Octave Specialty Group Inc (OSG) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the OSG second quarter 2008 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions).

This conference is being recorded today, July 30th, 2008. I would now like to turn the conference over to Mr. Jim Edelson, General Counsel.

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 third quarter of 2008; estimated TCE rates and synthetic time charter rates for the fourth quarter of 2008; and estimated synthetic timecharter rates for the year ended December 31, 2009 and the first quarter of 2010; projected drydock and repair schedule; estimated vessel and new building values; timely delivery of new buildings and conversion of vessels; prospect for growth in revenues and EBITDA of OSG America; estimates of OSG's income statement items for 2008; and prospects of OSG strategy of being a market leader in the segments in which it competes; the projected growth of the world tanker fleet; and forecast of world economic activity and the world's 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 and Form 10-K for 2007.

For this conference call, we prepared and posted on OSG's Website supporting slides to supplement our prepared remarks. This 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 would like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?

Good morning and thank you for joining our conference call this morning. Let me introduce the management team here with me. Myles Itkin, our Executive Vice President and Chief Financial Officer; Captain Bob Johnston, Senior Vice President, Head of Ship Operations; Mats Berglund, Senior Vice President in charge of our Crude Transportation business; Jonathan Whitworth, CEO of [LSP] America; Jennifer [Sleuter], head of Investor Relations and Corporate Communications; and Lois Zabrocky also joins us, and was promoted to Senior Vice President at the June Board [meeting] and heads up our International Product Tanker Group.

As Jim indicated, our remarks today will follow a presentation that is posted on our Website. Will you please now turn to slide 3?

Coming off the strength of the first quarter, second quarter freight rates drove exceptional results at OSG. This was the second -- this was the highest second quarter TCE revenues in OSG's 60-year history. TCE revenues were up 41% to $386 million, an increase of $112 million from the same quarter last year. EBITDA was $[151] million, a good indicator of the cash we will generate for the full year. Net income was up 10% to $87 million and reported EPS was up 23%, $2.81 per share.

Now EPS this quarter was affected by a number of nonrecurring items. The important ones, $0.76 or $24 million was due to the gain on sale of three older vessels. $0.20 or $9.4 million relates to the premium paid on the bond redemption. And $0.92 or $29 million relates to mark-to-market unrealized losses on hedge positioning in the quarter.

Now international freight rate strength was the big story, driving crude TCE revenues up 59% to $255 million, product TCE revenues up 21% to $72 million and U.S. Flag TCE revenues up 6% to $52 million.

The first-half results for 2008 are setting us up for a terrific year. As the first six-month numbers are so strong, I thought we should highlight them. TCE revenues for the six months, up 43% to $762 million. EBITDA, up 12% to $329 million. Net income up 22% to $199 million and reported EPS, up 45% to $6.42 per share.

Now along with these strong results, our investments in ongoing fleet expansion continued to enhance OSG's market-leading positions in the segments in which we compete. Year-over-year, 14 ships deliver across our four segments. I will talk more about our new [building] program later in my remarks.

Please turn to slide 4.

Since announcing our share repurchase program two years ago, we have repurchased approximately 24% of our stock. Some of you have said we were late to the repurchase game, but I think we have more than made up for that by completing two buyback programs at a total cost to OSG of $625 million. We have been paying attention to what our shareholders have been saying to us.

At our recent June board meeting, the Board authorized an additional $250 million stock repurchase program. Under that, we repurchased 150,000 shares at an average price of $77.40 per share before going into the blackout period on June 15th.

At the same Board meeting as the new stock repurchase authorization was approved, the Board increased OSG's dividend 40% to $1.75 per share per annum. This was the third dividend increase for the Company in three years.

The reload and dividend increase [are] actions possible due to our strong operating result and reflect our confidence in the ability of our businesses to continue to generate strong levels of cash flow into the future. Equally important these Board actions demonstrate our continued commitment to capital discipline and shareholder value creation. You should know by now that we believe having flexibility is critical to long-term success.

As a management team and a Board we look to strike a balance between several factors. Maintaining balance sheet strength and connects a financial flexibility, investing in growing our business, returning capital to our shareholders and building values for the long term. You can expect more of the same from us going forward.

During the quarter we completed the redemption of our 8.25% bond. This is expected to generate interest saving of $7 million per annum through 2013. Also during the period, we repatriated $545 million cash which was used to pay down debt by approximately $360 million.

Now as you are all painfully aware, the capital markets today are incredibly focused on credit and leverage ratios and on the financing challenges facing companies all over the globe in all industries. In this environment -- an even tougher environment than what we experienced during the Latin America debt crisis during the mid-1980s -- there's a real plus for OSG that we can approach our markets and look at opportunities from a position of financial strength.

This is reflected in some of our key financial measures. $1.6 billion in liquidity. Only $1.2 billion long-term debt, down more than $300 million from year-end. Liquidity adjusted debt to capital was 32.4% at quarter end and less than $30 million a year in debt repayments per annum prior to 2013.

Please turn to the next slide.

There's a lot of detail on this slide with respect to the markets. Let me just to the highlights. Why was the first-half so strong? [OPEC] production was up roughly 2 million barrels per day. The VLC (inaudible) Fleet actually contracted in the first half of '08 and long-haul shipments increased notably from the Middle East and Venezuela and single haul discrimination expanded.

That is why we have had such a good market.

Now, looking now at our 18-month outlook, how do we see that? We do see resumed fleet growth happening in the balance of the year next year. We see some slowdown in demand will put pressure on rates, notably in the US.

(inaudible) the wildcards, political unrest, weather, oil prices and the state of the global economy. Nevertheless it remains a good outlook.

On the next three slides, I want to highlight what is compelling in our three primary segments -- Crude, Products and U.S. Flag. This is OSG's growth story and it is worth repeating as you know I will do.

The Products [fleet] performance this quarter was solid. We are committed to this business and excited about its future. Now the Product business operates in a world of very high refining utilization and increasingly complex product specs. This results in both ton mile increases and opens up cargo arbitrage trading opportunities. Looking forward, most of the refinery expansion in the world is happening at further distances from the main consuming areas and its good for shipping.

Taking a quick look back the last three years, Lois has worked tirelessly with enormous financial discipline building our product tanker business for the future. The Products fleet is now made up of 33 MRs and four LR1s. 14 additional ships enter the fleet over the next three years.

Now despite all the product, the unit remains burdened with what we call the legacy ships. 13 pre-1990 MRs. One of the legacy ships left the fleet early this month and the remaining 12 will be returned to their owners over the next 12 months. They are being replaced with modern IMO III capable vessels that can easily switch between clean and dirty trade and trade worldwide, which is in sharp contrast to the legacy ships whose age and structures required us to put them out on modest timecharters while spending a lot to maintain them.

The bottom line is, we expect the 13 ships that replace the legacy ships to earn approximately $5,000 per day per ship more or $2 million a year adding $26 million to our operating profit line. This will be a very exciting story for the Product business going forward.

Moving to the U.S. Flag. In the next three years OSG America's fleet will grow by more than 50%. During the same period, EBITDA grows by 65% and revenues nearly double.

These are impressive numbers for business units that we have and will continue to make significant investments in and remains committed to the long term. Indeed, I don't know another shipping segment that has a more compelling path to the future than our U.S. Flag business.

The entire OSG America Jones Act fleet is characterized by stable and growing cash flows from medium- and long-term charters. This fits in attractively with OSG's portfolio approach to growth and diversification.

We are equally excited about the new projects underway in the U.S. Gulf, U.S. Ultra Deepwater market. So stay tuned on this front.

Now let me talked a little bit about our Crude business. Our timing entering the Suezmax segment could not have been more timely. Since the formation of Suezmax International with Seaarland, our Italian partner in Aframax International, we now have two OSG ships on the water and two additional tankers, Suezmax tankers, that deliver in the first quarter of 2009.

The pool, Suezmax International, will total 11 ships by 2011 and when all our partners' new buildings are delivered. In the last two months Aframax international has chartered in seven vessels to take advantage of the strong market. OSG's commercial management of this pool enables us to act quickly and benefit from the actions such as this.

On the new build front we now have 9 new builds in the crew group scheduled for delivery between next quarter and 2011. Three VLCCs, two Suezmaxes and four Aframaxes. We continue to focus on expanding the fleet to meet market and customer demand.

A quick update on the ULCC Conversion Project which is on time and on budget. The [TI Africa] will lead the OSG fleet in January of 2009, undergo conversion in Dubai and redeliver on-site in Qatar in September 2009.

Moving to the next slide, I want to talk a bit about our hedging strategy. I'm going to pick up on a theme I mentioned at the outset of this call, flexibility. As we look at how we manage the crude fleet, we have to build -- we have built a portfolio of synthetic timecharters to maintain commercial flexibility, as well as to avail ourselves of the higher levels of fixed earnings the paper market affords us.

The commercial strategy we deployed across each of the crude asset classes is to gain access to scale, via participation in commercial pools and then to build cargo systems with our customers. We believe strongly that cargo is king, and that our portfolio of COAs, contracts of affreightment, enables us to routinely outperform the broader markets in which we compete.

Now our need to keep ships available to meet the COA commitments means we don't put many of our ships out on fiscal timecharters. In the VLCCs segment, this has not prevented us from locking away ships on attractive timecharters as we haven't seen many. Indeed as best we can estimate, the average rate of the 33 timecharters, our four biggest competitors have entered into, is a tad more than $42,000 per day. These are levels we have chartered ships in at.

The only advantage of timecharter is that the accounting does not require mark-to-market treatment. So the impact is substantially the same.

Our [codes] have taken positions in the FAA -- SFA market is simple. We hedge our freight risk and manage the volatility in crude transportation rates by locking in positions when rates exceed our own internal forecast for spot rates. When considering hedging, we also take a look at historical rates and consider what the leading forecast services are projecting. Finally we have only taken cover at levels that support the current market values of our tankers -- the current high market value of our tankers.

Importantly, very importantly, to the extent that the market moves contrary to our hedged position, we have physical positions that cover the hedge. For the balance of 2008, we have 450 VLCC days hedged in third quarter, at $55,535 per day and 539 VLCC days at $69,832 per day in the fourth quarter.

Per 2009, 55% of the VLCC fleet is fixed at very attractive $63,000 a day rates. Myles will go through some of the mechanics of how the hedges flow through our financial statements later in the call.

While a lot more variables go into our hedging decision, if you look at the chart with the VLCC trading fleet outlook, you get a good directional sense for how we see the market. We see the VLCC fleet growth resuming in the second half of 2008, and then net growth of 43 ships in 2009, the largest increase in the trading fleet in one year since the early 1970s. 2010, on the other hand, looks really promising.

Our new build program. As you are all aware, new building prices in all categories of ships have continued to rise and new historic highs are reached every week with each new order. We feel very good about our 37 ship new building program, all of which were done at price levels well below today's current high prices.

I think it is worth noting the fact that the value of the new building fleet have appreciated $110 million since our initial contracts.

I'm taking over Myles's value of OSG slide. At the end of the first quarter, we estimated our NAV at approximately $110 per share. Since then, the secondhand value of our existing fleet and our new buildings has gone up at the same time as we have paid down debt by approximately $300 million while generating substantial amounts of cash from information. This is reflected in the NAV of $170 per share we now show on the chart that most of you have become familiar with.

The view of our value is conservative in our view. We have not built in the $110 million I mentioned on the appreciated value of the new build fleet nor have we built in the value of our in-the-money vessel purchase options and charter extension options. This, coupled with our market expansion opportunities, a significant portfolio of stable cash flows, an active asset management program and our continued distribution of capital to shareholders make OSG a very attractive investment at current levels.

That concludes my remarks. Now let me turn the call over to Myles Itkin, our CFO.

Thank you, Morten, and good morning. Please turn to slide 13 for a discussion of P&L items.

The results for the quarter ended June 30, 2008, reflect the counterseasonal strengthening of rates within the context of an already robust rate environment. The Company's earning power and our ability to deliver superior returns is evidenced by a 41% increase in TCE revenues, an operating margin of 39% and a net profit margin of more than 22%.

The increase in Q2 revenues over the prior year's quarter is attributable to an 82% increase in the VLCC's spot rates, the $98,750 per day, and a 75% increase in Aframax spot rates to $55,500 per day. 945 additional revenue days across all sectors are reflected in our quarterly results.

Of the $386 million of TCE revenues earned during the second quarter, $255 million or 66% is attributable to the Crude sector; $72 million or 19% to the Product sector; and $52 million or 13% to the U.S. Flag sector.

For the quarter, 61% of the Company's TCE revenues were derived in the spot market, and 39% in the fiscal and synthetic timecharter markets.

As we discussed, the Company enters into freight derivatives with the primary objective of using them as economic hedging instruments -- some of which qualify as cash flow hedges for accounting purposes. Those positions, primarily for VLCCs, resulted in hedging expenses of $18.2 million in the second quarter which are reflected as a reduction of shipping revenues. The synthetic TCE rate achieved in the second quarter was $73,832 per day for about 6.7 VLCCs.

The impact of settlements and changes in fair value of economic hedging treatment instruments that do not qualify as cash flow hedges, as well as any derivative transactions entered into for trading purposes, are reflected in other income and resulted in the charge in the second quarter of $42.4 million. This includes both realized and unrealized amounts. The $42.4 million includes over $30 million related to mark-to-market adjustments as of June 30th which is unrealized.

Since June 30th, however, rates in both the FFAA and the bumper markets have weakened. For perspective, using the forward rates as of July 29, rather than June 30, the unrealized loss included in Other Income would have decreased by approximately $6 million to $24 million.

The positive impact of the increases in spot rates and revenue days was partially offset by higher voyage expenses which increased by $16 million from the second quarter of last year. Higher fuel costs accounted for $14 million of this amount. Vessel expenses for the entire fleet increased by $9 million for the quarter to $78 million. This increase primarily reflects increases in crude costs of $6 million.

We continue to experience industry wide upward pressure in all areas of OpEx, but especially in the area of crew wages.

Charter higher expenses increased to $103 million in the current quarter, up $35 million or 52%. The increase was attributable to 10.4 more vessels or 948 days being chartered in during 2008's second quarter. The profit share component included in charter higher expense was $10 million higher than 2007's comparable quarter as a result of higher earnings generated on both the VLCCs and Aframaxes.

D&A expenses increased by $2.8 million in the second quarter to $34.5 million. The increase from the 2007 quarter is attributable to an increase in salaries and stock-based incentive compensation of $1.7 million; incremental costs associated with the [Manila] office of $500,000; and higher legal and consulting costs.

G&A expenses, however, decreased by $2.8 million from $37.3 million in Q1 '08. The decrease reflects the Company's programs to reduce G&A costs and is mainly attributable to a $1.1 million decrease in benefit-related expenses and a $900,000 decrease in accounting and legal costs. As a result we now expect G&A expenses to come in at the low end of our annual guidance of $145 million to $160 million.

During the quarter we sold three older vessels -- the Pacific Ruby, a 1994 built Aframax; the Aquamar, a 1998 built Handysize product carrier; and the M2-15, our last remaining single hull 1978 built ATB for an aggregate gain of more than $23 million.

Other income for the quarter resulted in a loss of $46 million compared with the $34 million gain in Q2 '07, a swing of more than $80 million. The loss for the current quarter is mainly due to the required accounting for derivative transaction since we previously discussed. In addition other income reflects a $7 million premium paid on the redemption of our 8.25 Senior Notes due 2013.

You'll also remember that Q2 '07 included a $26 million gain on the sale of our remaining shares in VHT.

Overall levels of both interest income and expense are down, as a result of the repatriation of $545 million of foreign cash during Q2 2008 and its resulting use to repay debt. The $545 million represents previously taxed income that could be repatriated without tax consequence. The repayment of our $176 million, 8.25 Senior Note issue and $31 million of capital lease obligations on two U.S. Flag Product carriers will reduce interest expense by about $8 million per annum through 2010.

Accordingly, we have revised our guidance for 2008 as shown in the appendix to this presentation to $60 million to $70 million from $85 million to $95 million for full year 2008.

Please turn to slide 14 for a discussion of various balance sheet line items. Our cash and cash equivalents stood at $220 million at June 30th compared with $500 million at December 31st. The decrease in the cash balances reflects the previously discussed $545 million cash repatriation. The reduction in investments and affiliated companies to $86 million from $132 million at December 31st is attributable to a $20 million return of capital from our [LNG] joint venture and the dissolution of a joint venture constructing two VLCCs.

As a result of the dissolution of such joint venture, one of its two VLCCs scheduled for delivery in 2010 is now reflected in the Vessel line item on our balance sheet. Across all sectors, our remaining newbuilding commitments aggregated just under $1 billion at June 30th; $195 million for the six months remaining in '08; $269 million for '09; $358 million for 2010; and $177 million for 2011.

Shareholders' equity increased by $78 [million] through the addition of $199 million of net income offset by $58 million spent for stock repurchases; $33 million in dividends; and a $47 million increase in unrealized derivative expenses related to freight rate cash flow hedges. It is important to note that the results of these effective freight rate cash flow hedges are expected to be offset by changes in the underlying hedged pool revenues in the periods to which such hedges relate.

[According] synthetic TCE positions have been created as follows -- Q3 2008 north of $55,000 a day; Q4 2008 approximately $70,000 a day for 5.9 VLCCs; 2009 $63,000 a day for 8.7 VLCCs; and the first quarter of 2010 $61,000 per day for 3.1 VLCCs.

Slide 15 underscores the actions we have taken to increase fundamental shareholder value by increasing our level of locked-in revenue and associatively our earnings stability. The amount of locked-in revenue including synthetic timecharters stood at more than $1.9 billion at June 30th. This amount includes $419 million related to U.S. Flag Lightering COAs, $278 million relating to our synthetic time charters and $22 million representing OSG's share of timecharters entered into by our Aframaxes' International pool.

The fixed revenue screens associated with our gas business unit and our FSO joint venture which, accounted for as equity income in affiliated companies, amounts to an additional $1.8 billion bringing aggregate locked-in revenue to more than $3.7 billion. Details regarding both locked-in revenue and days per sector are included in the appendix at the end of the slide presentation.

This concludes my formal remarks. Before opening the call up for questions, let me turn the call back to Morten.

Thank you, Myles. Before we turn to the Q&A, let me say that we will not be addressing any questions concerning rumors or speculation about Frontlines investment in OSG or about industry consolidation as it relates to OSG. We remain focused on executing our balance growth strategy.

Now we will be happy to take questions. We will ask the operator to put us into question mode.

(Operator Instructions). Jon Chappell with JPMorgan.

Good morning. Morten, as it relates to the U.S. business and the growth opportunities there, how do view what is going on on the West Coast, the [NASCO] yard and with one of your competitors as a potential growth opportunity for OSP longer-term?

Would you word that a little more clearly so I make sure I understand your question, Jonathan?

Sure. Are there opportunities -- better long-term opportunities now given some of the financial problems with your competitors in the (inaudible) yard.

I mean our -- you know we can't comment on financial challenges of any of our competitors would have. I would say that, long run, there's no question there is going to be a need for MR tankers, just like the ones we are building in Philadelphia, when you get out beyond 2012 and 2013. And we believe there will be shuttle tanker opportunities in the ultra Deepwater Gulf.

So if you just look at just those two segments, you are talking about enormous opportunities for OSG. And we certainly as we have shown in the -- what we have done with OSP in the last six months, we remain very committed to this business. (inaudible) Jonathan, you want to add some color to that?

I think that's the major point that, regardless of what is going on with some of our competitors, our plan is pretty simple and that is to continue to grow in this key market. And that is both with the product tankers, the ATDs and, as Morten just mentioned, the shuttle ships.

So I really don't want to speculate what is going on with other companies. We just clearly see that the future is bright for somebody that has a great platform like ourselves.

Okay. That's fair. Myles, after $300 million of debt paid down on the first half of the year, assuming a significant amount of cash flow generation in the third quarter, how do you feel about the Company's leverage right now in this credit environment? Would you like to take it down any further or are you at a perfect point you think right now as far as the debt is concerned?

I think we are at a perfect point, particularly considering the lease obligations that we have on a going-forward basis. Approximately half of our fleet, following the delivery of the newbuildings will be chartered in.

While they are not reflected as capitalized lease obligations, they still constitute obligations for the firm. So very, very comfortable with the leverage we have.

Do you have a number for -- I think you have given it in the past -- on an adjusted basis with the charter in fleet, what the debt to capital looks like?

Yes, you could -- if you add approximately $2.4 billion to our existing debt you will come up with the number.

Another cash question. There's about $49 million on the balance sheet for vessels held for sale. Does that relate to modern VLCCs that we have seen in some brokerage reports as being sold in the third quarter? And if so what would be the cash benefit from that?

I'm not sure that -- Jonathan, that number -- we have which we disclosed 18 months ago, we've sold the overseas -- (inaudible)? on a forward sale basis for conversion to an (inaudible) sale projects. That price I think would avail us about $126 million or $127 million.

$127.5 million.

$127.5 million and that is expected to come in in the first quarter of 2009.

In the balance sheet on the assets, vessels held for sale about $48.8 million. That wasn't there in the second quarter of last year. So.

We will come back to and clarify that, but that's the VLCC referred to in the broker reports.

Okay. Yes. Last one. (multiple speakers)

We obviously recognized a significant gain at that time.

Right. The last one is the charter higher expensed items in the appendix. The new range. Does that include the amortization of deferred gain or is there a net number when you back that out?

(inaudible)

Okay. That's all I have. Thank you.

Doug Mavrinac with Jefferies & Company.

I just had a few follow-up questions on your presentation this morning. Specifically, first related to the market, the strength in the market, Morten. In your comments you mentioned a number of factors, why rates are so strong.

But I was just curious to your thoughts as far as slow [steaming] goes. How much slow steaming that you may -- or that we may have seen in the crude oil tanker market over the last few months and the impact that you think that could have had on charter rates since, say, maybe early April?

I will let Mats take that one.

We have not seen a lot of slow steaming, given that rates have been so high, but it does provide a cushion should rates go down. It does become financially preferable to slow it down if VL rates go between -- starts to get below $100,000 per day to $80,000 per day. With these [bunker] prices it actually pays to slow down.

So we see that as a good cushion, but with VL rates being around $140,000, $150,000 per day right now people are not slowing down.

Okay (multiple speakers)

You see greater evidence of that in other sectors of the industry. So (inaudible) way more common in the container space than it is in the tanker space.

Right. That's exactly right guys and that's what I was trying to figure out is -- but to the extent -- and I mean whenever you are trying to make the decision, can you walked through the decision making process if rates were too soft in here, but with high bunker fuel prices? If we may not see a relatively high [for for] rates.

Who makes the decision? Is it the owner, is it the charter? And how much do the strong rates impact that decision?

That decision is made by the -- in our case the commercial manager. The pools that manage the crude ships.

On your balance leg you have flexibility to do any [speed] you want. On the [lead] leg you are governed by a (inaudible) party, but which generally gives you plus minus half and not as regards to speed.

And then, Mats, is it safe to say that, say, like a 10% reduction in speed translates to about a 30% reduction in fuel costs?

Yes. I mean, the curve gets very steep at high speed. So I can't comment exactly on the percentages you mention, but it has a big impact at high speed.

Thank you. Then maybe transitioning over to the product strength over the last few months, how much of the strength in rates -- I mean you guys operate both. How much of the strength in the product tanker trade would you attribute to the strength in the crude oil trade and maybe some product tankers leading the products tanker trade temporarily to take advantage of the strong rates and the (technical difficulties) rates?

Essentially if you look at our MR fleet, which is the majority of our vessels on the water, I think the strength in that market, year-to-date, has really been as a result of the pull on the middle just to let [part] of diesel, part of the barrel, a lot of South American trade. A lot of increase in ton miles.

I think where he used the the impact from the crude market is more on the larger sectors. So you'd really be on LR1s and the LR2s, and I think that with the -- in the second quarter, we certainly saw some of the large clean orders trading over into dirty and that did impact the markets.

But I would say on the MR, resilience has really been based on the fundamentals in the marketplace, on the product side.

Then one final question before I turn it back over, it has to do with scrappings. What they -- obviously I know they face that deadline coming up in 2010. You know we recently saw our fourth VLCC scrapped this year even though we've been experiencing very, very strong freight rates.

At what points -- I mean what would your best guess be as far as you start -- when we start seeing an acceleration in scrappings ahead of that 2010 phaseout deadline? Is it a rate decision or is it going to get to the point where they have to be scrapped, no matter what?

Well, it is a combination of freight rate and the scrap price. Yes, the IMO phaseout is happening gradually over 2010 and you know you can't -- it's likely to happen earlier because you have a drydock, you have a special survey coming up. And if that survey comes up, six or nine or 12 months before the IMO phaseout, you are unlikely to incur, you know, a $5 million drydocking, especially if rates are somewhat softer.

It's a factor of many things, but we don't think every single hardship will be scrapped at the very end of the IMO deadline. It will happen earlier.

Great. That's all I had.

Thank you for upping your forecast rates for the balance of the year next year. Well done.

All right. Thanks.

Natasha Boyden with Cantor Fitzgerald.

First question is wanted to ask, decision to repatriate the (inaudible) cash now as opposed to earlier. What the deciding factor was driving that decision?

It's frankly a spread on margins more than anything else. We have had the ability to repatriate the cash for flexibility purposes. We have kept that cash as overseas cash. The adjusted appears to be economically more desirable to bring it back today.

Great. Assuming that that was substantially all of the cash that could be repatriated with no cash consequences, was that substantially all of it now?

That's the previously untapped stake and although there is a possibility of pending legislation, which would afford an opportunity to repatriate an additional $0.5 billion at a tax favored rate of 5.25%.

Right. How is that sort of pending legislation? How does that look? Or is that something you can't really comment on?

We -- it's speculation, of course, but we are fairly [sanguine].

Okay. All right. Great. I wanted to go back and look at the -- you have been talking about the VLCC outlook. You've looked, decidedly locked in a rate of about (inaudible) for '09 with about 3,000 days significantly less for '10 and you've ordered VLCC newbuilds '10 or '11 delivery.

That sort of indicates to me that you do expect the rebounds for '10 and '11, but I'm just curious. On page 9, and on the table you've got new deliveries 67 VLCC, the [removal of] 67.

I'm sort of curious you know why you'd think that there will be such an absolute balance in the market? I know you've talked about the 2010 IMO regulations, but isn't there an awfully large loophole in there, that it says that the individual -- it is up to the individual [port state] to decide whether or not the single hulls can operate in their waters. And if the rate -- do you expect a rebound and the rate is going to be high doesn't that indicate that perhaps single halls will still be operating in some of those states?

I've been saying, answering this question pretty much the same way for three years and that is that we thought the commercial market would would obliterate single haul (inaudible) ships earlier than the IMO phaseout.

What happened in 2009, what happened with with the [Hebay] Spirit was that that trend was accelerated because of increased discriminations as a result of that. And you now have I mean as much as a 40,000 a day spread between singles and doubles. That will continue and as the single hull fleet falls below 10% of the total trading fee being an outlier and taking a single will become more difficult.

We continue to believe that China and Japan will outlaw singles sooner than the IMO phaseout. So we think that that number is actually really quite good. Period. So we don't see a lot of loopholes. The market won't allow it.

All right so effectively what you're looking for is (multiple speakers)

(multiple speakers) the Saudis now selling single hull VLCCs and take along with one other big oil company have been the major users of singles. And I think that is a pretty good telling sign. The commercial marketplace is doing what we expected it would. It's just doing it more quickly.

So essentially it is somewhat of a bearish market next year and then a rebound in 2010?

Well, bearish at (multiple speakers)

Well not bearish. (multiple speakers)

$3000 a day which I think was about double what the consensus forecast was at the beginning of the year, but other that that --.

I suppose I am done looking in relationship to today's market, I guess. Okay and then just lastly, (inaudible) dot resale opportunities. You know you've got a (inaudible) coming online. Do you believe that global credit crisis will cause asset valets to eventually come down or think freight rates right now are high enough to justify current (inaudible)?

Freight rates, you mean the rate we've locked in next year more than justifies the current market value today. The problem is that you can't get VLCC berthed now until 2012. There's a huge need for them. They generate enormous amounts of cash.

So -- and there's so much equity within the shipping world right now that wherein in the past you do your 80% financing, people can put down 50% equity in their vessel today because of the cash flows you have.

Do we think that will become a burden on some companies, on startup companies on new players or on bigger deals? We think the credit crunch will hit the shipping industry, because the shipping banks like everybody else are getting impacted by the overall cost of interbank funding, of medium-term funding.

I mean you can see some of the banks, out there raising five-year money at more expensive levels, no SG. And there's no way our industry will not be impacted by that.

Thank you very much.

Just to use this opportunity to answer previously asked question, the vessel held for sale is the overseas (technical difficulties), that we discussed.

And $49 million was the book value of the [donor]. Is the book value.

Urs Dur with Lazard Capital Markets.

A lot of the questions have been asked, but in regards to your coverage, synthetic coverage for next year on the Vs, maybe a little bit more color on next year, considering you've mentioned the fleet growth next year, which I concur with.

Do you view the $62,000 today as a discount forward to have coverage and you think overall rates should outperform that next year? Or do you view that as an attractive rate where it is locking in now and feel that may go lower?

No I think there is -- as we gradually every quarter up to our forecast (multiple speakers) 2009 and but there's a lot of economic uncertainty in the world. You have demand destruction in the US. You have more ships delivering in in a period of time than before. You have a lot of ships coming in in the fourth quarter of this year and historically when new ships have come in they have had to discount their initial voyages and you may not have that now.

So we have actually think that 2009 is going to shape up to be very strong to average, average to very strong year. Having said that, we also know that it's very difficult to call a market in which you are paying $120, $130, $140 a barrel of oil and so we decide to take some protection when we are able to achieve the kind of levels we did.

So we are happy with what we've done there. We think it was smart and the numbers you know, as I said, they're more than covered because of current market by the vessels.

Understood. Now forgive me on this a little bit, just in regards to unrealized loss -- and I get questions from investors on this and I'm not sure if I have the proper answer for this, but the unrealized on the forward agreement. Forgive me if this sounds stupid, does that ever -- is there ever an occasion where this does become realized?

Walk me through going forward how this is going to look possibly for the next few quarters?

If things stood in the markets as they did on June 30th, going forward, the unrealized loss would become a realized loss. However the rates have in the FSA markets have come down as well as the price of bunkers having decreased but with the result that even today that unrealized loss has been materially reduced and rates continue to come down.

So it's always a mark-to-market position over your remaining forward positions.

Sorry, I mean as in if rates come off of this quarter, the unrealized loss at the end of this quarter could be substantially lower than what we just saw on this quarter?

That's correct.

And then, again, this is a smaller issue, but noticing on the balance sheet other liabilities and deferred taxes are up a good, I believe, $50 million or so. Is there any, can you give us any color into that number and --?

That also has to do with the derivative position that's reflected as an effective cash flow hedge. But I would be more than happy off-line to take you through greater detail.

That's very detailed. That's basically all I had. I appreciate it very much and thank you, guys.

Omar Nokta with Dahlman Rose.

You've put a lot of your vessels obviously on these synthetic or against these synthetic charters. And right now, we estimate, I guess, that about half of your VLCC [days] are locked up against these. Going into '09 do you see yourselves any more or at least within the second half of this year adding more to the -- say picking up to 75% or 80%?

I don't think unless you saw some incredible spike in the fourth quarter, I think some see us adding anything [through] the synthetic book. The only thing you might see is some timecharter going into the Lightering business, possibly. That will be much Lightering business. But no I don't see us adding to it at all.

So nothing for that -- for the most part, nothing for the second half, then?

I would not expect much in the way of changes in that. But you know the [FFA] market is more volatile than the underlying freight market so as I said before, you could see us [unwinding] some of the positions we have so they could change. But right now as we sit I don't see us doing a whole lot more.

Okay. Just on the ULCCs, I know you are no longer classifying them as part of the VLCC average rate that you report. Would you be able to give me some color on what you -- what the two ULCCs earned for the second quarter?

They made what affects the accounting is $76,000 per day for the second quarter and [six] so far in the third I think is $116,000 per day.

Okay, and once the first one goes into FSO conversion early next year, what are your plans with the other ones? Do you intend to keep trading that as a ULCC or do you have longer-term plans for converting that into an FSO?

We will keep trading that as a tanker. There is no question. We have a lot of inquiries on that ship as an FSO or an [FBSO] and it very likely could end up in that space. The good thing about it is that we will have the ability to trade in the [physical] market and make really incredible returns on the ship, but if we move it into an alternative market, it will be because it will make good economic sense like the first deal we've done.

Good double hull tankers are hard to get ahold of. There's only two more double hull ULCCs left in the world. We have one, [Yuranev] has one. Good position to be in.

I have one final question that's a bit different. Now with respect to double hull takers. You formed this Company a couple of years ago and you sold your stake in the Company last year. For the most part I think at $15 or more and as stock has since fallen to below $10 I'm wondering with the appreciation in vessel pricing.

Especially since the beginning of this year do you think you would go back and revisit potentially getting back into that company?

It would be inappropriate of me to speculate about anything we do with double hull tankers. I can say that we remain committed to growing our cruise business and we are constantly looking it up (inaudible) which is why you saw us taking seven Aframaxes in the last two months and why you saw us snap up two new buildings at (inaudible) when the opportunity arose. We certainly will be opportunistic.

Understood. Thank you so much.

Greg Lewis with Credit Suisse.

Good morning. My first question is related to the Jones Act fleet. And you know with U.S. oil demand weakening, have you seen the Jones Act vessel rates come under any pressure?

We have seen actually very little downward pressure on the rate. It has come down this summer marginally, what we have seen though is a decrease of utilization on the non double hulled, non modern vessels.

So the rates have come down slightly, but the utilization on those vessels that continue to play in the oil trade has reduced at a greater rate. So effective time charter equivalents have dropped, but it has not been really driven by rates, despite utilization.

That's one of the reasons why you've seen a lot of -- in fact there were four vessels in the second quarter that were Jones Act oil carriers that actually switched to grain, foreign grain product. So that is kind of indicative of that utilization issue.

Could you just sort of place like a level on those (inaudible) utilization light on a percentage basis?

We don't have an industry utilization number on that. Sorry, I can give you anecdotal story of percentage or a number of vessels, but I -- unfortunately for an industry that's not tracked.

That's fine. I guess switching over to the Crude, it looks like since the end of last week, rates have come off pretty sharply. VLCC rates have come off pretty sharply over the last say, two, three days. Do you have any sort of feel on what sort of driving drove that pretty sharp correction in VLCC rate?

It's really too many ships in the AD. AD East rates have been significantly higher than West rates, so no ships have gone West and VLCCs have gathered to the AD loading area to a point where it got too many.

West Africa is holding strong, though, right? And what the owners should do is they should bring out their calculator and run some more numbers details because it actually pays to balance West Africa, to take a West Africa, China voyage instead.

So we hope that rates or owners will head to West Africa and that that will stop the fall in the AD market and balance out again. That is the situation right now.

Actually in the presentation you talked about 10 mile expansion out of, I guess, the Caribbean. Year-over-year how much of that is that trade actually picked up to? On the long ton mile expansion?

[Carib] Venezuela to the East. Well we saw a high earlier this first-half year of eight maybe nine cargoes per month heading from the Venezuelan Carib to the East. It has come down a little bit since. I think we saw three in July and two so far in August or something like that, but it didn't used to be any really, right?

No absolutely.

(multiple speakers)

My last quick question, I noticed that in the slides part where you talk about I guess (inaudible) being $117 a share? Does that include in the FFAs, I mean, I know it is immaterial at this point, but going forward I guess it's -- you become more of an asset-based player. Is that included anywhere in any of those numbers? The FSA gain or loss?

No.

[Justine Fisher] with Goldman Sachs.

Sorry to beat the dead horse on the hedges, but -- and Myles if you want to take this off-line, we can, but I just wanted to clarify the amounts of the mark-to-market. Because the way I would think about it is that you would take all of the days that you are hedged for or for which you have synthetic timecharters and mark those to the current market.

And so the difference between the average rates that you guys have locked in as shown in the slide presentation versus the spot is like $100,000 a day.

So I would have potentially taken that difference for all of those days and considered that as unrealized loss, but that's clearly not the way to do it because the numbers are much lower. So how should we think about that multiplication wise?

Why don't I take it off-line and go through each line item with you, be more sensible.

Okay. Then another question is about the average rates at which you are hedged. I think given that the increase cost of crudes and bunkers etc., they're may be a propensity for the world's (inaudible) slightly to increase next year. And if that happens could you give us any color as to what the magnitude of change might be on the average rate at which you have those synthetic timecharters?

We hedged the bunkers, Justine, so we don't get caught with that. If you didn't have the bunkers, you wouldn't have a hedge. And I think that operating cost levels will continue to increase at the same levels they have the last two or three years. There's no change in that really across the industry, across all segments.

So we can assume that those 60 -- and that $60,000 in change average synthetics timecharter rate for '09 would be the same irrespective of a move up in the world (inaudible) flat rate?

Yes because we are covering the bunkers. If we didn't you don't have a hedge.

Okay. And then another -- just a question on the LR products market. Lois's description earlier I guess, you said that you are seeing strength in the [MR] market because of a strong diesel market, but what are you seeing in that --? I mean are you seeing weakness in the other product carrier type markets because of demand destruction? Because of higher gas prices, etc.? I mean are you seeing more weakness in other markets besides (inaudible) market?

I think that, mainly, it is just the incredible strength in the Crude market that really proved to be the difference there on the LR1s and the LR2s. The refineries and the [AG], you do have reliance coming online within 2008. And that is really the first truly large refinery that's coming online of about [580,000] barrels per day that's being added in the marketplace. And that will really broaden the market for LR1s and LR2s.

But I think that the reason that the vessels really shifted over is that you just saw these incredible rates on the Aframaxes and the dirty Panamaxes where the product market just was not as high. And you now are seeing a rebound and you definitely are seeing the LR1s and LR2s at a much higher level, because of the transfer of some of those shifts over to dirty.

But, you know, you are just seeing some of the larger refineries coming online now in the AG.

Okay. Thanks.

Terese Fabian with Sidoti.

I want, of course, to return to your fixed VLCC positions for '09. Why would you do an FFA rather than a timecharter where you don't have to tally up mark-to-market considerations each quarter?

It's really straightforward. There are no timecharters at these levels that are available. If you look -- we looked at the 33 timecharters that our four biggest competitors have on their books and the average rate is $42,000 a day. I think the highest $45,000 and as low as $35,000. That's the one reason.

The second reason is that we have contracts for freight meant. If you look at the TI, I think rough -- a little more than 6% of the revenue days are covered by COAs. If we put the ship away on a timecharter, that ship then is no longer available to service our contracts and affreightment. And the contract of affreightment which we have in TIs, the same thing we have in AI Aframaxes, the utilization is even higher for COAs, we would not be able to service those contracts.

So we think our COA model works better and then just as importantly, the timecharters available have been well below the levels that we have locked in the paper. Aside from the fact that the levels that people put away timecharters we would take those ships in.

That is a fine explanation. Thank you. Are you seeing more (inaudible) paper hedges for VLCs in '09 or by other shipping companies?

Certainly the liquidity in that market has been growing rather nicely dramatically. I think we expect the volatility to include rates to get -- to do increase. Primarily functions as single, double, double discrimination. And so yes the answer would be, look where the market is growing.

Thank you. Then I have just a really general question. Do you see the price of oil affecting tanker rates in either a positive or a negative or is there a psychology behind high oil per barrel pricing driving high tanker rates?

There's not much of a correlation historically. Obviously in the long run we get impacted by what the energy markets due to the world economy and where it all goes.

But if there's no, the real -- if you want to drive, look at OPEC productions. OPEC production has a pretty strong correlation with VLCC rates in particular and so that when OPEC production is up, like I said in the first six months of this year, you will have a stronger VLCC market because it is long-haul crudes.

Thank you very much.

(Operator Instructions). There are no further questions. I would like to turn the call back over to management for closing remarks.

Thank you very much for participating in the call. If there are specific questions, accounting questions, whatever, feel free to contact Myles or Jennifer or myself. We are happy to answer all the questions and look forward to them and look forward to rejoining you all again in three months' time. Thank you very much.

Thank you, ladies and gentlemen. That does conclude our OSG second quarter 2008 earnings conference call. Thank you for your participation. You may now disconnect.