OSG – Overseas Shipholding

July 29th, 2011 by Potato

I’ve seen OSG mentioned twice on BNN now as a value play and decided to have a look myself.

Briefly, it’s a tanker company transporting largely oil and LNG. There’s currently an over-supply of tankers in the world, with still more in the process of being built (due to orders placed years ago), so the rates tankers can charge are way down. OSG lost a lot of money last year as a result.

They continue to pay a high dividend (despite losing money) indicating either that management believes things will turn around, or that management is not being conservative. In reading commentary I have seen that this is supposed to be a cyclical industry, but looking back 10 years I only see one (small) negative year, so I don’t know what to expect in terms of the earnings improving. Assuming that it is cyclical and will return to something like their 10-year average EPS/CFPS then it’s pretty attractively priced.

The book value is quite high (I get $46, when its trading at $25). My big question there is how realistic is the balance sheet? If they could sell the ships for what they’re carried on the balance sheet then it looks like there’s a lot of margin-of-safety here. But if a glut of ships means that the ships should be marked down in valuing the company then that situation changes quickly. If they’re paying dividends while losing money then that means they’re having to borrow money from somewhere, and if the lenders turn pessimistic on the value of the assets, then that could be a negative catalyst.

I wasn’t sure how to go about looking up what the current value of the ships would be, so I turned to the security analysis group on reddit and was pointed to a helpful source on the prices of recent transactions for ships. I haven’t had the time yet to go through and try to value each ship, or if it’s even worth trying, but I can say that the ships are carried at about $3B, with an average tonnage of 100k, and an average age of 7 years. Looking up what that “average ship” would sell for it looks like the figure is $27M, which multiplied out by the number of ships does come below (but close to) well below the book value. However, that figure looks like it’s heading down even just over the last few months. So to be conservative I’d reduce that by some more, and once you put in another ~20% fudge factor it doesn’t look like the safety of that book value is there after all. Edit: I made a mistake and multiplied by the total number of ships in the fleet. But, if I understand correctly (and I may well not since I got this wrong once already) many of those ships are chartered from other owners. If I just multiply the average ship value by the number of owned ships, I get a figure that’s about half the current book value.

I am being terribly inexact with that single “average ship” value, since seven 40 kT ships aren’t the same value as one 280 kT ship. If it came out closer I’d probably take the time to go through the exercise of trying to value each of the ships (or at least binning them into 5 or so more representative bins). Since the earnings will be released in just a few days, I’ll wait to see what happens there. If the stock slips more, it may be worth looking at in more detail.

Oh, and since most of this post was about determining just what the reality is from the numbers on the balance sheet, check out this thread on CMF on that very topic!

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