Octave Specialty Group Inc (OSG) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Overseas Shipholding Group Inc. fiscal 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, Monday, March 1, 2010.

I would now like to turn the conference over to General Counsel, Mr. Jim Edelson. 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 tub barge markets; changing oil trading patterns; anticipated levels of newbuilding and scrapping, prospects for certain strategic alliances and investments; estimated TCE rates achieved through the first quarter of 2010 and estimated TCE rates for the second, third, and fourth quarters of 2010; projected scheduled drydock and off-hire days for each quarter of 2010; timely delivery of newbuildings and conversion of vessels in accordance with contractual terms; the outcome of OSG's negotiations with Maersk Oil Qatar; the sustainability of OSG's dividend; projected locked in charter revenues and locked in time charter days for 2010 and thereafter; estimated revenue and expense items for 2010; levels of equity income, other income, taxes, and capital expenditures for 2010; 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 the forecast of world economic activity and oil demand.

Forward-looking statements are subject to a number of risks, uncertainties, and assumptions, many of which are beyond the control of OSG, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. Factors, risks, and uncertainties that could cause 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 2009 and the 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. 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 over the call 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 here with me in New York -- Myles Itkin, our Chief Financial Officer; Marc La Mont, head of our Gas Strategic Business Unit; Lois Zabrocky, Head of our Product Tanker Strategic Business Unit; Ian Blackley, Head of International Ship Operations; Jennifer Schlueter, Head of Investor Relations and Corporate Communications; Jim Edelson, our General Counsel; and [Jerry Miller], our Corporate Controller.

As Jim indicated, our marks today will follow a presentation that is posted on our website so if you would now please turn to slide three.

As this is our first earnings call in 2010 I would like to begin by celebrating that 2009 is behind us. As I reflect on last year there is no doubt it was one of the most challenging of my 30-year career. On many of our previous earnings calls I have highlighted that one of the main reasons we have always followed a conservative financial strategy is that shipping always throws surprises at you.

I don't think anyone listening to day needs to be reminded about the perfect storm of surprises that over the last 18 months have brought our industry to where it is today. Shipping is a volatile business. It always has been and always will be. The key has always been to be prepared for the unexpected rather than be overwhelmed by it, and thanks to the way we run the Company we weathered the storm just fine.

What I can say with more certainty today than at any time in the last 10 years is that being a public company -- a big, well-capitalized, transparent public company -- in today's market is a real advantage. Companies like OSG that have access to the world's capital markets at more reasonable terms and those that are not dependent on traditional first mortgage bank financing are best positioned to thrive in the new deleveraging world we all compete in.

Companies with solid balance sheets, sound liability structures, and lots of liquidity can take advantage of the opportunities weak markets present. Indeed, I feel better about our relative competitiveness than at any time since I have been at OSG.

Turning now to the financial results, 2009 financial results were down significantly over 2008 across all areas. Revenues of $953 million were down 38% year-over-year, for the quarter down 41% to $203 million. This was driven by spot rate declines in all our vessel categories except US flag [light arena].

EBITDA for 2009 was $251 million. Net income for the year was $70 million compared to $318 million last year. Net income for the quarter with a loss of $23 million versus a loss of $80 million in the fourth quarter last year. Now special items in the quarter totaled $7.3 million or $0.27 per share, bringing the adjusted loss for the quarter to $15.9 million or $0.59 per share.

Importantly, tax laws signed in the fourth quarter allowed us to carryback 2009 tax losses and will enable us to recover $42 million in cash in 2010 from the federal government under the Workers, Homeowners (sic), and Business Assistance Act of 2009, part of the stimulus package. Myles will go into more detail later in the call.

As I [prefaced] on our earnings call this time last year, OSG's balance sheet strength, liability management, and healthy liquidity enabled us to manage through a downturn like we experienced in 2009. In 2009 the combination of our active asset management practices and our portfolio of time charters, FFA coverage, COA business, and cargo systems enabled us to remain cash flow positive and profitable for the year.

Please turn to slide four. 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 in key geographical areas. Cargo systems enable us to triangulate voyages which leads to higher utilization. Particularly in down markets COAs keep our fully utilized to a higher degree than our competitors. This results in outperformance.

In 2009 our daily rate average outperformance in the markets in which we compete were just over $12,000 a day in the VLCC segment, nearly $5,000 a day in Suezmaxes, just over $4200 a day in Aframaxes, nearly $5,500 a day in Panamaxes, and nearly $10,000 a day in MRs. We expect to continue this commercial outperformance in the coming year, a year in which we expect even greater rate volatility than what we experienced in 2009.

Please turn to slide five. Just to recap a few highlights for the quarter, following our initial July tender announcement on December 17 we completed the tender for OSG America LP. Back in November of 2007 when we launched the master limited partnership it was with expectations of success in very different market conditions.

As you know, the last two years have been disappointing for the US flag market in general and for the broader MLP market. In addition, OSG America's planned fleet growth was disrupted by the cancellations of four APB newbuildings at the now bankrupt vendor yard and delays in completing the two remaining units that were moved to other yards.

Conditions in the US flag market in fact are as poor as they have been in several decades. This has resulted in financial stress in a number of our competitors, the accelerated scrapping of several single-hull tankers and ATBs, US flag varieties, with more to come and has also led to the cancellation of a number of US flag newbuilding projects.

As I said earlier in the call, tough market conditions are part of doing business in shipping but OSG America faced these headwinds as a stand-alone entity and now reintegrated OSG can better weather the US flag storm. And just like in our international flag market, we believe our US flag unit is better positioned to participate in the recovery in these markets than our competition.

Going to vessel deliveries. On February 10 the Overseas Everest, a 297,000-ton, deadweight tons, deadweight VLCC built at CSSC in Jiangnan, China, delivered. She has joined the Tankers International commercial pool and she will shortly be loading her first cargo in the Arabian Gulf.

Two MRs delivered; the Overseas Skopelos was delivered from SPP in Korea on November 2 and is the first of eight vessels we have under construction with this outstanding yard. We are very pleased with the quality of construction at SPP and with the solid commercial relationship we have established with the yard, something that benefits both parties.

We also took delivery of the Overseas Mykonos from Hyundai Mipo yard on February 25. The product unit has three additional MRs delivering in 2010, all part of our fleet replacement program in this segment.

Our newest US flag tanker, the Overseas Cascade, delivered to us in December. After operating in December this vessel is now at Detyen's Shipyards in Charleston for conversion to a shuttle tanker. If you look at the picture on the right you can see the bow loading system. We are also adding a bow thruster, controllable pitch, and telemetry systems.

Both the Overseas Cascade and the Overseas Chinook, which we expect to take delivery of in the fourth quarter of this year, will operate for Petrobras under long-term contracts in their ultra deepwater fields with the same name as our ships in the US Gulf of Mexico.

Let me give you the FSO update. The FSO Asia began operations on January 4 and is fully functioning on-site in Qatar. The photo on the right is the vessel hooked up to a single-point mooring system on-site.

On the FSO Africa conversion work is very near completion. Regarding the canceled contract on the FSO Africa, there is no change from our previous disclosures. We have contested MOQ's right to cancel and continue to be in commercial discussions.

Finally, after long and protracted negotiations in the fourth quarter we have reached a settlement with Aker's Philadelphia shipyard. We have settled all outstanding commercial disputes. The original bareboat economics of the ten-ship program have been maintained. The ownership costs of the two shuttle tankers have been reduced by agreeing to purchase the two vessels for $150 million per ship and the elimination of the profit-sharing entitlement to Aker.

In addition, the tax stimulus package that I mentioned earlier contained provisions that allowed us to claim accelerated depreciation in 2009 as a result of acquiring and operating the Cascade. This benefit, approximately $21 million, is included in the tax refund of $42 million previously mentioned.

Please turn to slide six. In the past three earnings call I outlined numerous areas of focus at the Company in 2009. Among others these included managing our commitments, which today total $522 million of orders for 14 vessels, five that deliver this year and another nine next year. Our efforts reducing G&A were significant in 2009 and will continue in 2010. You will hear more details on this from Myles.

Active asset management of our fleet is something that I am pleased investors give us credit for. Since most of these items have been covered in previous calls, let me just draw your attention to the box entitled 'Select 2009 Asset Management Activity.' In 2009 proceeds on vessel sales or sale-leaseback transactions totaled $252 million.

Cancelled charters brought in a benefit of $100 million. One canceled charter for a vessel that had been sold and leased back generated a $14 million gain, a reversal of a previously deferred gain, and we received a $19 million benefit on swapping two LR1 newbuilds for three MRs.

Because we are a reliable counterparty and have the financial flexibility to work with our shipyards, we have been able to significantly improve the economics of our newbuilding program while ensuring that we get the quality fleet additions we need for our business. We are continuing to focus on this area and expect to make further announcements in this area in 2010.

What are the key takeaways? The strength of OSG's financial condition and business model position us well as we manage through any market. OSG has not only weathered a very tough year but our conservative financial management has created a stronger company with a more modern fleet.

Looking at the key numbers, we ended the year with cash and short-term investments of $525 million, up from $344 million at 12/31/2008. Liquidity of approximately $1.6 billion, up slightly from $1.5 billion last year. Our construction commitments are fully funded. And, finally, our $1.75 annual dividend is sustainable given the strength of OSG's financial position.

Looking forward at near-term priorities, complete conversion of the FSO Africa, delivers the ATBs OSG 350 and 351 to Sunoco, deliver the Overseas Cascade to Petrobras, continue to identify corporate efficiency moves and further cost reductions without sacrificing quality, and continue to invest in systems and quality operations and people.

Our platforms have delivered solid performance during this difficult period. They should enable us to outperform the market and capitalize on opportunities as the market recovers.

Thank you. Now let me turn the presentation over to Myles Itkin, our CFO.

Thank you, Morton, good morning. Please turn to slide nine for a discussion of selected income statement items. Revenue continues to reflect depressed spot market rates across all of our segments as the supply of vessels exceeds demand during this period of global economic uncertainty.

In the international flag space the high level of contract cover is enjoyed by our pools resulted in premium earnings from our superior vessel utilization. Through FFA cover we added a favorable $41 million to our VLCC results for fiscal year 2009 including $17.4 million in the fourth quarter. In the US flag product space the lack of cargoes resulted in four US flag vessels in lay-up during the quarter.

Vessel expenses decreased by $11 million to $74 million from $85 million in the fourth quarter of 2008. $9 million of this favorable variance is attributable to the net reduction of 1,140 owned and bareboat chartered in days including the redelivery of 11 older, single-hulled product carriers. Accordingly, we have effectively contained operating expenses, a trend which we believe continues through 2010.

Charter higher expenses decreased by $34 million due to 960 fewer charter-in days and a $12 million decrease in profit share obligations for the owners of our chartered-in vessels.

Through our continued focus on cost management general and administrative expenses decreased quarter over quarter by $3 million to $36 million. This decrease included a one-time charge of $4.6 million incurred in connection with the December 2009 tender for OSG America and $1.75 million in advisory costs in connection with the Aker settlement. Excluding these one-time costs, expenses decreased by $10 million quarter over quarter.

This decrease results from a $3 million reduction in compensation and benefits for shore-side staff, a $5.4 million decline in consulting, legal, and travel and entertainment expenses, and a $1.3 million reduction in other discretionary spend categories. As previously discussed, we have initiated a G&A process improvement and overhead expense reduction project through which we plan to further reduce our G&A costs by a minimum of $5 million per year beginning in the second half of 2011.

Equity in income of affiliated companies decreased by $8.6 million as a result of the Company's share of costs incurred by the FSO joint venture which includes ineffectiveness on the interest rate swaps held by the FSO joint venture and liquidated damages paid to MOQ. Remaining joint venture interest generated income of $3.8 million during the quarter which was approximately $600,000 less than in the fourth quarter of 2008.

I would like to highlight taxes for a moment. The Company recognized a tax benefit of $30.5 million during the quarter. On November 6, 2009, the president of the United States signed the Worker, Homeownership, and Business Assistance Act of 2009. The impact of this change in law is recognized in the period of enactment, Q4 2009, and is significant for OSG because it included a provision allowing taxpayers to elect an increased carryback for net operating losses incurred in 2009.

This meant that by increasing the normal carryback period from two years to five years we could access taxable earnings from 2004 before the passage of the American Jobs Creation Act of 2004 which exempted foreign earnings from current taxation.

Additionally, for tax purposes in 2008 the Company had a tax loss which it could not then carryback and created a full valuation allowance for the tax impact of the resulting carryforward. That is the Company did not recognize any P&L benefit for such loss. With the new act, however, the Company was able to reverse the valuation allowance creating a tax benefit in 2009.

Accordingly, the 2009 $34 million impact -- income statement impact reflected in our press release is made up of the $42.2 million cash benefit that we received from the carryback less an $8.3 million change in deferred tax liabilities.

Please turn to slide 10 for a brief discussion of two balance sheet line items. Investment in affiliated companies increased by $91 million, primarily as a result of the Company's net contribution to the FSO joint venture of $40 million. An additional $70 million increase arises from the change in the fair values of interest rate swaps held by our LNG and FSO joint ventures. These increases were partially offset by $14 million in distributions received from our LNG and ATC joint ventures.

Total debt, both current and long-term portions, increased by $423 million as the Company drew down $299 million on the secured debt agreement with the Export-Import Bank of China, CEXIM, as well as drawing down an additional $189 million from our long-term revolving credit facilities offset by repayments on loans of $65 million. In September 2009 the Company deposited $7.9 million in restricted cash to secure the maximum amount available to us under the CEXIM facility.

Please turn to slide 11 for a discussion on fleet composition and fixed revenues. During 2009 there was a notable amount of fleet activity. Chartering in assets provides greater flexibility to us as markets change enabling us to redeliver vessels in accordance with contractual terms, and in certain cases affording charter-in extension and/or vessel purchase options.

At the beginning of 2009 59 vessels or 48% of our operating fleet were owned. During the year 20 chartered-in vessels or redelivered offset by four chartered-in newbuilds. Accordingly at year-end 2009, of our 106 vessel operating fleet 56% was owed. In 2010 an additional nine vessels will deliver offset by five redeliveries resulting in a projected operating fleet of 110 vessels, 64 of which, or 58%, will be owned.

The Company also manages its mix of fixed and spot business to maximize profitability while providing a given level of fixed revenue. Fixed revenues associated with noncancellable time charters for 2010 are approximately $275 million and represent 25% of total estimated revenue days. The Company's level of fixed revenues past generated from operations and current debt capacity provide a comfortable margin over our leased debt capital and other operating commitments for both 2010 and 2011.

One item I did want to call out was the benefit from forward freight agreements cover taken in 2007 and 2008 for calendar year 2009. Anticipating weak market conditions we entered into FFA contracts that ultimately resulted in $41 million in additional TCE revenues over that attainable in the spot market. Our expectations going into 2010 are that markets will improve, particularly in the second half of the year, and accordingly we have increased our aggregate spot exposure to maximize the profits.

Please turn to slide 12 for a discussion of 2010 guidance. As an aside, please note that our 2009 actual results were essentially in line with the guidance we provided in the last earnings call. Last year we introduced initiatives to manage costs companywide and we are pleased to have achieved the aggressive targets we set. Continuing this trend, our 2010 guidance is in line with our 2009 results.

Vessel expenses are expected to be in the range of $280 million to $300 million, consistent with 2009 actuals of $284 million. Cost per vessel day are also expected to remain relatively stable.

Charter hire expenses are expected to be in the range of $345 million to $370 million, which is a decrease of approximately $25 million to $50 million from 2009 actuals of just under $400 million. This decrease is attributable to the redelivery of more than 20 vessels in 2009 and decreased profit share offset by four new vessel additions in 2010.

Depreciation and amortization is expected to be in the range of $170 million to $190 million, a small increase over 2009 actuals of $172 million resulting from a net increase in owned vessels. G&A expenses for 2010 is expected to fall in the range of $100 million to $115 million, which is in line with our 2009 results of $113 million after adjusting for those non-recurring items we discussed earlier. This improvement is primarily driven by expected reduction in professional service fees and G&A cost reductions occurring from our process improvement and overhead reduction project.

Equity income from affiliates is expected to be in the range of $15 million to $20 million in comparison with 2009 actuals of $773,000. This guidance is based on the expectation that the FSO Africa will commence service as an FSO near the end of the first quarter.

Interest expense is expected to be in the $50 million to $60 million range compared with 2009 actuals of $45 million reflecting the expectation of higher interest rates during 2010 and the use of the long-term CEXIM loan which carries a higher margin than our long-term revolving credit facilities.

Our guidance for dry dock costs for the year is approximately $23 million involving 24 vessels; Q1 $1 million, Q2 $13 million, Q3 $2 million, and Q4 $7 million. Our guidance for capital expenditures for 2010 is approximately $360 million which includes progress payments, vessel improvements, and capitalized interest as follows -- Q1 $123 million, Q2 $55 million, Q3 $25 million, and Q4 $157 million.

We will now open up the floor to questions. Operator?

(Operator Instructions) Mike Webber, Deutsche Bank.

Good morning, guys. Morten, just curious a couple top-line, kind of high-level questions and one more specific question. You guys have a unique vantage point of view on Chinese import volumes and then obviously how important that trade is to the broader market. After seeing volumes peak probably close to 5 million barrels per day before they have come off a little bit in January.

But I was hoping maybe you could give a little bit of insight into your expectations for that trade as you look out into 2010 and any expectations you have of growth after that.

If you took an average growth, that market has been growing for us around 20% a year. We see no slowdown whatsoever in the growth of the Chinese market.

The other relevant, important factor is that they have been diversifying their sources of crudes taking more from West Africa, taking from Brazil, taking from Venezuela, as well as taking more from the Middle East. Our challenge with the Chinese growth will be to keep up with it, but we fully expect that to continue the same pattern we have seen in the last five years.

And that is very good for the tanker market because it's a longer haul barrel of crude than a crude barrel coming out of the United States. So it's good for the business and we think that will be a very positive factor going forward -- continue to be a positive factor going forward. And particularly for us because of the volume of crude we take in China through TI.

Right, right. That actually kind of relates to my next question when I think about your fleet size moving forward. You guys have delivered a handful of product tankers in the VLCC and you have a handful more coming on I guess as you look out into 2010.

How do you think about your fleet size, I guess, as we move into the summer with potential charter-ins looking attractive? And then with the volumes that you guys may or may not be pushing out into China, how does that factor into your fleet size projection?

I think if you look through our segments we probably have about the right size in the Panamax segment to meet our clients' contractual needs. On the Aframax side where we have a higher contract coverage we are about there now and we have newbuildings coming in. So I would say the size of the pool can support the contract base of our clients.

Suezmax fleet, clearly we are not big enough yet. We can satisfy the existing contract commitments we have, cargo commitments, but we would like to grow it. The VLCC fleet today with TI we have two more VLCCs going and (inaudible) now I believe has three more, but check that, and it will be a challenge for us to continue to grow that fleet. We would probably do so if the right opportunities come along because we will aim to keep up with that business.

Right now we can handle the demands of our clients, particularly the Chinese clients we have, but we will have to continue to grow that. And that will probably be a priority area for the Company.

On a product tankers side we have a significant newbuilding program. We are committed to it. It will give us the size we need to compete with just about anybody in the business. What I would say, just as with the other segments in addition to the VLCC, we will look at opportunities as they come along in these segments. And we expect there will be because the banking environment for the shipping industry has not improved at all since last year or for any of the calls we have had.

All right. That makes a lot of sense. I guess one more broad-based question. We are two months into 2010 now. Have you guys seen any sort of actual, tangible impact from the single-hull phase out yet and do you think it makes more sense for that to happen after we get past this period of seasonal strength?

I think we were -- what we said last year is that we would take less time charter and FFA cover in 2010 because we expected spot rates to improve over 2009. And that was a combination of things -- recovering demand; greater discrimination against single-hull tankers, which we certainly have seen; the presence of more ships in storage, which continues though that creates more volatility. And what we have seen so far in 2010 is a better spot market than in 2009, I think that is reflected in the numbers in the press release.

We expect that will continue across the year but with a lot of volatility. We are still not happy with the level of rates. We would like to see them higher but that will require a bigger overall recovery in the oil market. There is no doubt we expect 2010 to be stronger than 2009 on spot rates. So far we are happy with the extra exposure we took on this year.

All right. And I guess digging into that a little bit, do you have an idea right now of what single-hull utilization is? And if it is in the sub 50% range, is it still impacting I guess the bidding for businesses? Is it still kind of acting as a drag on rates from here?

It certainly doesn't lift rates what it really does is it creates more volatility because the singles no doubt are waiting longer now. And so when they have to take cargo they have to drop rates more. So rates tend to go up, go down quicker right now and we expect that across the year as those singles that can't stay in towards the second and third and fourth quarters of the year compete for cargoes.

Some will say take them; we are happy that China won't be taking any more next year. So we still think the phase out is real. It will create more volatility and that is what you will see across the year.

Okay.

The singles, the Grim Reaper has arrived for the single-hull tanker. He will finish up his job in 2010 and we will have a better market as a result of it.

Right. All right, that makes sense. I guess one housekeeping question left with regards to the FSO Africa. Can you maybe give a little bit of color around what alternative employment opportunities there are? And specifically in your conversations with your lenders if you were to employ it somewhere other of than with us Maersk Oil Qatar would you need to repay the $143 million, or is that still up for negotiation?

Everything is up for negotiations. I think what we disclosed is that we have cash collateralized it so we have already taken the hit basically. We have put up cash, so if we have to repay it the money is already there. We can deal with that problem.

This will be the most sophisticated FSO in the world. It can be an FSO other places. It could also be a very good storage tanker and there are alternative projects we can and would pursue. We are in commercial negotiations and we hope that those will be fruitful. And I think that is really about as much as I can say.

Okay. All right, I appreciate the time, guys. Thanks a lot.

Jon Chapell, JPMorgan.

Good morning, guys. Want to put my detailed questions out there first. Myles, just to be sure I understand this correctly on the tax carryback, is this a one-time event? You got the entire $42.2 million before the end of 2009 so that is in all the financial statements that are in your press release and we won't see any of that from that going forward?

That is correct.

Okay. And you didn't give taxes guidance on your guidance page and I can't remember if you have in the past, but it's typically negligible. What should we be looking for on the taxes line in 2010?

Say something in the neighborhood of approximately $3 million.

$3 million benefit or negative?

Benefit.

Okay. Another housekeeping item on the VLCC FFAs, it looks like they roll off in the first quarter. They have about 310 days there. Are there any more FFA hedging days for the VLCC fleet beyond the first quarter?

There is one ship across 2010. One supplement to your first question, the $42 million in cash under the tax benefit will come in in 2010 so that will have a balance sheet impact.

Okay. So the $34 million was the impact on the P&L in the fourth quarter but you will get $42 million on the cash flow statement? Got it.

We have one VLCC equivalent in FFAs for 2010 that is across this year.

Okay. All right, bigger picture of things for you, Morten. We have been hearing a little bit more about the Iranian embargoes or whatnot and ships not being able to trade there. What is the impact that that may have on the Tankers International pool?

Very little impact on TI because that is not a significant loading point for us and we have never solicited Iranian business.

Could it have an impact on just the trade flows throughout the entire VLCC fleet?

Usually what happens in the tanker world if there is disruptions in key loading points it usually improves the market. But I would be speculating on what the result would be but it really does not have an impact to us because it's not a big loading point for TI in that business.

All right. And the last thing, I read one of your interviews in the newspaper last week about how slippage cancellation will probably exceed most analysts' forecasts. I am just hoping you can give a little bit more insight as to how you get to that.

First of all, how do you separate what is actually slippage versus what is cancellation? And then also is this strictly just a function of lending capabilities or are there any issues with the yards where the ships are being built at?

There is no clear cut answer to that because the whole area remains gray because there is not adequate disclosure from the yards to the companies as to what is going on. What we can say is the main driver of the order book cancellations is lack of money and there is simply less money available, bank money available to finance the industry than there was in 2007, 2008. And that is a function of a number of the key shipping banks having to reduce their portfolios.

So at a time when the industry needs more money in fact there is less money available to finance these ships. What you are seeing is more cancellations conversion to options, deferrals. You are having some owners wait until the last minute and then just not collecting their ships as they are delivered from the yard. And there is a couple of VLCCs that have now fallen into that category.

So we the due a vessel-by-vessel, order-by-order, yard-by-yard, owner-by-owner count ourselves. If we have an owner who does not take delivery of two ships because that owner can't finance this and that owner has multiple ships on order, then we forecast that it's unlikely that all or most of the remaining orders will get built because it's too much risk or burden for the yard.

What we are seeing is continuation of that pattern and I think that the cancellations will surprise people in the aggregate. It contrasts a little bit with Clarksons -- and I do not in any way want to criticize Clarksons -- but they generally keep their number larger until they have public disclosures of contract terminations or adjustments. And flipping those just don't happen in a timely, clear manner because it's not in the interest of the owners of the yards to have that happen.

It's a lot messier out there than you think. There is a lot more negotiations going on and there is going to be a lot more order book construction to come.

Okay. Thanks a lot, Morten. Thanks, Myles.

Urs Dur, Lazard Capital Markets.

Good morning, guys. The questions about the FSO have been asked in a broad sense and I know you don't want to go into detail necessarily on the negotiations, but can you give us maybe an overview of what the FSO market is looking like in terms of the possibility of change of charter? I mean what are you seeing in the broader market, are there inquiries, other tenders, etc.?

The answer is, yes, and I think at this time I would rather not go into detail, Urs, but there are projects across the globe -- obviously noticeably Brazil has an enormous expansion program. These [are going to be] the most sophisticated, environmentally friendly FSOs out there. They are the only double-hull three million barrels ships. So we are comfortable there will be other projects to look at and you can be sure that we will be looking at them.

The offshore -- there is clearly and I don't think anybody disputes that the offshore area is going to be where the big oil majors are going to have to go. And then there is some very big growth off of -- in West Africa and in Brazil.

Sure. That is fine; just to touch on where you felt that market was, thank you. US flag business, I note in your release that so far this quarter has been a lot better than last and last year as well. Can you give some color? The ATB seem to be doing well, although it's a small percentage of what has been fit so far. But can you give us some color on what is driving that in the United States?

I don't think we have seen enormous improvement, but I am going to turn the question over to Captain Johnston, who I did not introduce and he is on the phone joining us from Tampa. And I would ask that he answer the question.

Great, thank you.

Bob?

Yes, I am here in sunny Tampa, Morten. One of the things on the ATBs are continuing to operate. What we are seeing though is an adjustment in the general economy. The refinery utilizations are done, some of the lowest refinery utilizations we have seen in many, many years. What we are waiting for now -- we have been fairly successful. There are still a few ATBs that are not working in our fleet and we are waiting for some of that US economy to pick up and start moving product again.

We are also looking -- as you start looking at the scrapping in the US flag market and vessels being disposed of, and these vessels are being disposed of, which when the economy picks up I can see this market picking up as well.

Yes, I just noted the ATB spot rate on page 12 of the release at $50,000 for 102 fixed days through February 19 and that seems to be a lot better than what they were in previous quarters. So I am wondering is that -- can we expect to get the 270 days remaining open fixed for the rest of the quarter or do you have any reasonable expectation there? Maybe you can't say.

Not certainly at that rate. That was sort of a one-off. I would not count on $50,000 a day for ATBs.

Okay.

I wish we could.

Yes, so do I.

My boss, Morten, wishes I could as well, but I can't promise that.

Just as a small point of clarification, that also includes the [lighter rig] ATBs.

Okay, fair enough. I just noticed that number is a bit different and a bit better, and that is good. I just wanted to get the [clarification] there.

A broader market question though, we have seen the contango. On crude and product storage we have seen contango come off and we have seen numbers of ships dropping in terms of storage globally, whether it be covering the CPP or dirty. One place we have noticed that has had an increase in storage on the crude side which is interesting is Iran, but that may be, again, sanctions related. And I think the question about Iran and embargo has already been asked and answered.

But do you -- how do you guys view the softening contango -- doesn't that cause a drag on spot rates as these ships come back into the market?

I am going to let Lois actually tackle that question because she is right on top of it.

So essentially it does, on the products in particular, soften the market but the reality is that a lot of the storage is coming off as demand picks up. So it's a process that I think we have to go through to get to an overall healthier market.

And on the products in particular what you have seen is the VLCC market and the Suezmax market have picked up substantially in the first quarters. A lot of those vessels had been in the fourth quarter holding products so (multiple speakers) a little bit more of a natural reversion to the way that things should be, and they are going over to the crude side to trade in their natural market.

So you haven't had as negative an impact on the product markets as you would have had otherwise.

Okay, that all sounds fair enough. Just to clear up again, I know Jon already asked it, so the tax issue that was this nice credit that we see in fourth quarter we are not expecting that going forward. You did say possible $3 million overall credit net for 2010, Myles?

That is correct, Urs.

Okay, thank you. That is all I got. Thanks.

[Chris Broe], FBR Capital Markets.

Morton, this is Rob MacKenzie. My question for you comes back again to another aspect of tanker supply and that is scrapping of the single-hull fleet. I does Martin Stopford was out saying it's quite slow so far this year.

I wonder your view of how that plays out through the remainder of the year. Because I know in the past you have been pretty outspoken that you think we see most, if not all, the single hulls taken out of the market this year.

I have read what Martin said. He was also one of those that prior used to say that if the market is weak, they will keep the singles going for way beyond 2010. The reality is the commercial marketplace does not want the single hulls.

There are no places you can take them in left in the West. Korea has said they are going to ban them and they are accelerating. China will have said the same. We expect Japan will do the same because they don't need them any longer. Thailand is talking about doing it. The Philippines has done it.

There are just very few places you can trade a single any longer. So whether the pace is two million or three million tons a month right now, we expect that the fleet will be irrelevant by the end of this year except for five or six double-sided Vs that still may trade. And they will be going to India, maybe Taiwan, and that is about is.

So we are not concerned about it and I will respectfully disagree with Martin Stopford who I think has an encyclopedic knowledge about the industry but his forecasting on this issue has not always been spot on.

So I guess would it be fair to characterize your viewpoint as whether or not they are cut up or not, they will become commercially obsolete anyways?

You interpret it correct.

Okay, thank you. And then on the demand side, I guess really more so on the supply side, recently OPEC was talking down demand for crude relative to other international agencies. To me that is interesting.

What is your take on that perspective? Because it would seem to be that OPEC would want crude production or would want the expectation for crude demand to be higher. Do you read anything into that for the tanker space?

No, I think that the market has pretty much evolved consistently, sort of with the way IEA has been forecasting it and that is what we follow. You did see in January one of the reasons the market picked up was that in fact there was more OPEC and Saudi barrels going west than we have seen in a long time.

So I am not sure how to interpret their comments but we expect a market that looks substantially like the IEA forecast. I guess the real big upside would be the demand growth in Asia has been greater, notably in China, and everybody continues to underestimate that.

Okay. And my final question goes back to an earlier question on the call and that is the demand growth in Asia and your insight into that. What are you guys seeing incrementally in terms of the marginal incremental loadings in terms of where they are coming from? Are you seeing a lot more come out of areas such as West Africa? More chartering potentially for that going east as opposed to west?

There is no question that the Chinese are taking more barrels from West Africa, more barrels from Brazil, more barrels from Venezuela. I think -- don't hold me to it -- I thought it [McQuilling] that had outlined that for a VLCC cargo -- the equivalent demand in China requires 1.9 VLCCs as is required in the US based on the way they source their crude.

Don't hold me to that number because I am quoting another broker. But the Chinese barrel is a nice long-haul barrel of crude so their demand growth helps our market more than demand growth in the US.

Are you seeing any of those flows directly in your fleet? It sounds like it.

We are the biggest transporter of West African crude to China by a long shot. I think we get most of it so for us it's a terrific area of business.

Okay, thank you. I will turn it back.

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

Just thank you very much for joining us. I know there were some technical questions so please feel free to call Jennifer or Myles with any questions you have on that. And thank you very much for joining and paying attention. Have a good day.

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