Octave Specialty Group Inc (OSG) 2005 Q3 法說會逐字稿

Good morning, my name is Toni and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Overseas Shipholding Group conference call. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Jim Edelson, General Counsel. Sir, you may begin your conference.

Thank you. Before we start, let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker markets, changing oil patterns, prospects for certain strategic alliances and investments, estimated TCE rates achieved for the fourth quarter, anticipated levels of new buildings and scrapping, projected dry dock schedule, the ability to restore refining capacity and crude oil production in the Gulf of Mexico from damage caused by hurricanes, the integration of the former Stelmar operations, the estimated impact in OSG's financial statements of the sale of seven vessels to Double Hull Tankers and charter back of such vessels and the forecast of world economic activity and world oil demand.

Factors, risks, and uncertainties that could cause the actual results to differ from the expectations reflected in these forward-looking statements are described in OSG's Annual Report on Form 10-K. With that out of the way, I'd like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?

Good morning. I will go through the performance of the quarter and I'm not going to review much that's already in the press release. I think that OSG once again has delivered exceptional results. And I think the key takeaway is we continue to execute the long-term growth strategy that we outlined for you in prior earnings calls and that we have outlined in numerous one-on-one meetings over the last 18 months with shareholders all over the country and across the globe.

Let me highlight some of the key financial points from this quarter. Third quarter TCE revenues were up 16% year-over-year to $195 million. This is particularly notable, given the declining rates in VLCCs and Aframax sectors in the last quarter. I'll come back to that in a little while.

Net income was up 5%, to 72 million. Net income year-to-date of $351 million is 88% of what we achieved in the full year 2004. And we'll talk a little bit about the fourth quarter, and it will help you put that in better perspective.

EPS for the quarter was $1.82 a share, up 5%. Excluding gain on vessel sales and gains from securities transactions, EPS was $1.36 a share. Again like in the other quarters of 2005, we benefited from the tax changes that were embedded in the 2004 Job Creation Act. In the third quarter last year we paid 33 million in taxes and this quarter our tax bill was negligible.

If you look at net cash flow from operations for the first nine months, it was $333 million. And you should remember that this includes paying $93 million in taxes this year, of which $91 million relate to 2004. Or put another way, cash flow would have been $424 million under the new tax regime we operate. So we continue to generate a lot of cash.

Average TCE rates in the quarter, which I think all of you know, were down. VLCCs averaged 34,676 per day in the quarter, which is down 44% year-over-year. Aframaxes averaged 26,769 a day, down 14% year-other-year. Panamax crude tankers averaged 22,807 a day, up 27% year-over-year and product carriers, 18,239, up 8% year-over-year.

If you look at total revenue days for the company, they were 7,954 in the quarter, 75% more than the same period of last year. Now, one of the things that we've been talking about consistently is a balanced portfolio strategy for OSG. And it's really about two things. Managing how we control our tonnage in order to capitalize on market conditions and making our spot and time to our exposure to capitalize on market rates, and our expectations for future rates.

So let's look at our four segments today and where are they. We trade the majority of our crude tankers in the spot market and we intend to continue that policy. We continue to believe that that is the optimal place to have the crude tankers. In fact, in any time period we look backwards, one year, two year, three year, five year, spot market was the place to be.

As we will look forward, our own projections, next six months, next year, and next three years, we continue to believe that for the crude tankers, the spot market is where we want to employ the majority of the tonnage, and we will continue to do so. If you look at the product tankers, it's more a mix of spot and time charters. And unlike the crude market, in the product market from time to time, we are able to lock in time charters that are in excess of what our forecasts are for spot market for the product tankers. When we could achieve those kind of fixtures, we capitalize on them.

If you look at the US flag, it is almost an entirely time charter market and it will continue to be so. And then finally, our LNG carriers, which are set to deliver in 2007 and 2008, they will be on 25-year charters when they come into the fleet. And right now, any project we would contemplate in the LNG space would involve long-term charter commitments. We continue to shy from ordinary (ph) LNG carrier spec.

And if you look at some of the mix in the quarter, 60% of the time charter equivalent revenue was derived in the spot market in the third quarter. This compares with 82% the same quarter a year ago, so a much healthier mix. If you look at crude, crude TCE revenues, third quarter last year represent 83% of TCE revenue. This last quarter it was 63%, thanks to the significant growth in the product tanker revenue. So we have a better mix between crude and product than we've had in the past.

Going to one of our other important themes, active fleet management. We made a commitment to you last year that we would do this and we have continued that. If you look at our operating fleet, it's grown close to 50% year-over-year, from 62 vessels last year this quarter, to 92 vessels now. If you take new building commitments into account, and including the commitment we made to time charter for product tankers, for 10 years, our fleet actually is up to 110 ships. So we have continued to prudently grow and manage this fleet.

Today, we own 69% of our vessels, down from 82% at the end of the year. One of the things we've emphasized, we want to have flexibility in our balance sheet. We'll probably look to have somewhere around two-thirds of the ships we control on our balance sheet and about one-third off. And the one-third that's off the balance sheet will come with options to extend, options to walk away, options to purchase. And we think that kind of flexibility will enable us to better capitalize on swings in the market and our expectations of future rates.

Now, what's the best, one of the better examples of it? Obviously the Double Hull Tanker transactions. We made a commitment to the Board and to our shareholders that we would try to return leverage ratios and liquidity levels by year-end 2005 to the levels that existed prior to the Stelmar acquisition. With the earnings we've generated this year and Double Hull Tanker's transactions, we've substantially achieved that and that's within one year.

So if you look back one year ago, we committed to spending 1.35 billion to buy Stelmar shipping. We did that. We did not issue any equity in the transaction. One year later, we have absorbed that transaction and restored the balance sheet to the condition it was in prior to doing that. And I think that's a fairly notable achievement.

Looking at DHT itself, it continues to trade really near its issue price offering a very attractive double-digit yield for investors. Considering what we know and I think what you on the phone know about the fourth quarter, it should be clear to anyone looking at DHT today, that the profit-sharing element of the charter-backed arrangements to OSG will enhance the base yield in the first quarter.

In addition to Double Hull Tankers, I think we announced earlier that we have chartered four brand-new product tankers from Parakou Shipping in Hong Kong. Two of these vessels will be delivered in 2006, and two in 2007. And again, this is more opportunistic chartering in. Today it is more economical for us to charter in ships than it is to contract new buildings or buy secondhand. And when those opportunities arise, we will take advantage of them. Because OSG has a strong credit rating and is a respected shop, other ship owners will charter ships to OSG. This does gives us an advantage.

Moving on to the US flag space and this has been a very exciting area for us. Last year we said we were recommitting to this space in a big way. And we've been doing that. In the -- last quarter, we reflagged three international product carriers to US flag. And we now have four US flag vessels participating in the US Maritime Security Program. These ships continue to trade as we see fit, unless called upon by the United States Government.

We could not have done this transaction if we had not acquired the Stelmar fleet. There is simply not -- no availability of suitable vessels in the US or the international market that we could bring over. We believe that the combination of the preference cargos we can compete for in the US flag market and the international back-hauled cargos we'll be able to generate through our international product tanker business that we can make these perhaps the three most highest-earning ships in our fleet. It's a very exciting program.

You've all heard about our 10-vessel new building program in Kvaerner Philadelphia. Keel laying for the first vessel happened last week and we had several representatives from OSG there. And this morning we announced that Shell Trading has signed contracts for long-term time charters of two of the vessels with OSG will build both from Aker American Shipping . So that program is proceeding, as we expected and we would hope, over the course of the next six months, to announce additional time charter contracts for some of those ships.

Let me shift gears a little bit, and just talk about the vision for OSG and again, a lot of this is going to be repeating things that we've gone over. But I want to emphasize that we are sticking to our strategy. We're trying to build a large-scale professionally managed world-class energy transportation company. Our goal is to be the leader in all the market segments that we're in.

If you look at the world we face, our clients are getting more demanding. The global regulatory environment in which our industry operates, and notably in the U.S. and Europe, is piling on regulations and more importantly, they're enforcing existing ones more vigilantly. The industry has no alternative but to spend more money on managing their fleets or fall behind. Our scale, our 100-ship-plus fleet, enables us to drive cost savings in all the services we purchase, from insurance to lube oils, to dry-docking. These savings we make in these areas are available for investment in upgrading our quality, safety and environmental systems, while maintaining the cost competitiveness in our ships. And this is exactly what we are doing and will continue to do. This industry was once about trading assets. Now, it is about running real businesses.

So, what does it take to succeed in this more-demanding environment? And why do I think that OSG has the platform to break from the pack and emerge as the leading tanker company in the world? And that is our goal.

First, you have to have staying power and be adequately capitalized, so you can make good money in bad markets and spectacular profits in high markets. OSG has been listed on the New York Stock Exchange since 1973. So, we've already demonstrated staying power, and have sailed through several industry cycles. With a BB-plus rating, we are the highest-rated independent tanker company in the industry. And again, this affords us opportunities like time chartering in new product tankers for long-term periods.

We have a strong focus on customer relationships. This has always been a cornerstone of OSG.'s approach to the business. Now I think you probably hear that from every shipping companies, so how can we demonstrate this. If you look at the independent tanker market, about 15% of the revenue days of the independent world tanker fleet is covered by contracts. If you look at Tankers International, where our VLCCs operate, 40% of the revenue days are covered by contracts. If you look at Aframax International, where Aframaxes' trade, north of 50% of the revenue days are covered by contracts. This underscores that OSG cares about clients and has superior customer relationships.

You have to have scale. We have a fleet now that will be north of 100 ships. To succeed in this business, you have to have more and better information than the average market participant and you've to be able to recruit and retain top talent. Without scale, this is very, very difficult. With T.I., for example, we track every VLCC fixture on the planet. I believe, we are the only ones that are able to do that today. To drive the -- to make the - to afford the investments we have in our quality environmental system, we have to have economies of purchasing power, we can do that. Scale does matter in this business and we believe, it will matter more, going forward.

You also have to have prudent corporate governance. We are a New York Stock Exchange-listed company. We have a board comprised of a majority of independent directors. We have professional management. We have transparent reporting. I hope, most of you have visited our new site. We have embraced both the word and the spirit of Sarbanes-Oxley. And we think going forward, that will matter for shareholders.

Finally, I think, as important as anything is a commitment to prudent growth. If you look at the pattern of our acquisitions, and investments the last two years, they all have been immediately accretive to earnings and non-dilutive. While, we are continuously evaluating opportunities, we will continue to exercise the financial discipline we've shown so far. We will not dilute shareholders. We will not make investments that don't support our goal of being a leader in the market segments we're in. And we'll only do investments that meet the strict return hurdles that both our board and management have set. And we will not undertake acquisitions that jeopardize the financial stability of this company. We will continue to grow in the prudent fashion we have demonstrated over the last few years.

Let me conclude my remarks on a very positive note. And then, I'm going to turn it over to Myles Itkin, our CFO, for specifics. When we were speaking with shareholders this summer, we said that we expected a normal strong winter season and that we would expect the signs of this to appear in September, and this is exactly what has happened. October will be a stronger month than September. November will exceed October, and December, based on the fixtures we are entering into today for VLCCs will be significantly better than November. In fact, the most recent fixtures we've been doing from West Africa, China, are now north of $100,000 a day.

If you look at the rates today for crude tankers, we do not think that they incorporate a Katrina or a Rita premium. These are normal winter rates. The production that was knocked out in the Gulf has been offset so far, by refinery shutdowns. As the refineries get back on stream quicker and the crude production is restored, we believe there will be an increase in long-haul crude coming into the U.S, which will be positive for tanker rates. So, today, we have a normal winter market. We may also get a Katrina-Rita kick in the course of the last quarter of this year or the first quarter of next year. We think that will be positive for the market. And keep in mind, that this, what I call, happy tanker market comes at a time when November in New York feels like December in the Bahamas. With that, I'm going to turn it over to Myles Itkin, our CFO, to go over specifics of what we have achieved so far this quarter. Thank you, Myles.

Sure. Let me just give you some insight into where we stand in the fourth quarter. About 77% of our capacity is fixed, leaving 23% or approximately 1,800 days open for spot trading. This, of course, varies by sector. So, for those interested as it relates to the VLCCs, 70% are fixed at a blended rate, that's blended between spot and time charter of 52.4. For Aframaxes, 60% are fixed at a blended rate of 36,600 per day. For Panamaxes, 78% are fixed at a blended rate of 23.9 per day, and for product carriers 87% are fixed, at a blended rate of $18,200 per day.

So, accordingly, we have 30% of our V's open, 40% of our Aframaxes open, 22% of our Panamaxes and 13% of our product carriers. Spot rates are currently high, this is also, as I go through existing spot rates, without reference to efficiency premiums through trading with pools. For VLCCs, we're booking currently north of 90 per day. For Aframaxes north of 40 in the Caribbean and north of 60 in the North Sea, for Panamaxes north of 58 and for product carriers, depending upon trade in the Atlantic 24 to 25 and in the Pacific 38,000. This provides a forward-looking fourth quarter that should prove to be very attractive.

As you take a look and run through 2006, we have been increasing number of spot days in both Panamaxes and product carriers. During the fourth quarter of this year, Panamaxes had 438 spot days. By the third quarter of next year, that will increase to 644 spot days or more than 50% of our fleet. For product carriers, the fourth quarter had 482 spot days out of total days of 2,500. By the third quarter of next year that will have increased to 1,000 spot days or over 40% of the fleet.

We have tried to provide additional disclosure within this press release. So we are providing forward quarter rates and booking details. We've provided the dry dock details. Just supplementing the dry dock details, in the fourth quarter of this year, dry dock expenses are estimated at 2.75 million and for fiscal year 2006, $27 million.

We've outlined the effect of the Double Hull Tanker transaction. The Double Hull Tanker transaction has been particularly accretive. The levels of accretion are reflected within the disclosures themselves. What I would like to do is just comment on the fact that Double Hull Tanker predominately will have on depreciation in interest going forward, annualized depreciation expense should average about 34.5 million per quarter or 138 million per year during 2006. And interest expense on an annualized basis should be approximately $60 to $65 million.

With that, I'd just like to open it up to questions.

Thank you. (Operator Instructions) Our first question is coming from Jon Chappell of JP Morgan. Please go ahead.

Thank you. Good morning. Morten, a couple themes you talked about on your prepared remarks. The cash you're generating, the balance sheet back to pre-Stelmar levels. Chartering in of tonnage because it makes more economic sense than buying new tonnage or secondhand tonnage right now. Given your stock price trading at the lowest multiples in the group and if you look at it versus the steel, pretty pessimistic NAV numbers. You're still trading at almost a 20% discount. At what point do you start to look at buying back your stock instead of buying new tonnage?

It's a very good question. And it's one that continuously is on the board agenda we -- just as we revisit the dividend at each board meeting. Right now, when we entered into the Parakou transaction, and that was a rate that we committed to in - hold up, I think, June, we then negotiated the time charter. Fortunately, we were negotiating with somebody who when you shake hands on a transaction sticks to the deal. Because the market clearly moved up from the period when we entered into that rate and where it is today.

But the charter -- time charter end market comes and goes. If you remember last year, during the first quarter, we time chartered in seven VLCCs. And then we tried the rest of the year to increase that. We were able to time charter in one Aframax tanker in September when a window opened up in the first week in September. The time charter end market is not a deep market, it's elusive and it comes and goes very quickly. So we're continuously looking at that. But there are not continuous opportunities.

There are opportunities that we have on the US flag that nobody else has. And so far -- if you look at the Kvaerner ships, while we don't own those ships, we will be bare-boat chartering them, you do have to have capital set aside for managing that risk. We took that risk and we're now starting to find term employment for those vessels. So again, we have opportunities in that area, like the shift of three ships over to the MSP program that others don't.

We continue to bid for LNG projects. We're only going to bid at levels that meet our hurdles. And we have a more active program actually pursuing LNG opportunities as we speak. So we continue to see opportunities in all our segments. And I would not rule out acquisitions in any of the segments we're in. And part of the reason that we are able to generate customer business, COA business or back-haul business that others can't do is because we have the scale to do so. But if we don't find opportunities, clearly the board will look at things like stock repurchases or increasing the dividend. But so far, we've had more than enough opportunities. I'm sorry, if that was a little long.

No. it's okay. I mean, it seems like there's still a lot of flexibility left. I believe in the press release it said the pro forma debt to cap would be 27% or just below that. Myles, what's the type of ideal debt to capital, I mean, you assuming you get some more of the LNG tenders, other opportunities in the US flag. Could you increase it to 50% and still feel comfortable with doing other things like increasing the dividend or buying back stock?

Yes. I think we certainly could. We're -- at this point in the cycle we are where we'd like to be. It provides us with all of the requisite firepower. But there's absolutely no reason that we couldn't increase the leverage beyond where it stands today.

All right. One last thing. You mentioned the spot exposure for next year on the crude side. But I don't believe you mentioned on the product tanker side. Can you mention what the time charter coverage will look like for the Panamaxes and the Handymaxes for 2006?

I can run that through that for you. The Panamaxes, if I can do it by quarter. I'll give you spot days and then total days. Okay, the balance being time charter. So Q1 spot days 450, total 1,164. Q2 spot days 557, total 1,177. Q3 spot days 644, total 1,190. The same in Q4. For the product carriers, Q1 spot days 780, total 2,508. Q2 909 spot days, total days 2,491. Q3, 1,044 spot days, total days 2,564. And Q4, 1,104 spot days, total days 2,510.

Great. Thanks a lot, Myles and Morten.

Sure.

Thank you. Our next question is coming from Justine Fisher of Goldman Sachs. Please go ahead.

Hi. The first question I have is just regarding what debt - I guess this is for Myles - what debt you paid down during the third quarter? Was it the secured term loan or was it part of the unsecured revolver drawing?

Unsecured.

Okay. And then, the second question that I have is just a question about the proceeds from the equity and joint ventures. I think, it was 1 to 2 million this quarter and historically it's been above 10 million. And I'm sure that has to do with maybe selling some ships that were jointly owned during the quarter. And to be honest, I have not gone through the fleet list yet. But I wanted to know if you could give us some color as to why that was down?

I can certainly go through the specifics of it with you offline. But it's predominantly the fact that the ULCC joint venture is terminated. There were four ULCCs. And as a result of the transaction, each of us now owns two. So the revenue that would have otherwise rifled through equity and joint ventures is now in top line time charter equivalent revenue.

I remember that now, thanks. And then the last question that I have is about time chartering in additional vessels. Morten, I know that you said you would look to any of the segments in which OSG currently operates vessels. But is there any segment in particular that you would look to time charter in VLCCs versus Aframaxes or even start up in the Suezmaxes. And is there any time charter market that's perhaps more robust? Like are there more vessels up for open time charters now in one particular type of ship?

The answer is -- I went through some of our cargo coverage in Aframax International and Tankers International. And they're pretty healthy numbers. So we would still very much like to increase what we have there under control, and we would look at time charters. There just hasn't been attractive alternatives available. Product tankers, it goes up and down. I think the rates that we reached last summer for the ships we chartered in, today that rate is probably $3,000 a day more, roughly. And that's significant over a 10-year period for four ships.

US Flag, it's very difficult to get a hold of anything. Would we look at Suezmax tankers, the answer is yes, because we have customer business that requires that. It isn't a priority. That will be more of a customer basis, but we wouldn't look away from it. So we are continuously looking in all of the -- really the product and the crude markets. And we'd be open to any of them.

Okay. Thanks so much.

Thank you. Our next question is coming from Philippe Lanier of Banc of America Securities. Please go ahead.

Yes, good morning. I came in a little bit late to the call, so apologize if I double up on something you've mentioned. I just have two questions. First of all, just on the way the company is going to be reporting following the sale of Double Hull Tankers. I wanted to confirm where -- what line items all the individual elements would go into.

Equity and joint ventures.

Pardon me?

It will be reported as equity and joint ventures.

Okay. You had broken up into Appendix 5 -- you had broken up a couple of line items and where things would change. And I just wanted to confirm the management fee income. Is that going to be part of net voyage revenues?

Yes, management fee income will serve as an offset to vessel expenses.

Okay. And then another question, this is perhaps a little bit complicated. In the years that I've worked in this space, I've seen so many vessels come in and out of fleets that I'd like to consider sales of vessels as part of operating expenses. That said, it leads to sometimes some choppy revenue numbers and most people exclude it. As I understand, the way things are going forward for the sale of those vessels, you're going to be, I guess, amortizing the gain and offsetting it from your charter hire expense. Is that correct in the way you're going to be reporting it?

Yes.

Yes.

What would be kind of your response as to how us as analysts should treat that? Should we be netting that out to make it equivalent to how we do the other asset sales or leave it in?

You should leave it in.

Okay. And then just one question just on the market. The way that the equities have been reacting the past two months, I'd say from an investor standpoint, it seems to be that for a number of the companies out there, there's a consensus view that asset values might be falling as much as 20% next year, given where some people view the market as going. That said, when you look at some of the recent sales that have been going on, particularly from General Maritime, there seems to be a divergence into what people are willing to actually pay for the steel versus what the equity market is saying. What's your particular outlook for asset prices next year?

I mean, I think we've been pretty consistent on that. And that is we do not see an environment, really the next two or three years, where vessel prices get significantly cheaper. Will you see movements of 5% and 10% and movements in new building prices of 5% or 10%? Yes. But do we see dramatic fall-off? No. And why is that? First of all, unlike any point really in the history of this business, the world shipyards, primarily Korea, Japan and China, they're substantially full through 2008. It takes you three, three-and-a-half years to get a new VLCC today. And you' have to pay $121 million to $130 million for that VLCC.

You've never had an order book that stretches out this far ever. And new building prices do have an impact upon secondhand prices. Secondly, there is this massive LNG building going on. And that - one, the LNG, projects are the most profitable thing the shipyards do. They're taking up an awful lot of building capacity, and they're giving the yards the financial wherewithal with which to hold off on significant price reductions. You have a continued weak dollar -- and I think your bank is probably better able to judge where the dollar is heading -- and you have continued high steel prices. They'll move 5% or 10%. But we don't see that falloff.

The second thing we've been saying consistently is while there -- that there may -- you may see some more fall -- some more volatility in rates, the world fleet of double-hull ships is largely fully utilized. And the replacement ships coming in are going to be adequate to keep up with the growth in demand for transport. And if you have a Katrina and Rita effect in the first quarter of next year, it actually could be a shortfall of tonnage. So while there are second -- double-side and single-hull ships that you can buy, such as the ones that Genmar has been selling, there's very few good modern double-hull ships available.

And thirdly, the industry has been making a lot of money. We are much, to a greater degree than ever before, equity-financed, there's been a lot of IPOs and a lot of profitability. Owners are not in a situation where they have to reduce price. They have the capacity to wait a year, two years. I mean, you look at our EBITDA for the first nine months, 535 million, and I think your own forecasts will project what we do in the fourth quarter. These are very large amounts of money. In that kind of environment, I don't see secondhand prices falling significantly. So the notion that you're going to wait around for this terrific buying spree next year or even the year after, I think you're going to be waiting a long time for that.

Right. A second question then on the market as it relates to Asian demand. We've been expecting a pick-up in Asian demand all year. But that said, from the numbers that I've seen, the rate and the steady increase in buying that you've seen over the past six weeks out of the AG going east, has even surprised myself. Do you think that we're going to look at a fall-off there and they've overbought a little bit? Or do you still see continued strength out of that market?

We've said along, we don't believe that China can grow its economy at the rates it's doing and defy energy gravity. We were also surprised, I think the entire industry was surprised, by the slowdown in demand growth of crude into China in the first nine months of this year. And what we've seen now, we believe is return to a more normal importing pattern. And that's what we're seeing in our fixtures and in our flow of business in that direction. We think we're more into a normal Chinese demand pattern now, not an unusual one. And you'll probably ask where do they stand with the strategic reserves? And I think that still is everybody's guess. We do not believe we're seeing a lot of buying for that yet.

Okay. Well, thank you very much for your time.

Thank you. (Operator Instructions) Our next question is coming from Harvey Stober of Dahlman Rose. Please go ahead.

Yes, a couple of questions. First one relatively easy is what are the return hurdles that OSG is using for potential acquisitions?

It varies somewhat by the riskiness of the project. However, it -- needless to say -- exceeds what we believe our deemed cost of capital to be. So, if you were to look at us on a steady-state basis, we would view ourselves as having 50% debt, 50% equity, with a current cost of equity capital of about 12%. We anticipate that any project that we undertake, depending upon the sector and depending upon the charter profile attached to it, would have to generate returns in excess of that.

Okay. There have been obviously inventories in the US for crude oil have been rising. Some of the figures they're showing there at 10-year highs. Obviously, this is due to some dislocations from the hurricanes, et cetera. Are you starting to see some push-back into the US markets? And are these dislocations being offset by returning those inventories to overseas markets?

No, no is the answer, I mean the only - really, you've seen some short-term storage contracts, for VLCCs in Mexico, but that's about it. We're really waiting to see the longer-term effects of Katrina and Rita on import patterns, yet, that hasn't emerged which is why we emphasize that what we're seeing today is just a normal market. And that the refinery shutdowns have offset the production losses. And we'll see how that plays out over the next four months. It's still too early to say.

But you're right, there's been an early build in both Europe and in the US

Okay. Thank you.

Thank you. Our next question is coming from Mark Alter of Credit Suisse First Boston. Please go ahead.

Hi, could I just follow up on that, your comment about possibility of increasing leverage for the right sort of thing? What, you've got this target of a nice BB. What would you be willing to do on the ratings front for a significant leveraging acquisition? Or would you look to again bring leverage down within a short period of time?

We're comfortable with the rating that we hold today. We're not aggressively pursuing an investment grade rating. We think that the rating we have today would allow us to undertake any reasonable acquisition that confronts us.

Okay. Thank you.

Thank you. Our next question is coming from Walter Lovato of Passport Capital. Please go ahead.

Good morning. Two questions. First one is, how many West African cargos are there that go to China? And what's the trend been in that number?

I think, I think I want to tackle that one offline. I think -- we do count the cargo out of West Africa. But let me tackle that one offline rather than give you a wrong answer.

Okay. Second question, what is the, what are you -- you gave us the dry docking expense. What are the capital expenditures for new buildings that you have?

There are none. All the down payments we have to make for new buildings which are really just the LNG carriers have been made. We have no further commitments for the LNG carriers.

For all the LNGs --

The five tankers at Philadelphia, we will bareboat, so there will be no capital. The four ships for Time Charter and Parakou, there will be no capital. So other than dry docking we have no CapEx requirements in the budget. It would have to be acquisitions that are yet to happen.

Well that's a phenomenal position to be in --

Thank you.

-- and as a shareholder, I would recommend seriously considering the share repurchase option.

Noted.

Thank you.

Thank you. (Operator Instructions) Our next question is coming from of Serge Atnas (ph) of Enskilda Securities. Please go ahead.

Hi, I have a question on the Jones Act Handysize product carriers. You said in the press release that you are making $42,000 a day in the third quarter. Can you give me an indication of how that performance is on the older ships versus the newest?

On the ships that we have, they're all approximately the same age. And it's about -- it makes no difference as far as our fleet goes on the age.

You have four ships built early '80s and you have one in '98 and one in 2002, is that correct?

That's correct. But the newer ships are not in the Jones Act trade. Those are the ships that are trading international markets under the MSP program.

Okay. Thank you.

Yes.

Thank you. At this time, there appear to be no further questions. I would like to turn the floor back over to management for any further or closing remarks.

Well, thank you for joining the earnings call. We will continue to do a lot of one-on-one meetings with shareholders. And we welcome anybody's questions -- whether by e-mail or phone, we'll take them. We're trying to be as open as we can with our shareholders and we're committed to doing that. So thank you very much for listening to us and we look forward to reporting the results of the fourth quarter early next year. Thank you.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time. And have a wonderful day.