Octave Specialty Group Inc (OSG) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Overseas Shipholding earnings conference call. My name is Michelle, and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Jim Edelson, general counsel of OSG. Please proceed, sir.

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 and articulated tug barge markets, changing oil trading patterns, prospects for certain strategic alliances and investments, the ability of OSG to successfully integrate the operations of Maritrans, Inc., with OSG's operations, estimated TCE rates achieved for the first quarter of 2006, and estimated time charter TCE rates achieved for the balance of 2007, projected income and expense items of OSG and its U.S. flag unit for 2007, anticipated levels of newbuilding and scrapping, projected dry-dock schedule, estimates of future costs and liabilities for certain environmental matters n compliance plans, the prospects of OSG strategy of being a market leader in the segments in which it competes, the projected growth of the world tanker fleet, and the forecast of world economic activity and world oil demand. Factors, risks and uncertainties that could cause the actual results to differ from the expectations reflected in these forward-looking statements are described in OSG's annual report on Form 10-K.

For this conference call, we have prepared and posted on OSG's website, 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 members of the senior management team that are with me today -- Myles Itkin, the chief financial officer; Captain Johnston, the head of ship operations; Jonathan Whitworth, the head of the U.S. Flag SBU; Lois Zabrocky, the head of the product carrier SBU; Jim Edelson, our general counsel; Jennifer Schlueter, our head of IR and corporate communications; and joining us by phone from Caracas is Mats Berglund, the head of our crude SBU.

As Jim indicated, our remarks will follow a presentation that is posted on the website, so if you would turn to slide 3, please.

Fourth quarter results were strong with solid performance in each of our operating segments -- crude, transportation, product, and U.S. Flag. Spot VLCC rates were just under $57,000 a day. Aframax rates were just under $37,000 a day, Panamax crude rates under $28,000 a day, and handysize spot rates were just under $25,000 a day.

So despite lower rates, quarter-on-quarter earnings were flat demonstrating the tactics we have taken to actively manage our business are delivering consistent returns to shareholders.

For the year, shipping revenues were $1.1 billion and TCE revenues $993 million, net income $393 million, and EPS of $9.92 per share.

Crude TCE revenues decreased slightly to $684 million and represented 69% of total time charter equivalent revenue. Product TCE revenues increased 60% year-over-year to $215 million and represented 22% of total revenue. U.S. Flag revenue was $75 million. It was just under 8% of total TCE revenue for the full year.

Turning to the balance sheet and the cash flow statement, cash and cash equivalents, including capital construction fund, was $923 million. This quarter, for the first time, we no longer tax effect the CCF as we anticipate using up to $292 million toward the three articulated tug barges we are building at Bender Shipyards.

Total assets were $4.2 million, an increase of more than $880 million from year-end 2005 reflecting the addition of Maritrans fleet and the associated assets.

Liquidity at year-end was $2.1 billion, and long-term debt was $1.3 billion versus $966 million at fiscal year-end 2005. Outstanding debt increased from the third quarter due to $466 million in additional borrowings under a revolving credit line for the Maritrans acquisition.

Liquidity adjusted debt-to-capital was 14.8% at the end of the quarter, an improvement from 24.5% last year, even after consideration of the approximately $500 million Maritrans acquisition.

Future revenues from non-cancellable time charters totaled $1.2 billion, an increase of $417 million from year-end 2005, an increase of more than $978 million since year-end 2004. This dramatic increase is a result of a very concerted effort to opportunistically expand our time charter business to provide more stable earnings, going forward.

At the fleet OSG's owned or operated fleet totals 105, and our newbuilding programs totals 37. I'll go into a little more detail on that later.

I'd say that OSG's solid financial performance confirms the fact that our fleet expansion, diversification, and active asset management is working and delivering good returns to our shareholders.

Please turn to Slide 4.

It was just three years ago that our global presence was comprised of offices in New York, Newcastle, England, and Singapore. Our pool partnerships with Tankers International and Aframax International were established but not necessarily optimized, and our partnership with Alaska Tankers was already successful.

Today our global office network has expanded to include Montreal, which is entirely focused on managing a relationship with one of our largest customers, Petro Canada, including operating one Aframax tanker under the Canadian flag.

We now have operations in Philadelphia and Tampa as a result of the Maritrans acquisition adding 75 shoreside personnel and just under 400 U.S. seafarers.

After the Heidmar acquisition closes, we will add [indiscernible] from Houston, which most of you know is a huge energy port for the United States.

Athens was a result of the January 2005 Stelmar acquisition. Today Athens is part of our global integrated technical operations group and manages the international product carrier unit of OSG.

To effective marketing and relationship-building efforts by each of our SBUs, we have expanded the number of partners in all the commercial pools we operate. With eight partners and tankers international, nine partners in Aframax International, and Panamax International, which was formed in 2004, that's three pool participants.

Clean Products International was formed in 2006 with one other partner who also came from Panamax International.

Three years ago our newbuilding program totaled one Aframax tanker. Today we are building 37 vessels in eight yards across China, South Korea, Japan, and the United States.

Please turn to Slide 5.

This will seem repetitive, but our strategy remains the same as it was three years ago -- to be a market leader in each of the segments we operate. Our efforts since then have been consistent, and you can expect more of the same from us in the future. Core to the success of our growth strategy is fleet diversification and expansion, financial flexibility, and active asset management. Let's look through those.

Major accomplishments of diversifying and expanding our fleet in 2006 through today include the acquisition of Maritrans, which established OSG as one of the market leaders in the Jones Act Trade -- more about that later. The joint venture with Trans Canada to develop CNG vessels to bring natural gas from the stranded offshore fields in the local markets; VLCC, Aframax, and U.S. Flag newbuilds, which have expanded our shipyard relationships within the United States and in China; the proposed Heidmar acquisition as a West Coast and a U.S. Gulf Coast lightering operation to our already-strong position in Delaware Bay on the East Coast -- more on this later.

We also announced a joint venture for two newbuilding VLCCs to be built in China scheduled for delivery in 2009 and 2010, and we will have a 49.9% stake in each of those.

Moving to financial flexibility, the strength of our balance sheet is critical to the success of our long-term strategy. In 2006 and 2007, we established a 1.8 million unsecured credit facility; we announced a 300 million share repurchase plan; we increased our quarterly dividend by 43% to $0.25 a share; we repurchased bonds totaling just over $30 million; we determined a qualifying use of our capital construction fund in connection with the Maritrans acquisition; and we sold 4.6 million shares of double hull tankers in 2007 resulting in $69 million in proceeds.

I should add that the selldown in our position in double hull tankers should not be interpreted by anyone as a lack of confidence on our part on the prospects of double hull tankers. To the contrary -- it simply positioned our shareholding positioned more in line with what we initially intended at the IPO.

Moving on -- we continue to actively manage our assets, to take advantage of a strong secondhand S&P market and execute sale-leaseback transaction. We have created optionality by owning our chartering vessels and have charter contracts that provide, in some cases, repurchase options, extension options, walkaway options. This enables us to operate a commercially optimal modern fleet.

In 2006 we generated $259 million in proceeds from the sale of three Aframaxes and one VLCC.

Amortization of preferred gains on prior sale leaseback transaction will reduce charter expense by $47 million in 2007. In the course of last year, 10 international flag product carriers purchased or time-charted in will help offset the scheduled [deliveries] in 2008 and 2009.

Please turn to Slide 6.

In order to always due to succeed with our goal to become the market leaders in each of the four segments in which we compete, we must deliver top quality, highly reliable, environmentally clean, incident-free shipping services. It is for this reason that we continue to invest in our global quality safety and environmental program and have stepped up our efforts to recruit quality shoreside and sea staff.

Our integrated global QS&E platforms will report to Captain Bob Johnston, who is head of ship operations. The cornerstone of this is an integrated in-house technical management of our fleet, and we continue to believe that the only way forward in the shipping industry is to have world-class, in-house, technical operations.

We set up an operational integrity group, which does unscheduled audits of all our ships that did close to 200 last year. We expect they'll do more next year. We have global external oversight and internal oversight by Captain John Grenier, who reports to me not to the head of ship operations. We have an open reporting system across our fleet, which enables seafarers to report anything, which is unusual, irregular, or needs to be fixed in a discreet and confidential basis. We have two-day quarterly technical management reviews looking at the performance of our fleet once a quarter attended by the entire senior management group including myself.

You can expect continued relentless focus from our senior management team on delivering high-quality operation performance in our fleet, because we think it's absolutely necessary for us to execute our strategy.

Moving on to Slide 7.

Crude transportation remains our biggest business, and we continue to expand this business. All three of our pools have been strengthened this year through a combination of additional cargo contracts, renewal of existing contracts, and adding additional members to the pools. And, once again, just as last year, our pools delivered superior numbers to the rest of the market.

Next slide.

As announced yesterday, OSG has reached an agreement in principle with Morgan Stanley to acquire for cash their Heidmar lightering business. This is an excellent strategic fit with our existing crude business.

Now, for those of you who don't know what lightering is, it is a transfer of cargo offshore for larger ships, typically VLCCs or Suezmaxes or V+ as you see in the picture. It's a smaller ship. Typically, Aframaxes or Panamaxes are shallow enough to enter U.S. ports. Smaller workboats, as you see in the picture, are used to carry the fenders and hoses to the lightering locations.

The acquisition means that we can offer our customers lightering service on all three U.S. coasts. We'll be the only company that can do that. OSG America already has a strong position lightering tankers in the Delaware Bay, something they've been doing for 25 years.

Heidmar gives us a significant lightering presence in the U.S. Gulf, and will give us good opportunities to grow on the West Coast using our strong Panamax position.

We get a Houston office and as lightering activity is an early market indicator, it makes our market intelligence even stronger. I think it's safe to say that everybody at OSG is excited about developing this business further.

In addition, lightering rates are more stable than regular crude rates and hold significantly better in weaker markets. We are taking over a portfolio of one to three-year fixed-rate cargo contracts, and we are doing it in the area where we already have both other cargoes and ships.

By combining the AI Aframax fleet with a lightering fleet, we can provide better reliability and on-time performance to our lightering customers. For example, if one ship is light, we can swap in another.

And, for our fleet, means less waiting time since the shorter lightering jobs are very efficient for reducing waiting time between our longer Aframax International voyages.

Now, this can be clearly seen on Slide 9, and the arrows show the key AI trading routes.

Please turn to Slide 10.

We are very pleased with the performance of our Product Carrier SBU in the last year. We continue to have a heavy time chart of focus in this segment at the same time as we have pulled up the performance of our spot ships relative to the competition.

I am also particularly pleased, as outlined there, that we have already committed to replacement of all the Product Time crews that leave the fleet in 2008 and 2009 time periods with modern double hull ships.

Turning to page 11.

As most of you are aware, we acquired Maritrans on November 29th and renamed it OSG America Inc. Our U.S. Flag business will make a much more significant contribution to our overall results in 2007 than in prior years, rivaling what our foreign flat product tanker segment generates in revenues.

Now, while the U.S. Flag platform we have put together in Tampa is impressive, the real story is what this business will become over the next three years, as our newbuilding and rebuilding program delivers 16 additional vessels into our fleet, most of which already have secured long-term employment.

We now have our entire U.S. Flag unit housed in Tampa on the top floor of the building you see in the picture on the slide. As you can also see, we have significant market share for clean products movement into Florida, close to 30% of the volume coming into Florida and close to 50% of the volume come into Tampa.

Equally as important, our Tampa base for this business means it is much easier for our shore staff to work with our fleet, many of which regularly crawl into Tampa. When I was in Tampa last week, for example, we had seven OSG vessels in the Tampa port at that time.

Please turn to Slide 12.

Many of you have heard me stress the importance of having a global platform in order to compete in what is a truly global business, and at OSG we do have this. At the same time, we have built up a very strong presence in the America, and America's footprint has expanded with domestic and international partnerships and acquisitions.

We have transatlantic cargoes through Aframax International. We have strength on the South American and U.S. West Coasts with Panamax International. We have strength in the Caribbean through Aframax International. We have Clean Product cargoes going through the canal on either side of the coast through Clean Products International. We will have lightering operations in the U.S. West Coast, U.S. East Coast, U.S. Gulf, and the Delaware Bay.

Nobody else in the industry has anything approaching this footprint. We expect the U.S. to import increasing amounts of crude oil, gas, and refined petroleum products in the years ahead. Our physical presence in this area, our strong position in both U.S. Flag and Foreign Flag markets, our modern fleet, our expanded service offerings uniquely position us to take advantage of the growing opportunities in the Americas, whether it is in our U.S. Flag fleet or in our Foreign Flag fleet.

Moving to the next slide.

I don't think anyone on this call needs any convincing that the LNG business worldwide and the U.S., in particular, is poised to grow very rapidly. Imports to the U.S. market are expected to triple by 2010 and quadruple by 2015.

Our gas transportation will become a reality in 2007 as the first two of our four ships get delivered later this year. We have already substantially built up our technical team in Newcastle, and they are about excited about this year as I am.

Please turn to page 14.

We have not been aggressively bidding for additional LNG transport contracts the last 18 months because the rate environment has become more difficult. We've been spending a lot of effort instead in the CNG arena and hope to enter into firm contracts in this trade in 2007.

If you look at the slide, it should be quite obvious that there will be significant opportunities for us in the Americas as this technology takes off as expected, and that could be both U.S. Flag or Foreign Flag.

Please turn to page 15.

Let me turn to our fleet expansion plans and how we continue to build future long-term shareholder value. OSG's newbuilding program totals 37 vessels across each of our operating units today. Since our last quarterly call, we have taken delivery of two newbuild tankers, the Overseas Houston and the Overseas Cygnus, and added 12 newbuild commitments.

Four newbuild/rebuild articulated tug barges from the Maritrans acquisition; two 49.99% newbuilding VLCCs in China; three additional U.S. Flag Product Carriers at Aker --

[audio difficulties]

Ladies and gentlemen, thank you for standing by. Your call is experiencing technical difficulties and will resume shortly. Again, thank you for your patience.

[audio break]

Ma'am, you are back in the call. You can go ahead.

I apologize. I can assure you we are better with ships than with phones. I'm not sure why that happened. We do intend to have Myles continue talking, and we were not trying to duck any questions that people have for after the call. So I'll turn it over to Myles Itkin.

Just for an overview on metrics, if you turn to page 17, please. During 2006, we generated a gross profit margin of 40% and equal net profit margin, and a return on equity of 19%. During the same period, OSG's overall return on invested capital exceeded 17% with the crude sector registering a 26% stand-alone return.

At December 31, 2006, total assets stood at $4.2 billion, shareholders equity at $2.2 billion, and working capital at over $600 million.

The company's strategic objectives are supported by liquidity of $2.1 billion and liquidity-adjusted debt-to-capital of 14.8%, a decline from 24.5% at year-end 2005.

During the year, we entered into outright sale and sale leaseback transactions generating proceeds of $260 million and an aggregate gain of $39 million, which was included in earnings.

Also, in January 2007, we sold 4.6 million shares of DHT common stock reducing our equity stake in DHT to 29.2%. The sale of stock will result in proceeds of approximately $69 million in the first quarter of 2007.

In June of '06, our board authorized a 300-million-share repurchase program under which we have repurchased 313,500 shares of our outstanding common stock through December 31st.

If you turn to Slide 18, please.

For the quarter, TCE revenues decreased by 11% to $242 million in comparison with the prior year's quarter of $271 million reflecting a decrease in daily TCE rates earned on the company's crude carriers.

Revenue days remain consistent with prior-year's fourth quarter at approximately 7,600 days. Revenue days for the fourth quarter reflected the delivery of two time-charted in Aframaxes in which the company has a 30% participation, and the delivery of two newbuild handysize product carriers in 2006 as well as the inclusion of one month of operations of the Maritrans fleet for 444 days in the company's U.S. Flag segment.

Crude tanker revenue days decreased by 234 days to an aggregate of approximately 3,815 days. The decrease was comprised over a 20-day decrease in VLCC days; 150-day decrease in Aframax days; and a 60-day decrease in Panamax days.

Product carrier revenue days, which include the three U.S. Flag tankers that participate in the MSP program but trade internationally equaled those realized in the fourth quarter of 2005 at approximately 2,700 days.

During 2006, three time charter and product carriers were delivered offsetting somewhat higher drydocking and repair days in the sector.

The fixed revenue portion of our business represented 34% of TCE revenue in the quarter reflecting OSG's balanced charter portfolio.

Please turn to Slide 19.

Spot TCE rates decreased quarter over prior-year's quarter across the company's crude and product carriers with VLCCs averaging $56,800 per day in comparison with $69,300 per day in the prior year's quarter.

Aframax spot rates averaging $36,700 per day compared with $42,800 per day. Crude Panamax spot rates averaging $28,000 per day compared with $40,100 per day and handysize product carrier spot rates averaging $24,700 per day compared with $29,900 per day.

Fourth quarter rates for crude carriers, which historically are the highest average quarterly rates during the year were the lowest in 2006. Spots in OPEC exports, specifically Middle East OPEC exports resulted when a surplus of available vessels exerting particular pressure on VLCC rates.

Warmer-than-normal weather in the U.S., Europe, and South Korea, resulted in a reduction in demand for heating oil, while power-generating companies displaced fuel oil with lower-priced fuel such as natural gas.

The extensive inventory drawdown of the crude stocks that occurred in North America during the fourth quarter in the wake of the third quarter buildup further reduced demand for seaboard shipments.

In the fourth quarter, average rates for product carriers declined to their lowest level in 2006, as both the demand heating oil in the Northern Hemisphere fell well short of expectations due to unseasonably mild weather, and as the drawdown of excess product inventory is amassed in the prior quarter in OECD countries became evident.

In the U.S. alone, the clean product inventories reduced by approximately 22 million barrels during the fourth quarter.

Please turn to Slide 20.

At quarter-end, close to 1.2 billion of future revenue was locked in, up $400 million from fiscal year-end 2006. The numbers, however, exclude future revenue from LNG carriers, which are fixed; profit sharers; charter extension options; vessels on time charter in the Aframax international pool; as well as fixed-rate lightering COAs.

Please turn to 21.

For the full year 2006, crude tankers represented 69% of TCE revenues and 80% of the segment's income-from-vessel operations 64% and 81%, respectively, for the quarter. Broader carriers represented 22% of TCE revenue and 14% of income from vessel ops, 23% and 14%, respectively, for the quarter; and the U.S. fleet represented 7% of TCE revenue and 3% of income from vessel operations, 12% and 6% for the quarter.

Slide 22, please.

Operating income in the fourth quarter totaled $104 million compared with $130 million in the prior year's quarter. Total ship operating expenses of $162 million compares with $150 million in 2006 third quarter before an increase in reserve for the DOJ settlement of $27 million in the third quarter of 2006.

Accordingly, vessel expenses of $55 million increased by approximately $3 million from the third quarter 2006 levels. The increase reflects $4 million attributable to the addition of Maritrans' fleet beginning November 29, 2006. Before taking into account Maritrans, vessel expenses decreased by $1.5 million principally due to the sale of the Majestic Unity and the sale leaseback of the Overseas Crown.

Time and bareboat hire expenses were $47.6 million representing an increase of $1.6 million quarter-over-quarter, principally due to the September sale leaseback over the Overseas Crown.

G&A expenses were $31.6 million, an increase of approximately $11 million quarter-over-quarter. Of this amount, $1.2 million was attributable to the addition of Tampa and Philadelphia offices of Maritrans. The remaining increase was due to a noncash pension charge of $4.2 million reflecting final settlement of OSG's defined benefit pension plan and an increase in cash incentive cost of $3.3 million.

Interest expense in the fourth quarter was $16.3 million, an increase of $1.7 million, quarter-over-quarter, attributable to an increase in debt outstanding, as the company borrowed $466 million to initially fund Ameritans acquisition.

Please turn to Slide 23.

On November 26th, we acquired Maritrans for $506 million including assumed debt in the amount of $56 million. In accordance with accounting rules, the acquired vessels were written up by approximately $185 million fair market value and other intangibles totaling $93 million recorded on our balance sheet. These intangibles consist primarily of long-term customer relationships and are being amortized over a 20-year period.

In addition, the Maritrans acquisition resulted in the recording of $64 million of goodwill, which is not being amortized but which will be tested periodically for impairment.

The valuation on which these amounts are based is preliminary. The accounting rules allow us one year from the date of the transaction to finalize the valuation.

Please note that deferred federal income taxes increased by $126 million to $234 million at December 31, 2006. One hundred eighteen million dollars of this increase is applicable to the acquisition of Maritrans, $43 million was reflected on Maritrans' balance sheet at the time of acquisition, and another $75 million resulted from the step up in depreciable and amortizable active values to fair market value through purchase accounting.

Please turn to Slide 24.

During 2006, we continued to actively manage our portfolio of vessels and charters. During 2006 through the first quarter of 2007, we have entered into six sale or sale leaseback transactions, transferring residual value risks to third parties and generating proceeds for this 15-month period of $335 million and economic gains of $79 million.

The gains associated with all sale leaseback transactions are amortized over the life of the relevant charter backs. 2007 will benefit from over $47 million in amortization of preferred gains.

In the past year, we also engaged in a number of vessel arbitrage transactions under which seasoned, double hull tonnage was sold at premium valuations, and the proceeds reinvested in new buildings with lower operating costs and higher earnings potential based on greater speed and carrying capacity.

During 2006, we locked in incremental long-term fixed charter revenues of over $400 million as been previously noted. Accordingly, aggregate future locked-in revenues totaled $1.2 billion without consideration of fixed-rate revenue in several other sectors.

Over 50% more than existed at year-end '05. Now, $340 million of this amount alone is attributable to calendar year 2007.

Associatively, upon completion of our newbuilding program, we'll be chartering over 50% of our tonnage, affording us greater ability to flex our balance sheet. As Morten mentioned, many charters' income with extension and repurchase options. Of those vessels chartered in, a number have been chartered out under fixed-rate, long-term contracts generating $200 million, or $5 per share in net present value benefit not reflected on our balance sheet.

If the remainder of the chartered in tonnage is chartered out for the balance of their term in 10-year historical rates, we'll generate additional net present value of $300 million, or $7.50 per share together aggregating $12.50 per share not reflected on our balance sheet.

In 2006 through year-to-date 2007, we have undertaken strategic actions, positioning ourselves to increase the level of longer-term contractual and program revenue through expansion in the U.S. Flag sectors, specifically the acquisition of Maritrans and additional orders for U.S. Flag product carriers; the announcement of a joint venture partnership in the CNG sector with Trans Canada, a sector in marine transportation characterized by fixed-rate charters of 10 to 15 years in duration and further expansion into the product carriers' phase.

We have undertaken each of these actions to optimize fundamental value while simultaneously reducing risk.

Please turn to Slide 25.

Turning to the first quarter of 2007, as of February 16th, 80% of our VLCC days were fixed at $46,000 per day; 57% of our spot Aframax days at $43,500 per day; 66% of our spot crude Panamax days at $31,000 per day; 70% of our spot handymax days at $28,000 per day. Additionally, 84% of our U.S. Flag product carrier days represent time charters at an average of $38,000 per day, and 38% of our U.S. Flag ATB days represent charters at an average of $26,500 per day. Fixed rate lightering contracts accounted for 264 of the remaining 576 days.

During 2007, we expect the U.S. Flag segment to account for 20% of the total revenue days for the company. This increase from 8% to 9% in 2006, is a result of the Maritrans acquisition in which forecasting will add more than 4,500 revenue days and the delivery of the first U.S. -- pre-U.S. the Jones Act newbuild product carriers chartered in by OSG.

One of these vessels, the Overseas Houston, delivered in February -- this month. The next two are currently expected to be delivered in June and December of this year.

Please turn to Slide 26.

With a view towards providing expense guidance for 2007, we expect vessel expenses to range from approximately $260 million to $280 million for the year. We estimate time and bareboat charter hire expenses of approximately $220 million to $250 million. Please note these estimates include an excess of $25 million of profit share, which depends upon rate assumptions.

I'd also like to point out that 19 charter-in arrangements and six Aframaxes and three Aker newbuilds provide for profit-sharing with the owner when rates exceed the base rate in the charters.

Depreciation and amortization is estimated to be approximately $180 million to $200 million, G&A expenses for 2007 will approximate $110 million to $130 million, and interest expense and other income should essentially offset one another.

Capex for the year will amount to $451 million, $366 million constitute payment for newbuildings; $52 million for drydockings; and $33 million for expenditure of vessels. Of this amount, an estimate $220 million represents qualified withdrawals from the CCF.

With a view towards providing some more specific guidance for the U.S. segment for 2007, we expect vessel expenses to range between $95 million and $105 million; time and bareboat charter hire expenses of approximately $12 million to $16 million; and depreciation and amortization to be approximately $60 million to $65 million.

Based upon that, we'd like to open it up to the floor for questions.

[Operator Instructions] Doug Mavrinac, Jefferies & Company.

I just had a few quick questions specifically as it to relates to your U.S. fleet. First, with the most recent announcement of Heidmar and the lightering operations there -- you mentioned how it could potentially positively impact your lightering operations -- or your Panamax fleet on the West Coast. Can you add some color or discuss that a little bit more in terms of how you see that acquisition benefiting some of your operations along the West Coast?

Yeah, I'm going to have Mats Berglund take that question from Caracas.

Yes, Doug. The lightering activity on the U.S. West Coast is increasing and key for success there is to have a Panamax vessel on the dates. Nobody has more Panamax vessels than we do on the U.S. West Coast. We see good growth opportunities there.

Okay. So many of the access points that the Panamaxes would access -- they aren't sufficient in size to be able to handle a Panamax?

Can you repeat that question, please?

In terms of some of the ports that the Panamaxes would be accessing -- are they just not sufficient in size to be able to offload a Panamax?

Panamaxes are suitable for lightering on the U.S. West Coast.

Got you -- the first time the larger ships that would be accessing those ports?

Yeah, and there's very few Aframaxes in that area. So, again, you need Panamaxes to do lightering on the U.S. West Coast.

Okay, and then as it relates more towards the Gulf of Mexico, Morten or Jonathan, could you shed some light on how the integration of Maritrans and the Maritrans assets has gone now that we're into the first quarter and that acquisition was completed in December?

I'm going to let Jonathan tackle that one.

It's gone incredibly well. I've gone through this in my past experience, so I know what to expect and to know when it goes well and when it doesn't go well.

With regards to relocation of many of the people from New York that came down to Tampa, with regards to getting all on the same page with our SMS system, with regards to making sure that the vessels that are on order are getting delivered in a timely manner, you know, it's certainly not over. Integration takes much more than just one quarter, and we'll continue to work through the year. But, so far, I would have to say it's going very, very well.

All right, great, thanks, Jonathan. And then, finally, this thing in the Gulf of Mexico, and I don't know if this is for you, Jonathan, or for you, Morten, but can you -- one of you guys discuss the opportunities that exist for, perhaps, your status as a U.S. Jones Act company in terms of the -- in terms of the shuttle tanker business that would be in the Gulf of Mexico? Can you talk about some of the opportunities that exist there for you?

I'd love to take that question, but I'm going to let Jonathan do it because I'll get too excited.

That's something that has a lot of people in the industry and, certainly, within OSG excited, and that is despite where and how deep of water in the Gulf of Mexico it is, the oil, once it comes up, and regardless if it goes to an FPSO or to a SPAR or to some other unit, the ability to move that oil from that platform or that FPSO to shore requires that it has to be on a U.S. Jones Act tanker.

So despite the flag of the FPSO, we certain that the vessel is bringing the oil from the ultra-deep water into the U.S. ports primarily, obviously, to the refining region in the Gulf of Mexico is going to be U.S. Flag.

With regards to a fleet that we are amassing, and the size and the skill sets that we have with regards to our longstanding lightering business, we certainly see that we are probably well positioned, if not better positioned, than anybody else in order to start putting vessels both in the future as well as in the near term into this trade. It's a trade that's been talked about for many, many years and, thankfully, we are finally here and seeing customers looking at interest for shuttle tankers in the near future.

So very well positioned for us with our past and our experience and our fleet size and, as Morten just said, an incredibly exciting area for the U.S. Flag.

Jonathan Chappell, J.P. Morgan.

Thanks for providing all the detail on the U.S. Jones Act fleet. I'm going to continue to build off some of Doug's questions. Just looking at the last page in the guidance that Myles gave, without knowing some of the things, like what lightering ships earn, or bulk and car carriers, but coming up with a rough estimate of roughly $90 million in U.S. Jones Act EBITDA in '07, and maybe $30 million in net income if you back out the D&A, is this number right, first of all, but, more importantly, Morten made a great point about how all the newbuildings you have coming out in the next couple of years is really the future of this business. What's the long-term run rate EBITDA we can look at for the Jones Act fleet?

By Jones Act, actually, I guess what we're discussing is the entire U.S. Flag fleet.

That's correct.

Your estimate is pretty well stable for 2007. I'd say you were a bit low on 2008.

Okay, and then '09, '10, when all the new ships come, are we talking about doubling this estimate of 90 million in '07? Do we get to 200 million or is that too aggressive, maybe 150, 175?

By 2010, you're closer to double.

Closer to double? All right, great. And then on your near-term expansion strategy, I've noticed you've done a lot of sale and leasebacks, and there's even some talk in some of the brokerage reports about more of the mid-90s product tankers out in the market right now, and most of your expansion, ex acquisitions, has come through newbuilds. Does that speak volumes about what you think about the current secondhand prices relative to newbuild prices? And would immediate fleet expansion really only come in the way of bulk acquisitions rather than onesies or twosies?

I think the answer is we hold open the possibility of all these alternatives. What we've been able to do in the Aframax as the most obvious one, the biggest discrepancy in vessel pricing wasn't between newbuildings and secondhand, it was between older secondhand and newbuilding prices. The gap was unsupportable.

If you look at the older product tankers we have shed or the Aframax tankers, we replaced those with ships 12, 13, 14 years newer with very little difference between what we sold the older ships and acquired the new ones. So they were very simple, almost risk-free, arbitrage positions.

We did not see newbuilding prices getting much cheaper in the next year or two, and we've said that pretty consistently for a couple of years, and that's really just a function of how long the world's shipyard order books remain, and there's been no change in that. In many ways, they've lengthened -- certainly, here in the U.S., in particular.

So when you have very high secondhand values for 10 to 15-year-old ships, we are going to consider shifting the residual value to third parties and continue to do what we've been doing.

Okay. And one last follow-up quickly from Myles -- did you mention the number of gains on vessel sales that have since been leased back that will be amortized over the course of '07 and beyond?

For '07, the level is $47 million, and a similar amount in '08 as well. We can provide you with a schedule of how that comes into income over the later years as well.

Natasha Boyden, Cantor Fitzgerald.

Jon and Morten, I guess this one's for you. On the Heidmar Lightering business -- the vessels operating in the U.S. Gulf are not going to be U.S. Flag vessels, correct, so they wouldn't be in the same area as the Maritrans vessels were in the Delaware Bay, is that right?

The workboats will be U.S. Flag. The ships doing the lightering will be Foreign Flag, and the item on lightering will fall under Mats Berglund.

Okay.

-- Jonathan on these, the answer is yes, he will.

I'm sorry?

Yes, but they will be cooperating on this operation, obviously.

Okay, great. And then just moving over to the drydocking schedule for 2007 -- Miles, is there any way you can give us some kind of CapEx guidance, drydocking maintenance for '07?

Yeah, if you actually just flip to the last slide, I believe, but I can do that for you -- $52 million --

Oh, I'm sorry, there it is. And you don't have a number for '08, do you?

Not at the moment, but I can provide that to you.

Okay, great. And then just touching on the share repurchase program -- you bought back, I think you said, around 313,000 shares in the fourth quarter. Are you still buying back any shares during the current quarter?

We will continue to look at buying shares if we continue to feel that we are relatively and absolutely undervalued. We have a lot of room under our program, and it's something we'll be monitoring daily.

Okay, and then if I can just follow on, I think it was Doug's question on the shuttle tankers in the U.S. Gulf. You obviously do have your own vessels, but would you look to potentially do an acquisition of companies already operating in that space in order to get an even bigger footprint fairly quickly? Or do you want to kind of build it organically?

This is Jonathan. Good morning, Natasha. There is nobody else yet in the U.S. Gulf doing shuttle tanker with a U.S. Flag vessel. So it will be, by definition, organic growth. The shuttle tanking that is done elsewhere in the world, North Sea, the coast of Brazil, those are all done with international built and crude shuttle tankers. What will happen in the U.S. Gulf will be U.S. Flag, and it just hasn't occurred yet.

Natasha, while I have you on the line, 2008 current estimate is about 430 drydocking days with an aggregate expenditure of about $28 million.

Philippe Lanier, Bank of America.

A couple of questions -- first, on the Heidmar acquisition -- could you give us any guidance as to what the cost was of that acquisition, or the estimated EBITDA impact on an annual basis?

I think Tradewinds has already done a fairly accurate job of presenting what we paid for that acquisition. So I think that's a good number to work with.

And could you give any EBITDA guidance on that?

Why don't you say shy of $8 million in 2007.

Okay, thank you. Then a second question as it relates to that business, I believe you guys have hinted in the past that you reserve the option to take the U.S. product business and spin it off in a separate vehicle, assume it's double hull tankers. If you could do that, perhaps in order to fuel further expansion in shuttle tankers, is that still an option and could you give us an update on that?

It remains an option that's under careful investigation here. We expect that the shuttle tanker business will happen, and it most likely will require newbuildings; that there could be a very substantial market so that remains very much an option under consideration.

We've also constantly said all along that we'd hoped as the U.S. Flag revenue grows we would get some multiple expansion as a result of that. Certainly, in the last couple of hours we haven't gotten that, and unless that manifests itself in our stock, we're going to look at the structural alternatives, because I think we have an obligation to our shareholders to do so.

Okay, and then one last question -- just curiosity on the balance sheet I noticed that the cash levels were way above what I had anticipated. Are you expecting any near-term capital expenditures that are related to Maritrans to explain why it's over 600 million, or is it just the way the cards fell?

It's the way the cards fell.

Terese Fabian, Sidoti Company.

Hello, I have a couple of diverse questions. First of all, getting back to your guidance, does that -- it probably doesn't include the Heidmar acquisition, does it?

It does not.

It does not, okay. And then going to the U.S. Jones Act fleet, do you have a breakout of what percentage of the total U.S. Jones Act fleet you will be operating in 2008 or 2010?

We can give you all that offline, but the good thing about the U.S. Flag is you can count every ship -- Jones Act -- every ship that's out there, and when that ship will go out of [indiscernible], so the answer is, yes, we can give you that -- that's easy.

Okay, and then a last question on VLCC rates -- do you expect that -- I mean -- the rate outlook looks pretty tough for the year ahead. Do you think it's going to improve any unless OPEC increases its supply of oil?

I'm going to answer that a little differently for you. If you look at the last three to four months, we obviously would have liked VLCC rates to be higher. But let's look at what happened -- over the last three months, OPEC, right now, is producing probably 2 million barrels a day less than was a consensus in the market.

We didn't have much of a hurricane season, to speak of. We had the warmest winter in Europe and the U.S. we've had -- at least since I've been alive or the last 100 years, something like that. There's been no major disruptions anywhere -- no strikes, no war, nothing. Yet you continue to have -- you said "challenging" -- you're still talking about a VLCC environment where our industry is making very substantial cash flow and will continue to do so.

So despite all those factors, rates [indiscernible] -- why have they held up primarily one of the reasons is that the differentiation between single hulls and double hulls continues to grow. The rate differential between singles and doubles continues to widen, waiting times for singles is expanding, and if you look at various trade routes, particularly those that are in the Atlantic or West Africa, which is primarily the double-hull market, the rates are significantly more attractive than they are in the single-hull markets.

So, yes, we would like rates to be higher, but you've had a set of circumstances over the last three months that hasn't been as good as you would have liked. But despite that, rates are holding up particularly well. If you look at Aframaxes and Panamaxes, I think you'd all be surprised. But I think people underestimate what the discrimination between singles and doubles is doing to this two-tier market we have.

Terese, just to add additional color to that, the difference between double-hull VLCC rates and single-hull VLCC rates, are $16,000 per day without taking into account the additional waiting time that's incurred by the single-hull vessel.

John Kartsonas, Citigroup.

Two questions -- first of all, on your LNGs. You said that you don't bid for new projects. Are you thinking about divesting this segment? Is it still a strategic investment for you? Can you free some capital from there; invest in higher, maybe, returns?

I really don't understand the question.

Well, you said that on the LNG segment, you are not really bidding on any new projects. You have these four LNGs coming online. What are the plans for the segment?

I think the answer is we have not bid aggressively for it, and by that I mean we have continued to exercise financial discipline, but we have certain returns we're going to make on these contracts, or we're not going to take them.

Having said that, I don't expect that all the LNG contracts will continue to be bid on the basis that they have. There are opportunities to become a provider of LNG services, a much bigger provider for individual charters, and we're talking about things like that.

The CNG business, we have a very strong belief in. We think that the projects are going to materialize this year. Once the initial projects materialize, we believe that the oil majors who sit on the majority of the stranded gas fields will move into that segment in a bigger way. So there's a lot of opportunity in that area.

Then keep in mind, the LNG carriers we're building -- these are $250 million assets that require a very sophisticated crew and management, and we've always felt all along that we were going to build up our technical management team first as we built this business. We have substantially done that. We are now working on the crewing, which is a critical part.

So we're not going to bid for lousy contracts, and we are continuing the strategy that we have, which I think in the future will see us expand in LNG, and we hope, in 2007, we will be entering into concrete CNG projects.

The thing is that, I mean, if see what kind of valuation multiples LNG has been trading at, do you think that you're getting a fair valuation for these assets in today -- I mean, what are the stock price today? I mean, wouldn't it be like maybe wise to either spin it off or sell it off and create, like, a bill of liquidity?

I think that today that we don't get really much benefit at all from the LNG carriers. I think we won't start getting that until revenue starts coming into the income statement of OSG. I think that's one thing.

Four ships is probably not an adequate fleet for which to contemplate an alternative such as TKLNG. But if we extend the business, so we don't credit for it, will we consider alternatives? I think the management has an obligation to constantly assess the alternatives, and if they make sense, you know, you could see us doing them.

A second question on the U.S. market, the U.S. Flag fleet -- what is your estimate of the market share that you currently have?

In the two areas that we operate, which is the first, the lightering lead up in the Delaware Bay -- that's somewhere between 80% and 90% of that market share.

With regards to the clean product -- our current fleet size represents about almost a third of the fleet, and that's in that size category.

Do you think that from the growth aspect there is a case to be made about antitrust regulations? I mean, is that something you think about when you think about growth?

We always bear those considerations in mind and take them into account. Remember, that the Maritrans acquisition was approved by the relevant antitrust authorities when it was made. We don't think we're bumping against any current antitrust limits at this time.

Josh Donfeld, Canyon Capital.

I just had a couple of detail questions. One is, with regards to your ATBs, what's the depth of market for chartering those out, i.e., could you charter, basically, your whole ATB fleet out for several years right now, if you wanted to?

We currently have approximately 20% to 25% of our fleet in the spot market, and most of those vessels in the spot market are ATBs. I think that's absolutely in our control, whether or not we want to firm those up and put them in the term market. But, as you've seen, or may not have seen, in the last three years the ability of the spot market to double, if not, in some cases, triple; has really shown that you do want a presence in the spot market. You don't want to put all of your eggs in one basket, but certainly having a spot presence in the Jones Act market is a good thing.

And just indicatively for, like, a three-year or a five-year contract, what do you think you could get for this?

The numbers that we gave in the package and presentation, that's pretty close to the term type numbers that you would be locking in now -- on the second-to-last slide, I believe.

Okay. And then with regard to your LNG business, what's the return on capital for those ships?

The return on equity capital is in excess of 20%. It's currently levered at 85%.

And your PP&E number, is there any advances against newbuilds in there?

I'm sorry?

Is there any advances against newbuild ships contained in your PP&E?

Absolutely.

What's that number?

It reflects all progress payments.

What number is that?

It's $366 million in progress payments for newbuildings. Oh, you're just taking LNG?

No, no, no, for the whole fleet.

366.

366? And how much of that is LNG?

LNG is not reflected in that amount because it's recorded on one-line equity.

Got it, and, again, you said that the Heidmar is $8 million in EBITDA, which is not reflected in that slide you have?

That's correct. Heidmar is not reflected in revenue or expenses.

Okay, and then last question -- the daily operating expenses for the ATBs and the U.S. product tankers is what?

Daily OpEx for the ATBs is in the mid-teens.

[inaudible] in the product carriers.

Greg Lewis, Fortis.

I'll try and keep this brief. My first question is regarding the chartered in fleet. I think in the next few months, three partial-interest and VLCCs are coming off of being chartered in. Do you expect to re-charter those back in?

I think the two that come off have been taken by a large Norwegian company that is affiliated with those ships. We have been working on some alternative charters to replace those, but they will be for different ships. But we continue to be constantly in the charter in market for VLCCs and Aframaxes, and we're one of the few non-oil companies that can take ships in on that basis.

So are you seeing a lot of appetite from owners willing to charter out their vessels to you?

We haven't seen much willingness from owners to enter into much more than very expensive short year, you know, one-year time charters.

Okay, and then just a quick follow-up -- also, like, this year -- 10 Handy product tankers are going to be, I guess, come off charter and come back to OSG. Do you expect to charter those out or do you think maybe you'll operate those yourself?

We'll let Lois Zabrocky answer that one.

Yes, good morning. Especially the vessels that were referenced are on bareboat and those vessels we'll deliver to their head owner in 2008 and 2009. And when Morton was referring to the vessels that we have committed, we have committed 12 vessels on either time charter or bareboat, four of those will be delivered within 2007, and the remainder will come into the fleet over 2008 and 2009 and 2010 in addition to two newbuilding product carriers that we will have deliver OSG 100% owned in 2010.

Okay, great, and then just one quick follow-up -- regarding the Jones Act fleet, is OSG considering expanding say, for instance, into the dry bulk Jones Act fleet through, like, a possible acquisition? I think I read somewhere that a small dry bulk transport company is for sale. Is that something that they would consider, or are you more focused on products and lightering?

We are in the U.S. Flag dry bulk market today. We were both the old Maritrans and LSG is not a priority for us, and we're going to focus on the crude and product segments in that market.

[Operator Instructions] Urs Dur, Lazard Capital Markets.

Most of my questions have been answered, since I'm late in the line here, but one of the interesting things, and this is more a macro question and maybe somebody can address it is, one of the more interesting things we see on expenses, and it's a big topic, is crewing expense and ever-increasing. I was wondering, do you guys have any plans in place? Do you have any -- I guess, "plans" is the same word -- programs in place to address these issues, over time? What are you doing about addressing crew costs, going forward?

We'll let Captain Johnston answer that question.

With operating expansion coming on, obviously, [inaudible] the acquisition of crews is a very important thing, going forward. We have established training programs. We've changed our nationalities on our international flagships who are predominantly now coming out of the Philippines. On our U.S. flagships, we have a large expansion coming there as well. We have the plans in place right now for training and gearing up for the crew and getting the people that we need to man the ships.

So, yes, it's very important to us, and it's something that we've addressed, and it's something that we're going to continue to monitor, going forward.

Just a quick follow-up -- is there -- do you have any specific organizational structure set up to source people, say, from the Philippines or from India, or is this something that's evolving, over time? I guess it's evolving is your answer, but --

No, no, not at all. We do have a structure in place, right now, in a large organization. [inaudible] to handle for our international crewing. In the U.S. we have a large structure in our Tampa office to handle our [inaudible]. Those structures are already in place. What we're doing is just fine-tuning those structures and working on programs so that when you get the crews, you can retain the crews.

Okay. Overall, you do foresee that there is inflation in crew pricing that is above and beyond has been typically seen in the past?

No question about it. It's not only on the crew pricing but also in the tanker crews but also on the LNG crews. This has been going on where people are just offering a lot of money to get qualified people, and as new companies start up, these companies don't have these programs in place, and the only thing they can do to get the crews is offer somebody big money to come and work for them. So there definitely is escalation going on and poaching going on.

Well, very good -- a good year, thank you very much.

There are no further questions. I will turn it back to Morten Arntzen for closing remarks.

Thank you very much for joining. Thank you for all the questions. So now we will be updating the website fleet list within the hour so that it is correct. And look forward to chatting with you all again either during the quarter or within three months. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the call, and you may now disconnect. Have a good day.