Overseas Shipholding to Underperform

We downgrade our recommendation on Overseas Shipholding Group Inc. ( ) to Underperform based on our assessment that the company will incur losses throughout fiscal 2012 as we failed to recognize any immediate growth catalyst. The company reported disappointing financial results for the third quarter of 2011.This was the tenth consecutive quarter that Overseas Shipholding suffered losses. 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 implies 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.

Management 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, which reduced crude imports into Japan (2) high level of refinery maintenance activities 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.

Overseas Shipholding provided a gloomy near-term picture for the global oil tanker industry. An oversupply of tankers in the industry resulted in spot rates, which are even below the break-even level of the tankers. To cope up with this, management has decided to reduce its annual dividend rate by a massive 50% to $0.875 per share from $1.75 per share.