We upgrade our recommendation on Overseas Shipholding Group Inc. (OSG) to Neutral based on its current valuation which dropped by an enormous 65% in the last year. The low valuation level may restrict further downslide of the stock price. The company’s fourth quarter of 2011 financial results outpaced the Zacks Consensus Estimates.
Recent political turmoil between the U.S. and other developed western countries and the Middle-East country of Iran regarding the latter’s nuclear weapon strategy has raised the spot prices of the oil tanker industry. Several countries are afraid of the fact that Iran, the third largest crude oil exporter of the world, may reduce its supply if the situation aggravated. Thus, developed and emerging countries that are highly dependent on imported oil are raising demand in the short-term. As a result, the global oil tanker industry is benefiting.
In March 2012, VLCC single voyage rate jumped 87% year over year and Suezmax rate surged 82% year over year. Overseas Shipholding together with its closest rivals, such as Frontline Ltd. (FRO) and Teekay Corp. (TK) benefited from this trend. A major positive for Overseas Shipholding is that it owns industry’s most sophisticated and latest technology driven fleet.
Charterers are becoming more selective with respect to the quality of the vessels they hire. In the time charter market, factors such as the age and quality of the vessel tend to be more significant in competing for businesses.
Nevertheless, we believe the long-term turnaround of the oil tanker industry will take more time. Meanwhile, the U.S. economy is witnessing some growth albeit a slow pace and the sovereign debt crisis in Europe is slowly settling down. These positives may further boost the oil tanker industry.
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