Octave Specialty Group Inc (OSG) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by and welcome to the Overseas Shipholding Group second quarter 2009 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, August 5, 2009. I would now like to turn the conference over to Mr. Jim Edelson, General Counsel. Go ahead, sir.

Thank you. Before we start, let me just stay 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, estimated TCE rates achieved for the third quarter of 2009 and estimated TCE rates for the fourth quarter of 2009, projected scheduled dry dock and off hire days for the third and fourth quarters of 2009, timely delivery of new buildings and conversion of vessels in accordance with contractual terms, OSG's intention to tender for the outstanding common units of OSG America, projected locked in charter revenue and locked in time charter days for 2009 and thereafter, estimated revenue and expense items for 2009, levels of equity income, other income, taxes and capital expenditures for 2009, prospects for OSG strategy of being a market leader in the segments for which it completes, the projected growth of the world tanker fleet and the forecast of world economic activity and oil demand.

Factors, risks and uncertainties that could cause the actual results to differ froom the expectations reflected in these forward looking statements are described in OSG's annual report on Form 10-K for 2008 and in other reports OSG files with the Securities & Exchange Commission. For this conference call, we have prepared and posted on OSG's website supporting slides that 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 would like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?

Thank you very him Jim. Good morning, and than you for joining our conference call this morning. Let me introduce the management team members that are here with me in New York. Myles Itkin, our Chief Financial Officer, Marc La Monte, Head of our Gas SBU, Jennifer Schlueter, Head of Investor Relations and Corporation, Jim Edelson, Lois Zabrocky, Head of our Products SBU, Mats Berglund, Head of our Crude SBU and Captain Robert Johnston, Head of our US Flag SBU. As Jim indicated, our remarks today will follow a presentation that is posted on our website, so if you would please now turn to slide three. Overall results for the second quarter 2009 were in line with expectations. TCE revenues were down 36% to $248 million quarter-over-quarter driven by a decline in spot rates across all international flag markets. It was a very tough market for tanker owners. Spot rates across the board were down. The only bright spot was US Flag, and it wasn't than the Jones Act rates behaved any differently than rates in the international markets, we had four new (inaudible) ships delivered in the last year, which gave rise to an increase in TCE revenues. EBITDA was $44 million in the quarter and $220 million in the first half, significantly below last year. We reported a net loss of $9 million in the quarter and $113 million of net income year-to-date. Reported EPS was a negative $0.33 and first half per share earnings were $4.20. Dripping out one time items such as asset and secure net gains and losses, mark-to-market unrealized losses and a reversal of contract termination changes, loss per share for the quarter was $0.29, much better than the street consensus of negative $0.66.

Although it was our first quarterly loss since 2002, and we expect the third quarter of 2009 to also be negative, OSG is on solid financial footing. We closed the quarter with $1.8 billion in liquidity, $571 million in cash on the balance sheet. We generated just under $190 million in cash from operations in the first six months of 2009, and we ended the quarter with an impressive 26.8% liquidity adjusted debt to equity ratio. These are difficult times for everyone in the shipping industry. We certainly do not like posting negative numbers during any quarter. However, as painful as this current tanker market is, it is probably the best management for the industry in the long term. As other ship owners and shipyards face extended tough markets ahead, we expect a significant reduction and significant postponement in the new build order book, and we anticipate taking advantage of distressed opportunities which could come in as individual ships or fleets. OSG is uniquely positioned to pursue distressed opportunities because of our balance sheet strength and balance growth strategy. I can tell you, in fact, that a handful of distressed situations have materialized in the past few weeks, and we are taking a look at them. Please turn to slide four.

We can't control OPEC production, nor global oil demand, but we can stay focused on doing what we can to improve our business in the future, and that is what we continue to do. This slide highlights just a few things that we are doing at OSG that strengthens the Company. Continued focus on G&A and vessel OpEx. We started to see the results of our efforts last quarter, and this has continued in Q2. G&A expenses were down 21% in the first half of 2009 over 2008. As I mentioned last quarter, we are now going beyond more obvious measures of restricting travel and lowering incentive compensation targets. Myles will go in to more detail in both. Let me assure you again, we remain very serious about taking more costs out of our business, and everyone in the Company is expected to contribute to this process.

In late 2007, we foresaw that 2009 will be a tough year, and this was even before OPEC took 4 million barrels out of the day per system and the financial credit markets collapsed. For 2009, we took FFA positions on roughly half of the LTC fleet, which this quarter earned $46,000 a day. We have positions on 10 ships for the second half and as soft market conditions continue, we will benefit from this move. Like every other ship owner, we have been talking to our yards, seeing if we can achieve better terms and conditions for our new build program. These are never easy discussions, but shipyards that we work with know that OSG will be around for the long term, and they want us as a customer for the long term. We are making progress.

In our product SBU, Lois was able to swap two LR1s for three MRs, one of which will be in on a five year, bare board charter into OSG. At the same time, we were able to push back the delivery of the two MRs from 2010 to 2011. This reduces our capital obligations by approximately $40 million. We continue to work with other ERs and we hope to make more announcements in the coming quarters. When we brought Heidmar Lightering back in 2007, the business came with a book of contract business with a good portion of those at fixed rates. Since the acquisition, we have doubled our market share and our contract portfolio, and this is now helping our performance in the Aframax segment. We like putting up numbers that speak for themselves, $27,500 a day. A core part of OSG's balanced growth strategy is participation in commercial pools. Pools give us scale, scale gives us the ability to build cargo systems, cargo systems enable triangulation which improves utilization. In the first half of 2009, our commercial pools achieved better than 50 (inaudible) utilization, which reflected in spot earnings in the quarter. In Tankers International, our VLCC pool, utilization was 59%; Suezmax International, our Suez pool, utilization was 57%; Aframax International, 62%; Panamax International 60% and Clean Product International, our MR product area pool was 73%. Please turn to slide five.

These numbers speak for themselves and are a testament to our scalable commercial platform. Just to walk you through what you are looking at, the first column is actual OSG spot earnings achieved and reported. Q3, our rates earned thus far as reported in today's press release. The benchmarks rates for the first and second quarter are from our 10-K, 10-Q and represent OSG's accessed market rates for fixtures on specific routes. Outperformance is the difference between the two. Across the board, we have ships trading in commercial pools which -- and we are beating -- not only beating our benchmark routes but in some cases, beating competitor rates, those that disclose them by more than double. Please turn to slide six.

Last Wednesday, we announced our intention to tender for OSG America at $8 per common unit. Let me give you a little bit of background on our rational for doing the tender now. When OSG America went public in November 2007, it was predicated on a compelling investment story, stable cash flows, built-in growth and attractive long-term Jones Act supply demand fundamentals. Part, but not all of that story has changed.

Near and medium-term dynamics have deteriorated significantly in Jones Act the market. The global recession and contraction of US oil demand has lead to suspended and/or canceled refinery projection expansion plans. This has led to a dramatic decline in what we anticipated would have been increased demand for Jones Act tankers. We have canceled four new building ATV orders and are in the process of completing two. The delivery timelines were pushed back once we moved them to alternate yards. Today, 12 vessels, or 18% of the Jones Act tanker fleet are idle or in lay-up, three of our own vessels included that count. Lay-ups of this magnitude have not been seen since the early '90s -- 1990s. Our revised forecast building on these assumptions now indicates that the next six quarters through 2010, distributable cash flow will be below the minimum quarterly distribution levels.

And finally, the change in the equity and credit markets equates to a higher cost of capital of OSG America funding its growth as a stand-alone entity. Clearly, the OSG dividend will be a matter that the entire board of OSG America will have to consider carefully and reach a decision on. There is certainly the possible that demand for Jones Act tankers could rebound faster than we expect and rates could recover sooner. However, looking at the banking and shipping markets from where I sit today and speaking as a director of OSP, and as CEO of OSG, the largest shareholder of OSG America, I would have to recommending suspension of the full dividend the next time the matter is reviewed by the OSG America board.

Coming up, we have a strong, focused organization that is weathering the most difficult tanker market in a worldwide recession very well. We are not sitting on our hands waiting for a rescue, but are taking many steps to improve the Company. None of our competitors are in better condition than OSG to take advantage of the opportunities that the industry will present to us. That concludes my remarks, let me turn the call now over to Myles and then we will take questions.

Thanks, Morten, and good morning. Please turn to slide eight for a discussion of our quarterly results. The results for the quarter ended June 30, 2009, continue to reflect significant downward pressure on spot rates across all our segments resulting from the reduction in worldwide oil demand exacerbated by increases in the supply of vessels. Total TCE revenues were significantly lower at $248 million compared with the prior year's quarter at $386 million.

Although total revenue days remained relatively constant quarter-over-quarter, daily spot rates declined across all vessel classes. Spot rates for VLCCs were $32,000 per day, now from $99,000 per day. Suezmax is $23,800 per day, down from $61,000 per day. Aframax is $16,800 per day, down from $55,000 per day and dirty Panamax is $18,800 per day, down from $36,000 per day. Despite challenging market conditions, income from vessel operations for the quarter was just above breakeven, compared with $147 million in the second quarter of 2008. Voyage expenses decreased by $8 million from the prior-year's quarter, primarily as a result of lower fuel expenses in the crude and US Flag segments. In the crude segment, lower fuel costs were attributable in large part from our Suezmax's moving from the spot market in which voyage expenses are reflected to the Suezmax International pool where earnings are calculated and distributed on a time charter equivalent basis. Voyage expenses also declined following the removal from service of two US Flag vessels, the Overseas Integrity and the M300 in the fourth quarter of 2008.

Other expense decreased by $45 million. The second quarter of 2008 included $42.4 million of losses related to the Company's derivative positions. In addition, other loss in 2008 reflected $7 million premium paid on the redemption of our 8.25 senior notes due in 2013. The Company's income tax benefit increased by $2.2 million in the second quarter of 2009 from the same period in 2008. Because the Company's financing structure results in most of our debt being held at the US parent level, we expect to be generating losses for US tax purposes in the near future. Under current accounting guidance, however, these losses don't generate current tax benefits because the realization of such benefit is uncertain. Accordingly, we provide evaluation allowance. Specifically, we reserve against such amounts. The 2009 tax benefit reflected in our quarterly income statement results primarily from the normal reversal of deferred tax liabilities.

Please turn to slide nine for a discussion of the balance sheet. As discussed on the last earnings call, the Company adopted Accounting Standard 161 in the first quarter of 2009, requiring additional derivative instrument disclosure on a perspective basis. Accordingly, review the presentation of our derivatives and related collateral and recorded these balances as either an asset or liability, further categorized as current or non-current, starting in March 2009. Variances in the other current assets and non-current asset line items are primarily the result of these revised presentations. Investments in affiliated companies increased by $72 million to $170 million at the end of the second quarter of 2009 from $99 million at the end of 2008. This increase resulted from the Company's $64 million share of the favorable mark-to-market movement on interest rate swaps held by our LNG and FSO joint ventures and a $10 million increase in our investment in the FSO joint venture. This increase related to the sale of the TI Africa to the joint venture and interim funding of conversion costs for the two ULCs being converted by this JV.

Please turn to slide 10 for discussion of our cost management efforts. As Morten indicated in his opening remarks, cost management, both on shore and at sea are taking hold. Our general and administrative expenses decreased by more than $5 million to $29 million in the second quarter of 2009, from $34.5 million in the second quarter of 2008. This decrease results from our previously announced Company-wide cost control efforts and was driven primarily by reductions of $3.3 million in compensation and benefits for shore side staff, $1.5 million from lower consulting and travel and entertainment expenses and $1 million in savings in other discretionary spend categories. Partially offset by $1 million in increased legal costs. Our general and administrative expenses for the six months ended 2009 were $56.4. million, 21% lower than those reported in 2008. The decrease is primarily the result of lower compensation and benefits for shore based staff of $9.6 million, lower travel and entertainment expenses of $1.8 million and other reductions in various areas of discretionary spend of $2 million.

Regarding our fleet-operating expenditures, vessel expenses decreased by $8 million to $70 million from $78 million in the second quarter of 2008 as a result of the renegotiation to market terms of the technical management fees paid by DHT Maritime. Under the current arrangement, there is a full pass-through of all expenses incurred on the seven original vessels chartered in from DHT and accordingly, OSG no longer subsidizes any portion of the vessel expenses, as was the case during 2008. The impact for the quarter is $2.3 million and year-to-date is $4.8 million, which is also incorporated in to our annual guidance found in the appendix of this presentation. Additionally, we incurred lower vessel expenses amounting to $3.1 million on our older single-hull handy size product carriers, the last of which redelivers this month. There were further reductions in OpEx of $4.1 million in the US Flag segment, essentially all of which related to crew expenses following the layup of five US Flag vessels during the second quarter of 2009. Contract negotiations are underway with a number of our major fleet vendors, and we believe that those efforts will achieve savings, principally in crude oil contracts, stores and spares and fleet services. These savings have been reflected in the updated guidance later in this presentation. Despite the recent upward pressure in crew costs, current expectations are that crew costs should remain relatively flat over the next two years. Please turn to the slide -- slide 11 for discussion of debt covenants.

Our credit facilities in our amortization profile, as well as our underlying debt covenants, will be briefly discussed here. Our primary credit facility is a $1.8 billion unsecured revolving credit agreement priced at LIBOR plus 70 basis points, a fair bit better than market today. We have the ability under this facility to incur additional indebtedness of $2.7 billion for the acquisition of new assets, the ability to incur secured indebtedness of $1. billion on existing assets and the ability to suffer losses of $1.4 billion before we violate any covenant. Our financial covenants are uniform across all facilities and debt amortization remains at a manageable $30 million to $33 million per year through 2011. The combination of these factors allows us to respond quickly and decisively to any desirable opportunity. Even subjecting OSG to a stress test scenario, calculated by employing 2002's decade low annual TCE rates for the period through 2011 does not subject OSG to risk. We don't violate any of our covenants and at the end of 2011, we would still have the ability to incur additional indebtedness of $1.4 billion. Now instead, if we were to use the 10 year average TCE rates, 1998 through 2007, 2008 being excluded for these purposes since TCE rates were considered abnormally high during that period, we would have the ability at the end of 2011 to incur $2.9 billion worth of additional indebtedness to acquire new assets.

The message is really quite straightforward. We do better than simply survive during a trough rate scenario, and we are financially strong and flexible if we were to enjoy 10 year rates. As a final point, on slide 15 of the appendix, you will see that we have lowered our full year guidance on vessel expenses to a rage of $290 million to $310 million down from a range of $300 million to $320 million, due in part to our operating expense controls. Charter hire expense guidance is being lowered to a rage of $400 million to $420 million from a rage of $405 million to $425 million, resulting primarily from a lower estimate for profit sharing obligations. And we also expect G&A to be towards the lower end of the range of $120 million to $125 million, and we have lowered interest expense guidance to a range of $40 million to $50 million from a range of $45 million to $55 million, reflecting the lower market interest rates we are seeing. Now we'll open up the call to questions. Operator?

Yes, thank you. (Operator Instructions). Our first question comes from the line of Jonathan Chappell with JPMorgan. Go ahead, sir.

Thank you. Good morning, guys. Morten, on the opportunity front, one of the first things you said was you were seeing some distressed opportunities. I know you can't speak specifically about any opportunity, but on a general basis, are you starting to see some of these things coming from the banks directly? And also, what in your mind, makes something a distressed asset sales? Are these values down 20% to 30% from the last "market values"? Or it is just the -- what makes it distressed in your mind?

It's really two things. One is if the opportunity is being brought to you by a bank or a bank is forcing the owner to do something or secondly, with the shipyard is sitting with a defaulted contract and may be subsidizing the price at which they'll sell you the ship with the deposit that the defaulting owner has left behind. And we have started to see situations like that in the last few weeks, and we are, as we should do, looking at them and evaluating them.

So in your opinion, are the banks going to get more aggressive on owners in the near future?

I -- as asset values continue to fall, as the banking markets remain completely plugged up, my expectation is that yes, that is the case.

Okay. Another opinion question for you. You have been speaking a lot of the phase out of the single hulls and how you think that the single halls will be at least economically not feasible in 2010, yet the scrapping year-to-date has really paled in comparison to last year's strong earnings year. With the lack of strapping so far, what do you think owners are thinking keeping these ships in operation? And does this change your view at all about single hulls being able to operate past next year?

Our view on the single hull phase out is unchanged. We think the commercial market is going to eliminate it even if the regulatory market gives it some flexibility. And as regard to tankers, those markets that take a lot of single hulls today that are important, China and Japan, we don't believe will be taking them after 2010. That is also the case with Korea, and certainly the case with all big oil majors now. So we are very comfortable and that is unchanged.

Okay, and then finally, now that you will eventually be taking OSG America back under the full ownership, just a couple of questions there, quick ones. What are the capital commitments for OSG America going forward? And also, are there any related write downs to the OSG America fleet that you are expecting?

The -- right now OSG America has the option to acquire two ATVs and has the option to acquire the shares of an entity which today bare boats in a number of product tankers from the OCER entities. The capital commitments are inherently negotiated in accordance with the terms of the partnership agreement and will involve discussion between the conflicts committee and the general partner.

Okay. And write downs -- you don't see anything on that front yet?

Nothing.

Okay. Great. Thank you, Morten and Myles.

And our next question comes from the line of Gregory Lewis with Credit Suisse. Go ahead.

Yes, thank you, and good morning. Just a follow-up on the OSG America transaction. How did you derive the $8 tender price? Is that based upon EBITDA calculation?

There will be a tender document that's filed with the SEC. As part of that tendered document, there will be a full discretion on valuation. There is an independent conflicts committee that's established to evaluate and potentially comment on that offer, but you'll see the full disclosure in the document filed with the SEC.

Okay. Great, and just to follow up on the OSG America fleet. It looked like one vessel went back into service on the grain trade. In the release you mentioned that there is three vessels that remain in lay-up. Is there any opportunity for any of those vessels to move in to the grain trade?

I'll have Captain Johnson answer that.

As of right now, the vessel you're talking about is the Pugent Sound. It's going to be about a 85 day voyage carrying grain into East Africa. Right now, the grain markets are all so slow. So we are constantly looking at all of the opportunities to take grain, but right now, the government program that these vessels participate in are waiting for the next budget cycle.

Greg, remember also, there is a qualifying income consideration, so no more than 10% of the income can come from the transport of non-commodity type petroleum products.

Okay, so it sounds like you expect those vessels to remain laid up?

At the moment, yes.

Okay, great. And then real quick, you did the switch where you took two LR1 product tankers and new buildings and you swapped those out for I guess two new MR new buildings and a chartered in MR new building. Was that sort of a strategic decision because you think that the MR product fleet offers more opportunities than the LR1 product fleet?

This is Lois Zabrocky. Essentially, our largest vehicle that we have developed to generate our most premiums is in the MR sector. We do still believe in the LR markets, but some of the refineries in the AG have been delayed coming online. So it gives us a nice opportunity to both rebuild our fleet and maximize our return.

Okay. Thank you very much.

Thanks, Greg.

And our next question comes from the line of Scott Berk with Oppenheimer. Go ahead.

Good morning, guys.

Good morning, Scott.

As -- very impressed with the cost control exhibited for the quarter, specifically within charter hire expense and operating expenses. It looked like based on the new guidance range that those costs could potentially go up in the third and fourth quarters. Am I reading that right? Or can we kind of expect flat costs for the rest of the year?

You can expect relatively flat costs for the remainder of the year. Charter hire, of course, is largely attributable to a reduced profit-sharing entitlement under those charters that have that has a condition of the charter. Saying that, one of the nice things about having a flexible charter portfolio is the vessels that we have returned are -- were at rates that are above the current spot market. So I would say, certainly on charter hire, you could expect us to continue at these levels. The same should be true on OpEx, and you saw the guidance on G&A, we're at the lower end of that range.

Okay. And then looking out into 2010, if we see day rates start to improve, how much of those costs -- do you discuss permanent versus -- I forget exactly what you called it, permanent versus temporary cost reductions. How much of those costs would come back on the fleet in 2010? I'm sorry?

Are we discussing operating expenses?

Yes, operating and charter hire, actually.

Well, the charter hire I'm going to have to give you offline. Because you'll need to tell me what you assume the rates are, because a large component of that is profit sharing, and we certainly could calculate with your insight on the market going forward. All right? I'm happy to do it. As far as operating expenses are concerned, there is a significant portion which is permanent, which really deals with the change in the technical management agreement with DHT maritime, which year-over-year removes an excess of $10 million, so that's a permanent change. Contract negotiations that are underway with a series of vendors, we haven't put a final number on because they are in process, but that will be permanent as opposed to transient in nature. Crude costs, we do expect to remain flat over the next two years, so within a two year time horizon, a permanent change. The only thing that would fall in to the temporary category are any changes in vessel expenses that might have to do with the timing of delivery of spares and stores.

Okay.

The vast majority is permanent.

Okay. Thank you very much.

You bet.

And kind of wanted to ask another question about the OSG America. Did the buying back that business -- obviously at a discount to the price that it IPOed at, did that represent a distressed acquisition in your mind? Or is that mostly too -- well, what kind of -- more color on your reasoning for buying that back.

I think there are a series of reasons inherent in buying it back. Certainly the fundamentals of the marketplace over the next couple of year period have materially changed. The expectation is that the demand that we saw in 2008 -- this is predicated upon an IEA forecast that was done in June doesn't return until 2013. When we did the initial IPO, there were built-in growth expectations, most of which have terminated, particularly in the form of four of the six initial ATBs ordered with Bender. There are difficult credit conditions within the marketplace, and OSG does have, however, $170 million remaining under its revolving credit agreement, but it's fundamentally the challenges in the market and our perception that cash available for distribution will fall well below the minimum quarterly dividend requirement in the balance of 2009 and into 2010.

Okay. And then one final question is about the broader market. We have seen some increased production out of OPEC the last few months, and just wondering if -- but day rates for VLCCs and the other large vessel classes are still dragging along at crash breakeven levels or below. Are you starting to see signs of enough demand to cause improvement near term, say in the third and the fourth quarters, or is it really going to have to wait until 2010 before we start to see real improvements in VLCC?

We have seen a little bit of it pick up -- this is Mats.

Hi.

-- late last couple of days. Today AGE sits around $15,000 a day, which is up from 5 a day. Still not very healthy returns, and I think we're going to have to wait for better fundamentals to have a real good market, but everything is not bad. Everything is not black. Chinese cargos are increasing tremendously in the second quarter, 20%, 25% up compared to the second quarter of last year. We ran some numbers the other day, and the Chinese increase alone represents an increased demand of 23 VOCCs comparing second quarter this year with second quarter last year. So when we get to some normalcy back in the OSCD demand and seeing how phase outs starting to come next year towards the third quarter of next year, our models show that we're back in the reasonable balance again. You have got winter demand, you have got seasonality. We may get to somewhat stronger markets, but the fundamentals are not at all that strong as they were last year at this time.

Okay. Thank you.

Thank you. And our next question comes from the line of Natasha Boyden with Cantor Fitzgerald. Go ahead, please.

Thank you, operator. Good morning, everyone.

Good morning.

Just let me follow up on John's question about acquisitions. You obviously have an attractive balance sheet here. What kind of subsector in particular would you prefer to be in should you actually look to take advantage of distressed sales or even (inaudible) odds?

I think we remain very much committed to the balanced growth, and we think that there will be opportunities in our main segments, in crude, in products, in US Flag or in gas, and that's where we are looking. We have a better chance of executing there. We have technical and commercial platforms that are in place. We will be able to take over a sizable distressed fleet and not have to add a whole lot of expense at OSG. So it will be -- we're going to stick to the areas that we are good at.

Okay. I guess what I was trying to get at it is are you looking more at trying to get VLCCs or Suezmaxes? Is there any area of your fleet that you think needs to be expanded, or what kind of things are you seeing out there in terms of subsector of the vessels? Is there any group in particular, that is more distressed, I guess?

No, I think that we have adequate scale in our all of our operating platforms, perhaps with the exception of Suezmax, and we'll be opportunistic, really across the board there. And that would regard both vessel substitution or distressed sales. So really, look at the segments we're in, and we will be very opportunistic.

Okay. Great. Just a quick question in terms of counter party risk. Obviously, that has been a huge issue in dry bulk and now that rates have come down in tankers, have you had any indication at all that any of your charters may not be able to fulfill their obligations?

None at all, no discussions, and we're pretty comfortable with the group, and we monitor that very closely, and review it with our audit committee and our board, and we'll continue to do so.

Okay, does that also apply your other (inaudible) counter parties?

Mostly on the exchanges, Natasha.

Okay.

We have come counter parties, it's a small amount, and they are very solid names.

Okay, great, that's helpful. Thank you.

We also follow the banks with whom we believe deposits on a regular basis.

Okay. Lastly, I guess expanding a little bit on OSP, can you explain why you still think the long-term fundamentals are attractive versus the diminished expectations over the next 18 months to two years?

Yes Natasha, it's really -- just look at the fleet. As you start looking at the fleet list, you have 17 vessels right now that are non-double hull vessels that are going to have to be leaving the fleet here in the next two or three years. That's under an open date as opposed to the commercial obsolescence that they have dry dock coming. So just looking at the scheduled phase out of the vessels that you have, it's a very attractive picture going out in a couple of years.

Okay. And what is the order book for that?

You mean the existing order book right now?

Yes.

You basically have the vessels that we currently have under contract at OCER --

I think it's total of 23 vessels.

Yes.

Okay, all right. Thank you very much.

And our next question comes from the line of Justine Fisher with Goldman Sachs. Go ahead.

Good morning.

Good morning, Justine.

So you guys are definitely not the only management team that has said that you're looking at distressed opportunities, and if we take that combined with some creative financing that we've heard, it's more from my perspective from dry bulk carriers, but it's really across the board as far as doing private placements for debt issuing preferred in order to buy vessels. So given that there are large companies willing to buy vessels and companies that are willing to undertake creative transactions in order to purchase distressed vessels, how is the credit crunch really leading to that many cancellations? Maybe delays, but are there really that many -- are there really going to be that many cancellations because of tough credit conditions?

I think if you went to the last time the tanker market had the fall that we've had now which was in the early '70s, 30% of the order book ended up being canceled. There are a lot of owners talking about creativity and doing this, that, or the other. A lot of them are dry bulk owners that have just gotten covenant waivers for a year or two, or companies that claim to have lots of fire power and when you add it up, and it really amounts to very little. The number of owners that are out looking for bank capital now for new buildings is way in excess of what the market can deliver, and we all know that the majority of the shipping banks are either keeping their books flat or reducing them, jacking up pricing significantly. Distressed opportunities that's we have seen lately, there have not been a lot of bidders, and the prices are prices that anybody on this call would find attractive. People do not have excess money today. We do have that, but we will be very disciplined about using it. But just based on the ones we have seen which are relatively attractive, there's a lot less money out there chasing deals than what you are hearing in -- from some creative owners.

Okay. Okay. And then along those lines, I know you guys had mentioned at your investor day that you may look to raise additional capital via exit financing or certain debt transactions, that you are evaluating all opportunities. I think you had put a number around $500 million as far as how much you would want to raise. Are you guys still looking to raise that type of cash, and is there any additional color on what market you might look to?

We should be able to update you at the next call on this. We do have a couple of transactions underway. One earlier in the channel towards consummation.

But we have a high confidence level that we're going to be able to achieve that objective.

Okay, and are you guys seeing exiting financing still be reasonably available for -- from Korea and China?

For -- yes, but for quality borrowers. We find that there's a -- that many are applying and few are benefiting.

That's China. Korea does not -- I met with one of the heads in one of the big Korean yards this week, and they do not have a lot of availability, because the Korean -- the western banks are full up with their Korean exposure and the marginal funding costs for (inaudible) for example, makes their money uncompetitive.

Super. Thanks a lot.

And our next question comes from the line of Daniel Berke with Clarkson, Johnson, Rice & Company. Go ahead, sir.

Good morning.

Good morning.

I had a specific question on the product carrier order book adjustment. On the chartered end MR, how long is that bare boat in charter? And is the yard, then, the counter party?

The yard has its own shipping company set up, so it's their shipping division. That's the counter party, and the bare boat is for five years.

Okay nd presumably it's that that we are currently seeing at market.

It's an attractive level, and it does have purchase options available as well that are exercisable after year three.

Great, and then a financial question, it looked like for the first two quarters of 2009, you have been pretty successful at sourcing cash from working capital, could you talk about some of those drivers and is that sustainable, or it is going to reverse over the next second half of the year?

No, we think it is sustainable.

And Myles, any -- what is the primary driver? I can look a little bit closer at the balance sheet, I suppose. But any specific drivers you can pinpoint for me there?

In terms of the maintenance of cash levels?

Yes.

Fundamentally we have very, very manageable capital expenditures. If you just take a look at what our annualized appreciation and interest run even at breakeven and below levels, we continue to generate cash. We have been managing our receivable and payable position very closely with concerted efforts to make certain that we maintain receivable collection within our guidelines, and our payables are just appropriately managed, so it's working capital management I think has become an increased activity for every business these days, so I'm certain that we'll continue to do that.

Great. I appreciate the comment.

And our next question comes from the line of Rob MacKenzie with FBR Capital Markets. Go ahead, sir.

Good morning, guys.

Good morning.

What are the -- my question is around slide five in the presentation, and how we should -- if you can give us any kind of color on how we should think about what has driven the outperformance here and how we can think about modeling that going forward.

I'm going to let Mats and Lois answer that one -- that question. Mats, you go first.

Yes, what you are looking at there is, again, our actuals vis-a-vis a typical market rate based on 50/50 laden and ballast. You see outperforming that typical 50/50 laden ballast model significantly, and you can expect that to continue. We are giving you our laden-- our actual laden ballast percentages on the previous slide. That's one way to do it. You can look at our historical track record. The fact that we have more cargoes than ships with cargo long and asset short is a tremendous benefit, especially in a weak market. Many owners struggle meeting that 50/50 number benchmark number because they are waiting between cargoes, assisting on our cargo portfolios by way of sea weight and very strong relationship with (inaudible) charterers, we don't wait. And by controlling cargoes in one direction, we can very aggressively go after cargoes in the other direction. We can even give discounts to our customers and still make more money. It's even a bigger advantage in a weak market than in a strong one. We also have longer cargo combinations which enables us to hold better in a downturn than not. That pretty much a summary -- you have in our investor day presentation more detail about our cargo systems and how we build it up in each specific segment, who our partners are, who our customers are.

Thank you, that was very helpful.

Yes, from my side, I think this is our favorite topic. It's what we practice every day. Mats says cargo is king. It's another way of saying your customers and cargo is king. If you look at our triangulation this year on the product fleet, it added about $65 per day to our result which is very substantive in these weak markets. And it's something that we do consistently year in and year out. If -- as Mats said, if you look at our track record. So I think that it's a real bright spot in this difficult market environment.

Thank you. (Operator Instructions). And we have a question from the line of Stephen Williams with Simmons. Go ahead, please.

Yes, hi, guys. Just a quick one. I'm wondering if you could repeat something you mentioned earlier that I didn't quite catch. You were talking about an incremental 23 of ALCCs needed to satisfy Chinese demand in Q2. Can you just repeat that?

Yes, that's comparing second quarter actual cargos into China where the second quarter last year and looking at the length of where those cargoes are coming from. You need 23 more Vs to meet that higher number. 18 of those 23 is a result of higher volume into China. The other 5 is a result of longer distance, or a different cargo combination. What is happening is that there's fewer cargos from the AG going west, and that means that fewer owners are able to combine an AG west with a follow on west Africa China cargo. So more and more ships are doing round trip China with Africa voyages, right? So they load in west Africa, and discharge in China, and since they can't get an AG west cargo, they have to balance from China all the way back to west Africa. That is happening more and more, and that means that it takes more ships to meet the Chinese demand.

You also have more ships coming from Venezuela and going forward, Brazil and in the North Sea. So China is diversifying, they are buying more, and they are buying from longer distances, and that helps ton mile demand. There is also a piece of strategic reserve building in this 23 number, so we can't maybe expect the same number to go on forever. Maybe 25% of that. That's just a guess, but call it 25%, maybe increase in Chinese strategic reserve, 75% is true demand increase. But it's very helpful because with the next year single hull phase outs, we are going to see a reduction in our estimates number of Vs available, and if you continue to see this Chinese demand increase, you are going to have balance again in the V market, and that market tends to the driver and affect a lot of what is happening in the other segments as well.

Okay. That's helpful. Thank you.

You're welcome.

And there are no further questions. And I would like to turn the call back over to Mr. Morten Arntzen with any closing remarks. Go ahead, sir.

Well, thank you, very much, for joining us today. Thank you for very good questions, and we look forward to seeing you and speaking to all of you in the coming days. Thank you very much