Octave Specialty Group Inc (OSG) 2008 Q4 法說會逐字稿

Welcome to the Overseas Shipholding Group fiscal year 2008 earnings conference call. (Operator Instructions). I'll now turn the conference over to Mr. Jim Edelson, General Counsel and Secretary. 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, the outcome of negotiations with American Shipping Company, ASA and Bender Shipbuilding Repair Company. Changing oil trading patterns, anticipated levels of new building and scrapping, prospects for certain strategic alliances and investments, prospects for the growth of OSG gas transport business, estimated TCE rates and synthetic time charter rates achieved for 2009. Projected dry dock and repair schedule, timely delivery of new buildings and conversion of vessel in accordance with contractual terms, credit risks of counterparties including charters, suppliers and shipyards, and the impact this may have on OSG and prospects of OSG's strategy being a market leader in the segments in which it competes, the projected growth of the world tanker fleet and the forecast of world economic activity and world oil demand. Factors, risks and uncertainties that could cause the actual results to differ from the expectations reflected in these forward-looking statements are described in OSG's annual report on Form 10-K for 2008. For this conference call we have 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. Morten?

Good morning. Thank you for joining our call. Let me introduce the management team that's with me, Myles Itkin, our CFO, Jennifer Schlueter head of Investor Relations and Communications, Lois Zabrocky head of our product anchor SBU, Mats Berglund head of our crew tanker SBU and Captain Bob Johnston, head of our US flag SBU. As Jim indicated, our remarks will follow a presentation that is posted on the website so if you would now turn to Slide three. Before I get into the numbers and the full year say '08, I want to highlight a few things about OSG and the tanker markets. This is a departure from the way we normally handle our earnings calls but these are not ordinary times.

For the corporate world in general and the shipping world in particular, the lack of functioning credit markets has had an likely will continue to have a profound impact on equity valuations and business prospects for the ship industry well into next year. While the tanker business has held up better than all other shipping segment, OPEC cuts, the downturn in gasoline demand worldwide and increased new building deliveries will make for a challenging 2009. For those companies that came into this financial headwind unprepared, theses are times for survival tactics. Fortunately, we saw back in 2007 that weaker markets were ahead and were prepared for the downturn that has hit us. Although there is no escaping the 2009 will not be nearly as good as 2008, this troubled financial environment could end up being highly beneficial for those of us that are in a strong position, those of us that are being managed for the long run. The most important take-away from this earnings call is that OSG's balanced growth strategy has positioned us to handle even the extraordinary difficult economic times we are operating in.

In 2009, we will focus on reducing costs on shore and at sea, performing flawlessly for our customers, continuing to improve the quality of our operations,forcing incremental liquidity,even though we don't need it today, and fixing those aspects of our business that are not performing adequately. The alternative for many is hunting for money and negotiating with their banks. Our balance sheet strength, liability management and healthy liquidity means we can manage through a prolonged downturn in the markets. Unlike many companies in all industries, we are not facing looming debt repayments or covenant issues. Later in this call we will give you details of our financial flexibility at a time when most have none. We will let the facts speak for themselves. As a result of the overall world economy and the OPEC production cuts, 2009 will be a weak year for the overall tanker industry. But the combination of our portfolio, FFA coverage, COA business and cargo systems will enable OSG to remain profitable and generate positive cash flow.

As far back as early 2007 we expected 2009 to be challenging. In anticipation of this, we took more term cover than we ever have for this period to shield ourselves from the serious falling rates. We also accelerated our program of vessel sales and sale leasebacks and we took on incremental financing. We know that the unexpected always surprises our industry. We built the business so surprises can be managed. This belief has guided our balance sheet management strategy for decades. The performance of our US flag unit has been extremely disappointing but we are taking decisive actions to turn it around. The write-downs, order cancellations and impairment charges taken by our company in the fourth quarter on our US flag business impacted our financial results in the fourth quarter significantly. However, in the first two weeks of 2009, we generated $127.5 million in gains on vessel sales, largely offsetting the write-downs in this unit. We have put new management in place and they are decisively sorting out the problems. Please turn to page four.

Looking to the coming years, we expect the phase-out of the 98 remaining single hull BLCCs in the world in 2010 to spark a recovery in tanker rates. We have highlighted the difficulties single hull vessels have competing against double hull investigation else for several years. This increase of discrimination against single hold tankers continued throughout 2008 and was one of the reasons for the high rate environment last year. We expect the phase-out to be adhered to strictly and this should result in improving tanker markets in 2010 and beyond. More ships will exit than enter the market next year. Now, the almost complete, complete absence of bank financing for new buildings except from governments will have a profound impact on the tanker order book, the global shipbuilding industry and could result in much healthier tanker markets than what the static order book suggests today.

If you looked at the new building order book in June of 2008 it was easy to get concerned about the earn outlook for most shipping segments. While it is early in the game, we believe this outlook is changing. We have already seen a number of bankruptcies, order cancellations, contract extensions and distressed sales. All of which we expect to accelerate as the year progresses. We foresee shipyard bankruptcies and lot more shipping company bankruptcies. Owners will be walking away from new building orders even when it means for fitting 20 to 30% down payments. Owners will get 2010, 2011 and 2012 deliveries pushed back to 2013 and beyond. Orders will be reduced. It will be messy. The yards will try to hide what they consent to but before this banking crisis is behind us, we will have a better order book. In many ways, this is the best thing that could have for the strongest players in the industry. Or another way to put it is that too many ships were ordered by companies that should not have ordered to be built at yards that should not have been built, to be financed by memories of the banks that no longer lend.

Now, the rapid collapse of the global credit market along with the global recession has been disastrous for most shipping segments. If your Company entered this period with bank financing, no term cover, looming debt maturities, unfinanced new buildings or poor commercial management, your Company has a challenge. In most respects, it mattered more what condition your Company was in when the banking market collapse hit than what steps you have taken since. These problems in the banking system that we are all aware of, which is even more acute amongst the historically key ship lending institutions, will create enormous opportunities for the stronger shipping companies during the next few years. But patience, patience and discipline are key. There is simply no new bank financing available for the industry worldwide right now. This is what is driving secondhand values for ships down. Not many buying opportunities have emerged yet but they will.

Only the companies with liquidity and strong operating platforms will be able to take advantage of the situations when they arise. OSG is one of those few companies but we are in no hurry, no hurry to chase deals. We will monitor the markets closely, focusing -- focus on running our business well and then make investment moves when the time is right. Today is not that day. When the global economy recovers, OSG will emerge as one of the clear winners in the tanker trades. We have the privilege today of not having to worry about survival, thanks to our long-term approach to managing the business. Instead, we can focus on addressing certain issues including those in our US flag unit, reducing costs and improving service. At the same time, we can patiently wait for opportunities to fall our way. They will and we will take advantage of them. Thus, when the global economy eventually turns around, we will be one of the winners. Please turn to page five.

Turning to the financial results. TCE Revenues of $1.5 billion in 2008 was the highest in the Company's history, up nearly 50% year-over-year. Annual results were driven by very strong spot rates across nearly every sector we trade in. Reported net income of $318 million included among other things charges associated with our US flag unit which in aggregate were $201 million or $5.64 per share and included $168 million of non-cash goodwill and asset impairment charges. Adjusted net income of EPS was -- and EPS was $449 million $13.83 per share including gains on vessel sales of $78 million. Details of all special items affecting net income are in the appendix of this presentation, page 22 on the website. Cash generated from operations was $367 million in 2008 compared with $168 million last year. An increase of just under $200 million year-over-year.

During the year we purchased 4.5 million shares or 14% of the total outstanding for $259 million. In the fourth quarter, 1.6 million shares were repurchased at an average price of $36.26 per share. We had $37.2 million left in our current program. With the annual dividend raised in June to $1.75 per share, we paid $45 million in dividends last year. Today our liquidity position is very healthy and more on that later, totaling $1.5 billion a modest 36.8% liquidity adjusted debt to capital. Cash balances as of Friday last week stood at $500 million. Please turn to Slide six.

If you look at the two charts on the right, 2008 rate performance as compared with that in 2007. For me, the important take-away from 2008 is that once again we delivered superior performance to our major competitors. The outperformance in the Aframax and Panamax sectors is particularly noticeable. What delivers this is our scale, our cargo systems, our customer relationships and our key partnerships. In this market, cargo is king. And in weak markets, that's especially true. The key is not to wait for cargoes. If you have cargo commitments, cargo systems, we will wait less than our competitors and that will result in better performance across the year. We've talked for many years about scale. Scale matters. Scale is what we get to our commercial proves. It improves our balance ratios. It enables us to beat our competition. It enables us to build our cargo system. It's a a cycle.

We also get new business derived from the key partners and customers that we have and we mentioned a few of them. You all know that Unipec is a key client for ours in tankers international, our (inaudible) pool, while China this year will be one of the few markets we expect to actually have growth in imported oil. We have a key relationship with SONAP in both the Panamax pool and they became a co-founder of Clean Products International, our products pool. Korea Line which was a TI partner has joined us in Clean Products. We have Seaarland, one of our key partners in Aframax International was a founding partner in our new Suezmax International pool. This Best-in-Class platform leads to higher margin projects and business and better results. Turning to the next slide.

Just so it's clear, OSG remains strongly committed to Best-in-Class in-house technical management. No doubt, weaker markets will benefit the better operators. We speak with our big clients, they are concerned that weaker companies will start cutting their standards. We will not. We are vetted and approved by all the oil majors and we will commit even more to maintain that in 2009. We have a tenacious focus on results. In 2008, crew attention for US mariners for 90% and for international, 97%. Terrific numbers. We improved our training programs. We have dedicated facilities in Manila and Tampa. It's paying off, and that commitment is going to help us in these difficult times. Something we also talked about a lot, the cost of regulatory compliance will continue to escalate. Those who failed to plan for this should plan to fail. We will be planning for it. Turning the page.

2009 is going to be a challenging year for everyone. Nevertheless, all is not bad. We have a number of things we have done and that will happen in 2009 that will strengthen our business going forward. Let me start with crude. We closed on the sale of the Donna at the beginning of the year and netted a gain of $77 million. You have a picture there of the two FSOs -- the two ULCC in Dubai at dry docks getting converted to FSO's. That project is on schedule, has very healthy returns and those ships will be on full year contract in 2010 and a part contract in 2009. We acquired a lightering business a couple years ago which we said would help us in weaker markets. Lightering is a contract oriented business and a good hedge in weaker markets. It is and will serve us that way in 2009 and 2010 and then we have much tighter controls and emphasis on daily running costs in our crude fleet.

If if you look at the products fleet, we're in the midst of a nine ship MR expansion, two have already delivered and we have seven more to go and most importantly, if you look at the bottom of that box, we have 11 old vessels redelivering in 2009. We believe that as they are replaced by the modern ships, we will increase earnings per day by $4,500, or $1.6 million per year, adding $18 million to the bottom line and reducing the drag on earnings represented by the older ships. We will continue with our LR1 expansion which we think is one of the more exciting growth segment in the products trade and Clean Products International, our pool, has continued to take on new members. If you look quickly at the US flag, we have six ships trading. We recently took delivery of the overseas Boston. The higher yielding Aker vessels will deliver through the first quarter of 2011 including two shuttle tankers and that will improve our results in the US flag business as we go into 2010 and beyond. Turning to the next page.

Most of our shareholders are singularly focused these days on the credit worthiness of the companies in which they hold shares. Considering the state of the world banking markets, this is not misguided. In a world where AAA GE has to turn to the US Government for liquidity, financial viability matters. Fortunately for our shareholders, the credit story at OSG is a good one. Another key take-away from those on the call today is that you can drive a truck through our loan covenants. This is not because we got great deals that were too favorable from our banks but because as many of you have heard me mention time and time again, we had a goal of always having one of the strongest balance sheets in the industry, so we are prepared for good and bad times.

Let's go to the numbers, we put together a similar slide for you last quarter and have used in every meeting with investors in the past four months. The financial flexibility this slide demonstrates is one of the key themes investors should take away from today's call. Let's look at it. We are predominantly an unsecured borrower with 28% of net book value pledged as collateral. That means we are not constricted confronted with loan to value calculations that the vast majority of shipping companies are struggling with today. Long-term debt totals $1.4 billion, with annual principal payment obligations of less than $30 million this year and next and rising to $33 million in 2011.

There's been an increased focus across the board by investors on covenant obligations so we thought we would put them out for all of you to see. There is, no matter how you look at it, plenty of room for OSG. We have no need to negotiate with any of our banks on relaxing covenants. Let's look at them. If you look at the max leverage, we have the ability to add another $963 million of additional debt, assuming that our net worth stayed constant today. You look at the minimum net worth. We can incur $1.2 billion losses or payout of share dividends and still be in compliance with our minimum net worth covenant. Assuming a 70% advance rate, we have the ability to take on $965 million on additional debt on newly acquired vessels or new buildings. And we have the ability to take on $275 million of secured debt on existing assets. Again, the other take-away here is that OSG is well positioned to capitalize on opportunities without going to the equity or debt capital markets for funding. Please turn to Slide 10.

I talked about our debt capacity, cash balances, healthy levels of cash generated from operations, all of which give OSG ample coverage of our new building commitments so let's take a look at them. In 2009, we have $256 million due on six vessels delivering. We can cover these from just our asset sales and what remains in our capital construction fund. This is why we expect to end up at December 31st, 2009, with as much liquidity as we ended 2008. In 2010, we have $357 million in commitments on five vessels and in 2011, $209 million commitments on six ships. We already have these commitments covered. While we are in the enviable position of not having to raise incremental loan or equity capital to finance our new building program, this does not mean that we won't. Indeed, probably because we don't need the to raise incremental debt means that we will be able to do so. We are pursuing alternative long-term financing for some of our new buildings and look forward to sharing the details with you when things are finalized. Please turn to Slide 11.

Our contract portfolio has grown significantly since we committed to doing so in 2004. We enter 2009 with more locked-in revenue than we have ever had before. Our fixed contract portfolio of $507 million positions us well for 2009. The investment in growth in our products and US flag fleets and their time chartered books of business coupled with COAs, time charter through the pools and (inaudible) positions will pay off in any market. In addition, we have a full year of gas earnings in 2009 and the FSO project coming on line in the second half of the year adding another $77 million in fixed revenues. Of the $507 million locked in TC revenues this year, 65% is from time charters or $331 million, another 6% from pool time charters, the balance from FFA positions. The chart on the lower left is the revenue days and percentage of our fixed versus spot. Let me take this one step further and how fixed revenue sets us up for this year and the next year. Please turn to Slide 12.

Contracted revenue in 2009 covers a significant portion of cash expenditures. In crude, 54% of cash expenditures operating dry dock and charter allocations, allocated G&A, debt amortization and interest expense are covered, requiring the fleet to earn $20,000 a day on unfixed or open days to cover the balance of cash expenditures. These charts further show this relationship in the product and US flags segment and further breaks down crude by vessel class. I should add in the products that includes covering five dry docks this year which does increase that number, so it's a fully loaded number. The messages on these last four slides is that OSG is in a solid position. Capital commitments are covered by asset sales and require no borrowings in 2009 and we have ample debt capacity to fund. Our covenant room, while we think most competitors would like to be in a similar position, not to have to think about what they need to get from the banks in this environment. Financial commitments and operating cash expenditures are substantially covered from locked in revenue enabling us to you achieve certain level of earnings on the balance of open days. We have ample liquidity and borrowing available to us. This concludes my introductory remarks. Let me turn the call over to Myles and I'll come back to conclude.

Thank you Morten and good morning, Please turn to slide 14. The results for the quarter ended December 31st, reflect once again a strong yet volatile rate environment in our crude and product sectors, as well as OSG's operating earnings power and our ability to deliver superior operating returns. The 39% increase in Q4 revenues is largely attributable to a 60% increase in BLCC spot rates to $57,000 per day, a 38% increase in Aframax spot rates to $34,000 per day, and 1240 additional revenue days across all sectors. Of the quarter's $349 million of TCE revenues and $96 million in income from vessel operations, before asset and goodwill impairment write-downs, the crude sector contributed 59% to TCA revenue and 75% of income from vessel operations. The product sector, 23% of TCE revenue and 18% of income from vessel operations. And the US flag sector, 18% of TCE revenue and 8% of income from vessel operations. For the quarter, 61% of our TCE revenues were derived in the spot market and 39% in physical and synthetic time charter markets.

Please turn to Slide 15 for a discussion of other income statement items. The positive impact of increases in spot rates and revenue days was partially offset by higher voyage expenses, which increased by $19 million from the fourth quarter of 2007, principally due to higher fuel costs. Vessel expenses for the entire fleet increased by $17 million for the quarter, to $85 million. In addition to a 411 day increase in owned and bare boat charter days in the quarter, we experienced the effects of upward pressure on crew wages and insurance premiums. We also incurred higher costs on seven tankers which operated under fixed rate management agreements with DHT Maritime. These agreements were scheduled to terminate in January 2009. New technical management agreements have been executed at market terms, eliminating the $11.5 million subsidy provided by us to DHT in 2008.

Charter hire expense increased to $121 million in the current quarter, up by $49 million or 68%. The increase was attributable to approximately 10 more vessels, 1300 days, being chartered in during the fourth quarter compared with the fourth quarter of 2007. The profit share component included in charter hire expense for the current quarter totaled $13 million. It's $9 million higher than the prior year's quarter, reflecting higher earnings generated on BLCCs and Aframax. G&A expenses increased by $7 million to $39.8 million in the fourth quarter of 2008 versus $32.8 million for the same period in 2007. This increase is primarily attributable to an increase in salaries and stock based incentive compensation, of $4.4 million, and higher legal and consulting costs of $4 million. However, the Company has initiated a program to reduce G&A in the coming year to an annualized level, ranging between $125 million $130 million, generating savings of up to $20 million over 2008's level.

During the fourth quarter of 2008, the combination of the decline in the unit price of OSG America, together with the economic downturn, were considered trigger events in accordance with accounting standards requiring the Company to perform a goodwill impairment test at year end. There are a number of market related events in the fourth quarter that resulted in the deterioration in the forward supply demand balance in the Jones Act markets. This, together with the reduction in the Company's US flag new build program are expected to negatively impact the Company's US flag operations in the near and medium term. Consequently, the Company has reduced its estimates of future cash flows used to estimate the fair value of its US flag operations and accordingly recorded an impairment charge of $62.9 million representing the entire value of goodwill related to the US flag segment.

During the quarter, we also recognized an impairment of $105 million related to a series of vessels being constructed by Bender Shipbuilding and Repair Company. Repeated delivery delays by Bender caused concerns that the yard would not be able to complete these six ATVs and two tugboats within contract terms due to both Bender's failure to perform under such agreements, its lack of liquidity and its poor financial condition. In early 2009, OSG began negotiations with Bender to end construction agreements covering the eight units associated with our US flag expansion plans. There is no assurance that OSG and Bender will reach an agreement on the termination of their existing contracts, and the transfer of the vessels to OSG in their current state of completion. The Company intends to complete two of the six ATVs and two tugboats at alternative shipyards, based on -- and based on accounting rules, the Company expects to record an additional impairment charge and contract termination cost of between $20 million and $35 million against earnings in the first quarter of 2009 related to these four ATVs.

In addition, we recorded a further $8.8 million write-down on two older US flag vessels that had operated in the Delaware lightering trade which units were placed in layup pending sale and have been classified as held for sale on our balance sheet after the Company decided not to put these vessels through expensive dry dockings which would have been required for them to continue trading. Now these vessels were written down by $24 million in the third quarter of 2008. Other income decreased by $5 million quarter-over-quarter. Interest income in the current quarter declined by $6.5 million to $2 million as a result of both lower interest rates and a reduction in capital construction fund and cash balances, all of this resulting from the repayment of a portion of our outstanding revolving credit debt through the application of $545 million of funds repatriated in the second quarter of '08. The decrease in interest income was partially offset by a $2.7 million favorable gain from freight derivative transactions compared with the fourth quarter of 2007. Interest expense is down $11.6 million, as a result of a 250 basis point decline on our floating rate debt, 3.3% from 5.8% and lower outstanding average debt balances decreasing to $1.4 billion, from $1.6 billion.

Additionally, during the second quarter of 2008, the Company redeemed $176 million of our 8.25% senior notes, this redemption reduces interest expense on an annualized basis by about $7 million a year through 2013. As it relates to minority interest, the $53.5 million net loss incurred by OSG America multiplied by the 22.5% interest in that Company held by the public explains essentially all of the offset, that $12 million offset reflected on our financials. The income tax benefit increased by $28 million to $32 million in the fourth quarter of 2008. The income tax calculations are based on pretax results of the Company's US subsidiaries and adjusted to include non-shipping income of the Company's foreign subsidiaries. The major drivers for the tax benefit for 2008 are the carry-back of approximately $4 million of 2008 tax losses, against the non-shipping income of the Company's foreign subsidiaries generated in 2007.

In addition, the vessel write-downs on the US flag fleet gave rise to the reversal of previously established deferred tax liabilities in the amount of $26 million. As it relates to specifics, the write-down taken on the ATV 352, of $50.7 million times 35% amounts to approximately $17.8 million of this reversal of deferred tax liabilities. The write-downs on the integrity and the M-300 of $24.3 million multiplied by 35% or $8.5 million, the same reversal of deferred tax liabilities and then the carry-back I mentioned to you as well as other reversals of previously established deferred tax liabilities that were determined no longer to be required. Please turn to Slide 16 for a discussion of various balance sheet items. Cash and cash equivalents stood at $344 million at December 31st. The decrease in the cash balances from December 31st '07 reflects repayment of debt and purchase of Treasury stock, offset by cash generated from operations.

Investments in affiliated companies decreased by $33 million from December 31st, 2007. Largely attributable to a $94 million decrease in our LNG investment balance related to the mark-to-market measurement on interest rate swaps, as well as distributions received from the LNG joint venture of $20 million and a decrease of $26 million relating to the termination of a joint venture earlier in 2008 that was constructing to the LCCs. Long-term debt and capital leases decreased by $135 million from December 31st '07 mainly reflecting the use of cash repatriated in the second quarter of '08. $184 million was used for the redemption of high coupon debt and $25 million in capital lease obligations with an implicit rate of 10%. These reductions were offset by increases in net revolver drawdowns to fund share repurchases of $259 million in 2008. Shareholders' equity decreased by $95 million from year end '07 through the additions of $318 million of net income, offset by $259 million spent for stock repurchases, 4.5 million shares, $45 million in dividends and $118 million increase in unrealized derivative expenses being deferred in OCI. Please turn to Slide 17 for comments on 2009 guidance.

As it relates to vessel expenses, our guidance for the year is in the 300 to $320 million range, consistent with 2008 levels. Our guidance for time and bare boat charter hire expense is in the 415 to $435 million range. Depreciation and amortization is estimated in the 175 to $195 million range, consistent with last year. As mentioned earlier, we expect that steady state general and administrative expenses for 2009 will end up in the 125 to $130 million range. This reflects lower expected incentive compensation, reductions in expected legal fees and ongoing efforts to reduce cost. These estimates exclude one-off items such as severance agreements and the like.

For equity income of affiliated companies, our guidance is in the 12 to $16 million range and will include the equity earnings for the FSO joint venture commencing in the third quarter of this year. Our guidance for dry dock costs for the year is approximately $35 million, which includes the dry docking of a number of the older pre1990 MRs which we delivered toward the end of the second quarter. Our guidance for capital expenditures for 2009 is approximately $286 million, which includes progress payments, vessel improvements and capitalized interest, Q1, $80 million, Q2, $52 million, Q3, $62 million Q4, $92 million. With that, I now turn the discussion to Morten.

Thank you, Myles. Before we get to Q&A, I would just like to comment. I think we all have accepted that 2009 is going to be a very forgettable year for practically everyone, everywhere, except perhaps people doing snowplows in New York City. While we will fare better than most in this environment, we are happy that we have built a lot of positive momentum for 2010. Let me go through those and highlight those. Our balance sheet strengths, strong liquidity and superior liability management means that we can focus on running the business well. Taking advantage of opportunities and reducing costs, not on meeting with our banks for covenant or maturity relief. Our product tanker segment delivers nine old double sided problem tankers by July 6, 2009 and eliminates the drag on earnings they represent.

In 2010, we will get a full year contribution from the FSOs stationed in Qatar. By the middle of 2010, we will have six more of the Aker ships delivered, all with term, all with term charters, time charters and all at higher rates than the first five. Our US lightering business which we acquired to provide stable contract revenues in weaker markets could do just that in 2009 and with greater market share is well positioned for 2010. The crude tanker fleet will benefit from the single hull phase-out in 2010. The banking crisis will both winnow down the new building order book and create opportunities for the strong companies with liquidity and real operating platforms. We have already identified $15 million of G&A cuts in 2009 and intend to make further progress in the coming two years. We are confident that OSG will emerge a winner in this difficult environment. Before we turn to Q&A, I just wanted to extend an invitation to investors to join OSG's management at the Company's annual investor event in New York on May 21st. Please contact Jennifer Schlueter for details. And with that, we'll turn it over to the Q&A period.

All right, thank you, sir. Ladies and gentlemen, at this time we will begin our question-and-answer session. (Operator Instructions). Our first question is from the line of John Chapel from JP Morgan. Please go ahead.

Thank you. Good morning, guys.

Good morning.

Morton, you made it perfectly clear that you're not ready to do anything on the acquisition front today. Just wondering, is that because there's not a lot of opportunities available? Is it because the returns that you're seeing on the time charters don't really make sense now, given asset prices? Or is it because you see some potential desperation sales over the next couple quarters as things play out as bearishly as you've kind of laid out.

I think it's a combination of things. You actually hit on some of them. But in many respects, the financial crisis crisis shipping industry is in is not that old. We have yet to see the spectacular shipyard bankruptcies that we saw in the early '70s the last time the industry had a real tough time or in the mid- '80s. We expect there will be more pain to come. You talk to very good ship owners across the world and they are unable to get their traditional banks or new banks or any banks to finance their new building commitments. And that is a big problem for a huge part of the industry. You bring all those factors together and there will be added pressure and when things -- when levels fall, when values fall to levels that we think make no-brainer sense, that's when we will be moving.

As far as the asset prices are concerned, I know there's a lot of ill liquidity in the market still but by best estimations, dry bulk assets fell by about 70% from their peak and maybe tanker asset prices never got to the lofty levels of dry bulk. But do you think the tanker can fall.

No, I don't think so. Really for a variety of reasons. I think any asset in any class in anything, anywhere in the world when you don't have a banking market is going to fall. We're not suggesting that things haven't fallen. One, the tanker earnings have continued to be reasonably strong. Secondly, the outlook, because of the single hull phase-out is for a much healthier tanker market than what you had in dry bulk, continues for example. You didn't have the benefit or the structural support of the single hull phase-out and that is real and it will happen. So I think that's the big difference and then within the tanker market, you know, we have owners, big owners with fairly strong equity bases. Thirdly, the yards are simply not quoting prices for new buildings today. There's no indication of that. The yards are going to wait a year or two, I think, before they start quoting and I think it will be before then before owners start ordering new vessels.

Okay. One final one. One final question on cash and then I'll turn it over. As far as the buyback's concerned, 37.2 million left, you're buying at 36. I would probably assume you would be buying at these types of levels too or do you want to be holding back cash in this type of environment? And let me just put one follow-on. On the dividend, you did increase it last year. Obviously the banks aren't on you, cutting your dividend like some other companies in the public markets. Do you think it's maybe prudent to scale back the dividend a little bit, given this market environment?

I'll give you the same answer that I give you. The Board looks at this every Board meeting. We have a Board meeting next week. We will discuss it. We got criticized for not bringing our dividend up quickly enough. Excuse me, it's tomorrow, not next week of we've been working all weekend. We were criticized for not bringing it up high enough as some of our competitors did. We raised the dividend based on our long-term view of the company, its propects, the markets it's in, the balance sheet and we obviously have to take into account the banking markets and we both look at dividend increases, maintaining it, and doing any incremental stock buybacks.

Okay. Thanks a lot, Morton.

Thank you. Our next question is from the line of Greg Lewis with Credit Suisse. Please go ahead.

Thank you and congratulations on a solid quarter.

Thank you.

My first question is regarding too, could you just provide some color in relation to the Bender situation and also on the alternative yards where your looking to maybe push on a few of those vessels?

I think the color is the -- we've had repeated delays from the Bender yard. Clearly, it's very difficult for shipyards anywhere in the world today to get external funding for working capital and such. Clearly his financial condition has been impacted by that and we combine that with the delays, we did not think we could continue to wait for him to be able to deliver those vessels. So we are negotiating to move those vessels to alternative yards. Clearly, we have identified alternative yards to take them to and we have brought really the full resources of the OSG new building team in in both assessing alternative yards, planning for the moves and how we're going to do it. I don't know, Bob, you want to add a little more color on that.

I would say transitional move that we will do, something we just can't wait any longer. We've done a complete assessment of the various yards we're looking at I think it will be a positive move.

Given the near term headwinds facing the US product tanker market, could we see the number of vessels on order potentially come down?

You know, the -- a number of the vessels that are on order are contracted for going out. So with that in mind, probably not many cancellations beyond a set that applies to an entity in bankruptcy and the four ATVs that we're cancelling.

Myles, I have two questions for you. One, in running through the numbers that you gave in detailing out the minority interest credit, it sounded like it was $17.8 million and 8.5 for about $26.5 million per vessel write-downs and then about $4 million in carry-back related to the depreciation and then what there was another 2 to $3 million related to -- did you mention that?

Yeah. It's reversals of previously established deferred tax liabilities that are no longer necessary. But you're referring to the tax; right?

Yes.

All right. Yeah.

Okay. And then just could you also apply similar detail on the tax credit?

That basically is the tax credit.

Okay. Thank you.

You're welcome.

Thank you. (Operator Instructions). Scott Burk with Oppenheimer, please go ahead with your question.

Hi, good morning, guys.

good morning, Scott.

I had just a couple of industry questions. You know, there's been a lot of talk about BOCCs being used for storage. Do you guys have a count of how many vessels are being used for storage now and are you seeing that contract with (inaudible) kind of slimming down?

Yeah, we count 28, just below 30 today, and the terms that these are contracted for vary between very short, three months, six months, some up to nine months so some of them come off. We do not see new recent activity in the last couple of weeks, due to the smaller [contango]. Likely the number will come down slightly but we do not see a dramatic change in that number.

Okay. And on a similar vein, we've seen OPEC actually do pretty well, actually do pretty well with their production cuts or match -- coming close to matching what they said they'll cut. Have you guys seen any sign that we're getting to an end of those production cuts or should we continue to expect another million barrels or so off of that, off current production?

I mean, I think that's -- I think what they've committed to has been reflected in what the loadings have been in the Gulf. And until they announce additional, there's nothing that we're going to see in the trading patterns. They reflect the cuts they've done to date and there's no question that's had an impact upon our markets.

I had a question about, towards the end of the fourth quarter, I mean in the third and the fourth quarter and a little bit in the first quarter, Suezmax has outperformed pretty healthily what the VLs were doing, sometimes trading at a premium in terms of day rates. Just going forward as you look out into 2010 you've got a lot more VL's being delivered (inaudible), I'm wondering if there's any structural -- something structural in the (inaudible) versus VLCC market that would prevent VLs from being able to compete away strength that you sometimes see in the market.

No, I do not think so. They do hang together. I think the recent better performance on the Suezmax side has been due to the OPEC cuts, mostly affect the AG while Suezmax biggest market for the Suezmax and we've seen better activity there. Long-term, the markets hang very closely together and Vs show up (inaudible), combined two cargoes and it evens out over time.

Okay. And then do you have any other plans to reduce your chartered in fleet. You mentioned the nine product tankers that are rolling off. Do you plan to cancel any more charters? Similarly, have you had any charters approach you on your chartered out fleet, looking to renegotiate?

No, I mean, I think the tanker industry unlike the dry bulk industry hasn't been faced with that, primarily because if you look at the rates at which time charters have been done in the tanker market, they're at historically senseable rates. They didn't get it, become three or four multiples of historical earnings. We have not had a single approach on that basis. Remember, we were very disciplined throughout I think the process and when we took charters in and that is we made sure that we could -- we would be able to base them on long-term earnings basis, take into account some history, that's why we refrain from a lot of secondhand purchases during this period because the charter in rates were more attractive. Obviously the US flag we have the charter route to cover that but in the US flag they're absolutely needed. The FSOs are absolutely needed. So we have not seen that. I think we will be opportunistic, if we see rates being offered at time (inaudible) at very low levels. So far we haven't seen that. If there's an opportunity to cancel either because a shipyard is late or an owner gets in trouble, we will consider it at the time. But we're not under pressure to do that and we're comfortable with the rate levels we have. Having said that, Mark, is there a couple -- in.

We cancelled and Suezmax's and two Aframax shorter ins. We reported them so they're in our release. One was before that. The two Suezmaxs (inaudible) new billing are late which gave us the right to cancel without penalty which we did and we also cancelled two Aframax time charter ins.

Okay. All right. Thanks.

Thank you. There are no further questions at this time. Please continue with any closing comments you may have.

I want to thank you for joining. These are difficult times but I think we have a program that will see us in to 2009, 10. 11 and beyond. So thank you for working. I hope you'll be working with us and I hope you will all join us on Investor Day on the 21st.

This concludes the oversea ship holding group fiscal year 2008 conference call. We thank you very much for your participation. Have a very pleasant rest of your day.