The 2nd quarter earnings for Overseas Shipholding Group OSG are a wake-up call for the tanker group. Net income for the 2nd quarter was a loss of 33¢ per share compared to a $2.81 a year earlier. Spot VLCC TCE rates fell from $98k per day to $32k, knocking almost $140 million or 35% out of revenues.

OSG is financially in excellent shape and the market has responded to the earnings today by driving the share price up 4%. This report is a wake up call on how weak the rates in the tanker business currently are and I do not see much chance of improvement in the next 6 months. I am surprised how well the shares of tanker stocks are holding up. The tanker group as I track them is up 7% YTD and OSG is down only 12%. I would expect a pull back in tanker stock prices if the current rate environment holds.

Overseas Shipholding Group OSG has announced they want to purchase the remaining units of OSG America L.P. OSP. The offer is for $8.00 per share, about 12% above the recent average price. The reason for the purchase is interesting and shows the company’s interest in their shareholders:

Morten Arntzen, President and CEO said, “While we continue to believe that OSG America can generate attractive long-term returns, recent adverse changes in the outlook for the Jones Act market have created significant near- and medium-term challenges for OSG America’s business. As a result of these deteriorating market conditions, we expect OSG America’s distributable cash flow generated in the second half of 2009 through 2010 to be materially below that required to fund its minimum quarterly distribution. While the Partnership’s distribution policy is established by its Board of Directors, we believe that the Partnership will be unable to continue its current levels of distributions to common unitholders in this challenging market environment. Furthermore, vessel cancellations, delivery delays and tighter credit and equity market conditions have diminished OSG America’s fleet growth and expansion opportunities, which were central to the investment story at its initial public offering. In light of these difficult circumstances, we believe that our offer to acquire the public units of OSG America represents an attractive opportunity for unitholders to realize value for their units at a significant premium to the recent unit price.”

OSP stock has appreciated 44% so far in 2009 and the distribution is at a 21% rate, so shareholders have had a nice run this year. It will be interesting to see how this move affects to bottom line of OSG.

OSG America L.P. OSP is a U.S. flagged transporter of petroleum products, primarily by barge. Overseas Shipholding Group holds the general management shares and 75.1% of the LP shares. OSP has been paying a steady 37.5¢ per share quarterly distribution since its inception in late 2007. Here is a quote from the last quarterly earnings concerning distribution coverage:

The Partnership generated $17.5 million of distributable cash flow for the first quarter of 2009, resulting in a distribution coverage ratio of 152%. Excluding the dividend of $5.3 million received from an affiliated company (Alaska Tanker Company), distribution coverage ratio for the period was 106%.

It appears the Alaska Tanker Company dividend was an one-time or annual event. The coverage ratio for all of 2008 was 119%. The current distribution rate looks a little iffy.

Overseas Shipholding Group OSG covers the spectrum of tanker shipping: crude, product, gas and Jones Act (U.S. flagged). The $1.75 annual dividend seems adequately covered looking at the net earnings of $10.65 in 2008 and $4.53 in the 1st quarter of 2009. The companies website claims a 5-year dividend growth rate of 18%. OSG looks like a nice place for the conservative investor looking for a growing dividend stream.

Paragon Shipping Inc. PRGN currently charters their fleet of dry bulk carriers on 1 to 2 year charters. Through the 3rd quarter of 2008 Paragon had been paying 50¢ per share quarterly. The bulk shipping meltdown and financial problems caused many bulk shippers to suspend their distributions. Paragon elected to keep paying dividend a 5¢ per share, which they have for 2 quarters now. The company had very good results in the 1st quarter of 2009, so hopefully they will start increasing the payout soon.

Again, three shipping companies with 3 different dividend payout setups. More dividend paying companies soon.

To stretch this out and give me something to write about for a few days I am going the write about these stocks in groups of 5. I will start with the lowest dividend returns for the half and work up the the largest cash payout.

Here are the bottom 5 payors on my list. The stocks are listed in this order: Company and stock symbol, dividend earned on $1000 invested on 1/1/2009 (divide by 5 to get an annualized percentage) and the share price change since the beginning of the year.

• Frontline Ltd.FRO, $17.00, -18.8%
• Knightsbridge Tankers Ltd., $19.04, +7.5%
• Paragon Shipping, Inc. PRGN, $21.00, +16.0%
• Overseas Shipholding Group, $21.00, -16.7%
• Teekay Corp.TK, $32.26, -13.3%

Tanker companies are the bulk of this group with only Paragon as a bulk shipper. FRO and VLCCF typically payout a high percentage of the free cash flow they earn in the tanker spot market. That market has been very depressed for the last 5 months or so. Knightsbridge paid only a single dividend during the 1st half of 2009 and elected not to make a payout after 1st quarter earnings were very low. OSG and TK have more stable revenues and payout a conservative portion of earnings.

Paragon Shipping was paying 50¢ per share until the dry bulk market and values collapsed. Instead of suspending the dividend like many others in the sector, Paragon’s management elected to keep paying a dividend a 5¢ per share.

Remenber whe looking at dividends from shipping companies that the different companies in the sector can have significantly different payout policies. Some have payouts that vary significantly from quarter to quarter and others strive for a more stable payout policy. Make sure you know what you are getting before investing in one of these companies.