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Overseas Shipping Group (OSG) has become quite attractively priced over the past few weeks. OSG is a leading bulk shipper of crude oil and petroleum products around the world, operating 113 vessels (with 15 more under construction). Their business is organized into four divisions: Crude Oil, Products, U.S. Flag and Gas. They also participate in five different “pools”, which are co-operatives of shipping companies that provide more efficient sourcing to customers by pooling resources.

We were attracted to them by their low debt, simple balance sheet and valuation. Demand for ships is obviously sensitive to global trade flows and commodity prices. In addition, they do an increasing amount of their business on the spot market rather than negotiating long term charters, which increases their sensitivity to short term rate fluctuations. Recent economic weakness has hit their stock price quite hard, and their 2Q10 time charter equivalent revenues (shipping revenues less voyage expenses) were down 7% producing a loss of $1.26 per share ($0.34 after extraordinary items). Consensus estimates for 2011 are that they’ll earn $2.14 per share.In 2008 they earned $10.71 a share.

OSG’s assets are mostly ships and cash. They own $3BN in ships (net of depreciation) which includes $614MM for ships under construction (paid for but not yet generating a return). They have negligible goodwill, so the accuracy of their stockholder’s equity really relates to the carrying value of their ships. OSG has been upgrading their fleet over the past several years and now only employs double-hulled vessels which puts them in a good position to deal with the increased focus on environmental risks following the BP spill in GOM.

The average age of their fleet is under eight years, and last year they realized a $125MM gain on the sale of vessels so this supports their depreciation rates and carrying value (though they did report a $25MM loss on ship sales during the first half of 2010). We’ve done our own calculations on resale value of their fleet and we think it’s probably worth closer to $3.5BN so we can draw some further comfort from that.

OSG Selected Balance Sheet Data ($MMs except shares and BVPS)

June 30, 2010

December 31, 2009

Cash

352

475

Other current assets

341

342

Total Current Assets

694

817

Vessels less accumulated dep.

3,032

2,942

Investments in affiliates

296

189

Other assets

239

260

Total Assets

4,261

4,208

Current Liabilities

253

183

LT Debt

1,772

1,813

Deferred Fed Inc Tax & other liab

263

262

Deferred gain on sale/leaseback

61

83

Total Liabilities

2,349

2,341

Stockholder’s Equity

1,911

1,868

Shares outstanding (000s)

30,427

26,857

BVPS

$62.81

$69.55

Their current stock price is almost 50% lower than book value, so there’s considerable room for their ships to be misvalued and still support a higher valuation.

OSG Peer Comparison, Selected Metrics

Mkt Cap ($MM)

Price/Revs

Price/Book

OSG

$1,000

1.0

0.5

DSX

$933

2.8

1.2

NAT

$952

4.4

1.2

DRYS

$680

0.6

0.3

ESEA

$118

1.9

0.5

Their valuation is also attractive relative to the peers listed above. Although DRYS looks interesting we’ve always been uncomfortable with the affiliate transactions disclosed in their filings. We continue to like ESEA but have been switching some of that position into OSG on given their recent relative performance.

Disclosure: Author is long OSG, ESEA

Source: Overseas Shipping: A Fleet of Ships at 30% Off