Octave Specialty Group Inc (OSG) 2007 Q3 法說會逐字稿

Good morning. My name is Ray, and I will be your conference operator today. At this time, I would like to welcome everyone to the OSG's Third Quarter 2007 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS).

Thank you. It is now my pleasure to turn the floor over to your host, Jim Edelson, General Counsel. Sir, you may begin your conference.

Thank you. Before we start, let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker 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 and Heidmar Lightering with OSG's operations, estimated TCE rates achieved for the fourth quarter of 2007 and for 2008, anticipated levels of newbuilding and scrapping, projected drydock 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've 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 our conference call this morning. Let me first introduce the management team members that are here with me in New York. We have Myles Itkin, Chief Financial Officer; Jim Edelson, General Counsel; Jennifer Schlueter, Head of Investor Relations and Corporate Communications; Lois Zabrocky, Head of our Product Tanker SBU; Jonathan Whitworth, Head of our U.S. Flag SBU; and Mats Berglund, Head of our Crude Tanker SBU.

As Jim indicated, the presentation is posted on our Website, so if you please would turn to slide three. As all of you know, the third quarter was one of the weakest operating environments we've seen in several years. In our remarks today, I will review our results, the market factors that influence the rates, our winter 2007/2008 market outlook, and some important activities that took place at the Company during the quarter in support of our growth strategy.

Let me first turn to the performance for the quarter. Net income was down 71% in the third quarter to $26.6 million from $90 million last year. Results in this quarter included a $1.5 million gain on sale of a vessel compared with a $15.8 million gain on the vessel and securities sales in the same period last year. EBITDA was a healthy $92.8 million, but was down 32% from $135.6 million in the same period last year. EPS was $0.83 per share, down 64% from last year, and sales adjusted EPS was $0.78 compared with $2.58 a year ago.

TCE revenues were essentially unchanged at $254 million versus $254.8 million last year. Turning to performance by sector, crude oil TCE revenues were $127.3 million, down 28% quarter-over-quarter. Heidmar Lightering, which as you know we acquired in April this year, contributed $16 million to total crude TCE. And importantly, crude as a percent of total TCE was 50% in the quarter versus 69% in the same period last year. Product TCE was up a healthy 22% to $66.9 million, 26% of total TCE.

Although the mix of spot and time charter days in the product tanker revenues was roughly the same, 26% spot and 74% time charter, [net] expense in this sector resulted in revenues increasing by 16%. We continue to be very positive about this market segment, and I'll talk a little bit about it later in my remarks. U.S. Flag revenues were $53.8 million, up more than 180% and it represented 21% of total TCE versus 7.5% last year. The former Maritrans fleet added $32 million to current quarter TCE.

Switching to rigs, third quarter spot rates were weak across most segments in the crude trade, with the exception of Panamaxes. Average TCE rates for VLCCs were $34,800 per day versus $69,300 a day in the third quarter last year. Aframax is $24,600 a day this last quarter, just under $35,000 a day in the third quarter last year. Spot TCE rates for Panamaxes were close to $35,000 a day versus $30,000 a day in the same period a year ago.

Average time share rates for Panamax were just under $27,500 a day versus $25,000 a day last year, and this reflects one ship that has been fixed on a bareboat charter in 2007 for the Argentinean cabotage trade. Strength in this sector is due to our strong position -- cargo position and our cooperation with our two key partners in the Panamax international pool, SONAP and FLOPEC. Average TCE spot rates for the Handysize Product Carriers were $26,000 a day versus $29,000 a day last year and time charter TCE rates for Handys averaged $18,500 a day versus just $20,000 a day last year.

Please turn to the next slide. Now, there were a number of uncorrelated independent circumstances that combined and led to a deteriorating crude transportation market in the second and third quarters, factors that we believe are unsustainable in the long run. Most important, OPEC maintained production cuts, which resulted in a decline of just about 1 million barrels per day in third quarter '07 versus third quarter '06. In the Far East, we had higher than normal maintenance activities, which resulted in lower refinery utilization. VLCCs used for storage in the first half of 2007 were released and we at this point, can out-count any VLCCs on storage contracts in the West.

Both higher than normal platform maintenance in the North Sea and field closures in Mexico resulted in lower production in key Aframax loading areas. Also impacting our Aframax trades were weak refining margins in Europe, resulting in lower throughput levels in the Med, which in turn lowered crude requirements. Lower natural gas prices in the U.S. reduced demand for fuel imports. And then record gasoline manufacturing in U.S. closed European gasoline arbitrages. And finally, obviously, we moved from contango to backwardation in the oil markets, and that discouraged inventory buildup and obviously resulted in inventories being drawn down.

Let me turn to the winter outlook, so please turn to the next slide. Over the last few weeks, you have seen the tanker rate -- tanker rates recover rather significantly. Well, it still has not made the jump to what you would have expected in normal winter market. But, the jump, which in some cases was as much as 50% to 100% in the course of two weeks, reflects a tight market. What we have haven't seen in the tanker market is OPEC returning that million or so barrels back in the market. Until we get that, rates will remain relatively weak by historical measures.

Oil demand next year is expected to increase 2% versus 2007. Of that, we expect the call in OPEC to be about 1 million barrels and a significant part of the balance will come out of the FSU and Brazil. We expect, and I think you are reading about it everyday, more tanker conversions to bulk carriers as well as FPSO projects, and that will mitigate some of the supply increases in 2008. I believe that two weeks ago, we had the count of conversions at 29, and there have been some reports in [brokers] of additional this week, so we believe the number's going up, but we will not confer to those numbers until we know that these are booked in the firm conversion contracts of shipyards, so the trend is clearly going in more conversions.

Our refinery systems worldwide continue to remain stretched. There is about 1.8 million barrels of worldwide refining capacity to be added next year, of which 700,000 is coming from China and 500,000 will come out of a start-up of the India-based Reliance export refinery. So, these are good things for the crude market as well as for the product tanker market.

And finally, as I said, we do not expect 1973 to repeat itself. And I have been asked about a number of times over the last week by analysts, are we back in 1973, and the answer is no. In 1973 at this stage, oil prices were $2 a barrel and the VLCC order book was at 200% of the existing fleet. The VLCC order book today is slightly greater than the total single-hull VLCC fleet, so it will accommodate the replacement of that and some growth, a completely different situation.

In 1973, the North Sea, Mexico, Venezuela, West Africa were coming on stream, so the crude was going from all long haul to a combination of short haul and long haul. Today, North Sea, U.S., Mexico, Venezuela are in declining production mode. This is favoring us again, a return to more long haul crude throughout the west -- throughout the OSG countries.

Please turn to the next slide. You have heard this before, but I'll continue to reiterate, OSG's strategy is balanced growth across each of our core segments, crude oil, products, U.S. and gas. Our fleet expansion and diversification program over the past several years continues to support this goal. We want sufficient scale in each of the markets we trade to give us leadership positions and strong commercial positions. We have grown products where the market dynamics are just too compelling not to be in the game. On the U.S. side, we have a unique competitive advantage and scale and are tightly bound to market for growth and new market that exists for us, and I will elaborate on that a little later.

We have moved from a nearly 100% owned fleet to owning 53% of our fleet today. We are more comfortable in this ratio, which provides us with much greater future flexibility. Our newbuilding program of 44 vessels is equally compelling. 52% of that is owned with associated capital commitments of just 924 million. On the 21 chartered and newbuilds, nine are already chartered out compared to [vary] duration. This built-in future growth is an important part of our organic growth strategy.

Please turn to slide seven. During the third quarter, we repurchased 1.6 million shares of OSG stock at an average price of $73.22 per share, what we would call a very shareholder friendly action. As you will see later on this presentation, we continue to believe our stock is undervalued. Given our strong balance sheet, strong cash flow, share repurchases don't prevent us from continuing to grow organically, from considering acquisitions or repaying debt.

Moving on, during the quarter, we made a number of announcements about the expansion and further diversification of our fleet. The entrance into the Suezmax sector, done with two newbuilds chartered in for three years and two second hand tankers that were purchased and then immediately resold and bareboat chartered back in Double Hull Tankers, were done primarily to satisfy several key customers. Taking a financially disciplined approach, where our effective ownership cost with these ships to just over a 20% discount to a prompt delivery for our new Suezmax tanker, which would be about $105 million today.

Now having a presence in the Suezmax sector will enhance our market intelligence. It will also make us the only ship owner that can offer customer services on all cruise segments. The ULCCs, the VLCCs, Suezmaxes, Aframaxes, Panamaxes and lightering services. We also announced newbuild LR1s, which I'll talk more about later, and perhaps the most exciting announcement made during the quarter was our entrance into the U.S. Gulf ultra-deepwater shuttle tanker trade, more on that to come also.

Now, why are we so excited about the product tanker market? If you look at the chart, you can see the growth in ton-mile, the outlook for ton-mile growth and these are significant amounts. What's driving that? The growth in refineries across the globe are in longer distances from where the demand is. So, you have new refineries coming on in India, in China, in Saudi Arabia. These will be export refineries and these will increase significantly ton-mile demand for product tankers.

Secondly, you continue to have very high refinery utilization across the globe. This creates enormous arbitrage opportunities and without the ships, this creates great utilization of the fleet. You have the Russian trying to move from product exports over to crude over time. This will also help long-haul transportation of products. So overall, we see a very both medium-term and long-term favorable outlook for this market. We have a significant fleet of 35 MRs and LRs operating today. We are replacing the older ones with new modern ones, and we will continue to focus on chartering opportunities and full expansion in this segment. It is a very excitement segment, and we are very pleased with how quickly we have grown in this area over the last two years.

Moving to slide nine, this is my favorite slide in this entire presentation this morning. This is a profile of the U.S. Gulf oil field structure and what you see here is the first new Jones Act market since 1975 when the Alaskan North Slope opened up. And if you see that, there are some red dots with circles around Chinook and Cascade, those will be the first two ultra-deepwater Gulf fields that will be producing oil and OSG has won the contract to service that.

Flipping to the next page, the oil supply from this beautiful U.S. outer continental shelf is a Jones Act trade and not available for foreign competitors. Last month, we announced an agreement with Petrobras for two FPSO shuttle tankers that will transport oil from Chinook and Cascade fields. The field production is expected to begin in the early 2010. As a result of this contract award, we confirmed two additional ships at Aker. These will be carbon copies of what we already built in there, the first ten, and we will then spend approximately $20 million, give or take a million or two on either end, deliver to Petrobras two Jones Act shuttle tankers in the first quarter of 2010 and the first quarter of 2011.

Now, if you remember when we announced the Maritrans acquisition, we talked a lot about the synergies that can be created for making -- whereby creating the number one U.S. Flag platform. Without the Maritrans acquisition, OSG would not have landed this business with Petrobras nor do we believe Maritrans would have landed on its own. By combining the U.S. Flag operations of the two companies and building the leading platform in the industry, we were able to achieve this. And we now have first-mover advantage in the first new trade in the U.S. in about 30 years.

I will now turn the presentation over to Myles Itkin for the financial review and I will return to answer your questions after that. Myles?

Thanks, Morten. Good morning. The consolidated statements of operations on slide 12 reflects net income of $27 million or $0.83 per share for the third quarter. The Company's expanding portfolio of stable U.S. Flag and International Flag Product Carrier earnings absorbed the earnings impact of lower VLCC and Aframax rates. Even as net income declined during the quarter, EBITDA remained at a healthy $92 million. As we review certain income statement items in comparison with the prior year's quarter, please recall that the acquisitions of Maritrans and Heidmar took place subsequent to last year's third quarter, with Maritrans closing in November of 2006 and Heidmar in April of 2007.

OSG's consolidated TCE revenues for the third quarter of 2007 remained relatively unchanged at $254 million compared with $255 million in the same period in '06. Despite the essentially unchanged quarter-on-quarter results, spot rates, on average across all sectors during the quarter, declined by $7,000 per day compared with the third quarter of 2006, as revenue days increased by 1,800 days.

Depreciation and amortization expenses increased by $5 million during the third quarter to $49 million, $3.5 million reflecting increases in drydock amortization and $1 million representing an increase in depreciation attributable to the purchase of two vessels during the quarter.

Equity income of affiliated companies for the third quarter decreased by $2 million from the immediately preceding quarter, reflecting the June 2007 sale of our remaining minority interest in Double Hull Tankers. Associatively, other income for Q3 '07 was $9 million, a decrease of $25 million from Q2 2007, which included a $26 million gain on the sale of our remaining DHT holdings.

Interest expense increased by $4 million to $22 million, reflecting the debt incurred to repurchase 1.6 million outstanding shares during the third quarter of 2007. Our tax provision is driven largely by non-shipping income earned by our foreign subsidiaries. Non-shipping income includes interest income on deposits and gain on sale of securities, both of which are subject to tax. The non-shipping income earned in the third quarter did not include any significant taxable gain, as was the case for Q2 2007, which included the $26 million gain on the sale of DHT.

If you would be good enough to turn to slide 13, we can review certain balance sheet items. Cash and cash equivalents stood at $541 million at September 30th compared with $742 million at June 30th. The reduction in cash balances reflected vessel acquisitions, progress payments and continued repurchase of OSG stock. During the third quarter of 2007, we withdrew an additional $45 million, $152 million year-to-date from the capital construction fund to satisfy payments on the three new ATBs currently being built in U.S. shipyards.

We expect to withdraw an additional $120 million over the next two years from the CCF, including about $38 million for the balance of 2007, bringing our total qualified funds withdrawal to approximately $290 million. You will recall that the capital construction fund withdrawals preclude the need for borrowings to fund certain future capital commitments. The reduction in investments in affiliated companies to $145 million from $275 million at December 2006 primarily reflects the sale of our position in DHT.

If you turn to slide 14 please, slide 14 underscores the actions we've taken to increase fundamental shareholder value, by increasing our level of locked-in revenue and increasing earnings stability. In furtherance of our strategy to provide an increased label of stable earnings, we have expanded in markets characterized by a higher level of term coverage, product carriers, gas, and U.S. Flag. Accordingly, the amount of locked-in revenue has grown close to eightfold from $186 million at year-end 2004 to more than $1.6 billion at the end of September 2007, 71% of which is attributable to our U.S. Flag business unit and 16% to our International Flag Product Carrier business unit. Details regarding both locked-in revenue and days per sector are included in the appendix at the end of the slide presentation.

Slide 15 lays out management's view of OSG's net asset value in comparison with our share price. Each of the categories of NAV are included in an appendix to this presentation. We are currently trading at $71 per share in comparison with a net asset value of $106. We believe the combination of this valuation gap, our expansion into sectors characterized by long-term stable cash flows, our active asset management program and our active share repurchase program, makes us the most attractive investment in this space.

Thank you. And if we could open it up to questions, please?

Thank you. (OPERATOR INSTRUCTIONS).

Our first question comes from Doug Mavrinac of Jefferies & Company. Please go ahead.

Great, thank you, good morning all. Just had a few quick questions for you guys. First, we're sitting here with $90 oil and inventories that are declining. Morten or Mats, what are you guys seeing in terms of anticipated OPEC fixtures for November, December? And are you surprised, we haven't seen more of a response from OPEC given what we are seeing with oil prices and inventories up 'til now?

We are expecting more activity for November [lacans] and that's historically in a week or two, two's time. We are a bit surprised it hasn't started earlier, but we do expect it to come. We do expect the winter to materialize.

Okay, great, thank you, Mats. And then, Morten, and you had mentioned that your Panamax rates were very strong and in fact, when looking at it, it is almost as strong as your VLCC rates were during the quarter. What do you attribute the strength that the pool partners in the Panamax international pool were benefiting from during the quarter?

I think, Doug, you have heard my spiels before, and one of the things that we emphasize every quarter is that we are building cargo systems in both VLCCs, Aframax, and Panamax. The majority of our revenue days are committed to cargoes and clients, which is completely opposite of -- the remainder of the independent tanker companies. As a result of those -- those cargo commitments and contracts, we are able to triangulate better -- have a better [leg] in the ballast ratio than others and therefore, drive up the Q3 performance. And I have also said that, in weaker markets, we are going to do much better markets because we are supported by clients we also service during good markets.

All right, great, thank you. And then, just two additional questions. One, Morten, you also mentioned about the trend that we're seeing with older crude tankers being sold for conversions to dry bulk carriers. But, we're reading recently about even newbuilding slots that have been designated to the old crude tankers being used or going to be converted to building the dry bulk carriers. What are you guys hearing or seeing as it relates to newbuilding slots being changed to build dry bulk carriers at this point?

I mean what you are seeing or where you have the ability to do that, the people are going to do that, it's not that easy. I can say for example with our newbuilding program, we can not swap in the bulk carriers. We have no intention of doing that because we are committed, we need the ships for our business, but there is no question there are discussions going on. So, I would not be surprised if you saw a reduction in the actual number of Aframaxes and Suezmaxes coming out of the yards, because they -- it's pretty compelling right now. We remain committed to our segments and we'll do that. And on the conversion side, we expect continuation of VLCCs, some Suez and Aframax in the dry bulk, and there is no question about that. I think the number now we think is approaching 40 on the VLCC side.

Okay, great, thank you. And then one final question. Morten, you had mentioned about the -- the U.S. Gulf Jones Act shuttle tanker business that has been established with Petrobras. Can you talk to the scope of how big this could potentially be for OSG?

I will let Jonathan answer that one.

Hey, Doug. Obviously, we are right at the beginning. There is another FPSO that's in the Gulf of Mexico, but that is off the Mexican Coast. So, this is the first FPSO that we have really seen in the U.S. waters. And as we have been talking with customers, which a lot have been asking questions about -- about shuttle tankers, the complexity of pipeline alternatives and the cost of the pipeline alternatives, it certainly has created a lot of interest in shuttle tankers and obviously, having Petrobras stepping up and starting that I think is going to further the trade.

With regards to a number, we could see probably somewhere between four and six in the next two to three years, at least being announced. How far and how large does it go beyond that? All we know is there is a lot of ultra-deepwater exploration going on. And it's either the oil majors or even the international players. Total just announced yesterday about ultra deep fields that they have just purchased. So, we are really not sure how big it can get.

Okay. Great, thank you very much, Jonathan, thanks Mort, and thanks Mats.

Thank you. Our next question comes from Jonathan Chappell of JP Morgan. Please go ahead.

Thank you. Good morning, guys.

Good morning.

Morten, as you look at growth for OSG in the future, well three, five, ten years, you look at asset prices as they stand today and you balance newbuildings with a charter-in fleet, what do you think about the current asset prices, vis-a-vis the rate environment, and also as you compare to charter-ins, clearly you have made a decision to go a little bit more asset like with the fleet expansion lately?

There is no question that newbuilding prices are at all time highs in practically every segment you have in shipping. In the U.S. Flag, for the most part, we're covered by long-term contracts that you recover that. In the gas sector, where we are looking at several projects, you are going to have long-term contracts. We have been pretty careful in purchases -- in the newbuilding commitments we've made for products, Afras and VLCCs. And if you compare the rates we've paid with where you have today, we have a significant discount of those rates.

Now, what's the lesson there? If you are in the market every day looking the charter ship, sell ships, buy ships, as windows open up and you are able to act quickly, you can achieve prices that work on your long-term models. If you look at our expansion in the Suezmax market, as I mentioned, our ownership costs equate to an ownership cost of Suezmax in the $85 million to $90 million range depending on how you want to apply the math, whereas if you bought that ship in the second hand market, you're paying $105 million today.

So, there are still opportunities in this environment to do things. On the product tanker side, we very aggressively went to the charter-in market 18 months ago, and we wouldn't get anywhere near the rates we achieved then today. So, there are still lots of opportunities, but you really got to work very hard about it, and you have to be very financially disciplined about how you run the numbers on these deals, and I believe we have been doing that pretty consistently.

As a follow-up to that, Morten, do you see asset prices flipping at all and the spot environments remain pretty low, or do you think that the time charter environments, as well as the strength of the dry bulk market and you previously mentioned conversions can keep newbuild and second hand asset values quite robust for the tankers in the next two years?

I don't see asset prices falling off in the short run as a result of shipyards. We all know the story on shipyards, their order books are longer, they are raising prices, their inputs, their components all cost more, their currencies are strengthening against the dollar, and they can build ships very quickly. So, they have no inclination or showing on to reduce prices. If you had a sustained weaker crude market, you could see some softness in second hand values. I don't think that of these things as very significant because you won't see a decoupling, you can see that much of a decoupling from second hand prices and newbuilding prices. You are seeing some very small softening in time charter rates for crude tankers.

But, they are still at very healthy levels that more than justify the second hand value of ships today. And then, normally, ships get cheap because of distressed sellers and the majority of crude tankers, product tankers, dry bulk carriers have been financed with equity for the last two, three years. So, I don't see a lot of panic selling or distressed debt sellers of assets coming up. So, there could be some follow-ups, if there is sustained longer weak crude market. We don't see that happening. So, I think we are going to look forward to a pretty solid and high price environment for all types of the ships for the next two, three years. And if I read your work and Doug's work and others, the dry bulk market is going to stay good for a long time. So, you are going to see a lot more contracting in those areas and that's where shipyards make a lot of money.

Okay, one last one and it would be for Morten or Myles. Just any update on the timing of the OSG America launch. We all have had a chance to look finally. And then also, what is OSG Corporate's top priority for the use of proceeds from the spin-off? You laid out quite eloquently the difference between the net asset value and the share price. Should we expect to see a significant move up in the share buyback program as this influx of cash comes with the pricing of OSGA?

We are receiving SEC clearance predicated upon that. We have initiated a roadshow towards the end of this week. The expectation is that the proceeds that we receive will be used to pay down domestic debt. That's currently where that stands.

Was there a second part of the question, Jonathan?

No, it was timing and use of proceeds. So --

Okay.

Thank you. Our next question comes from Greg Lewis of Credit Suisse. Please go ahead.

Good morning. Morten, my first question is for you. You alluded to tanker conversion projections and not really firming the number until that wasn't announced, and how many are at yards.

Yes.

Roughly how many are assigned out yards today?

Two weeks ago, the best number I had which we had confirmed was 29 firm contracts. We now believe the number is closer to 40. But, I am saying that that is a best guess. When we know that somebody has actually booked at berth in a yard, you then add it to the firm list. So, I think that 40 is not a bad number, based on what we have seen in the second hand markets.

Okay, great. And then, you mentioned the expansion in Suezmax market satisfying customer needs. Are any of those Suezmaxes going to be on time charters or COA agreements, or are they going to be trading in the spot?

Mats will take that one.

They are not committed to time charters so far. Two of them deliver now this winter and two deliver later in 2008, and they are currently working hard on the employment opportunities for those ships. They are likely to be operated under seaways similar to our other segments.

Okay.

A lot of customers have overlapped into Suezmax facilities, other people they are obviously talking to right now.

Okay, great and then, I guess one last question. I was trying to match up the third quarter Aframax days for the quarter. And it looks like there were revenue days for the crude Aframax fleet of I guess 1,733 days. But when I look at the Aframax fleet, the earned and chartered in and then, I guess I add in the one lightering, I'm left only with 16.1 Aframaxes. So, I was wondering where that disconnect is and where those extra Aframax days came from?

It includes 375 Aframax lightering days, which weren't previously disclosed.

Okay. And those lightering days come from vessels?

Chartering in and tonnage.

Chartering, okay. All right, thank you. That's all from me.

Thank you. Our next question comes from the Natasha Boyden of Cantor. Please go ahead.

Pretty good morning. Just wanted to follow up on Greg's question about the Suezmaxes. In terms of strategy, are you -- sort of how big and how fast are you looking to get into that sector or are you not - is this it because it was a customer focus?

I have not firmly decided that yet, but scale is important too. But, we are also not opposed to niche employment opportunities. So, at this point, we are starting with four, continuing to look for opportunities and we will take it as it comes.

Okay, great. And just looking, going back again to the large amount of cash you do have on the balance sheet right now and you have carried on a great deal of repurchasing shares. Is that still the most attractive investment for you at the moment, and could we see perhaps a follow-on share repurchase program after this one is completed?

We still have some availability under the existing program. Clearly, that will be a topic we take up at our December Board meeting. The Board looks at a lot of things, including our credit rating, including credit conditions in the market. And I don't know what you are hearing, but I -- the credit market has certainly deteriorated, looks [like it'll continue] to deteriorate. We have a number of opportunities we are looking at and the Board will always weigh additional share repurchase against what the opportunities we have. And it will be a -- and I think we have been pretty consistent in how we have handled that now over time. The Board will look at it, will look at the alternatives and look at the overall credit portfolio and then we will decide at that time, but first of all, to use up the existing programs.

Okay, great. And then just last, a quick question for Myles. Myles, can you just let us know what we should be looking for in terms of provision credit for federal income taxes?

For the fourth quarter, if you take a look at a credit of approximately $2 million to $3 million, that would be our guidance.

A credit, okay. And then, for 2008, I'm just trying to figure out when we should look at it as a credit and when it's a debit as well? Is it hard for us to look for?

Yes, it's a -- what I'd rather do is when we finalize 2008, we will provide whatever guidance we are going to provide, to do it in detail at that point.

Okay, that's fair enough. Thanks very much, gentlemen.

Thank you.

Thank you. Our next question comes from Scott Burk of Bear Stearns. Please go ahead.

Hey, Scott.

Hi, guys. Hey, just had a question about how the rates -- your day rate, your revenue rates have been trending since October 12th. We have had another two weeks since then. Just wondered if we have any -- if you started to see any winter upside in rates subsequent to what you got in the release?

I will let Mats tackle that one.

I think, compared to what we're showing in the press release as regards what it speaks for fourth quarter, since then, things have improved primarily in the Aframaxes, but also in the VLCCs. It's heading in the right direction, although not as to the levels we hope and think it will go a little bit longer term.

And speaking of the Aframaxes, I was also interested that you only had, I think it was 13% booked so far in the quarter. Is that -- I was under the impression they usually book like two to three weeks in advance or something, that number would a little bit higher. How does that work? Is that because of the pool system or why isn't there more booked already for the Aframaxes?

I think we will commit to try to have fresher numbers at the next reporting. As you see the date, it's as of October 12 there. Now, we are October 30. So, we have fixed a lot more than what we show there. But, it's partly a result of having the pool system and getting the numbers just to [boost] it out. We will have fresher numbers next time.

Okay, and then, also the question, you talked about VLCCs being used for storage earlier this year. In the first half, what kind of range or how many VLCCs were actually used?

I think it was as much as 12, tramping down to about seven in the second quarter, and then by the third quarter, all the ones that we could count are gone. Now, there may be some -- there is storage of Iran, we don't have access to that information. But, in terms of independent tanker owners, ships being used to storage, right now, we got none.

Okay. And that storage you are talking about, the 12 and the 7 now would have been mostly in the Gulf of Mexico?

Mostly there, yes.

Okay. Just taking management, so that all went away once you went into backwardation on oil prices?

Very quickly.

Okay. And then, I guess one other question, Myles, if you could run through some -- you have previously given some guidance in terms of ranges for the next quarter in terms of charter hire expense, that sort of thing?

We are inherently on target with the guidance that we have provided for the full year. Is it helpful to repeat that?

Sure, it would be great to hear again.

We said vessel expenses, $130 million to $140 million; charter hire expenses, $145 million to $160 million; depreciation and amortization, $95 million to $105 million; G&A, $60 million to $70 million. Now, that's second -- this is second half guidance.

Okay.

Equity income of affiliated companies, $4 million to $8 million; interest expense, $35 million to $40 million; and other income, $18 million to $22 million.

And then, you gave us the tax number a little bit earlier in the past question. Okay, well, thank you very much.

Sure.

Thank you. Our next question comes from Urs Dur of Lazard Capital Markets. Please go ahead.

Good afternoon, gentlemen. I guess it is not afternoon yet, it is quite about lunch.

Good morning, Urs, good morning, Urs.

Good morning. Yes, well, it seems like afternoon for me. All right, thanks, nice call and a lot of the great questions have been asked. So, I guess I am stuck at the end on this one. I guess I'm most interested looking forward much more on a macro level, this is coming I guess to all of you and then I have a micro one for Mats. But, we have a fleet that, even by aggressive estimates on conversions over the next few years, is growing at a pace between 5% and 7%, really about 4% next year, about 12% -- excuse me, between 11% and 12% in 2009. That's with aggressive attrition, that includes conversions and so on. I mean, that is what I am seeing. As well, we have had demand be flat this year for the seaborne transport of crude oil by ton miles in increasing and I appreciate that number.

And therefore -- we have also had rates overall slowly but surely declining since 2004, but we have had asset prices stay up. I mean, how much longer can this condition occur with a fleet growing at or exceeding supply growth before we do have slowing or lowering asset prices and therefore, pushing the NAV down. I guess my biggest issue is that, well, I appreciate your $106 target on the NAV, I think it would be very difficult to sell your entire fleet on the steel side, not everything else with the charters and so on. At that price, it would be a fire sale, so I'm not sure whether investors see it that way either when we have the $70 share. I was wondering if you could comment more on the macro side of where you think that's going and where the disconnect is.

Urs, I think, I am not sure if you are asking a question or giving an opinion.

Sorry.

Let me start, right now, try and go on the markets and buy second hand modern double hull tonnage in almost any segment is extremely difficult. Now, what's the -- how can I show that? If you look at the sale of the Overseas Donna, you see that way down? That is at a price of $126 million. It will leave our fleet sometime between now and July in 2009, and we will book somewhere between $75 million and $80 million gain on that, now.

Yes.

And that was obviously a very good transaction. But, it's a reflection of how few double hulls there actually are available in the market. If everyone is out there to sell their double hulls, they would. Just like, if you look forward, and I think it is a pretty reasonable -- if you took a consensus among the owners for the next five years, on average, rates, will be something like the last five years. Not suggesting we're going back to the heights of 2004 with the average, but with more volatility.

If you produce -- if you run that rate, that means that today's second hand values, using reasonable financing of 35/65, it still makes sense for people to be buying these ships. And during that period, if there is an accelerated phase-out, which we believe there will be, then you have a chance of very strong market. Just look at the last two weeks where rates effectively doubled in Afras, doubled in West Africa, and that's with a million barrels less coming out of OPEC. So, that just tells you how tight this market is.

So, can this market deliver one very strong quarter that brings average supply, the answer is yes. And I think the -- you got to look at this sort of on a weekly basis. At the beginning of this year, we expect -- I think we calculate that the projected additions to the VLCC fleet between the beginning of this year and the end of '09 is going to be 133 VLCCs. Now, that number with a 29 number is at 92, with a [40] number would now be closer to 80 net vessels. If you put that against a growth in supply from OPEC as just what we know -- 1.5% to 2% growth in demand across the globe and you have a relatively balanced market. And underneath that, you have a shipbuilding order book, where still there would be no let up on the shipyards in the short run here for any kind of price reductions. So, I don't think there's as big a disconnect as you're positing. In fact, we see the opposite.

Okay, that's fair. Thank you. And I guess just directly for Mats, the order book you guys entered in Suezmax, I mean what are you looking at on the order book, what's your opinion of the order book for Suezmaxes going forward, do you have some substantial numbers in 2009 and 2010?

I think all the crude segments hang together and when you look at the order books, you got to look at all the segments, the Suezmax, the profile is not too different than the other segment. But, what we are seeing is potentially more growth in the Suezmax trade from load area with West Africa and Black Sea primarily being the two load Suezmax areas. So, we think these will balance in the overall crude segments, including the Suezmax segments.

Okay. And any other loading areas growing other than the two you mentioned? How about South Africa or -- excuse me, South America and so on for Suezmaxes?

We think the new interesting trade is going to the West Coast to Chile and we see more and more load ships coming in to the U.S. West Coast. But, those are small trades and the two major trades for the Suezmax, and so, that's growing in West Africa and the Black Sea.

Okay. But, in the -- I do see that the Suezmax market -- there is a lot more orders there on a percentage basis than other segments of the fleet. But, I agree with you, you are right, take your tenders and go step and step. Thanks for the update there, thank you very much guys.

Thank you. Our next question comes from Justine Fisher of Goldman Sachs. Please go ahead.

Good morning.

Good morning, Justine.

The first question that I was going to ask was to Myles, and I guess to Morten as well, as far as whether you guys intend to continue issuing more debt in order to buy back shares, I guess drawing down on your revolver to do so. Is that the financing strategy going forward?

We have -- as you know, the foreign cash we maintain for and in order to satisfy future commitments because repatriation isn't tax efficient. So, what we've done is we've incurred debt on the U.S. side, predominately to repurchase shares. The proceeds from the MLP offering will be most immediately directed to a repayment of that debt. But, if we were to incur additional obligations by share repurchases, it would increase debt balances.

And then, related to that, Morten, when you responded to Natasha's question about the credit markets, I was trying to think through why the weakness in the credit markets would affect your share repurchase decision? I mean, do you guys think that that would reduce the availability of your revolver? It doesn't seem to me that that would be the case, but I was wondering why the dynamics in the credit market would affect your decision to repurchase shares.

I mean, Justine, I think you have seen some rather colorful CEOs who would ignore the credit markets in the last few days that make career changes as a result. (inaudible) flipping. But, when you are looking at -- one of the things that we have said about OSG and our Board feels very strongly about it is that we are going to maintain a very strong credit profile that we want to retain one of the strong credit profiles in the business. One of the reasons we are able to time charter ships from owners and financial investors on a scale that we do is because we have a strong balance sheet, we repay our obligations and we are able to do that in weak markets and in bad markets.

I think the -- so, the Board is very keen on maintaining that profile, so is the management and we will do that. And that has been one of the factors that you look at. Clearly, our liability management and our current liquidity is quite strong, and I think we have no more than $40 million of long-term debt maturing between now and 2013 in any one year.

But, what a credit market like this could possible create, about I think it's three quarters of the world's newbuildings are not financed yet. And raising financing for those may prove challenging to those without liquidity and that may create opportunities for us. And so, we want to be certain that we are able to take advantage of openings as they come. So, as we discuss with the Board, we will look at current projects we're working on, we will look at the overall environment, we will look at what we are seeing through the SMB market, and then we will make a decision. But, it will be a very balanced complete look at the market.

So, the impact of weaker credit markets would kind of be secondary for you guys because that would take away potentially other tanker owners' ability to finance vessels, which means that you might want to keep revolver availability to buy the vessels, I guess that they may not build rather than to buyback shares?

Correct. And that's a premature -- I am not saying that's the case today. But, if the credit markets continue to deteriorate, it certainly is a possibility.

Okay. And then, another question I had was more on the business side of things. But, I was wondering if you could comment what kind of operators you are seeing for their vessels and for conversions. I know the exact number is to be decided based on the berths that have been booked. But, are you guys seeing owners of older tankers, are you seeing owners of large fleets, is there any color as to what type of owners are deciding to put their vessels into the bulk market? Clearly, you guys aren't because you are a tanker operator, but I was wondering if you could give us color on that.

I'll let Mats take that one because I think he has a better grip on it than I do.

Justine, it's varying owners, it is tanker specific (inaudible) worldwide, there's T&T, but there is also the big Chinese like COSCO is doing it with their own ships. So, it is a mix of solid industrial players as well as more speculative independent owners.

So, there's not really a lesson that we can glean from who is converting, it's both people who want to speculate on stronger dry bulk rates versus tanker rates and those who say, "Well, we just want to own our own vessel."

I think that is the right conclusion.

Okay. And then, as far as OSG's ownership, I know that -- Morten, you mentioned that you prefer to maintain the flexibility in having about half your fleet chartered in. Is there any particular type of vessel that you would want to own more of going forward? I looked at the fleet breakdown, both existing and the vessels you have on order, and I can't really see any preference for owning a particular type of vessel. But, going forward, would you guys rather own product carriers versus VLCCs or is there no preference?

There is really no difference in there. I think that we want to own and technically manage and operate a sufficient number, so that we can service core contracts because there certainly are a number of customers that insist that we service them with an OSG owned, run, technically managed ship. So, it will be more a function of what our customers want. But we're not going to be able to retain the kind of cargo commitments we have unless we have a big, owned controlled fleet.

Okay. Thanks very much.

Thank you. Our next question comes from Terese Fabian of Sidoti. Please go ahead.

Hi, I have a question on the single hull and double hull VLCC rates this past quarter, can you tell me a little bit about what the direction was?

The spread has not continued to increase, if anything, a slight decrease in the spread. There is still a significant difference, but it has to do with the single hulls being trading in the [ABE trade] and a little bit more competition amongst the double hulls for the [AB West] cargoes. So again, the spread is still large, but not increasing.

Okay. And then, a question on the LNG market, you're having two carriers delivered, can you talk about the timing of that and I don't know if you can address the contribution from those at this time?

I think the less stuff that I call tell you, we expect the first one to be delivered perhaps in the next couple of days. As always, there are some technical issues you sort out at the last minute, but we expect one to come in the next few days and then one more to come in about four or five weeks time.

Maybe a little bit less.

Maybe a little bit less and then two right in the beginning of next year.

And is there sort of a dry run with those vessels also or do they start earning right away?

They start earning the minute we take delivery of them and then, they become accepted for delivery by our customer, Qatar Gas, which should be simultaneous.

Okay, thank you.

Thank you. Our next question comes from John Kartsonas of Citigroup. Please go ahead.

Hi, I guess a question for Morten, more of a long-term strategy question and obviously, you are fairly bullish in the market. If we see here like several more quarters of weaker rates, is there any point that you will consider exiting the crude business or maybe significantly reducing your exposure? Or put it another way, I mean, what would you look for doing that?

Well John, first of all, I am not going to accept that we are going to have such a market that I am going to slit my wrists. So, I am just not going to accept that. We have spent a decade building one of the top two or three crude transportation businesses in the world. It is a customer-focused business. It is in very large pools, in the VLCC pools, we review this summer for three years a contract we have in the China, we are committed to serving those customers, to provide a differentiated service.

If you look at our results, quarter end, each quarter compare our rates with the market or the other big players, we are pretty proud of the spread that we are getting towards the general market and other competition. We have compared to a lot of fairly low book value fleet. We have been very disciplined about the acquisitions really across the segments. So, we have the ability to tolerate weaker markets, but keep in mind, even in a market like today, like this last quarter, we are still generating close to $100 million of EBITDA. And so, it will be -- I can live with $100 million of EBITDA as a weak quarter pretty consistently before I start slitting my wrists.

Whichever thinking about -- I mean that's fair obviously, you have a very low base before you start, but if you look at return or replacement costs for example, these are coming lower and lower. Maybe it makes more sense of like capitalizing on this strong asset prices than operating them, that's where I am getting to.

John, I think I agree with you and I think we have done -- been a pretty active seller of double hull tonnage that we have shifted residual value to folks with different cost of equity or different financing objectives than we have, and taking them back on charters so we can give options sometimes to purchase, sometimes to extend charters. So, I think we have been very aggressive by doing that for the last two or three years. I think we might have been criticized a year ago for started that too early. Today, I feel pretty good about it because the cost of our controlled fleet is much lower than the majority of our competitors and that will give us an advantage of whether I am right about this market or it is closer to your projection.

Is there anything that -- I mean in TI, I mean you can basically manage your vessels the way you want, right? I mean, there is nothing that stops you from selling or, say, leasing back these vessels right?

Nothing that stops us from selling or sale leaseback. The only thing I would say is that the key to TI are the big cargo contracts that we have and we are very committed to TI and to maintaining that, and that before we entertain any outright sale, we would look very carefully about cargo commitments and keep in mind that we are transporting now close to a quarter of the crude oil that comes into China. Any forecast you would look at, and most importantly our customers, they expect to be transporting more in over time and so that we have to maintain a sufficient scale that we can service them. And that will be very key to anything we do on the disposal side. Sale leasebacks, we will do opportunistically when it makes sense, and we have done that with a large number of our VLCCs and we will continue to do that.

Okay. And finally, can you give us a breakdown on the VLCC [prone], on the contracts with -- that you have there, meaning COAs or spot, how is it today?

There are some contracts that are formalized and there are some contracts that are not formalized, at-work contracts. I would categorize it as roughly 50/50 on the VLCC side; 50% contract, 50% spot.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS).

Our next question comes from [Stephen Williams] with Simmons. Please go ahead.

Yes, hi. Just one more on the VLCC conversions, if we see more conversions going forward, is it bit more pronounced, we are converting five VLCCs as of now, and how easily can I actually get into a shipyard, so - you know, for how long would they continue to trade us tankers while I'm waiting to find a shipyard slot?

Shipyard capacity is tight, so it is hard to get in prompt. But, these numbers we are talking, we expect to be taken out within a coming 12-month period. Some of them starting now and then gradually over a 12-month period, ahead of us, then they will be gone for six months. But, we expect all these roughly 40 numbers to have left the tanker fleet within one year from now.

Okay. And so going forward, if there were more - we'd expect to be 12 months or longer before they actually came out of service?

It's probably a fair assumption.

Okay, that's great. Thanks.

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

Okay, thank you very much. Actually, thank you very much, we got a lot of very good questions. I appreciate you listening to the conference call. If there are any specific issues, you know how to get a hold of Jennifer Schlueter or Myles Itkin or anybody in the team here. Thank you very much. Have a continued good day.

This concludes today's OSG third quarter 2007 earnings results conference call. You may now disconnect and have a great day.