Octave Specialty Group Inc (OSG) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Overseas Shipholding Group Incorporated fourth-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 the General Counsel, Mr. Jim Edelson. Please go ahead.

Thank you. Before we start, let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker and articulated tug barge markets; changing oil trading patterns; anticipated levels of new building and scrapping; prospects for certain strategic alliances and investments; forecasted new building delivery schedule for 2011 through 2013; estimated TCE [reach] achieved for the first quarter 2011 and estimated CCE rates for the second, third and fourth quarters of 2011; projected schedule drydock and off hire days for each quarter of 2011; timely delivery of new buildings and conversion of vessels in accordance with contractual terms; projected locked-in charter revenue and locked-in time charter days for 2011 through 2015 and thereafter; estimated expense items for 2011; projected levels of equity income and capital expenditures for 2011; profitability in 2011 of certain business units in OSG's two FSOs; 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 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 disclosed in OSG's annual report on Form 10-K 2009 and in other reports OSG files for the Securities and Exchange Commission.

For this conference call, we've repaired and posted on OSG's website supporting slides that supplement our prepared remarks. The supporting presentation can be viewed and downloaded from the Investor Relations webcast and Presentation section on OSG.com.

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

Thank you Jim. Thank you for joining today's earnings call. I am taking part from Oslo, Norway. Joining us from Tampa, Florida is Bob Johnston, head of our U.S. Flag SBU, and from Newcastle, England, Ian Blackley, head of International Ship operations. The management team members that are joining us from New York are John Collins, head of Investor Relations, Jim Edelson, our General Counsel, Myles Itkin, our Chief Financial Officer, Mats Berglund, head of our Crude SBU, Lois Zabrocky, head of our Products SBU, Janice Smith, Our Chief Risk Officer, and Jerry Miller, our Controller.

The presentation is posted on the website, so please if you would turn to Page 3. Now, 2010 was clearly a disappointing financial year for OSG, and the fourth quarter was particularly challenging for everyone in the tanker industry. Our adjusted net loss for the quarter was $59 million, or $1.96 per share. For the year, our adjusted net loss was $98 million.

The negative results for 2010 were largely driven by very weak spot tanker rates in all segments during the last six months of the year. Contrasted with 2009, in 2010, we have more ships trading on the spot market in both crude and product markets, and we did not benefit from the time charters and VLCC forward FFA cover that we had in 2009. Consequently, the VLCC rates achieved in the fourth quarter were 55% less than the prior year's fourth quarter. I can say that we are happy to have 2010 behind us.

Please turn to Page 4. Now, while our financial results were unsatisfactory, I was very pleased with the efforts made across OSG, both at sea and on shore, to improve the performance of the Company. Rather than sit on our hands waiting for the markets to improve, we better positioned OSG for a recovery in our markets and laid the groundwork for significantly improved financial performance in 2011.

Let me turn to some noteworthy items. We had a significant improvement in the equity income from affiliated companies in the fourth quarter, largely driven by our FSO joint venture with Euronav. The two FSO service vessels were, for the first time, both fully employed throughout the quarter on long-term contracts and both earned service-level bonuses provided in the contracts.

In addition, the Company recognized a benefit in the current quarter related to interest rate swaps associated with the FSO Africa as long-term interest rates rose. The operating performance of these two units in the fourth quarter is indicative of what we expect them to do going forward.

We continued our efforts to improve our products new building order book and reduce our average chartering costs. The MR product tanker, the Overseas Kythnos, which was on a long-term bareboat that was canceled, was purchased at the then-attractive market levels. We further changed -- we made further changes with SPP shipyard in Korea, canceling an order for two LR1 product tankers scheduled to come in the second half of 2011 and replacing it with an order for two Aframax crude tankers to be delivered in 2013 with improved acquisition cost numbers per unit for OSG.

The U.S. Flag team was very busy in the quarter and our modernization program is now almost complete and beginning to deliver results. During the quarter, the Overseas Chinook was delivered from Aker, Philadelphia, the 11th ship we have taken from the yard. She is now being converted to a shuttle tanker at [Dutchens] and we expect to deliver her on May 1, 2011 to Petrobras to commence an attractive long-term charter for use in the deep water Gulf, a Jones Act trade.

The Delaware Bay Lightering fleet Delaware Bay lightering fleet removal -- renewal is almost complete with the ATB 351 expected to be put into service in the Delaware Bay before the quarter is out. There is a term contract in place that will occupy this vessel initially through 2020.

Finally, one single-hull vessel was disposed of in the fourth quarter and the remaining two in our fleet are now under contract to be sold in the first half of 2011, at which point we will have a fully double-hull U.S. Flag fleet. This is all happening as the Jones Act spot market has moved up, which enabled us to take the OSG 209 out of layup during the quarter.

Please turn to Page 5. As we enter 2011, the difficult projects that tested us were nearly behind us with the imminent delivery of the ATB 351 being the final piece. In addition, I can now comfortably state that our three market-leading business segments have sufficient scale in ships, people, capital, contracts, and opportunities to compete with anyone. With our new building program expected to be largely completed by the end of 2011, we will have reached a fleet size in our three main businesses where we don't need to add vessels to maintain our competitive edge. This also means that we can add vessels to these businesses with only minor additional overhead cost. Therefore, we will only make incremental investments in these segments when good opportunities knock. It is from this position of financial strength, operational excellence, and improved company fundamentals that we move forward into 2011.

Let me mention a few specific items that will enable us to improve upon last year's performance. With both FSOs on contract, we expect to turn a $7 million loss on these units in 2010 to a $14 million profit in 2011, a $21 million swing. Thanks to a lot of hard work and investment, we expect a positive contribution from our U.S. Flag unit this year compared to an operating loss of $35 million in 2010.

Our highly successful G&A reduction campaign will continue, and we are targeting further reductions of $5 million this year. Further, we expect to hold the line on overall fleet operating expenses in 2011 and do this without sacrificing safety, quality, or environmental performance. We do not foresee taking any vessel impairment charges in 2011 whereas we took $29 million in 2010.

At the same time, we have strengthened our already strong commercial platforms. Critical contracts were renewed in Tankers International, Aframax International, and in both our international and U.S. Flag lightering businesses. In addition, we added new pool partners in Tankers International, Suezmax International, and Clean Products International.

Please turn to Page 7. I'm very proud about how everyone at OSG has responded to our G&A reduction challenge. If we hit our 2011 targets, we will have reduced G&A by 34% since 2008, going from $144 million annual spend to $95 million. These savings are permanent, and the will to continue attack of them is undiminished.

I am equally proud of the job we've done keeping ship operating costs in check, as you can see in the chart on the slide. It is extra noteworthy that we improved our environmental and safety performance at the same time that we were significantly reducing shore-side G&A expenses and keeping shipboard operating costs in check. Despite this challenging environment, there was no backing down by our crews or shore-side staff from the goal of running the cleanest, safest, and most reliable fleet in the tanker industry.

Please turn to the next page. While the last two years have been tough on the Company and our financial performance, we continue to benefit from ample liquidity and a strong balance sheet profile. At year-end, we had $1.3 billion in liquidity, a long-term debt-to-capital ratio of 48%, and a very manageable debt and refinancing obligations ahead of us over the next two years.

Future new building construction commitments totaled $222 million at year-end, of which $152 million are due this year and are fully funded. As the chart on the lower right-hand corner shows, we have ample, enormous room under the financial covenants in our agreements. The timely capital raises we undertook last year extended our debt maturity profile, diversified our funding sources, and strengthened our balance sheet. Now, if you need further evidence of our financial flexibility, note that 70% of the net book value of our fleet is unencumbered. Please

turn to the next page. Let me briefly touch on the outlook for our three main business segments. At investors day in December, we said that we expect crude rates to be substantially similar for the full year 2011 as for 2010. Now, on the one hand, we have an encouraging demand picture developing, as evidenced by the pickup in VLCC liftings during the last four months with strong prospects for increases in OPEC production and an [attendant] increase in average voyage length, but on the other hand, an expectation that fleet growth will exceed demand growth throughout the year. During investor day, we noted that slow steaming could impact rates in 2011, and indeed we believe that it was a strong contributing factor to the spike we saw in the end of February. The spike was not caused by unrest in the Middle East, as oil supplies had not been disrupted at that time.

Furthermore, unlike the last three years, the wild cards that could impact the market are more likely to impact rates positively than negatively. Notable wild cards include greater Chinese demand growth, broad adoption of slow steaming, increased diversion distance and delays because of piracy, US economic recovery, increases in OPEC production, order book slippage and destruction, a return of contango oil pricing resulting in floating storage opportunities, and political unrest disrupting markets. Consequently, we have not altered our outlook for the crude markets.

Our outlook for the product markets in 2011 is also unchanged. We expect rates in 2011 to exceed those of the prior year as a result for our products SBU to make a greater contribution this year. This is largely a supply and demand driven outlook. After several years of rapid fleet growth, we expect demand to exceed the growth of the fleet with the demand driven by global recovery and new long-haul refineries coming on stream. On the supply side, we've already seen significant order book destruction and slippage on the product side and very little new ordering in the last 24 months.

Please move to the next page. I've already touched on the improved outlook in our Jones Act business. There will be just eight new buildings delivering through 2014, and they will be more than offset by mandated expected retirements, including the two single-hull vessels we will dispose of in the first half of the year.

We see refinery expansion in the Mid-Continent and Gulf Coast resulting in more Jones Act product movement, and the return to operation of the Delaware City refinery giving a boost to lightering volumes. We will of course benefit from the contracts we already have in place for our two newest units.

Please turn the page. In summary, last year was a tough year for everyone in the tanker industry, but we remain focused on executing our strategy, modernizing and optimizing our fleet, reducing costs at sea and in the office, enhancing our commercial platforms, and maintaining our financial flexibility. I remain confident that we are all well positioned -- that we are well positioned to lead the industry when markets recover and that our patience and financial discipline will be rewarded.

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

Good morning. Please turn to Slide 12 for a discussion of the four take-aways on the consolidated results for the fourth quarter of 2010 in comparison with the prior year's quarter. The first take-away is that the quarter-over-quarter decline in TCE revenues was driven by both the shift in the mix of the Company's fixed versus spot coverage and the weaker-than-anticipated rates incurred during the winter months of 2010.

Our spot exposure increased from 45% in 2009's fourth quarter to 59% during Q4 2010. The Company's VLCC and MR fleets accounted for the majority of this increase. The weak rate environment in the second half of 2010 provided few incentives for committing to new fixed-rate cover upon expiry of existing charters.

During Q4 2009, the Company had fixed-rate coverage on approximately 10 VLCCs at rates that exceeded average spot earnings by $19,000 per day. During Q4 2010, there was only one VLCC under fixed-rate coverage for 30 days. With spot rates for VLCCs lower quarter-over-quarter, essentially 880 fixed-rate VLCC days were replaced at average rates that were lower than those earned in the prior year's quarter by $25,000 per day. Similarly, with respect to the MR fleet, 300 days of fixed coverage at $21,000 per day were replaced with spot rates that were approximately 42% lower.

The second key take-away is evidence of that turnaround in the U.S. Flag segment. TCE revenues for the Company's U.S. Flag vessels increased by $7 million quarter-over-quarter. This increase was in part attributable to the delivery of two new build product carriers and a shuttle tanker during 2010. These vessels commenced multiyear time charter agreements which were negotiated at attractive rates prior to the economic recession. In addition, important contracts of [a breakment] were renewed in our U.S. Flag lightering business.

The third take-away relates to the turnaround of the at FSO joint venture. As Morten mentioned, during Q4 2010, the Company recognized income of $5.2 million from the FSO joint venture, compared with a loss of $9.1 million during Q4 2009. This positive swing reflects a full quarter's earnings for each of the FSO Asia and the FSO Africa, coupled with the positive change in the mark-to-market value of the FSO Africa's interest rate swap.

Lastly, we have continued our cost control program in 2010 which resulted in a $12.4 million decrease in G&A expense in the current quarter over the prior year's quarter. Of this amount, $7.6 million was related to a reduction in consulting and legal costs, primarily related to the tender of OSG America LP and the Aker settlement. The balance reflects cost control efforts across a series of line items.

Please turn to Slide 13 for a brief discussion of selected balance sheet line items. The year-over-year movement in the Company's cash position reflects $450 million of debt and equity financing raised during March of 2010. These amounts were offset by $176 million of net reductions in outstanding balances under our revolving credit facilities. Other cash flows during the year included $421 million in vessel expenditures, $20 million in drydock expenditures, and $98 million in net advances to the FSO joint venture.

A few points to emphasize the Company's financial strength -- liquidity at December 31, 2010 was $1.3 billion. Remaining construction contract commitments at December 31 were $222 million, of which only $152 million is due during 2011. Scheduled debt amortizations total only $45 million in 2011. Additionally, we continue to have significant headroom under our debt covenants and 2011's cash from operating activities will reflect the $41 million tax refund resulting from the workers, Homeowners, and Business Assistance Act of 2009 that increased the loss carryback period from two to five years.

Please turn to Slide 14 for a discussion of our 2011 guidance related to vessel expenses, charter hire expense, depreciation and amortization, G&A expense, equity income of affiliated companies, interest expense, and capital expenditures. Vessel expenses are projected to be in the range of $295 million to $310 million compared with 2010 actuals of $265 million. Costs per vessel day are expected to remain relatively stable, reflects our ongoing focus on operating expenses. With costs per vessel day remaining essentially flat, the increase in total vessel expenses reflects the delivery of seven owned and one bareboat chartered in vessel in 2011, as well as the full-year impact of 2010 deliveries.

Charter hire expense is expected to be in the range of $380 million to $395 million, which is consistent with 2010 actuals at $370 million. The increase reflects three charters in that commence in 2011 as well as the full-year impact of three chartered in ships that delivered during 2010.

Depreciation and amortization is expected to be in the range of $185 million to $195 million, an increase over 2010's actuals of $171 million and resulting from a net increase in owned vessels. Seven vessels are expected to deliver in 2011.

G&A expense for 2010 is estimated to fall 2011 is estimated to fall in the range of $95 million to $100 million with the expectation of performing at the lower end of that range. Equity income from affiliates is expected to be in the range of $20 million to $25 million in comparison with 2010 actuals of $3.5 million. This turnaround reflects a full year of service for both the FSO Asia and the FSO Africa. This number does not reflect the impact of any changes in long-term interest rates on the mark-to-market of the interest rate swap on the FSO Africa.

Interest expense is expected to be in the $95 million to $110 million range compared with 2000 actuals of $67 million. This increase reflects three major items -- first of all, a full year of interest expense on our senior 8 1/8% unsecured debt raised at the end of March 2010; secondly, expected interest and amortization of financing fees relating to Title 11 financing; and thirdly, expected commitment fees and amortization of financing fees related to the implementation of an unsecured forward start facility.

Our guidance for drydock costs for the year is approximately $43 million. Drydocks will be performed on 29 vessels -- Q1, $7 million; Q2, $11 million; Q3, $12 million; and Q4, $13 million.

Our guidance for capital expenditures for 2011 is approximately $176 million, which includes progress payments on new builds, vessel improvements, and capitalized interest. Q1, $76 million; Q2, $60 million; Q3, $17 million; and Q4, $23 million.

We'll now open the call up to questions. Operator?

We will now begin the question-and-answer session. (Operator Instructions). Jon Chappell, JPMorgan.

Thank you. Good morning and good afternoon. Morten, you touched on a couple of issues that I was hoping to follow-up on a little bit. The first one is slow steaming. You mentioned its impact in mid to late February and we certainly saw that in the [TD3] market although maybe not so much in the smaller asset classes. But now the [TD3] market has turned pretty aggressively the other way just in the last few days and we are back to the midteens on a TCE basis. My question is as the rates started to improve, did that kind of eliminate the desire to slow steams? Is this is a very short-term event, or is there something else even more powerful in the market that's offset the benefits of slow steaming just in the very near term?

I'm going to let Mats answer that because this is a subject very near and dear to his heart.

It's not a short-term effect, Jon. It's still going on, and it will go on even more than it is today. It is an absolute no-brainer to increase the slow steaming today. Everybody should do it and it is increasing.

What we've seen so far are speeds going from 15 knots to 13 knots, both on [late and on] ballast legs. What you will see now is the speed on the ballast leg going from 13 down to 10, further reducing the [banker] consumption with 25 tons per day or something like that. The higher bunker price -- the higher oil price and therefore the higher bunker price makes this even more profitable to do. So you're going to see an improving effect on the supply overhang due to that going forward.

I understand that, but could you just maybe explain a little bit then what happened in the last week that's driven the rates back down to those midteen levels from where they were just a couple of weeks ago if the slow steaming hasn't changed at all?

Yes, what you saw was a period with very high rates in the AG earlier this year and a little bit higher rates than West Africa. So that caused a lot of ships to ballast from the east to the west, and that created a shortage of ships in the AG that was one of the contributing factors to the spike. That has now shifted back again, and that combined with a little bit lower activity for importing into China has caused the situation we have now. We feel this is definitely the bottom, though, and it's going to swing the other way around shortly. But we are fairly well balanced, and you have these waves of ships moving between the two markets, the AG market and the Western market. It caused a shortage in AG, causing this spike.

Okay, thanks. And --

Just to add, we have not really seen the benefits of Libya yet, because there's still oil flowing out there. So I think that will help contribute to an improved market as well going forward.

Understood. Morten, you also talked about your discipline for your growth strategy in the last couple of years, which has certainly paid off given the current market we're in right now. What's your kind of outlook on your timing for a return to acquisition mode? I guess the two parts that go into that are what do you think about asset prices today and the near-term future for those, and then fitting that you're in Oslo, what are the banks telling you as far as availability of financing to I guess well-capitalized public companies?

I think there's a few -- a couple of things, financing tasks, that we've been working on that we expect to put in place here in the coming months that I'd like to have in place ahead of time. I think our story investor day was very clear. We thought the second half of the year would be stronger than the first half of the year, and that was largely predicated on economic growth and increased OPEC production. We still think that is the case.

We have been very clear and patient waiting for people to have pain. That creates the opportunities that are better than competing in the market for a ship. We've been lucky in picking up some MRs with reasonable arrangements from yards. Everybody's reading about Korea Lines' bankruptcy. That has a knock-on effect.

So we are -- we would expect that there would distress opportunities, which would be below today's current market levels. If those come along in our core segments, we will consider them. But we are going to remain patient and keep putting the bricks in place for our business. Does that make sense to you?

If you're right about the secondhand recovery in the market, though, and people share that same view, might they hold onto their assets a little bit longer in the hopes that they can make it through the next couple of months in the recovery and then those distressed opportunities will emerge?

I think some will, those that are able to, but there are people that are living day-to-day by cash today. That's problematic. I believe the KLC -- I'm not picking on them, but I think there's something around 50 new buildings that are involved in their commitment program. That puts enormous strain on both yards and owners. We know there are owners that have already had to issue some fairly funky expensive securities to get new buildings delivered in Korea VLCCs I'm talking about. So we know of enough situations out there that are stressed that I could be comfortable.

But I repeat what I said earlier today. We have enough ships in our three businesses so that we are only going to do moves that we are positive are going to be accretive immediately, that are in excess of our WAC, that I can go to you and anybody and say this was a good transaction. I believe we will see those.

One last quick one for Captain Johnston. You mentioned the improvement in the Jones Act business, in the spot market. Can you give us any type of magnitude guidance on how that's improved over the last couple months?

The spot market in the last couple of months, Jon, has gone up about 17%, 18%. You're seeing initially the utilization which is the waiting time before the next cargo is dropped dramatically. So, with the rates going up and the utilization going up, that's definitely improving the TCEs.

Great to hear. Thank you, thanks Morten and Mats.

Natasha Boyden, Cantor Fitzgerald.

Thank you very much. Good morning and good afternoon everybody. You've been -- in terms of charter hire expensive, you've certainly been focused on returning high-cost vessels to owners in order to reduce your charter hire. Can you reduce this further or are you actually comfortable with your current levels of exposure?

Why don't we let Mats and Lois tackle that one for each of their segments.

On crude, we are currently still not renewing more so than we are renewing. So for crude, we are a little bit reducing it, but we are on the verge of turning that around. We are taking some positions. You've seen us take two Suezmaxes recently for example, so when we see real attractive levels, we do strike. But we are also looking to renew a little bit on the lightering front where we have redelivered expensive ships, but still a little bit of a reduction on the number of ships you see in our fleet, but that's flattening out and would be expected to see the increase again shortly.

On the product side, we have opportunistically taken a couple of vessels over staggered periods, one vessel for one year and a vessel for three years, and at very low rates. So, what we have seen -- and we do believe we will be able to take advantage of that going forward.

Great. Then Morten, perhaps this just more of a general question, but if the market continues to stay depressed for a fairly significant amount of time longer than it currently is, are you considering at all cutting or reducing your dividend or are you still comfortable with the current payout that you have?

I think we've said all along that our dividend is set at a sustainable level. It's always reviewed by the Board, but we believe, based on the business outlook that we have and our ability to turnaround those businesses we have, that we would expect to continue at the current level.

Great. then a couple of industry questions. Mats, I think you touched on this earlier when you were answering Jon. But can you talk a little bit about how the Libyan situation is affecting the tanker market, particularly for Aframaxes? Based on that, how are you positioned to protect or benefit yourselves from this?

Mort, do you want me to take that?

You take that, but I'd also like Lois to also answer the products, because Libya impacts both crude and products.

What we expect to happen and which has started to happen but hasn't played out in full yet. It's for the Libyan exports to Europe, which is a light sweet crude, and they need that in Europe, so that will come from West Africa instead. You saw couple of Suezmax [fixtures] from West Africa last week, (inaudible) started to see that happening.

Then in turn, you're going to have AG crude going to US Gulf and Asia to replace the West African. Lois will take over from there, because you're going to see products moving from US to Europe. So we kind of see the 900,000 barrels per day or so that goes from Libya to Europe today to Italy and France and Northwest Europe probably being split, and about half of it coming by way of West African light sweet crude, but the other half coming by way of already refined products in the US refineries that can handle heavier crudes. But, it will net in higher ton miles demand overall. We have that at some 3%. It's a chain domino reaction, so you can -- and Aframax is benefiting right now because of -- primarily because all the charters are asking for more optionality in their discharge options, which gives the owners a reason to ask for higher rates. Owners right now are asking for a 50 point premium to go to Libya and there are still ships (inaudible) there. You also have the Baltic market pretty firm on Aframax side due to the (inaudible) ships there. So Aframax market is going up, but this has an overall effect, Libya has an overall effect, which mostly benefits Suezmaxes on the crude side.

On the product side, as Mats mentioned, we definitely are seeing a call for more diesel moving into the Med, which is part of the market that would have been served consistently by Libya. That is -- you know, US Gulf to the Med is a longer voyage than what you'd see when the diesel moves to the continent.

Another factor that's happening is that the elections in Nigeria are coming up, and you're seeing a call for more diesel in West Africa. I think part of that is just the security of having available product near to the market just in case that there are disruptions. That is a result of the overall I think increased tension in the market. So on the product side, we're definitely seeing the market pick up, although not as much as it would if some of the premium wasn't weighed by increase bunker expenses.

Great. Then lastly, and this again sort of surrounds the same issue, but Saudi Arabia announced that it's increasing output to offset declines in Libyan production. Again, maybe, Mats, you could address this. What do you see as the development effect on the tanker market here? Could we see more strength in VLCCs as we see more production increasing?

Yes. I think we will. Again, it really hasn't really happened yet, so they talk about the increased production, but we haven't seen an increase in the cargo count. As I alluded to before, (inaudible) into China eventually has slowed down a little bit compared to around year-end when it was very high. It's going to swing back up again but it hasn't happened yet. But yes, more crude out of the AG as a result of the Libyan is one of the net effects.

Thank you very much for your time.

Justin Yagerman, Deutsche Bank.

Good afternoon. This is [Josh Katz] on for Justin. Just a quick follow-up on Libya. I guess, from what we've seen in the market, Aframaxes are still loading in Libya. Do you guys have any tonnage in the area, or have you guys heard whether there's been significant delays or is it kind of still business as usual [with] a high amount of concern?

(inaudible) because we have a pretty good update on that.

Yes, ships are still loading. There are slowdowns; there are delays. Owners are asking premiums to go there. But it is slowing down. It's also been bad weather in the area, so the ports have been closed for periods due to bad weather, not due to the political situation. But there's still oil in the tanks; oil is still coming out of there. It's both Aframaxes and Suezmaxes. But it's slowing down, and we foresee it slowing down more and more to more or less come to a halt with everything going on with the oil companies bringing their people out and production is decreasing.

Great, thanks. I guess, just touching up on your Jones Act fleet, just for clarification, do you still have any vessels in lay-up?

We have right now the two vessels in lay-up in the Jones Act fleet. One of them is ours, which is one ATB, which is the 214. We only have one vessel in lay-up.

Just to add, we do not have any ships in Libya ourselves.

Okay. Now, I guess some bottling questions. I guess the FSOs I guess had pretty solid results in Q4. It was mentioned that there some service bonuses included. Are those bonuses expected in 2011? Is that baked into guidance?

It's baked into the guidance.

One last question before I turn it over. There was a lot of talk about generally starting the refinancing process and extending out maturity of debt. You guys were able to raise capital through the high-yield bond as well as three US Jones Act (inaudible) financing. How is that progressing so far in 2011? Is there some sort of timeframe you guys are working off of?

We are in the process of negotiating each of the forward start facilities in the Title 11 financing. We've made progress along both fronts. Expectation would be completion of a forward-start facility no later than the beginning of the second quarter, and merit financing at least one tranche within the second quarter.

Justine Fisher, Goldman Sachs.

Good morning. Just one clarification on the forward-start facility. Myles, has the recent downgrades from the rating agencies changed any of the negotiations with banks that you may have started in December? Is it still -- are you still -- can you comment any further on rolling it on a secured or unsecured basis, etc.?

The terms remain essentially the same since that which we shared with you in December, so the facility remains an unsecured facility.

Okay. Then the debt that you guys drew down during the quarter obviously was to finance some vessel deliveries. But what facility was it? Did you drive down on your revolver in order to fund those deliveries, unsecured one?

That's correct.

Then as far as the broader market is concerned, I would characterize it as extremely weak right now, not taking into account any potential rate improvements from what could happen in the Middle East. How long do you guys think the market has to stay this weak in order to see a "shakeout", whether that's orders actually being canceled, like someone might pick up those Korea line orders instead of just letting them go away? How long does the market have to remain really weak in order to see the shakeout that we need to sort of permanently reduce capacity or improve the structure of the tanker market?

I don't think, Justine, there's a precise sense to that. If you look at -- take the MR product tankers, which is the segment we are in that was at the earliest. Lois can correct me, but there's almost no orders for two years. Probably almost half the order book has disappeared, and there's been very little ordering. That is I would call a very typical cyclical development in the industry. You've even seen it -- one prominent owner allegedly is converting VLCC orders to LNG orders. We know there has been more order book changes that we talked about at investor day. So, I believe if we have a continued quarter or two of weakness, it is going to be -- it will be -- it will create those kind of shakeout situations that we've been waiting for. KLC impacts an awful lot of companies. You have a few end yards, you have a few more like that, and you have a big change. So we are in the zone; we are in the pain zone now for people.

But I guess based on your comment about orders, if there haven't been new MRs for two years, and rates are still in the high single-digits/low teens depending at where you charter it, it seems as though that two-year dearth of orders and payment in that product market hasn't necessarily lead to an improvement. So does that imply the tanker market could need two years of bad rates before seeing an improvement?

No. I think we had an unprecedented worldwide recession, and you had unprecedented developments in particular the oil market in the United States. Remember you've got gasoline, decreasing gasoline usage in California and Florida for two years running. That's never happened before. We went through a trough, a demand trough that we haven't seen. That demand is recovering now, and the demand recovery is rather dramatic, which is why we would expect -- we don't expect it to be as long-lasting as some would believe. Normally, when the markets get very depressed, everybody gets depressed and says the world has come to an end. Normally, when a consensus forms along those lines, whether it's up or down, the market behaves differently.

Okay, thanks very much.

Rob MacKenzie, FBR Capital Markets.

Good morning and afternoon. I guess a question for you, perhaps Morten first. In your press release, you mentioned that you no longer have any FFAs in place for your Vs right now. Is that -- should we interpret that as a bullish statement that V rates have bottomed and can only go higher from here?

I think that's a reasonable interpretation of it. I think it's partly that we get premium earnings from our tankers' international operation. If you look at our earnings over a longer particular time probably front lines, which has a different (inaudible) but we outperform the market consistently so that gives us a little premium. To lock in rates in 20s really doesn't make a lot of sense for us. So we would expect that if rates move up and they could, that it might get back into FFA activity. But we see no need to lock in levels when they were as low as they were this year. They've moved back up, but I think if I looked this morning, I think you could cover most of the year over 30 now, which is a pickup of probably 5000, 6000 from not too far back. So we will -- I think it is a testament that it's slightly bullish (inaudible) but partly it's we are not going to lock in and predict (inaudible) just as we wouldn't (inaudible) levels. You only do that if you have to.

Okay. Thanks. How can you characterize for us, coming back to a topic that's already been discussed some, how fast perhaps you expect to see slow steaming spread throughout the global tanker fleet? If so, which sizes is it going to be more prevalent on?

Mats, do you want to take that one?

Yes, the bigger the ship, the bigger the benefit of slow steaming, but it helps all segments. But the long haul VLCCs is where it makes the most sense. Now, you have a bunker price $650 a ton going from -- the example we used at investor day, we said that going from 15 to 13 knots means $4000 per day higher TCE every day. That is now $6200 per day or $6500 per day just because the bunker price is even more expensive. The level at which they breakeven goes is $80,000 per day, or actually, a little bit higher than that now. So it makes enormous sense to do it. You can't go much lower than 13 on the laden leg because the (technical difficulty) everybody is working and trying to get that slower. But on the ballast leg, the owners do what they want, and all our technical people are working on reducing the speed to 10 knots. You can do it. It's just a matter of pushing it and managing it correctly.

I would point out this isn't wishful thinking. If you look at the container sector, it rebounded more quickly than anybody expected, certainly me. Yes, it was partly driven by a recovery in demand, a lot of business in Asia, but it was slow steaming across the industry, implemented with discipline everywhere that really was the big driver of the improvement in the container business. It impacted of the capacity utilization of the fleet so enormously that it changed the market. It's a good model.

In your slide deck, one of the things you guys highlight for 2011 is net fleet growth in 2011 to exceed demand growth. I guess that is before you take into account these kinds of factors, correct?

Correct.

I guess a follow-up for Mats. What percentage would you think of OSG's fleet right now is steaming at 13 knots laden versus 15, and give a similar guesstimate for the overall industry?

100% is doing 13 unless there is an extreme situation to meet (inaudible) or a customer has a dire need. So every VLCC is doing it. Again, we're running a couple of (inaudible) down at 10 knots and more and more of (technical difficulty) at 10 knots on the ballast leg. It's not spread to everybody. The state-owned ships and companies are not doing it as much as the independent owners, but it's spreading, spreading really fast right now.

Do you think you were pretty much converted in the next quarter or two?

Big ships? We certainly will be.

Definitely for ourselves in one quarter, yes.

Then I guess my final topic comes back to the floating storage topic that you guys brought up. The contango now is what it is even with the -- it is growing sort of $6, $7 a barrel right now. Where do you think it needs to be to really start seeing material floating storage start emerging again as a source of demand?

You have contango on [WTI]. You have a backwardation on [BRENT], and [BRENT] is unfortunately the more relevant price, the more indicative price. So it does not really work now. We have seen some inquiry, but not significant. It needs to be $0.50, $0.50 a month is a good rule of thumb. But it depends on what the charter rates are as well. But you take the daily TCE times 30 days and divide by 2 million barrels, and you get $0.45 a barrel, $0.50 a barrel. You need to have a higher contango than $0.50 a barrel to have it take effect.

Got it. Do you think -- what is your view of where [Brent] goes when we see some unrest in North Africa start to lessen? Do you think that the contango backwardation profile changes some?

We are not going to be one that predicts the direction of oil prices. I think you guys are much better at that than we are. I think what we have said is our budget doesn't include return of contango. We just say it's a wild card that certainly can happen. (technical difficulty) there are very few vessels now in storage, which is a good thing. (multiple speakers)

That's good. Thank you Morten.

Fotis Giannakoulis, Morgan Stanley.

Good morning and good afternoon. Morten, I understand you are in Oslo right now. Perhaps you can give us a better idea of how the weather is right now. We see today there is some activity in the North Sea because of the adverse weather conditions. Would you be able to comment on that?

I'll let Mats do that, but I will report that Norway -- Norwegian woman got her third gold in three events today. So spirits are rising in Oslo. Mats, do you want to take the [weather] market up here?

Yes, there was a rumor I think it happened -- but it was very high fixture down in a nice (inaudible) Aframaxes that drives up the Aframax market right now. So that's what's going on there. The ice market is very, very high, and that spreads through the non-ice as well.

How long do you think that this tightening for ice classes can last? Also if you can -- going back to the Libya disruption, oil disruption, if this 700, 800 -- actually it's more than that, it's 1 million barrels has to be replaced, where do think that this oil is going to come from and how many ships, additional ships, in different asset classes this increase in distances can absorb?

First, on the Baltic ice market, it's probably the most volatile of all markets. It's extremely difficult to forecast how long that will last. It's jumping up and down like crazy. But the ice will stay for a long time, more in the Baltic, that's for sure.

On the Libyan replacement, as we mentioned before, you can model that many different ways. But we think that about half of it will be replaced by light sweet West African crude, and the other half will then be heavy sour crude going from primarily AG to places like the US where they can handle that heavier crude. It will be refined there, so refinery runs in the US will go up. So you're going to have diesel go from US to meet the other half of the products that are missing in Europe, as Lois mentioned. But -- and what vessel classes does that affect? Well, it affects almost all of them. But it's a net increased ton miles due to you have a short-haul production that disappears and is replaced with production and products from further away. Both Suezmaxes, VLCCs from AG to US, Suezmaxes from West Africa to France and Italy, and some product tankers from the US Gulf to Europe.

I think the important thing to understand here is the situation is very fluid. There are ships that are chartered in to go to Libya that are way under load, but there's a possibly that force majeure could be called on those vessels. I believe there's been a Suez that has failed on that basis already. But I don't think anybody at this point knows how much of the Libya production will be lost and how much will be kept up. So we definitely know, based on [owned] charterers is they are asking for a lot more flexibility where they can take the ships, try line up where their new supplies will come from if they have to. But this is all unfolding very, very quickly, and as it becomes apparent how much has to be replaced, you'll see the market react very quickly.

Just a follow up -- do you think that this can be in sum more beneficial for Suezmaxes than VLCCs given the West Africa trade and the AG trade, and might put some pressure on Aframaxes in the Mediterranean?

Mats?

It all hangs together. Right now, the market that has the most strength is actually the Aframax market due to the confusion and the stuff that's going on there, combined with the Baltic situation. So it's very hard to say, but you know, the segment that are the most positive I would say is Suezmaxes and secondly the [Vs] on the crude side.

Lastly, can you give us an idea of how the situation with increasing oil prices works for bankers and if this will have any material impact on a lot of smaller private owners that they might have to get bigger lines for bunking costs?

I don't want to comment on that, but again the effect of the higher bunker prices has is that owners are pushing rates up, and they need to and they should because, again, it [left] after the bunkers is paid, and again, the second effect as we've mentioned very, very clearly is the slow steaming. It incentivizes slow steaming even further.

Thank you guys.

Michael Webber, Wells Fargo.

Good morning guys. Most of my questions have actually already been asked, but I just want to zero back in on a couple. Morten, you talked a little bit about being opportunistic in terms of acquisitions and really try to pick your spot. In terms of where vessel values are right now, can you give us a little bit of a feel of how far they would need to come down before you guys would really look to get active, and maybe do that within the context of the value of maybe like a (inaudible) VLCC?

Unfortunately, there's people that might be stuck with ships that might be listening. I don't want to do that. It's always a fluid situation. I think you saw a new build in Aframax, albeit not a high spec one, a Japanese build that went for a much lower price than prior done. The MRs that we picked up were at current market levels, and those are levels we are very comfortable we are going to make a return in excess of our lack over time, are going to be accretive. I think that's really the measure. We don't expect levels to fall down to levels -- to historic low levels primarily because new building prices, because of a lot of reasons, steel input prices, currencies, to a certain extent dampen the amount that they can fall. But it will be more people that have to sell under duress. There are people -- everybody can unload new building orders into public companies or affiliated companies, and so people are going to have to get pressed. (technical difficulty) on that Aframax from originally ordered was quite significant, so the owner in that case lost an awful lot of down payment to get it done. we expect to see more of that. But I've got to be a little bit cagey and just remain very disciplined, because so far that's served us well. I'm glad we've not pulled the trigger yet.

No, that makes sense. To that point, in terms of where we should think about trough asset values, we should be thinking around trough in the last couple of years and not necessarily trough of, say, the last 15 or 20, you think it's going to be somewhere where we found support over the last four to five years?

Yes, because I think just kind of new building prices are a bit of a damper on the secondhand market. It's just the reality of currencies and steel prices and input costs make -- that softens it a bit.

All right, makes sense. Next question, and this is more kind of high-level and kind of strategic. When you think about rising crude costs and your strategic relationship with the Chinese, in your experience, how sensitive are the Chinese imports to price? If they are relatively sensitive, where do you think that price point kind of lies, that inflection point within the crude pricing curve that you think could actually have an impact on those incremental volumes that are now going to China?

I think the one mistake we've made really consistently here the last six, seven years is underestimate the capacity of Chinese growth to continue at the kind of levels it has been. We've tried to convince ourselves exactly what you talked about. The real driver of that is going to be the industrial growth in Japan, housing build, car sales. As long as that continues and they allow refiners in China, and they are bringing on new refineries to either earn money or get government subsidies to make up for losses, we don't really see demand falling off much absent another global shock. So, we see that demand growth as being very solid.

Right, so you think the government could basically make up so any sort of disconnect between where the price might ordinarily [imply] in terms of volumes?

Which is what they've done.

Okay. I guess final question, this is more just kind of a nuts and bolts question. Now that you guys are up to kind of a more normalized run rate for the [FSOs], how should we think about I guess upkeep and maintenance and how that impacts employment over the course of the next year, next two years? What sort of schedule would these things typically be on?

Mats, do you want to give it to him? Because it's fairly good news.

(inaudible).

Serious?

Yes. Not (technical difficulty) for the eight-year period, but they're converted and designed to not go into drydock during the eight-year contract that Asia is on and Africa is on a shorter contract. But we work extremely hard to not have any (inaudible) there, and we haven't had a minute so far. We don't plan to either. (multiple speakers) built into the ships.

Got you. That's good news. Thanks a lot for the time. I appreciate it.

(Operator Instructions). Sal Vitale, Sterne Agee.

Good morning all. Just some quick questions for Morten on what you were just discussing on potential for VLCC acquisitions if prices come down a bit. There seems to be a dichotomy of you're very positive on -- or at least cautiously optimistic on VLCC rates being at a bottom and coming back this year. Won't that basically maintain or potentially even increase VLCC prices?

The follow-up to that would be if you are in an environment of let's say static VLCC prices going forward for the rest of this year, would that preclude you from growing your fleet and making some acquisitions?

I'll answer a little differently. There is an enormous disconnect right now between secondhand values for the oil tanker asset classes and charter rates. So a one year time charter today is, Mats, high 20s, low 30s?

Something like that for a VLCC, yes.

That doesn't -- whereas a prompt VLCC is still somewhere in the $90 million to $100 million. There's absolutely no sense for us to buy a VLCC at those levels when you can charter them in at economic costs that are much lower. So -- and the owners that tend to charter at those low levels are ones that have to either because their banks force them to or they are desperate for cover. Those are the ones that are going to be under pressure.

One of the reasons that we run the Company the way we do is if the secondhand market or the new building market is not adjusting to the charter market, then we can stay in the charter market. That's what we would do. That helps us keep our discipline so you don't chase assets.

So it wouldn't necessarily preclude you growing the fleet. You could just increase your charters and mix, basically?

Yes.

Then just to follow-up on your view on contango, so [Brent] contango is now actually in backwardation now. I'm not going to ask you to predict where you see that going over the next few months. But what do think -- because that really switched over the last couple of weeks. It was in contango. I don't know the exact number, but it was in significant contango. What do you think has been the driver of that? Is it just a view of higher demand, or is it just more a crimp in supply? What do you make of that?

Mats, do you want to take it?

I think it's the political unrest in Libya and the other things going on that drives up the front price. So the forward price doesn't change as much, so that changes from where it were.

Sorry, Morten, you had mentioned earlier that there are very few VLCCs that are currently still in floating storage. In terms of a percentage of the overall VLCC fleet, would you say it's maybe 1% or 2% or something like that?

Yes, there's one in Clean Products and I don't know how many Iran has in storage. That's about it, isn't it?

Yes, very few in crude, so you can count them on one or two hands as regards VLCCs.

Then just a follow-up question for Mats on slow steaming. Could you describe what is your view on why slow steaming became really popular in the container industry probably about a year or so ago? That was one of the main drivers of container strength, demand strength. Why the tanker market has been so slow to adopt that, and why suddenly it's becoming more of a factor besides the recent increase in bunker posts?

I don't really understand it myself. It should happen quicker; it is happening and happening in steps. Again, as I mentioned, it's gone from 15 to 13, and now it's taking the next leap from 13 down to what people call super slow steaming on the ballast leg. But if you let the engineers, and all respect to engineers, but you've got to manage it correctly. If you just slow down, you risk suiting up the economizer and the (inaudible) because you've got to know how to do it, but it can be done.

I think the container guys -- you've got to remember they're paying their own bunker bill. They were sometimes able to put fuel surcharges on, but they are effectively paying it, so their incentive (technical difficulty) whereas tanker owners' view has always been that is something we pass on to charters. That's just historically the way the business is run.

I'd say one of the differences between the way we run our company and some the other operators is those operators simply run them at all times. They just want to have cargo as quickly as they can onboard the ship. So when they discharge, they sprint back to the nearest load port to get the next cargo. That's -- it is a change. We've not lived in this sort of high bunker price world now for an extended period of time ever. Now we are there, so people are now experimenting with lower speeds and realizing that it works, not only does it work, it puts money in their pocket. So I think the change is happening. I think it's absolutely reversible because this is really very simple HP12C math, and the ships technically can do it.

Then just the last question for Mats, you had mentioned in your comments earlier that Chinese oil imports came down a little bit. That was the explanation for the rates coming down a little bit.

I think it's a combination of manufactures. But we do keep a close count on all the cargoes moving everywhere, including into China. It hasn't come down compared to last year, but it has come down compared to around year-end when the levels were very high.

Okay, thank you very much.

(Operator Instructions). Urs Dur, Lazard Capital Markets.

Thanks for your time. Great questions by everybody. I have one final one that I just think is sort of interesting. You talked a lot about the spread between Brent and West Texas and all the oil sitting in cushing, and there's backwardation in Brent, but good contango in West Texas. What do you think about -- in the past, you were able, when you had a discount of Brent to US crude, you were able to go from Hound Point to the US on an arbitrage. Why doesn't that -- I have some ideas, but in your view, why doesn't that arbitrage work in reverse? Is there any way to take advantage of that arbitrage between the cheap US oil and the more expensive brand?

You've got to ask the oil traders. We're seeing a little of it, but very, very little. I'm asking that myself. So again, it's not our (technical difficulty) people that do nothing but this for a living. So there's got to be some reason. I don't know it is.

We don't think we're smarter than people who trade oil. But we do have an effort in the Company, and that is how we purchase bunkers worldwide, because there are opportunities now to arbitrage by being smart in how you buy and getting flexibility to bunkers across the globe. The numbers are real, and that is something we are going to apply more effort, math, and time to and believe there will be savings, particularly in this environment. We are not going to start guessing on the direction of oil. That you can be rest assured on.

All I wanted to know is whether or not you had seen any uptick in demand for the trade. That arbitrage trade worked really well from Hound Point to the US back when I was a broker. We don't have it anymore. It's a big reverse, and nobody seems to be able to take advantage of arbitraging it. It would seem there's got to be some way to get tankers involved in storage or movement of it, because that's really the big contango, or the big arch window right now, and it would be fun to see if it happens. But I guess you haven't seen much of it, so that's all I was looking for. Thank you for your time. Thank you for such a long call.

Management, there are no further questions in queue. Please continue with any closing remarks you may have.

I just want to thank everybody for joining us. I believe this was our longest earnings call, so I appreciate all of the questions. I think it's a reflection that there's an awful lot of change and turmoil going on in the markets right now. We are trying to stay on top of it. You help us. If anybody has additional questions, please call John Collins or any of the management team. We're always open to you. Enjoy the day. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.