Neutral on Overseas Shipholding

Overseas Shipholding Group Inc. (OSG - Analyst Report), the second largest independent oil tanker company in the world, reported disappointing financial results for the third quarter of 2011. The company suffered losses for the tenth straight quarters. The spot rate of its very large crude carriers fell 66% in the previous quarter. Unfortunately, Overseas Shipholding has significant spot exposure.

The oil tanker industry is facing severe problem due to oversupply of fleets, which resulted in truncated spot prices. The U.S. demand for petroleum is yet to reach its peak. This signifies that the oil tanker industry is facing double edged problems, low demand and oversupply. Several oil tanker operators such as Frontline Ltd. (FRO - Snapshot Report) and Teekay Corp. (TK - Snapshot Report) reported disappointing financial results in the previous quarter.

Overseas Shipholding cited several reasons for this lackluster performance. Some of them include (1) the closure of Japanese refineries in the aftermath of the March 2011 earthquake and tsunami reduced crude imports into Japan (2) high refinery maintenance activity across the Atlantic basin (3) release of 60 million barrels of oil from the U.S and European strategic petroleum reserves and (4) political unrest in Africa.

Nevertheless, the stock price plummeted nearly 74% last year. We believe this low-level of current valuation may provide a cushion for further downslide. We therefore, reiterate our Neutral recommendation on Overseas Shipholding.

Furthermore, the global demand for liquefied natural gas is up once again. This, in turn, has resulted in high demand for LNG tankers, which are specifically designed to transport liquefied natural gas. Overseas Shipholding has four LNG tankers, each of them is capable of transporting 40% more liquefied natural gases than its closest rivals. We believe LNG tankers will become a major source of revenue in 2012.   

Read the full analyst report on OSG

Read the full analyst report on TK

Read the full analyst report on FRO