Octave Specialty Group Inc (OSG) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the OSG third-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 opened for questions. (Operator Instructions).

I would now like to turn the conference over to 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 (inaudible) barge markets; changing oil trading patterns; anticipated levels and signing of new building and scrapping; prospects for certain strategic alliances and investments; forecasted new building delivery schedules for 2010 through 2013; estimated TCE rates achieved for the fourth quarter of 2010 and estimated TCE rates for 2011; projected scheduled drydock and (inaudible) for the fourth quarter of 2010; the sustainability of OSG's dividend, projected lock-in charter revenue and locked-in time charter days for 2010, for 2014 and thereafter; estimated revenue expense items for 2010; levels of equity income and capital expenditures in 2010; projected 2011 operating expenses and general and administrative expense; OSG's ability to meet refinancing obligations in 2011 and 2012; prospects of OSG's strategy of being a market leader in the segments in which we compete; the projected growth of the world tanker fleet; and the forecasted 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 statement. 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 to supplement our prepared remarks. The supporting presentation can be viewed and downloaded from the Investor Relations "Webcasts and Presentations" section on OSG.com.

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

Good morning and thank you for finding time on election day to join our conference call.

Let me first introduce the management team members that are here in New York with me -- Jennifer Schlueter, Head of Investor Relations and Corporate Communications; Janice Smith, Chief Risk Officer for the Company; Lois Zabrocky, Head of the International Product SBU,; Mats Berglund, Head of the International Crude SBU; Myles Itkin, the Chief Financial Officer; Jerry Miller, Controller; and Jim Edelson, General Counsel.

Joining by phone from Newcastle is Captain Ian Blackley, Head of International Shipping Operations. Joining by phone from Tampa is Captain Bob Johnston out of our US flag SBU.

As Jim indicated, our remarks will follow a presentation that is posted on the website, so please turn to Slide 3. Third-quarter TCE revenues were $209 million, a slight increase from $207 million in the same period a year ago. The reported net loss and the loss per share for the quarter were $31.8 million and $1.06 per share. Adjusted for $4.9 million or $0.17 of items that are typically excluded by analysts, the net loss was $26.8 million or $0.89 per share.

Converging market events in the quarter made it tough for any tanker operator. First, the trading fleet increased from a combination of new building deliveries and vessels released from floating storage as the Contango position disappeared.

Tonne mile demand declined as China sourced more oil from the Arabian Gulf instead of longer-haul sources in West Africa. There was no change in OPEC production levels and no (technical difficulty) in August and continued into September. I will talk more about our forward outlook on the market later on this call.

Now, compared to the third quarter of 2009, TCE revenues were impacted by an increase in pure spot business versus a much higher percentage of synthetic time charters and fixed-rate business within the third quarter of last year. The change in mix for the VLCC fleet significantly overshadowed the fact that spot rates were up 40% quarter-over-quarter. The change in mix was also significant for our MR fleet as a number of our time charters expired during 2010. Myles will go into more detail about this in his remarks.

Please turn to Slide 4. I'd like to take a moment to reemphasize some themes we think are important for shareholders. In market conditions like we've seen in the past six quarters, we focus on our three core market segments -- crude, products, and US Flag and on improving and in strengthening our businesses for the long-term. I am very comfortable that OSG has the scale, the ships, the capital, the people, and the opportunities to be competitive with anyone.

Our fleet modernization programs continued during the third quarter. On the crude side, the FSO Africa delivered and began a three-year service contract in the Al Shaheen oilfield of Qatar. The vessel is part of a joint venture between Euronav and OSG. Together, we own two FSOs on charter to Maersk Oil Qatar. What's most important about the commencement of this charter is the joint venture will be profitable beginning this quarter and beyond. Furthermore, our share of the cash collateral, approximately $60 million posted on the joint venture debt, will be returned in connection with restructuring the debt on the FSO Africa, a fourth quarter 2010 event.

On the product side, the outright purchase at current market levels of the Overseas Kythnos from [SPC] allowed us to cancel the five-year bareboat commitment on the vessel in a win/win for both OSG and our Korean yard partner, [SPC]. The product fleet now totals 31 vessels.

On the US Flag side, the Overseas Anacortes delivered and began a three-year charter for Tesoro. Of the 12 ship order we placed back in 2005, these later deliveries are chartered out at higher levels than the average rate of the earlier ships. Two final ships in the order are scheduled for delivery from the Aker Philadelphia shipyard during the next six months.

The Overseas Chinook delivers to us at the end of this year and will be converted to a shuttle tanker and begin servicing a four-year contract to Petrobras in the ultra-deepwater Gulf next spring. The Overseas Tampa, our last ship from Aker, is scheduled for delivery in the second quarter of 2011.

During the quarter, we sold two older US Flag vessels, and the sale of a third has been approved by US authorities and is expected to close next week. Two additional US Flag single-hull tankers and two ATBs remain in layup as of today.

Finally, we converted an order for two new building LR1 scheduled for delivery in 2011 to two Aframaxes for delivery in 2013. The transaction increased our construction commitments by less than $5 million. With our core Aframax franchise, these new builds, which will enter our fleet at much more competitive book values than the earlier LR1s would have, will be an attractive addition to the Aframax international fleet.

Please go to Slide 5. This is a snapshot of OSG's large, diversified fleet. In crude, we have assets across all vessel classes. This affords us the ability to leverage full partner relationships and customer relationships to optimize the trading and positioning of vessels with our commercial full-cargo contracted fleet. It also gives us access to superior information flow from the market and the broad broker community that services our pool. This is one of the keys to our consistent commercial market outperformance every year.

On the product side, two new full partners were added to Clean Products International in the third quarter. Koenig & Co., which also has ships in the Aframax international pool, joined by adding one vessel, and the Japanese shipping giant, Mitsui O.S.K., entered one vessel and is expected to add an additional ship this quarter. This would bring the pool to 15 vessels by year-end, further strengthening our position in the international products market and positioning us well for the expected recovery in this segment.

In addition to our owned and chartered-in fleet, our commercial footprint is significantly enlarged by the 80 ships -- 80 ships -- our full partners contribute to the pool we operate in -- (technical difficulty) operate in. When you add in our remaining new buildings, this brings our competitive fleet to over 200 vessels. This scale is critical to our ability to outperform the market, particularly in markets like we have experienced the last four months.

Please turn to Slide 6. As I've said before, pools give us scale. Scale gives us the ability to build cargo systems in key geographical areas. Cargo systems enable us to triangulate voyages, which leads to higher utilization. Particularly in down markets, COAs reduce waiting time and keep our fleet utilized more. This results in outperformance.

In the third quarter, our daily average outperformance in the markets in which we compete were more than $14,500 a day in the VLCC segment; nearly $5000 a day in the Suezmaxes; just over $1500 a day in Aframaxes; more than $5300 a day in Panamaxes; and over $3300 a day in MR product tankers. As a result, unlike a lot of our competitors, we are not forced to scramble to raise unattractive financing for [stalled] ships to fix covenant defaults. This flexibility means instead we can focus on taking positive measures to position the Company for the recovery in our market.

Please turn to Slide 7. Let me shift gears now and comment on our expense-control efforts. For the past two years, we have made significant headway in addressing G&A expense levels. This has come from large and small efforts at every level of the organization.

Let me highlight just a few in the past quarter. With the departure of Marc La Monte, the former head of our Gas Business Unit, we consolidated the commercial management of Gas under Lois Zabrocky's leadership. We also made a decision to cease pursuing marine compressed natural gas projects. After several years of effort and bidding on projects around the world, the gradual decline in gas prices proved to be too challenging an environment to get projects approved by the producers and other market participants.

As far as our LNG carriers are concerned, our focus will be on continuing to deliver flawless technical management of this fleet.

With respect to our office infrastructure, we have proactively renegotiated rent in several locations. We have initiated numerous permanent cost reductions in IT and process improvement programs in our finance and accounting infrastructure.

Operations personnel, fleet managers, superintendents, and officers onboard our vessels have worked diligently to keep vessel OpEx in check. We are committed to holding vessel OpEx costs flat for another year without sacrificing quality, safety, environmental performance, crew retention or service levels. This has been the result of better crew planning and better maintenance planning. For example, we have significantly improved costs associated with crude changeovers, and we will continue -- I commit to you we will continue to look to reduce G&A next year and optimize and rationalize every area that makes sense.

Please turn to the next slide. Our conservative financial strategy has served us well in boom times and tough times. It means we can reward shareholders with an annual dividend payment that is sustainable and consistent. It has allowed us to take actions to improve the maturity profile of our debt, and gives us access to the broader capital markets. All of this has meant that the headline -- the analyst headlines about OSG are not about our financial covenants or dividend reduction.

We lay out our covenants again for you today in response to what every investor eventually focuses on. Similar to when we first published this for you in the fall of 2008 and now seven quarters later, we continue to have room to collateralize more assets, take on additional debt, and to continue to pay dividends without jeopardizing our covenant.

Turn to Page 9. We continue to manage our business conservatively, and we believe that we will see improved freight market in 2011. While the fourth quarter will be weaker than anticipated, we expect that stronger economic recovery across the globe and a normal increase in demand during the winter months will improve rate. Indeed, we think the recent uptrend tanker rate in is the beginning of the winter market.

On the crude side, we see continued refinery expansion and demand growth in China, as well as tonne mile expansion as it sources more oil from long distances. September deviated from this trend with low overall volumes into China and smaller-than-normal share taken from Atlantic [ports]. In October and early November, this pattern reverted to norm with increasing overall activity and the longer Atlantic to East voyages back to their normal level. As a result, the short-term (inaudible) surplus is shrinking and VLCC rates in the Arabian Gulf has increased from below $10,000 a day to about $30,000 a day, closing in on $40,000 a day in the last week.

On the product side, things are looking more favorable. Tonne mile growth is expected in some longer haul trading patterns, and on MRs, tonne mile extension is expected to exceed supply growth next year in distinct reversal from the past 36 months. On the US side, the Jones Act fleet is expected to contract as a result of mandated open-ended retirement.

Now, in addition to these macroeconomic drivers, the wild card is the tanker order book. Just like the drybulk order book, we expect to see continued slippage, cancellations and conversions in the tanker new building book. This enormous discrepancy between current asset value levels and the prices at which new buildings were ordered two years ago without financing in place raises significant funding [holes] for many owners. Banks these days, especially if there is no fixed employment per vessel, prefer not to loan more than 60% of market value for new buildings, and this is at a time when secondhand values are soft, not firm. In fact, they have been steadily creeping down since June. Thus, we believe fleet growth will be considerably less than what the Clarkston's order book suggests. In this case, our patience sitting on the sidelines this year will more than pay off.

Turn to Slide 10, please. Over the last two years, we have practiced safety, exercised financial discipline, pursued expense reductions in charter commitments, (inaudible) OpEx and G&A, and focused on whatever actions that we could take to better position OSG for a recovery in our markets.

Looking back, we are glad we had not jumped on the new building bandwagon this summer or chased secondhand deals in competition with IPO money. We said we would reduce costs [on shore SP], and we have. We've said we would negotiate improvements to our new building commitments, and we've done so. We said we would be patient about the opportunities we pursued, and we are better off for having done so. We said we would sort out the challenges in our US Flag and FSO business; the proof of this is now on the water. We set our scale, cargo systems and commercial infrastructure with no less [to] outperform a weak market. It has, and the numbers are here for you to compare. We said we would maintain a high level of liquidity and financial flexibility, and we've done just that. In short, we have followed a consistent strategy throughout this difficult period and believe we will emerge at the head of the pack as our markets recover.

I will now turn you over to the Myles Itkin.

Thank you, Morten, and good morning.

Just a few opening comments on the quarter before a discussion of selected financial statement line items. There are two key takeaways on the consolidated results for the third quarter of 2010 when compared to the third quarter of 2009. First, there was a shift in the mix of fixed versus spot coverage on our VLCCs and MRFs, as well as our US Flag ATBs. Overall spot exposure shifted from 43% during the quarter ended September 30, 2009 to 63% in the third quarter of 2010. Although spot rates increased this quarter over last year's quarter, the percentage of prior earnings tonne charters diminished, and term rates were at insufficient levels to warrant committing to new time charters.

During Q3 2009, OSG had fixed-rate coverage on approximately 10 VLCCs at rates that exceeded spot earnings by approximately $16,000 per day. There was only one VLCC covered during Q3 2010 at rates that approximated spot rates. Essentially, 800 fixed days were replaced with comparatively lower (technical difficulty) spot charters. Similarly, in the MR product carriers class, spot days increased and fixed days decreased, quarter-over-quarter, with spot days representing 73% of Q3 2010 MR revenue days, versus 54% in Q3 2009.

The second key takeaway is the change in fair market value of the FSO Africa's interest rate swap continued to have an adverse effect on earnings. By de-designating this interest rate swap as a hedge for accounting purposes at March 31 of this year, any change in the market value of such swap is recorded directly to the FSO joint venture's earnings. The effective changes in market value on OSG's earnings for the third quarter was a $3 million charge, a $3.9 million charge in Q2 2010.

Please turn to Slide 12 for a discussion of selected income-statement items. TCE revenues increased marginally to $209 million, quarter-over-quarter. This change consisted of a $4.5 million decline in TCE revenues in the international crude tanker segment, offset by increases of $1.9 million and $1.7 million, respectively, in the products and US Flag segment. The $4.5 million decline in TCE revenues in the crude tanker segment was driven by the quarter-over-quarter change in the mix of fixed and spot TCE coverage.

The $1.9 million increase in TCE revenues for the Product segment was driven by 300 more revenue days during Q3 2010 compared with Q3 2009. With this increase in revenue days was partially offset by the shift to greater spot exposure in this year's third quarter from 54% to 73%.

TCE revenues in the US Flag segment increased by $1.7 million versus the third quarter of 2009. This increase reflects a number of items -- the delivery of the shuttle tanker, which commenced a five-year time charter in April 2010 to Petrobras; the delivery of two [bareboat chartered] in Jones Act product carriers from the Aker shipyard in May and in August of 2010, each of which commenced three-year time charters to Tesoro; and an increase in lightering volumes. Partially offsetting these increases in revenue days for the US Flag business unit were the sale of a single-hull tanker in July 2010, as well as an increase in laid-up vessels in the current quarter compared to the corresponding prior year's quarter.

Results of affiliated companies decreased by $2.6 million from income of $2.4 million in Q3 2009 to a loss of $200,000 in Q3 2010. The primary driver behind this decrease is OSG's 50% share of the loss generated by the FSO Africa for $6 million. The Africa was idled for most of the quarter. Half of this loss, or $3 million, was attributable to the change in the value of the interest rate swap that is mark-to-market through earnings.

The FSO Africa's third-quarter loss also includes fuel consumption and other costs approximating $1 million incurred during the vessel's idle time. Following commencement of service on August 30, such costs are now the charterer's account.

Interest expense increased quarter-over-quarter by $6.8 million, 80% of which is attributable to the incrementally higher coupon on our $300 million, eight-year, unsecured debenture which we issued in March of this year.

Please turn to Slide 13 for a brief discussion of selected balance-sheet items. The Company's cash position at September 30 was essentially unchanged from June 30, decreasing by less than $2 million, with long-term debt remaining essentially unchanged, and $63 million in vessel expenditures being funded through the release of the remaining balance in the [TCE] accounts, and cash flow from operating activity.

In accordance with accounting principles, the Company classified one single-hull US Flag tanker, the Overseas Galena Bay, as held for sale at September 30, 2010. We have now received all requisite approvals and expect to deliver the vessel to its buyer within the next week.

Investments in affiliated companies increased by $93 million from December 31, 2009, principally as a result of the Company's advances to the FSO joint venture. The aggregate increase in investment was partially offset by a $44 million increase in the unrealized mark-to-market losses on interest rate swaps held by our LNG and FSO joint ventures, and $9 million in distributions received from joint ventures, $4.3 million from ATC, and $4.5 million from our LNG joint venture. In addition, the Company recognized net losses in 2010 of $5.5 million related to all of our joint venture activities.

Please turn to Slide 14 for a discussion of 2010 guidance. We have updated our guidance related to vessel expenses, G&A, and equity income of affiliated companies. Vessel expense guidance is revised downwards to a range of $265 million to $270 million, principally to reflect lower actual year-to-date results on costs incurred from lubricating oils, stores, spares and repairs, reflecting tight management of operating expenses by our fleet managers.

The revised guidance also fully reflects the reduction in expenses attributable to the two single-hull US Flag vessels remaining in layup for the balance of the year. Our initial guidance had conservatively estimated such expense reductions.

G&A expense guidance has been lowered and we are targeting approximately $105 million for the year, $39 million lower than in 2008 and $16 million lower than in 2009. This is a reflection of the effectiveness of the Company's ongoing efforts to reduce the costs of our shoreside operations.

Finally, we would like to invite all our institutional investors, analysts and lenders to our investor and lender's meeting on December 15 in New York. Please contact Jennifer Schlueter to register for this event.

We will now open the call up for questions. Operator?

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Urs Dur with Lazard Capital Markets.

Good morning, guys. Thank you.

Now, just as everything looked like it was going to fall apart, the V market turns in a week from $12,000 a day. We've seen $43,000 [east] if you are running at a decent speed. How sustainable is that? I know you've already mentioned this, but how sustainable is this through the remainder of the quarter? A little more color on the spot market, on the V sizes and Suezmax, and how does that translate down to the Aframaxes for you guys?

You know, I'm going to turn that over to Mats, but let me just add that, in the space of rate hysteria just a few weeks back, we held firm and said we believed there would be a winter market. We find out the lower-level activity levels in October (inaudible) a precursor to. But let me have Mats answer your question directly.

Sure, thanks.

Yes, big swings in the volume into China where September, as Morten mentioned, was a very slow month with a significant decrease even compared to last year.

Yes.

-- October, and so for November we are back to normal there with significant increases in the overall volume. In addition, there's been another walk back to more (inaudible) taken from the Atlantic, which is a longer voyage. But you had a period when West Africa held out higher than the AG, so ships started to [balance] to West Africa and now activity came back [big time] into China, both from the AG and West Africa. Too few ships -- or people starting to see that there will be too few ships in the AG, and the AG starts in a week, as you mentioned.

You know, it will flow over to West Africa, it has already, but not at the same pace, right? Right now, for a West Africa-China round-trip, if you fixed it today, you would probably make $25,000 to $30,000 per day, while AGE [as you say] is $40,000-plus.

Right.

So it looks as if it will continue, at least for a while. The fixture level is back to where it was; it's actually a little bit above where it was, but that may well go on for a while. It should flow over to the Suezmax segment. It has not yet, but it will after West Africa tightens up.

Yes, that's helpful.

On the product tankers side of the business -- actually, Mats, a follow-up question very, very quickly. On storage [inquiry], we saw one of the few remaining (inaudible) out there that's running spot actually [fixed] Petrobras six months last week. There's not really enough contango out there, but given -- and maybe this is a bit of an esoteric question -- but given that so little oil has been flowing to the west and inventories are high, would you expect oil inventories in the United States in particular to be declining over the next few weeks while some supply gets picked up in the AG and has to start to flow again?

If you take the data that comes from (inaudible) on that, they see both storage declining in Europe and the United States during the coming period at a time when demand is picking up. You went from 90 million barrels stored -- 90 million tonnes stored and shipped at the beginning of the year. By the end of the year, you will have none. But compared to last year, storage will be down, both onshore and at sea.

To your earlier question, is that good for tanker activity going into 2011? The answer, we think, is yes.

Yes, I think there's going to have to be some contango and pick it up there.

On the product tanker side, the dynamics are better on the order book, but still very weak rates. Can you highlight some changes maybe in tonne mile demand further, that you already did a little bit in your presentation, but which ones look most promising to you, which ship sizes are you most attracted to at this point in time, and where do you think the upturn starts?

Urs, this is Lois Zabrocky. Just, what we're really seeing is, in the third quarter, you have a lot of refinery maintenance in the Western Hemisphere. If you've noticed, even last week, the diesel oil inventories as well as gasoline inventories were down in the US. So, we are seeing, I think, the lineup for winter for the heating oil season, and it looks like the Northeast is supposed to be about 5% colder, year-on-year. But I think we have some positive dynamics in the Western Hemisphere where we have the majority of our LR1s. We remain focused on the MRs and the LR1 sectors.

Great, helpful. Thank you.

Myles, just one final question on the debt levels, just as a general question here. You mentioned that -- Morten mentioned that the dividend is sustainable and you're in good shape, but that's not really where the question is. But given the debt levels where you are and given your coverage, are you satisfied, when you do have amortization coming up that, A, you're in good cash position to pay that, and then, B, would you be able to refinance any significant portion, should that become available going forward?

Well, I mean, we have -- as you know, our amortizations are particularly manageable through 2012 and then through the very beginning of 2013.

Right.

So there would really be no issue handling amortizations.

As far as debt and debt alternatives and refinancing options, we explore all options and find that, at this stage, all are available to us.

Once again, just to reiterate, you have no covenant issues at this time?

We have no covenant issues.

Jon Chappell from JPMorgan.

Good morning. Myles, if I can follow up on that last answer you gave in just a little bit more detail, I'm sure it will be in the 10-Q but if you can give us a little sneak preview. What is the amortization of the debt in 2011 and 2012? Then if you can also just add onto that the capital expenditure commitment, so we can think about your total capital commitments over the next year?

It's roughly $40 million to $50 million in amortization in 2011, falling to $45 million. Capital expenditures for the balance of this year is about $193 million. In 2011, we are forecasting $193 million.

So the same number in '11 (multiple speakers)?

Yes, yes.

Okay. Another question on the cost guidance -- two things. First, on the full-year 2010 numbers that you provided in the presentation, if we just back into what the fourth quarter would look like based on the full-year run rate that you provided, it looked like there would be pretty big potential step ups, both in vessel OpEx and in G&A at the highest quarterly pace of the year.

Were there some timing issues backend loading a lot of things into the fourth quarter? Are you being really conservative with these guidance ranges and it's likely going to come in closer to the run rate of the first three quarters? How should we think about that?

I think, as you start thinking about vessel operating expenses, we've had a number of vessels that have been off-hire a couple of vessels undergoing repair. So those vessel operating expenses, which would have diminished during that period, will return. So you would expect the vessel operating expenses to be higher.

As far as G&A expenses, there shouldn't be a material difference. We are expecting G&A in aggregate to come in at about $105 million, maybe a tad of room for the bounce back.

Okay, then that's a perfect lead-in to the second question I had on that. On Slide 7, Morten comments talked about keeping vessel OpEx relatively flat in 2011. As we think about that, should we just think about the fourth-quarter number that we can back into and just multiply that by 4, to think about where vessel OpEx should come out next year?

I think the better thing to do, Jon, is we are just in the midst of forecasting 2011. Because of the reduced vessel operating expenses with certain vessels being off-hire during the period, let us give you a more refined number for 2011.

Okay, I will look for that in December.

Then finally, the last thing, and I know you've been kind of tight with the information surrounding the Africa, but if we think about $3 million of mark-to-market swaps in the third quarter, and if you look at the full nine months, there's like $7 million of mark-to-market swaps which we would exclude. Then you put the $1 million in bunker costs. I'm just trying to figure out the right run rate we should use for the Asia and Africa combined when we think about contribution to income from those two charters.

I would consider a number somewhere between $3.5 million to $4 million per quarter.

Combined for the two vessels?

Yes.

Perfect. All right, thanks a lot, Myles.

Michael Webber, Wells Fargo.

I just wanted to piggyback on Urs' question for a second and maybe come at it a different way. When you think about the rates have been increasing here the last week or so, and you think about sustainability over the next couple of months, how much of that strength is really being driven by underlying demand versus, I guess, momentum and kind of pulling forward of demand? I know that's difficult to kind of separate, but when you think about the trends in the last week or so, I guess how much of it do you really attribute to underlying demand increases?

It's really all demand, you know. Again, the swings have been exaggerated. You know, September was unusually low (inaudible) (technical difficulty) it is unusually high, but there is nothing other than demand that drives it. But people time their buying based on arbitrages and prices, both on the crude buying side and on the refinery side. It's extremely difficult to forecast. (multiple speakers)

Maybe another way to think about it -- are you seeing a lot of people pulling forward demand, I guess, to be chartered in the last week or so, or do you think that is going to kind of continue?

Well, we see it continuing. There's no signs of slowdown right now.

Okay, fair enough. Myles, you just talked about the cost structure a bit. I guess, particularly on G&A, when you think about the cuts there, can you talk about I guess how much [low-lying] crude is really left? You haven't really given 2011 guidance. But if you guys were to expand your fleet again, I mean are these costs that would kind of flex back up or are these more kind of systemic in nature that we should be thinking about kind of being in place long-term?

These are more systemic in nature. I'd say (inaudible) (technical difficulty) if we add ships, we could certainly had a ship here or a ship there, but if you add a full fleet, you are going to have to add some -- there's some superintendents and staff and the technical offices. But in terms of IT infrastructure, accounting finance infrastructure, legal infrastructure, all of that, we have the capacity to take on quite a lot. But whenever you take on ships, you need technical management staff, but not significant.

The other item that clearly is going to vary over time is going to be incentive compensation. Unlike some of (technical difficulty), if we do well, we will pay our employees well. If the Company and our shareholders don't do well, we will reduce compensation. So that has been -- if the Company is doing well, that item will go up; if it isn't, it will stay down, which is what I think our shareholders -- the way they want us to behave.

Right, right. Okay. No, that makes a lot of sense.

I guess. finally, you guys have been pretty active in the past kind of synthetically fixing some of your spot rates using [FSAs]. I'm just curious. With rates still relatively low on an absolute basis, will you ever consider kind of incrementally adding exposure through the [FSA] market, just kind of a cheap alternative to gaining leverage to a potential rebound?

I think if you look at the amount of operating leverage in this company today with our modern fleet and very heavy cost emphasis in the international products and food side, I think we have enough operating leverage that we don't need to play it around. We will use [FSA's] for the time being for hedging. The one thing good about (inaudible) our balance sheet strength in the existing fleet, we don't need to take on what I would say are ridiculously cheap time charters to cover lightbulbs and payrolls and things like that.

Right, right, okay. Fair enough.

Gregory Lewis with Credit Suisse.

Thank you and good morning. I guess my first question is for either Morten Arntzen or Lois in that it seems like we have been talking about an improving product tanker market as we look out over the next year or two. I am just trying to close the loop on the decision by the Company to shift those LR1 product tankers to Aframax crude tankers two to three years out.

Let me -- this was not in any way a backing-away from our commitment to product tankers or LR1s. Those are going to be the long-term core segments were in.

Clearly, we have a big franchise in the Aframax side that has been very profitable and on which we trade at a premium.

We were able to swap two LR1s that were coming in next year, that would have come in at -- when you mark-to-market at much higher book values than the Aframaxes we will bring on in 2013 where we also expect we will have a better market. But it was really a comparison of the relative book values you are bringing on those assets. We do disclose in the release that it's only a $5 million incremental increase in our CapEx to move from LR1s to Aframaxes, so it should be relatively easy for you to figure what the pickup is if it's done on a cargo capacity basis. So it's simply the very good mark-to-market asset swaps from one core area to another in a very core area.

Okay, great. Then I guess my other question --

I'll just add Lois negotiated it, because she was doing it on behalf of the Company. So I think she would rather have two more LR1s and give two Aframaxes to (inaudible).

(laughter). Then I guess my other question is regarding the decision to -- I mean, I guess for all intents and purposes, pull back from the LNG gas business. I mean, given that that's the case and it seems like you're consolidating that business, I mean when you look at opportunities over the next couple of years, is this going to be a core segment for OSG? Or could we see maybe the Company maybe sell its interests in some of its existing LNG contracts, LNG vessels on the water over the next, say, one, two, three years?

There's several answers to that question. First is we don't have enormous amounts of capital committed against the four LNG carriers. There's less than $100 million. But we are taking -- you know, it's a high return on equity business, and we get a very steady dividend from it every year. So it just generates earnings and it generates cash.

Having said that, we are not wed to any asset in the Company. So if somebody were to come along and offer us a price for those at which it would make sense, we would certainly think about it. But I think we'd think about that for most assets.

Long run -- and in the long run, I'm talking 5, 10, 15, 25 years -- there's no question in my mind the gas business is going to be more important in the world and grow. In the short run, however, with gas prices flirting around $4 per Mmbtu, compressed natural gas projects just don't work. A lot of the LNG projects that people are talking about have been pushed back. There's been delays and there's not a lot of opportunity right now. So, we are very comfortable keeping it because it's profitable, it generates cash, we have terrific technical management, performance of those ships, and we prefer to keep it. But we are not wed to that business the way we are to VLCCs, Aframaxes. But we will manage it well. It makes more sense from a resource standpoint to have it as part of a bigger SBU than as an individual one.

I think one of the things we have to keep in mind, there's a whole shale gas phenomenon in the US which clearly is a game changer in the gas business. What does that mean in the long run for LNG? I think we want to learn a little bit more about that.

Hopefully that answers your question.

Absolutely. Then just really one last question and I guess this is for Captain Johnston. When we look at those -- you mentioned that there's five Jones Act vessels; one of them is sort of already pending sale. When look at those four Jones Act vessels that are I guess sort of sitting there idle, what kind of costs would be required to bring those ships back into service? Is that something we could maybe see in 2011? Should we see a pickup in the US product market?

Yes, there's two, three tankers we have in lay up right now. One of them, as Myles and Morten mentioned, will be delivered to the new buyer next week. The other two vessels that we have in lay up could be probably in service within a week. They are fully certificated and they could go out in service, should the need dictate they go.

The other two units we have are double-hull ATBs. One of them could go back out in about five days notice. The second ATB would have to go through a shipyard before she goes back into service.

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

Justin Yagerman, Deutsche Bank.

Good morning, everyone. I wanted to get a sense. You talked about the FSO Africa having utilization and I guess other capability clauses into the contract. I guess I wanted to get a sense of how much upside there potentially is there, and what it would take to get some of those clauses to be put into use so that you would be earning a higher rate and maybe I guess a more full rate on that asset.

You know, that type of clause would be violating every confidentiality agreement we have with our customer. Honestly, I really can't say much more than that, but I think we've suggested that maybe Africa could perform at the same levels as the Asia (inaudible) all of its capabilities were utilized. But we've never disclosed the contracts on the Asia either. We're just -- we have very strict confidentiality agreements, and we're going to honor those.

Okay. But there isn't -- I mean, in terms of equity guidance, what it would mean in terms of upside from where you currently are?

We don't give that out. I think you have to rely on the more conservative guidance and then see what happens. I'd like to be able to say more, but we simply can't.

No, that's fair. One other question -- just given the bigger-picture, I guess., given the move we have seen in the US economy and the strength, the ISM numbers have come out and the strength we've seen generally, I guess I would expected crude demand to have been stronger maybe a bit earlier. We are getting a seasonal trend here, but you didn't get kind of the recovery uptick that may have been otherwise expected from the improvement in Western economies.

When you think about that and the demand pull-through, what would you attribute that to? Maybe it's a question for Mats. I mean, are we generally just seeing the US systemically having less imports? Is that -- and if so, do you think it's due to efficiency or sourcing crude nearer to the US? Otherwise, do you think that was just supply-driven as we moved through the third quarter of this year?

Well, I think you just have to eat through the storage, both floating and shoreside first, and that's causing our delay to the shipping market. I think that's the main question.

We still have the good underlying fundamentals going on with less production [flows] through the US, Mexico and Venezuela, and things coming from further away, but you know the storage has been used and we have been forced to eat through that first.

So that's the main thing that you would attribute that slackening relative to the overall macro to?

Yes.

Okay. All right, that's all I have. I appreciate it.

Scott Burk, Oppenheimer.

Good morning, guys. I had a couple of questions just kind of on the day rate front. I wanted to look at the graph you had on Page 6, where you compared VLCC rates to the Clarkston's average.

You talked about how you had weighted it, but I'm just wondering. Is some of that outperformance just an issue of capturing a few weeks at the beginning of the quarter that were relatively strong, or is this the outperformance -- can we kind of layer that into our day rate assumptions going forward to back into what you guys might earn in future quarters?

For the most part, that's really consistent outperformance.

It varies a little bit with the fluctuations as you say. so part of it, you are correct, because the Clarkston rates are measuring 16 rates and are actually earning (technical difficulty) forward, so there is a lag effect there. You need to look over a longer period to get a more consistent long-term number, but this is the way that we do it and we have always done it.

Yes, okay. So you still kind of would say that you should be able to get a premium, based on your pools and triangulation and what that, but maybe (multiple speakers)?

(multiple speakers) Absolutely we expect that across any year. There might be quarters where you deviate. Across any year, we are going to generate premiums in all of our main businesses.

Okay. Yes, I was just wondering, because the outperformance was pretty -- was like almost double the spot rate.

Then I had one other question kind of on the rate front. You know, where we are starting to see (inaudible) pop up is that -- or move up at least as has been discussed already, but what kind of rates would you guys start to think about maybe putting a little more -- locking away some of your ships on one or two or three-year contracts? What would it take for you to want to try to reduce your spot exposure?

You know, I'm not going to give you a rate there. What we have done -- you know, we've run our balance sheet so that when we look at the segments where we have lots of spot exposure, where we think spot exposure is going to give us a better medium-term return, we are going to stay in the spot market. If the paper market or the time charter market enables us to lock in rates that are above our rate forecast, we are going to do so.

Now, having said that, I think everybody in the shipping world, and us included, were surprised by the length of this recession in our market and by the depth of the recession. So would we take that into account as rates go up to levels where we can get good returns? The answer is yes. So you are not going to see us scramble around the way I see some people today, locking in time charters at the levels you've seen in the last month or two because that just doesn't make sense.

Right, okay. When you say the length of the recession, are you talking about just how long the seasonal slowness lasted this year, or are you talking about kind of the length of the broader (multiple speakers) --?

-- (multiple speakers) right, the length of the overall recession. You're talking about 2.5, 3 years now. If you went back to 2007, over half of our product tankers were on medium-term time charters. Now, in hindsight, it should have been three-quarters. But we did not see this kind of depression, you're right, and it caught us by surprise.

Yes.

We will take that into account, but we run our business so we are (inaudible) smart, [fixed] in hedging positions. Because of our commercial outperformance, unlike somebody with a small fleet or limited commercial management capability, we have a bit of a buffer in our COA portfolio which enables us to take more spot risk.

So as you look at our risk profile, our cargo systems give us a better downside protection than the average ship owner.

Okay. Then I guess kind of one related question, following up on your expenses, which great job on getting those expense levels down -- just wondered if there's any kind of leverage to day rates. As day rates rise, does that put upward pressure on operating expenses at all, or G&A for that matter?

No, not really. The only expense category where that would put some pressure on is charter in vessels that are subject to profit share.

Okay. So really the only impact would be is if (inaudible) rates get high enough for vessels to come online, then that would obviously be a per-day increase, not so much a (inaudible) rate.

Yes.

Okay, and then actually one final question for Mats. There has been some talk about owners, ship owners being at a disadvantage when it comes to negotiating day rates, because the cargo holders can see where ships are through GPS systems, yet the cargo availability remains pretty opaque.

When you look at negotiating your ability to negotiate day rates, do you see that having any impact over the last couple of years, and do you see that having an impact going forward?

No, I don't really see that having an effect. You know, there's some people who have been playing games with that. We've never done that and never will do. We have very good margin intelligence through our scale and through our brokers and through our contacts anyway. So that technology has not meant anything for us.

Okay. All right, thanks.

Borge Johansen, [Oslo] Asset Management.

I was wondering. With the accounting boards getting more aggressive and getting operating leases to the Company's balance sheet, with your significant exposure to chartering fleets, how would that affect your balance sheets and P&Ls going forward in terms of capitalizing more debt (multiple speakers) having to take --?

The jury is out in terms of exactly how that would take place and the timeframe in which it would take place, but with reasonable certainty it would inflate the balance sheet because you would be capitalizing the asset as well as capitalizing the liability. Indeed, in certain cases, you may be amortizing the asset and the liability in at different rates but yet to really get the deferment how that's going to work.

You know, a lot of it is still subject to comment before any decisions are being made, and it doesn't seem to apply as well to the shipping industry as it might to other industries. But from a pure capitalization perspective on the liability side, it would increase perceived leverage.

Would your covenants as they are now on the facilities hold, your dividend sustainability be in place if those (multiple speakers) --?

(multiple speakers) The dividend would in no way be affected, because we are really talking about cash in terms of sustainability. It wouldn't affect our secured debt limitations. It wouldn't affect minimum net worth calculations, other than if you get a mismatch in terms of how the assets and liability are amortized, and it wouldn't affect unencumbered assets. So I would say, all in all, we would be in decent shape.

I think it's an interesting thing for a number of firms, going forward, as to when there is a material change in GAAP, how that change ultimately impacts performance, but this is going to be felt across industrial America. So, one would think that it will be addressed closer to the time of (inaudible).

Okay, and when do you expect this might happen? Is it one year out or three years out?

No, I think it's longer than that. My guess would be '13, '14.

Justine Fisher, Goldman Sachs.

Good morning. So the first question I have is just on your change of the LR1 orders to Aframaxes. It definitely seems like you're getting a good deal in terms of where you are purchasing the Aframax in 2013. But I'm interested to see that the yard would even be willing to do that. I think, when we all look at the order book, we see the yards in a bit of a tough spot not being able to necessarily reduce their pricing. That's one reason why people say that a lot of vessels will be delivered, just because people won't be able to afford the prices they paid -- or the prices they booked ships at a couple of years ago. But your deal makes it seem like yards are willing to change orders or renegotiate downwards for certain vessel types in order to just keep the yards. So, are you seeing that in other instances? Is this something we may expect to see more going forward as companies look to change their order books?

Justine, it isn't as easy as all of that, I think, with any of the yards. We originally started out with six ships and we ended up with a total of eight, so I think for yards in general, when you increase overall, even if it's albeit incrementally the capital, then that's a positive for the yards. But they have taken, the yard that we are dealing with has taken a lot of dry cargo orders this year and I think they were quite happy to put those up until 2013, having filled up their interim order book with dry cargo vessels.

The other thing to keep in mind is the ship we had on bareboat was a ship from the yard. So now they've gone from having to finance a ship to getting cash for that ship. We were able to do that because we had a very liquid balance sheet. As we've said, when we find ships at prices that make sense to us, whether it be from shipyards or banks or the market, we are going to jump on them, which is what we did here.

So have you heard instances of others being able to exchange vessels like this and maybe get a much better deal on a larger ship, I guess, or a different vessel type, similar to what you guys have done?

I mean, there's lots of swaps all over, I mean lots of swaps. In some cases, it's where an owner is simply incapable of [paying in] the yard, which has been sad, but our partner, Euronav, has done some swaps on orders. You've seen it.

The type that we are doing, you're going to have to have a solid yard and a company with liquidity and access to the balance sheet, and the ability to make cash payments today and take the risk (inaudible).

[Ceedo] has gone from MR to dry; you've seen a number of people do that. That's why -- I said earlier in the call, the order book is the wild card. There's a lot of stuff going on with the big collections number. It's a good reference point, but there's a lot of switching going on because people have no choice but to do so. The yards have been very smart about how they've handled it, but if they have an owner that has no capacity to finance something, they are going to be flexible. They are also going to turn to good friends like ourselves to help them with difficult situations, which we've been able to do.

Got you.

Just another thing -- some of that is just locking and tackling. We've had people out in Korea and China every month for the last two years and continuing -- we have people on airplanes right now as we speak -- and this is, a lot of this is just hard work.

Okay. Another question that I have for Myles -- I know that, in terms of your revolver and how you guys may look to refinance that, it's still up in the air and there are options available in terms of rolling it on an unsecured basis or a secured basis.

But to your point that banks are pretty much giving 60% leverage on assets now, I know that comment was made with respect to new orders, but should we think of 60% as the type of loan to value that you guys would have to provide for your revolver if you did decide to roll it on a secured basis as opposed to keep it unsecured?

No, I don't believe so. I think the leverage, the advanced level becomes an issue of the credit worthiness of the borrower, as well as competition within the banking markets. So dealing with, say, a potential 2013, beginning of 2013 to '30, my sense is we would be dealing with higher advanced levels but not the advanced levels that approach 90% that was achievable in 2008.

So for investors looking at how many assets OSG may have to pledge if it did make that decision, it would be 50% or less, I guess, of the value of the revolver outstanding?

I think, Justine, you are in an area of speculation that we've not contemplated what you're talking about. I can say, with $1.85 billion of equity behind us, a very modern, large, unencumbered fleet, I think we are going to be able to choose between a number of debt options that will enable us. We will do that in a timely manner.

But I think the other thing is just emphasize that the financial flexibility that we've had as an unsecured borrower is something that we would likely prefer to continue into the future. Secured borrowing represents a reasonably small portion of our portfolio, and that has served us very well during this downturn.

Excellent. Thanks very much.

Sal Vitale, Sterne, Agee.

I have a question regarding one of the comments made earlier about there being a shift in where China sources its oil from, from the AG to West Africa and then how that has shifted repeatedly over the last two months. Is that something that's normal? Is that something that we should expect to see going forward as well? Not injecting volatility into it?

I think we've been pretty consistent on this question. Our conversations with our extended clients is very clear. They're going to support increasing amounts of oil from West Africa, from Venezuela, from Colombia, from Brazil over time, from other places in Africa. It was a bit of a surprise and it took as crude from the Arabian Gulf in that August-September time period that they did, but it had to do with pricing. But from a long-term standpoint, if you look at the investments the Chinese are making in actual field development in Venezuela, Brazil and other places, there is no question they will be sourcing their crude from a multiple of sources. That is their policy, and we expect that the growth in tonne miles (inaudible) crude oil transportation will continue as a result. It doesn't mean there won't be volatility in it, but just structurally that's where they're going and they are very clear on that. They are putting their money behind that policy.

Okay, thank you for that. Then, just one other question, just based on the -- and I apologize if you've talked about this earlier -- just based on the fixed days you provided in Appendix 4 of the earnings release. Does that work out to about roughly about 15% of your days for 2011, fixed? Is it roughly in that range?

(inaudible) 2011. I don't know if (inaudible) days; I don't know that.

Can we take that off-line?

Sure, that's fine. Thank you.

Fotis Giannakoulis, Morgan Stanley.

Yes, guys, I have pretty much been covered by the previous speakers. I just want to ask you, what is right now the amount of deposit that you have paid for your new building program? If you can give us this number.

(technical difficulty) (multiple speakers) it's $632 million.

Thank you very much.

It's reflected as an asset on the balance sheet with additional payments due about call it $193 million for the fourth quarter and then a similar amount for full-year 2011.

Thank you.

Let's see, the new building program is pretty well complete. Yes, (inaudible).

John Parker, Jefferies & Company.

Yes, I'm sorry, my question has already been asked and answered. Thank you.

[Doug Carver]. FBR Capital Markets.

My first question is you guys gave some comments on how much equity, roughly, was in the LNG venture. Can you give us a similar framework for how much equity you've already invested in the FSO venture now that it is complete, and maybe how much of a payback you guys expect to get during the contract period on that equity?

I don't think we can give you the payback we're going to get, because then we would basically be giving you the rate. I can't give you a proxy for the day rate because that's violating our confidentiality (multiple speakers) (technical difficulty) it goes on the discussion there so --

Let's get back to you on that.

Okay. And I have another --

We are very, very sensitive to what we give out.

Okay, fair enough. My second question was kind of on a macro basis, if I look at the US market and be more efficient with their consumption of oil, hydrocarbons and a lot of refinery capacity, what are your thoughts on the US becoming more of an exporter of refined products going forward over the next few years?

Definitely, from the diesel oil point of view, you are already seeing the United States and the US Gulf exporting around 600,000 barrels per day. We do see middle distillates under continued demand in Europe as well as South America. So from the middle distillates point of view, I do think the United States will continue to be an exporter. There will be some of the capacity coming online in the next couple of years and the Gulf. Valero specifically has stated that they would like to export some of that diesel oil. But from a gasoline point of view, we just continue to see that as a deficit position in barrels coming from the continent.

Okay. With the excess Jones Act vessels, would you possibly use those on short range routes to transport some of that diesel, or do you still want to use non-US-built vessels?

You know, I think I can defer to Captain Johnston there, but he definitely sees those fundamentals ticking up on the inter-US Gulf over into Florida (inaudible). Is that correct, Bob, in 2011?

That's correct, Lois.

Thank you. There are no further questions at this time. I would like to turn the call back to Morten Arntzen for any closing remarks.

Thank you very much for joining us, and we intend to give a very detailed review of our businesses at investor Day on December 15 here in New York. Hopefully, you've gotten a save the date and that will be -- please contact Jennifer Schlueter for details. We look forward to seeing all of you there and answering in even more detail some of the questions you'll have. Thank you very much.

Ladies and gentlemen, this concludes OSG third-quarter 2010 earnings conference call. Thank you for your participation. You may now disconnect.