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Published: April 12, 2010
The financial crisis interrupted an unmistakable
trend.
Worldwide demand for oil, which had been sharply on the rise in
the past decade as a result of ever-increasing demand in China
and India, plummeted in the past year.
While worldwide oil consumption rose from 64.8 million barrels a
day in 1980 to more than 85.0 million barrels a day in 2007,
demand shrunk by about 1.4 million barrels a day in 2009.
But demand is once again on the rise as economies throughout the
world recover. OPEC, the oil
cartel, estimates oil demand will increase by 900,000
barrels a day in 2010. This
uptick in demand will be driven by China, which is expected
to grow by about +9% this year. That's far better than overall
worldwide economic growth, which forecasters predict will be
+3.4% in 2010, a strong rise from a -0.9% contraction last year.
Rising demand for oil benefits companies that transport oil. As
the flow of oil increases, so does demand for shipping and, with
it, the rates shippers can charge. Low demand for crude pushed
oil shippers to seven-year lows in 2009, but things are
beginning to look up.
Overseas Shipholding Group (NYSE: OSG) is the
second-largest publicly traded tanker company in the world. The
New York-based shipping group owns and operates a diverse fleet
of 129 vessels that primarily ship crude oil and petroleum
products all over the world for oil companies. In the fourth
quarter of 2009, about 50% of revenue was attributable to crude
shipments; 22% was from the petroleum product segment and 28%
came from the U.S. flag fleet.
What makes OSG particularly attractive at this point is that it
has a significant exposure to spot rates, the daily shipping
rates at time of charter, which vary significantly. OSG
estimates that 75% of its revenue-earning days in 2010 will be
exposed to the spot market. While spot-rate exposure has been
disadvantageous in recent quarters, it should be a big plus
going forward.
According to Chief Executive Morten Arntzen, 2009 was one of the
most difficult tanker markets of the past 20 years. The company
earned $70.2 million in the period, or $2.61 per share, way down
from $317.7 million or $10.65 per share, in 2008. The company
cited the worldwide economic slowdown, OPEC production cuts and
a +6% increase in the worldwide fleet, which all had the effect
of reducing the amount of oil shipped and lowering spot rates
for shipping in 2009.
Average rates earned by the company’s international crude oil
tankers fell -50% in 2009 to $26,307 per day from $52,344 in
2008. International product-carriers declined -21%, to $17,976
per day, from $22,803 a day the year before. Revenue days, that
is, when ships are operating and producing revenue, decreased
year-over-year by 1,810 days fleetwide, or -4.6%.
Things have been turning around fast.
As world economies continue to recover and oil demand increases,
shipping rates have moved higher. In the fourth quarter, average
charter rates earned for OSG's tankers were $37,620, a rate that
trounces average 2009 rates of $26,307. Spot rates for VLCCs --
shorthand for "very large crude carriers" -- averaged $25,000 in
fourth-quarter '09 but are expected to reach $55,000 in 2010,
according to investment group Jefferies & Co. The firm sees
rates at $60,000 in 2011.
OSG has paid quarterly dividends of $0.438 per share since
mid-2008. Annual payments of $1.75 translate to a solid 4.1%
yield. Earnings of $2.61 per share even in a rotten year nicely
covered the current dividend with a
payout ratio of 67%.
Shipping rates are on the rise. A worldwide recovery makes it
likely that rates will be significantly higher in 2010. Longer
term, worldwide oil demand should continue to increase. OSG
appears to be facing long and short term tailwinds and the stock
is still a long way from its high of $90 in 2007. OSG appears
timely and is a great way to play the recovery and rising oil
demand.
-- Tom Hutchinson
Staff Writer
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