Octave Specialty Group Inc (OSG) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your OSG earnings call. My name is Jeanne--I'll be your conference coordinator today. At this time, all lines are in a listen-only mode, and towards the end of the conference call, we'll be taking questions. If you need operator assistance, please key *0.

At this time, I will turn the call over to your host, Mr. Jim Edelson, General Counsel. Sir, please proceed.

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. and Heidmar Lightering with OSG's operations, estimated TCE rates achieved for the second quarter of 2007, and estimated time charter TCE rates achieved for the balance of 2007, anticipated levels of newbuilding and scrapping, projected dry-dock and repair schedule, 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 2006.

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, everyone. Thanks for joining us this morning. It's a real pleasure to be with you this morning.

Let me introduce the management team that's with me. Jonathan Whitworth, the head of OSG America, Inc. You've heard from Jim Edelson, our general counsel. Jennifer Schlueter, our head of corporate communications and investor relations--Lois Zabrocky, the head of our product tanker SBU--Mats Berglund, the head of our crude transportation SBU--Myles Itkin, our chief financial officer--and joining us from Manila is Captain Bob Johnston, our head of ship operations.

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

It was a challenging business environment during the first quarter of 2007. I'm pleased to say that OSG's results and cash flow from operations were again strong for the period. It was another solid quarter with lots of activity and a good performance from our technical operations.

While we are generating strong cash flow from operations and from active asset management, we are simultaneously investing in and expanding our global platform, where scale and diversification bring long term benefits to shareholders who want to invest in a quality shipping company that is being run for the long haul.

Look at the first quarter. Net income was $84.7 million, or two points--$2.16 EPS. Adjusted for the double hull tanker sales, it comes in at $1.91, which is what we get credit for. That excludes the $15 million gain on our sale.

Average daily TCE rates for VLCCs were $47,000 a day in the quarter, versus $80,000 a day last year, and that explains a big part of the falloff in earnings from the year before.

Aframax, Panamax and product carrier spot rates were roughly in line when comparing quarter over quarter, as were product tanker time charter rates. I'll go into that in a little more detail in the next slide.

Moving to segment detail. The crude oil segment was down 29%, to $147 million in TCE revenue. This is 15% of total TCE revenue, which compares with 74% from last year. Product TCE was up 7%, to $58 million, representing 22% of total time charter revenue. This compares with 90% the year before.

The U.S. Flag segment TCE revenue was $50 million, representing 19% of total TCE versus just under 5% of total TCE last year. Revenue days, of course, increased 222%, due to the November 28, 2006 acquisition of Maritrans.

What happened in the first quarter? I'll try to go over just some of the positives and the negatives.

We continued to have, on the positive side, strong demand growth in China and North America. This is primarily in transportation fuels, what with delays in the Bosporus and an 18-day strike in the ports of France. Now these were events, and events do happen in the shipping world. In fact, the--I would say, it is an abnormal quarter when there are no events in the world.

There was escalating tension with Iran over nuclear and hostage situations. And there was some increase in South American movements into Asia. Now, this is not just Venezuela. There were increases in crude from Ecuador and Colombia to China, and towards the end of the quarter, we know that Venezuela reached agreement to start shipping crude oil to Japan.

Our liftings at Ceyhan via the BTC pipeline reached 470,000 barrels per day. This compares with none in the first quarter of last year. This was good for the Aframaxes. And there was unplanned refinery downtime in the U.S. to upgrade capacity, and this was very helpful for the product tanker segment. In addition, the product tanker segment benefited from the new IMO regulations in vegetable oil trade.

Now, what were the negatives in the quarter? You had reduced OPEC production, in compliance with the quotas. That compliance--the OPEC quotas was the highest we've seen for a long time. And that--most importantly, about a million barrels a day of reduced production in the Middle East.

Now, you can take that as a negative. You could also see it as a positive. So despite this falloff, and OPEC production is critical, it's strongly correlated to tanker rates--we still had a good quarter. There was lower demand in Europe and Asia from a warm winter, and there was about--an increased production in the U.S. Gulf of Mexico of about 300,000 barrels per day. And there was significant reduction in OECD inventory levels. Again, that can be seen as a positive, because those will have to rebuild in subsequent quarters.

And there was an increase in the tanker fleet of about 1.7% during Q1. [technical difficult] to the next slide.

You know, as we have reiterated, we are following a balanced growth strategy at OSG, and that includes maintaining financial strength and stability in order to maximize return to shareholders in any operating environment. We want to diversify and expand our fleet in order to enjoy the benefits of scale, and create a sustainable model in this highly volatile and cyclical market. And three, actively manage our assets, which allows us to expand or shrink our fleet as market movements dictate, not what our financial commitments may or may not allow us to do.

Since 2004, we have consistently executed on programs that support our goal of being a market leader in each of our operating segments, while at the same time, delivering superior returns for our shareholders. Let's go through some of the highlights, starting with financial strength and flexibility.

When we announced our share buyback program last fall, we did it because our board and our management felt the stock was very undervalued. That undervaluation has continued into this year, if not expanded.

We were a bit slow getting going on our buyback program, primarily because the Maritrans acquisition tied our hands for several months. But we made significant progress during the first quarter, during which we repurchased 1,044,000 shares at an average price of $59.42 per share. So by the end of the first quarter, we had completed 81 million of the 300 million authorized program.

Yesterday morning, we were approached by ADM to buy their 13.3% block in the company, a holding they had maintained since the early '90s. As we believe the stock remains substantially undervalued, we gathered our board by teleconference yesterday morning, and increased the authorization so we could buy the entire block.

This was not a difficult decision for the board, as it was entirely consistent with our reasons for establishing an initial program last year, and our severe undervaluation has persisted. In addition, our strong financial position enables us to take advantage of large opportunities that sometimes pop up.

Now, we've had plenty of opportunities of late to buy assets at substantial premiums to NAV in the past. In this case, we spent $333 million acquiring the ADM block at a price that we think is at a significant discount to NAV. This will be a highly accretive transaction for shareholders, and a much better investment than some of the others we have looked at in recent months.

With respect to capital allocation priorities, you can expect more of the same from OSG. Our disciplined approach to investment, expansion and repurchases are done to maximize return on capital in each of the sectors we operate.

While the run-up in our stock the past week narrowed the valuation gap with our peer group, we still believe we are undervalued, and that our share price does not reflect the quality of earnings our diversification efforts have created for our shareholders. For this reason, our board authorized a new $200 million repurchase program yesterday.

Moving on, the Maritrans acquisition, among other things, enabled us to effect a qualifying use of our capital construction fund, something we have been searching for, for well over a decade. We will use more than $290 million of the capital construction fund towards the construction of three ATBs that will go into the Lightering trade. The qualifying use of the CCF fund eliminated a potential tax penalty, allowing us to recover approximately $8.50 per share of the $37.50 per share acquisition cost of Maritrans.

In addition to this, we--in the first quarter, we sold 4.6 million shares of double hulled tankers, generating a gain of $15 million. We remain confident in DHT's outlook and merely reduced our position to be more in line with what we initially intended at the IPO.

As we have stated in almost all our earnings calls, we aim to be market leaders in each of our operating segments. Consistent with this goal, last Friday we closed on the Heidmar Lightering acquisition. This small but important transaction should enable us to provide better service and offerings to our clients, while improving the results in both the Aframax International and Panamax International pools.

The Maritrans integration is well underway. This acquisition, I need to emphasize, wasn't done solely for its asset base and revenue stream, although they were clearly important to us. By combining our shore-side operations, we have created a platform to oversee the growth from the extensive newbuild/rebuild programs at both companies. Our confidence in the capabilities of the combined team allowed us to go forward with additional newbuild commitments of up to six product carriers and three ATBs, all announced in the first quarter of 2007.

Moving back to asset management. Vessel S&P activity during the quarter included a definitive agreement to sell the Overseas Donna, a 2000-built VLCC. This is a forward sale arrangement--that is, we will deliver the vessel at the buyer's request, no earlier than July 2007 and no later than July 2009.

The confirmed sale price will, at minimum, generate a future gain of $75 million. This capital gain, in fact, is greater than the cost of the VLCC at the time she joined our fleet.

Now, you need to understand--we were not actively seeking to sell the vessel. We believe that it was in the best interest of shareholders to capitalize on an opportunity that will generate a capital gain, again, $75 million or more, that is greater than the discounted value of the forecasted earnings for the balance of the ship's useful life.

In addition, during the period, we chartered-in two additional Aframaxes and one VLCC. We did sale/leasebacks of two of--the OS Nedimar and the Limar. And on April 24, we closed on the sale of the Almar, taking proceeds of $38 million.

I think we've already talked about the ATBs, and I'll talk a little bit more about that later.

Slide six, please?

As mentioned earlier, we acquired Heidmar Lightering. This transaction closed on Friday. Heidmar Lightering was one of the three main lightering companies in the U.S. Gulf. We have acquired this from Morgan Stanley. The cost was $41 million. It comes with four chartered-in Aframaxes, including ownership interest in the Brazos and the Sabine.

It comes with a portfolio of one- to three-year contracts. That is, 70% of the voyages are covered by contracts, and it includes customers, some of which we're already servicing, like Seariver, Vela, Marathon, Vitol, and Conoco Phillips. We now have an office in Houston, with a staff of eight, who we are very excited to have join the OSG team. And we think there are significant synergies of this business. This creates greater earnings stability, and potentially higher utilization, leveraging Aframax International's cargoes and positions and fleets.

It gives us an opportunity to grow U.S. West Coast operations with our strong Panamax position, through Panamax International. It gives us better market intelligence, and now we have market presence on all three U.S. coasts, covering U.S. Flag and international flag plates. As many of you know, we have a very big [operate] lightering presence in the U.S. Gulf.

Looking at the Maritrans acquisition, and I'm going to--this is on the next slide. And I'll stress again, this was a highly strategic acquisition. We have achieved critical mass in a market with high barriers to entry, and an attractive supply and demand profile.

The key takeaways of why we did this. This combined two leading players in adjacent but complementary markets. We have broader service opportunities now for customers, an expanded geographic footprint, we are operating along all the coasts and up in Alaska -- the only company doing so. And most importantly, we have a superior platform for future growth, and we will be pursuing future growth in this segment. And in some ways our newbuilding program has been preemptive, and ensures preferential access and treatment by shipyards in a very shipyard-constrained environment.

I've already mentioned the qualifying use of the capital construction fund. I will say the integration is well underway. The New York based personnel have all moved down to Florida--we are now operating other offices right adjacent to the Port of Tampa. And we've already identified drydocking, purchasing and insurance synergies.

What I would also--we are committed to bringing forth the value in this very exciting segment. And why is it so exciting? If you look very simply at the next slide--and this is a U.S. Flag supply and demand profile--and you see the projections on demand are provided by Wilson and Gillette. They are fairly conservative projections, we believe. And the conservative nature is that of the 985 million barrels per day in refinery expansions projected in the U.S., they are only--they are forecasting that roughly 10% will go on Bluewater vessels. We think that this number may be closer to 50%, and in fact, that this black line you see in the drawing may approach the top of the chart.

Nevertheless, we believe that if there is a temporary period in which supply and demand are out of line, as you see, this will affect the single hull vessels. We believe that our strong double hulled presence, our committed time charters, nine of the ten Aker newbuildings already committed on time charter, combined with our large, long term and [COA] customer commitments, will keep our vessels both employed and at competitive rates.

Lastly, even though we're not predicting that, many of the single hulls may be removed before their [OPA] expiry dates, which we have not portrayed in this chart. This is a very exciting market.

Moving to the next page--and this is really a chart of our diverse, modern and flexible fleet. It also shows our significant newbuilding program, our commitment to growth. And you'll see a picture there of the Overseas Long Beach--this will be the second in the Aker series, and we're showing you this just to reinforce that our newbuilding program in the U.S. Flag is real, it's happening, and the ships are going on the water.

We also have the picture of the Overseas Los Angeles, which used to be called the Overseas San Francisco. But Overseas San Francisco was too large a name to put on the stern, so we renamed it.

You also see a picture of the OSG 242. This is a rebuilt, single hull barge that is now double hull. And as she has come out, we've put OSG 243 in, for conversion from single hull to double hull under the patented process developed by Maritrans.

Go to the next slide, and I'll talk a little bit about the market outlook for the rest of 2007. And some of this refers back to the second slide I went through.

We expect OPEC production from the Arabian Gulf to increase in the last half of the year. The price for oil now is within their targeted bandwidth. Higher demand, rebuilding of inventories, and possible product shortages will necessitate, we believe, production increases from OPEC, and most importantly, from the Arabian Gulf.

Second half demand forecast--we expect significant increase, and non-OPEC production cannot handle the seasonal increases that we would expect to happen.

The refinery maintenance season is over in the first half of the year, so the second half 2007 refinery runs, we forecast to be about two million barrels per day over current levels.

And then most importantly, one of the most important factors--the two-tier market continues to offset newbuilding deliveries. As we've said all along, the market preference for double hulls over single hulls is creating a volatile market. But whenever there is a balance of shorter hull--of shortage of double hull markets in any loading port, rates can go up $20,000 or $30,000 a day. I think, in fact, in Aframaxes, we saw rates go from $71,000 to $28,000 a day in the course of one day. Volatile markets, but the need to replace the single hull fleet and a preference for double hull will keep the rates stronger than we think most of the forecasters have been doing.

You remember last year? People were concerned about an active hurricane season--we didn't have one? There is a possibility that may happen last year. I am not a weather forecaster or expert--I simply read what the experts say, and they say there is a high probability that we will have an above-average hurricane season this year. We shall see.

There is clearly a need to rebuild inventory levels--I already mentioned that. The OPEC production cut has resulted in significant drawdown from the last two quarters, and we think that bodes well for the second half of the year.

China's demand growth has been historically understated, and it continues to be strong. Transportation demand now at 50% of total demand and growing fast.

Scrapping may be above expectations, and this includes not just scrapping, but conversion of tankers to FPSO projects--in some cases, single hull VLCCs being converted in dry bulk carriers, so people can take advantage of the extremely strong dry bulk markets.

And of course, geopolitical concerns continue to impact our market. The recent elections in Nigeria are just one of those factors.

And I'll give the people an opportunity to ask questions on this at the end of the session. Now I'm going to turn the mike over to Myles Itkin.

Thank you, Morten. Good morning.

Although the big news is our repurchase of ADM's 13% stake in OSG, we'd like to spend a few minutes on our financial results for the quarter.

Slide 12 presents the consolidated statements of operations, and highlights certain individual line items. As a practice, any line item comparison of Q1 '07 with the prior year's quarter should be viewed within the context of our acquisition of Maritrans in November of 2006, since Maritrans' results are not included in the prior year's quarter.

Specifically, in Q1 '07, OSG America, a combination of Maritrans and OSG's U.S. Flag vessels, contributed TCE revenues of $50 million, representing approximately 1,700 revenue days. Vessel expenses of $22 million. Charter hire expense of $2 million. Depreciation and amortization of $13 million. G&A of $5 million. And operating income of $13 million.

OSG's consolidated TCE revenues for the first quarter of 2007 decreased by $20 million, to $260 million, from $280 million in the same period in '06. This reduction was principally due to a decrease in the spot rates earned by VLCCs of $33,000 per day, representing $51 million for the quarter.

Results for all other sectors held up well in what was a tough operating environment. Actual hire days exceeded the forecast we provided in February. The Overseas Crown, a chartered-in VLCC, suffered engine room damages in January, and is expected to rejoin the fleet in May. This damage resulted in 66 days off hire in the first quarter, and 35 days forecasted for the second quarter.

Forecasted off hire days for the second and third quarters have been revised to reflect some shifting of drydocking between the periods. These revisions are reflected in the chart on page 10 of the press release. Additionally, we're now including in this chart the expected out of service days to rebuild ATBs.

Charter hire expense during the quarter increased by $2 million, from $48 million in the fourth quarter of '06, reflecting the delivery of three vessels and the sale/leaseback of two vessels. These increases were partially offset by the off hire days on the time chartered-in Overseas Crown. Also with nine of our chartered-in VLCCs subject to profit-sharing, the decrease in VLCC rates from the fourth quarter of 2006 reduced quarter over quarter charter hire expense by $1 million.

D&A expenses increased by $5 million, to $29 million from $24 million, quarter over quarter. This was principally due to the acquisition of Maritrans, and an increase in non-cash compensation related to stock options and restricted stock of approximately $1 million.

Non-cash compensation attributable to the amortization of stock grants is likely to run at close to $2.5 million per quarter for the balance of this year. This has already been included in our G&A guidance of $110 million to $130 million for fiscal year 2007.

Interest expense decreased by $3 million, compared with the fourth quarter of '06, as we reduced our outstanding revolving credit debt by $175 million to $290 million, and capitalized interest during the period increased by $1 million.

Please note, the variability of taxes is driven to a large degree by the non-shipping income earned by our foreign subsidiaries, for example, interest income on deposits, gain on sale of securities, etc. In Q1 2007, non-shipping income amounted to $22 million, including the $15 million pre-tax gain on the sale of DHT stock, compared with Q1 '06 of only $2 million.

Slide 13 reviews key elements on the balance sheet. Cash and cash equivalent levels stand at just under $600 million at March 31. Most of the balances have been generated by our foreign operations, and are maintained offshore. Our debt, on the other hand, is mostly U.S. based, and the current repatriation of foreign funds to settle such debts would have tax implications for us.

During the first quarter of 2007, we withdrew $98 million from the capital construction fund to satisfy payments on the three lightering ATBs currently being built in U.S. shipyards. We expect to withdraw an additional $192 million over the next two years from the CCF, including about $100 million for the balance of 2007. This will bring our total qualified funds withdrawal to $290 million.

The use of the capital construction fund should be considered when evaluating our future capital commitments, since this will not require any incremental borrowings.

The deferred gain on sale and leaseback vessels of $218 million is being amortized over the life of the type of the charters, as a reduction of charter hire expense. This occurs at the rate of $12 million per quarter, for the remaining three quarters of 2007. Now, this run rate will hold through June 2008, and then will step down to about $11 million per quarter for the final two quarters of that year.

Slides 14 and 15 underscore the actions we've taken to increase fundamental shareholder value, by increasing our level of locked-in revenue, and actively managing our assets to provide low operating breakeven rates. In furtherance of our strategy to provide an increased level of stable earnings, we have expanded in markets characterized by a higher level of time charter coverage--product carriers, U.S. Flag, gas, and lightering. The amount of locked-in revenue has grown close to five-fold, from $186 million at year-end '04, to $1.1 billion at the end of March 2007.

A breakdown of this locked-in revenue by sector shows that the U.S. sector constitutes the greatest percentage of locked-in revenue, at 62%, while representing 45% of all locked-in revenue days. And at 19% of locked-in revenue, and 35% of locked-in revenue days, the international product sector is the second greatest contributor to earnings stability.

I'd like you to note that this high level of $1.1 billion of locked-in revenues excludes revenue from U.S. Flag lightering, which is based on fixed-rate, long-term contracts of freightment, providing for minimum monthly cargo quantities of 6 million barrels. This will generate in excess of $350 million over the next 11 years.

Nor does this $1.1 billion of locked-in revenue include our share of time charters done through the Aframax International pool. This represents a further $50 million, and brings the aggregate locked-in revenue to more than $1.5 billion.

Details regarding locked-in revenue and days per sector are included in the appendix at the end of this slide presentation.

Just for additional information--the LNG sector, in which we hold a 49.9% joint venture interest, is scheduled to deliver two of its four newbuilds in the fourth quarter, with the other vessels delivering in Q1 '08. Our share of joint venture earnings are projected to grow, from approximately $8 million in 2008 to $10 million in 2012, as the underlying debt is serviced.

Please turn to slide 15 for a review of our international flag breakeven levels against 10-year average spot rates.

The company's P&L levels are substantially below the 10-year average spot rates across all vessel types. Ten-year average spot rates exceed breakeven rates by $20,000 per day for VLCCs, $9,000 per day for Aframaxes, nearly $6,000 per day for Panamaxes, and over $3,000 per day for international flag product carriers.

These low breakeven rates enable us to provide superior earnings performance to our shareholders.

Transitioning to slide 16, which updates forward-looking guidance. We anticipate no change to the guidance provided, other than separating and updating the single line item, Other Income Net of Interest Expense, into its individual components.

Other income for the year is estimated at $39 million, $22 million of which was realized during the first quarter, and included the $15 million pre-tax gain on sale of DHT shares. The $17 million to be realized during the balance of the year represents only interest income on cash.

Interest expense is now expected to approximate $59 million for the year. Please note, this is net of $21 million in capitalized interest. Interest expense includes the effect of the additional borrowings incurred to fund yesterday's repurchase of the 13.3% ADM block.

Please turn to the summary slide on 17.

In summary, we have grown the business in a capital-efficient manner, entering into market charters and sale/leasebacks when the resulting charter-in rates reflect a lower cost of capital than that which is achieved via ownership.

As you know, many of our charters-in have extension options, walkaway options, and repurchase options. Through sale/leasebacks, we've transferred residual value risk on more seasoned tonnage to third parties, and through vessel arbitrage transactions, we have sold older, less efficient tonnage at high prices, and reinvested proceeds in more modern, higher-earnings tonnage.

We have expanded significantly in those sectors with high levels of revenue stability, with the result that our current levels of locked-in revenue exceed $1.5 billion. Our strong investment discipline causes us to solely enter into transactions that exceed our cost of capital.

Our strong balance sheet has afforded us the opportunity to expand our core business, providing for long-term fundamental shareholders' value, while simultaneously undertaking shareholder-friendly capital allocations, as evidenced by our repurchase of 16% of our float during the last ten months.

At this point, I'd like to turn this back to Morten and open it up for questions.

Yes, open to questions, please?

(OPERATOR INSTRUCTIONS)

We'll take a question from Mr. Doug Mavrinac of Jefferies and Company.

Great, thank you. Good morning, Morten and Myles, and congratulations on your recent announcements, which the market is clearly applauding as well.

I just had a few quick questions for you guys. First, can you talk about your share repurchase program by way of the criteria that you look at and use when determining when you would like to purchase your shares, whether it would be price or timing? And also, I guess that kind of segues into, could you shed some additional color on the blackout periods and some of the restrictions you face around buying shares, given some of those blackout periods?

Doug, they are very much related, so thanks for asking those questions. Our blackout period extends from two weeks before the end of the quarter to two days following the reporting of earnings. We, however, have shortened the period of time for reporting. But that still represents kind of five weeks per quarter.

OK, great. Thank you, Myles.

Yeah, as it relates to timing as a result of the blackout periods for us, other than putting in place a 10b5 program, we're limited during the quarter to the period of time in which we can acquire. We acquire based upon a view of the net asset value of the firm versus the trading value. Even at today's current price, we feel we're selling at a substantial discount to net asset value, so find it attractive to repurchase shares.

Yep, okay, that's perfect. Perfect. Fantastic. And then, kind of along the same lines of capital deployment--and Morten alluded to this in his earlier comments. When you guys are looking at potential acquisition opportunities, what is your primary criteria there? Is it relative return that you would get on that acquisition versus repurchasing shares? Or what, exactly, do you look for when you decide to pursue an acquisition?

We're seeking economic returns that well exceed our cost of capital. From our perspective, share repurchase and investment in the long-term fundamental value of the company are not mutually exclusive. We balance these as opportunities present themselves, in terms of the acquisition of operating assets, to provide for stability of earnings and long-term cash flow on a consistent basis over the long haul to shareholders.

Okay, fantastic. And then one final question. Can you talk about your plans for a--your U.S. Jones Act fleet, and if--we had talked in the past about possibly looking at alternative structures for that particular business. Is that something that you were still considering?

Yeah, I think in Morten's remarks, he mentioned it's still under active consideration.

Perfect. Perfect. That's it. Thank you very much, Myles.

Thanks.

I'll take our next question from Justine Fisher of Goldman Sachs.

Good morning.

Hey, good morning, Justine.

I have a couple questions about shipyards and shipbuilding. The first is about the Chinese yards. And it seems to me that if everyone has said, historically said, that the Achilles heel of either shipping industries or other commodity type industries is that when prices or rates are high, that producers tend to overbuild. And in the last few years, the shipyards in Japan and Korea have all been full, and so that's put a limit on how much the order book could increase.

But we've seen, at least over the last few months, significant orders put in at Chinese yards, and I was wondering if you guys could comment on how you think that will affect the market. I guess, not necessarily in '08, '09--but in 2010 and beyond.

Justine, predicting the shipping market five years out is--there's one or two guys in Norway that can do it, and maybe a couple in Greece, and that's about it.

Right now, if you look at the order book for tankers, and that's what we focus on, there are enough tankers ordered to replace the single hull fleet. We have been pretty consistent saying is that--while there is flexibility within the IMO guidelines to delay--to allow single hulls to trade beyond 2010, we think the commercial marketplace is going to so discriminate against single hulls that that process will be accelerated.

So the IMO guidelines are helpful--the commercial market is more important. And then you have to look at overall growth and demand for the trade. The shifting of--the increase in long-haul trades, Venezuela to China, Venezuela to Japan, West Africa to China-- ton-mile demand continues to grow, so if you look at the total order book right now, even all the way through 2011, and just look at the double hull fleet--the world is keeping up with it, absent some big changes. And of course, changes can happen, and that includes those pipeline projects we know.

Now, keep in mind, with the Chinese yards right now, while they have a fair amount of tankers, the real action now is in bulk carriers--I think container ships. And the LNG order book continues to be extremely strong.

What happens beyond 2012? We'll have our conference call in the fourth quarter of 2012, and you can be there for it. But right now, the balance between--if it was a double hull fleet, then that, to me, is what people should focus on. We're far from overbuilt yet.

Can it happen in the future? Yes. But you don't see it today.

The second thing I'll add is why I have enormous confidence in the ability of the Chinese yard groups to build their infrastructure on time. It would be extraordinary if all the yards that are under planning are able to produce, one, their backlogs, existing backlogs--and deliver the ships that have been committed to 2011, 2012 on time. That would be an extraordinary accomplishment.

Okay, thanks. And then the second question that I had is regarding retrofitting U.S. yards and Chinese yards, or other yards abroad. And I know that this has been a big issue, not necessarily with you guys, but with one of your competitors in the Jones Act space, and I know that you guys are doing a) your big product tanker build, and then b) your ATB builds and retrofitting in the U.S.

But I was wondering if you could comment on, first of all, how--whether or not you think Jones Act companies will continue to have the ability to do this type of work abroad going forward, and b) how you think that will affect supply in the Jones Act, and then c) I guess it doesn't seem to me that you would, but whether OSG would consider doing this for some of your vessels because of the lower cost going forward.

We're going to let Jonathan Whitworth answer that question.

Good morning, Justine.

Hi.

I guess I'll take b) first.

Well, whichever one you want.

I think that right now, there is a lot of scrutiny from both Washington D.C. all the way down to individual companies, looking to make sure that--is something that you can rebuild in China something that you can bring back. And I won't really comment on that any further, because those are actually under litigation as we speak, with both the Coast Guard and some of our competitors in the hot seat with regards to approval for doing this reconstruction in China.

With regards to, will this have a damaging effect on the Jones Act--I think the answer is no. I think there's only so many vessels that can actually be suitable to this type of reconstruction, and really, one of the big successes to Maritrans' previous rebuilding of tug barges was the fact, not that we had the patents--the patents were nice. The real test was the fact that the vessels were extremely well maintained and in fantastic shape. If you don't have that to begin with, going to China or going to anywhere else in the world isn't going to help you out.

So will these Chinese rebuildings continue? I don't know. I think there's going to be some continued fights in that effort. But will it have a negative impact on the Jones Act in the long term? I firmly think, no.

Okay, thank you for that. And then the next question I had, and I know--maybe we can name names and maybe we can't, in this discussion. But one of your competitors was recently acquired by two other of your competitors, and I was wondering if you guys could comment on your involvement in that process. And then also, just more generally, whether OSG has a desire to get into the Suezmax market or not.

I don't think we can comment on our involvement or lack of involvement in that, because that would be inappropriate. I think that what I explained--we have looked--we have a very attractive, growing product tanker business. It is one of the top ten fleets in the world. We'd like to grow it, and we intend to grow it.

When we made the Stelmar acquisition, over two years ago, we explained that one of the reasons that we were doing it was that we did not think we could duplicate that fleet in the market, if we went on the S&P market, to buy that fleet. We would just be chasing the market up. And if you look at the market since then, that's exactly what happened.

In fact, the Almar, which we sold--two days ago?--for $38 million, we recognized a $5 million gain, and that's one of the ships that we acquired in the Stelmar acquisition. Obviously, we've benefited from the earnings during that period.

So we believe now that we would have a better chance in expanding our fleet right now on the S&P market than what you see on the stock exchange. And that's just a conclusion we made. And I will also acknowledge--when we looked at that company you're talking about, it had more than a product tanker fleet. If it had been just a product tanker fleet, we might have been a little bit more aggressive. But you have the complexity of the Suezmax tankers also.

And that--I think that made it a little bit more than we were prepared to swallow. But we will continue to be active, and we are committed to those sectors, and I'm going to let Mats talk a little bit about the Suezmax tankers, specifically.

I think we have a key interest in that segment as well, but the Suezmax market is the most highly priced one, of all the markets, and it just limits for where we draw the line.

Okay. Thanks a lot.

And we'll take our next question from Natasha Boyden of Cantor Fitzgerald.

Good morning, gentlemen and ladies. I just wanted to a) congratulate you on the ADM purchase. Great to see such a good use of capital there.

Morten, I'm going to ask you to try and read some minds, after Justine's asked you to look into the future. Can you perhaps add some color into why ADM decided to sell at this point? Was there any particular reason, or just that they had been in for a while and the stock has done well over the last ten years, or whenever it was.

I'm probably one of the few people on the call old enough to remember when they acquired it, but when ADM acquired the initial position in OSG--oh, Myles is, too. Captain Johnston is also, just for the record.

And I'm still awake.

When ADM acquired the stake in OSG, OSG had a very large dry bulk business. And part of the rationale at the time, as I understood it, was that the stake in OSG was a hedge to their chronically short transport--dry bulk transportation position, a position which continues today. As you know, we're down to two cape-size bulk carriers on long-term charters, and one U.S. Flag dry bulk carrier. So we no longer provide a hedge for that.

They acquired it in the '90s--I'm not sure, it was over a period of time, so I'm not sure what their basis is, but I think it was pretty much low double digit--probably closer to 10 than 20. So I'm not sure--I don't know, that's just a guess. So they've had a very nice run in this share.

And as far as I know, they have pretty interesting investment opportunities in ethanol and a whole lot of areas to put their money. My guess is, they're doing the same thing we're doing--they're investing their capital in those areas where they have real strength.

So they've had a nice skate on this, they've been a good shareholder, and they were--they--we were given the opportunity to buy that block yesterday, and we did.

Well, it's a great use of capital, in our opinion, and we're really pleased to see it. Just a little more mind reading, if you don't mind, Morten. Any color on why OPEC suddenly decided to be so compliant with this latest cutback? I mean, usually, they're typically completely ignoring all of the edicts that come out. Did you hear anything about that?

Well, I think it's really--it's more the numbers. The 1.2 million cutbacks, all but 200,000, were in the Arabian Gulf, and the majority of that was Saudi Arabia. So if you really--if Saudi Arabia wants to reduce production, they can, and they have, and they did.

If they want to open the tap because there's going to be demand, which we've forecasted, they have the ability to do that, and they have the production capacity to open the taps.

Okay. And lastly, if I can just move over to the U.S. market. Obviously, the ATBs that you're going to build are clearly a big asset for you, but given the ongoing strength in the market and the overall age of the Jones Act fleet, can you give us some idea how the values of those ATBs are trending right now?

Good morning, Natasha.

Oh, hello.

The ATB market is illiquid. There is not a lot of transfers in that type of business. So it's difficult to base it on a resale valuation. But clearly, as you know, we just announced approximately $88 million, the building of three ATBs ourselves.

So I would say that on newbuilds, we've seen some strengthening--those are on a dollar per barrel slightly more expensive than the ones that we ordered just over two years ago, so there has been some market creep with regard to the pricing of those vessels.

But other than that, it's a tough one to peg.

Okay. And then, just a last quick question. Can you give us a quick update on the gas business in particular, the CNG? Is there any development there?

Really, nothing to report on there. The LNG carriers are coming on-stream, as we had projected, and we continue to work very aggressively on the CNG projects. I think the only update from last time is, the ship design that we've been working on is now complete. So we believe we have the marine solution, and we are working a couple of projects feverishly.

Okay, great. Great, well, thank you very much, and congratulations again.

We'll take our next question from Jonathan Scarpell of JPMorgan.

Thanks, guys--Jon Chappell. Morten, you reiterated a comment that you made in the press following the OMI acquisition, about if it was product tankers, it might have been different. What is it about product tankers that you think offer--let's just say, enhanced longer term potential than the crude side right now? And is it more difficult to add your product tanker exposure to charters versus the crude side?

It's not that we're choosing one over the other. If you look at our crude business, through Tankers International, we are the biggest player in the VLCC market in the world. Through Aframax International, we're the second largest player in the world, and through Panamax International, we're the second largest.

So we have the scale in those three segments to take on contracts for freightment, and client positions that enable us to triangulate better, to trade better, provide better service. And we believe we have as good market information in those three segments as anyone, and we have more scale than any other player in the world.

In the product tanker market, while we have a good size, we don't have the same scale we had there to take on the kind of trading and contract positions, cargo positions, we'd like to. As I've said before, you need to be big in the Pacific, you need to be big in the Atlantic, you need to be a player in the time charter market, and you really need--we need to be a bigger size to get there.

So while we like the business, and we have been enhancing the revenue streams of the fleet we have since we acquired it, we still need to get better, bigger, and we will do so.

So we'd like the product tanker business to be as efficient and as market savvy as our crude business. We will continue to invest in the crude business--as I said, we're not backing off of that, and the newbuilds that we announced last year and the new charters in this last quarter reflect that. And clearly, the Lightering investment has directed our crude business.

Does that explain it?

Yeah, it does. And then the second part--do you find it more difficult, though, to charter-in product tankers than you've been able to find it on the crude market?

Well, I wouldn't say that, because you can look at our--over the last--we were very aggressive last summer in taking in product tankers on time charter, and the number is--12?

Yes.

So we're very happy about that, because those were done at rates last summer that you could not duplicate right now. And as you know, we have some older product tankers that come off charter in 2008 and 2009, and we have replaced them entirely with our charter-in commitments as well as our own contracting.

Okay. And then one last question, on the double hull tanker stake. Are there any lock-ups that are still outstanding? I know you mentioned that you--you sold the stake, as was your plan when it was initially listed as a separate company. What's your plan for any further sell downs, whether it be later this year, or going forward?

Well, we did a--continue to evaluate our holdings with the double hull tankers. We have not as yet made any definitive decisions. We're supportive of the company--we think it provides an interesting financing vehicle for us over time, assuming that the right opportunities present themselves.

But fundamentally, we just remain flexible in our position [tons].

Okay. And do any lock-ups remain?

It was a 90-day lock-up from the time of sale.

Okay. Thank you, Morten and Myles.

I'll take our next question from Philippe Lanier of Banc of America.

Yes, good morning.

Hey, Philippe. How are you?

Good, thank you--but not as good as you guys. You're having a great month.

A couple of questions. First of all, you had mentioned earlier that a lot of markets are doing great, and I wanted to focus a little bit on the dry bulk market. It's taking a lot of people by surprise, and it looks like there's potentially a chronic shortage of assets in that market going into the end of the decade.

Are you seeing any surprise activity that you can comment on out of the shipyards that are swapping tanker for dry bulk assets, in the construction plans?

I think--one thing we're clearly seeing is seeing how VLCCs are converted to dry bulk carriers, which is good for our markets. And the other thing we're seeing very clearly is that the yards are filling up with dry cargo slots, which prohibit more tanker orders, out 2010 and 2011. So there's a lot of activity--there's a bonanza, and it helps us.

But it hasn't yet reached a scale that you can kind of quantify, if that might happen?

Again, I think there's five single hull Vs, something like that, converted to dry cargo. I don't know how else you're asking for quantification.

It--have there been any of them--I believe, and tell me if I'm wrong, if you get into the process early enough, you can convert some of the berths and swap them for crude to dry bulk? Have you seen those activities?

I think--no, I think that--that's yet to happen, really, there's discussions there, but it's very, very difficult for the yards to change their plans, to build a dry cargo instead of a tanker. They have a big shortage on design capability at the yards. A lot of new yards just starting out, and the yards are resisting very strongly, to make any changes--they just want to spit out all the ships they have in the order book; as Morten mentioned, some of them will have big challenges in meeting the delivery schedule, so I don't think it's going to be a lot of that.

Another question, as it relates to just the U.S. market in the past few months. We've been reading reports and getting reports that--storage in Cushing is backing up to the point that LOOP storage is also really filling up. And I don't know if you had any comments on that--if that's affecting any of the import traffic going into the U.S. Gulf.

Crude storage, you're asking?

Yes, crude storage at the LOOP terminal.

At LOOP?

Yeah.

We have a little bit of that--exactly--we had one of our vessels on a pretty long-term storage contact in the U.S. Gulf right now--one of our V-plus vessels.

The other thing we're seeing in the Far East is the storage--the reserves increasing there with China, and gradually filling their strategic reserves.

Okay. And then--one question, one more question as it relates to OSG specifically. On your U.S. strategy, you guys have spoken in the past about exploring or wanting to build U.S. Flag shuttle tankers. Could you give us any updates as to how the planning of that is going, whether or not there are any things that are changing that might affect that decision, any updates on timing?

This is Johnston. That market is, as we talked about before, is an exciting area that we are certainly keen and interested in, and looking at and pursuing. It's really just the beginning of that. I do feel confident that I think there will be a deal done this year in the U.S. Gulf for a Jones Act shuttle tanker, and I do think that also, there will be more coming in the next year or two.

But as of now, nothing has been announced yet. They certainly are progressing down the road to do those Jones Act shuttle tanker ultra-deepwater vessels.

Great. Thank you very much.

I'll take the next question from Scott Burk of Bear, Stearns.

Hi, guys--how you doing?

Hey, Scott.

Just kind of a question--I wanted to ask, why did you decide to do the forward sale of the Overseas Donna as opposed to an outright sale, or a sale/leaseback like you've done in prior transactions? What's kind of the reasoning for the forward sale, or the benefits?

Because we're making a lot of money in the interim. Again, we get to keep the ship, we keep control of it both commercially and technically, and we're making a lot of money. We have locked in a price that's well above what we believe is the market price, and we're making money in the interim.

But--so, if you deliver in July '07, that excess money would be--you're hoping to be able to keep the ship for the next two years?

I think the answer is that the buyer here had needed a flexible delivery program, and the buyer wanted us to continue to commercially manage it. We were not in the market to sell this vessel. But because we have an active S&P function, we have a lot of discussions about various projects.

Sure.

This ship could get taken and get converted to something beginning this summer--it could happen next summer. The buyer did not want the ship to sit idle, so they gave it to us to operate. There is a minimum earnings level on it, above which we share in some of the revenues.

Oh, I see.

So we will have a book value gain of, minimum, $75 million when the vessel is delivered to the buyer. In between, we will continue to earn money from that vessel, from operations, the way we do today, with some sharing with the buyer.

I see.

A formula that we cannot--unfortunately cannot disclose to you.

Okay. I understand. Yeah, the product stream makes sense there. And another question, kind of going back to the shareholders. The next largest shareholder in your stock is the Recanati family. Have you--is there any interest there in terms of buying out their block of stock, or is that a less likely occurrence?

Let me just say--we did not approach ADM for their block. Obviously, they were aware that we had a share repurchase program--they approached us with the block. We convened the board. As capital allocation and dividends is something that we discuss at every board meeting, as well as the valuation of the company, it was an informed discussion we could have with the board about that yesterday.

The Recanatis are--there are two on the board, they are independent directors. Very active--I think they are happy with their investments. I don't think they have any program to sell more, but--you know. They will decide what to do when they decide it, but they are very committed to this company, and very actively involved in the board, and very good shareholders and directors.

Okay. And Myles mentioned the fact that you can't use the cash from international operations to pay down the U.S. denominated--or, the debt based in the U.S. Is there any kind of restriction in terms of using cash to further your share buyback program?

No. The issue, Scott, is that there is currently a movement underfoot to potentially reduce the ordering rules on the repatriation of foreign earnings, which will render that fully available.

It's just more cost effective for us today to borrow than to repatriate that, and reduce a basket available, fundamentally for dividends and share repurchase.

Additionally, we would expect--for example, like through the sale of DHT shares and other structural alternatives, to generate U.S. cash, which would be more appropriately used to pay down the underlying debt.

Okay, very good. And then one final question on just expense levels. The expenses for the first quarter came in kind of on the low end of the annualized guidance that you've given--if you just annualized the quarterly expense levels.

Should we expect that to kind of go back towards your full-year guidance, or should we expect it to be more towards the low end overall?

I think you could look at the--certainly, the mid-point of the range as where to set your sights. But we're sticking with our guidance.

Okay. Thank you very much.

Sure.

I will take our next question from Terese Fabian at Sidoti.

Hi. Good afternoon, at this point. I have a question on your lightering--and the entry into the lightering market in the Gulf of Mexico and the U.S. Gulf Coast.

Can you give a little bit of color, of where you stand? You said that there are three main lightering providers in the Gulf. Where are you in relationship to the three, and is this the position that you would like to develop a leadership spot in also?

Yes, it is. We're the smallest of the three. We have currently between 15% and 17% market share. It's a business that fits in beautifully with our Aframax business. We're the biggest Aframax player in the Atlantic basin, and we have a lot of contracts in this area.

We expect to realize a lot of synergies by swapping ships in both directions. When lightering is long ships, we can use them for our AI contracts, and when lightering needs ships, we have a lot of ships in that area. It helps with on-time performance for our customers in the lightering business, and we will try hard to grow our position in that market. And I think we have everything in place to do that.

Okay, thank you. And a question on capital expenditure for 2008. Do you have any kind of a guidance number on that?

Yeah, let me just break it down into components for you. Newbuildings, including capitalized interest, circa $215 million--2008 drydocks, about $45 million--an investment in a joint venture that will own a couple of Vs, $22 million--and vessel improvements in crude, circa $80-odd million.

Okay, thank you.

So we're in the land of $365 million.

$365 million. And then one last question, sort of a semi-technical question, on conversion of VLCCs to dry cargo carriers. Are all single hull Vs convertible, or are there technical limitations on what can be turned into a dry bulk carrier?

I think all of them would be eligible--it's really just the condition of the ship. Is the integrity of the steel good enough that you can take that risk?

We fortunately don't have to struggle with the issue, because we got rid of all of our single hull VLCCs a while ago.

Okay, thank you.

You bet.

I will take our next question from Urs Dur of Lazard Capital Markets.

Hi, guys. Congratulations. I'll withdraw my question--all have been asked. Thank you very much.

Thanks, Urs.

At this time, I would like to turn the call back over to Morten Arntzen.

Well, thank you very much. It's been a long call--a lot of good question. It's an enjoyable day for us, and I've enjoyed the last hour and ten minutes.

Have a good day, and we'll be in touch. Thank you.

Ladies and gentlemen, thank you for joining us on the call today. You may now disconnect your phone lines.