Octave Specialty Group Inc (OSG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the OSG second-quarter 2010 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).

Now I'd like to hand the conference over to 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 or certain strategic alliances and investments; forecasted new building delivery schedule for 2010 and 2011; estimated TCE rates achieved for the third quarter of 2010 and estimated TCE rates for the fourth quarter of 2010; projected scheduled dry dock and off-hire dates for the third and fourth quarters of 2010; the outcome of OSG's negotiations concerning the FSO Africa; the sustainability of OSG's dividend; projected lock-in charter revenue and lock-in time charter days for 2010 and thereafter; estimated revenue and expense items for 2010; levels of equity income and capital expenditures for 2010; prospects of OSG 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 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 have prepared and posted on OSG's website supporting slides and supplemental prepared remarks. The supporting presentation can be viewed and downloaded from the Investor Relations Webcast and Presentation section at OSG.com.

With that out of the way, I'd like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?

Good morning and thank you for joining our conference call today. Let me introduce the management team members that are here with me in New York.

In addition to Jim Edelson, I have [Jerry Miller], the Controller of the Company; Jennifer Schlueter, head of Investor Relations and Corporate Communications; Janice Smith, head of Risk Management for the Company; Lois Zabrocky, head of the International Flag Product Tanker SBU; Mats Berglund, head of the Crude SBU; and Myles Itkin, our Chief Financial Officer. Joining by phone is Captain Ian Blackley, head of our International Flag Operations, who is in Athens office today; and Captain Bob Johnston, head of our U.S. Flag Business unit, calling in from Tampa.

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

Second-quarter TCE revenues were $232 million, a 7% decline from $248 million in the same period a year ago. Reported net loss and loss per share for the quarter was $37.9 million or $1.26 per share. Adjusted for $28 million of unusual items, the net loss was $10.1 million or $0.34 a share.

Our financial results in the quarter reflect the continued challenging market conditions. The slump in the tanker market, brought on by the deep recession that began in 2009, continued in the first half of 2010. On the positive side, we are seeing some firming global macroeconomic indicators and improvements in most of the markets we serve. World oil demand was up 3.2% in the second quarter of 2010 versus 2009. Eastbound cargo counts are up. 30 single-hull VLCCs left the trading fleet in the first half of 2010. And finally, refinery utilization in the US has increased, following a very difficult period.

We took a $25 million non-cash impairment charge in the second quarter to put behind us the challenge of trading our single-hull vessels. These write-downs are the result of both continued preference for modern double-hull tonnage by most of our customers, and legislation we expect will follow the April 20th oil spill in the US Gulf, which I'll talk about later in this call.

We had four vessels delivered during the quarter as we continue to upgrade and modernize our fleet. In addition to our fleet modernization program, we continue to make progress on cost controls throughout the Company. Such initiatives as strict travel rules, close scrutiny of replacement hires, supplier negotiations, and savings on real estate costs are helping reduce the cost of running the Company. Everyone in the Company is expected to be cost-vigilant all the time.

OSG's financial strength, conservative financial management, and ability to weather these difficult market conditions continues to differentiate us as an investment. I should add that we were able to weather these conditions without having to negotiate covenant waivers, principal relief, or take on overly expensive high yield debt.

We took actions in the quarter to further strengthen our balance sheet, including terminating a $200 million secured revolver and paying off secured term loans due through 2014. As a result, we have raised the percentage of unencumbered assets to approximately 68%. Total liquidity as of June 30 was a very healthy $1.6 billion, including $1.2 billion of long-term, unsecured credit available to us.

Please turn to slide four.

Some highlights in the quarter. The Overseas Martinez delivered to our U.S. Flag fleet and commenced a three-year charter with extension options to Tesoro. Tesoro has chartered back four of our modern U.S. Flag MRs. Nine ships are now delivered from our Aker Philadelphia Shipyard order. The 10th vessel, the Overseas Anacortes, will deliver this quarter. Of the 12 ship series, these later deliveries are charted out at higher levels than the average rates on the earlier ships.

Last quarter, Shell extended for two years its charter on the Overseas Houston, which was the first Aker ship to deliver. As of July 1, 59% of the US Flag fleet is chartered out to demanding, high-quality customers such as Shell, Petrobras, BP, Sunoco, ConocoPhillips and Valero.

Three international flag MRs delivered during the quarter, bringing the fleet to 35 vessels with an average age of just five years. These additions are critically important to our goals of modernizing and creating scale in our product segment. The chartering rates on the Aegean Wave and the Adriatic Wave are at attractive, long-term levels. On the FSO Africa, we and our partner, Euronav, continue to be in active negotiations. A successful outcome of these negotiations will reverse what has been a negative drag on earnings.

Finally, I'm very pleased with the contribution OSG is making to the Gulf of Mexico oil spill response effort. Our shuttle tanker, the Overseas Cascade, on charter to Petrobras, was sub-chartered to BP to assist with the oil recovery effort in the Gulf. So far, we have completed four loads and two discharges, and remain on station.

The work the vessel and the crew performed was very technical and very challenging. We installed additional air intake filters on the ship, provided respirators for the crew, and had air monitors onboard. Our crew did a great job operating in the middle of the media spotlight, and more importantly, they did it safely without incident. The photos that are here show the Overseas Cascade working alongside Transocean's Discoverer Enterprise. It is certainly rewarding to be part of the solution down there.

The Gulf of Mexico oil spill will change things for companies operating vessels and rigs in the United States. There are now over 100 proposals that have been put forward in Congress to respond to this bill, a number of which we believe will find their way into law -- which leads me to the next slide. Please turn to page 5.

We believe that the oil spill will inevitably lead to more stringent US regulations. I also believe that owners operating in a tighter regulatory environment will be faced with more oversight, more processes, more controls, more inspections, and more reporting to the US government, and of course, greater costs and greater risks associated with failures.

This phenomenon is good for the environment and also for OSG. It is companies with strong in-house technical management and a commitment to excellence that will differentiate themselves in this kind of new regulatory regime. It is here that OSG excels.

I spend a great deal of time with our customers and I also spend a fair amount of time in Washington, in an effort to ensure that shipping and OSG's interests are protected. I can tell you that the oil majors we deal with, all the big ones, are the most demanding customers on the planet when it comes to safety, and quality, and environmental stewardship. In times like these, after the Gulf of Mexico oil spill, and after the pipeline explosion in Dalian, top-tier customers only want to do business with companies that keep their cargoes and ships' crews safe and our customers out of the evening news.

We take very seriously the need to sustain and improve a safety culture amongst our seafarers. To further augment our pursuit of technical excellence, we have put in place a Marine Operations Insurance and Response Group that integrates our operational audit function with emergency response preparedness. This wasn't something we have added because of the Gulf spill; this is the way we have carried out business at OSG for years.

At OSG, top management -- in fact, everyone in this room and on the phone, is engaged in enhancing the operational excellence of our fleet. Continuity of crews with our ships is critically important to our success, and with a 97% retention rate in our international group, and 90% in our U.S. Flag, I'd say we're doing things right.

I can also ensure you that our oil spill response plan is current and real. There are no walruses referred to or dead experts listed in this plan. The photos to the right on the slideshow are integrated bridge and engine rooms simulated to Manila. Also shown is the cover of our 2009 health, safety and environmental report, which will be published later this month. This report is another step for us in being transparent about our operations to all stakeholders.

Please turn to slide six.

At the end of June, we had 15 new buildings on order scheduled to deliver through the end of 2011. In the second half of 2010, one owned and three chartered-in vessels deliver. In 2011, nine of the 11 vessels to deliver will be owned and two will be chartered-in.

The newbuild program is across multiple asset classes -- two VLCC's; four LR1's; four MR's; three Jones Act product tankers; one large ATB for U.S. Flag; and a chemical tanker coming in on a medium-term charter. These ships will enter our fleet in what we expect to be a rising rate environment in all the segments in which we operate. These deliveries both drive our growth strategy and modernize our fleet.

Of the $3 billion in vessel assets on our balance sheet at June 30, $614 million of new buildings under construction represents capital deployed in the form of construction in progress but not yet generating revenue. This capital we converted to revenue-generating assets over the next 18 months.

Finally, we can comfortably fund our remaining shipyard contract commitments of $391 million from operations or lines of credit available to us.

Please turn to slide seven.

Let me shift gears now and comment on each of our three operating segments. As we head into the third quarter, a typically weak quarter in the tanker trade, we remain optimistic that average rates earned in the second half of this year will exceed those earned in the first six months. We are expecting a typically stronger winter market pickup this year, and as a result, expect that the fourth quarter time charter current rates will exceed those of the prior three quarters. In addition, as I indicated at the outset of this call, there are several key factors worth mentioning that support our market outlook.

The world is clearly moving more eastbound, and crude movements are no exception to this trend. Discharges to China continue to be up month over month with the exception of June. A trend is clearly developing for our VLCC's. The front-haul trade is more and more West Africa or the Caribbean to China-bound, and Arabian Gulf to the West is the back-haul. We recently signed a three-year renewal of a contract with our key customer in China, and named through our commercial pool participation to maintain our 25% share of crude transport into China.

Looking at the charts on the right, the refinery expansion projects in the East are, in fact, moving forward. The addition of these refineries, combined with increasing ton/mile demand, should absorb vessel deliveries coming into the fleet in the medium-term, as India and China continue to diversify their crude sources away from the Arabian Gulf.

Take a look also at import levels into China from West Africa and South America. And while there have been recent headlines about China slowing down, let's look at the numbers. China's GDP growth was 10.3% in the second quarter and is forecasted to grow 10.5% and 9.5% in 2010 and 2011 -- growth that comes with persistent increases in oil demand.

Please turn to slide eight.

We expect our Product segments to benefit from both short and long-term market developments. There's a lot of detail in this slide, so let me highlight a few key points. The supply and demand dynamics of the Product segment was hit hard in 2009 by vessel deliveries and product demand destruction. Over the course of 2010, we expect a reversal of that trend.

At the beginning of the year, Clarkston has projected 200 MR's delivering in full-year 2010, which seems like an alarmingly high number. So far, through the end of June, we count 50 MR's that have delivered year-to-date. So we are on track to actually deliver less than 50% of what the leading brokerage houses projected just six months earlier.

Along with the improving supply side, product demand levels have picked up from last year and we expect the second half of 2010 will improve from the first half. Arbitrage barrels are trading again and transatlantic cargoes are moving in both directions. We now have the opposite math from last year -- the fleet growth is slowing with demand increasing.

Finally, we have seen the fleet of tankers storing refined products, a fleet that was acting as a break on product freight rates, decreasing from 118 at year-end to approximately 25 today.

Please turn to slide nine.

Our strategy in the U.S. Flag segment is to become the leading operator of double-hull tankers and ATBs in the Jones Act market, with the majority of the fleet committed to serving long-term COAs and time charters. This segment is integral to our overall portfolio of assets and remains a compelling market for OSG.

As a niche market, the barriers to entry are significant, and we like the contractual nature of the Jones Act trade and the known cash flow it generates. It will be a good offset to our more volatile spot cargoes once all our new assets are on the water.

I talked earlier on the call about our customers in the Gulf, and I believe now more than ever, these customers will want to do business with well-capitalized, high-quality ship operators such as OSG. In the Jones Act, we already have the largest, most modern fleet of double-hull vessels.

Now in the past 18 months, we have had our challenges in U.S. Flag, challenges we have addressed head-on. Captain Johnston has put an entirely new leadership team in place in Tampa; our US shipyard problems are behind us; and we have effectively focused on cost reductions both at sea and ashore, without sacrificing safety or quality.

Turning to the Jones Act market drivers. US oil demand is expected to be up from last year and should track the overall recovering economy -- the supply story that Jones Act is compelling, as the table on the right shows. These are our numbers, which we scrub every quarter. The combination of financial troubles at some of our competitors and the early retirement of marginal tonnage, particularly post-oil spill, will only improve this picture. And refinery utilization is improving, hitting 91% in the US Gulf Coast during the second quarter.

This concludes my opening remarks. Now I'll turn the call over to Myles.

Thank you, Morten, and good morning. Just a few opening comments on the quarter before a discussion of selected financial statement line items.

Average second-quarter 2010 spot rates for all international vessel categories, except MRs and international crude lightering vessels, were higher than in the second quarter of 2009 -- the result of increasing oil and ton mile demand.

The U.S. Flag product space, although benefiting from reduced waiting time, continues to be challenging. Five U.S. Flag vessels were in lay-up for the full quarter. The sixth vessel, the Overseas Philadelphia, we sold on July 1, following completion of a grain voyage to Djibouti.

OSG's consolidated results for the second quarter included two noteworthy items. The first is a non-cash impairment charge of $25.2 million covering five single-hull vessels; three U.S. Flag vessels -- the Overseas Philadelphia, Puget Sound, and New Orleans; and two double-side international Flag lightering Aframaxes -- the Sabine and the Brazos; as well as a 1981-built U.S. Flag ATB employed in the Delaware Bay lightering trade.

The second item is the effect on earnings of the change in fair market value with the FSO Africa's interest rate swaps. As discussed in our first-quarter earnings call, the FSO joint venture de-designated these interest rate swaps as a hedge for accounting purposes at March 31. As a result of the swap de-designation, all current and future changes in the market value of these swaps will be recorded directly to earnings. The effect of changes in market value on OSG's earnings for the second quarter was a $3.9 million charge.

Please turn to slide 11 for a discussion of selected income statement items. TCE revenues decreased by $16 million to $232 million from $248 million in the second quarter of 2009. We had more spot exposure in the second quarter of 2010 -- 68% -- compared with 48% in the second quarter of 2009. In 2009 second-quarter, we had nine VLCC's that were hedged at rates that exceeded spot earnings by close to $14,000 per day in comparison with the one hedged VLCC in 2010 second-quarter. On a blended basis, which includes spot, hedged, and time chartered rates, VLCC TCE's increased by about $3,000 per day quarter-over-quarter.

The averaged TCE for international lightering reflects 135 unemployed days on the two single-hull vessels that were subject to an impairment charge. Excluding consideration of these days, the lightering daily TCE rate was $22,000 per day, a $2,500 per day premium to our spot Aframaxes.

Our Product suite had more than 400 fewer revenue days in the 2010 quarter compared with the 2009 quarter. In addition, spot days for the MR fleet as a percentage of total revenue days increased to 70% from 45%. Although spot MR rates have increased in the third quarter, average spot rates for the second quarter have declined $5,100 per day quarter-over-quarter. The combination of reduced days, low rates, and increased spot exposure resulted in the reduction in TCE revenues from the MR fleet of more than $13 million.

Charter hire expenses decreased by $16 million due to 600 fewer charter-in days, and a $7 million decrease in profit share obligations to the owners of our chartered-in vessels, primarily VLCC and lightering vessels. The change in mix of chartered-in tonnage, 280 fewer VLCC and Aframax days, and 280 more MR days further contributed to the decrease in expense, due to the rate differential between these classes of the ships.

As previously mentioned, the Company recorded impairment charges of $12.7 million in its crude segment and $12.4 million in its US segment. The carrying values of the written-down, single-hulled assets are close to current scrap values at June 30.

General and administrative expenses decreased by approximately $5 million to $24.5 million. This decrease was principally attributable to reductions in market returns on unfunded defined benefit pension liabilities that favorably impacted G&A, as well as reduction in legal costs. In addition, compensation and benefit costs were reduced quarter-over-quarter, due to tight scrutiny of replacement hires and reductions in certain benefit programs. We are not, however, changing our annual guidance for the full-year 2010.

Equity income of affiliated companies decreased by $4.2 million to a loss of $3 million. This decrease is attributable to the FSO Africa, which was unemployed the entire quarter, generating a loss of more than $16 million, our share of which was $8.1 million.

$7.8 million of the gross loss, our share of $3.9 million, was attributable to the change in value of interest rate swaps there to being mark-to-market to earnings. Over the remaining seven-year term of the swaps, any change in value of the FSO Africa swaps will be recognized in earnings. The balance of the FSO Africa loss represents vessel operating expenses and depreciation, and $1.1 million in fuel consumed at Anchorage, which will be for the charter's accounts when the FSO goes on charter. As Morten indicated, we continue to be in active negotiations for employment of the FSO Africa, which, when in service, will positively contribute to equity income of affiliated companies.

Interest expense increased by $8 million to $19 million from $11 million in the second quarter of 2009. We extended the maturity profile of our debt through the issuance in March of 2010 of $300 million at [8 and one-eighth] percent unsecured notes due in 2018. The proceeds from this note issuance we used to pay down outstanding balances under the unsecured revolving credit facility.

The difference between the fixed rate of [8 and one-eighth] percent and the credit facilities' LIBOR-based rate resulted in an additional interest expense of $5.5 million in the second quarter of 2010. In addition, the average amount of floating rate debt increase by $100 million quarter-over-quarter, and $1 million of deferred finance costs were written off upon termination of our $200 million secured revolver, previously associated with our U.S. Flag [MLP].

Please turn to slide 12 for a brief discussion of selected balance sheet items.

Year-to-date, the Company's cash position increased through two public offerings and the maturity of a short-term investment, which added $448 million and $50 million, respectively. We used these proceeds to reduce balances outstanding under our revolving credit facility by $370 million and to cover payments on vessel construction of $177 million; funding of commitments to our FSO joint venture of $150 million; and payment of dividends of $25 million. These actions resulted in a $352 million balance of cash and cash equivalents at June 30.

Investments in affiliated companies increased by $107 million from December 31, 2009, principally as a result of the Company's advances to the FSO joint venture. The aggregate gross increase in investment was partially offset by a $28 million increase in unrealized mark-to-market losses on interest rate swaps held by our LNG and FSO joint ventures, and $9 million in distributions received from our ATC and LNG joint ventures. In addition, we recognized net losses in 2010 of $5 million related to all of our joint ventures in the first six months of 2010.

Intangible assets decreased by $13 million from December 31. The decrease reflects normal amortization of $3.7 million, as well as the impairment charges taken on the two single-hull international flag Aframaxes engaged in lightering that were chartered in by us, in which we hold a 50% residual value interest.

Please turn to slide 13 for a discussion of 2010 guidance.

We've updated our guidance relating to vessel expenses, charter hire expenses, results from affiliated companies, and capital expenditures. Vessel expense guidance is revised downwards to a range of $275 million to $290 million, principally to reflect revised assumptions with respect to certain of our U.S. Flag single-hull Product carriers. Our prior estimates assume that the three remaining single-hull tankers would return to service during 2010. This is no longer our working assumption and we have therefore removed related OpEx estimates.

Charter hire expense guidance has been increased to a range of $365 million to $380 million, reflecting new charters entered into since March 31.

Results from affiliates guidance is updated and is expected to be in the range of $3 million to $8 million in comparison with previous guidance of $10 million to $15 million. This revised guidance is based on the expectation that the FSO Africa, which is currently not employed, will commence employment in the third quarter. It is worth noting that although the results for the first six months were a loss of $5 million, we are expecting that the second half of the year will generate income of $8 million to $13 million, weighted towards the fourth quarter.

Our guidance for capital expenditures for 2010 is slightly higher at approximately $397 million -- previously, $366 million. This includes progress payments, vessel improvements, and capitalized interest.

Morten, back to you.

To wrap up before taking your questions, I'd like to emphasize several themes we think are important for investors to remember about OSG. We are running OSG for the long-term. We are focused on growth, conservative financial management, and the execution of our strategy through the peaks and valleys of the tanker markets.

The financial position of OSG is strong. Our focus on maintaining a [fortress] balance sheet has served us well, as we've [waded] through some very tough quarters in the past 18 months. We have ample liquidity and can ably manage our principal repayments, which total $45 million and $54 million in 2011 and 2012. We have a sustainable dividend, and as Myles indicated, are well within all financial covenants.

We have built in growth at OSG. With four additional ships delivering in the second half of the 2010 and 11 more in 2011, we don't have to chase deals. These vessels will deliver in what we anticipate will be rising rate environments across the multiple markets in which we trade.

We continue our efforts to improve our newbuilding order book. Working cooperatively with our yards, we have brought the cost of our order book much closer to today's market levels and gained valuable flexibility. Our commercial strategy remains unchanged -- we will lock in vessels on time charters and take FFA positions when rates exceed our forecasts. Third quarter bookings so far are above where the FFA markets were at the beginning of the year, so our decision at the beginning of the year to take on greater spot exposure was the correct one.

Finally, in today's presentation we try to provide some color and details supporting what we expect to be increasing rate environment beginning in the fourth quarter. OSG is leveraged to rebound with OPEC production increases, spot rate improvements, and start-up export refineries in Asia.

With that, Operator, we'll now open the call to questions.

(Operator Instructions). Jon Chappell, JPMorgan.

You guys probably said about as much as you can about the Africa, but I do have one quick follow-up question on that regarding this cash collateral of $72 million that you had to give to the bank facility. Once that vessel goes onto a contract, do you receive that cash back? Or is it completely dependent upon the returns on the vessel? Or does the bank continue to hold that $72 million regardless?

It depends upon negotiations with the bank group, Jon.

Okay. And then I also had a question on the impact of the Deepwater Horizon. There's obviously a lot of moving parts here and a lot of uncertainty about what that's going to mean for the Gulf longer-term, so we won't talk about that; but trying to balance how it's impacting your lightering business, which I think I understood is in the negative light versus how it's potentially impacting the US Jones Act business.

Now whether OSG ships are working there or not, I've heard that some of your competitors' ships are probably down there, which could be tightening the balance of the rest of the US Jones Act fleet. Is there any way to give magnitude or maybe just some subjective talk about the benefits and the detriments to what's going on down there?

It would be very difficult to do, Jon. We have not had a dramatic impact on the lightering volumes themselves. The issue -- we fully expect that non-double-hull vessels will be banned from January 1, 2011 in the US economic zone. That's 200 miles offshore. The current lightering areas are about 50 or 60 miles offshore.

So that when we think -- there's no objection to that really across the industry and that will happen. That's one of the basis for the impairment charge.

On the U.S. Flag, if you look closely at that chart and you compare it with others, there has been an improvement in the supply and demand picture in the U.S. Flag. So, in fact, we do see less waiting time in that area and that results ultimately in better performance in the US flag unit.

But it's a little uncertain now. And you know, with a 100 different bills running through Washington, all you know is stuff is going to happen. I think it's clear that increases in liability for accidents is an absolute certainty. And the question becomes what ultimately that is for the shipping industry, who's going to pay for the cost, and how much it will be, and what that means for our customers in terms of who they will deal with. We have a team monitoring it all the time and I think we will be prepared.

In the short run, the moratorium clearly means there will be more imports of oil to the US. And as new fields -- or as drilling gets postponed, that is a consequence of that absent reductions in demand in the United States.

With more lightering to follow from that.

Right. More lightering to follow. And it's a little early in the game still, Jonathan.

Okay. And then just one last question then. There's been a lot of talk about asset prices near the bottoms and we've certainly seen some people step in pretty aggressively, more on the private side, to buy. As you look at deploying the incremental capital dollar from OSG across your four different business segments, which appear to be most attractive right now?

I think the -- our view is we like the International Flag segment, the Product Tanker business, and the Crude business, really -- those are our core businesses. We have scale in there. We will take advantage of opportunities as they come.

In the crude side, we benefit now from a very low book value fleet -- book value fleet well below what you have compared to market prices today or what competitors have been willing to pay for assets. We've put a lot of focus on improving the cost and delivery dates to get flexibility in our new building book. And that's -- we've added very significant benefits there.

But we certainly will continue to look at opportunities in those core segments. I think we have enough new assets coming in the U.S. Flag in the medium-term now that we'll wait until all that's on the water and we have more size [positive] the results there.

Do you think that the returns are close to looking attractive, based on your outlook for the markets and where the prices are today?

I think you have to do it on a segment-by-segment basis; but certainly that we're at levels where acquisitions, buying of assets can make sense, yes.

Okay. Thanks, Morten. Thanks, Myles.

Justin Yagerman, Deutsche Bank.

Wanted to just ask -- I know there's probably a limited amount you can say, as Jon kind of highlighted on the FSO Africa, but Euronav said it -- in the not-too-distant future, you should have something you guys are saying employment in Q3. When's the timing for when we should expect some kind of an announcement to come up? At least in terms of thinking about this thing for modeling Q3 versus Q4 in the back half of the year, how should we be looking at employment timing?

Justin, you should know that Euronav and OSG, we compare notes on what we're going to say on this very carefully, so we don't send any confusing messages. I think Myles gave pretty good color on the guidance from the line item -- the equity line item that's impacted by this. And I think what Euronav said is directionally giving you good guidance.

Okay. Can't blame a guy for trying. (laughter)

Was curious, in terms of spot versus TC exposure in the back half of the year, it sounds like you guys are pretty optimistic in terms of your rate outlook and what you're seeing. Should we assume that as we move through the year that you're going to be trying to keep as much of your fleet on spot? Or is there a balance that you'd be looking to strike, in terms of trying to up some of the time charter exposure, especially on the crude side?

Well, now, to start on the Product side, we're benefiting from increasing spot rates already. You see that in the release. And we don't need to nor would we be locking in significant exposure delevel on a time charter basis.

We have a view, particularly on the fourth quarter, that the crude rates are going to improve. It's consistent with what we've said really across the entire year. And we would expect that crude rates will obviously -- based on what I said earlier, will exceed what FFA rates have been across the year. So we will keep a heavy spot focus.

I guess, a related question, getting at it a different way, is -- are customer time charter requests or inquiries picking up as they look out and potentially see the same trends that you guys are seeing?

Lois and Mats, answer that one directly particular segment.

Pretty quiet, pretty flat on the crude side. Some activity but you don't see a significant pickup. People are a bit hesitant when spot rates go low as they do right now and holding back.

And essentially on the Product side, you see the time charter activity being limited largely one to two years because owners don't want to fix [add at] these rates for a prolonged period. So there are some owners who will take cover; but with the utilization rates that we're achieving, those are below what we can do on the spot market.

Got it. No, that makes a lot of sense. Yes, it sounded pretty clear from the prepared remarks that the single-hulls that you guys have taken impairments on probably aren't going to be finding alternative employment; but just curious, is there a chance that we see these ships being retrofitted or employed in other ways, and showing up in different parts of the business over the next year or so?

I think the impairment now suggests that there's lower probability of those finding gainful employment. So we have taken -- they're largely written down to near-scrap value and that just suggests that we're not optimistic about the employment (inaudible). We're putting them behind us.

Okay. (multiple speakers) That's what I figured. And then lastly, I'll turn it over to somebody else after this -- I was curious on if you had any color on where you think Chinese petroleum strategic reserves are at this point? And we continue to see pretty strong crude demand out of China, even as you're starting to hear about some of their industrial production and GDP numbers decelerating a little bit here.

What are your thoughts on that? And then maybe if you could go into any change in terms on the contract that you guys have re-upped at this point with -- I'm assuming that's the one with [Unopec].

The strategic reserve we believe will continue to be filled in China. They have reached the first stage, but there's two more stages, so there's a lot of confidentiality there; but the bottom line is that we think that, over time, China will continue to increase their strategic reserve in line with their consumption increase or even more proportionately than their consumption increase.

What was the other question?

Just in regards -- you guys had mentioned that in the quarter you achieved a three-year contract extension. I think you said on -- I'm assuming that's the COA with Unopec -- if there was any change in the relationship with that new contract renewal in terms of increases or decreases in volumes or rates being paid?

No change in base terms. It's market-related COA, but the volumes are going up in line with their increases; so, even higher. It's focused on West Africa as it has been before, although we have access to other Atlantic and AG cargoes as well.

Excellent. Alright, thank you so much for the time.

Thank you. Our next question comes from the line of Doug Mavrinac with Jefferies & Company. Please go ahead.

Doug, you on?

We'll move on. Our next question comes from the line of Gregory Lewis with Credit Suisse. Please go ahead.

Morten, I just wanted to follow-up on some comments you made regarding your conversations you've had with customers and maybe what you've heard down in Washington regarding the ban of single-hulls. Are you thinking -- and you mentioned Jan. 1, 2011 -- are you thinking that Open 1990 will simply be amended? Or are we talking about a whole new type of regulation?

No, I think that is -- I think, technically, that is a adjustment to Open 90 and that's the way it will be written in. I think the other things will be more oil spill response plans and such. There will be an enormous attention and bureaucratic focus and review, we think, will be required certainly for rigs and for ships. We're very comfortable with our plan -- so it will be things like that. So these will largely be outside of Open 90.

I think the industry did a pretty good job articulating and representing that Open 90 has been a very effective piece of legislation for reducing incidents from ships in and around the United States. And I think the legislature -- the legislators pick that up.

What they want to make sure is that those that put things in the water that's bad, whether it be a ship (technical difficulty) are responsible for it, have the cleanup plans to deal with it, the financial resources to pay for it, and that it will be a broader and more punitive definition of liability.

I think -- well, we have -- there may be some owners who are convinced that the cost of doing business here may simply -- the risk may be too much. But that remains to be seen. Certainly the cost is going up.

Okay, great. And then shifting gears a little bit to the Jones Act fleet, it looked like in Q2 there were around 1,595 operating days. And as I look at the guidance for Q3, it looks like there's only going to be around 1,300 days. How should we think about tying that out? Is that -- my understanding is the lightering vessels are included in the International; so I guess, really, I'm just trying to figure out where that extra 300 days is going to be.

What we'll do is we'll come back and give you the exact answer. Anybody else that needs that we'll have them follow-up with Jennifer.

Okay, great. And then shifting gears, it looks -- congratulations on selling the Philadelphia. Is there going to be any type of gain related to that vessel in Q3?

A small gain.

Okay, small gain. And then lastly, just stripping out the -- as I strip out or try to back into equity income, it looks like if we strip out the $8 million from the Africa, it would have been around $5 million for the quarter. Is that pretty much just split equally between the LNG vessel and then the other FSO, the Asia?

The FSO's for the second quarter had a combined loss of around $5.5 million. The difference is skewed toward the LNG.

Okay, great. Thank you very much for the time.

Natasha Boyden, Cantor Fitzgerald.

Just a quick question on the write-down. Do you have any vessels at all that could be written down in the near-term or over the near future?

We've conducted the impairment analysis on any of the vessels that appear to require the analysis. It triggered an impairment analysis, so nothing incremental at this time.

Okay. Alright, great. And then just in terms of your charter hire expense, you know, you've been returning high-cost vessels to owners to reduce your charter hire expense there and done a pretty good job of it. Can this be reduced further? Or are you comfortable with your exposure currently?

No, I think we're both comfortable and committed under the charter hire arrangements. At the moment, the third quarter outlook would reflect that there'd be a lower level of profit sharing that might have existed in the third quarter of last year.

Okay, great. And then just a very general question, maybe for Morten. Obviously, the third quarter is seasonally typically weak and we see a seasonal spike in the fourth quarter, which I presume everybody is looking for. Do you see any other catalysts in the near-term that could really make rates spike up? Or is it really just a seasonal factor?

It's seasonal -- it's return of ships from storage, both crude and product. If you look back to other quarters, the amount of ships that are in queue, we've seen numbers near these levels before.

If all a sudden, there's a contango play gets back in, that could very quickly turn things around quickly; China was a little bit down in June -- if all a sudden China takes more cargoes and puts them in reserve; if all of a sudden they release more cargoes to the West and the Gulf -- so it's the usual things.

So there's nothing that has surprised us about a weak third quarter. That's what we had budgeted for. And fortunately, for the quarter, July, as you know, was a lot stronger than people had expected. At least the quarter got off to a good start. On the product tanker side, we know that's a very healthy pickup from the second quarter.

Okay, great. Thank you very much.

Rob MacKenzie, FBR Capital Markets.

Morten, I wanted to explore some comments you made earlier in the call. You said you thought asset prices for further acquisitions were attractive now. But before that in the call, you said you didn't -- felt like you didn't have to chase any deals. Were you referring to some of the prices paid recently, thinking that those were too expensive? Or was that just a generic comment?

I'm very careful about not criticizing what our competitors do in terms of buying ships; so I certainly wouldn't want to be quoted as that.

We have adequate scale in our segments, so we have been able to focus on improving newbuildings, time-chartering in, because that has been more attractive than buying ships for quite awhile now. And it has still been over the last 12 months. And that we will look for opportunities where yards and owners are perhaps in a more willing, selling mode.

And that's -- when you have a newbuilding program like we have, the fleet size you have, capacity to charter-in, which we have, which most don't, we can be a little bit more disciplined, demanding about the price we're prepared to pay. But I'm not going to criticize what other owners are doing; that's not -- there's a lot of smart people out there.

Okay. And kind of related follow-up to that. In your comments about more stringent regulations in the wake of the US Gulf spill, what is your view on the availability or whether or not there will be smaller companies that just decide to exit as opposed to trying to meet more stringent criteria?

There are already big companies that won't trade the United States. And that's before you got to whatever liability, whether it's unlimited liability or increased amounts determined by the executive branch, which is one of the proposals -- when you have criminal charges, criminal investigation commenced against BP in the middle of the cleanup effort, criminalizing an accident, you combine that with just the cost of insuring and the risk of being at fault, I think will lead some players to stay away from this market.

Okay. And that also segueways nicely into my next question was, what about insurance? Obviously, it's still quite early in terms of understanding what the liability cap might end up being, but how would you see that, given the different scenarios have been talked about from $10 billion to unlimited, affecting your cost of doing business going into the US?

You know, I think we're going to be able to, in many cases, pass on the cost of increased insurance coverage in the US with customers, I think. And the spot market will adjust to it -- obviously, assuming you can get insurance.

I think the oil industry, the only way they're going to deal with it, it's going to have to be a mutual arrangement where the players get together and on a mutual basis will ensure that 10 billion or 20 billion strip, whatever it is they need to ensure for a cleanup. And I think there's some pretty sensible proposals are being put forward on that. Obviously, that's going to cost the oil industry some money but I think they've collectively recognized that's the best solution.

What it means for the smaller operators is still unclear. And I think one of the concerns is that the direction they're heading now may make it difficult for smaller players to operate in the US. We are neither encouraging or discouraging this, but I'm comfortable that we're going to be in a position to get the insurance coverage we need, and where we have -- our customers are going to accept that we're going to have to pass some of that on in rate.

Okay. And then I guess the last question along that line of thinking is -- does this whole change in the status quo or the paradigm here mean that the majors might be more likely to own and operate their own tankers? Or the opposite, are they more likely to shed those assets to others and outsource that risk?

Based on what we're hearing from our clients, there's no appetite for increasing [their main] exposure. It is going to be increased vetting and discrimination of what they deal with.

I consider -- in our last quarter, we just reviewed this internally, but we had 100% success in our vetting inspections. And that's something that all the people in operations from the top down to the superintendents and fleet managers are measured by. So this has always been important. We think it just becomes more important.

Got you. Okay and (multiple speakers) --

It may create opportunities for us.

Okay, thanks. And my final question, if I can just come back to a dead horse, on the FSO Africa, Euronav in their release said they were continuing to look for employment with various parties -- I guess with the implication being apart from Maersk Oil Qatar. Whereas your comments earlier seem to imply that you were close to an agreement with Maersk Oil. Can you bridge the gap there for us?

I think you're putting words in my mouth. I was very careful not to say who we were in discussions with or who we might end up with. Obviously, we're talking with Maersk Oil Qatar and others. But I think Euronav's words were very careful and complete.

Okay, thank you very much.

Urs Dur, Lazard Capital Markets.

I was wondering if you guys could just give -- everything has really been asked -- so what's the outlook really for Handymax spot clean going forward? I know you gave some color on that, but maybe if you could dig a little deeper and see what's going to drive that up from rough levels, and where you see it now and where it's going.

Lois?

Okay. Essentially, we've seen those refinery utilization numbers that Morten mentioned earlier, have touched 90%. And we're seeing a lot of diesel oil exports out of the US Gulf, which is something that we haven't seen for some time. And that allows us on the MRs to triangulate better.

So you've got the gasoline coming into the East Coast and then the diesel oil coming out of the US Gulf. And we're also seeing an increase in the number of vegetable oil, the palm oil movements from the east. So overall, I think you see the market absorbing the heavy supply deliveries from 2009. And I think we have an overall better picture on the fundamentals.

We're coming out up out of a nasty hole, I guess. So that sounds fair enough. I guess you went over that. Thank you very much for your time.

Otis Jenopolis, Morgan Stanley.

You gave us an indication of what your vessels they have earned during the beginning of the quarter. And given the fact that another 2 -- 2.5 weeks have passed, during this Q3, and spot market rates especially in the crude segment, they look quite low right now. VLCC's are around $10,000. Can you give us your view about the remaining of the quarter? And what are you seeing are the catalyst that they will (multiple speakers) [save] the market?

(multiple speakers) [We know] where spot rates are, we generally make slightly bigger margin above rates when they're really low, right, given our cargo coverage and our systems, et cetera. So I wouldn't use the current spot rates when you model us there, but you know you -- the slight premium above -- of that. But it's safe to say the average is not improving as we stay at these levels.

I'm assuming that the market in the third quarter is much worse than second quarter as looks right now. And if we do not see this big recovery in Q4, shall we start thinking of potentially raising new capital to strengthen further the balance of the Company?

I think right now we are well-capitalized, very liquid, a good fleet. We have ships coming in with contracts already -- right now we're very comfortable with all our commitments, obligations, debt repayments and no need to add capital for what we're doing. There may be some of our competitors that cannot say the same thing. We're very comfortable where we are. And I think I said earlier, our dividend remains sustainable in this environment.

Again, we're optimistic about Q4 rates.

Would you mind give us some range that you expect that rates will move in Q4?

No, that's -- good for asking, but that's something we refrain from doing.

Okay, thank you.

Blaine Marder, Loeb Capital Management.

Morten, you had mentioned in commenting on asset values the attractiveness in the market. And it gets me to thinking that you bought in your Jones Act vessels, and given that, why not look at DHT, which you spun out several years ago. I mean, that trades in the market for just above unchartered asset value. And given where spot rates are, doesn't it make sense to consider buying that back in? And in all fairness, I will disclose it, I am a DHT shareholder. Thank you.

We never comment on specific companies that we might have an interest in.

We have extension options on the ships from double-hull tankers. Those extension options and the levels they're at are the lower of the current rates, which are rates today which we deem attractive, or the market. So we have enormous optionality to control those ships. The way we make money on those ships is by trading them.

A financial transaction that could be done that would enhance that benefit, of course, we'd consider, but it would have to be something that made more sense than just continuing to charter those ships and extending them and use the optionality we have.

So we're interested in OSG shareholders, double-hull tankers, shareholders benefit from our charter commitment. And anything that we would have to consider would have to be a good transaction for OSG. As it is, we like the optionality we have; we like the charter rates we have; and we like the vessels that we're running there.

Absolutely. Thank you.

Sal Vitale, Sterne, Agee.

Thanks for taking my question. Could you just update us on your VLCCs, what percentage of either overall operating days or overall cargoes carried -- what percentage is in the Arabian Gulf to Asia route as opposed to any other routes?

Yes, fairly small. I don't have an exact percentage for you. But our V activity is very much focused on West Africa/China, balancing to AG and then we've got COAs from AG down to South Africa. We then have a short ballast up to West Africa again. So that's our milk runs and that takes up 70% -- 75% more or less of our V business.

Now China is diversifying their buying, and buying more from other Atlantic ports, which is good because they're long-haul, and we're loading at times in the Caribbean, in Brazil and in the North Sea, which is even longer voyages. But we do make some AG East, but that's not our core business and our milk run.

Okay. Well, then just a follow-up to that question. Given that, it seems that the $40,000 per day that you have, if I quoted that number correct, the $40,000 per day spot bookings to date on VLCCs, it seems that that's doing significantly better than the overall market. Can you give us a sense for whether you think that continues for the rest of the quarter?

Rates are low now, right? But I also mentioned that we usually make a premium above where you see spot rates. I mean, you see AGEs right now around $10,000 per day. We are making at least 50% above that in our West African voyages today. This is normally a weak period and we had the same phenomenon last year, and rates can spike up very quickly again.

So are you saying that that 50% premium will probably shrink a bit as rates improve?

We don't predict rates, but we've been very clear and consistent that in all our markets, V's, Aframaxes, Panamaxes, where we have good contract cover, we are going to earn a premium to the overall market because we wait less for cargoes and we're laden more than the overall market. And that produces the premium in the weaker markets. There's absolutely no reason for that to change because our cargo coverage remains at historically pretty high levels.

Okay, that makes sense. And then if I could just switch gears to the U.S. Flag business -- just looking at the off-hire schedule you provided in your presentation, it seems like delay of days for the US Flag was at 459 and 460 for the fourth quarter -- is that -- I assume that assumes that the five US flag vessels that were on lay-up in the second quarter continue to be on lay-up for the rest of the year? Is that accurate?

Yes, that's correct.

Okay. Any sense for -- and it's probably too far out to look at 1Q, just for modeling purposes -- are those vessels older vessels that, eventually, if you don't get employment for, you'd consider selling or something or taking some other type of action?

The vessels are indeed older vessels. They have [OPA] expiry dates that go, depending upon the vessel, to 2012. We have written those vessels down, predominately to approximate scrap value. So the unemployment, while there is a small possibility of continued employment, which was reflected in the impairment analysis, will remain in lay-up, certainly, for the balance of this year.

And just to add a comment, there are a couple of ATBs that are also in lay-up. And the market, although those are smaller ATBs, we expect that those ships will be activated some time through 2011 or late this year.

What you're seeing is a phenomenon where there's reduced waiting time for the double-hull vessels. That does have the ability, if this continues, to carry over to those smaller ATBs that are currently in lay-up.

Okay, I'm sorry, just a clarification -- those ATBs that you're saying are also in lay-up, are they included in the -- no, they're included in the 459, correct?

Correct.

Okay. And then just one last question, I know it's been a long call -- could you just update us really quick on your -- on when the revolver, your current revolver starts to reduce? Is it 2012?

It's 2011 and 2012 -- $150 million in each of those periods.

Okay. Thank you very much.]

(Operator Instructions). Doug Mavrinac, Jefferies & Company.

With the call already over an hour, I'll keep this quick to just two questions. And I apologize if they were asked earlier, but I was disconnected from the call. First, Morten, you mentioned in your comments you had a COA that was renewed. Is that the COA that covers liftings out of the AG?

No, primarily West Africa but also other Atlantic ports.

Got you. That's what I was curious about, Mats, was that -- I know it used to cover primarily West Africa but has that been expanded to include more South American cargoes, potentially just kind of highlighting China's diversifying sources of its crude?

It kind of tracks their diversification of their buying, yes, that's correct.

Okay, got you. And then just the second question -- and this may be more for you, Mats, as well -- you guys highlighted the number of product tankers that were being used as floating storage and the number that had been -- how much that had decreased. Can you shed some light as far as the number of crude tankers being currently used as floating storage?

And then also perhaps the duration of some of those -- distinguishing between permanent versus maybe temporary storage that came about because of the widening of the contango that came about back in May.

Crude storage has come down significantly and that is one of the main reasons why the market is so weak. And again, it can swing up again if we get contango back. It doesn't make sense today financially, to store crude. So most of the commercial storage has come off, apart from four or five double-hull V's that are still in commercial storage.

But then you have the NITC, and they have roughly 20 of them and half of them are in the Red Sea and some count them as storage and some do not. But then you have about 10 single-hull tankers off Malaysia storing fuel oil, and you have three -- I think, Lois -- remaining storing clean products. But I would say 20, 25 V's have come out of crude storage -- commercial crude storage.

Okay. Right now it sounds like right now you have a handful storing crude, maybe another handful storing fuel oil but that's about it as far as the commercial ships being used as floating storage right now?

Excluding NITC and excluding the single-hull fuel storage, correct.

Okay, perfect. That's all I had. Thank you.

Thank you. And there are no further questions in the queue. Management, please continue with any further remarks.

No, I just wanted to thank everybody for joining the call and staying on for an hour and 15 minutes and a lot of good questions. If there are any follow-up, feel free to contact Jennifer, Myles, myself, Mats, Lois, and thank you very much. Good day.

And ladies and gentlemen, that does conclude the OSG second-quarter 2010 earnings conference call. Thank you for your participation and you may now disconnect.