OSG’s Q4 Results & Improving Outlook
Overseas Shipholding Group’s Q4 2009 results were aided by an unexpected tax credit. OSG (OSG.F) reported a loss of $0.59 excluding one-time items versus our ($1.02) forecast and the Street’s ($1.25) forecast. However a $30.5 million tax credit for 2009 against 2004 earnings led to the earnings beat, as earnings without the tax credit would have been ($1.73). The actual cash tax credit will be $43 million, which OSG will receive in 2010. TCE revenues were $5 million below our forecasts on slightly lower utilization than we had expected while G&A costs of $36 million were $5 million higher than we forecast.
Management guided stronger 1Q10 results.OSG disclosed that 66% of its spot VLCC days have been fixed at an average of $50,000/day, with 57% of its spot Aframax days done at $25,000/day. Current rates for both vessel classes imply a lower result for the complete quarter, particularly on the Aframax side, where rates stand at nearly cash costs and have underperformed other tanker markets. OSG has allowed its FFA positions to roll off at the end of last year, increasing its spot exposure on the VLCC and Aframax side to near 100% for 2010. OSG believes this strategy will pay off, as the group expects higher tanker rates later this year as stronger demand against limited new oil supplies pushes OPEC to boost output.
OSG provided an update for the FSO Africa, which is nearing completion at Dubai Drydocks.Maersk Qatar is seeking to cancel the contract for the unit due to the vessel’s delay along with a revised estimate of storage requirements for its Al Shaheen field. A cancellation of the contract would result in an early call on the loan to the venture of $143 million, 50% of which OSG is responsible for. OSG is contesting the validity of the cancellation, and did state a belief that the unit could be modified to find work elsewhere should a resolution not be reached. OSG expects to have no issue if it were required to repay the bank loan as it has $475 million in cash on the balance sheet.
OSG’s capital commitments are fully-funded. The company has $1.6 billion in liquidity, including $525 million in cash and marketable investments, against $522 million of construction and delivery commitments. Additionally, OSG will receive its $43 million tax benefit during 2010, another unexpected boost to liquidity. Overall, OSG remains well capitalized, and given its more constructive outlook on the tanker market we could see the company play a larger role as consolidator in the coming year.
Despite an uncertain near-term outlook, we remain positive on OSG. The company is among the best-positioned to benefit from an upturn we forecast later in the year, as we believe low refinery utilization will ultimately result in product inventory draws supporting crack spreads and a need for higher OPEC output. Even after taking into account the loss of employment for the FSO Africa, OSG shares remain attractively valued. The group reiterate our Buy rating and $60 target, maintain a 6x CF target multiple.