Octave Specialty Group Inc (OSG) 2007 Q2 法說會逐字稿

Good day, ladies and gentleman, and welcome to the second quarter 2007 Overseas Shipholding Group earnings conference call. My name is Tim and I'll be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over the Mr. Jim Edelson, General Counsel. 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. and Heidmar Lightering with OSG's operations, estimated TCE rates achieved for the third and fourth quarters of 2007, anticipated levels of new building and scrapping, projected dry-dock and repair schedule, the prospects of OSG's 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'd like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?

Good morning and thank you for joining us on the conference call this morning. Let me quickly introduce the management team that's with me here in New York -- Myles Itkin, our Chief Financial Officer; Captain Bob Johnston, our Head of Ship Operations; Lois Zabrocky, head of our Flag Tanker SBU; Jonathan Whitworth, Head of our U.S. Flag Business; Jim Edelson, General Counsel; and Jennifer Schlueter, Head of Investor Relations and Corporate Communications.

As Jim indicated, our remarks today will follow a presentation that is posted on our website. So if you would now please turn to Slide 3. Financial results were strong in the second quarter of 2007. Net income was $79 million, up 31% from $60 million last year. This included $31.9 million in gains from the sale of the overseas Almar and our position in double-hull tankers.

EBITDA at $149 million was up 36% from $109 million in the same period last year.

Reported EPS increased 50% to $2.28 per share from $1.52 per share, reflecting higher earnings as well as a reduction in the share count from the share repurchases made since September 2006.

Sales adjusted earnings per share was $1.63, which includes profits we make from selling ships and securities. It was up-- excludes profits from those. It was up 7% from a similarly adjusted $1.53 last year.

Total TCE revenues increased 27% to $274 million in the quarter from $260 million a year ago.

Crude oil TCE revenues increased 10% to $160 million from $146 million. The addition of Heidmar Lightering added $13.8 million to current quarter TCE revenues. And year-over-year, all crude oil tanker classes achieved stronger rates.

Crude as a percentage of TCE declined to 59% from 67% a year ago, a notable and intended decline, the result of our expansion in the US segment last year.

Products TCE was up 20% to $59 million, representing 22% of total TCE. US Flag TCE revenue was $49 million, up more than 200%, now representing 18% of total TCE versus just 7% last year. The former Maritrans fleet added $29 million to the current quarter TCE.

Switching to rates, rates in the second quarter were strong across all vessel segments. Average spot TCE rates were stronger in the second quarter than the first quarter of 2000 [sic] except for Aframax's. And for all vessel classes, rates were higher year over year.

Quickly, average spot TC TCE rates for VLCCs were $53,000 a day versus $47,000 a day, up 15% year-over-year. Average spot TCE rates throughout the Americas were up 21% to $32,000 a day, versus just under $29,000 a day last year. Average spot TCE rates for Panamaxes were up 27% to $34,000 a day versus $27,000 a day in the same period a year ago. And finally, average spot TC rates for any size product carriers were up 32% to $35,000 a day from $27,000 a year ago.

Please turn to Slide 4. Now, there were both positive and negative factors influencing rates during the second quarter. It is notable that second quarter rates were up year over year despite OPEC Arab Gulf production being below second quarter 2006 levels, a negative you see in the right box of the slide.

The VLCC rates were bolstered by a number of factors. We saw a significant increase in seaborne imports of crude oil into China, which increased by 400,000 barrels per day, a trend now that's been continuing for several years, and reached 2.9 million barrels per day during the second quarter of 2007.

And adding to the improved ton-mileage picture, Venezuelan fuel oil movements to Asia continued to increase.

A final factor that helped lift rates in the second quarter was 12 to 15 VLCCs in the US Gulf being used for storage.

Both for the second quarter and going forward, the increased output going through the BTC pipeline as new fields coming on stream in Angola will benefit ton-mile growth. BTC throughput increased from 10,000 barrels per day in the second quarter of 2006 to 500,000 barrels per day in 2007. Liftings are expected to reach 1.2 million barrels per day by 2010.

In Angola, there was an increase in the first half from the Dahlia field, and we expect another 250,000 barrels come on when the Rosa field comes on in Angola. The increased long-haul cargoes coming out of BTC in Angola will benefit the tanker market going forward.

Product tanker rates were up significantly year over year due to increasing US demand combined with the impact of planned and unplanned refinery down time in the USA. This resulted in increased Transatlantic product movement.

Notable, we also saw increased imports of gasoline into both Mexico and Nigeria.

On the negative side, we experienced production declines in key Aframax areas in Mexico, production by 5.6%; in Venezuelan and crude output declined by 0.1%. We also saw reduced short-haul movements from Venezuela to the United States.

North Sea production declined and substantial maintenance programs reduced available cargo from the bulkhead.

In Asia, extensive refinery maintenance programs reduced long-haul movements through the region. However, these are expected to recover in the second half of this year.

US crude production during the second quarter was up over 2006 levels and, combined with lower refinery runs, reduced requirements for imports.

And of course, tanker supply increased across all vessel categories.

Turning to Slide 5, OSG remains on track with expansion, investment, and continued growth in each of our four segments -- crude, products, US Flag, and gas. Our balanced growth strategy is focused on maintaining financial strength and flexibility, diversifying and expanding our fleet, and actively managing our assets. Let me take you through some of the things we did.

During the second quarter, we repurchased 5.5 million shares of stock at an average price of $66.13 per share, including purchases made at prices up to $77 per share. To date, we have repurchased a total of 17.4% of total shares outstanding in roughly the last six months.

We sold our remaining stake in double-hull tankers in the quarter. The sale of DHTs, which this quarter alone generated $26 million gains on sales and securities, has been a very successful deal for us.

Going back, the October 2005 IPO generated total proceeds of $413 million to OSG, which we used to pay down debt at the time, which enabled OSG to return leverage and liquidity levels back to the levels they were prior to the acquisition of (inaudible). Our initial 44.5 (inaudible) stake has now been reduced to zero in the course of just under two years and has generated additional cash proceeds of $202 million, or $34 million above the $12 per share IPO price two years ago. At the same time, we remain closely tied to double-hull tankers as the charterer of their seven-vessel fleet. And importantly, it remains a vehicle available for us for future vessel transactions.

Finally, we increased our annual dividend 25% to $1.25 per share, the second increase in a two-year period.

Looking at fleet diversification expansion, we purchased two 2000-built LR1 product tankers. The product tankers unit now has six coded Aframaxes and Panamaxes, known as LR1s and LR2s, to better compete as the product tankers trade shifts and globalizes. You can expect to see continued expansion in this larger product carrier class in the future. As with our other segments, we are not going to be dabbling in segments; we will try to establish leadership positions in each of the segments we enter.

The OSG lightering business is up and running Houston and is a nice fit in our crude segment. We are able to leverage commercial pool relationships such as Aframax International's cross-Atlantic trades to offer a total service solution to our customers while improving utilization of our Aframax fleet. We hope to do similar things on the West Coast with our Panamax fleet in Panamax International.

On the active asset management theme, which has been a recurring one here, there are a number of other transactions outlined in detail in yesterday's press release -- notably, extending time charters in excess of expiring rates, moving assets as they come off charters at lower rates into commercial pools earning higher rates.

Our Clean Products pool is growing in size and now totals six vessels.

And we've further cemented our relationship with Sonap, who is our partner in both Panamax and Clean Products pools by bare-boat chartering to them the Rubymar, which will participate in the Argentinean cabotage trade, something we would not have been able to do without good cooperation with our partner.

Please turn to Slide 6. OSG's fleet looks significantly different than it did three years ago. By only owning 53% of our operating fleet, we've given ourselves flexibility for the future, no matter what the outlook for the markets in which we participate.

Our new building program across the four markets in which we trade has expanded significantly, with a net of four vessels delivered in the first half of this year and another five expected in the fourth quarter of 2007. In the fourth quarter of this year, a US Flag ATB and a third Aker ship, overseas Long Beach, delivers as well as two LNG carriers and an Aframax tanker in which we have a 50% interest.

You'll find all these changes made on our website and we hope this will be helpful for those who are looking at the expanded fleet.

Please turn to Slide 7. Demand growth in the second half is forecast to increase by approximately 2 million barrels per day over first half levels as we continue in the North American driving season in the third quarter and the northern hemisphere winter in the fourth quarter. We expect demand to be met by additional inventory draw-down and increased OPEC production, and we expect non-OPEC supply production to remain the same as in first half levels.

Importantly, refining capacity in the last half of 2007 is forecast to be significantly above first half levels. Refining utilization in the US that was under 90% in the first half is forecast to be over 90% in the second half of 2007. Also, refining runs are forecast to increase in Asia as refining maintenance activities come to an end in July and as new refining capacity comes on stream in China.

Geopolitical and other risks remain a factor, with political uncertainty in Nigeria; and continued tensions between the international community and Iran could change supply patterns and impact rates. There is always the possibility of a major hurricane that damages the infrastructure in the Gulf of Mexico, although we do not have that in our forecast.

Finally, VLCC times does not forecast a material increase from current levels for the remainder of 2007. Additions to the fleet -- we forecast that 16 tankers will be delivered in the last half of 2007. This will be largely offset by the conversion of single-hull VLCCs, primarily to bulk carriers. So no net growth in the fleet.

In summary, given our outlook, increased second half 2007 demand in refinery runs, steady non-OPEC production levels, better-than-average probability of a hurricane, and the fact that OPEC must increase second half production, mainly long-haul movements from the Middle East, there would seem to be more upside potential than down-side risk for the balance of the year.

That concludes my remarks. Let me now turn it over to Myles Itkin to review the financial results of the quarter. Myles?

Thanks, Morten. Good morning. Although the more noteworthy news for the quarter is the repurchase of OSG stock and the sale of our remaining shares in DHT, I'd like to spend a few minutes on our financial results for the quarter.

Slide 9 presents our consolidated statement of operations and highlights certain individual line items. As a preface, line item comparisons to Q2 with the prior year's quarter reflect neither our November 2006 acquisition of Maritrans nor our April 2007 acquisition of Heidmar Lightering. Accordingly, the number of instances of line item comparisons between the second quarter of 2007 and the first quarter of 2007 are more relevant.

OSG's consolidated time charter equivalent revenues for the second quarter of '07 increased by $58 million, or 27%, to $274 million from $216 million in the same period in '06. This increase reflects the two acquisitions just noted as well as an across-the-board increase in spot rates earned by vessels in the international crude tanker and international product carrier segments. This is highlighted on page 5 of the press release. Results for all other sectors held up well during the second quarter of '07.

Actual off-hire days were lower by 15 days from the forecast we provided in April. This was mainly attributable to a shifting of two dry dockings from the second to the third quarters. The forecasted off-hire days for the third and fourth quarters have, accordingly, been revised to reflect some further shifting to dry dockings between periods. All of these revisions are reflected in the chart on page 11 of this press release. And please note that the chart also reflects the expected out-of-service days to rebuild ATDs.

Charter hire expense during the second quarter of '07 increased by $19 million to $68 million from $49 million in the first quarter of '07, reflecting the acquisition of Heidmar Lightering. Please note that that alone added $12 million of additional charter hire expense for the quarter. It also reflects the delivery of one VLCC, one Aframax, two Handy-size product carriers, and the sale or lease-back of two additional Handy-size product carriers. Additionally, with ten of our charters in VLCCs subject to profit-sharing, the increase in VLCC rates from the first quarter of '07 increased charter hire expense by an additional $2 million.

G&A expense increased by $2.5 million to $31.5 million from $29 in Q1 of 2007. This was principally due to the Houston office expenses of $500,000 associated with the acquisition of Heidmar Lightering, an increase in stock compensation of $600,000 related to the 2007 grants, and pension benefits of $600,000.

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 to $130 million for full-year 2007.

Equity income of affiliated companies decreased by $500,000 to $2.8 million during the second quarter and reflects our sale of our remaining interest in DHT.

Other income for Q2 '07 was $34 million, an increase of $11 million over the first quarter of 2007, and is mainly attributable to the $26 million due to pre-tax book gain of the sale of DHT shares in comparison with the $15 million pre-tax gain in Q1.

Interest expense increased by $5 million compared with the first quarter of '07 as we increased our outstanding revolving credit debt by approximately $365 million as a result of the repurchase of 5.5 million OSG shares. These shares were repurchased at an average price of $66.13 per share, with the highest price paid being $77 per share, concrete representation of our belief that our stock price does not fully reflect our underlying net asset value.

The variability of taxes is driven, to a large degree, by non-shipping income earned by our foreign subsidiaries -- for example, interest income on deposits gained on sale of securities, etc. In Q2 2007, non-shipping income amounted to $47 million compared with Q1 '07 of $22 million and Q2 '06 of only $11 million.

Slide 10 reviews key elements on the balance sheet. Cash and cash equivalent levels, $742 million at June 30 compared with just under $600 million at March 31. Most of the cash balances has been generated by our foreign operations and are maintained offshore to fund our commitments and growth in the proven product sectors. The current repatriation of foreign funds to settle US corporate debts would reduce our flexibility from a tax perspective.

During the second quarter of 2007, we withdrew an additional $8 million from the capital construction fund to satisfy payments on the three lightering ATBs currently being built in US shipyards. We expect to withdraw an additional $180 million over the next two years from the CCF, including about $100 million for the balance of 2007. This will bring our total qualified CCF fund withdrawal to $290 million. The use of capital construction funds satisfies our future capital commitments for these qualifying lightering ATBs, removing the necessity for incremental borrowings.

The operating results of Heidmar Lightering have been included in our statements of operations effective April 1. Purchase accounting resulted in assigning a $28.5 million value to amortizable intangible assets, $19 million of which was assigned to two charters in associated vessel residual values and will be amortized over three years; $10 million of which was allocated to customer relationships, which will be amortized over 20 years; and approximately $9 million to goodwill, which doesn't get amortized but will be a value rated annually for impairment.

Slide 11 underscores our effectiveness in increasing fundamental shareholder value by increasing our level of locked-in revenue in furtherance of our goal to provide for increased levels of earnings certainty. We've expanded in markets characterized by a higher level of term coverage -- product carriers, gas, and US flag, including lightering. As a result, the amount of locked-in revenue has grown more than eight-fold from $186 million at year-end 2004 to more than $1.6 billion at the end of 2007. The US sector constitutes the greatest percentage of total locked-in revenue for the company, representing 67% of this amount, with international product carriers in second place at 24%. Details regarding locked-in revenue and days per sector are included in the appendix at the end of the slide presentation.

Please turn to Slide 12 for an updated discussion of OSG's net asset value. This past spring, we started releasing to the public the statement and supporting detail behind our calculation of OSG's net asset value, a common metric for assessing value for marine transportation companies. The fair market value of our fleet as of June 30 amounts to $3.7 billion, $2.3 billion for international crude carrier; $686 million for international product carriers; and $676 million for US Flag vessels. Cash and CCF funds total approximately $960 million.

The $171 million of value assigned to equity and joint ventures consists primarily of our equity investment in OSG (nockalot) and the net present value of our expected cash distributions form our 37.5% equity investment in the Alaska Tanker Company.

The next two columns, title Net Present Value of Covered and Uncovered Charters In totaled $388 million, or just under $12 per share. Today, 47% of our operating and new building fleet is chartered in.

The column labeled "Covered Charters In" reflects the net present value of the operating cash flows marked Chartered In Fleet that has been chartered out. This amounts to $112 million.

The column labeled "Uncovered Charters In" calculates the net present value of the operating cash flows of our remaining chartered in fleet based upon ten-year average historical time charter equivalent rates, resulting in a net present value benefit of over $275 million. We believe the use of a ten-year average is a conservative assumption.

Deducting from these incremental components our funded debt of $1.6 billion, we arrive at a net asset value of $3.6 billion, or approximately $110 per share.

In summary, we think OSG today constitutes one of the better, if not the best, investment opportunities within the sector. We continue to be materially undervalued, selling at less than 75% of net asset value. We have an active program of cash distribution to shareholders and have repurchased 17.5% of our outstanding shares since September 2006. In April, we announced an additional 200 million share buy-back program and have repurchased 32 million of this amount to date. Also in June, we announced an increase in our annual dividend by 25% to $1.25 per share. We have $1.7 billion of locked-in revenue attributable to expansion in the US Flag and international product carrier sectors. We continue to follow strict investment guidelines, undertaking only those transactions that will exceed our cost of capital and enhance our competitive advantage.

In short, we're a management dedicated to unleashing fundamental long-term value for shareholders through appropriate capital allocation, both investment capital and distributed capital. And that concludes my remarks this morning. And operator, will you open the floor for questions at this time? Thank you.

Yes, sir. (Operator Instructions) Your first question comes from the line of Mr. Jonathan Chappell from JP Morgan. Please proceed.

Thank you. Good morning, guys.

Morning.

Myles, in the press release, you have a number of your adjusted debt to capital -- 23.6% still seems pretty underlevered, but I know you have a new big building commitment program. Where does the balance sheet get to when you take into account new building commitments?

If you consider our aggregate new building commitments to date, for the-- in this case, I'm going to give you a total number and then we'll just back out the dry docks. CapEx for the third quarter is about $246 million, which includes about $21 million worth of dry docks. CapEx for the fourth quarter is $89 million, including about $6.3 million in dry dock. So an aggregate of about $335 million, a portion of which will be funded through the CCF, and therefore won't result in incremental debt. For 2008, total CapEx is $284 million, of which 46 constitutes dry dock.

Okay, thanks. It doesn't really-- probably puts you into the mid-30s, at best. What's your ultimate leverage for the balance sheet? And given the stock price where it is right now, and your NAV estimate on Slide 12, do you think that share buybacks would be your primary use of cash going forward to try to narrow that valuation disconnect and to bring the balance sheet up to what you would view as an ultimate leverage? Hello? [Silence]

Mr. Berglund, it appears that the primary speaker line has been dropped. Would you like to take that question?

Sure. Are you there? [Silence]

Ladies and gentlemen, please hold for just a moment while we try and regain your speaker. [Silence] Okay, sir, you're back in; you may proceed.

Jonathan?

Yes.

Your question is with adjusted debt to capital in the 30s--

Where would you ultimately like it to be? And then, given the spread between the current share price and your NAV on Slide 12, would you categorize share buy-backs as the No. 1 use of cash to bring your balance sheet up to the ultimate level as well as kind of close that disconnect in valuation?

Just take it in reverse order -- at the current share price, we remain an active buyer of shares given the discount that we're selling to net asset value. We do consider excess cash proceeds will be applied to share buy-backs, but not at the expense of appropriate growth opportunities that well exceed our cost of capital.

Okay. And one for Morten on strategy. There also seems to be a current disconnect in the market between spot rates and time charter rates. Given your focus, really, on chartering and a lot of tonnage, has this kind of forced you to pull back from the market a little bit as far as chartering's concerned, or do you take a longer-term view on what you can turn around and put those ships into the market for?

And I guess a third part is, does your pooling system actually provide even more benefits above and beyond what you think you can get by putting those in the spot market on their own?

There's not an easy answer to that question. The one thing we do do is that we are in the market virtually every day in really all the segments, but notably the products and the crude, looking at chartering opportunities. And we have looked at a number of large corporate acquisitions the last 18 months and we have passed for various reasons, largely price. And we've been able to go into the new building market directly to acquire tonnage. We've gone into time charter and tonnage forward. We have bought ships, taken in ships on bare bulk rate forward. So the market goes up and down, and when the window is there where we can charter in ships at rates that are below our long-term forecast and enable us to meet new returns, we will continue to go in. So so far, we have not had a problem in finding incremental tonnage.

We have also been able to bring new members into the pool, notably bringing Flo-Pax in the Panamax International. We have a new member to the TI pool which we brought in. So we are able to do that, but it is a constant, daily, every day in-the-market process and we will continue to do that. So far, we've been able to get our hold of new, modern ships to pursue our growth strategy.

And in answer to your other question regarding the performance of the pool, pools do operate at higher efficiency levels as a result of combination (inaudible) and our Clean Products pool, for example, is operating at a 75% legging factor for the current quarter.

Okay; I'll turn it over to others. Thank you, Martin and Myles.

Your next question comes from the line of Natasha Boyden from Cantor Fitzgerald. Please proceed.

Thank you, Operator. Good morning, ladies and gentlemen. Morten, I just wanted to see if we could get your view on the seeming discrepancy between the IEA segment saying that there's currently not enough oil supply in the system to meet demand and OPEC's stance that there is, in fact, plenty of supply.

I think that's a long-term view, Natasha, not a short-term view. I don't think there's anybody out there that's suggesting that there isn't the incremental capacity out there. If we're saying that we expect production to increase by about 2 million barrels per day when you get into the fourth quarter of this year, the incremental surplus supply availability in OPEC is well in excess of that. I think what they're saying is long run, right now, we are not finding enough reserves to replace that which is being used and the growth that's anticipated. So that's a long-run view, not a short-run view.

Okay. And I suppose in the absolute short term, it looks like rates have come down pretty substantially over the last several weeks along with rates for other crude vessel sectors. Do you put this down to sort of typical seasonal weakness or do you really think that there are other drivers at work there? And what is your outlook in terms of the winter season for rates?

I think one of the things with the tanker market is that, particularly the VLCCs market, psychology does enter in to it. And you could argue, given the OPEC production levels during the second quarter, that rates probably were higher than you think they would have been, and that was partly psychology. And right now, given the volume of liftings, they probably should be higher than they've been.

What we're seeing now is, as we've said in the past, in West Africa, as we speak, there's a better balance of cargoes versus ships. In fact, you've seen a jump in world scale over the last week and notably in the last two days. We expect, as production increases up through the fourth quarter -- and that'll be notably production coming out of the Middle East, which is long haul -- we would expect rates to rise to levels that really are more, on average, in line with what we did in the first half of the year.

So the markets will go up and down, but the Athramax and the Panamax markets have not been as impacted as the VLCC market, which is worth mentioning, and the product tanker market really [silence]

Hello? [silence] Hello? Operator?

Hi, we're back on.

Back on, Natasha.

Oh, hello.

Somebody from TK keeps disconnecting us.

[Laughs] Okay, I get the general idea is that you really do see outlook for the second half to be pretty strong here.

Yeah. I mean, if you look at the contract volumes we're expecting and what we're seeing, we would expect the second half to be rather strong.

Okay, great. And lastly, more-- looking closer at OSG itself, you've talked in the past about a spin-off of the Jones Act business. Is still a viable option for OSG? If so, can you give us any idea of timing on that?

We continue to work a spin-off on an MLP for the US Flag business. It's more complicated for us than some of the others because of the way the Aker ships come in the fleet. Keep in mind, those are not owned; those are bare boat chartered in. So you have to address that in coming up with the optimal structure for your MLP, and you have to make the necessary contractual adjustments with Aker.

At the same time as we're doing that, we are out right now bidding for incremental Jones Act business for both existing ships that we have as well as new buildings that we would commit to that also could go into the MLP. So you have some complicating factors that we want to optimize.

And keep in mind that we don't have a shortage of cash so there's not a rush to get into the market and do a transaction. There is a focus to get the transaction right, taking into account the way our fleet is configured. But we are putting a lot of effort into it and it remains under serious consideration. And it would be-- I think as a fourth quarter event, I would say that that would be highly likely, assuming we can solve all the contractual and timing issues.

Great. Well, that's something to look forward to, then. Well, thank you very much.

Your next question comes from the line of Scott Burk from Bear, Stearns. Please proceed.

Good morning.

Good morning.

Let's see. I wanted to ask about the tankers that you mentioned that have been-- that were used for storage in the Gulf of Mexico. Those, I believe, have come back on the market; is that your impression as well, or can you describe a little more about that?

I think most of them have come back on the market. We have one that's out there. In fact, I'll be on that ship with Captain Johnston and three of our directors on Tuesday; it's still on a storage contract. So, yes, I think most of those have come out. And what's happened that really changes is-- those have come off but the number of VLCCs going to conversion of bulk carriers has increased. So that number now is somewhere around 20, and don't hold me to that number -- that's roughly single-hull 20 VLCCs that are going over to become king-sized bulk carriers. So in fact, there'll be no net growth in the VLCC fleet this year.

Okay. Yes, it makes sense with how much the bulkers are making these days. But also in the single-hull versus double-hull discrepancy, what kind of differences in rates are you seeing, or maybe do you have an estimate of how long single-hulls are waiting these days, especially since rates have weakened so much in the last few months?

What has happened with rates is the single hulls have pulled down rates dramatically this quarter. Mats, you're on -- can you tell us the discrepancy? Because I don't want to give a misleading number there.

I think longer-term, we've been seeing up towards $20,000 per day. I do not have an exact number for the last quarter, but the trend is for an increasing difference.

Okay; that sounds good, in line with kind of what we've been seeing or thinking, as well. And then finally, just going back to the share repurchase plan, what price level? I mean, do you keep buying back shares all the way up to $110 a share or is there a price level where it just doesn't seem as attractive versus acquisition opportunities?

You know we're not going answer that question. [Chuckles]

[Laughs] Let me ask--

What we did release here is that we did buy as high as $77 a share. Our NAV continues to grow because the value of our fleet grows, our earnings continue to grow, our cash continues to grow, and some of the transactions we do are creating surplus cash, like the double-hull tankers reduction. We will take those things into account and it'll be a week-by-week, month-by-month review. We have the authorization from the board because we intend to use it. And when we see opportunities, we will be in the market.

Okay. And maybe one other question, then. In terms of the acquisition market, do you see any large fleets or any kind of specific area where you'd still like to add some acquisitions to add further diversify your fleet or you see some opportunities right now in terms of acquisitions?

There are really almost daily fleets that are being put up for sale around the globe, and we are looking at them. But we are very disciplined in how we're approaching it. In the last 18 months, on the international side, it really has been new building, charters in; single- or two-ship purchases have made more sense. But there's plenty of opportunity internationally to expand, just as there continue to be plenty of opportunities on the US side.

As I said in the past, we're willing to diversify; we still have looked very closely at the chemical carrier segment, which does fit fairly neatly in with our product tanker expansion and we would look at that area. And on the gas side, we continue to work on some C&G projects. And those, I think, would be the two areas where you'd see the most immediate expansion.

I think the other would be a segment. We have been working on the US Flag shuttle tanker market; we think that market will come and we continue to put a lot of effort into being prepared for that.

Great. Thanks, Morten.

Your next question comes from the line of Justine Fisher from Goldman Sachs. Please proceed.

Good morning.

Good morning.

The first couple of questions I have are regarding your market outlook for this year. And I know that you mentioned that you thought we would see conversions of VLCCs to VLOCs through the rest of this year. And again, it's understandable given the strength of the bulk market, but I just wanted to double-check what you guys think the total capacity potential for those conversions is. And do you think it will offset the 4 million dead weight or so of VLCCs that are due to be delivered through the rest of this year?

I think the number is fairly balanced with the number of ships leaving for VLCC conversions this year combined with actually actual double hulls leaving for FCSO conversion has largely offset the growth in the fleet. The timing is not always perfect, but that's a rough approximation. So you will see basically, roughly, no net growth in the VLCC fleet this year. You'll see more growth next year, but I think the expectation is that in 2008, the bulk market will continue to be strong. And the economics of taking a single-hull VLCC and converting it to a VLOC are fairly apparent. And we would be surprised if you didn't see a continuation of that, particularly when cape sizes are getting-- new buildings are getting up to $120-plus million.

The economics-- can you say how much it costs to convert a VLCC to a VLOC? What's it, like, $20 to $25 million or something?

It's a tough call. Let me let Captain Johnston give you his best guess.

A lot of it's going to depend on the condition of the VLCC, especially on a single hull, and the condition of the steel. But your $20, $25 million is probably in the ballpark.

Okay. And so Morten, you're basically saying, though, that the conversions to both the ore carriers and FCSOs, that's going to take excess VLCC capacity out of the market?

Yes.

Okay. And then the other question is regarding Nigeria. I know that it seems to be an off-- apparently political risk on the radar screen for tanker rtes. But we've seen issues with shut-ins in Nigeria over the last year or so. There's news stories most weeks about production being hamstrung or pipelines being sabotaged. And we haven't really seen that move rates on a week-to-week basis. I'm wondering why-- is there more risk of this going forward this year that would make Nigeria actually move rates? Because it seems as though, despite the ongoing political issues there, we haven't really seen it reflected in rates.

I think partly Angola-- the increase in Angolan production in West Africa has offset partially -- probably about 50% -- of what you've lost in Nigeria. So I think that's why it's had less dramatic impact on rates.

If we're going to need 2 million barrels per day more in the fourth quarter, then that's going to take some of the double-hull tankers that are in the Atlantic back into the Middle East and that will certainly-- if you get an imbalance of double hulls in West Africa, that will have an immediate impact on rates; there's no question about that.

Okay. So the argument is not that it's necessarily the short-term day-to-day situations in Nigeria that would spike rates, but rather a long-term declining production from Nigeria?

Yes.

Okay. And then, the next couple of questions I have are on the sale lease-backs and the cost. Obviously, operating costs have increased for time charter expense as the company's done more sale lease-back transactions and time chartered in more vessels. And you're not there yet, but you're getting toward almost a 50-50 breakdown between owned and chartered-in ships. And I'm wondering whether that stops soon or whether you'll continue to conduct sale lease-back transactions because of where vessel prices are?

It really depends upon the effective economic returns that are associated with the transaction. So if we can implicitly lower our cost of capital through a sale lease-back, realizing high secondhand values and low charter rates because of an implied lower cost of capital or a higher residual value assumption by the lessor, we'll look at it. However, we're very comfortable with a close to 50-50 balance on charter in and owned time.

Okay. And then, the Jones Act spin-off aside, would you guys consider doing transactions like double-hull tankers with some of your other non-Jones Act owned ships in order to realize the same benefits that you did from DHT in order to spin off-- get cash, pay down debt, and then sell the rest of your stake?

I think-- it'll be a case-by-case basis, but we've been fairly consistent in looking at some of our older double-hull ships and putting them in to sale lease-back transactions. So we keep the average age of our own ships fairly young. And I think we'll continue to do that. But really, the flexibility to either buy and hold charter and bare boat, charter in time, charter contract, new building -- we look at each one, and which one gives you the ship controlling at the cheapest rate. And that's really the equation; it's not a magic 55-45 or 50-50 -- it's what's the best way to control modern ships at that time?

But we'd evaluate structural alternatives as we move forward.

Okay. One more question, then I'll get back in queue. This is the first time that I've seen you guys do a massive draw-down on your revolver in order to repurchase shares. And understood that leverage is pretty low to begin with and so, as John was saying earlier, there's room to do this. But do you guys plan to draw down on your revolver to repurchase significant amounts of shares going forward? Because it kind of seemed like a bit of an about-face for an OSC that's been particularly adamant about keeping debt levels relatively low.

I think debt levels are low. So it's-- we will judiciously draw down on the revolvers when it's more desirable from a tax perspective to do so.

But so you'll do that-- you would consider doing that to finance relatively large share repurchases going forward?

There are a couple of things which I think we can go into detail off line on if you like. But there are certain transactions which, for a US repurchase of shares, provide us with the ease and flexibility of doing it. For example, gain on sale of DHT shares provides us with US income that can be appropriately applied toward a share repurchase without any tax consequences at all. So there are a number of related transactions like that. So not all share repurchases will result in a draw-down under the revolver.

If your question is, have we changed our policy on having a strong balance sheet, then the answer's absolutely no. The board remains committed to that, the management remains committed to that. And I think you should put in perspective, also, the amount of locked-in revenue we have now is at levels we've never seen before. So we will continue to have a policy of having one of the strongest balances sheets in our industry because that's important for the overall strategy.

Okay, thanks; I'll get back in queue.

Your next question comes from the line of Greg Lewis from Credit Suisse. Please proceed, sir.

Thank you; good afternoon. I guess my first question -- could you comment on the military sea lift comments on OSG as a nonresponsible bidder? And what I mean by that is there anything OSG can do to speed up the process so that it is a responsible bidder on those types of contracts?

Let me-- I'll quickly deal with that one. The MSC contract was a very competitively bid one. We didn't agree with the decision or any aspect of it; we are protesting it and we think that the systems, the investments we made in our operations, far exceed anything our competitors in this segment are doing and we will continue to invest and improve those operations. It is critical to our strategy. We are protesting it and we'll see how that develops.

Okay, great. And then my next question is more surrounding, I guess, the potential port strike in California. Does that have any effect on the Jones Act fleet -- on your Jones Act fleet?

Jonathan Whitworth has an answer to that one.

The strikes on the West Coast are primarily--

Container ships.

So we have not seen that being a detrimental effect on the tankers at all; zero.

Because what I was getting at is if the Longshoremen do honor the clerical workers' strike, would that affect any of the oil terminals on the West Coast?

The oil terminals are all privately owned and we do not use Longshoremen. So those types of workers do not come in contact with our vessels.

Okay, great. Thank you.

Your next question comes from the line of Terese Fabian from Sidoti and Company. Please proceed.

Hello; I have a couple of questions. First off, can you tell me how indicative you think the freight forward rates are when you look ahead? Because when I look at a MRX chart, it shows declines across all classes on routes through 2009.

I'd say if you're looking at 2009, I don't think freight forwards are indicative of anything because the market's so illiquid; it really is not particularly helpful. I think on a 12-month basis it's fairly indicative, certainly of market sentiment. And if you'd look at that, I think you'll get a better feel for where-- if there's a consensus in the market. But 2009 is just completely illiquid. Twelve months forward is about the best you can do; it's a reasonable barometer.

Okay. And in terms of your own areas of trading, for Aframax and product tankers, can you talk a little bit about that and about the flexibility you have to move tankers to areas of higher spot rates when that happens to rate changes?

I'm not sure exactly-- Mats, do you want to try and tackle that on the crude side?

Yeah, I can do that, certainly on the Aframax side. We do not chase good markets across the globe. We, instead, build a very strong cargo base in a certain geographical area, and our area is the Atlantic Basin, where we trade on both sides of the Atlantic, but primarily the Transatlantic cargoes as well. So we try to build our niche and our out performance on efficient triangulation and solid cargo support and no waiting time than chasing markets around the world.

Now, maybe Lois, you want to tackle on the product tanker side?

Yes, absolutely. Certainly, we've seen some of the highest time charter rates historically on the MR sectors. And the contracts that are mentioned in our earnings release were commencing in 2008, so we've consciously chosen to leave, in particular, one of those vessels on the spot market to take advantage of present high rates, and then the time charter will commence in 2008 at very respectable levels. On average, those contracts are about 15% over the previous time charter rate. So we're trying to employ a mixed usage of higher spot rates and then going on to higher time charter rates than what we've (inaudible).

Okay, that's helpful. In terms-- again, getting back to the Aframax. Do you have a notable percentage in the Transatlantic market?

Yes, we have all our ships in the Atlantic. Again, I mean, we try to-- between the Med and the North Sea, we swap ships around depending on rates. But our base and core cargo contracts are a combination of Transatlantic, Caribbean, and European cargoes -- call it one-third or maybe 40% are Transatlantic and the rest are in the-- on both sides of the Atlantic.

Okay, thank you. And then, just a quick question on expense guidance -- does your earlier guidance remain in place?

Yes, in terms of estimated vessel expenses, we remain on target. Time and bare boat hire expenses are somewhat higher as a result of the Heidmar acquisition. So if you were looking at Q3 and Q4, I'd say $145 to $160 million for Q3 and Q4 in aggregate. Other than that, most other expenses remain pretty much in line. Equity in income of affiliates would step down as a result of the sale of DHT.

Okay. And on the income statement, what was the residual in that $34 million in other income? You had $26 million or so from DHT sales?

It's interest income on foreign assets, predominately, as well as a portion from the CCF.

Okay; thank you.

(Operator Instructions) Your next question comes from the line of Steve Williams. Please proceed.

Yeah, hi. I've just got a quick question on the basis behind your NAV calculation on Slide 12. The sort of portions that are based on the MPV of future cash flows -- I guess that includes the US Flag fleet. And what's the basis behind the discount rate for those calculations?

It's in-- we've indicated in the rear of the presentation what we're using. The discount rate is an indicative rate. We just-- tax effect interest for US Flag vessels so we're employing a discount rate a little bit north of 8.25 -- it's 8.275.

Okay, thanks. And for new builds that's in that calculation, that's just the payments you've already made toward those vessels, right?

It's the payments we've made towards the vessels. It doesn't include any equity appreciation in the value of the vessels. So even though we placed a number of these orders some time ago, and vessel values have increased, we're only considering the actual funds (inaudible).

Okay, that's great. Thanks.

Thank you.

Your next question is a follow-up from Justine Fisher from Goldman Sachs. Please proceed.

Hi. I just also wanted to ask about China. As you guys signed-- you noted in your press release, you signed a new contract to pursue building opportunities, ship-building opportunities, in China. And it seems as though there's a significant amount of supply coming on from the Chinese yards for the next few years, probably, I guess, starting primarily in '08 and '09. And I'm wondering if you can comment on the quality of those ships coming out of the Chinese yards.

And second of all, what factors could prevent this oncoming supply from pushing rates down significantly a couple of years from now?

I think the new building order book in China is fairly well known and it's in all the macro numbers you've seen. And the stuff that's coming out in 2008 and a little bit in 2009 are all from existing yards. And certainly, the big Chinese yards are very capable of building high-quality ships. They're not as productive yet as the Koreans are, but the Koreans have incredible productivity in the yards. But the quality will meet any standard that MCRD requires.

The Chinese yards, though, just like the Japanese yards and the Korean yards, for the most part, they're fairly full in 2008, '09, and '10. And they're taking orders now into 2011. So the comments we've made about the overall new building scene and shipyard scene hasn't changed much.

Do we think that there will be some slippage in some of the Chinese yards, the new ones coming on? The answer is yes. We're not taking that into account in any of our forecasting and modeling, but I think it's highly unlikely that there won't be slippage, if for no other reason than just getting ahold of things like main engines and other key parts is difficult because the whole system is at maximum capacity.

But right now, based on where the order book is across the globe in all the segments we're in, we don't see a major threat of oversupply based on sort of the 2011, 2012 time frame. Beyond that is beyond my crystal ball's ability to give you a clear answer.

What about the advent of new berth capacity? I mean, I guess a couple of years ago, the market was extremely tight because a lot of the berth space in Japan and Korea had been sold. But then, you had new berth capacity coming on line in places like China. And maybe that capacity has been filled, but are you guys seeing a lot of new capacity coming on line that could bring new orders on in 2009 and 2010 that have not yet been closed?

Not 2009, but potentially in 2010, 2011. That's assuming the new yards are being built, that they get built on time and they deliver the ships on time, which I think is a highly optimistic assumption. Let's just look at it.

Let's look at the VLCC market, because that's the one that people tend to focus on the most. Right now, I think there's 153 single-hull VLCCs in the world, give or take one or two. There are about 179 double hulls ordered. And of that 153, we already know that 120 are going out to be converted to cape-size bulk carriers and we know that about 5 to 7 double hulls are going to become FPSOs.

But you have roughly a balance between what has to go out in this time frame and what's coming in. So could there be incremental berths coming out in China or Korea? I think the answer's yes, and probably likely. But you still have to push into the next decade before that starts impacting the market in any kind of material way. Could it, down the road, have that? The answer is yes. But so far, the reality is the world needs a lot more ships in virtually all segments.

Okay, thank you very much.

At this time, there are no further questions in the queue. I would like to turn the call back over to Morten Arntzen for closing remarks.

Thank you very much for joining. If you have any more detailed questions, you'll find a lot of answers on the website. Otherwise, contact Jennifer Schlueter, our head of Investor Relations, or contact Myles or myself directly. Thank you very much for joining us.

Thank you for your participation in today's conference. This concludes the presentation; you may now disconnect. Good day.