Sell Overseas Shipholding Group

We are maintaining our Sell recommendation on Overseas Shipholding Group, Inc. (OSG - Analyst Report). OSG reported first quarter diluted EPS before nonrecurring items of $1.03 -- above the $1.00 consensus, but below our $1.06 estimate as revenues came in weaker than expected from lower spot tanker rates, partly offset by increased revenue days.

First quarter 2009 net income before nonrecurring items was $28 million versus $112 million in the year-ago period. Time Charter Equivalent (TCE) revenue in first quarter 2009 was $293 million, down 22% from the prior-year quarter. The decline in TCE revenues reflected an increase of 428 revenue days, or 4%, to 9,989 days from 9,561 days across most segments of the company’s fleet, offset by decreases in year-over-year spot charter rates of 52% for VLCC, 22% for Aframax and 21% for Panamax. Spot rates for Suezmax rose 26% during the quarter.

During the period, total operating expenses increased 2 ½%, or $7 million, to $290 million from $283 million in the corresponding quarter in 2008. Voyage expenses decreased by $3 million, principally as a result of lower fuel costs. Vessel expenses increased $0.7 million, primarily due to the increased number of operating days.

Charter-hire expense increased 23% to $111 million from $91 million in the first quarter of 2008, largely due to 10 additional ships chartered-in. Depreciation and amortization fell $4 million to $44 million due to a decline in operating vessels. General and administrative expense dropped 27% to $27 million on cost-cutting measures.

We are slashing our 2009 diluted EPS estimate to a loss of $0.45 per share from earnings of $2.10 per share, as we now believe the impact of the global economic slowdown will be more pronounced than previously expected. We have cut our 2009 revenue assumptions due to reduced estimates for spot market rates (roughly 45% of the company’s fleet is exposed to the spot market) and fewer revenue days.

Our initial estimate for 2010 is a $0.05 loss per share.

While OSG recently increased its dividend by 40%, we cannot rule out a dividend cut in the event of a protracted economic downturn.

The current Zacks rank for OSG is 4, indicating near-term selling pressure on the stock. OSG shares were off 0.2% to close at $33.41 on Tuesday.