Octave Specialty Group Inc (OSG) 2005 Q4 法說會逐字稿

Good day. My name is Jackie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Overseas Shipholding Group Fourth Quarter 2005 Earnings Results Conference Call. (Operator Instructions.) Thank you. It is now my pleasure to turn the floor over to your host, Mr. 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 first quarter of 2006, forecasts of certain income and expense items for 2006, anticipated levels of newbuildings and scrapping, projected drydock 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 projected growth of world tanker fleet, and the forecasted 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, Morton Arntzen. Morton?

Good morning. 2005 was another terrific year of achievements for OSG. Now, this is my third year-end results conference call since joining OSG just over 26 months ago, and by all accounts and measures I think this was the best year since I’ve been here. I strongly believe that we have the strategic platforms and the magnitude in place to lead the company to achieve exceptional results going forward.

I’m going to focus my remarks this morning on the annual accomplishments and results and provide an outlook for 2006. And then, Myles Itkin, our CFO, will take you through the quarterly numbers and some of the new disclosures and financial information in today’s press release, which I presume all of you have digested already.

Let’s go through some of the highlights of the financial results. At year-end, we surpassed a major milestone achieving $1 billion-plus in shipping revenues. Time Charter Equivalent revenues of $962 million were up 22% over 2004, which was also a record year for the Company. The crude segment, now headed since August by Mats Berglund, achieved Time Charter Equivalent revenues of $684 million, an increase of 3% over the prior year. The Time Charter Equivalent revenues for the products group, headed by Lois Zabrocky, was $171 million, up over 580% since the prior year. And the U.S. Flag Division Time Charter Equivalent revenue was $81 million, up 10% year over year. Total revenue days were 30,645 during the year, up 74%, or 13,068 days, from 2004.

Turning to EBITDA. EBITDA for the year was $705 million, up 8% year-on-year. Taxes for the year were a credit of $1.1 million versus a provision in 2004 of $80 million. We have been talking in most of our investor meetings about the significance of the 2004 Jobs Creation Act, which put OSG on a level playing field with our foreign competitors. It is working. Net income for the year was $465 million, up 16% from the prior year.

Now, quickly turning to the balance sheet. Total assets for the Company year-end were $3.3 billion, and shareholders equity was an impressive $1.9 billion, up 32% from the year before. Cash and cash equivalents, including a tax effective capital construction fund at year-end, was $356 million and liquidity, as it stands today, is $1.6 billion.

Net cash flow from operations for the year was $452 million. You should recognize this is after paying $91 million of accrued federal income taxes from prior years. So, the new tax world we compete in - the level playing field - cash flow operations would have been a robust $543 million, which is more indicative of the kind of cash we’ll be generating here going forward.

Our financial results, which are the best in the history of OSG, demonstrate that our fleet expansion, fleet diversification, active asset management, and focus on growth is working and delivering good results for shareholders. Let me take you through some of the--what I feel are the major achievements of last year.

Looking at our fleet diversification expansion strategy, this is about using the strength of OSG’s balance sheet and operating excellence to expand the business, ensuring a favorable rate of return in any market cycle, strong or weak. The $1.35 billion acquisition of Stelmar Shipping in January of last year enabled us to expand and diversify our fleet, execute a more diversified chartering strategy, and reinvest savings achieved into our business. In 2005, Stelmar alone added $172 million to our EBITDA.

Our dependence on crude, which we would have highlighted as a strength in bull markets, but others have discounted in uncertain markets, was down to 71% of Time Charter Equivalent revenues in 2005, versus 84% in 2004. Sixty-nine percent of Time Charter Equivalent revenues in 2005 was derived from the spot market, compared with 85% a year ago. Significant improvements.

Another of the strong advantages of having a strong balance sheet, a diversified business model, and a significant--and significant locked-in revenue streams is that it enables you to acquire tonnage in very capital efficient ways. Now, if you look at the 18 new buildings we are involved in, the 10 Philadelphia new buildings are bareboat chartered, no capital involved. The four [indiscernible] newbuilding product tankers that are being built in Korea that come into the fleet this year and next are Time Chartered. Again, no capital. And the four LNG carriers we are building in Korea are being acquired in a joint venture financed with 15% equity and 85% non-recourse financing. Minimal capital. Most shipping companies cannot avail themselves of such opportunities. And in strong asset markets like we have today, that gives us an advantage.

Although many investors don’t give us credit for actively managing our assets, we think we deserve it, and I’m pleased to say that the long-term-oriented investors we’ve been talking with in the past quarters share our view. In the past year, we captured a premium to our market of over $350 million by actively managing our fleet.

Let me go into some of the details. In 2005, we generated $858 million from vessel sales and sale leasebacks, producing $283 million in book gains and resulting in $43 million in gains to OSG in 2005, or $1.02 per share. Active asset management, resulting in bottom line returns to shareholders, is something we think investors should begin to look at differently. At the same time, in 2005, our operating fleet grew by 46%, from 61 vessels to 89. If you take the 18 newbuildings into account, our fleet rises to 107 ships, an increase of 62%. And probably as important as anything, 100% of our own fleet is now Double Hull.

Let me talk a little bit about what many see and I see as an important differentiator for OSG, and that is our U.S. Flag Expansion Strategy. Unlike our foreign competitors, we have the opportunity to take advantage of the high barriers to entry in the U.S. Flag and Jones Act market. In June, we took the risk of signing an agreement to bareboat 10 Jones Act product carriers to be built at Aker Philadelphia Shipyard. None of the ships had employment beforehand. We believe this was the biggest commercial order of ships in the U.S. since World War II. Today, four of those 10 tankers are fixed with oil [majors] on profitable charters.

In the middle of last year, we re-flagged three international product carriers to U.S. Flag and entered them into the military security program. We believe that we will be able to make those ships the most profitable product tankers in our fleet. We also renewed the MSP slot, military security program slot, on our one U.S. Flag car carrier, and began a concerted push to increase our U.S. Government business. This is an area with high barriers to entry, and OSG, of the big tanker companies, is the one company that can participate in it.

Let me shift gears and talk about what OSG will focus on in 2006. We intend to continue to execute the strategy we outlined for all of you almost two years ago. And that is, to remain or become the market leader in the four segments we compete - crude transportation, product tankers, gas transportation, and the U.S. Flag market. We like our position in the crude market. Our oil--Double Hull oil and crude fleet gives us a competitive advantage in a market that is increasingly discriminating against single-hull operators.

We will continue to build our product tanker fleet. The most recent additions to this fleet were the long-term charters we entered into in the fall for four MR newbuilding product tankers. You can expect more transactions like that from OSG going forward.

We will continue to grow our U.S. Flag segment. We will likely fix at least two more of the 10 Jones Acts series we are building in Philadelphia. In addition, we are studying investments in the U.S. Flag shuttle tanker market, and continue to be interested in the product tankers needed for the U.S. military.

As we develop our product tanker business and gas transportation business, we are constantly coming across opportunities to expand into LPG and chemical transportation, areas I’ve discussed in earlier calls. We consider the chemical trade to be a logical expansion of our products trade and LPG transport to fit perfectly with our growing LNG footprint. Therefore, we are looking actively at expansion and opportunities in these two segments also. This should not surprise any of you on the call.

At the same time, and perhaps the biggest priority at OSG, we will continue to invest in and upgrade the quality of our operations. Last year, we established an Operations Integrity Unit, which is modeled along the lines of the G.E. Audit Group. This unit reports directly to the Head of Ship Operations, Captain Bob Johnson. In addition, we hired an Operations Compliance Officer, reporting directly to me, [John Granier], who joined OSG after a distinguished 30-year career with the U.S. Coast Guard.

We have a Company-wide commitment from the Board down to the last [indiscernible] our ships to achieve excellence aboard our ships, and we will make the necessary investments in people and technology to make certain we get there.

Now, before I turn it over to Myles, let me give you my views on 2006, which I have also done in prior calls. We perceive rates remaining strong in 2006 in the range of annual TCE rates realized in 2005, if not a tad better, albeit with even greater volatility. In saying this, if we had a large fleet of single hull tankers, I would not be as confident. We have been telling investors for 18 months now about how the gap in earnings between single hull and double hull tankers is growing. The gap is widening aided in the first days of this year by BP’s decision to move exclusively double-hull tonnage for the transport of their products, the same policy Total has had for a couple of years. And we would expect more oil companies to jump on this bandwagon over time.

You can’t talk about one VLCC market any longer. You have to talk separately about the market for single hulls and the market for double Hulls, a phenomenon I think most of the analysts are not putting proper weight on.

Now, the second reason we are confident about 2006 is that we expect the oil demand growth in 2006 will increase compared with 2005. Oil demand growth in 2006 is expected to exceed 2005 primarily because of the growth in the U.S., China, and India. Non-OPEC producers are forecast to satisfy most of the world’s oil demand growth in 2006. Changing trade flows, for example, the export of crude from Venezuela to China, will add ton miles to [indiscernible] ports. And finally, which I think we saw strongly in January and February, Chinese demand growth is expected to exceed that of 2005.

At the same time, we expect the oil market to remain extremely volatile in 2006. This is a factor we all have to deal with, whether we’ll remain a wild card. With the entire oil chain operating at near 100% utilization, that will exaggerate the effects of disruption in supply. And disruptions in supplies in the market normally benefit the tanker industry. The shipping markets we think will remain fairly balanced in 2006. Tanker deliveries in 2006 are lower than on new vessels delivered in 2005, particularly in the VLCC segment.

Demand growth and logistical challenges in the oil markets will keep tanker demand healthy, as will the arbitrages, for example, that come up in the products market. Almost all incremental oil supply is sourced from long haul sources, so ton miles are growing faster than oil demand. I think you’ve heard of the ton mile multipliers in the range of 2 to 2.5. We have used two times growth for purposes of our planning. We put the total together and we expect rates for crude oil tankers and product carriers to remain healthy throughout 2006.

So far, in the first two months of 2006, as we disclosed in our earnings release, which Myles will go into, we are off to a very good start. The first quarter of 2006 should be considerably stronger than the fourth quarter of 2005. A lot of the trends we have been discussing with investors, notably the single versus double two-tier market and a healthy products market, have continued and our earnings will benefit from such.

Now, having reviewed both the outlook for 2006 and the long-term, the Board of OSG was comfortable raising our dividend by 43% to $0.25 per share per quarter. This reflects the Board’s confidence in our long-term strategy and their view that our new fleet profile should enable us to generate a higher level of core earnings going forward, hence the increase.

On that, I’ll turn the call over to Myles.

Good morning. How are you? For the quarter, Time Charter Equivalent revenue totaled $271 million, in comparison with the prior year’s quarter of $276 million, reflecting an increase in revenue days, 1,000 Panamax days and 2,175 product carrier days, attributable to the 2005 acquisition of Stelmar. The growth in revenue days, however, was offset by rate declines in our VLCCs and Aframax suites of 37 and 33%, respectively, relative to the same quarter in the prior year.

Operating income in the year’s fourth quarter totaled $124 million, versus $198 million in the prior year’s quarter. For the three months ended December 31, crude tankers represented 73% of revenue and 82% of operating income, product carriers, 17% of revenue and 10% of operating income, and U.S. Flag, 7% of revenue and 7% of operating income. The quarter over prior year’s quarter reduction in the percentage of total revenue and operating income, which the crude sector represents, reflects the success of the Company’s suite diversification activities.

For the quarter, time charter earnings remained strong. VLCC earnings averaged $69,000 per day, $23,000 per day in excess of their five-year average. Aframax earnings, which were both spot and time charter, of $39,000 per day exceeded their five-year average by $10,000 per day. And similarly, Panamax earnings of $28,000 per day and product carrier earnings of $18,000 per day materially surpassed their medium-term average. These earnings reflect 100% spot exposure during the quarter for VLCCs, 76% spot exposure for Aframaxes, 38% for Panamaxes, and 16% for product carriers.

Vessel expenses in the quarter increased to $46 million from $34 million in the prior year’s quarter, reflecting the addition of approximately 2,700 vessel days, or almost 30 vessels. The quarter included certain non-recurring items, the $2 million expense associated with the re-flagging of three international Flag product carriers to U.S. Flag, $1 million expense associated with the grounding of the Colmar, and $1 million pertaining to the deck fractures on the Beryl and the Fran.

Associatively, time and bareboat charter and expense rose to $42 million from $26 million in the prior year’s quarter, reflecting a more than three-fold increase in the number of vessels we charter-in.

G&A in the fourth quarter at $34.6 million exceeded G&A in the prior year’s quarter by $15 million. The difference is primarily attributable to a $5.6 million non-cash charge related to the termination of the Company’s defined benefit plan and SERP settlement with one departing senior executive, $5.7 million in incremental incentive compensation payments and personnel costs inherent in the acquisition of Stelmar, and $2.1 million of expense incurred in connection with the DOJ investigation.

At year-end, working capital stood at $250 million, total assets at $3.3 billion. The fair market value of the Company’s assets exceeds its book value by more than $1 billion. At year-end, approximately 44% of the Company’s 89-vessel fleet was bareboat chartered or time chartered-in. Our 18-vessel newbuilding program, 10 U.S. Flag Jones Act product carriers, four International Flag product carriers, and four LNG carriers, 14 of these will be chartered-in. Our decision to owner charter-in is driven by the action which reduces our overall cost of capital.

At year-end 2005, long-term debt totaled $965 million, and adjusted debt at $610 million. Adjusted debt to capital registered 24.5%, adjusted debt to EBITDA at .86 times, and EBITDA fixed charges at 7.6 times.

As you are aware, in February of this year, the Company entered into a $1.5 billion omnibus seven-year unsecured credit facility replacing its existing series of revolving credit agreements. This facility increases total liquidity to approximately $1.65 billion. There will be a charge for write-off of deferred costs in Q1 of 2006 associated with this facility of $4.8 million.

In summary, 2005 was a highly successful year with the Company generating a net profit margin in excess of 48%, and a return on average equity of 28%.

Looking forward, the first quarter of 2006 is evidencing strong earnings trends. Ninety-one percent of our spot VLCCs, which are really all of our VLCC days, have been fixed at 77,500 per day, 81% of our spot Aframaxes at 42,500 per day, that’s 60% of our total Aframax days, 42% of our spot Panamax days at 36,500 per day, that’s 15% of our total Panamax days, and 53% of our spot product carrier days at 36,000 per day, which constitutes 13% of our total product carrier days. Time charter days and rates by sector are included in the press release as well on a going forward basis by quarter for 2006.

In 2006, G&A by quarter will reflect an accrual for incentive compensation, which has previously been taken in the fourth quarter of each year, resulting in estimated G&A as follows - Q1, $22 million, Q2, $20 million, Q3, $18 million, and Q4, $18 million.

For full year 2006, time and bareboat charter-in expense will approximate $150 million, and depreciation and amortization, $140 million. Other income, which is predominantly dividend and interest income, including dividends expected to be received from Double Hull tankers, but excluding gains on sales of [indiscernible] gains and sales of securities, which we do not forecast, should aggregate $21 million.

Strong earnings momentum and controlled costs, substantial levels of locked-in revenue, and active asset management are setting the stage for a strong 2006.

With that, we’d like to open the floor to questions.

Thank you. (Operator Instructions.) Your first question is from John Chappell of J.P. Morgan.

Good morning, guys.

Hey, John. How are you?

Pretty good. You spelled out a pretty strong balance sheet and also a commitment to adding tonnage through time chartering-in and bareboat chartering-in. Your balance sheet is back to the pre-Stelmar levels. What is the primary use of capital going forward? And I guess to break it out a little bit further, Morton, you talk about your four growth strategies or four growth areas. Is there any way to kind of prioritize the areas where you think assets might be attractive, versus areas where you think prices may not be attractive at current levels?

That’s a question I think we spend about two hours every morning discussing here - what’s the right way to grow. We prefer to grow the businesses fairly in a balanced way, so that we don’t end up with one segment, for example, crude tankers, completely dominating the income statement and the balance sheet of the Company. I think the U.S. Flag segment is a special case. Obviously, you are going to pay a lot more for assets there. And there, we think it’s not really a matter of finding opportunities, it’s a matter of finding yard capacity to build the vessels that are needed for the fleet replacement or for shuttle tanker projects that we expect to happen in the U.S. Gulf.

And we certainly will pursue that. We’ve been actively pursuing the product tanker program for the military. I think we have said consistently that we need to get bigger in the product tanker market. And it’s not just get big for the sake of being big, it’s so that we can have an adequate footprint in the Pacific, the Atlantic, and in the time charter market. While we like the size of our fleet today, it needs to grow. We have--so far, in the last six months, it’s been more cost competitive to charter-in ships than it has been to buy or build. We are certainly continuing to monitor the new building market and really on a day-by-day, week-by-week basis.

We like how our ship owners have been systematically going through the Chinese yards, and we’ll continue to do that. There are, as I indicated a couple of years ago, that we would--once we had the product tanker market business running smoothly and assert some scale, we would look at the chemical market. And we are looking at that. I wouldn’t prioritize over the product tanker market, but to be consistent, we will look at that area. In the LNG business, we will continue to compete for contracts, but I think you all know that the pure LNG transportation contracts over the last--since we were successful, the margins have gotten thinner. Now, that can change and that will change from--really from geography to geography.

One thing we have seen with our LNG business is that the LPG business is going to growing dramatically as a result of both the LNG business and the increased exploration throughout the globe. So, we are also looking at that segment because it fits neatly in. So, if you look across the segment, there’s still up--there’s [indiscernible] opportunities for growth across the four segments we’re in. It is a big day-to-day, week-by-week assessment of what we see out there.

Okay. Myles, this question might be for you. The vessel operating expenses was up about $3.5 million sequentially from the third quarter, yet the revenue generating days was down. Was there--was this timing issues? Is this impact of crewing costs or insurance? And what’s the kind of run rate you would think looking forward for a vessel OpEx?

You look for it, although it will vary slightly by quarter, I would say something in the neighborhood of 45 to 46 per quarter. You are correct in your assessment. It was a combination of things. There were--there was an acceleration of drydock. There was a certain level of off-hire days. And the line items of expenses that I shared with you during our talk also impacted the quarter and put that on a non-recurring basis.

Move expenses will have gone up year-over-year, probably in the neighborhood of 50%. However, insurance cost has been--better been contained. They’re probably down $500,000 for the year.

Okay. And then, one last item. I don’t recall seeing the CapEx budget for the--in the press release. What I have is just the LNGs for ’06 and ’07. Is that correct, and what are those totals?

Well, there is--that’s down in the joint venture, so you won’t even see that. It’s funded by non-recourse debt. The capital has already been put in. So, view the LNG vessels as not having any incremental capital expenditure associated with OSG’s balance sheet. [Indiscernible] drydock and maintenance [indiscernible].

Okay. Thanks, Myles and Morton.

Thank you. Your next question is from [Simile Jagwoney] of Citadel.

Good morning, guys.

Hey, Simile. How are you?

Good. This--my question was more related to the private market. One of the issues that I’ve been struggling with is--maybe it’s just my perception, but the gap that you guys trade at on an EBIT to EBITDA basis versus your peers is a whole lot lighter than you look at it on the price of NAV basis. Now, I can at least partially attribute that to people calculating their NAVs differently. But, do--in the private market, do you think that VLCCs and Afras trade at a different multiple than say [indiscernible] maxes?

No. I mean, I have to think a little bit about the question. I think the--we’re all puzzled by the pricing gap between OSG and our peer group. And I’d love to have the answer for you. We haven’t--the international fleet now is all Double Hull. It’s a modern fleet. We have a lot more left in revenues. The VLCCs, when things are going well, as they are this quarter, are going to outperform everything. That’s always going to be the case. And when you have the kind of margins we have and you trade at, let’s call it 70% of NAV, which is hardly generous today, it’s a bit puzzling. And I think the answer for us is going to be we are going to continue to generate superior earnings, make smart investments, be careful of the capital, and hopefully, over time, the market will accept that.

Well, I guess, what could potentially be the reason you think that causes that gap? I mean, you guys look cheap either way. But, what confuses me is that the gap--the magnitude of the gap changes depending on the metric one chooses to look at. And the only answer I come up--I’ve been able to figure out--and I’ve talked to pretty every sell-side analyst out there about this. The only answer I get is perhaps there’s a difference in the way people calculate their NAVs a little bit. And then, the other answer is basically that your mix--your particular mix of vessel that’s going into the NAV calculation is just being priced differently.

And, I’m sure it’s a tough question to answer. But, just--.

Well, it’s a tough question to answer. But, I think one of the things you can look at is that the market--the stock market today does not differentiate between the age of a fleet. If you look at the age of our fleet, compared it with--and I’m not going to name names because that’s not right. But, they have older fleets. Then, in many cases, if you look at the--just the makeup of our fleets, the makeup of our Aframaxes and our VLCCs, they are high quality Aframaxes and VLCCs. That doesn’t get taken into account with the stock market. Where it does show is over time you’re going to get consistently higher earnings. And that doesn’t mean every quarter you’re going to beat everybody. But, over a one year, a two year, a three year period, you could consistently do that. And we have.

I think part of it is OSG has been an evolving story. We were paying taxes until the end of 2004. And so, we’re in a different world right now because we did pay cash taxes last year for prior years, but that’s now gone. I don’t think the equity markets have fully digested that yet. And the reality is that old ships have done reasonably well the last couple of years also. But, going forward, the markets are going to have to differentiate between that because a fleet that’s eight years old or 12 years old is not going to have the long-term earnings potential of a fleet as young as ours.

And do you think that the focus that some people have on NAVs is slightly misplaced? If one were to focus on the ability of a collection of assets that actually generate cash over what, frankly, I think is a nebulous calculation to begin with--when you look at transactions, when you look at fleets, when you look at private deals--and I understand that you will operate things differently, so the EBITDA might change under different ownerships. But, how do you look at things?

We are a shipping company that makes the majority of its money from operations. This is not the age of the Golden Greeks and the regions where you bought low and sold the asset high, and in between you went to the Mediterranean and got [ten]. We make our money from ship operations, predominantly that was the case this year, that year, and that will be the case going forward. The business has changed. The business has evolved. It’s becoming more professional, more industrial, and that is the model we are pursuing.

Simile, it’s--when we evaluate any potential acquisition, whether it’s an individual investor or a company, it’s really predicated upon our assumption of the cash flows that can be generated by the underlying assets. Additionally, if you were to take a look at our charter-in portfolio today, if we were today to enter into new charters for the remaining duration of that portfolio, it would cost us an additional $300 million in net present value costs.

Right.

Which one doesn’t really derive benefit from. So, I mean, I think the concept is that net asset value is a convenient mechanism for looking at a company, but it’s not an accurate mechanism for assessing the value of a company.

And just one other question. This is also something I’ve struggled with before. In CCF--I tend to include it as cash. What do you think the right methodology is? And--.

--Include it as cash. That’s sensible because we’re always in a position to liquidate that. At liquidation, we would pay approximately 35% in the value of that fund for taxes as well as interest. So, if you were trying to come up with the cash equivalent, 65% of that amount.

Unless you chose to deploy it as CapEx?

I’m sorry? Yes, there will be a chance to employ that in terms of additional capital expenditures as we expand our U.S. footprint.

In which case it would be 100%?

It would be 100%.

All right. Thank you.

Thank you. Your next question is from John Kartsonas of Citigroup.

Good morning.

How are you?

I want to follow-up a bit on the previous discussion, I guess. And obviously, you talked about the differential between single hulls and double hulls and your competitors a bit. However, your rates have been running - even on a yearly basis - below competitors that have all the fleets--or single hulls--or actually have single hulls. How satisfied are you with the performance of the pools that you have out there? And any thoughts of like going by yourself, like leaving the pools and maybe you can do better than that? Or are you concerned about that at all?

I have not had [indiscernible] before he gets anywhere. I think [indiscernible] we like to think of international and [indiscernible] international. They are tremendous pools with tremendous assets. But, let me have Mats answer that question.

I don’t think it’s correct if you glean out the spot and compare spot for spot. I think we outperformed our main competitors in the aftermath of [indiscernible-accented]. I think we were even to some of the others on the real [indiscernible-accented] side. So, really one [indiscernible-accented] a public number. I think longer-term, longer periods, you will see us out competing them more. We have a more industrialized way of employing our ships. A more seaway cover than others and a strong market that may not help us as much as it does in weaker markets, but over time, we do outperform our competition.

Let me ask something else. Are there any costs involved in operating the pool? I mean, when you--from the [PC] that you realize in the pool, is there any subtraction because of costs that are specifically to the pool?

Yes, there is. It varies by the pool and sometimes it varies by period But, if you’re looking for other--the magnitude, it’s a few hundred dollars per day as opposed to a larger number.

And I guess a question on a different subject. Any thoughts on like putting more vessels on the DHT on that Double Hull [indiscernible] created last year? And what are you looking for when you think about this spot?

Well, we always evaluate alternatives and we consider sale leaseback markets across the board. DHT is an alternative for us. Of course, they’re an independent company and will make their own specific decisions. We enter into sale leaseback transactions when we can realize an amount that’s greater than the fair market value of the asset and transfer residual value risk at a point in the cycle that we think it’s attractive to do so. So, yes, we’ll continue to take a look at worldwide sale leaseback markets during the first of the year.

That’s all I had. Thank you very much.

Thank you, John.

Thank you. Your next question is from Justine Fisher of Goldman Sachs.

Hi, Justine. How are you?

I’m good. How are you guys doing?

Good, thanks.

I hope you’re still making it to the Greek Islands anyway, even if the market’s changed. The first question I have is regarding the time charter strategy. I know that--and I don’t expect to get answers on every single vessel--whether you guys plan to expand or not the time charter. But, I looked at the website this morning and some of the time charters out, meaning that the vessels that you have are expiring in the next few months. Can we expect a meaningful change? Or from a modeling perspective, can we expect the ratio of time charter to spot vessels to remain more or less the same?

I think you could assume that the product tankers that come off-charter will most likely stay in the stock market. And I would say the same for any of the crude market tankers that won’t be able to come off-charter. So, I think you would--all things considered, unless we get a pickup like we did last year after the two hurricanes, we would intend to have the modern tankers trade spot as they come off. I think we have one of the older tankers that is trading spot and she would probably get put on time charter, and that’s something we said we’re looking to do.

But, if we look at the one older tanker - I think it’s one of the 88s - that will probably go in the time charter market, and of course, there, we hope that’s the plan. And everything else we assume will trade spot.

Okay. And then, another question--.

--And if there is a pickup--if the weather forecasters are right and there’s more hurricanes in the nature we had next year--last year, and you see a pickup in rates for the time charter rates, we’ll go through our forecast of spot rates. We will offer to specifically lock-in again, then.

Did that happen this past year? Because that’s kind of interesting. So that--are you saying that when the hurricanes occurred last year, the time charter rates surpassed buy rates because there were people who were taking a look, they think the weather is going to be worse next year, let’s just lock-in the tonnage now?

If you try--we’d be happy to go through it. But, you can look at time charter rates that were available in the course of September, October, November. But, definitely, they went right through spot rates and they were very attractive. And our--just, if they can get time charters that are in excess of our long-term forecast in spot rates, then they’re authorized to go ahead and do transactions..

Okay. The next question I had is just on the whole--the acquisition question, which I know is semi-kicking a dead horse. But, it seems as though you guys have been trying to sale--do more sale leaseback transactions and time charter-in more tonnage. And as Myles said, they can see the better return on capital. So, keeping that in mind, and then, with respect to OSG looking at acquisitions, would you be less inclined to consider purchasing other companies because that would be owned tonnage, or would you--would that not make a difference because you would just try and do sale leaseback transactions with the tonnage that you did purchase?

It wouldn’t make a difference.

Okay. And then, the next question I have is just on the whole NAV question. I’m interested--it’s interesting you guys increased your dividend. I know people have been asking on every conference call for the last year or so are you going to back shares and increase the dividend. Many--most of the other--or many of the others, probably tanker companies, have just started buying back shares at an aggressive rate because they think that the public markets are not buying them correctly. Why did you guys decide on a dividend increase in light of the whole NA--the fact that the stock is trading well below NAV?

I think you’re into a very interesting theoretical financial discussion. My view is that when you raise your dividend, you’re showing long-term confidence in the ability of the company to generate more earnings, greater cash flow. And when our Board, which discusses stock buybacks and dividends at every board meeting, assessed that their view is with our bigger size, our more locked-in revenue, they’re comfortable we will be generating more earnings year-on-year than we have in the past.

Stock buy--and when you put in dividends there is an expectation that you will maintain them. The stock buyback programs, they are here today, they are gone tomorrow. They are not long-term commitments to continue to do that. And much of that reflects as much confidence in your long-term strategy. The other aspect of it is we have--we’ve been fairly busy the last couple of years and unfortunately we weren’t able to invest in assets and opportunities that earn well in excess of our cost of capital. And we continue to see opportunities. And as long as we do, we will continue to invest in the business. But, we’re very comfortable we will be generating on average more cash than we have in the past, therefore, the dividend increase.

Okay. And then, one last quick question. I mean, I certainly applaud the level of disclosure in your press release. And I’m sure I, and I’m sure the other analysts, also appreciate it. Other of the tanker companies in their most recent quarterly reports have reduced the level of disclosure. They say they won’t give guidance on rates. Do you guys plan to continue giving the same level of disclosure that you do now going forward?

Absolutely. We’re committed to doing that. We’ve said all along we’re a transparent company, we’re a real company, a real board, and we will continue to do that. And we think it’s helpful.

Thanks.

Thank you. Your next question is from Scott Burk of Bear.

Hello. Good morning. I just have one--a few incremental questions here. Would you--in terms of free cash that you guys are going to generate in 2006, would you like to do another large company acquisition? Are you looking more towards kind of newbuild programs or vessel acquisitions?

Well, it’s really--what we’re look--the answer is all of the above. Mats talked a little bit about the Aframax market, where we have close to 70% of our revenue days covered by contract. In fact, in the Aframax, we need to add ships. So, looking at one ship acquisitions or two or three ship newbuildings programs is perfectly sensible, as it would be looking at an entire fleet. Similarly, in the [indiscernible] area, we need to grow that fleet ship by ship or with a fleet to meet current contractual commitments. So, we’re quite open. One of the reasons we maintain the balance sheet and the liquidity we have is so that we can look at both large or small transactions. We’ve made a real concerted effort to make sure that we are in the market day in and day out seeing what’s going on out there.

To put it into context, we have a highly disciplined view towards investing. We have liquidity. We don’t have a commitment to commit that liquidity to another project. The project has to generate returns that well exceed our underlying cost of capital. We, more so than our competition, have an ability to look into discreet markets, in our case, particularly, the U.S. Flag market, that provides for substantially greater returns than can be consistently earned in the international side of the market with long-term contracts attached to it as opposed to the higher volatility in the international crude sector.

Okay. Then--so, with the free cash that you spin off, I guess it’s more likely you’ll continue to reduce your debt level as opposed to buy back shares--?

And reduce that--can be used to reduce our debt level. Yes.

Having said that, we will continue to be active and we’ll continue to look at things. We don’t have an objective to reduce the debt level to zero debt level. And we think we’ll find opportunities.

Okay. And then, one other question. I’d like to second the motion that--I do appreciate the guidance you have given in terms of days going forward. The ship--.

We call it disclosure, not guidance.

Okay. Excuse me. Disclosure. But, I think it’s great. And that’s based on your current fleet, or does it assume some--any incremental changes? Or that’s just your current fleet?

Our current fleet. That’s actual money that’s locked-in.

And do you back out the drydock days of the--you call them the non-fixed days. Are the dry dock days already backed out?

They’re backed out.

Okay. Thank you.

Thank you. Your next question is from Terese Fabian of Sidoti and Company.

Good morning. Let me say I also welcome your additional disclosures on vessel rates and also the guidance you are providing. I think it will be an assistant to visibility here. My question though pertains to the U.S. Flag fleet and developments there. What are you seeing going on with the U.S. Flag fleet? I know their mandatory vessel retirement is coming up. Can you talk a little bit about that?

I’m going to let Captain Johnston, the head of ship operations, who has been also overseeing U.S. Flag talk about that.

Yes. What you’re seeing is a very definitive phase-out basically of the older 90s. And we’re--we don’t see those dates being extended. So, you can sit down and calculate on a ship-by-ship basis exactly when ships are going to go out or ones--the maximum date they can [indiscernible] to. Although we also believe that some of those ships will go out early as a result of drydockings. So, we can actually see what the supply of vessels is today. And this is probably almost the only market that there is today in the shipping world where you can actually forecast the number of ships that will be available.

Okay, great. An additional question. Your U.S. Jones Act product tankers. Where will they be operating? Do you know? I know that they’re on time chartered. But, what will be their roots?

Right now, the two that we have announced that are on charter to Shell will probably be trading in the U.S. Gulf. And the two that we have announced are on charter to BP will probably be trading on the U.S. West Coast.

Okay, great. And then, a question on your capital construction fund. It’s now nearly $300 million. What are your options for using that?

Our options today are those defined under legislation, which are U.S. to foreign trade, Great Lakes trade, shuttle tankers--.

--And non-contiguous trade.

Yes.

Any opportunities?

Yes, we do.

Okay, great. And then--.

--My guy is a financial guy saying that.

I agree with him.

Shifting the geographic scope a little bit, are developments in Nigeria affecting your operations?

Not at all so far.

Okay, great. Thank--.

--[Indiscernible.]

Okay. Thanks.

Thank you. Your next question is from Ruairidh Stewart of Simmons and Company.

Yes. Good morning. Actually, I have a couple of questions on the product side. And I was just curious as to your thoughts with the change in gasoline specs this year in the U.S. and the abolition of MTBE, what the impact of that and the additional requirement for ethanol imports would be on the U.S. product fleet at both your domestic fleet--U.S. fleet and the International Flag product carriers? What you saw going forward through this summer?

I think what we’re expecting in the [indiscernible] effect is that--this [indiscernible] already. We would expect really a continuation of the trends that you had last year, which resulted in a very strong August, September month or a weakened October, November, and then, a really strengthening right through till now. The arbitrage market is open and close. Right now, they’re open and you see rates picking up rather dramatically. We expect to see that. I think you’re going to see more volatility in these rates than you have in the past as the arbitrage window is opened and close. But, we--one of the reasons we invested in the product tankers market and made it a priority is because of long-term fundamentals. We see more transport both across the globe, across the Atlantic, and the arbitrage markets going forward.

Yes. I think most would kind of subscribe to that view. I guess against that, you have a fairly significant order book on the products side. So, I was just interested in your comments--that you’re signaling that product carriers is one area that you’re particularly interested in and we should expect you to make some additions to the fleet there. I was just wondering how you balance that against the orders being delivered over the next couple of years, and what your view is of the kind of likely timing and maybe a better opportunity that you might have to acquire vessels at lower prices going forward.

Well, I think that’s a question that would probably take a couple of hours to answer. But, one thing that we do not expect is significant reductions in newbuilding prices is at the world’s shipyards in the next two or three years. The world is basically--the shipyards are closed. They are booked through 2006, 2007, and 2008. You can get your odd spots from time to time. But effectively, they’re sold. There is right now a scramble going on amongst the bigger shipping companies looking at 2009, and notably it’s higher. This is what is going on. You have continued high input prices. You didn’t have particularly strong performance at the bottom line at some of the shipyards last year. And you had those [indiscernible] high input prices and high demands. They will not be reducing prices. So, that isn’t going to be that easy.

But, if you look at the age profile of the product tanker fleet along with the Panamax tanker fleet, it’s got one of the older profiles and will handle a lot larger number of ships [indiscernible] through legislation or commercially. We feel pretty comfortable about the supply and demand with respect to that market. So, we don’t see things getting real cheap here very quickly.

Hopefully, we’re going to have a refinery expansion in the Middle East, in China, and in India. There is going to--some of these for domestic consumption. There’ll be substantial levels of exports. We anticipate that the increase in ton mile demand will more than address the net supply increase.

Okay. I guess I was just focusing on the balancing act of the next couple of years order versus the longer term drivers there. But, that’s helpful. And again, I’d echo everyone else with the appreciation on additional disclosures. Thank you.

Thank you. Your next question comes from Simile Jagwoney at Citadel.

Yes. Sorry to bother you guys again. Just, where on your list of ways to return cash are variable dividends and liquidity--you have the liquidity. And even with an opportunity set for reinvestment, if you do get to a period where there is excess cash flow, is that something you would consider?

The Board, as I said, looks at these issues every quarter. I think a 43% increase in the dividend was [indiscernible] significant. And I think you could expect our Board to continue to look at this on a quarter by quarter basis. That’s what we’ve done. And if we’re able to build the Company to where we expect it to be, I think you’ll see our Board will react accordingly.

Thank you.

Thank you. Your next question is from [Justin Yaegerman] of Wachovia Securities.

Hey. Good morning, fellows. Most of my questions were asked and answered. I guess the one major thing--and you kind of touched on it before, was I was wondering--we’ve seen one of your major competitors go and explore their options with the Chinese shipyards. I’d just like a little color on where you guys see them right now and kind of what opportunities you have been exploring there, if any?

We have been systematically looking at the Chinese shipyards. What you will find is the Chinese shipyards may be a little bit steeper than the Korean and Japanese yards, but it’s not much. I believe the order you are referring to is at a shipyard that I think right now is nothing more than a beach and a pier. And that’s not a negative comment. I believe the yard will get built. I believe they’ll be able to build ships and they’ll be high quality ships. But, you’re talking about a yard that doesn’t exist today except on paper.

Right.

So, systematically, I’ll be in China next week as part of exploration. But, we will continue to look at possibly building in Korea. We will also look at Japan. But, it’s--we have a need to--we need to expand our yard context beyond our long-term reliable partners in Korea. But, we will continue to talk to our long-term reliable partners in Korea, also.

Okay, very good. Thank you very much.

Thank you. (Operator Instructions.) I am currently showing no further questions and would like to hand the floor back over to Jim Edelson.

I’ll turn it over to Morton Arntzen who will give closing remarks.

Thank you very much. And I appreciate--we got a lot of good questions and it gave us an opportunity to disclose further our story here. Before I sign off, I want to announce that OSG will hold its first ever Investor Day. This is scheduled for May 18. Jennifer Schleuter will be following--our Head of Investor Relations, who most of you know, will be following you with more details. We will hold the event in Philadelphia and have planned a morning session of presentations for members of OSG’s Management Team, followed by an afternoon tour of the Aker Philadelphia shipyard, where our Jones Act tankers are being built. This is the most modern commercial yard in the United States. I think you’ll find it all interesting. And we hope as many of you will be able to join us as is possible.

Thank you very much for joining today’s call. Good day.

Thank you. This does conclude today’s teleconference. You may now disconnect your line and have a wonderful day.