Octave Specialty Group Inc (OSG) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Overseas Shipholding Group third 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).

I would now like to turn the conference over to our host, Mr. Jim Edelson, General Counsel. Please go ahead, sir.

Thank you. Before we start let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects including the outlook for tanker and articulated tug barge markets; changing oil trading patterns; anticipated levels of new building and scrapping; prospects for certain strategic alliances and investments; estimated TCE rates achieved for the fourth quarter of 2009 and estimated TCE rates for 2010; projected scheduled dry-dock and off-hire days for the fourth quarter of 2009; timely delivery of new buildings and conversion of vessels in accordance with contractual terms; OSG's intention to tender the outstanding common units of OSG America; the sustainability of OSG's dividend; projected lock-in charter revenue and lock-in time charter days for 2009 and thereafter; estimated revenue expense items for 2009; levels of equity income, other income, taxes and capital expenditures for 2009; prospects of OSG's strategy of being a market leader in the segments in which it competes; the projected growth of the world tanker fleet and forecast of world economic activity and 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 and other reports OSG files with the Securities and Exchange Commission.

For this conference call, we have prepared and posted on OSG's Website supporting slides that supplement our prepared remarks. This supporting presentation can be viewed and downloaded from the Investor Relations 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 members that are with me here in New York. You've already heard from Jim. Myles Itkin, our Chief Financial Officer; Mats Berglund, head of our Crude SBU; Lois Zabrocky, head of our Products SBU; Marc La Monte, head of our Gas SBU; Jennifer Schlueter, head of Investor Relations and Corporate Communications; and Captain Robert Johnston joins us from Tampa. He is head of our US Flag SBU.

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

Results for the third quarter of 2009 were significantly below third quarter levels last year. As you all know, the tanker markets during the third quarter were very challenging.

Quarter-over-quarter, TCE revenues were down 52% to $207 million, driven by a decline in spot rates across all international flag markets. Year-to-date, TCE revenues were $749 million, down 37% for the comparable period a year ago.

EBITDA declined 88% to $30 million in the third quarter. Year-to-date EBITDA was $250 million, down 57% from the year before.

Net loss for the quarter was approximately $20 million, the per-share loss was $0.73. Excluding special items in the quarter which included a gain recognized on the termination of a time charter contract offset by impairment charges taken on two of our older US Flag vessels and other items, third quarter loss was $0.98 per share, better than Street expectations.

While the financial results were disappointing on an absolute basis, on a relative basis, we commercially outperformed average rates in each of our asset classes which you will see later in the presentation. Please turn to page 4.

In markets like today, we are focused on managing what is in our control in order to improve the business today and for the future. We continue to focus globally on cost-cutting efforts. This is a day-to-day fixation for everyone here at OSG.

We have been and will continue to manage all aspects of discretionary spend. While we never scrimp on client care, safety or environmental performance, everything else, everything else -- from replacement headcount requisitions which must be justified and approved at the highest levels of the organization, to negotiating better terms with all of our vendors -- everything is getting a hard look.

I am satisfied with the progress we have made. Year-to-date G&A is down 19% and I'm confident that we will beat our 2009 guidance.

We are now in the 2010 budget process and I have challenged all divisions to do more in this area. Myles will go into detail later in the call.

We continue to actively manage our order book and continue to make progress. This quarter, we added the Overseas Skopelos which delivered this morning in South Korea the first owned new build MR added in five years, as Lois continues to modernize our core MR fleet.

Working with the same yard, we accelerated payments in the third quarter as a concession for price modifications on two additional new buildings. We have the flexibility and the financial wherewithal to do this.

Turning to the banking market, while there was some credit availability out there for those that don't need it, the shipping finance markets are effectively closed for new business. We expect this to continue through at least the next year and believe that it will have a profound impact on many companies and on the world's new building order book. Thus, our newly minted $389 million facility with CEXIM is particularly notable.

Our relationship with CEXIM started in 2007 when we put together a framework for up to $800 million -- a framework that was never finalized. The new $389 million facility is tied to the five tankers we are building in China, two of which have already delivered.

We drew down $299 million under this 12-year loan facility at rates and a maturity that are considerably better than we could achieve by tapping the high-yield market today as some of our competitors are being forced to do.

Turn to slide 5, please. A core part of OSG's balanced growth strategy is participation in commercial pools. As we have said in the past, this is a critical ingredient in outperforming in markets like we're seeing today. Pools give us scale. Scale gives us the ability to build cargo systems in key geographical areas. Cargo systems enable us to triangulate voyages which leads to higher utilization. This results in outperforming.

In the first nine months of 2009, our commercial pools achieved far better than 50-50 utilization. Tankers International, our VLCC pool utilization, was 62%, up from 59% we reported in the first half of 2009; Aframax International, 63% utilization; Panamax International, 61%; and Clean Products International, our MR Product Carrier pool, was 71%.

We have built cargo systems with core customers on the VLCC side with [Unitech]. On the Aframax side, with [PDV Citgo] and on the Panamax side with [Flow-tech]. Our core crude triangulation [phases] are built around West Africa and China, the Atlantic Basin and the West Coast Americas, specifically Ecuador North. We believe we have more cargo contracts than any other competitor which is a key advantage and what we will carry with us in the future.

Turn to page 6, please. The numbers speak for themselves. In the third quarter we outperformed the benchmarks by $15,777 a day on the VLCC side; $4,500 a day in Suezmax's; $5,760 a day in Aframax's; $5,798 a day in Panamax's; and a whopping $8,766 a day in MR's. These numbers are a testimony to the strength of our commercial platform.

Please turn to slide 7. Despite all the turmoil the world markets have seen in the last year -- stock markets, the credit market, and shipping markets -- OSG has not only weathered the storm, our conservative financial management is enabling us to build a stronger company with a more modern fleet.

Looking at the key numbers, since the second quarter 2009 levels cash and short-term deposits up $62 million to $633 million. Total credit availability is up $100 million to $1.2 billion from $1.1 billion at June 30. Liquidity is up $100 million to $1.9 billion from $1.8 billion last quarter.

On the other hand, commitments on construction contracts have declined by $140 million to $495 million since June 30. Let me repeat for emphasis. At the same time as we decreased our construction commitments by $140 million, we materially increased our cash levels and total liquidity.

And finally our current $1.75 annual dividend is sustainable, given the strength of OSG's financial position.

So what can you expect from OSG next year? More of the same.

On the tender for the shares of OSG America that we don't own, we expect to commence the tender offer this week and are in the process of finalizing the documentation. We will continue to focus on cost management in areas where we have a direct control. We will continue to closely manage key projects in our order book delivering high-quality vessels.

Our [vestors] can expect continued conservative financial management and prudent capital allocation decisions. And we will continue prioritizing top quality service for our core customers and not sacrifice on quality, safety or environmental performance despite the challenging times we are in.

As I have said many times, OSG is well-positioned to prosper when freight markets rebound.

As we head into 2010, we expect a combination of the single hull tanker phaseout, slippage and cancellation in the order book and an improving world economy to lift tanker rates above the levels we have seen the last two quarters and in the beginning of the fourth quarter. Cancellations, deferrals and slippage in new building order book are increasing.

Though you won't see much of it in the reported numbers yet, we expect to see significantly more order book [destruction] and postponement in the next six months as yards, banks and owners deal with the twin realities of stagnant shipping loan markets and poor freight markets. The long-term outlook for our industry is improving with each month as a result.

That concludes my remarks. Let me turn the call now over to Myles and then we'll take your questions.

Thank you, Morten, and good morning. Please turn to slide 8 for a discussion of selected items on the income statement.

Quarterly revenue reflects downward pressure on spot rates across all of our segments resulting from a 1.6% (technical difficulties) reduction in worldwide oil demand for the third quarter, a 2.5% reduction year-to-date, and an 8% increase in the supply of vessels. Yet we have outperformed our competitors, often materially, based on the contract cover enjoyed by our pools, resulting in superior vessel utilization as well as fixed charter revenue coverage in both physical and paper markets.

Vessel expenses decreased by $13 million to $66 million from $79 million in the third quarter of 2008. $10 million of this savings is attributable to the net reduction of owned and bareboat chartered-in days. The remaining $3 million being the result of renegotiating the market terms with technical management fees paid by us -- to us by DHT Maritime.

OSG no longer subsidizes any portion of DHT's vessel expenses as was the case in 2008. Accordingly, we have effectively reduced operating expenses across a number of categories, contained other categories of expenses, and through redelivery of 13 older single hull product carriers eliminated our exposure to the higher cost inherent in operating older vessels.

Charter hire expenses decreased by $22 million due to a decrease in profit share obligations to the owners of our chartered-in vessels. We have also actively managed the size and costs of our chartered-in fleet through redeliveries and in certain cases terminations of contracts due to breach by owners, resulting in a reduction in charter hire expense of $62 million in 2009, $49 million in 2010 and $41 million in 2011.

With the corporate focus on cost management, general and administrative expenses decreased quarter over quarter by $4 million to $28 million. This decrease results from a $1.8 million reduction in compensation and benefits for shore side staff, a $2.6 million decline in consulting, legal and travel and entertainment expenses, and a $1.4 million reduction in other discretionary spend categories.

This $5.8 million in savings was offset by a $1.7 million one-time expense incurred in connection with the expected tender offer for the units of OSG America.

For the nine months ended 2009, general and administrative expenses were $85 million, $20 million lower than those reported in 2008. The decrease is primarily a result of lower compensation and benefits for shore-based staff of $11.4 million; lower consulting, legal and travel and entertainment expenses of $4.4 million; a favorable change in foreign exchange rates that resulted in benefits of $1 million; and other reductions in various areas of discretionary spending totaling $3.4 million.

Of equal importance, we have initiated a G&A process improvement and shared service centralization project which is currently expected to further reduce our G&A cost by a minimum of $5 million per year beginning the second half of 2010.

With regard to the $5.1 million gain reported on shipyard contract termination costs, we have successfully negotiated further reductions with vendors [applicable] to the construction of the ATV units and two tugs previously being constructed at vendor.

As it relates to gain on sale of vessels, we recorded a net gain of approximately $800,000 during the third quarter. This is a product of an early realization of a $13.8 million net deferred gain, triggered by an owners breaching the terms of the charter party and offset by a $12.5 million impairment charge on two US flag vessels.

Other income statement items are fully discussed in the callout boxes within the PowerPoint presentation. And I will direct your attention to those for future review.

Please turn to slide 10 for a brief discussion of two new balance sheet line items. The new short-term investment line item consists of time deposits that extend beyond 90 days. The duration of these deposits do not allow them to be categorized as cash or cash equivalents.

Please also note that long-term debt increased due to the 12-year borrowings under our $389 million secured debt agreement with the Export-Import Bank of China, $299 million of which has already been drawn under favorable terms. In September 2009, we deposited $7.9 million in restricted cash to secure the maximum amount available to us under this facility.

You will see that our guidance has been updated. We have lowered guidance on vessel expenses to a range of $280 million to $300 million down from a range of $290 million to $310 million. Depreciation and amortization expenses are also being lowered to a range of $165 million to $185 million, down from a range of $175 million to $195 million -- resulting from changes to timing of dry docks, changes to delivery schedule and the impact of the impairment of the two US flag vessels mentioned earlier. But our hire expense, G&A expense and interest expense guidance all remain unchanged.

To briefly summarize before opening up to questions, cost-cutting efforts and redelivery of 13 vessels, quarter over quarter, resulted in significant reductions in G&A and vessel expenses, down 13% and 16%, respectively.

Since June 30, cash and short-term deposit balances have increased by $62 million to $633 million. Liquidity stands at $1.9 billion and commitments on construction contracts have decreased to $495 million. Together, this affords us the opportunity to weather difficult times and to position ourselves to take advantage of future opportunities.

Now we will open up the call to questions.

(Operator Instructions). Justin Yagerman with Deutsche Bank.

Good morning. This is Mike (inaudible) filling in for Justin Yagerman. Just a couple of quick questions. First are the FSO projects. Can you give a little bit more color on what the major hangup is with the conversion and when you will get a better sense of exactly when those are going to be done?

Yes. Again, when they will be done, we have stated in the disclosure there, right, November 11, we have given delivery notice to our customer for the Asia, the first ship. And the second ship, during the first two months of next year.

Right, but that would need to deliver in early January correct? Before, or else the contract could be terminated?

We are giving ourselves a little room there, but it's in that range. (technical difficulties).

I'm sorry.

It's in that range.

Okay. I guess just generally I guess high-level you guys delivered 13 vessels on a year-over-year basis having delivered. How do you think about resizing your fleet going forward? Are you going to, I guess, focus on letting vessels roll off to downsize your fleet. Or are you going to take advantage of lower rates if possible if you can -- in a time charter vessel in that market not too thin?

I think the first answer is in all our core segments -- crude, our products, US Flag -- we have adequate size to meet the contractual commitments and customer requirements that we have.

Are we going to let expiring time charters roll off if we can replace them with cheaper ones? The answer is yes. And we will look to do that, but there is no pressure on us because of the composition roughly the size -- we have a very modern fleet.

So there's no pressure for us to do that. We will look at opportunities to reduce our charter-in costs when it can happen. We have been doing that consistently.

Right. I guess what I'm getting at is there -- do you have enough visibility to where you would speculatively take on some time charters in at extremely low rates? Or do we not -- do you not have enough visibility to start thinking about that yet?

We are going to act on facts. And I think you're going to see increasing distress across the shipping world in the next six months. We are already seeing that happen and that will result in companies getting into difficulties, yards being stuck with vessels, and they will be looking for creditworthy counterparties with a history of actually paying, not walking away from charters.

I think we will stand out there and we will look at situations as they arise. But like I say, we are in no rush to do it. We can meet all of our contractual requirements. And we will be very disciplined in how we approach that.

That makes sense. I guess just broadly again from a high-level perspective thinking about from the asset side of potential acquisitions and I mean you guys are one of the few people that apparently has access to bank debt.

How do you think about acquisitions going forward and is there one area of the market right now that you think looks more attractive either on the crude or the product side or maybe another area?

No. I still think that we like the core businesses we are in. We want to preserve those positions, build on strength. We think we will see opportunities in all those areas, but there's no need for us to rush anything right now.

And if you go back to the 80s, which was the mid-80s which was the last time you had a situation like this, you really could almost wait until banks and yards have to hand you situations that you help sort them out. We are going to do that. We will act on facts. We are not going to move ahead of the markets actually offering up those possibilities.

We will be disciplined and I am not concerned that we are going to miss opportunities because there's not that many players that can go after opportunities today. So we will take our time, be disciplined, and if and when we do a deal, it will be a good one.

Great. Thanks for the time.

Rob MacKenzie with FBR Capital Markets.

Good morning. Question for you, Morten, I guess on the laden-to-ballast show. You continue to do very well on that front. How do we -- what you see historically in the normal seasonal trend going (technical difficulties)?

I couldn't hear you there.

Sorry. Question was on your laden-to-ballast ratio. What do you see in terms of normal seasonal trends in that stat going from 3Q to 4Q?

We really don't expect much change. But let Mats and Lois tackle it individually.

Okay --.

It's really pretty stable. There is no seasonality to that number on the crude side at least historically. It's been pretty flat but at a high level.

Well, we've seen some increase so far this year in that statistic. What do you attribute that to?

Little [billing], couple of percent percentage up and down is normal what we see. Just better being able to schedule the ships against the cargoes is the variation there.

Okay, fair enough. Next question, I'm going to go back to the FSO question for one second. And since the FSO Africa, I think, was supposed to commence service on September 21, have you guys accumulated any liquidated damages for that yet?

We have a claim on liquidated damages against the yard, but it's really not dramatic or significant in the context of the costs there.

Right and you also potentially had claims from -- MOQ against you guys as well for those?

Correct.

And how do you think about --? Clearly it seems like the Asia is going to deliver on time. What can you share with us about your conversations with Maersk Oil Qatar about how they view a late delivery of the Africa and how do you think that might impact the overall project economics for OSG?

Well, we think that both the episodes will no doubt end up at this field. We do not think that Maersk will cancel us even if we should be later than January 19 on the Africa, which gives Maersk that right.

The episodes are built as a totally integrated part to the field expansion there. Maersk is investing some $6 billion; they will work as a hotel. There's room for 90 people on board. They will work as an airport, we can refuel helicopters.

Secondly, their capacity is unique. Right? Together the two FSOs at 6 million barrels. That's equivalent to three VLCCs.

So if they don't use ours which are the only double hull ULCCs in the world, they have got to get three of everything -- three VLCCs, three loading systems, three offloading systems. It's a different arrangement for MOQ.

I understand. I guess my question is more around they are going to have some leverage, if you will, if the later delivery date is not met. Have you had many conversations with them about amending contract terms that might impact the economics of the project as opposed to (multiple speakers)?

I think you know very well that any discussions we have on contracts and terms with MOQ are under strict confidentiality agreements and we would be betraying those if we -- violating those if we were to say anything. I think Mats has given you a very good assessment of the situation.

Okay, thanks, Morten. And then just wondering, I guess, going back to Justin's question again. On opportunities for chartering in at low rates, from a different perspective, I'd like to ask the question what percentage of your fleet perhaps when you think of it as a portfolio might you be comfortable chartering in for some term at these rates?

We have been fairly flexible on that. And I think one of the reasons that we are in such strong position today, is if you look back over the last five years we really didn't buy a whole lot of ships because it was a lot cheaper to charter them in and we took advantage of that. Both direct charters in as well as sales charter back.

As we now move into a different world, a world which there hasn't been a new building order in maybe yards for over a year, owning the vessels may become more attractive. We will be -- continue to be very flexible on that and we're as comfortable with having 50% of our ships unchartered. We can be comfortable with 60%. We can be comfortable with 40%.

We will look at the ownership cost of controlling modern tonnage and that will drive our decision.

Thanks. I will turn it back.

Scott Burk with Oppenheimer.

Good morning. I wanted to ask a couple questions about the Chinese facility. Congrats on getting that.

I just wondered, you drew down $299 million immediately. Did you need that for progress payments or did that substitute for another facility you already had in place?

As you know, we have a substantial level of unsecured availability. There were two vessels that had previously delivered that were part and parcel of that facility. So we drew down against those as well as a certain level of prior progress [payments].

Okay. And just -- so I guess the -- so net net it was in addition to your overall liquidity. And then what other shipping companies might have access to this kind of facility?

There's only one other company that has a bilateral facility with CEXIM and it's Maersk.

Interesting. All right. And then I wanted to follow up on the questions that have been asked about acquisitions. It's interesting that you did buy the one product tanker during the quarter. Was that a special situation there or do you need a few more product tankers to kind of bridge the gap until you start getting your new buildings delivered next year?

We will let Lois tackle that one.

Yes the Overseas Skopelos, the MRs, it is where we have the highest outperformance in our sector. So it is a strategic move. And in addition it continues our efforts with the yard and we have been able to improve the price on two of our four LR1s simultaneously.

Okay so just to understand correctly. You took over that new building from another operator, correct?

No. We bought it from SPP, the yard.

Oh you bought it from the yard and then got a discount on a couple of other LRs. Did you disclose the price that you paid for it?

No, it was a market level.

Okay. So market level. But then if you include the discount on the other two it would potentially be considered below market?

What we've been able to do based on our level of liquidity is work with yards in helping them address any liquidity issues including vessels available for sale that have been defaulted on by other owners. (multiple speakers) deriving a net present value benefit on our total commitment with that yard.

Okay, I see. I guess the other part of my question was, is there any other product tanker needs to -- see, because you've turned back these 13 product tankers and you still have about as a year before you start to receive the bulk of your -- you know, kind of the replacement vessels from the new building fleet. Is there any need between now and then over the next year to buy additional product tankers?

Essentially, as Morten mentioned, we have enough vessels to satisfy our strategic customers. And anything that we do will have to be a very, very good deal in today's marketplace.

Okay. Good. Thanks. And then I guess one other question. This is more kind of a broad industry question, but it has been interesting over the last -- this year to date that Aframaxes have underperformed Suezmaxes and, actually VLCCs have also seemed to underperform a bit, although not as much as last quarter.

Just wondering if there is something structural that is going to make that kind of a continued long-term underperformance for Aframaxes and VLCCs relative to Suezmaxes or can we expect in 2010 those to normalize back to regular -- the differential between the rates of those three different classes?

I think it is going to normalize back. The situation with Aframaxes is that the order book came a little bit earlier, right? If you noticed, the -- the worst is behind us on the Aframaxes. We took -- the segment took a lot of deliveries this year and the remaining order book is down to around 20%, which is much, much lower than the larger segments.

There's a little bit of a timing difference, but we believe it will normalize going forward.

Okay. Great. That's it for me. Oh, actually, I'm sorry, one other question. 50 -- Myles, probably for you -- there was $50 million cash outflow on a short-term investment during the quarter. What was that related to?

It is a four month time deposit and we define cash as anything that is three months or less. We are stretching out the maturity by one month to get a little bit more yield.

Okay. All right. Very good. Thanks.

Jon Chappell with JPMorgan.

Want to talk about the capital structure a little bit more. The 389 you got from [CEXIM] was a good deal, but it is a little bit less than the numbers you were talking about back in May. Are you happy with the way the capital structure sits now? Are there still more facilities that you would like to get to, just to improve your position in case the recovery is pushed back a little bit more or to take advantage of opportunities?

We are in the midst of evaluating a series of additional facilities. The ECA financing, Title 11 program through the US government which provides for a 25-year financing, government guarantee, 87.5% advance rates at very favorable terms and conditions. Aggregate size of that facility should be in the $400 million to $500 million area.

We are having further discussions in terms of creating availability, additional availability with CEXIM as well as having some discussions concerning various other forms of ECA financing.

So in aggregate, the material level of additional facilities, longer-term structures that have been typically available from ship finance banks, at least today, and evaluating a number of alternatives from [cap lease] structures to the extent that they may exist to other forms of sale leaseback activity.

So your availability or your ability to get access to that type of capital which may be others in the peer (inaudible), would that preclude you from looking at other options such as high-yield deals or even straight equity?

No. It doesn't preclude doing it at all and as we are evaluating the appropriate structures, we look forward and as we start to assess opportunities that we may want to take advantage of.

I'd just emphasize, Jon, that in our case we do not have any covenant problems. We are not going to be forced in any particular market to satisfy -- to maintain compliance with loan covenants. We won't go into the high-yield market because we have to. We will assess on a regular basis all of the markets and try to choose those that are most advantageous.

And it is usually those companies that don't need funding that are able to get it and get it on favorable terms and that is the case here. But we intend to continue to build our -- and stretch out our capital structure.

Yes, I mean we are looking both in terms of extending duration and making sure that rates are contained.

Great. If I can get a little bit more explanation, too, on page 5, the cargo systems and triangulation. Not the seasonality of it, but actually are there contract of afreightments involved with these? Is there something where the timing might shift where if you can't recharter or make new agreements with the charters that that premium that you are earning over the market rates could flip at some point?

I don't think so. You know our relationships here are long and well-established and we make sure we service our customers well. And again this is a win/win arrangement, right? What the customers get here is reliability, repetitiveness; ships and captains and crews have been through the terminals and facilities before. We do not see this changing. So it's --.

Jonathan, from a product side, part of our performance there has been consistent -- consistently loading palm oil and repositioning all of our new billings as well as Mats says, you know chartering the right cargoes and putting them together. And if you go back several quarters, we have been able to consistently add that lease without (inaudible) ratio and I think we can maintain that going forward.

If there is a difference looking forward, because of the cargo systems we can't always take advantage of short-term storage opportunities and, though, while we think there will always be storage opportunities in the tanker space, they won't be forever on the levels we have now.

But our cargo systems will go forward. That is something that is within our control provided we continue to service, whereas the ability to access short-term storage at better rates is something the market determines for you.

Right. One last one. As the time charter coverage slips on the Jones Act to about 55% next year, obviously this is a market where we don't have the same transparency as the international stuff. What realistically can we expect from the ships that roll off charter? I mean are they going to be rechartered on short-term contracts at rates that are 10 to 15% below the current contracts? Is it more meaningful than that? Is there a potential for short-term spot trade. Or is there really no spot in the Jones Act business?

Bob, do you want to take that?

Yes, sure, Jon. As they start rolling off, I think that -- number one -- there is a spot market. There's a spot market today and certainly as they start rolling off there will be continuous spot markets. So what I would see is short-term, you will see them in the spot market, but the intention of the Jones Act, it is still a long-term business and we will do what we can to keep them back on term business. (multiple speakers)

Any sense to where the market is today on term business versus where the heritage contracts are signed at?

Right now the spot -- I'm sorry -- the term market right now is not good. In fact it is very difficult. If you were to put the ship in the term market right now, try to get a term contract right now the vessels that are coming off are going in the spot market. Just that we are even seeing oil companies that have ships under long-term contract in the spot market themselves because they're having difficulty moving and fulfilling their own programs.

So in effect you have a situation today where actually time chartered vessels are in the spot market competing against normal spot players.

Okay.

You can see from the results that the vessels that we've put out on charter, the product carriers and basically although the vessels were delivering in subsequent periods, many of the contracts were entered into in 2006, in the mid-40s to low 50s. Today they would be in the mid-30s at best.

Very helpful. Glad to get everyone involved. Thanks to everybody.

Daniel Burke with Clarkson Johnson Rice.

Most things have been touched on. I did want to talk about time charter-in commitments. Did I hear correctly that you've reduced those figures by $49 million in 2010 and $41 million in 2011? Was that correct?

Yes, what we talked about was taking out $49 million in 2010, $41 million in 2011; it was $62 million in 2009.

Okay and I guess the Samho Crown is identified as one of those vessels. Could you maybe talk about how you were able to work through the cancellation of some of those charter-ins, whether the Crown or others?

Well in the case of Crown, the owner changed to ship manager which they did not have the right to do under the contract and hence we had the right to terminate the charter. Can't comment on the others because many of the charters are running out. And there's also profit piece of the charter hire that goes away when rates are lower.

There were vessels to be chartered from yards that fell outside of the accepted delivery window and consequently we had termination options to exercise those options as well. We just actively managed that charter in the portfolio.

Thanks. That's helpful. It sounds like it's not so much that there were other existing charter-ins also canceled, but there may be some new ones set to be added on are not going to occur?

Yes.

And then the only one I have left as well -- actually I guess I have two left. But the quick and practical one, is there a way to get the FFA position realization for Q3?

(inaudible) reported numbers.

Reported numbers, yes.

It's in the fixed rate schedule.

Okay, we are back to reporting it that way. Okay, thanks.

And maybe one last one, Mats, or more broadly, I appreciated the comments on expecting that the 2010 market will look better, but was wondering if maybe we could get some comments on how the VLCCs look headed into winter here? There has been a little bit of a nudge up to the rate environment, but was wondering what you feel about Q4 and Q1 '10 specifically?

Rates have come up a little bit. You know, V rates are around $30,000 per day right now, a little bit below [AGEs], but higher than that in West Africa. And we believe that's the result of a couple of different things going on at the same time.

Chinese demand is very strong. If [D8] covers into China in October, 55 in September, that's more than 20% up compared to last year. So very strong Chinese demand is number one.

But, secondly, you still have a lot of storage going on. We count 40 ships today, actually a few of them are coming off shortly, but between 30 and 40 Vs on storage. And storage, we believe, will keep going there in the short term.

Then you have got slow steaming and everybody, almost everybody is doing it now. We do it a lot. And I think that's the thing that will stay. You know with high bunker prices and medium or low freight rates, slow steaming is a no-brainer. And you know if normal speed is 1450 knots and you slow down only one knot, that's 7%, right, of the fleet.

And we are certainly slow steaming. Not one knot, but two, three, four knots on the ballast leg and maybe one or one and a half on the laden leg. You combine these three factors and actually it calls for a fairly tight market.

The underlying fundamental is not good. Right, we have too many ships right now. But you take a few of these factors into account. That is what is causing rates to be at this level which -- three times the operating cost is not bad for being in the economic situation we are in. And with demand coming back, no, I think it doesn't look that bad.

We think 2010 will be a tough year, but right now you've got $30,000 today. And we think that will stay in the short term. We don't see any overhang of ships in the real short term at least. But you know more ships delivers from the yards. We are going to head into 2010 when we start to see the [takes] out of single hull tankers.

Great. I really appreciate the commentary.

(Operator Instructions). Justine Fisher with Goldman Sachs.

Good morning. So I think, Morten, you had spoken earlier about how companies that have had issues with their banks previously in terms of covenants, etc., may not have as easy access to financing as OSG, but it seems as though that's the norm. It's become the norm even for large shipping companies to have to amend covenants.

So have you seen -- have you I guess heard even anecdotally of any stories of larger companies that did want to do deals, but banks said we'd rather not lend to you period, because you are paying us more now for your previous loan? Have you heard of stories of that happening?

Most companies if you wanted to order a new building today and asked the bank to commit to financing it down the road, the answer will be don't even bother to call.

Yes, but it --.

If you had done finance new buildings and you went in and asked for it, the likely response will be the same. If you are part of an existing syndicate, where it's in the interest of the banks to restructure to help you, they are there to help you. But what has been happening is that yards have been postponing orders, not disclosing that. They have been very tough on contract terms.

So we met with an owner here last week who has postponed three Suezmaxes from 2010 and 2011 to 2012 and 2013. They're being postponed at the same prices as was entered into. Now those are in the order book. I call those zombie orders. It's an option on the part of the owner to build the vessel at the price that he originally contracted and so the yard doesn't have to say it's canceled today and the owner doesn't have to say it's cancelled today.

But those ships will get built if and only if the market really picks up both earnings and new buildings and the bank market. And there's a lot more of that. There's one owner, while I won't discuss the yard, they have in the order book from one owner an order for somewhere between 20 -- 10 and 20 product tankers of a certain size. That order has been taken off the yard's book, but still appears in the numbers you'll see from Clarkston and others.

So what you are really -- what you're reading -- you are not reading much about it in the paper because everybody is acting confidentially. But what is happening out there is there is an awful lot of postponement, cancellations and a zombie order is a zombie order. And I think it is a good expression for it.

But --

(multiple speakers) the vast majority of banks have indicated that they are contracting their shipping portfolio and that while there are core relationship clients to whom which they will consider extending funds, they are both redefining what constitutes a core client and also emphasizing in some cases clients where they have material additional levels of exposure. So that a failure to provide incremental funding could jeopardize that which they have today.

But inherently, you know, contraction is the rule of the game. They're -- on a number of occasions I've been told by a good number of banks that they are doing nothing for the balance of this year followed by the statement, but then again how different this next year a bank may be from this year.

So contraction is more common than additional providing of credit. Durations for loans are shorter rather than longer spreads. You know, remain quite high and you are not seeing a return of liquidity to the market yet.

So it seems -- I mean I'm not surprised that banks don't want to finance new builds, especially for certain customers who they don't think may be able to meet their part of the bargain. But it does seem that if there was a new build that couldn't be financed, kind of like the product carrier that you guys took on, then the banks will go to those core customers and extend credit to that because that is advantageous for the banks to do.

It's in limited amounts. You would think, given the condition of the ship finance market today, that it would almost be the optimal time that banks had liquidity to extend financing because vessel values have declined. So loan to value ratios will be low and margins have increased.

So while it's -- each of the banks recognizes it as being kind of a great time to do it, the limitations on liquidity have not permitted them to do nearly any amount that they would like to.

Great. Thanks very much.

Stephen Williams with Simmons.

Thank you. A quick follow-up on the comments earlier on the effects of the -- on the market of slow steaming. There's probably not a simple answer to this, but just generally, at what earnings level, assuming bunker prices stay the same, do you add back that one knot of transit speed and effectively add another 7% of supply capacity into the market?

It is financially rewarding to slow steam with the current bunker price of $450 a ton. I think it's $70,000 per day, $65,000 per day -- that level. Below that level it's rewarding to slow steam. It is a no-brainer. You know at $30,000, $40,000 per day, and even at higher rates, owners still benefit from slow steaming.

That's helpful. Thank you. And just one more quickly on the market in general. I guess, given that rates are fairly subdued still and there's a lot of capacity around, all these single hull tankers haven't been scrapped yet and are still trading. Are they seeing decent levels of utilization or are they sitting idle most of the time?

They are waiting a lot on the Vs. You know there are 70, 80 still around are [waiting] significantly more than the other ships. And they only have one trade lane open to them, right, which is primarily now into Thailand and India and Taiwan as well.

The Koreans are stopping, the Chinese have already stopped. The Japanese too, etc., and opportunities are getting fewer, fewer and fewer there.

And if that is the case does the arrival of 2010 and the fact that these might be completely taken out of the market, does that really have much impact?

It does. 60, 70 ships although they have a bit more waiting, it's a big impact.

If you took all of those ships out, it means that you would have negative growth in the VLCC fleet next year.

Okay. (multiple speakers)

Better environment than what we've seen this year.

That was helpful. Thank you.

Mr. Arntzen, there are no further questions at this time. Please continue with any closing remarks you may have.

Thank you very much for joining us. If anybody has specific questions feel free to call me or Jennifer Schlueter or Myles Itkin. We are happy to take your questions and appreciate you joining us today. Have a good afternoon.

Ladies and gentlemen, this concludes the Overseas Shipholding Group third quarter 2009 earnings conference call. Thank you for your participation. You may now disconnect.