Octave Specialty Group Inc (OSG) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Carley, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Overseas Shipholding Group Third Quarter 2006 Earnings Results Conference Call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Mr. James Edelson, General Counsel. The floor is yours.

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, the likelihood of closing the acquisition of Maritrans, Inc., the integration of its operations with OSG's operations, estimated TCE rates achieved for the fourth quarter of 2006, anticipated levels of newbuilding and scrapping, projected dry-dock schedule, the projected growth of the world tanker fleet, and a forecast of world economic activity and world oil demand. Factors, risks and uncertainties that could cause the actual results to differ from the expectations reflected in these forward-looking statements are described in OSG's annual report on Form 10-K.

For this conference call, we have prepared and posted on OSG's Web site, supporting slides that supplement our prepared remarks. This supporting presentation can be viewed and downloaded from the Investor Relations Webcasts and Presentations section on OSG.com.

With that out of the way, I would like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?

Good morning and thank you for joining our earnings call today. Let me introduce the management team that are here with me. You already heard from Jim Edelson, our general counsel. Jennifer Schlueter, who is head of Investor Relations and Corporate Communications; we have Lois Zabrocky, who is head of our Product Tanker SBU; Captain Bob Johnston, head of Ship Operations; Mats Berglund, head of Crew Transportation SBU; and joining us from OSG Athens is Myles Itkin, our CFO.

As Jim indicated, we're going to follow the presentation that's on the Web site, so if you would please turn to slide 3.

The third quarter was another quarter of solid performance in each of our operating segments: Crude Transportation, Product Carriers, and U.S. Flag. The strong financial performance for the quarter and year-to-date demonstrates the OSG advantage of operating a modern, large-scale, high quality, diverse fleet. Some of the highlights.

Time charter equivalent revenues were $255 million, up 31% in the same period a year ago. Crude revenues increased by 42%, to $176 million quarter-over-quarter. Product revenues increased 25%, to $55 million, and U.S. Flag revenues were $19 million. EBITDA for the third quarter was $136 million, and net income $91 million.

Now, in our earnings release today, we announced a $27 million increase in reserve in connection with the ongoing Department of Justice investigation. As we disclosed to you previously in both conference calls and in our SEC filings, there have been ongoing discussions from the Department of Justice resulting from an investigation that began in 2003, which covered a number of vessels.

We are far enough along in settlement negotiations with the DOJ, but in accordance with U.S. GAAP, we are taking a $27 million charge in addition to the $10 million reserve previously taken. The $37 million reserve is associated with the previously disclosed investigation regarding the handling of waste oil and maintenance of books and records relating thereto of the company’s vessels and is not indicative of any new incidents outside of what we have previously disclosed. We continue to fully cooperate with DOJ with the goal of achieving a comprehensive settlement.

Let me turn back to OSG's year-to-date performance. For nine months, TCE revenues were $751 million, up 9% from the comparable period a year ago. EBITDA was $425 million, and net income was $279 million.

Turning to the balance sheet and cash flow statement, at quarter end, cash and cash equivalent including a tax-affected capital construction fund was just under $600 million. Total assets were $3.5 billion, liquidity was $2.3 billion, liquidity adjusted debt-to-capital was 9.7% at the end of the quarter, an improvement from 24.5% at year-end 2005.

Long-term debt was $799 million versus [$966] million at fiscal year 2005. Outstanding debt increased slightly from the second quarter due to the amendment of certain secured loans that provided for additional borrowings.

Shareholders' equity increased to more than $2.1 billion, and net cash from operations for the first nine months of 2006 were $310 million. Our consistent financial performance confirms the fact that our fleet expansion and diversification, active asset management, and a prudent focus on capital efficient growth is working and delivering returns to our shareholders. Please return to slide 4.

Rates achieved in the quarter were strong across all segments in both time and spot charter markets. This was the result of multiple factors that were both specific to the third quarter and representative of a fundamentally different market in which we operate in today compared to five, ten years ago.

Rates from the third quarter were in fact the highest third quarter rates we've seen thus far in this decade. Good rates benefited from increased in imports from China, we well as third quarter demand increase by over 7% [inaudible].

Panamax rates during the quarter benefited from the partial shutdown of BP's Alaskan North [inaudible] production that resulted in additional long and short haul crude movement as West Coast refineries source supplied from alternate sources.

In the tight shipping market, unforeseen markets like this has a positive effect on rates. As we said before, in the shipping market stuff happens.

Our Product Carrier fleet benefited from higher rates due to increases in voyages from the Continental U.S. to build inventory as a precaution against another active hurricane season, and from Long-Haul Trans-Pacific product movement as suppliers compensated for the possible oil shortage on the U.S. West Coast, the BP production shutdown talked about.

In general, 2006 tanker rates have been supported by changes in supply patterns that have created tonnage demand, and we've spoken about these in earlier conference calls. A significant change in supply has occurred as a result of Venezuela's decision to diversify its customer base. As you know, Venezuela has reduced export to the U.S. and is strengthening its ties with Asian refiners, especially in China. This change in the double benefit for shipping companies as was an increase in ton miles from Venezuela to Asia, and additional ton miles demand by U.S. refiners that must now source crude from West Africa to go to the Middle East, [inaudible] rates.

Steady decline in North Sea production has forced refineries in Europe and North America to source imports from West Africa or FSU, as well as additional from the AG. At the same time as these market events, we have been able to expand our contract portfolio to take advantage of this.

In TI, for example, we have secured additional contracts to carry crude oil into South Africa, which enhances our contract business coming out of West Africa into China. Again, it's the process of increasing the utilization of your fleet, the contract enabled us to do that.

At the same time, as we've said in the past [inaudible] call, the two-tier market continues to have a positive commercial impact on our oil crude fleet as the discrimination against single-hull tankers continues. Turn to slide 5.

OSG continues to actively manage our active portfolio ensuring optionality and flexibility for our controlled [inaudible] tonnage. We continue to be [inaudible] expansion and modernization tactics. We have been able to charter in a significant portion of our total tonnage, 48% in fact at quarter end. At very attractive rate because the strength of our brand, balance sheet and financial position. Through vessel arbitrage we sold older tonnage that is more expensive to operate, which partially offsets the purchase of newer, more cost-efficient tankers. We continue to sell older tonnage and take advantage of exceptionally strong secondhand market. Such transactions will generate proceeds in 2006 of approximately $260 million.

In July and August, we sold Pacific Sapphire and the Overseas Keymar. The Overseas Crown was sold and leased back for seven years. The sale of the Majestic Unity, which was delayed, is now expected to take place in the fourth quarter of 2006, and we expect to take a gain of $28 million from the sale of that vessel next quarter.

Further expansion of our Product Carrier Fleet continues reflecting the substantial number of modern vessels we have chartered in, in order to replace the existing charters of older, non-double hull vessels. We signed agreements with Capital Maritime to charter in three newbuilds, 50,000 dwt Handysize Product Carriers for 10 years. This brings our newbuild product carrier fleet to nine tankers scheduled for delivery between the second quarter of 2007 and the third quarter of 2009.

On the U.S. Flag fleet, 80% of our 10 ship Jones Act newbuild program has been committed to customers. This is all within 18 months of signing the initial newbuilding deal with Aker. The overseas use of the first of the 10 ship series, which will be christened next week in Philadelphia is set to be delivered in December. Please turn to slide 6.

The fixed revenue portion of our business represented 32% of TCE revenue in the quarter, reflecting OSG's balance growth strategy. At quarter-end, $900 million of future revenue was locked in, up $154 million from fiscal year-end 2005. The increase in the third quarter was largely a result of the two new Tesoro contracts signed in September.

I should point out that these numbers exclude future revenue from the LNG carriers, profit shares and charters, charter extension options, or vessels on time charter in the AI pool.

Let me turn now to our fleet expansion plans and how we continue to build future long-term shareholder value. Please turn to slide 7.

What I should point out before I go to the box is the picture above, where you have four Jones Act tankers being under construction at one time in one yard in the U.S. I think you have to look back many decades, perhaps back all the way to World War II before that happened, the last time that happened. So, we're very proud of that and now you see the Overseas Houston almost ready for delivery.

OSG's new building program now totals 27 vessels across each of our operating units today. Only four of these tankers are 100% owned; the rest are time or bareboat chartered in, or owned through a joint venture, which are not only capital efficient ways to grow our fleet, but importantly gives us optionality in the future.

By chartering in with extension options, we have walk-away options, we have purchase options that give us flexibility no matter what one believes about future tanker market conditions. If you look at the boxes, the grey-shaded boxes represent change from when we showed you in the chart last quarter. That is representing tankers that have delivered or new orders.

Finally, -- I think -- I just say enjoy the pictures of the four tankers, because those are proceeding on schedule. I think there was a lot of skepticism when we first announced it 18 months ago, and there they are. Please turn to slide 8.

On September 25, we announced that we had signed a merger agreement to acquire Maritrans, Inc., a leading U.S. Flag, crude oil and petroleum product shipping company that owns and operates one of the largest fleets of double-hull vessels serving the East Coast and the U.S. Gulf Coast trades. On October 16, we received early termination of the waiting period under the Hart-Scott-Rodino Antitrust Act. A meeting of shareholders of Maritrans to approve those transactions has been scheduled for Tuesday, November 28, and if approval is obtained, the closing is scheduled to occur on November 29, 2006. Please turn to slide 9.

Let me take a moment to recap why we are very excited about the transactions and establishing the leading position in Jones Act markets. I think you are aware we are acquiring Maritrans for $37.50 per share, total transaction value of $455 million. The acquisition will be immediately accretive to earnings without synergies, and because Maritrans has [ATBs] under construction that will be used in the lightering trade as a qualifying use for our capital construction funds.

Now, the benefit to the combination. This is, above all, a strategic transaction. A strategic fit was OSG's objective to become a market leader, the market leader in the U.S. Flag segment. We'll be able to offer additional services to customers, notably lightering business in the Delaware Bay serves the third largest refinery system.

There is almost no overlap of existing customers and we'll be serving all the four major domestic trade locations, and I believe we'll be the only company doing so. This gives us a superior platform for existing and future business growth opportunities. For example, shuttle tanker business in the deepwater gulf and additional lightering business. We're very excited about the Maritrans transaction.

That concludes my introductory remarks. Let me now turn the call over to Myles, who will review the quarter in much more detail. Myles?

Thank you, Morten. If I could ask you to turn to slide 11, please. For the quarter, time charter equivalent revenues increased by 31% to $255 million, in comparison with the prior year's quarter of $195 million. This represents an increase in daily TCE rates earned on the Company's crude and product carriers partially offset by a 600-day reduction in revenue days to an aggregate of 7300 days.

The reduction in revenue days was principally due to the 2005 sale of two U.S. Flag crude tankers at their respective over expiry dates, and the sale of three older Aframaxes, the Bravery, Keymar, and Pacific Sapphire, and an increase of 360 dry-dock and repair days.

Of the 600-day reduction in revenue days, crude tanker revenue days decreased by 375 days, to an aggregate of approximately 3850 days. The decrease was comprised of 195-day decrease in VLTC days, to about 1520 days; 160-day decrease in Aframax days to 1350 days; and a small decrease in Panamax days to 980 days.

Product Carrier days, which you will recall include the three U.S. Flag tankers that participate in the MSP program but trade internationally decreased 50 days to 2670 days. This was principally due to higher dry-docking and repair days, partially offset by the delivery of three time chartered in vessels, East Point Hercules and Orient, subsequent to last year's third quarter.

While Morten discussed strong third quarter rates in his remark, let me provide a little bit more detail and ask you to turn to slide 12, please.

Average TCE rates, blend of spot and time charter rates, evidence improvement quarter over prior year's quarter, across VLCCs, Aframax, Crude Panamax tankers, and Handysize Product carriers. VLCCs average $68,400 per day, in comparison to $34,700 per day in the prior year's quarter. This represents the highest third quarter rates in a decade and constitutes a 97% year-over-year improvement.

Aframax rates average $33,600 per day, in comparison to $25,000 per day in the prior year's quarter, a 34% year-over-year improvement.

Crude Panamaxes, $26,900 per day, in comparison to $24,100 per day in the prior year's quarter, and Handysize Product carriers, $21,200 per day in comparison to $17,200 per day in the prior year's quarter.

Average TCE rates were clean, trading Panamaxes were also higher than the same carrier last year at $18,300 per day. The time charter for these two clean Panamaxes provide a base rate plus profit share. When the charter subchartered these vessels in the spot market, the profit share was recognized on the charter anniversary date, which fell in the second quarter. Thus, the results for the third quarter of 2005 reflected no profit share.

In 2006, the charter placed these vessels in time charter for the balance of their charter periods ending in July 2009, fixing additional hire to us at $3400 per day per vessel. Please turn to slide 13.

For the three months ended September 30, crude tankers represented 69% to time charter equivalent revenues, and 83% of the segment's income from vessel ops adjusted to exclude the $27 million incremental charge with respect to the DOJ settlement. Product areas represented a 22% to time charter equivalent revenue, and 13% of adjusted income from vessel ops. And the U.S. fleet represented 7% of time charter equivalent revenue, and 3% of adjusted income per vessel ops. Please note again that the U.S. revenue excludes the 3 MSP Flag Product Carriers that are included in the Product Carrier segment.

Adjusted operating income in the third quarter totaled $122 million, compared with $85 million in the prior year's quarter, constituting a 43% year-over-year improvement.

Total ship operating expenses of $177 million, 149.9 net of the $27 million adjustment compares with the $168.8 million in 2006 second quarter. More relevant comparison than to ship operating expenses in the third quarter of 2005 of $120 million, which reflects results prior to concluding the double-hull tankers initial public offering and other portfolio management transactions that resulted in meaningful shifts in expense in other line item categories.

Accordingly, vessel expense of $52.3 million decreased by $1.6 million from second quarter 2006 levels. Note we had given guidance of $50 to $52 million and came in at approximately 52.3. Time in bareboat charter higher expenses were 46 million, an increase of 8 million quarter-over-quarter, principally due to the sales leaseback of the VLCC, the Overseas Crown in September. Higher profit-sharing on VLCCs, and the commencement of five charters in after April 1, one product carrier on a short-term basis, two product carrier new buildings, which delivered in August and September 2006, and two Aframaxes, in which the Company has a 30% participation.

G&A expenses were $20.9 million, a decrease of $2.2 million quarter-over-quarter. We gave guidance of $22 million and the positive variance was attributable to somewhat lower level of cost associated with the DOJ investigation.

Interest expense in the third quarter was $14.6 million, a decrease of $0.6 million quarter-over-quarter attributable to an increase in interest capitalized in connection with vessels under construction.

There was tax credit of $3.8 million in the period. The Company made an election in September 2006, at the time of its filing of the 2005 U.S. tax return under the Jobs Creation Act effective for years commencing with 2005, to have qualifying U.S. Flag operations taxed under a new tonnage tax regime rather than the U.S. corporate income tax regime. As a result of that election, OSG's taxable income for U.S. income tax purposes with respect to eligible U.S. Flag vessels will not include income from qualifying shipping activities in the U.S. foreign trade.

The Company recorded a reduction in its deferred tax provision of $3.5 million in the third quarter, attributable to deferred tax liabilities that will no longer be reversed.

For an overview on metrics, net profit margin for the year-to-date 2006 was 37%, and 35.6% for the third quarter. The return on average capital for the trailing 12 months was more than 20%, and at September 30, working capital stood at $447 million, total assets $3.5 billion, shareholders' equity in excess of $2.1 billion, and liquidity at just below $2.3 billion.

During the quarter, cash adjusted debt decreased by approximately $200 million, and liquidity adjusted debt-to-capital declined to less than 10%. Please turn to slide 15.

For the fourth quarter of 2006, as of October 20, 57% of our VLCC days were fixed at $68,00 per day; 29% of our spot Aframax days at 32,500 per day; 40% percent of our spot crude Panamax days at 29,500 per day; and 41% of our spot Handysize days fixed at 22,000 per day.

Please note that the following guidance for the fourth quarter of 2006 excludes any impact of the Maritrans transaction. Taking into account announced vessel sales and scheduled deliveries, we expect vessel expenses to be approximately $50 million to $51 million. We expect time in bareboat charter hire expenses to be approximately $53 million to $54 million, reflecting the September sale leaseback with the Overseas Crown. Please note that 14 of our current charter arrangements, eight VLCC and six Aframaxes, provide for profit-sharing with the owner when rates exceed the base rates of the charters, and therefore time in bareboat hire expense is in part a function of actual TCE earnings.

We now expect the G&A administrative -- G&A expenses will approximate $30 million reflecting increases in incentive compensation, approximately $2.5 million, and a non-cash charge of approximately $4.7 million in connection with final settlement of the Company's defined benefit pension plan covering U.S. shore-based staff. You'll remember that we previously disclosed that such termination would occur in late 2006 or early 2007.

We expect interest expense to approximately be $15 million in the fourth quarter of 2006, and capex for the fourth quarter of 2006 will approximate $15 million, over $14 million for dry dockings, and approximately $700,000 for expenditure for vessels.

For full year 2007, as of today, over 40% of our revenue days are locked in under fixed rate contracts. This includes vessels under time charters in pool, and this amounts to locked in revenue time charter equipment revenue for 2007 of $300 million.

At this point, I'd like to open it up to the floor for questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question is coming fro Jonathan Chappell from JPMorgan.

Thank you. Good afternoon, guys. A couple of questions for Myles. The first one, I just wanted to ask Morten your outlook on the fourth quarter. You went into quite a lot of detail on why the third quarter was so strong. Clearly, we haven't seen a seasonal spike yet. Are your views that we borrowed a little bit from the fourth quarter seasonal spike to help the third quarter and the typical seasonality that you'd expect from summer to winter is probably going to be smooth in 2006?

I'm going to let Mats answer that, because I think that's probably the one that you want to most focus on that?

That's right.

I think I would agree with you. We have seen people drawing from inventories. We've seen a number of fixtures going into China come down recently. That is certainly not sustainable. China continues to grow and we see it increasing again in December.

Okay. So you'd expect the typical first quarter seasonality?

Yes.

Okay. For Myles, you've mentioned the Overseas Crown sale and charter back a bunch of times; do you have the gain on sale from that ship, so we could amortize it over the seven-year leaseback?

I'm in Greece at the moment, but if memory serves me, it was in the order of $14 million; is that correct?

Jonathan, why don't we just get you that rather than give some number.

That's fine. Another question and maybe this is for Eric Smith, if he's on the line, or Myles, or whoever. But the U.S. Flag business, the revenue, spiked pretty materially quarter-to-quarter, and if my memory serves me correct, you haven't received any new ships in that fleet. So, what's been the real driver of sequential increase in the U.S. Flag business?

The normal -- the biggest fluctuation in our U.S. Flag income is normally what happens to dry boat carriers, which trade in the [PL4E] trade, and they can sit quite a while waiting for employment, and they've been active the last quarter. I think that's where the biggest variance in that. Otherwise, there is no real significant change in the fleet. That's not -- they have a longer waiting period for cargo than the other trades we're in.

Jonathan, as long as you're asking about the U.S. Flag business as well, it gives me an opportunity to mention that with the acquisition of Maritrans that has 65% of its fleet locked in under long-term contract, our level of fixed revenue for 2007 increases, represents in excess of 50% of total revenue days, and obviously more than $300 million worth of time charter equivalent revenue for the group.

Okay. And my last thing, just clarification for me on the Jobs Creation Act. I mean, obviously we've seen some tax benefits for you since the beginning of 2005.

It also created an opportunity for U.S. vessels in the U.S. to foreign trade, to elect a tonnage tax regime.

Right.

Instead of being subject to U.S. income tax, and so we elected to do from the period of 2005 forward.

So this $3.5 million, that's essentially seven quarters worth of kind of making of the tonnage tax.

Exactly. Exactly.

Do you have sense, probably too much with you being out of town, but do you have any sense as to what the '05 versus the '06 impact was?

Yeah, give me a second. I'll find it and mention it to you, okay?

Okay. In the meantime, I'll turn it over. Thank you guys.

Jonathan, the answer[inaudible] is $27 million spread over seven years.

$27 million.

Over seven years.

Okay. Thanks, Morten.

Thank you. Your next question is coming from Doug Mavrinac from Jeffries and Company.

Thank you. Good afternoon, guys. I just have a handful of questions. The first one, I guess either for Morten or for Myles. I'm trying to gage on whether or not you guys gave seen and to what extent you guys have seen any potential OPEC cuts? I mean, I know you track every single VLCC on the planet, and I know what the rates have done. But in terms of the demand for ships, have you seen an appreciable decline in demand for VLCC tonnage on the Arabian Gulf?

We've seen a slight decrease, you know, as much due to people drawing from inventories as much as the OPEC cuts. You know, we have seen some OPEC cuts that's also been verified by customers, but some of the countries have not. It's a mix there, but there is a slight decline in the VLCC activity out of AG recently, that's correct.

Okay, great.

That's turning back positive again, as mentioned before.

All right, great. And then we've talked about and we've seen obviously the disconnect between the strength -- the continued strength in the Aframax market versus some weakness in the VLCC market, and we know that a lot of that has to do with non-OPEC production increasing.

For 2007, I mean, can you see a scenario where that is maintained, where Aframax has continued to out perform the VLCCs, or do you think some of the substitutability will begin to work its way into both of those markets with the VLCC market once again maybe perking up relative to the Aframax market next year?

We see that turning back to normal. These things can go on for a couple of months, but over time they tend to even out in a segment, you know, varies somewhat with each other. Long-term for '07, we do not see that difference continue.

Right, right. Okay, fantastic. And then two other quick things that are a little bit off the crude tanker market. First in terms of OSG strategy going forward, obviously with the Maritrans acquisition looking like it's going to close here very shortly, and that being the final piece in the puzzle for you guys establishing the type of scale that you wanted in the U.S. Jones Flag market, what's next? I mean, you know, you have your scale in the VLCC market, the Aframax market, the Product Tanker market with the Stelmar acquisition back in January of '05, and then the U.S. Jones Act market. Where does OSG turn its attention to next?

Well, I think we continue to pursue balanced growth, and there are still some -- the Products Anchor segment, while we've grown it dramatically and we're very happy with both the newbuilding and projects we have committed to, we still think we don't have optimal size there, even though we're one of the top 10 owners in the world. We want to have sufficient scale in both the Pacific, Atlantic and the time charter markets. So, we're not there yet, but we are moving in that direction.

I think on the gas front, you're familiar with our CNG joint venture with TransCanada, and that is getting a lot of attention. There are projects being worked on. There is nothing specifically I could share with you now, but I can say that there are some large projects there that are in the bidding, and we hope to be able to capitalize on some of those.

On the crude side, we do not have a need to go out and contract ships or buy ships. However, if you look at the businesses, in the Aframax pool, I think close to 80% of our ships are covered by existing contract commitments. So, since we have a need for additional ships there, or else we'll have to turn away business.

In the TI pool, similar, we can just service the existing contract portfolio we have. So, if we can opportunistically find ships, whether it will be time charters in, it could be new construction, it could be joint venture, we will do that.

On the Panamax side, we've added FLOPEC earlier this year, which is really strengthening that pool. We like the size there, but again, we had a very high contract coverage there and we need to be able to service that and maintain that. That's why we are able to consistently outperform the market. And that's why if we look at our spot market rates in the Aframax, for example, in this quarter, I think along with one other player, we're about $5,000 a day better than the market. And you get that because you have a CLA portfolio [inaudible].

Great. Thank you, Morten and thanks, Bob.

Thank you. Your next question is coming from [Urz Der from Lazard Capital Markets].

Hello, guys. Good quarter. Congratulations.

Welcome back [inaudible].

And I note the first two guys or three guys asked a lot of questions that I had, so I won't waste too much of your time. On the $27 million provision, it's in anticipation of a settlement, and is it reasonable to assume that we can look at the settlement in this quarter or next quarter?

Urz, you know that we're not allowed to give you --

Yeah.

A settlement is a settlement when it's a settlement. Obviously, discussions, the pace of discussions has picked up, and we wouldn't be able to specify a number like that unless we had concrete discussions. But we can always say what we have to say, which is a settlement is a settlement.

I gotcha. Yeah, I gotcha. I just felt like I had to ask that. Something very particular as well; if you close no Maritrans on the 29th, is it reasonable to consolidate Maritrans then beginning with December instead of Q1, as many are doing?

Yes.

Well, we'll certainly pick up their income effective for that 30-day period.

Right. And then something more general and more broad on the crude tanker side. A 10-mile demand has been expanding substantially for product tankers and for crude tankers for some time, and I seem to have a fairly firm idea on product tankers and developing on crude tankers. I'm wondering if there was any sort of, other than Venezuela, which is often pointed out. Is there any other particular route that you would point to that provides tremendous interest on the 10-mile side?

There's the North Sea is of interest, and that's been a strength for us, because the North Sea is in a fairly steady decline, and that has led to more long-haul crude coming into Europe. We've had a particularly good business coming out of the AG-UK continent, and that's the UK. That's good long-haul business. It's not massive yet, but it is increasing, and that has a tremendous 10-mile pickup, clearly. And we already talked about Venezuela, so I won't repeat that. And there's simply more coming out of West Africa. That's going to continue. That's good long-haul business.

And there's been a lot of that moving on the V's. Are the V's poaching from [inaudible]?

I think West Africa, China, is the most important route to look at. And, again, the fact that we've mentioned before is that you don't have enough ships any longer going from AG west, to pick up the cargos from West Africa going back east again. So, ships have to balance now from the East to West Africa, to pick up the cargos, and that has a very positive effect on ton mile demand.

Yeah. All right. Congratulations again and everything else is answered. Thanks.

Thank you. Your next question is coming from Omar Nokta of Dahlman Rose.

Hi there. You mentioned in the past the possibility of spinning of your Jones Act business to get a better valuation for it. Does your merger with Maritrans in any way jumpstart such a spinoff, especially --

It certainly provides sufficient critical mass in the form of the level of EBITDA to make it particularly attractive. So, if we were to choose to move ahead to do that, we could do it earlier than we might otherwise have done.

If I can just add a little bit. We're hoping that the acquisition, the closing of the acquisition on the 29th will be a catalyst for improving the results of the valuation of OSG, so we still have our fingers crossed that in fact the greater share of U.S. Flag revenue will result in some multiple expansion, and we want to look at that. But if it doesn't, we now have all the tools we need to pursue options at the timing of our choosing.

Okay. And do you feel like you've got a good base of Jones Act tankers right now, do you want to continue getting bigger?

Oh, we will have a very strong base. What we have said consistently is there is still an incremental need for replacement tonnage from the ships that have to go out under Open 90. There is a specific need for three replacement ships for the military, and we believe that the Deepwater Gulf will be an attractive market for Jones Act shuttle tanker business, and we will be pursuing that business.

Okay. Thanks a lot, guys.

Thank you. Your next question is coming from Natasha Boyden of Cantor Fitzgerald.

Thank you, operator. Good afternoon, gentlemen. Are you in any position to give us some detail on the Maritrans's future in terms of their rebuilding strategy, etc. Do you have any ideas on that yet?

We have essentially undertaken the rebuilding of all but one ATB, so that has proceeded. There is a patented technology for the rebuilding or double-hulling of tankers. We're still evaluating the viability of doing that. When we make a determination, we'll let you know. There's commercial acceptance of those vessels. They are performing very well, so I'd say it was a great concept which really for the cost of $30 million, while simultaneously expanding capacity by 38,000 barrels, 30 million versus a new bill of circa 90-plus million provides some nice economic benefits.

Agreed, definitely. And the two older tankers that they have that I think are currently working in the grain business or, again, do you plan on just selling them or keeping them or --

That's what I said. We'll evaluate whether or not double-hulling of those works.

Okay. And then in terms of -- I think Bob touched on this, but potentially expanding further into the Jones Act segment, have you looked at potential for the Gulf of Mexico area with OSVs? Is that something you would look at, or is that too far off the beaten path?

We've looked at that and up to now we've determined that it's too far off the beaten path. But we know we'll be getting in through Maritrans the lightering business, and you could certainly see us looking at more lightering activity in the Gulf, which could involve us with workboats. But if we start getting closer into tangential markets, then it becomes more realistic, because we have both the technical then and a better commercial sense.

But in the short run, the T5 tanker replacement is a real program. The military needs the ships and we want to be the company that provides them. And if these deepwater fields are going to get developed in 2010, 2012 time frame, we believe they will need shuttle tankers, and getting those built -- and the [inaudible] will be shuttle ATB's I should add, and maybe a combination of tankers or ATBs, and we're [not] going to be in a position to provide either, or, or both, and that's pressing. So, that will be priority and those are obviously the markets that we're already in, so we're less likely to screw it up [inaudible].

Would never suggest that you would. Okay. Would there be any -- you know, you're pretty on plan now with the acquisition of Maritrans. Would there be any antitrust issues potentially going into those other areas, or are they different enough that you wouldn't suffer from that?

I think they're sufficiently different. It would be subject to review, but certainly discrete markets.

Right. And then if I could just ask one very, very detail question. The Majestic Unity, that is actually going for sale, it's not being leased back; is that correct?

That is correct.

Okay. Thank you very much.

Thank you. Your next question is coming from [Suno Gadrani] from Citadel.

Good morning, guys. Congratulations. I just -- in the past you've provided, I think, a slide which had kind of a present value, net to OSG of your charter end fleet, and I was just wondering if you could give us an update on where that dollar amount stands?

I actually can, because I'm putting together for another presentation, but if you take a look at the tonnage that we have chartered in and have entered into charter outspawn, that represents an MPV of about $200 million, or $5 per share. If you were then to subject the remaining open days on chartered in tonnage that has not yet been fully chartered out for its term, and did that based upon the 10-year average time charter rates earned by each of those class of vessels, it would represent another $5 per share. So, an aggregate $10 per share. If you were to look at it based upon the five-year average rates, it is substantially more than that.

Okay. And so the first $200 million, as I understand it, is pretty much locked in, and the second $200 million to, I guess, $400 million is basically to yet to be realized over time, is the expectation?

Yeah.

Okay. Thank you.

Thank you. Your next question is coming from John Kartsonis from CitiGroup.

Yeah, hi. I have a few questions, I guess. First on the DOJ investigation. Looking back at what happened and what [inaudible] has been made in the Company today, what are you doing differently to avoid something like that in the future? I mean, is there maybe a case to be made about the permanent type of provision for such incidents given that you can have right now your exposure to U.S. markets?

I'm going to let Bob Johnston answer that one.

There are a number of things that we have changed I'll tell you in the last year. We probably have -- I know we have one of the most stringent environmental protection programs in the world today, certainly among all our competitors. We've developed something along the EE model as far as internal auditing.

We have an operational integrity unit, which is our internal auditors that report directly to me, and they go out to inspect the vessels, look for environmental compliance, look at vessel operations.

We also have an operations integrity officer reporting directly to Morten, who checks up on me to make sure that I'm doing things right. We've put a number of factors -- and under the operational compliance officer, he also has a group of external auditors, which is controlled by him. And they also check upon the vessels.

So, I believe -- some people may say belts and suspenders, we feel it's a prudent thing to do going forward and we can [inaudible] provide the transportation that our customers demand, and it's going to provide the transportation assurance that we need to make sure that we move energy and move oil properly and environmentally friendly.

Do you think there's a different treatment for OSG, given that you are U.S.-based compared to a foreign company when it comes to these matters?

No, I don't believe there's any difference there.

Okay. A different subject. Obviously, six months ago you announced your share repurchase program. You stated that you haven't bought back any shares. Can you give us an idea of what exactly -- I mean, what point you're thinking? I mean, is it related to Maritrans acquisition or you're still looking at repurchasing shares?

We're still looking at repurchasing shares. We spent a period of time in blackouts based upon Maritrans, as we said, and then, of course, the reporting period blackouts as well. But we remain committed to a share repurchase program.

Okay. Also, on the Overseas Crown, was it offered to THD to a double hull? I mean, I guess the reason -- the right of first refusal there, or --

No, there's no right of first refusal. They are a separate, independent company. We will periodically talk to them about transactions, but we neither have a right of first refusal to them, nor do they have an obligation to take anything that we show them.

Okay. And finally, I guess for Mats, you talk about the [inaudible] expansion and specifically related to Venezuela. Obviously, they announced that they're going to stop production of the orimulsion, which has been the major export to Asia. Do you think that's going to be significant VLCC market?

No, that's a very tiny piece of the VLCC market. I think the things going on in Venezuela overall would be positive for shipping, but the orimulsion piece is small. The fact that some of the cargo is in Aframaxes may decrease into U.S. and go longer distances instead. It's positive for us and for the market in general.

But in general you haven't seen really higher fixtures so far from Venezuela right? I mean, on the VLCC market going to Asia?

Yes, you have seen more of the fixtures from Venezuela to Asia, primarily fuel oil, not orimulsion. It's fuel oil from Venezuela and the other southern Caribbean islands.

Okay, thank you.

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

Hi. I have a couple of questions. First of all, can I confirm that the fourth quarter guidance you gave does not include the 30 days from the Maritrans integration?

That's correct.

Okay. And then in terms of the G&A number you gave, that was $30 million?

The G&A guidance was -- one second -- was $30 million, which included a non-cash charge of $4.7 million.

Okay. That included that charge, okay. My other question -- I have another question or two on the VLCCs. I read someplace that Chinese ports are being deepened to accommodate more VLCCs. Do you have any color or light on that? Are there many ports that cannot accommodate them at this time?

The absolutely largest percentage of all the crude going into China is already going in on VLCCs, so while more of the ports will be dredged and deepened there, I don't think that's going to change the trading pattern substantially. It's just going to make it possible to bring in more VLCCs to more ports. But it's already moving in these.

Okay, thank you. And then based on dynamics of world trade and oil demand, and based on what's happened with shipping rates in the past, do you expect tanker asset values to come down at any time, because they have been on a steady curve going up over the past year.

Well, I think it's a complicated issue. What we've said pretty consistently for a couple years is we've thought newbuilding prices would remain high, if not go up, and that's what you're seeing over 2006, is that newbuilding prices have gotten stronger, and yard order books have gotten longer, which you're seeing more and more contracts now in 2010.

When you have newbuilding prices at the current levels you have, and you have the shipyard with forward order books the way they have -- and keep in mind that you can build a VLCC in under a year once you get going -- but if your order book is all the way up to 2010, you have very little or no incentive to reduce prices whatsoever. And you have a double whammy that shipyards are still trying to rebuild retained earnings from losses they incurred on ships that they built on option contracts or fixed contracts ordered in 2001, 2002, that didn't take into effect both currency movement and steel movement and such. So, from a newbuilding standpoint, that's going to help keep secondhand prices up high.

And if you look at rates, where they are today, and people are paying very high prices for newbuilding, VLCCs, Aframaxes and Suezmaxes. In fact, they're justified based on the earnings you have today. If you took the consensus earnings that you see among some of the analysts, you can still justify the kind of active prices you have today.

You have a continued need to replace the single hull tankers. Almost any double-hull tanker that goes on the market attracts really a whole lot of attention. So in the short run, both from the newbuilding side and the earnings side, and from the need to replace the single-hull ships, we don't see much downward pressure on secondhand value.

Will there be some movement up or down? There always is, but not dramatic. If you order single-hull ships, you've got a bigger problem, because we see those values going one direction, and that's down.

Okay, thank you.

Thank you. Your next question is coming from Philippe Lanier from Banc of America Securities.

[Inaudible]

Sir, did you have a question?

Yeah, I'm sorry, all my questions have been answered. Thank you.

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

Hi. I just have one question, because most of mine have been answered as well. On the impact, I know it's longer term, but the impact of the expansion on the Panama Canal. I don't want to get too specific into the sort of Panamax name, but do you guys seeing that having a significant impact on the Panamax trade kind of five years from now or --

Panama Canal question, the estimated date that people talk about is 2014. It will definitely have an impact on both the Panamax and Aframax market. We have obviously good intelligence on this, but it's a long way out and it will have an effect on the Panamax trade.

Could you tell us what that effect may be and -- the reason I ask that is to get a bit of a better read on the acquisition side. I think Morten said previously that he thinks the Company could use some growth in the Panamax sector. Would the potential outcome for what happens at the Panama Canal affect the ships that OSG chooses to acquire between now and 2010?

I think the answer probably is no. Let's say on the product carrier space, the widening of the Panama Canal I think certainly could open up more trade in clean products and bigger ships, Aframaxes and such. So, we might very well take that into account. But if you look at the crude tankers we ordered in China earlier this year, they were very specifically ordered for our existing contract business in the Atlantic, and they were needed. I think we'll take it into account, but 2014, it is a ways off.

Okay. And then the last question I just had was, I just wanted to get your take on this, too, Suezmax market. I'm not asking whether or not you guys have plans to expand. I believe that some of your competitors in their calls have been talking about how they think that market is such a benefit from the West Africa trade and the non-OPEC trade. What's your view of that market?

I think, you know, it is more in between the VLCCs and the Aframax, and it's very effective by the VLCC market. It's a smaller market, it's not that global. It's more a niche market. It's an interesting market that we obviously have an interest in. But when we choose between our V market and our Aframax market, where we are already very, very strong, you know, it is easy to choose to add two more ships to the already strong sector rather than establish a small presence in a new market. But it's obviously a market that we follow extremely well and would have an interest in longer term.

On the heels of the discussion earlier that that interplays between the VLCCs and even Aframax routes, depending on where oil is being shipped from and to, would owning Suezmaxes give OSG better insight into the trading dynamic than either the bigger VLCCs or the smaller Aframaxes, or would that not really be the case?

I think there is some but limited market intelligence benefit of being in both sectors. You know, when you control 45 VLCCs all in the spot market, the brokers tend to answer to your questions, you know. So, it's not that we don't know what's happening on the Suezmax side today. I think we have extremely good market intelligence in our pools as we operate today.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Your next question is coming from Scott Burk from Bear Stearns.

Hi, guys. Thanks for the call. All my questions have been answered.

Thank you.

Thank you. There appear to be no further questions at this time.

Thank you for joining us on today's call. As I said in the past, we continue to focus on executing our balanced growth strategy which we laid out for all of you two years ago. We aim to be a leader in all the segments in which we operate, and to achieve this through active asset management, fleet expansion and fleet diversification, I think we're doing that. We had another strong quarter, strong financial and operating performance, and based on what we've showed you for the fourth quarter, an incorporated Maritrans, that looks like it will continue. Thank you very much.

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