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This Might Be Why People Are So Nervous To Lend To OSG

|Includes:Overseas Shipholding Group, Inc. (OSGB)

OSG stock is tanking on liquidity fears over the last few days. Put buying has been rampant. Looking at the company's website you can see the fleet that they own and understand what is going on

http://www.osg.com/index.cfm?pageid=20

If you check that excel file you will see that the avg age of their ships is 5 years(2007), their main ships VLCC and MR have an avg age of 2003 and 2006 respectively(For fully owned ships, 2002 and 2006 for all VLCC and MR ships fully owned or not). Prices of tankers have been declining for years

This blog offers a chart for up to end of 2011

http://pragcap.com/shipping-is-a-leading-deflationary-indicator

This site has a chart of VLCC ship prices

http://cottonclubdc.org/documents/pdf/gg12.pdf

You can see that the bread and butter of OSG, VLCC and Handysize(NYSE:MR) have tumbled a lot over the last few years. And in 2012 prices have declined further. Do not be mislead by $1.5B in equity shows in its balance sheet, those numbers reflect accounting rules that allow the company to mark ships at cost and not have to update them(Until sale)

If you apply a generous decline of 35% in value to OSG fleet, and decrease that from the Property Plant and Equipment item on the balance sheet(Which seem compromised mostly by ships), OSG equity would decline by $1B. They would have $500M in equity against $2.6B in liabilities and 35% is a generous mark, prices of tankers are down more than that. They are currently losing money and have generated some operating cashflow over the past few quarters, however they are expected to lose cash from operations going forward(It seems that they generated cash by getting payments upfront and faster then normal, but cashflows should converge to earnings overtime as the payment cycle evens out)

This might be just the reason why they are having a hard time raising money. They are very close to insolvency in a market to market basis. This could be why the company is so reluctant to sell more ships. The interest rate required to finance their operations going forward, even if secured, could make their business unprofitable even after the tide turns for them. This on top of issues regarding covenants which management has not been entirely transparent about. They even refused to discuss liquidity issues in the last conference call.

Because of those factors we rate the stock a sell and have a short position in the stock

Disclosure: I am short OSG.

Stocks: OSGB