Octave Specialty Group Inc (OSG) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the OSG first-quarter 2008 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded today, Wednesday, April 30, 2008. I would now like to turn the conference over to Mr. Jim Edelson, General Counsel. Please go ahead, 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, anticipated levels of new building and scrapping, prospects for certain strategic alliances and investments, prospects for the growth of the OSG gas transport business, estimated TCE rates achieved for the second quarter of 2008, and estimated TCE rates for the third and fourth quarters of 2008, projected drydock and repair schedule, timely delivery of newbuildings and prospects of OSG's strategy of being a market leader in the segments in which it competes. The projected growth of the world's 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 2007. For this conference call we prepared and posted on OSG's website supporting slides to supplement our prepared remarks. The supporting presentation can be viewed and downloaded from the Investor Relations webcast and presentation 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.

Good morning, and thank you for joining our conference call this morning. Let me introduce the management team members that are here with me in New York. Jonathan Whitworth, the CEO of our OSG America and head of our US Flag Business Unit; Jennifer Schlueter, head of Corporate Communications and Investor Relations; Jim Edelson, General Counsel; Lois Zabrocky, head of our International Product Tanker strategic business unit; Mats Berglund, head of our Crude Transportation business unit; Captain Bob Johnson, Senior Vice President, head of Ship Operations and Myles Itkin, our Chief Financial Officer.

As Jim indicated, our remarks will follow a presentation that is posted on the website. So if you would please now turn to slide 3. We're on the first bullet. As anticipated, the first quarter of 2008 was another quarter of strong performance by the Company. Net income came in at $112.4 million, and EBITDA at $178.4 million. EPS was up 67% quarter-over-quarter and up 88% when adjusted to exclude first quarter '07 special gains. What particularly pleased me about our performance is that these greatly improved numbers compared with last year, came almost entirely from earnings from operations, no significant special items and with expenses substantially in line with our internal budget and guidance. We had solid near budget performance from our US Flag and International Product Tanker businesses and exceptional results from our Crude Transportation business.

Second bullet, the big story of the first quarter was our crude transportation business and within that segment it was the very strong performance of the VLCC that stood out. Powered by 99,000 a day VLCC rates, crude revenues rose 70% during the quarter compared with last year. This enabled us to grow first quarter top line revenues to $376 million, the best first quarter in the Company's history.

Now our numbers ended up below the consensus forecast, which is disappointing, especially considering how good the first quarter numbers were. The differences can be explained by four line items, of which the weaker performance or V Pluses or ULCC's during the quarter accounted for slightly more than half the shortfall. The positioning of the Suezmax's upon joining the fleet was also contributing to the shortfall. Now with the V Pluses they are heavily impacted by loading activity in the Arabian Gulf.

So when Saudi Aramco cuts back on allocations of crude to the US customers, which they did in the first quarter, this has a direct result on the V Pluses, which were forced to wait longer than usual for cargo. In addition to the cutbacks, the TI Oceania encountered significant waiting time waiting for employment following her first quarter scheduled drydock. While the results of the V Pluses were below expectations, in absolute terms they remain very healthy, well in excess of our cost of capital.

In addition, in seven months 2 of the 4 ULCC's that we own jointly with Euronav, will exit the market in order to be converted to FSOs and then moving on to profitable eight-year charters to Maersk Qatar. The bottom line is the ships have done well even though they have been challenging the trade, and now we are attacking this challenge by moving 2 V Pluses onto attractive alternative long-term employment. The way I looked at these ships, I've said that with 4 V Pluses we are low on one ship. With 2 V Pluses we will be short 1 V Plus.

Moving on, we continued with our share repurchase program during the first quarter, repurchasing 400,000 shares at an average price of $57.33 -- we used $21.8 million remains outstanding under the current program. We have now bought back close to 23% of our outstanding shares since the buyback program commenced two years ago. We intend to complete this program in the near-term, and we will be reviewing both our dividend and buyback programs at the June board meeting coinciding with our annual shareholders meeting.

Bullet 5. We gave notice this month of our intention to call our 8.25% CD Notes due 2013 in the principal amount of $176 million. They will be redeemed on May 15 at 104.125%. We will draw under our revolving credit to fund the redemption and have locked in the interest expense on this amount. Thus we anticipate interest savings of $7 million per annum on the same amount of debt.

Just as with the first quarter we are pleased to put forth strong second quarter bookings so far. I am confident now that you have seen -- now that you have seen our second quarter bookings todate that the analyst consensus forecast will go up from the $1.85 per share that currently stand for the second quarter. Through April 18th we have locked in 67% of our second quarter VLCC revenue days at $78,000 per day. Spot Aframax and Suezmax rates are so far running ahead of what we achieved in the prior quarter and international product tanker spot rates are also up. Right now there appears to be more upside risk in rates than downside in the balance of the quarter, reflecting the tight balance in the double hull VLCC market.

Moving to the next page, in order to stabilize earnings in OSG America and to manage the newbuilding delivery delays encountered, and importantly as an owner with a 75% interest in the success of the newly public MLP, OSG has entered into charter arrangements on seven vessels with OSG America. This involves the chartering in of five vessels from OSP at fixed rates, and chartering out to OSG America two of the vessels we have currently handling lightering in the Delaware Bay. Now while beneficial for the MLP, these transactions are not material for OSG.

Now I already mentioned the solid performance by our international product tanker unit in the first quarter. It is important to recognize that this unit's performance, while good, remains burdened by bareboat in arrangements on 13 older non-double-hull product tankers. We will redeliver the first two of these units in the second quarter of '08. Two will be redelivered in the first quarter of '09, and the remaining nine in July of 2009. Over time these 13 ships will be replaced with 15 double-hull vessels which will enable us to significantly increase the margins of this business. We forecast the double-hull vessels should be able to earn in excess of $5,000 per day more than the older, non-double hull units they replace and in the process transform our international product tanker business.

Moving to the next slide. When we laid out our balanced growth strategy, which was predicated on strong, in-house technical ship management, one of our objectives was to capture premium long-term business. The first awards of this strategy were the initial time charters we obtained from nine of our 10 Aker Philadelphia Jones Act newbuildings. In the last 12 months the scalable platform we have built has enabled us to secure the first US Flag Jones Act shuttle tanker business and then in the last quarter the eight-year FSL contract with Maersk Qatar. We would not have won these premium, high margin contracts unless we had in place a high-quality, scalable operating and technical platforms. We will continue to pursue incremental high margin business like this and believe that our shareholders will benefit enormously as a result.

Moving on to the next slide, the strength of the VLCC market has surprised most analysts, but it shouldn't. We have kept our fleet trade spot for clear reasons, of which the supply side of the equation is the most obvious. I think the slide speaks for itself. The VLCC fleet was 483 units at the beginning of '07, exactly the number of units where it ended the year. Today it stands at 475 tradings units.

Next slide. Living in the USA, particularly New York, it is very easy to get caught up in the gloom of the subprime crisis and a debate on whether or not the US is in a recession or not. The facts are that the USA has imported slightly less crude in 2008 than they did in the same period 2007. This is not the case in the rest of the world and notably in China, where crude imports were up 6% in the first quarter. This slide shows the strong demand we saw in January from China, which is reflective of how the year has evolved so far.

Moving on to the next slide, we have been telling investors for several years that the commercial obsolescence of the single-hull tanker fleet would precede the mandatory phaseout and that the gap in earnings between single-hull ships and double-hull ships would widen as double-hull fleet grew and this would keep rates at attractive levels. The current market demand for double-hull VLCC's has resulted in now $30,000 a day earning premium to single-hulls.

If you look at the slide here which shows a number of Arabian Gulf fixtures in '07 '08 by month. And what you see in '07 was that the ratio of those cargoes taken by double-hull vessels. And when you look at '08 you compare month-to-month, in every single month but March the ratio, the number of cargoes percentage taken by double hulls has gone up dramatically from 47% to 53% in November, to 64% in December, 61% in January. This is a trend that is not going away. And as you see the average of 58 double-hull VLCC fixtures per month in '07 was 74% so far in '08.

Another way to look at this percentage of [void] is the percentage of void is done by double-hull vessels in the key discharge areas. I am now on slide nine. Those areas still accept single-hull vessels. If you look at Japan, for example, and look at spot only, in '07, 18% of the cargoes were taken by double hulls. In '08, 56%. The number in Korea, 23% rising to 45%. China, 63% to 71%. This trend is irreversible and will gather steam as we approach the mandatory phaseout dates, and as the single-hull fleet becomes a smaller percentage of the overall tanker fleet. Today that number is approaching 20%.

I am now into my next slide -- I am now into my fifth year with OSG. I have never felt better about the prospects for our company and the technical and commercial platform we now have in place. Combine this with a much better market outlook and I feel good about our ability to generate sustainable growth and shareholder returns. Looking at some of the key catalysts for growth, the balance of 2008 looks strong, more upside risk than downside risk. And 2009 outlook looks much better than prior expectations, notably for our crude business.

The rate outlook now for 2010 and 2011 is compelling as a single- hull tank fleet is phased out completely. I already mentioned OSG's International Flag Product's fleet is poised for significant earnings jump when the 13 older, double sided MRs are replaced with 15 new double-hull MRs and LR1s. The US Flag segment cash flows have been stabilized, and that fleet will nearly double in the next three years.

New long-term contracts with improved margins in US Flag and crude oil segments, notably the FSO, will provide incremental earnings growth to OSG also. And then the appreciating value of OSG's newbuilding program. We are very happy that we have a 41 ship newbuilding program today, and that we committed this program in many cases two or three years back. We will be taking delivery of our new crude tankers in 2009 and 2010 as opposed to waiting for them into 11 and 12. So we have built in growth into the system already, and we have done that ahead of this rapid increase we've had in newbuilding prices.

Going to the last page, our aim at OSG is to build long-term sustainable value for our shareholders. We understand the need to both deliver good current returns and long-term value. We think we have the platform that can do this, and we think we have the market with us. Looking at the key elements of our strategy, and this will not be new news to a lot of you, we will continue the expansion of our crude oil sector and retain our heavy spot trading focus. As mentioned, we have 10 new vessels that deliver through 2010. The FSO project is now moving forward. This is a new, high-growth market, and we will look for incremental opportunities in this segment.

We have the lightering business in the Gulf, and we are expanding on the West Coast. And we believe the US will be importing more, not less crude in the coming years, and this will provide growth for that business. And as you learned at the investor day, we have been active users of the FFA markets to hedge attractive rates.

In addition to crude, the balance growth we have expansion in sectors that provide for earnings growth and stability. In the second quarter of '08 will be the first time we have all four LNG vessels on the water for the full quarter. In the products you will see the effect of the modernization will fully come into our numbers in the second half of '09. Already mentioned the Jones Act fleet will double, and the overwhelming majority of those ships are already on long-term contracts.

I should mention the US shuttle type tankers first mover advantage in the first new Jones Act trade in 25 years, and our intention is to go after incremental business in that area, and we believe we are the best positioned to capture that. The core of what we do and everything depends on focused, best-in-class technical operations. The technical performance is critical, particularly in timecharter customers and if we are to win incremental premium long-term business. We have very proactive efforts underway to recruit, retain, train and motivate high-quality crews.

This is going to be one of the biggest challenges the industry faces the next decade. As I've said before, regulation and legislation will only increase over time, and demands on shipping companies will grow. The other core part of our strategy we've had along is the importance of scale. This provides us opportunity to invest in projects that deliver superior returns. We would not have gotten the FSO business if we didn't have a large technical staff at Newcastle that is able to allocate the people, resources and imagination to pursue it.

Technical excellence, in fact, is a critical differentiator to the higher margin long-term business. On top of that scale gives you superior market information, which in a global business like we are in, is critical. Finally, and something that we talked about before and we are very grateful for today, we will maintain a solid balance sheet and financial flexibility. We always want to be the best or among the best rated companies in our segment, and that is the case today. Today we sit with $1.9 billion in liquidity. We have liquidity adjusted debt of 30.8%. We have the best liability structure, we think, in the industry, and we are able to pursue as a result, capital efficient growth.

All this adds up to we believe a formula for building sustainable, long-term value for our shareholders. With that, I'm going to turn the microphone over to Myles Itkin, our CFO, to continue the financial review.

Thank you, Morten and good morning. Please turn to slide 13. The results for the quarter ended March 31, 2008 reflect the robustness of the crude tanker market, the company's earning power and our ability to deliver superior returns as evidenced by a 30% net profit margin for the quarter and a similar margin in the prior year's quarter.

Slide 14 outlines the composition of Q1's timecharter equivalent revenue. Of the $376 million of timecharter equivalent revenue earned during the first quarter, $249 million or 66%, is attributable to the crude sector. $66 million, or 18%, to the product sector and $53 million or 14%, to the US Flag sector. The 45% increase in Q1 revenues over the prior year's quarter reflects an over 1000 day increase in revenue days and over 100% increase in spot rates for VLCCs.

For the quarter 73% of the Company's TCE revenue was derived in the spot market compared with 64% for Q1, 2007. Please turn to slide 15 for a discussion of expenses. The positive impact of the increases in spot rates and revenue days was partially offset by higher voyage expenses, mostly in fuel costs and port charges. Average fuel cost per day was $15,000 in the current quarter, about double the average daily rate in Q1 '07. Vessel expenses across the entire fleet increased by $12 million for the quarter to $73 million from $61 million in Q1, 2007. Vessel expenses for the crude sector increased by $9 million to $29 million in the first three months of 2008, reflecting an increase of 184 owned and bareboat chartered in days and an increase in average daily vessel expenses, principally as a result of increases in crude costs and repairs.

Similarly product sector vessel expenses increased by $2.5 million to $21.5 million in the first quarter due to an increase in operating days attributed to the purchase of two Panamax product carriers, and an increase in average daily vessel expenses resulting from increases in crew costs, environmental compliance costs and the timing of delivery of spares.

Vessel expenses for the US Flag sector remained essentially unchanged quarter-over-quarter. Charter hire expense increased to $91 million in the current quarter, up by $42 million or 86% including $14 million in charter hire expense associated with the April 2007 acquisition of Heidmar Lightering. The increase was further attributable to a greater number of vessels chartered in during the first quarter, 4500 days, relative to the first quarter of the prior year, 3250 days.

Profit share components of charter hire expense was $8 million higher in Q1 as a result of the higher earnings generated on VLCCs. Compared with Q1 2007 there was a $5 million increase in depreciation and amortization due to the inclusion of Heidmar Lightering, representing $2.3 million of this amount, the 2007 purchase of 2 LR1s and increased amortization from dry docks incurred reflecting first dry docks in the form of Maritrans fleet and the impact of short and amortization periods on the older double-sided MRs.

Depreciation and amortization for the quarter also reflects the effect of a change in accounting estimates with salvage values increasing to $300 per lightweight, from $150 per lightweight, constituting $2.7 million for the (inaudible) and $10.9 million for the full year 2008. Please note that current salvage values exceed $700,000 per lightweight. G&A expenses increased by $8 million in Q1 '08 to $37 million from $29 million in the first quarter of the prior year. The increase is attributable to an increase in salaries and stock-based incentive compensation of $4 million. Incremental costs associated with the Manila and Houston offices of $1 million and higher travel and consulting costs associated with newbuild activities and systems integrations.

Equity income decreased to $1.3 million in the first quarter from $3.3 million in Q1 2007. The decrease was primarily due to the loss of earnings following the sale of our holdings in DHT, as well as a $1.4 million non-recurring severance charge applicable to an entity which the Company accounts for under the equity method. This $2 million decrease was offset partially by earnings from our four LNG carriers.

Other income for the quarter was $3 million, a decrease of $20 million from the prior year's quarter. Please note, however, that Q1 2007 included a $15 million gain on the sale of shares in DHT. In addition, Q1 2008 includes a $3.3 million loss on derivative transactions, $2.8 million realized and $0.5 million unrealized, and a $600,000 reduction in interest income due to a drop in interest rates.

The combined effect of these changes was that EBITDA for the quarter increased by 22% to $178 million from $146 million in the comparable period of 2007. Net income for the period increased to $112 million and EPS to $3.60 per share compared with $85 million or $2.16 per share for the same period a year ago. The guidance we provided earlier this year remains essentially unchanged for all categories other than D&A where the change in accounting estimates for depreciation reduces depreciation by $10.9 million for the full year.

Other income were at lower earnings rates, lower cash deposits will cause results to be at the lower end of guidance, and adjustments to interest expense reflecting the repurchase of the bonds, as well as costs associated with the repurchase of those bonds. In furtherance of our strategy, if you will turn to slide 16, to provide an increased level of stable earnings we have expanded in markets characterized by a higher level of term coverage. As a result, the amount of locked in revenue has grown ninefold from $186 million at the end of 2004 to more than $1.7 billion at the end of March, 2008. 77% of this amount is attributable to our US Flag business unit, and 11% to our international flag product carrier business unit.

The fixed revenue streams associated with our gas business unit and our new FSO joint venture, which are accounted for as equity income in affiliated companies, amounts to an additional $1.8 billion, bringing aggregate locked in revenue to $3.5 billion, a 1900% increase over year end 2004. Details regarding both locked in revenue and days per sector are included in the appendix at the end of this slide presentation.

Slide 17 lays out our view of OSG's net asset value in comparison with our share price, an analysis of each category of NAV is included in the appendix of this presentation. As of the market close yesterday we were trading north of $77 per share in comparison with a net asset value of $110 per share. Please note that the $110 per share net asset value excludes the difference between the fair market value and estimated delivered cost of our newbuilding portfolio, as well as the value of our in the money vessel purchase options and charter extension options.

We believe the combination of this valuation gap, the contracted growth in our US Flag business, our expansion into sectors characterized by long-term stable cash flows, our active asset management program and our continued distribution of capital to shareholders makes us a compelling investment. This concludes my formal remarks; before opening up the call for questions, I would like to turn the call back to Morten.

Thank you very much. I think we will turn the floor over to the operator if we can get the questions.

(OPERATOR INSTRUCTIONS) Jonathan Chappell, JPMorgan.

Thank you. Good morning. Morton, my first question is around your chartering-in policy. With rates where they are right now and your optimistic outlook on the sector, it seems that maybe the charter-in costs are increasing a little bit faster versus revenue than they had in the past. How nimble are you with the charter-in strategy, and do you think you may be ratcheting that in a little bit as some of these ships roll off, given the current market environment?

It's a very good question. One of the reasons we expanded our S&P and chartering desk two years ago was so that we would have a presence in the market day in, day out, and be able to see opportunities. And we have found opportunities in the product tanker market recently, and these really stem from people who need to have long-term charters in order to secure bank loans.

As you know, the banking market hasn't gotten any easier in the last few months, so we are seeing deals. If you look at on the crude side last year, even in a rising market, we were able to take in a fairly significant number of ships on timecharter.

The one difference I would say today and when we first started our active chartering in is you can also hedge some of these positions you do in the paper market from time to time. So we continue to believe that we will be able to find opportunities. We will be in the market every day.

We will be disciplined at what we are prepared to pay. And if it makes sense to do something, and only if you can hedge with paper, we will consider that option. So we think it is still very much a viable strategy, and we are still finding opportunities.

Second question on the Gulf of Mexico shuttle tanker business. Aker made some comments in the last couple of days about their interest in ramping up that sector. I know you have a relationship with Aker, but as far as the shuttle tankers are concerned, do you have any right of first refusals? What is the outlook for you getting these ships built to capacity and also what do you view as the competitive nature of this US shuttle tanker business?

I am going to let Jonathan answer this, because he lives this market every day.

Good morning, Jonathan. With regards to the contracts and the projects that are out there, we certainly see a lot of discussions and we are having a lot of discussions with different customers about shuttle tankers and, obviously, the FPSOs that would be required in the Gulf of Mexico. But those projects are long-lead items right now that funny enough, match up the yard capacity which I think is part of your question that we have in the market.

Right now, all of the major yards in the US are full through 2011. If a project was to start this year with an RFQ that would come out from a customer, first oil wouldn't be until 2011, 2012. So the ability to build vessels in the US for shuttle tankers to match those projects are okay. There is a shortage of yards to build these at. We have relationships, of course, as you know with Aker who you mentioned earlier, but also other yards in the United States that could possibly build larger shuttle tankers.

There is no exclusivity to Aker for building shuttle tankers for us. That was the question.

Okay. And then finally, and maybe this one is for Mats, the Nigeria shut-in or just the pure decline in Nigeria exports, has that been having an impact in the longhaul VL trade, and do you expect it to continue to benefit the VLs as we see ton miles expand?

Not really. Nigeria has more Suezmaxes. Angola has more VLs, and there's been problems there before. So it has not had an impact yet, and we are not impacted on it. We primarily load Angola for China.

But if we see less Suezmax cargoes out of West Africa coming across the Atlantic, could that open the opportunity for more VLs out of maybe the AG, which could add to the ton mile of the crude segment?

Yes, exactly. So their replacement, most of Nigeria comes to US. So if Nigeria goes down, it probably needs to be replaced by AG, which is a longer ton mile. So that's positive.

Okay. Thanks, Morton, Jonathan, and Mats.

Doug Mavrinac, Jefferies & Co.

Good morning, guys. Just had a few questions for you all. And the first, and it's somewhat of a follow-up to the last question; we have seen average VLCC spot charter rates in December top $200,000 a day. Then they declined down to $57,000 a day only two weeks ago. But what specifically do you attribute the strength in the VLCC market over the past two weeks?

Is it maybe the anticipation of more longhaul cargoes going to the West? Is it a port strike? What sort of factors do you attribute the strength in the market over just the last two weeks, and do you believe those factors are sustainable?

I think it is just a very tight balance. You may have heard about NITC having up to 10, 12 ships in storage which combined with the dry cargo conversions just makes the supply too tight. We have seen China take a record number of cargoes, both from West Africa and AG recently. The combination of those two factors is what is driving the markets.

Okay, so within the last couple weeks?

Yes.

Okay, great. And Morten, this is a comment or a question about a comment that you had made during your presentation. Last month at OSG's investor presentation you guys mentioned that you believed it would be prudent to take some downside protection for 2009. And take a position in the FSA market to hedge, the equivalent of about seven vessels for next year. What have you seen over the past month to make you feel the outlook for the crude tanker market is now better than your prior expectations as you mentioned?

I think I was trying to show that with my charts. Perhaps there is too much data on that, but what you are seeing is increased discrimination against the single hull vessels. If you look at China, in particular, they are a strong preference for double hulls. Anything that is going near Beijing, for example, that part of China is in a double hull today. If you look how quickly Japan turned around its usage of single hull to primarily double hull, the big Japanese carriers will soon have finished their fleet replacement programs. So we think the commercial phaseout is simply going to happen fast. And you are seeing that in the divergence between single hull and double hull rigs. That is the big change. Because commercial obsolescence has come quicker than we thought.

Okay, has the fact that we've seen a number of VLCCs scrapped over the last month or so also been somewhat of a pleasant surprise? Is it sooner than you thought that we may see that?

I think we expected commercial obsolescence and conversions. Scrapping was a positive thing, but when you can get $700, $800 per light ton it is compelling.

Right.

Particularly for a very old ragged VLCC that nobody wants, you have to spend a lot of money to maintain and get through dry docking.

Okay, and then just one final question. You guys have bought back a lot of stock. You've retired from debt, yet you still have a very strong balance sheet. At what point do we see OSG maybe looking to expand the number of crude tankers that they own, either in their existing fleet or on order?

I think we have continued to -- we believe very strongly in scale as a critical differentiator in this business. In the crude market we are big enough -- we are the leader in the VLCC market for TI, and we are the number two player in Afra's and in Panamax's. So we are big enough. So anything we do there will be opportunistic and or to make sure that we have enough ties to service existing customer obligations. It will be opportunistic. On the product tanker side we have a very good business that is growing. We still think we need to get a little bit bigger. Simply so that we will have as much information as those with who we compete as well as our clients, and that we have a good presence in both the Pacific, the Atlantic and in the timecharter market. So you could see that.

We have not said that much about the gas market because it is a small business. But we are working very hard on CNG projects, and we are optimistic about that area. In the US Flag, we don't have to do anything to make that business into a terrific business but we have every intention of doing that. We are looking at projects. We are looking at incremental shuttle tanker business and we are looking at other areas. So we will continue to build scale in the segments that we are in. For example, in the lighter business that was a Gulf presence. We now have a workboat on the West Coast. We are going to go after more West Coast lightering business, for example. So there is no slowdown there.

And then the FSO business, I just add, we have to spend $150 million to convert the U into an FFSO. It is not a small investment, and its handy to have the money available in today's banking market to be able to do that.

Great. Thank you very much, Morten. And thank you for earlier, Mats.

Omar Nokta, Dahlman Rose.

Thank you, good morning. Just real quick, you said $150 million would be the conversion price of the one ULCC?

Yes.

It is still early to give us details on the charter rate, right?

We are prevented by our confidentiality agreement just like on the LNG carriers from disclosing the rate. So we do put, lump all that revenue together into one item that Myles reviewed. We just can't do it under the confidentiality agreement. I think ultimately you guys will figure it out.

Okay. And just a follow-up to what Doug was asking with respect to buying vessels or ordering new ships, you said in your last call that you are not a seller of VLCCs here and sure enough, vessel prices continue to move higher. We have seen lately some of your peers placing orders for 2011 VLCC deliveries. Do you see yourself as a buyer at these prices?

I think we've been pretty consistent in saying that the price levels of today, very tough. We were able to pick up a resale of the VLCC, which is what we had come in the first quarter 2010; we were able to pick up a couple product tankers last year when a window opened. But at these kind of levels it is unlikely that we are going to do that. But what I would say that even at today's high levels for a VLCC that today's spot rate for VLCCs and timecharter rates actually justify going out and buying them.

Having said that, we are not going to be going out and spending $150 million for a VLCC or $85 million for an Aframax, whatever it is people are paying today or $60 million for an MR. We are simply not going to do that.

Would you consider maybe partnering with someone, or would you probably just stick with chartering in more vessels?

The economics being the same, we will wait and wait until we find rates, whether it is through chartering, bareboat timecharter otherwise and we will wait, or where we might do things synthetically where you take the risk in the paper market and that you look at but that is a little different game. But we are going to be very disciplined about our buying and we are not convinced yet that $170 million VLCC is an uneconomic long-term proposition.

Understood. And just one final question back to the ULCCs. You were talking about Aramco with the cutbacks in the first quarter. Is that going to stick with just the first quarter or do you see that following through into second? Is this just a onetime event?

Aramco's allocation strategy is one that we don't see a sort of pattern to. I think there is more upside risk than downside risk given where we are today, but Saudi Aramco is not easy to read.

And I guess your experience so far this quarter, is it better than what it was on the ULCCs? Versus the first?

This will sound like a bad answer. One of the things we found with the ULCCs because there are only four of them that we constantly have been picked off in the whole charter negotiations dance. So we are going to be a lot more careful about how we release rates on those ships, because we need to do a better job trading them. They've been more of a challenge; we've been picked off and we don't want that to continue.

Okay, and these will go into.

Please do not be offended by that.

No, no not at all. And just to double check, these are going to go into conversion at the end of this year?

Yes.

Okay, thank you so much.

Urs Dur, Lazard Capital Markets.

I guess my main question is you got a great amount of liquidity, fantastic. Very nice balance sheet. Where -- you've mentioned a lot of things you are working on like FSOs and so on. Where do you go next outside of what you are currently working on? Any other gas sectors, smaller vessels, different sectors; can you elaborate a little bit?

We will continue to build scale in the segments we are in. We have said repeatedly we will look at business opportunities in segments that are immediately adjacent to our existing ones. To moving from crude transportation to lightering to shuttle tankers to FSO projects. We have looked at chemical tankers as we've gotten more comfortable with our product tanker business and in carrying the cargoes where we compete with the chemical guys from time to time. But we are going to stick close to where we are today, continue to build scale and look at adjacent areas where we can manage the commercial and technical and financial risk, the same way we do the existing businesses.

All right. Thank you very much. That's all I've gone. Thanks.

Natasha Boyden, Cantor Fitzgerald.

Just following on the balance sheet question you ended the quarter with a balance I think about $518 million in cash. Can you give us a breakdown of how much of that is overseas and what the tax impact will be if that were repatriated?

The vast majority, Natasha, is overseas. There would be no tax effect inherited repatriated $545 million of that amount, which constitutes previously taxed income.

Okay. Now I think on your taxes that you had described in the notes that you had, I think as of December 2007, about $700 million had not been taxed. Is that correct?

It is really $2 billion.

$2 billion have not been taxed?

Right.

And when does that come due?

It doesn't as long as we continue to reinvest in foreign shipping assets.

Okay, so that is just deferred sort of infinitely until you keep investing?

Exactly.

Well that is good news. Thank you for answering that. I appreciate that. Now this may be a question here I think had said in the presentation that with the bond redemption you expected to lower interest by about $7 million per annum. Was that correct?

That's correct. There is a redemption premium, of course, on those. It is north of $7 million. And a write-off of deferred financing costs.

Is that why we're seeing the guidance of 85 to 95 staying the same?

Yes, yes.

That's helpful. And then sort of general question on the macro side. Morten, are you seeing any new build resale opportunities from buyers that have been able to obtain financing given the sort of general credit crisis?

We haven't yet, but we've seen some ships that were originally committed to one owner who couldn't get financing that went to another owner. And then were subsequently put out on ten-year charters I guess would be the highest rates I have seen for ten-year charters. So you're starting to see some of that circulating deals, newbuilding commitments falling apart. That is the first crack you are seeing. I think this is where you got to be patient.

Right, is there anything there that you think you might be able to sort of jump on? Do you think it might get worse I suppose is what I am asking and that you might be able to sort of pounce on?

I think what you are seeing, you are seeing some owners actually starting to sell newbuilding commitments that they have they might not otherwise. That's an indication that people are rethinking their financial liabilities. We are certainly following that all very closely. But this is not a market where you jump at things, you be patient and you wait for things to come your way at levels that makes sense. And I believe that that's -- we will find things.

Sure. And then lastly, with the price of steel being where it is, it has gone up dramatically. I'm sure you've seen that. Are you seeing any increase or any substantial increase in scrapping that is sort of raising your levels of optimism in terms of strengthening the market?

Yes. I think all those things are actually very positive for our market right now, both in terms of what it does to newbuilding prices and what it does to the -- up slightly, the phase on single hulls. If you have a single-hull vessel and you're probably right now going to budget one voyage less a year than a double hull and you are looking at max another year to trade it, the single-hull VLCC fleet is now 20% of the fleet. When they get to 15% and 10% we've been saying all along and I think trend is showing it, they will be waiting longer. It will be harder to earn money. So if you can capture $700, $800 per light ton, that is unattractive. So yes. But is it overwhelming? No. I think the market, the commercial market is going to drive these old dogs out, and that will force whether it is conversions or scrapping, they will happen.

Great. Thank you very much.

Greg Lewis, Credit Suisse.

My first question I wanted to circle back on what is going on in Nigeria with the shut in production. I guess really what I am trying to get at it is per ton mile to expand I guess there would have to be spare capacity that could make up that shortfall, in potentially in the AG. Are we seeing basically about one million barrels of spare capacity in the AG that could sort of be dropped on the market?

Spare capacity in AG as many people who debate about. We believe there is some spare capacity there. We believe that shut-in in Nigeria is roughly 500,000 barrels per day. So they are producing maybe 2 million. But they have hardly ever been up to the 2.5 that people talk about at the max. So the impact is not that dramatic. And is there 400,000 barrels per day spare capacity in the AG? I would say yes, personally. But again, there is a million views on that.

I guess my last question would be -- I noticed that there were two vessel sales during the quarter that actually will be delivered out of the fleet. I guess first, are those two sales included in the March 31 fleet lift in the presentation, are those going to be in addition? And then what was the rationale? Was that just a strategic opportunity, or are they more the newbuildings coming online and those two tankers will be replaced by newbuildings?

One was an Aframax, the Ruby. It is our oldest, slowest, smallest Aframax. And again, we have four Aframax newbuildings coming from China. So makes commercial sense to get rid of that ship at the price we were able to get. So part of the replacement strategy there again, the count is included in the March 31 count because they won't deliver until second quarter. And there is a $13 million capital gain on the Ruby.

Okay, thank you.

The other vessel is the Overseas Alcmar, which is a 1998 built product carrier and is a simple 4 gauge vessel and it really does not perform as well as our IM 03 modern tonnage. And we were able to get a very premium price for her. And that is a $9.5 million gain on that vessel.

Justine Fisher, Goldman Sachs.

Good morning. The first question that I have is about the CapEx for the additional newbuilds. Have you guys put out -- I did not see it in the presentation or the press release but do you have numbers for how much more you have to pay for those CapEx commitments for the rest of '08 and then 2009?

I can give you CapEx commitments by quarter for '08.

Okay.

The first quarter was $144 million. The second quarter, $75 million. Third quarter, $98 million. Fourth quarter, $87 million. For a total of just slightly over $400 million. And if I am looking at 2009, current indications, first quarter $163 million; second quarter, $39 million; third quarter, $37 million; and fourth quarter, $54 million.

Okay, thanks very much. And then a question related to Natasha's issue of steel but in a bit of a different way. Historically I think that most companies have commented that contracts and newbuilds don't include re-openers for the steel costs for the yard. So first I wanted to check whether or not any of your newbuild contracts have reopeners. But if they don't I would just love to hear your opinion as to how you think the yards are going to deal with $1200 plate.

The answer is no, there is no steel adjusted claim in any newbuilding contract we have or I believe have ever had. I think if you go to the yards in Asia, and you look at their profit margins, they are pretty high right now. I think HHI I think made $1.8 billion last year, not a bad number. So I think that they have used their market, the balance to secure much higher prices for their products. So I think there is room within their earnings to handle that. I think if you haven't secured your steel and you have an issue in your marginal yard you may have a discussion with your owner. But for the most part I think the shipbuilding industry right now, which I know surprised a lot of us, is a very profitable business to be in.

So from the shipowner's perspective the thought is that some owners may have been taken to the cleaners on vessel prices before and so now they are happy to stick it back to the yards with lower margins because of steel? I will say that. You don't have to say that.

We are good citizens.

Okay. And then the other question I have is about the bareboat rates for those older vessels. Have you disclosed what those rates are for the older vessels that you're going to get rid of?

No, what we disclosed in the chart was simply the differential of the positive (multiple speakers) per day. Essentially the net benefit, as Morten mentioned is $5,000 per day. And the reason for that is that the low bareboat rate is somewhat offset by the fact that these older vessels have very high drydocks, and they are amortized over a short period until we get rid of them. So they have a very high depreciation cost per day. And that is why, although we do have a slightly higher charter, higher date on the new tonnage, the net differential is positive by $5,000 per day.

Okay, and then the last question I have is about the Jones Act trade. And I know that crude and product trade is very, very different from the container trade in numerous ways but this has been an issue that has been spoken about with the Jones Act container companies. A lot of them are now being investigated for antitrust issues. And I know even price ending is different but I think it is probably a concern for some investors. I mean, is there anything like this that could potentially be brought for the crude end product Jones Act trade because different as it is, it is still quite a small trade?

I will let Jonathan answer it, but my first remark is most of our competitors won't talk to us. They don't like us. More so these days.

With regard to the case that has kind of come to light in the last couple weeks there has been a number of Jones Act operators that have been spoken with. But because we are not in the container trade and we are also not in the Puerto Rico trade, which is where the claim and the issue is lying, we have not been met with, and actually don't plan to be met with since we don't have vessels that are either that type or in that trade.

Just wanted to check. Thanks a lot.

Darren Gacicia, Morgan Stanley.

One thing I wanted to ask is it strikes me that the oil market may be a little tight and inventories remain low. And over the last quarter as you sort of see the counter seasonal rally in rates, are you seeing any sort of unconventional routes that seem to be dominating maybe more than others, maybe Venezuela to China or something other than maybe cross straits in the [med]?

I will let Mats take it.

Certainly we've seen -- and that is another reason why the V market is the number of the cargoes from Venezuela and the Caribbean to China and Singapore, both crude and fuel oil. So that is certainly not a new trade, but it is a trade that has grown a lot recently.

Is that something where -- I noticed the forward curves have rates coming off a bit. Are they wrong if that continues?

You know, I think the rates right now are very tight because the number of ships is very tight. Would you expect to have some seasonal fall off in the third quarter? I think you have to expect that. We certainly would expect that. But when the fleet is barely growing for the first eight months of the year, and demand is flat, but it is traveling longer distances, you are going to have attractive rates whenever any loading port is short or balanced with double hulls. And that is what's happening. So it is going to take quite an increment to supply to change that in the short run. I think so far the forward rates have generally been wrong now for two or three years on the crude market.

Sure. Usually they are a little bit more right in the near-term, a little bit longer in the long time sale, but one last question. A little bit more technical. In terms of the product tanker trade, the international product tankers, I was curious in terms of the foreign built US Flag ships and what portion of the earnings that are included in that number are attributable to those vessels?

The foreign built US Flag vessels are formally recorded, the Luxmar and the Maremar, are in the OSP.

Okay.

The only one of the three that is in our foreign earnings is the Overseas Ambermar. And so it is only one vessel.

Thank you very much.

Rikard Vabo, FF.

You announced in February some FF positions, and you -- I arrived five minutes late for this call and sorry if I repeat anything here, but on page 3 you refer to SSA loss of $3.3 million which is recorded under other income. I guess the mark to market loss on those SSA positions should be somewhat higher, and if so, if they are higher than the $3.3 million, where is that reported in the P&L?

Those that constitute cash flow hedges, effective hedges, are treated as balance sheet liabilities and are reflected in other comprehensive income. The $3.3 million that you have shown reflects a hedge that does not constitute a cash flow hedge. And therefore flows through other income. Of that $3.3 million, approximately $2.8 million is realized and $0.5 million unrealized.

Okay.

(OPERATOR INSTRUCTIONS) John Rogers, private investor.

Maybe this is not the right time in the markets with the US Fag container business investigation, but have you contemplated spinning off the US Flag ship business into separate company to unlock shareholder value?

It already is, in OSP America. Right now what we have is a business that provides very solid earnings today. It will double in three years roughly can say the EBITDA will close to double within that period of time. With each vessel that comes into the fleet we have margin expansions. We have a very attractive long-term supply and demand outlook for that market if you look beyond 2011, 2012. We actually think there will be new product tankers needed. We have ten-year contracts for our new ATBs that go into lightering business. We have the highest barriers to entry in the shipping world because of the tightness of US shipbuilding and the cost of doing that. And if you marked our newbuilding contracts to market, there is a huge pickup in that. So this is a business that is going to grow if we do nothing else but just sit still and take delivery of what we have. And I don't think you have any other businesses in the shipping world where today you can sit and say that.

But we have it, and our foreign competitors can't get into this business. So we love this business. We think it's going to generate enormous shareholder value in the future and we hope that the market will reward that with multiple expansion over time as the ships come in and EBITDA grows. I hope that was clear.

Thank you.

Espen Westeren, HBK.

My questions have been answered.

I'm showing that we have no further questions at this time. Please continue.

Thank you very much for joining again. If you have any questions you want to raise to anybody that is here, feel free to do that, and we look forward to meeting with as many of you face-to-face either in your offices or ours in the coming quarter. Thank you very much for joining.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.