Octave Specialty Group Inc (OSG) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Elsa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Overseas Shipholding Group’s first quarter 2006 earnings results conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following today’s presentation. If you would like to ask a question please press star, one on your telephone keypad.

At this time, I’d like to turn the floor over to your host, Mr. James 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 trading patterns, prospects for certain strategic alliances and investments, estimated TCE rates achieved for the second, third, and fourth quarters of 2006, 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 following damage caused by hurricanes, the projected growth of the world’s tanker fleet, and the forecast of oil 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.

For this conference call, we’ve prepared and posted on OSG’s web sit supporting slides that supplement our prepared remarks. This supporting presentation can be viewed and downloaded from the Investor Relations events and webcast section on osg.com.

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, and thank you for joining our earnings call. I’m starting to get a cold, so if I lose my voice now and then, I’ll try to get it back.

I’m joined today by Myles Itkin, our CFO, Captain Bob Johnson, our head of Ship Operations, Jennifer Schlueter, who is head of Investor Relations and Corporate Communications, and you just heard from Jim Edelson, our General Counsel.

As Jim indicated, our remarks will follow the presentation which has been posted on our web site for the first time, so if you want we can turn right to slide 3.

The first quarter was another quarter of solid execution across all of our business segments. OSG continues to generate strong results and cash flows, demonstrating advantages of having a large, diverse, and modern quality fleet. Today, our fleet of 89 tankers is optimized to take advantage of the markets they trade in.

Going to the segment, 88 percent of our crude tankers operate in the spot market, while 83 percent of our product carriers operate on time charters, and 78 percent of our U.S. vessels and international dry-dock carriers operate on time charters. This diversification of our fleet enables shareholders to participate in the up side of crude rate, as well as having predictable book of time charter business, business which generated 28 percent of TCE revenue in this quarter.

Now, let me elaborate a bit more on our trading strategies for our tankers, because we get a lot of questions on this. All of the historical research we have done shows that trading [BLCCs] in the spot market is the way to maximize earnings over time, that’s when you look back one year, three years, five years. The BLCC earnings can go as low as $15,000 a day but they can also rise to over $200,000 a day. BLCC can [earn as much] as product tankers when things are bad, but product tankers can never earn as much as BLCCs when things are good.

Now, in addition, there’s a much more active time charter market for product tankers, so there are periods of time such as when the, such as the hurricane season last year when you can fix product tankers well in excess of average trend lines. Attractive BLCC time charters, on the other hand, have been few and far between.

This is why it makes sense for us to maintain a higher exposure to the spot market with our big crude tankers and have more of our smaller ships on time charter. And I think, as all of you are aware, we have the balance sheet to pursue this trading strategy and all the [containers on spot], and feel comfortable with it.

OSG has the platform for continued expansion. We have long-term established relationships with major global customers and business partners. We have a high quality, modern fleet, and experienced management team in place and are the premiere brand in the industry. OSG is poised to continue to exceed exceptional results.

I’d like you to now turn to slide 4. Now, quickly, talking to the financial performance, and I think you’ve read some of it this morning. TCE revenues were $280.1 million, a record first quarter, up 5 percent YOY. Of that, crude revenues were 207 percent, up 3 percent YOY, product revenues were $54 million up 36 percent, and U.S. revenue was $13 million, down 34 quarter over quarter. Declining U.S. [segments] was a result of decline in revenue days in the same period last year.

EBITDA for the first quarter was a healthy 180 million. Net income was 128.4 million, and EPS $3.24 per share. The first quarter was one of the three best performing quarters in the history of OSG.

Turning to the balance sheet, cash and cash equivalents including a tax affected capital construction fund was 368 million at the end of the quarter. We had total assets of $3.13 billion, and liquidity of $1.8 billion.

Liquidity adjusted debt to capital was 19.5 at the end of the quarter, an improvement from 24.5 at yearend. And net cash from operations increased 55 million in the quarter to 152 million. You may recall that in last year’s first quarter we paid taxes for the prior year, that was not the case this year.

Shareholders equity was up just over 2 billion, up 7 percent from 1.9 billion at yearend. This 2 billion in shareholders equity equates to a 35 percent compounded annual growth rate over the least eight quarters.

This consistent financial performance of OSG underscores the fact that fleet expansion and diversification, active asset management, and a focus on growth is working and delivering return to our shareholders.

Now, let me turn to some of our expansion plans and how we continue, how we will continue to build future long-term shareholder value. And if you turn quickly to slide 5. In March we announced a new building contract for four 44-meter beam Aframaxes. These tankers are the new common structural rules compliant, the rules that came into affect April 1st, and were built in China at the New York Time Jinjiang shipyard.

Delivery of the first tanker is in August 2008, the next two in December 2008, and the final tanker in May 2009. These 44-meter beam ships are faster, more desirable, and more beneficial to OSG in the Aframax international pool. When we get these first ships we will have 10 44-meter beam Aframaxes in our fleet.

Also in March, we announced the charter in of two product carriers from [Cego Tanker Company.] Credit terms are for seven years with extension options. The tankers are being built at Hyundai Mipo in Korea, and are expected to be delivered in May and June of 2008.

On the U.S. tank side, we now have 60 percent of the 10 Jones Act tankers being built at the Aker Yard in Philadelphia chartered out on medium and long-term commitments with Tesoro, BP, and Shell. Delivery is on track, beginning late fall of 2006 for the first ship.

In addition, our fleet expansion [inaudible] program includes chartering in four product areas from [Paracruse] shipping with a term of 10 years. The tankers are being built in Korea with delivery expected to begin late this year and into mid-2007.

Finally, our LNG carriers are under construction at the Hyundai Industries and [inaudible] shipyards in Korea. Delivery expected in the fourth quarter of 2007 and two in the first quarter of 2008.

Our [inaudible] OSG’s capital efficient new build program has gone from four [gas] carriers at the end of 2004 to 24 vessels across each of our operating segments today. And the most rewarding part of this is that we are already setting up attractive business with some of our big clients for some of these new buildings.

Turning now to slide 6, our new building program, existing operating fleet, and access to additional tankers through participation in three commercial pools gives OSG the scale that our customers want. Scale also means that we have more and better market information throughout to optimize our fleet.

In addition to the scale we have, the quality of our ships matters to the oil majors, to our clients, whose [inaudible] requirements are tougher than regulatory mandates. That is why we spend more money on maintenance and technical operations to ensure our young, double hulk fleet remains one of the best in the industry, and we will continue to do so.

Turn to page 7, with the credit carrier fleet expansion in the last year we’ve been able to significantly enhance the fixed revenue portion of our business. At the end of March, we had just under 850 million of future locked in revenue, up 100 million from 736 million at yearend. This increase represents six new contracts in the past quarter. And keep in mind, these numbers exclude future revenues from the LNG carriers, and each charter extension options, and any time charters of ships that trade in the AI pool.

Turning to page 8, I’d like to just mention a few Corporate highlights. On April 1st, Jean Paul Vettier joined OSG’s Board. Jean Paul is in charge of all the downstream and trading operations at [inaudible], and retired upon reaching the mandatory retirement age from [inaudible]. He brings 15 years of experience of [inaudible], knowledge experience of the oil industry broadly, and experience in operating a large multinational company. He will be the twelfth independent Director on a Board of 13, I am the only insider.

We announced OSG’s intention to increase the dividend last quarter. This was effective April 12th, and this is based on the Board’s confidence in the long-term outlook and future for the Company. The dividend increased at that time 43 percent to $0.25 per share.

Additional, FLOPEC, a state owned [inaudible] oil company, joined Panamax International [inaudible] adding five tankers to the commercial pool. Panamax International now has preference cargoes coming out of cargo with this fleet of 20 double hull Panamax tankers.

Other OSG efforts that are noteworthy, OSG rejoined INTERTANKO, an association of independent tanker owners, committed to the highest standards of safety, quality, and environmental [inaudible] in the shipping industry. Captain Bob Johnson will be going on the Executive Council of INTERTANKO, and OSG intends to be an active member, providing leadership in the operational and technical issues that confront both the industry and our Company.

Similarly, Eric Smith, who was named the head of OSG’s U.S. Flag Strategic Business Unit this morning, has joined the Board of Directors of the Maritime Cabotage Task Force. The Maritime Cabotage Task Force is represented by a diverse group of business across the industry in order to promote and protect the U.S. Maritime Cabot laws, but most important to us the Jones Act. So, we are getting active in some of the big industry forums.

Let me shift gears now and go to the market outlook. In 2006 we forecasted the rate environment would be slightly below 2005 levels, and so far that has been the case. The increase in OPEC production in the Middle East combined with the increased long haul movements from Africa to China and a tight supply/demand balance in both producing and refining [inaudible] forecast of 2006. And although we have not changed it in any way since then.

We expect a very tight gasoline market in the U.S. resulting from changes in production specifications which is both supportive of crude and product movement and rate. Recent geopolitical events in Nigeria, [inaudible], and Iran also support rates. We expect, in fact, 2006 product demand to be stronger than 2005, particularly as China and the U.S. demand increases for long haul product carrier rates. All of this, of course, is offset by increased tonnage which will temper any dramatic rate increases.

If you turn to page 11, I won’t go through the whole slide, but just point out that in the first three months of 2006 refinery utilization in the U.S. was well below where it was in 2004 and 2005. We expect this to pick-up in the course of the second quarter and then towards the end of the year. And that will also have a positive affect upon rates.

Turning to page, slide 12, and this is very simply going through our basic long-term freight forecast, we expect demand growth to be at or above current levels albeit dependent upon energy costs and government subsidy programs for oil and gas in a number of countries. Supply growth will come primarily from OPEC after 2006, resulting in longer haul voyages. Product demand growth will exceed refining capacity increases worldwide, and we anticipate longer haul product voyages will be required.

And, finally, you have to put in this whole mix customers getting more and more demanding and having a greater emphasis on operating with quality owners with quality ships, something OSG ascribes to be.

This will conclude my introductory remarks. Let me now turn the call over to Myles Itkin, who will review the quarter in a bit more detail, as well as the second quarter rate outlook.

Good morning. How are you?

If I could ask you to turn to slide 14, please. For the quarter time charter [prevalent] revenues totaled 280 million in comparison with the prior year’s quarter of 267 million, reflecting only a marginal increase of 70 days revenue base to 7,200 days, although a greater shift in revenue day composition.

International flag product carrier days increased by 340 days to a total of 2,600 days, as U.S. flag days increased by 340 days to approximately 515 days, reflecting the 2005 sales of three older U.S. flag crew carriers and the scheduled dry-dockings of three U.S. flag vessels.

Average time charter equipment rates, a blend of spots and time charter rates, evidenced improvement quarter over prior year’s quarter across all vessel types, and with the exception of the BLCC rates, which were approximately 5 percent less at 78,600 per day.

Now, time charter equipment earnings for the quarter not only materially exceeded their respective five-year averages, but also exceeded the lofty levels achieved in Q4 2005, in all vessel categories other than Aframaxes, where there were only 2 percent lower.

Operating income in the year’s first quarter totaled 136 million, this compares with 176 million in the prior year’s quarter. Please note, however, that beginning this quarter we include results from disposal of vessels and ship operating expense. The first quarter of 2005 included a $13 million gain on disposal of vessels, versus only $100,000 in Q1, 2006, thereby accounting for about one-third of the difference in quarter over quarter operating income.

For the three months ended March 31st crude tankers represented 74 percent of revenue and 84 percent of operating income. Product carriers, 19 percent of revenue and 13 percent of operating income. And U.S. flag carriers, 5 percent of revenue and 2 percent of operating income, this, however, excludes the three MSP reflag product carriers.

The increasing contribution of international flag product carriers to total revenue and operating income reflects the continuing diversification benefit in the acquisition of Somar. It is worth noting that the U.S. flag contribution to revenue and operating income will begin increasing the delivery of our 10 U.S. flag Jones Act product carriers, beginning in the fourth quarter of this year.

During the quarter, TCE earnings reflected 100 percent spot exposure for BLCCs, 76 percent for Aframaxes, 42 percent for crude Panamaxes, and 22 percent for product carriers. We estimate that in the third and fourth quarter of this year, spot days recruit Panamaxes will increase to 45 and 50 percent, respectively, and spot days for product carriers will increase to 29 and 33 percent, respectively.

If you just flip to slide 15, please. Strong top line performance appears to be somewhat offset by higher expense ratios relative to the prior year’s first quarter. The first quarter of 2005, however, reflects results prior to the termination of certain of the Company’s joint ventures, with the including of the double hull tankers IPO and the sales leaseback transactions with six other vessels, four Aframaxes and two Panamaxes that resulted in meaningful shifts in expense and other line item categories, making the more relevant comparison of expenses between the first quarter of 2006 and the fourth quarter of 2005.

Our vessel increases under that comparison increased by 2.5 million. 700,000 of which was attributable to [type repair] on a Panamax crude carrier, and an additional 700,000 of contaminated bunkers in one of the re-flagged product carriers. The balance primarily reflects the timing differences applicable to [DHP], with management fees exceeding expenses in Q4 2005, and expenses exceeding fees in Q1 2006, so a timing difference.

Time and [charter hire] expense increased by 1.1 million with charter hire expenses relating to DHP increasing by 2.1 million quarter over quarter, and Q1 2006 constituted a full quarter’s higher than Q4 2005 partial quarters higher. The DHP increase was partially offset by reduced higher expense on two vessels on which charter hire expenses calculated on indices rather than specific earnings.

G&A decreased by 10.6 million, and you will recall Q4 2005 included a 5.6 million non cash charge related to the termination of OSG’s U.S. shore based defined benefit plans. The fourth quarter of ’05 also included recognition of a full year’s cash incentive compensation, totaling 11 million, in contrast with 2006 during which cash incentive compensation is being accrued on a quarterly basis, 3.4 million recognized in 2006’s first quarter.

Equity and income affiliated companies decreased $4.8 million. $3.8 million of this decline related to the fourth quarter sale of our 30 percent interest in the BLCC. The balance of the change relates to a decline of 1.8 million in our share of incentive hire recognized by ATC, which typically recognizes the highest level of incentive hire in the fourth quarter of the year, since certain performance standards are annual.

Interest expense increased by 4.2 million. If we exclude a onetime 4.8 million non cash write-off taken in the first quarter of 2006 it can actually terminating our prior long-term credit facilities, interest expense actually declined by $600,000.

About some questions earlier in the morning, our tax credit of 5.2 million in the first quarter is nonrecurring. This was principally attributable to lower results from U.S. flag vessels, including the accrual of targeted cash incentive awards and higher domestic interest expense including that 4.8 million write-off of preferred finance [inaudible].

Now, as of March 31st working capital for the Firm stood at 265 million, total assets at 3.3 billion, shareholders equity in excess of 2 billion, and liquidity of 1.75 billion. During the quarter cash adjusted debt decreased by approximately 125 million and liquidity adjusted debt capital declined to approximately 20 percent.

If I could just ask you to flip to slide 16, for the second quarter of 2006, as of April 21st 68 percent of our spot BLCC days were fixed at $49,000 per day, 23 percent of our spot Aframax’ days at 29,000 a day, 12 percent of our spot crude Panamax days at 30,500 a day. And 40 percent of our spot [inaudible] days at 27,500 per day. Now, charter days by sector are included within the press release.

During last quarter’s conference call we provided some forward-looking guidance for certain expense categories. We indicated that G&A in 2006 would reflect quarterly accrual for incentive compensation, resulting in an estimated G&A of 22 million in Q1.

Now, although we came in 2 million higher in Q1, G&A based primarily on professional service and consulting fees, we continue to believe that the rest of the year will come in as forecasted: Q2, 20 million, Q3, 18 million, Q4, 18 million G&A expenses Our estimate for full year 2006 [inaudible] charter higher and expense holds at 150 million and D&A holds at 140 million.

Just quickly flipping to slide 17, spot rates have softened during the quarter, we remain sanguine for full year 2006. Increasing levels of locked in revenue, reasonable expense certainty, and the limited capital expenditures of less than 12 million for dry-docks and 46 million for progress payments on four new buildings during Q2 though Q4 of 2006, should provide for substantial free cash flow from operations and render 2006 the third consecutive exceptional year for OSG.

Our new building program consisting of 24 vessels, 10 of which have already been committed under long-term charters, provides for continuing profitable growth, reaffirming OSG’s market leadership position in each of the sectors and creating future value for shareholders.

Before we open the call up to questions, I’d just like to extend another invitation to those of you haven’t already responded to our Institutional Investor event on May 18th. The event will be hosted in Philadelphia and will include Management presentations, as well as a tour of the Aker Philadelphia Shipyard where our Jones Act product tankers are being built. We hope as many of you can join as possible. We look forward to your attendance, and ask that you feel free to contact Jennifer Schlueter at 212-578-1634.

At this point, we’d like to open it up for questions. Thanks very much for listening.

[OPERATOR INSTRUCTIONS.]

Our first question is coming from John Chappell with JP Morgan.

Good morning, guys. Morton, my first question is for you, unless [Matt] is around, I don’t remember hearing his name. Regarding the tankers, international, and how you’re accounting for revenue and the pool points there, the last two quarters, previous to this one, your BLCC rates were very similar to those posted by yearend of about $1,000 difference. This quarter the spread had widened significantly. Does that have something to do with the double hull tankers profit sharing? Or is there something else involved? Maybe you booked some ships earlier?

I think I’d have to go back – I think what we should go offline. I think I need to understand correctly your note supporting it, because the only difference will be with the fleet composition, but [inaudible] the same as ours, but I’d have to give you a detailed breakdown on that. Can we do it offline, if we can?

Yes, absolutely. Another question regarding the U.S. flag, I don’t know if this is better for Morton or Myles. Is there any way to quantify the quarter over quarter impact from the sale to the vessels versus the dry-dock? In essence, I’m just trying to get a better run rate for the revenue for the U.S. flag before the new charter ships start to hit in the 4 QSX?

You know what I think we’ll do, Jonathan, is we’ll just – I think we can provide insight into those numbers. We’ll use something more generally, probably in the next call or at the Investors Day Conference.

Okay, and then one last thing, and I’ll turn it over. Myles, you gave great detail on the OpEx items, other than vessel OpEx per day. The last quarter you had given a run rate of 45 to 46 million per quarter. Once you came in slightly higher than that. Is this the same type thing, do we look for that same 45 to 46 going forward?

45 to 46, there were a couple of exceptional items, one is really associated with the re-flagged MSP vessels, and the other that dealt with a Panamax vessel, anticipated nonrecurring.

Okay. Thanks, Morton and Myles.

Thank you. Our next question is coming from [Doug Mavernax] with Jefferies & Company. Please go ahead.

Great, thank you. Good morning. Just had a quick question regarding your strategy of owning your vessels or expanding through ownership versus expanding through chartered in vessels. I notice that over the past year your percentage of owned vessels has declined from about 69 percent at the end of the first quarter of ’05 to 56 percent at the end of the first quarter of ’06.

I was just wondering, with that in mind, the recent new building orders that you guys have placed for the four Aframaxes, is that a change in that strategy or would that be more of an opportunistic acquisition opportunity?

It’s a good question. The way we approach it is that we look at all the market, the time charter market, the secondhand market, the new building market, and what I call more the financial market, the KG market, the Norwegian KS market, and we are constantly getting ideas and feedback from that market. And we look at where ships can be controlled or acquired the cheapest.

During the summer of 2005 the long-term time charters from product tankers, MRs, were significantly cheaper than either contracting new or buying secondhand. That’s the arbitrage. We have the same expectation of earnings regardless of the way we own them.

We also look where we can get optionality to make optionality with the ships, so if you look at the U.S. flag we have the ability to, the first flag ships we owned, we controlled for seven years but we have options to control those ships for their entire useful lives.

If you look at the Aframax tankers in China the secondhand market for 44-meter beam ships today, you can check the [inaudible] is 75, 76 million. We contracted those for 58 million in delivery in 2008.

And what we’ve also said is we would consider selling one or two of the older ships, the 12 to 14-year-old ships, for which you can get rates somewhere in the 35 to 45 million today.

So, you look at it, the most expensive ship is your ship you buy today, secondhand, this is a new design for the yard. We will get a price that we deem attractive. And at the same time, the secondhand market is not differentiating between the age of ships today, so the ability to dispose of some of the ships at attractive levels is there and it isn’t.

But we are constantly monitoring these markets, and so you’ll continue to see us jumping between new builds, time charters, spare boats. The other thing I would say is we have preference for operating the ships ourselves as opposed to time charter [inaudible], the answer is yes, but all things being equal we would rather operate the ships ourselves.

So, ownership of [inaudible] is preferred, but when the financial ownership costs so much less for time charter we’re going to do that. And lots of times one of the reasons we keep a very strong balance sheet is that other owners are comfortable time chartering ships for us for seven, eight, 10 years, and that can actually [inaudible] many shipping companies [inaudible] other owners of time charter ships for them.

Great. Thank you for that explanation. That actually leads into my next question is, you know, with your available liquidity of about 1.8 billion, debt adjusted equity cap, debt to capital of around 20 percent can you share with us kind of some of your thought process of how much or what your optimal capital structure is going forward? And, also, you know, in terms of sort of your thought process and the strategy behind expanding your fleet versus doing one-off things like a share repurchase program or something like that?

There are a couple of things. We addressed the debt-to-capital ratio at close to 20 percent is at a level that probably should be modified for some value given to our chartering portfolio, and with our chartering in the 44 percent of our tonnage today it really affords a ‘comfortable’ spot for us to be in.

We continuously reevaluate cash distribution to shareholders, either in the form of dividends and have increased our dividend and evaluate share repurchase program in light of the investment options that we have facing us today. Unlike most of our international competition we have some unique opportunities within the U.S. protective markets, and at this moment still find those investment opportunities as, if not more attractive, than a distribution to shareholders. But it is something that’s continuously looked at and reevaluated.

Great, thanks very much. That’s all I had.

Thank you. Our next question is coming from [Philip Lanier] with Banc of America Securities. Please go ahead.

Yes, good morning. Just a side question on the oil market, with the oil price such [inaudible] seems to have very strong desire [inaudible] oil in the U.S. and overseas, are you guys seeing any bids for tankers as storage vessels in order to store additional oil?

You know, I wouldn’t say anything firm yet, but it’s interesting, for some of the bigger [inaudible] BLCCs, or [inaudible] projects where people require modern double hull sized BLCCs we’ve started to increase in that area. And we’ve even gotten increase on the big ships, the 442,000 [OSM] ships.

But we’re hearing things, it’s nothing firm. I think you’re seeing an awful lot of scrambling going on all over the globe on how they’re going to deal with projects, and I think that we’ll be surprised by the number of tankers that actually end up in some of these projects.

Great. And then a second question, you had indicated in your presentation about a potential positive for the shipping market related to disturbances in Iran. Could you elaborate how that could play-out as a positive?

Yes, I think it depends on your view of the capacity of Saudi to increase their oil production. But if, in fact, they have 1.5 million to 2 million of excess capacity that’s long haul crude that is going to get moved.

I think, also, what you said about the need for storage capacity, you already have higher inventory building now because of the concerns that are in the market, and we would except and if you can remember this time last year during the hurricane period, that’s [inaudible] storage in Aframaxes, in the U.S. Gulf and other places.

So with the supply as constrained as it is inventory buildup and storage will become more relevant, and Saudi will have to play its role as a swing provider.

Okay, great. Thank you very much.

Thank you. Our next question is coming from [John Cartisones] with Citigroup. Please go ahead.

Hi, good morning. I guess a couple of questions. First of all, on what you discussed previously about time charter vessels, freight [acquiring] vessels, can you give us a little bit more color on the speed of transaction, maybe discuss a little bit…

John, I’m sorry, the system is having you come in in a way that we can’t hear you. Could I just ask you to speak-up?

Yes, I’m talking about the speed of transaction that you did, the two time charters, I assume they are, for the seven years. Where is that because of specific requirements that you have from your clients or was it more of a speculative deal?

No, I think the way we approach ownership, whether it be owning, contracting, time chartering, is we, something we have to do on a monthly basis, look at the short-term markets and long-term markets. And we have projections of what we think we can reasonably expect to earn with [inaudible].

Now, if we contract it, [inaudible] buy it secondhand today for 50 million, we would still expect to earn the same with it. The ships that we took on on time charter, where we took the [inaudible] as they came. One, they are high quality ships being built in a high quality yard and, two, they are coming at levels that we were comfortable with our long-time projections, we’d be able to make profits with them. And, in fact, when we look at the rates we took them in, they were significantly higher in the last five year’s average rate, for example.

I see. I guess a little bit different question, on the rates that you reported for [inaudible] so far this quarter, the Aframax is a little bit lower. I mean you have booked so far, you say 23 percent, is there something going on there? I mean why that product is so high, you have booked already 40 percent and in the Aframax only 23 percent?

Is that the percentage of spot days, right?

Yes.

And there were fewer spot days for product carriers constituting a larger percentage of the total available days. Is your question days or rate levels?

No, the days, actually, the actual days. I would assume that by now you would have booked at least close to 40, 45 percent for the Aframaxes?

We have approximately 20 percent of our Aframax portfolio already on time charter, and as of April 21st which is now about 10 days, it was at 23 percent.

Okay. And, lastly, do you have any updates on the investigation? I saw that you had something on G&A on the Department of Justice investigation? Is there any update there or any…?

With respect to the investigation, OSG continues to fully cooperate with DOJ. As of last week, Chief Engineer of one of our vessels was individually indicted for alleged record keeping violations. OSG, this was violations that were afforded by OSG to the Government, and, as far as the Company’s continuing cooperation with the investigation. But, otherwise, no change.

Okay, thank you very much.

Thank you. Our next question is coming from Terese Fabian with Sidoti & Company. Please go ahead.

Hello, good morning. I know that you’ll be talking more about the Jones Act fleet at the Investor Day, but can you talk a little bit about how the low refinery utilization levels in the U.S. affected rates in this sector?

Well, in fact, we’re waiting to see, but spot rates in the first quarter this year for Jones Act tankers were soft. It was not a terrific quarter, and [inaudible] we believe was higher than what we would have forecasted. It hasn’t impacted us materially but others have, so I’m curious to see how other people report.

Right.

And, of course, as it relates to the 10 Jones Act product carriers on forward commission, those are for literally beginning the end of this year and have been committed for at rate levels that well exceed the prevailing rate level today.

The other thing I would say about it is a double hulled Jones Act product tanker is going to get employment before a single hulled Jones and flag tank, almost 99 percent of the time. It’s the same thing you’re seeing with double hulled BLCCs, matched head to head with a single, the double always is chosen first.

And you think that will hold across in the U.S. market?

I think it’ll hold across all segments across the globe, particularly in the U.S. market. At least that’s what our clients are telling us, and that's what we see the market.

Okay, that’s how it seems here, also. A question on your product tankers, I think you had said before that those coming off of the lower rate time charter contract that Delmar had would be trading on spot, is that still going to be happening?

Yes, there’s a little – you know, we did modify that a little bit because of the – in the Autumn last year when time charter rates spiked after Katrina, Rita, we did go out and enter into some longer term time charter contracts, primarily because rates went above our forecast long-term rates. And we have a number of ships coming off charter this year in the course of the summer, so we’re actually well positioned for the third and the fourth quarter without more spot exposure.

However, if there is another spike in the market because of another hurricane season in the U.S. we will respond to that, but the intention is to have a bigger spot portfolio of modern double hull [vessels] in the third and fourth quarter, and we will.

Okay. And then just one last question. You seem relatively sanguine about spot rates in terms of the crude oil carriers, the crude oil tankers, and it looks to me like so far your BLCC spot rates are trending above the average on [Clarkson]. I mean I’m getting like $44,000 or something average on Clarkson doing four weeks prior booking at 100 percent utilization. And you’re reporting 49,000 for what you’ve booked so far. Can you talk about that a little?

Thank you for asking. One of the things that I’ve been repeating across the globe in virtually every investor meeting I have is that over time you’re going to get differentiation between double hulls and single hulls. Double hulls will, single hulls will wait longer and they will lose on rate. And that differentiation continues.

In addition, through TI we have some large contracts, notably contracts out of West Africa, so we have more ships coming out of that loading area than others. And it’s really the benefits of having a large fleet of 47 BLCCs. Your ability to know what’s going on around the place has advantages.

But the real disadvantage to [inaudible] so you can get the flip side of that, if the market is really, really hot and you have a lot of contracts coverage other routers without contracts, which is most, can say no to a client. When we have contracts, we can’t. So, what we have historically done at least as well as the market or not better, we will generally outperform the market more in the softer declining market than into a bull market.

That’s helpful. Thank yours

Thank you. Our next question is coming from [Scott Burke] with Bear Stearns. Please go ahead.

Good morning. How are you doing?

Great, Scott. How are you?

Good. Hey, just one question about how you guys choose between the two shipyard locations, between the Chinese shipyards and the South Korean yards? I notice that the vessels you’re picking up from the Korean yards are going to be coming on earlier than the Aframaxes from China. Just wondered if there’s differentiation there between when you can get vessels by yard and also difference in costs between…

Yes, I mean what we’ve tried to do is actually map out what we thought were building slots for us available in the major yards in China and Japan and Korea. And in Japan we basically concluded for OSG that we couldn’t get anything built there until 2010 today. And maybe we’d get lucky and push, but that’d be a general statement.

And in China it really varies from yard to yard, and in Korea the same way. Now, the Koreans have enormous efficiency and at times are able to through subcontracting create extra berth for ships. Not much, and so it’s really just figuring out who is available, who has berths, what’s the design, what’s the quality of the yard, what’s the price differentials, and then make a decision.

Okay.

We could not have gotten those Aframaxes in Korea, we do not believe, at the time and the price that we’re getting. In addition, none of the Korean yards were offering Aframaxes under the new common structural rules of [inaudible] contracting. They’re obviously shortly going to be doing that, but they weren’t then.

Okay. And you said because the Chinese, the Aframaxes are a new type of construction that you’ll get a discount for that reason?

No, the – whenever a yard launches a new series of ships, this yard has built about, [inaudible] tankers. This is going to be their first Aframax series. So, whether you’re a Chinese yard, Korean yard, or a Japanese yard, when you’re coming out with a new series you tend to be a little bit more aggressive on price. The International Association of Ship Classification Societies has come out with new standard of steel, common standards for steel and [inaudible] carriers and tankers of certain size.

As of April 1st.

This ship’s classification will include those new standards. It is believed that that will add somewhere between 3 and 5 percent for cost per ship, and that’s what I call sort of a market consensus number. And most of the ordering is going to Korea prior to April 1st was under the old rules without the new common structural rules and requirements.

Does that answer your question or?

I was actually asking more about the, I knew about the new structural rules, I was asking more about the new series, I guess is what you’d call it, so, okay, thank you very much.

Thank you. Our next question is coming from Ruairidh Stewart with Simmons & Company. Please go ahead.

Yes, thanks. And a couple of supplementals to your prior questions, just more broadly with regard to placing orders with Chinese yards and you alluded to a comment about a new series so perhaps a little bit untested for the specific yard, but also with the new [inaudible] using and more generally in China, what do you think the appropriate discount is for just the risk or the relatively new capacity that’s in China?

I’d say right now that there’s very little difference in price between the modern Chinese yard, but they’ve invested in state of the art technology and design. The yard we’re going to have build 40 Panamax tankers are foreign owners. We spoke to all of those foreign owners and asked them their satisfaction with them.

While there may be some discount now it’s really small, and I toured the U.S. yards as did [inaudible] of our New Building Department, as did [Max Bergland], and these are very impressive high quality yards. It helped also that our partner in TI has built a number of vessels in China, [Yuronav].

So, we’re very comfortable with the quality that you’re going to be getting there, and the Chinese have managed to narrow the gap with the Koreans and the Japanese very quickly. But you’ll be amazed if you go to the yards there of the quality you’ll find.

Okay. And just, you know, you mentioned the difference in quality is quite narrow. I guess I’ve been struck by there actually being a relatively meaningful difference in price, and a relatively high proportion of orders made in the first couple of months this year, have been placed with Chinese yards. You know, maybe 10, 15 percent discount levels.

I just wondered if you would disagree with that, particularly given your own order experience which seemed to be below the market? And then how does that jive with your broader statement that new build prices would be staying relatively strong in your market overview section?

Well, I think you have to – again, you’ve got to look at the design, and [inaudible] might be a generalization but on BLCCs, my guess is you’re probably talking about the orders that [Front Line] placed for about 106 million or 104 million, that was for a 297,000 deadweight ton ship, old design.

Whereas, if you look at our ships or the ships that we have now ordered, [inaudible] 318,000, more sophisticated ships. A lot of the difference you’re talking about is right there, the difference in the design in the ship, itself. These ships that -- some of the smaller Aframaxes that are being built in the same yards, they’re 105,000 deadweight ton ships, they’re too small, they wouldn’t fit our contract portfolio. Less carry capacity and they would erode [inaudible] as a result of that. You really have to differentiate between the ship type, whether there’s new common rules or not, and when the delivery dates are.

Okay, fair enough. And then to the [inaudible] product question, I had a supplemental. The BLCC rate and 49,000 up until the third week in April [inaudible], and which I’m guessing is probably above general expectations. I was just wondering what the more recent trades have been at over the last couple of weeks, and whether you’re comfortable that, you know, broadly speaking give or take 5,000 or so, that’s where you’re going to end up for the entire quarter and [inaudible]?

I don’t want to speculate on that right now, but I think you can look at that number, the April 21st, because of such long voyages, it actually takes a fair amount of [inaudible] days in that number. If you just look at the actual percentage of spot days left in the BLCCs, it’s significantly less than the Aframaxes. Because the Aframaxes, and actually an earlier question on the [inaudible] tankers, they tend to [inaudible] routes, particularly if you’re [inaudible], for example. So, you’re going to have lot shorter voyages.

I mean it’s just under 70, 68 percent of the BLCC days are fixed through April 21st. So, that provides you with a degree of comfort. The other thing is there have been bifurcated earnings levels between the West Africa to Asia trades and other trades, and we do have substantial contracts in West Africa and Asia.

Okay, very good. Thanks.

We do expect to outperform the market on a regular basis in all our segments, and that’s what we’re striving to do.

Thank you. Our next question is coming from [Omar Notsa] with [Solomon Rose]. Please go ahead.

Hi, good morning, gentlemen. You spoke briefly about the [SBSO] business and your doubts in some market players’ expectations. Do you see OSG at all expanding into the services sector, whether it’s SBSOs or FSOs, shuttle tankers or heavy lifters?

I think we’ve been pretty public, on the U.S. side we are looking at Jones Act shuttle tankers. We believe because of the problems you had with the pipeline out of the U.S. Gulf the last couple of years, which was the real problem for the crude production falloffs, there’ll be need for some tankers. A number of our important clients have pushed us in that direction. And we are working on technical solutions now. SBSOs and FSOs would be fairly natural areas for us to extend into, and we are considering them but there’s nothing imminent right now.

There’s a lot of things, we’ve had quite a lot of shift in the [linering] business historically. That’s a business we understand. So, those things that are close to what we are doing today are things that we would opportunistically expand into. But the [inaudible] tankers in the U.S. Gulf, Jones Act, we’re very serious. If we can get the right design, right solution, right price, we’ll have a strong appetite for that.

Got you. Well, thanks, thank you very much.

Thank you. Our next question is coming from [Ken Sabario] with Wachovia Securities.

Hey, guys. It’s actually [Justin Mia], how are you doing?

Hi, Justin. How are you?

I’m good. I just two kind of bigger picture questions. The first is there’s been rumblings I guess at different times about the EU and different antitrust organizations looking into the pool structure in general. I was wondering if anything had materialized in the last few months over that? And I think I spotted an article at one point, so if you could comment on that, and I have another question after that?

To date they’re still considering what to do about the exemption for [inaudible] fair trading, but there’s nothing definitive that has come out on that at this point in time. They’re still examining it and considering the issue.

Okay, thanks. I would imagine given the state of the trade right now would be a hard time to disrupt anything more.

Another question I guess I had was given the rules going into effect in the U.S. I guess with refineries and [inaudible] for diesel, I was wondering if you guys could give me any color on what you’re seeing in your U.S. trade on that? And maybe how that affects global product trade, as well, as you bring diesel to and from the U.S.?

We see very little of it to date. There have been a number of our customers that are talking about it, but we haven’t seen a great shift in the market yet as of now. But it is coming.

Are there issues with contamination and that kind of thing, as you have to deal with a certain grade of diesel and delivery? I mean what are your requirements or I guess your charterers’ requirements when they look at vessels and figure out whether or not they’re useable? I know that there’s been speculation that some of the pipelines might be too contaminated to move that diesel around the country?

Well, pipelines I can’t address, but certainly on the shipping, you know, we carry mostly grades in some of the ships right now, and there’s no difference on that diesel, grades, there’s different grades of gasoline we carry today.

Okay, that’s fair enough. Thank you. I appreciate it.

[OPERATOR INSTRUCTIONS.]

There appear to be no further questions at this time. I’ll turn the floor back over to you for any further or closing remarks.

Well, thank you, once again, for joining this call today. And we were very happy with the quarter. We think we continue to execute our growth strategies, the same one we laid-out for you two years ago, and we’ll continue to talk about it.

I just want to reiterate Myles’ invitation. We hope to see as many of you as possible in Philadelphia, where we will provide you with an in-depth look of each of our operating units, and you’ll also get a chance to tour a shipyard and see what a product tanker looks like when it’s under construction. Jones Act product tanker, which actually looks a lot like a lot like a foreign flat product tanker, just for the record. I think you’ll enjoy that, and hope you all can make it. Thank you, again.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time, and have a wonderful day.