OSG - Overseas Shipholding: Growing The Buyback Program Bolsters My Buy Case

2023-08-17 06:59:51 ET

Summary

• Overseas Shipholding Group has seen its share price rise whenever it announces a significant share repurchase increase.
• The company specializes in transportation services for oil and petroleum, which has shown strong demand and stable revenues.
• The outlook for maritime trade and energy demand is positive, making OSG stock a promising investment.

Investment Summary

One of the leading factors for the runup of the share price for Overseas Shipholding Group ( OSG ) over the last several years seems to come any time the company announces a significant share repurchase increase. Most recently it was the announcement of doubling their share buyback program to $20 million. Seeing as the market cap for the company is just over $300 million this would take out a significant portion of the outstanding shares. But is it worth investing solely in these factors with OSG?

Well, it seems that the company has managed to capture demand for oil and petroleum rather well as the company engages in the transportation of these commodities. As opposed to regular shipping companies it seems that revenues and growth for OSG are more stable and don't include significant hikes like 2021 when rates went almost ballistic. Companies like ZIM Integrated Shipping Services ( ZIM ) saw their share price increase dramatically as significant FCF was generated. The case for OSG seems to be more around betting on continued demand for oil and petroleum, one that I am confident betting on. This of course concludes to me rating OSG a buy at these prices.

Oil Demand Brings Strong EBITDA

Where OSG has chosen to be specializing in operating as a provider of transportation services for both oil and petroleum to an international customer base. The company owns and operates a vast fleet of oceangoing vessels. The company has 21 vessels currently operating and whilst earnings have been dependent on demand and shipping rates, OSG has done a good job of hedging against difficult market times and still delivers solid returns to investors.

Looking back on the revenues chart for the company there isn't a noticeable dip in terms of revenues or earnings when the shipping rates drastically increased during 2021, that tells me that OSG had contracted revenues that weren't affected too much by outside influences, enhancing the stability of the revenues further. For me, this isn't such an issue as long-term sustainable earnings are a bit more important than one of successful years. Companies like ZIM saw massive demand, but looking at where the share price went for that company I am happy I didn't invest any money.

The fleet for the company is diversified and serves various customers. They have divided them into three different groups, those being Specialized Business, Jones Act ATBs, and Jones Act Tankers. As for what types of customers OSG serves it comes down to independent oil traders, refinery operators but also government entities like the United States.

Looking at the recent report from the company though I think we are looking at quite stabilizing EBITDA growth right now. This isn't to say that OSG is plateauing in terms of growth, but rather they are finding the floor on which they can grow further on. The specialized business is continuing to grow and that makes me optimistic about the outlook for the company.

Historically OSG hasn't had the best reputation for buying back shares. In fact, up until 2021, the shares were continuously diluted but it seems only recently that the management is shifting focus and instead seeing the opportunity of leveraging their position to deliver a solid ROI for inventors. The company lacks a dividend and I don’t think we will have one unless it's a special dividend. The announcement of a quarterly dividend seems farfetched as buying back shares seems more efficient instead for the company.

Maritime trade continues to be a significant aspect of our world economy, and oil makes up a large portion of it too. The global oil market is demanding as more and more countries are seeking to build up reserves. The only real viable way of transporting it from South America to Europe for example is through vessels that OSG operates. With a steady uptrend of oil shipments, I think OSG will lack any difficulties finding work and customers.

The outlook for maritime trade remains very positive and some estimates suggest that by 2050 it will have tripled. This goes in hand with energy demand which is constantly rising as well. Capturing both of these trends I think can be done through OSG, which is why I have my buy rating for them.

One of the key highlights from the last quarter was the solid utilization of the fleet, which almost managed to max out the available days with contracted days. That indicates to me that demand is high and OSG is able to capture it as well. Ultimately these high levels of utilization are what seem to be driving the sustainable buybacks for the company. With predictable EBITDA it becomes easier for them to execute on this.

Risks

As per the insights provided by the company, a prominent risk involving OSG's operations stems from the growing demand within the maritime transportation sector. This surge in demand could potentially trigger a scenario where larger companies, with larger capital bases, focus on attracting and retaining skilled mariners. Consequently, this could precipitate a challenge for OSG, as the supply of qualified mariners might dwindle, as the efforts for OSG to meet existing customer demand become difficult.

Moreover, there exists the potential that the company might not fully capitalize on the upswing in maritime transportation demand. It's essential to acknowledge that, as of December 31, 2022, OSG carried long-term debt amounting to $399 million.

This twofold challenge casts a nuanced shadow on OSG's outlook. Firstly, the prospect of not fully harnessing the heightened demand in maritime transportation underscores the intricacies that companies in this sector navigate. While the rising demand presents growth opportunities, seizing them requires a multifaceted approach that spans operational efficiency, strategic partnerships, and maintaining a flexible fleet. Failing to capitalize on this trend could potentially limit OSG's ability to maximize its market share in this favorable environment. Ultimately this could result in the share price falling as the prospects of continued share buybacks dwindle as OSG fails to capture demand.

Valuation & Wrap Up

Looking at the valuation of the company right now it remains quite attractive. The p/e sits at just under 8, and comparing that to the sector we get a decent discount of between 15 - 20%. For me, the main attraction of investing in OSG is the strong buyback programs they are doing.

That will help ensure solid shareholder returns over the long term as they capitalize on the demand. Delving deeper into the valuation of the company the p/s looks solid at just 0.7, around 40% below the rest of the sector. Pairing these discounts with the buyback program and continued demand for oil and petroleum I think OSG makes sense as a buy right now.

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