates for the product carriers declined. This also contributed to the fall in revenue.

While these are reasons for concern, I see the following factors as supportive to EBITDA at current levels:

  • Eagle Ford oil production has trended higher, and this can potentially create incremental demand for oil transportation in the coming quarters. I expect oil to move higher and that can deliver further growth for the oil transportation business. I specifically mentioned Eagle Ford as the asset was the largest source of Jones Act crude oil traded prior to the decline in oil prices.
  • In the lightering business, second-quarter 2016 spot earnings were $69,795 per day for first-half 2016 and for first-half 2017 the spot earnings were $72,137 per day. With robust rates in the lightering business, the company has growth avenues if Overseas Shipholding considers inorganic growth opportunities from the strong cash buffer. It is important to mention here that, with imports from West Africa, the lightering business is likely to maintain strong fundamentals.
  • Overseas Shipholding Group also operates in the maritime security program and the MSP revenue is likely to increase to $5 million in fiscal 2017. While this is insignificant from a revenue or cash flow driver perspective, making inroads in the military segment can be a long-term value creator for Overseas Shipholding Group.

Conclusion

There is no doubt that the company’s near-term business outlook has taken a hit as fixed rate contracts have declined and spot rates are weak. Overseas Shipholding Group has strong fundamentals to navigate challenging times.

The company has potential opportunities in the lightering business and as oil trends higher there can be increased demand for Jones Act vessels. After a steep decline, the stock is worth considering for the medium term.

Disclosure: No positions in the stock.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with eight years of experience in equity research, credit research, economic research and financial modeling.

Visit Faisal Humayun's Website


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