Overseas Shipholding Suffers Setback

Credit rating agency Standard and Poor’s (S&P) lowered global energy transportation company Overseas Shipholding Group Inc.’s ( ) corporate credit rating. S&P stated that downgraded rating reflects the possibility of a liquidity crisis that the company might face during the early part of next year.

OSG’s long-term corporate credit rating has been reduced to ‘CCC+’ from ‘B-‘coupled with a negative outlook, as the rating firm believes that the company will face cash constraints when its $1.5 billion revolving credit facility is replaced by a smaller facility of $900 million.

Although the New York-based shipping company’s senior unsecured debts credit rating has also being lowered to ‘CCC+’ from ‘BB-', its recovery rating remains unchanged at ‘3’, stating that in case of any default the creditor will be able to recover at least 50–70% of the outstanding amount.

As of March 31, 2012, OSG had a financial obligation of almost $372.9 million, which included an additional amount of $256.1 million under the existing credit facility, an outstanding $63.6 million debenture and capital commitments of $53.2 million. Furthermore, the company has a cash balance of $226.7 million and has produced negative cash from operations of $62 million over the last 12 months.

Currently, the company is facing certain serious problems, which if not dealt with properly may lead to further downgrade in ratings. The company does not generate enough cash from operations to meet its debt and capital obligations. In addition, the company’s revenue is also exposed to spot market rates, which are susceptible to macro-economic concerns, geo-political risks and demand-supply mismatches.

We believe that a continuous rise in fuel demand in the international market coupled with a profitable U.S. domestic shipping business and improving spot market rates bode well for the company. Moreover, if the company manages to raise funds through asset sales or through additional borrowings, it would be in a better position to improve its credibility. However, rivals Frontline Ltd ( FRO - Snapshot Report ) and Teekay Corp ( TK - Snapshot Report ) provide stiff competition to OSG.

The current Zacks Consensus Estimate for Overseas Shipping Group Inc. is pegged at ($1.09) for the second quarter, with a growth rate estimate of 9.48%. For 2012 and 2013, the Zacks Consensus Estimates stand at ($4.80) and ($2.80) with a growth rate of 23.44% and 41.77%, respectively.

Recommendation

Currently, Overseas Shipping Group Inc. has a Zacks #2 Rank, implying a short-term Buy rating on the stock.