Octave Specialty Group Inc (OSG) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the OSG first-quarter 2010 earnings conference call. (Operator Instructions). This conference is being recorded today, Tuesday, May 4, 2010. I'd now like to turn the conference over to Jim Edelson, General Counsel.

Thank you. Before we start, let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker and articulated tug barge markets; changing oil trading patterns; anticipated levels of new building and scrapping; prospects for certain strategic alliances and investments; estimated TCE rates achieved for the second quarter 2010 and estimated TCE rates for the third and fourth quarters of 2010; projected schedule drive-out and off-hire days for second, third, and fourth quarters of 2010; timely delivery of new buildings in accordance with contractual terms; the outcome of OSG negotiations with Maersk Oil Qatar; the sustainability of OSG's dividend; projected locked-in charter revenue and locked-in time charter days for 2010 and thereafter; estimated revenue and expense items 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 world 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 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 2009 and other reports OSG files with the Securities and Exchange Commission.

For this conference call, we've 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'd like to turn the call over to our Chief Executive Officer and President, Morten Arntzen.

Good morning and thank you for joining our conference call this morning, and let me introduce the management team. Here in New York, you have Jim Edelson, General Counsel; Jennifer Schlueter, Head of Investor Relations and Corporate Communications; Ian Blackley, Head of International Ship Operations; Lois Zabrocky, Head of our Product Tanker SBU; Mats Berglund, Head of our Crude SBU; Jay Miller, our Controller. Joining us by telephone today is Myles Itkin, our Chief Financial officer, and Captain Bob Johnston, Head of our U.S. Flag SBU.

As Jim indicated, our remarks today will follow a presentation that is posted on our website, so please turn to slide three.

Let me begin by saying that I'm not pleased with delivering negative results in any quarter; however, the fact is we expected the first half of 2010 to be challenging for tanker operators, and so far it has been.

I'm pleased, though, with the progress we continue to make on a number of fronts, which Myles and I will cover on today's call. In our presentation, we will follow our usual format, reviewing the numbers and talking about quarterly events. In addition, we've added information about our portfolio and operating units that we think you will -- will be of interest of you.

Turning now to the first quarter of 2010, TC revenues of $230 million declined 21% from $293 million in the same period last year. This was driven by spot rate declines in all U.S. and international market sectors we trade, except VLCC. VLCC's spot rates were up a modest 5% quarter over quarter to just under $50,000 a day. Indeed, had we not made the decision last year to take on more spot exposure with our VLCCs, and instead covered 2010 with FFAs or lower turning time charters, our results would have been worse as a consequence.

EBITDA totaled $44 million for the quarter, and we generated a net loss of $9 million, or $0.34 per share. Excluding charges related to impairments taken on two U.S. flagged assets and a charge related to interest rate swaps on the FSO debt, net loss was $2.5 million, or $0.09 per share. Myles will go into more detail on this later in the call.

VLCC rates in the first quarter were better than most -- better than what most analysts on the FFA market predicted from a combination of greater than anticipated Chinese demand and Chinese refinery runs, which were up 25% quarter over quarter; continued slowed steaming by most of the industry; modest increases in OPEC production; and the continuation of a significant number of crude tankers being used for floating storage.

Spot rates in the rest of our asset classes continue to be dampened by new vessel deliveries, lower global oil demand levels, and reduced refining utilization in most of the world other than China and India. Our bookings to date are as expected in the second quarter in what is traditionally a weak quarter. More encouraging is the strengthening trend in VLCC and Suezmax rate in the past three weeks.

I can clearly say OSG's financial condition remains very strong. We ended the quarter with $1.9 billion in liquidity. Our debt and refinancing obligations over the next three years are very manageable. All 11 of our own new builds are fully funded and our dividend is sustainable. Clearly, the Company is well positioned for the recovery in the world economy and in tanker rates.

Please turn to slide four. At OSG, we continue to focus on Companywide efforts to improve and strengthen the Company, including reducing costs, both onshore and at sea; reducing the cost of our new building program while improving the delivery schedule; completing the more challenging new building and conversion projects we've had in the works; and renewing key cargo contracts as we strengthen commercial relationships.

In the first quarter, we completed an equity raise and a high-yield bond offering. The net proceeds from both transactions was nearly $450 million. The capital raise extended our debt maturity profile, diversified funding sources, and added additional flexibility for future investments and expansion opportunities.

I've been asked on a number of occasions about the timing of these transactions. First, both the bond and equity market conditions were very favorable at the time. Then, there was an enormous amount of corporate refinancing to be done in the 2011 and 2012, and we wanted to be ahead of that. And finally, in the next 12 months or so we will be looking to refinance our unsecured facility which matures in 2013 and wanted to ahead of that and ahead of what we expect will be some interest rate risk between now and then.

Moving on, two U.S. flagged vessels delivered during the quarter, the Overseas Cascade after completing conversion to a shuttle tanker, and the OSG 350. The Overseas Cascade began a five-year charter to Petrobras America on April 1. Last week, however, the vessel was diverted to assist with oil spill recovery efforts in the U.S. Gulf, an agreement made between BP and Petrobras, so I'm glad that OSG is playing its part.

The OSG 350 joins the OSG 192 and OSG 400 and the Diligence in the Delaware Bay lightering operations servicing Sunoco, Salerno, and ConocoPhillips.

The convergence of the FSO Africa and the FSO Asia are now complete. The conversions were highly complex, but speaking on behalf of the technical supervisors and conversion oversight teams from both OSG and our partner Euronav, we are very pleased with the technical aspects and quality of the converted vessel.

Specialized environmental equipment on both vessels includes two VOC units that reduce the environmental footprint by capturing VOCs and reinjecting them back into the cargo. There's also a water treatment plant to ensure that the quality of any stripped water pumped overboard exceeds local requirements. As FSOs, these vessels have a useful life of 30 years or more.

As we mentioned in our call last quarter, the FSO Asia is on site and operating very well. In fact, the environmental equipment on board, specifically oily water separators that return water back to the field of less than 15 million parts per million, has earned performance bonuses from our customer consistently since she hooked up.

Regarding the employment of the FSO Africa, discussions with various parties concerning employment are ongoing. Due to confidentiality agreements, I can't say anything more about that.

Please turn to page five. In April, I spent a good deal of time on the road meeting with current and potential investors in Los Angeles, San Francisco, Milwaukee, and Chicago. Between Myles and I, the bond road show took us to New York, New Jersey, Boston, and the West Coast.

In most meetings with equity investors, there was a good deal of discussion about our active asset management, our new-build program, our chartered in portfolio, and the prospects for our three-man operating segments. We thought it would be beneficial to the broader audience on this call to continue that dialogue. This is the focus of the next six slides.

At the end of March, we had $3 billion in vessel assets on our balance sheet. Of that, $625 million was construction in progress comprised of shipyard construction payments, owner-furnished equipment, and capitalized interest. This is a significant amount of capital deployed that isn't generating revenue, but will begin to do so over the course of the next two years.

Construction-in-progress balances declined from roughly $860 million at year end, as we converted four non-earning assets into earning assets -- the Overseas Mykonos and Overseas Everest, delivered in February, and the OSG 350 and Overseas Cascade, as already mentioned, at the very end of March.

Turning to our 17 ship new-build programs, 11 will be owned and six will be chartered in. The 11 will be funded from cash or existing credit facilities, and two of the six chartered in new builds are chartered out.

So as we continue to patiently troll the waters for new opportunities, opportunities we will assess with the financial discipline that has been our practice, we can look forward to built-in growth over the next 24 months from our existing new building program, which should enter the fleet in a rising rate environment.

Please turn to page six. During the quarter and through April, we continued to make progress on actively managing our order book. During 2004 through 2009, in what was a rising market environment, for the most part, actively managing our assets generated $2.4 billion in proceeds from asset sales and sale-leaseback transactions.

When asset values are declining, as they have been the last 18 months, active asset management has also meant improving our new building order book. Over the last 15 months, we have negotiated price reductions on MRs, LR1s, and VLCCs we had on order. As we have shared with you before, we canceled orders for two LR1s in exchange for price reductions on other LR1s, and we've brought three MRs at very attractive prices, and took one MR in on a five-year bareboat at historically a very attractive level.

Working cooperatively with our yard, we have brought the cost of our order book much closer to today's market levels. We have been able to do this in part due to the financial strength of the Company, and also due to a very savvy and talented group of people in our commercial and sale and purchase groups.

At the end of March, we concluded another transaction. We reached a conditional agreement with a self-curing yard to reduce the contract price of two LR1s, while at the same time pushing their delivery dates from the third quarter of 2011 to the fourth quarter of 2012. In exchange, we are buying an additional LR1 at a very favorable price. That is expected to deliver in the third quarter of 2012.

Please turn to slide seven. In 2010, we are levered to expected improvements in spot rates. We manage the mix of term business and spot exposure in order to maximize profitability while providing for a certain level of known revenues. In 2010, this mix is 25% fixed and 75% levered to the spot market. Fixed revenue is expected to generate approximately $260 million revenues in 2010.

We also manage our portfolio of owned versus chartered in vessels. Shifting from nearly 70% ownership in 2004 to 57% today has provided for greater flexibility in changing market conditions.

Our charter portfolio has been a significant, significant contributor to profits since we shifted this mix. After six years, 2004 to 2009, a cumulative net operating profitability of the chartered in portfolio, fully loaded with overhead and G&A expense, was nearly $240 million.

In these slides, we've also provided some statistics here on the average charter duration by segment.

Finally, the MR swap transaction in the second quarter is also worth noting. We swapped two chartered in new builds scheduled to deliver in the first quarter of 2011 for two 2009 built MRs, the Adriatic Wave, delivered early last month, and the Aegean Wave, delivered later this month. This swap delivered a $6 million reduction to charter high obligations.

Please turn to slide eight. The next three slides are focused on our three primary businesses -- crude, products, and U.S. flag. Let me start with U.S. flag. Our strategy in this segment is to become the leading operator of the modern double-hull tankers and ATBs in the Jones Act market with the majority of the fleet committed to servicing long-term COAs and time charters.

Looking at the last 18 months, the Jones Act market has been very tough and is expected to remain so until refinery utilization increases, expansion projects get reactivated, and in general, the health of the U.S. economy rebounds.

Consequently, this year and next we will focus on managing delivery of five additional new buildings. The next three ships in our 12 ship series order of marker, including the units that will be converted to our second shuttle tanker, have all been chartered out at higher rates than the early deliveries in that program. In addition, we will take delivery of a second ATB, the OSG 351, from Halter, which will join the OSG 350 servicing our Delaware Bay lighting operation.

We continue to believe the U.S. flag market will turn by 2012. From a purely regulatory standpoint, both the mandatory retirements result in supply contracting beginning in 2012. However, we expect the market will swing into balance sooner from a combination of a rebound in gasoline demand, competitor financial troubles leading to bankruptcies, and the early retirement of marginal tonnage. These are the reasons the U.S. flag remains a critical part of our diversified portfolio.

Please turn to page nine. Our product strategy is to be the ship operator of choice by offering high-quality ships and technical management and fostering strong relationships with customers and partners. Just as our crude tanker pulls, we aim to build contract portfolios to enhance the utilization of our product tankers, which we are already doing in Clean Products International.

Our long-term growth strategy in products is based on the growth and export refineries being built in the Middle and Far East and the expected [ten-mile] growth that will ensue as North America and Europe import more refined products from longer distances. The map on page nine highlights some of the refineries we expect to come online over the next four years. Our LR1 order book modifications also reflect the timing of this expansion.

Please turn to slide 10. Our crude strategy is to maintain our market leadership positions through commercial pool participation and build cargo portfolios with key partners and customers, and thereby consistently outperform the general market year in and year out. Looking at the business today with our heavy spot exposure in all crude segments, we are levered to increases in OPEC production as we expect demand to gradually rebound over the remainder of the year, and into next year we expect most of this demand will be met by long-haul OPEC-produced barrels.

In the VLCC segment, our most important segment, we are heavily geared for the transport of crude oil into China primarily from West Africa. And China is the fastest-growing crude destination market in the world. We expect to benefit from the growth of imports into China from Brazil, an exciting and rapidly-growing long-haul export market for the VLCC trade.

The charts and information on this slide underscore that China isn't slowing down. Crude oil imports continue at unprecedented levels. Cargoes sent to China were up significantly in the first four months of 2010 and auto sales are up 56% year over year, 56%.

Please turn to slide 11. And this will be a little bit repetitive, but I want to go over the key takeaways from these prior pages.

We are focused on running our business for the long term. We have had a consistent strategy throughout the 2008-2009 financial credit crisis, the same consistent strategy that put us in position to handle financial pressure in the first place. Our Board holds us accountable for both short-term performance and long-term value creation. We have a real transparent active Board process at OSG.

I'm more confident about our relative competitive position right now than any time since I joined the Company. We are market leaders in crude, products, and the U.S. flag segments. Our strong balance sheet and financial position differentiates ourselves from our competitors. We are predominantly an unsecured borrower. Our liquidity position is strong. We have conservative, consistent financial management, and we are well, well, well within our covenant limitations. And as I've already mentioned, we deem our annual dividend as sustainable.

We have built in growth with a 17-ship new-build program over the next two years. Our commercial pools and cargo systems uniquely enable OSG to outperform the market. Our active asset management generates cash, creates optionality, and results in competitive vessel ownership costs.

And finally, we are levered to a rebound in OPEC production, increases and also spot-rate improvements in the start-up of export refineries in Asia, and leverage increases demand in China.

With that, I will turn the microphone over to Myles Itkin, our CFO.

Thank you, Morten, and good morning. I'd just like to mention I've had some difficulties with phone connections, so if it fails, I'm going to ask Jerry Miller to pick up where I've left off.

If you'd please turn to slide 13 for a discussion of selected income statement items, in contrast to the balance of our international flag fleet, whose depressed rates reflected an oversupply of tonnage relative to demand, VLCC spot rates during the quarter strengthened to $50,000 per day, compared with approximately $47,000 per day for Q1 2009. This increase was largely attributable to increased long-haul maintenance into China.

Consistent with an historically high level of contract cover offered by our pools, OSG's VLCCs enjoyed premium earnings from reduced wait-in-time and higher [lady to] balance ratios than are generally attainable in the market. FFA coverage also added a favorable $2 million to our VLCC results for the first quarter.

The U.S. flag product space, however, continues to be challenged by the lack of cargoes. Fixed OSG U.S. flag vessels were in layup for the major portion of this quarter.

OSG's consolidated results for the first quarter included two notable one-off items. The first is the impairment on two U.S. flag vessels in the amount of $3.6 million. The second is the dedesignation of the FSO Africa's interest rate swap in the amount of $4.5 million. Accordingly, the quarter was impacted (technical difficulty)

I'll pick it up then. Accordingly, the quarter was impacted by aggregate one-off charges of $6.9 million, taking into account gains on asset sales, or $0.25 per share.

Vessel expenses decreased by $9 million to $64 million from approximately $74 million in the first quarter of 2009. Substantially all of this favorable variance is attributable to changes in the operating fleet, principally driven by the redelivery of 11 older single-hull product carriers and reduced costs attributable to the lay-up of six U.S. flag vessels.

Charter hire expenses decreased by $21 million, due to 880 fewer chartering days, and a $6 million decrease in [apopoture] obligations for owners of our charter-in vessels.

Spot charter-in vessels are not reflected in our guidance, but are compensated for it by an equal or greater contribution to revenue. Most prevalent in our international flag [rider] trade.

G&A expenses decreased quarter over quarter by approximately $500,000 to $27 million, which is consistent with our annual guidance of $100 million to $150 million for calendar-year 2010.

With respect to the U.S. impairment charges recognized in Q1, we recorded a charge of about $3.6 million to write down the carrying values of two of our U.S. flag vessels, an older double-hull tanker and one of our four single-hull vessels which is scheduled to drydock later in 2010 to their estimated net fair values at March 31, 2010.

Equity income from affiliated companies decreased by $4.8 million to a loss of $2.3 million in the first quarter. This decrease is attributable to increases and losses in the FSO joint venture, primarily driven by the $4.5 million charge resulting from the hedge dedesignation of an interest rate swap associated with the FSO Africa debt.

The Company's earnings from its L&G and ATC investments also decreased by about $900,000 quarter over quarter.

Please turn to slide 14. During the quarter, $112 million was paid out in progress payments on various vessels under construction, including $53 million paid on delivery of the Everest, a VLCC; a further $26 million on the Mykonos, an MR; and $33 million in progress payments on other vessels.

Investments in affiliated companies increased by about $82 million, principally as the result of the Company's advances to the FSO joint venture which comprise two main elements -- $20 million primarily related to costs related to the conversion of the FSO Africa and $72 million representing the Company's 50% share of cash collateral posted by the joint venture for the FSO [napotoli] following MLQ's cancellation of its service contract on the FSO Africa.

The aggregate increase in investment was partially offset by a $2.8 million change in the fair value of interest rates held by our LNG and FSO joint ventures, a $4 million distribution received from our ATC joint venture, and, in addition to that, OSG's share of the FSO joint venture lawsuit as previously discussed. I would also note that the Company expects to contribute an additional $47 million during the second quarter of 2010 in connection with final payments to the shipyard doing the conversion on the two FSOs.

For the long-term debt, both current and long-term, decreased by $112 million during the quarter. During the quarter, the Company raised about $448 million, $400 million of which was used to reduce the Company's unsecured credit facility.

Please turn to slide 15. Cash and cash equivalents held at the end of the current quarter decreased by $134 million to $340 million. During the quarter, the Company's cash position increased through the two public offerings previously discussed and the maturity of the short-term investment of $50 million, which added $440 million and $50 million, respectively.

The Company use these proceeds to repay $400 million of debt on its unsecured revolving credit facility and to cover payments on vessel construction and funding our FSO joint venture investment, and of course, the payment of the dividend.

Please turn to slide 16 for updates on our guidance. We have updated our guidance relating to the equity income from affiliated companies to reflect our estimate of the impact of the cancellation of the FSO Africa service contract with MLQ. We have also updated our guidance for interest expense reflecting our issuance of $300 million of 8.125% fixed-rate debt, and the previously discussed reduction of our outstanding borrowings under our credit facility.

Equity and income guidance is updated and is expected to be in the range of $10 million to $15 million in comparison to the previous guidance of $15 million to $20 million. And this revised guidance is based on the expectation that the FSO Africa, which is currently idle, will commence employment at a reduced rate.

Interest expense is updated and is expected to be in a range of $65 million to $75 million in comparison with the previous guidance of $50 million to $60 million. Our guidance for drydock costs for the year is relatively unchanged at approximately $22 million and our guidance for capital expenditures for 2010 is also relatively unchanged at approximately $366 million.

We will now open the call up to questions.

(Operator Instructions). Jon Chapell, JPMorgan.

I have a couple of quick detailed questions. I'm on the financials, so we'll see if anyone can answer them, or otherwise I guess Myles will follow up offline.

But first on the swap dedesignations, if I read this correctly, will this -- this is going to be mark-to-market every quarter, but once the Africa is employed, does this mark-to-market stop?

No, the swap will be mark-to-market each quarter. What -- that's a permanent change. The flowthrough the income statement going forward will be the interest rate on the underlying debt, which is LIFO based.

Okay. And then, on the time and variable charter expense guidance, does that include the deferred gain on sales and leasebacks?

Say that again, please?

The guidance for time and variable charter expense, that 345 to 370, does that include the deferred gain on sale and leasebacks?

Yes, it does.

It does. And that's about $40 million annually?

Yes, it is.

Two other questions from the presentation and the earnings release, quick ones. On the off-hire days for the U.S. Jones Act fleet, there's a big drop in the second half of the year. Is this assuming that you're going to re-employ a couple of these vessels? And is that dependent upon market conditions improving or are those already set up to re-enter activity?

It is based on expectation that we will be able to employ later in the year.

So nothing is lined up yet, it's just assuming that the market (multiple speakers)

That's correct. That's correct.

And then, the final one on the second quarter to date revenue day update. There is seven vessels in the footnote that are not included in those. What is the purpose of those not being included? Are they on special contracts or something? Are they not employed in the second quarter?

I think we're going to have -- that one (multiple speakers)

I can take it. This is Jennifer. We just have not projected that in the past. They were tied to very specific vessels, and it's just been a little bit of a disconnect between that information and then the next quarter's revenue days. So I thought I'd just put out that information for you. It would be more helpful.

So they're all active in generating revenue; we just put those days in separately from the guidance that you provide in that table?

On that table, yes.

Justin Yagerman, Deutsche Bank.

I wanted to start with just a topical question, and since you guys have a vessel employed in this whole process, maybe you could comment on the Gulf impact to date with the situation there? How do you see that potentially developing in terms of rate structure or what is going on with the ships trading in the Jones Act business?

So far, it really -- it's business as usual. There has been no impact upon either the U.S. flag or the international flagships.

We have had a couple of vessels that have had to deviate around the slick, but the deviations amounted to hours of deviation, not days of deviation. Could this change if a refinery or refineries get locked in? And the answer is yes. But I don't really care to speculate whether or not that can or will happen. I think we are all watching the situation very, very, very carefully.

The FFA markets in both products and crude have so far not reacted to this. But I think you have traders sitting eagerly on the edge of their seats, waiting for information. And that's really where we are. We are certainly monitoring it closely.

We will have the -- the Overseas Cascade is now employed by BP, and I think we should point out that that ship is on charter to Petrobras, so Petrobras, it should get credit for reacting in a positive way and making that ship available to BP.

But so far, it's business as usual, but it is very much monitored on an hour-by-hour basis as to what is happening.

Okay. Just piggybacking on what Jon was asking on the Jones Act fleet and the expected pick-up in the back half of the year, we have seen refinery utilization come way up off the trough in the U.S., and I guess that would play into part of that expectation. Have you seen indication from customers and are you in ongoing negotiations in terms of employment or is this still just kind of speculative as you look out and have a view that it's more bullish for the back half of the year?

I'm just going to turn it back over to Bob, but I'll just make one point. The market, we had one competitor exit the market a couple of weeks ago that had defaulted on government debt. Three ships were taken over by the Maritime Administration and one is being auctioned off, I'm not sure if it's this week or next week, and that had an immediate psychological impact on the market. But let Captain Johnston take the outlook for the laid-up ships.

Thanks, Morten. That one ship will be auctioned off this Thursday, by the way; that has been confirmed.

But looking forward into the future, we have seen an uptick in the last couple of weeks in the number of spot fixtures, and also the rates have gone up a little bit. Also, waiting time between voyages has been reduced, so there is an uptick in the market.

We're also getting on a longer-term basis inquiries from customers saying what is available in the longer term? So I think what you're seeing is that small increase in the refinery is translating into requests for tonnage. So it is starting to pick up.

Also, we're looking at a number of retirements coming forward. The four ships that American Heavy Lift, when they went into bankruptcy and repossessed by MARAD, that has an effect on the market, but there are also other ships that will be going out as a result of open 90. So I think you're starting to see a tightening of the supply of available vessels, coupled with an increase in the refining.

That's helpful, thanks. Think about the equity in JV, can you -- you gave the lower guidance, and part of it was predicated on the FSO Africa and employment. How should I think about that trending as we move through the year in terms of second through fourth quarter and where we should be thinking of some of that income really starting to ramp up from your estimates?

I would say make an adjustment the second half of the year; that would be our expectation. So first half, not employed; second half, employed.

Okay, that's helpful. Thanks.

I guess when I think about at least our outlook in the back half of the year, and it's definitely informed by what we're seeing, on the transportation side of things we've been experiencing a material uptick in fuel consumption and [jet a] consumption. And our expectation is that gasoline consumption will begin to increase, all very bullish for the market. When I think about positioning for the back half of the year, are you guys looking at chartering in tonnage currently and levering up in terms of your thoughts on operating days in the back half of the year in expectation of that?

We have taken in a number of ships in the last six or eight months at historically attractive levels. I mentioned earlier that we'd made about $240 million over the last five years from that chartered in portfolio. A lot of that was in ships we took on early on in that uptick in the tanker market, and the answer is we have and we would expect to continue to do that. So we are looking for short-term chartering opportunities. Yes.

Okay. When I think about where your FFA exposure stands right now, can you just comment on where that is and how we should expect that to play into TC rates going forward?

Mats will take that.

We have very little, as you can see, in the forward rates there. We only have one ship during the second and third quarter, but nothing other than that going forward. We like that position for this year.

Thanks for your time, guys. Appreciate it.

Doug Mavrinac, Jefferies & Company.

I just have a few follow-up questions this morning that are more industry specific. First, with the recent widening of the contango in the crude oil strip, have you guys seen an increase in the number of crude oil tankers entering new floating storage contracts in recent days or weeks?

Mats.

Yes, we have, primarily due to NITC, though, rather than the contango. But the contango is certainly making existing storage ships stay on rather than getting relief.

Our count today is 44 (technical difficulty) on storage. About 10 of them for NITC and about six, seven of them for storing clean products. But the contango makes it stay in the -- and that's good for us.

Second, somewhat related, but a bit different. As it relates to the current discount that WTI is receiving versus Brent, in the past how has this phenomenon affected shipping demand, both in the near term and in the more intermediate term after whatever inventory adjustments are made, if there are any?

I think you stumped us. That is one that right now we have not been attributed any trading patterns in the ships that we're moving.

Right.

(Multiple speakers) sourcing, but I think (multiple speakers) note that question and do a little more research on it.

Yes, because it's totally bizarre. It shouldn't be happening.

It does affect the contango and storage situation because a lot of the storage and contango plays are based on that arbitrage and moving of Brent over this way.

Right, right, right, right, exactly. Okay, great. Then we'll move to the next one. And then, if it's more -- as it relates to anticipated demand going forward and whatnot, are you guys hearing anything specific, given your cargo-specific strategy, hearing anything specific from your international customers that make you more or less optimistic about the prospects for crude oil tanker demand in the coming months, second half of this year, and so on?

I'll speak. I hate to sound like a drybulk guy, but I just got back from a week in Asia and I spoke with just about -- a whole lot of people, a lot of people in the shipping industry, and I couldn't get one to tell me that they think there's any slowdown in crude oil going into China. And certainly our customer is telling us that and utilization of our ships is suggesting that. So, that is a very important market for us, and no slowdown there.

I think generally the tone from the refiners is that we are starting to see some pick-up right across our customer base. And we still believe, as we said last year, that the second half of this year will be stronger than the first half, and really nothing has changed in that outlook, and what our clients are telling us reinforces that.

Okay, thank you very much, Morten, and thank you, Mats.

Gregory Lewis, Credit Suisse.

Just following up on the Jones Act, it looks like there are seven to eight Jones Act vessels that are currently laid off. What is the sort of quality/age profile of those vessels that are in lay-up at the moment?

Bob, do you want to take that one?

Sure. Right now, they're actually eight vessels in lay-up, six of the vessels are non-double-hull vessels and two of them are double-hull ATBs.

Okay, so at this point, it is doubtful -- with [hope in ninety nine, the coming], it's doubtful that those six single-hulls will probably ever trade again?

That is correct.

And then, Morten, you talked briefly about the [seto] transaction where you pushed forward the two product tankers. Was that really just a move to lower the charter in expense or do you -- maybe doing that in anticipation of a rebound in product tanker rates maybe in the second half of the year?

I will let Lois take that one.

Actually, both is really the answer there. The structure of this replacement deal is that the first year is a low charter rate, so it puts us in a good position in today's market recovery and it did allow was to save over $3,000 per day over the length of the charter.

Great. Thank you for the time.

(Operator Instructions) Urs Dur, Lazard Capital Markets.

I know you mentioned it in your market overview, Morten, but maybe Mats and others could discuss the outlook for the order books going forward. There's been a lot of debate as to how much you're flipping, when and where. And then, also, if you flip a good portion of this year into next year, what happens next year?

The reason why I ask for this is largely because consensus on OSG and many other tanker stocks is extremely broad. In fact, there really is no consensus. I think the order book is one thing that is sort of leading to that. So I'd love to hear your color on how it is developing, how much [purchase] you're seeing, and what you expect for next year, going into 2012.

Let me just -- on a broad statement, Urs, and you and I have talked about it, the outlook on the order book is still very gray, opaque, and there is a lot of fog and secrecy around that.

We've shared with you our estimates of it. There are some -- there has been some ordering of late, but some of that ordering, which I'm still trying to confirm, is -- are ships that are order that are actually replacing orders that have been canceled or voluntarily given up.

When I was in Asia last week, I got on one specific order I was very interested about. One owner was absolutely certain, gotten confirmation that the yard stopped working on that order, and then one bank I spoke with said they were absolutely certain that the money would be available so they could finish it.

My expectation has been that you'd see similar slippage in the order book in 2010 as you saw in 2009, which was a little bit more than 20% of the book, and I haven't changed from that view. I also believe that slippage in the MR book will be bigger than the slippage in the [proof] book, primarily because I think there's less known about the MR orders and so there's a bigger number clock posted out there than I think is reality.

Do I think there will be some orders because rates have picked up? The answer is probably yes, but overall I don't think we've changed the perspective we've had. With a few caveats, Mats can be a little more specific on the crude side.

I just wanted to point out that the phasing-out of the single-hull [Vs] and other sciences is happening. I just checked this morning. 21 Vs have left the V fleet this year, which is one-third of where we started the year. I think we had 64, as per our count, when we started the year. Only one of them have gone.

But was nobody there, as a number of those ships that have been scrapped were ones that technically, under the IMO rules, could continue to trade. It's going out because of the commercial aspect, not because of the regulatory phase-out. You should look very specifically at the ships going out, and I think to me that is a very positive data point.

They've been going to full conversion and to FSOs in storage as well, right? So it's not only (multiple speakers). We have eight scrapped, six to dry, and seven to FSO projects. So we supply the situation on the big ships were very good to this year when you add the storage and the [sole] steaming.

Especially the contango coming back with the recent headlines. Okay, no, that's extremely helpful. Thank you very much. Everything else has been asked for me.

Justin Yagerman, Deutsche Bank.

Mats, I just wanted to clarify. You gave out a number, I think, of 45 Bs on storage. Can you give where you guys think total barrels of crude and clean are in on-water storage right now and was that's come up off of in terms of a low for this year?

For crude, it's been fairly stable and, if anything, most recently going up a little bit. We need to do some calculations to come up with a number of barrels, but for clean it has been coming off lows.

Yes, we're -- presently on clean, we're at about half the numbers that we were in December. And largely, it's being stored now on LR1s and LR2s. The Suezmaxes and Bs, we've seen a steady reduction as their markets have returned. So, eventually, after that tonnage gets onboard, that offsets some of that demand, but then we can see demand pick up and the rates start to recover.

When I think about that, a V that was storing clean and now is trading in crude really can't go back to storing clean, right? So, has it got to be a new V that is coming out of a yard that is going to be potentially employed in the clean storage situation?

That's it, that's the only trade.

And then, if you had to ballpark, I guess, maybe I'll follow up with you guys off-line if you don't have the numbers now. Do you have current crude and clean numbers?

We'll get you those numbers, Justin. I know we have them. The system changes monthly. We'll update them. We'll get them to you.

Thanks a lot, guys. I appreciate the time.

(Operator Instructions).

If there are no more questions, I want to thank everybody for joining, and I -- please, I do encourage you to reach out to Jennifer, to me, to anybody on the senior team. We're happy to take your questions, and I appreciate the hospitality I received from a lot of you on the road over the last month. Thank you and have a good day. Thanks for joining us.

Thank you. Ladies and gentlemen, this concludes our conference call for today. We thank you for your participation and you may now disconnect.