Octave Specialty Group Inc (OSG) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Overseas Shipholding Group Incorporated First Quarter 2011 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode and following the presentation the conference will be open for questions. (Operator Instructions).

We'd now let you turn the conference over to Jim Edelson, General Counsel. 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, estimated TCE rates achieved for the second quarter 2011 and estimated TCE rates for the third and fourth quarters of 2011, projected scheduled dry dock and off hire days for the second, third and fourth quarters of 2011, projected locked-in charter revenue and locked-in time charter days for the remaining nine months of 2011 through 2015 and thereafter, estimated revenue and expense items, levels of equity income and capital expenditures for 2011, the profitability of 2011 of certain business units and 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 world oil demand.

Forward-looking statements are subject to a number of risks, uncertainties and assumptions, many of which are beyond the control of OSG, which may cause actual results to differ materially from those implied or expressed by the forward-looking 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 2010 and in other reports that 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. This supporting presentation can be viewed and downloaded from the Investor Relations webcast and presentations 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, and good morning and thank you to everyone for joining today's earnings call. I am here in London along with Myles Itkin, our Chief Financial Officer; Lois Zabrocky, our newly named Chief Commercial Officer for all our international flag business and Ian Blackley, Head of International Shipping Operations. Bob Johnston, Head of our U.S. Flag SBU is joining us from Tampa, Florida. The Management Team Members that are joining us from New York are Jim Edelson, our General Counsel; Jerry Miller, our Controller, and John Collins, Head of Investor Relations.

The presentation is posted on our website but please if you would turn to page three. The first quarter saw a continuation of the weak freight rates we experienced during the last six months of 2010. Consequently, we reported a $34.6 million loss in the first quarter, which translates into $1.15 per share. While a significant improvement from the fourth quarter of 2010, the loss is still disappointing.

The main contributors to the loss were weak spot rates in all our international flag segments, increased Company exposure to the spot market and higher fuel costs not fully recoverable in the marketplace. This was partially offset by improvements in our U.S. Flag unit results and on budget performance from our LNG carriers and FSO joint venture and continued cost discipline throughout the Company. While far from satisfied with these results, we believe that the numbers demonstrate that we are headed in the right direction. Please turn to the next page.

There are three key takeaways from this slide. The first is that by the end of this year we will be substantially completed with our new building program. With just the two STP Aframax tankers that are scheduled for delivery in 2013 remaining.

The second and most important point is that we now have critical mass in our three main business segments, U.S. Flag, International Products and Crude Transportation. We have the size and scale to compete with anyone of these segments.

The third point is that we have completed all the difficult and challenging conversion and new building projects we had, notably the FSOs, the Bender ATBs and the Jones Act shuttle tankers and these have been all placed under attractive term employment contracts.

Please turn to the next page. When we commenced on our expense reduction campaign three years ago we knew we needed to get the entire Company, both employees on shore and at sea, behind the effort or we would not succeed. Fortunately, we've gotten contributions throughout OSG enabling us to take out close to one-third of the overhead of the Company over the last three years with more progress to come.

At sea we sought to control costs but without in any way sacrificing safety, reliability and environmental Stewardship. There again our sea staff rose to the challenge and kept cost in check while operating a safer and cleaner fleet. We will maintain this disciplined cost management as we move forward.

Please turn to the next page. Let me talk about the outlook in our three main segments. In the crude sector for 2011, we forecasted another challenging year largely based on supply side considerations with an expectation that the second half of the year would be stronger than the first and, as a result, we would deliver time charter rates that were substantially on par with last year's levels. Our outlook has not changed. We expect that increased demand levels in the second half of 2011 will have to be met primarily from increased Middle East production going both West and East and thus increasing tanker utilization.

We expect the loss of Libyan crude exports and the resultant change in supply patterns will result in additional long-haul crude movements to both U.S. and Europe. In the immediate term, the completion of the refinery maintenance cycle around the Atlantic Basin and low inventories is likely to turn draw downs into re-stockings, which should benefit the tanker market.

While there is currently a lot of doom and gloom in the tanker analyst world, the tanker world never behaves in a linear fashion and is normally unpredictable, almost always impacted by wild cards. The key wild cards we see to the positive are slow steaming, which is being widely embraced in the industry, the substitution into Europe of Libyan production with longer ton mile barrels, increased burning of crude and diesel in Japan, as the country comes to grips with how to replace the nuclear power generating capacity that they have lost following the tragic events there last month, increased delays caused by piracy deviations and likely increase in OPEC production to meet expandable demand. These are the positive wild cards.

Moving to our international products business, we believe that we are in the beginning of a medium-term cyclical recovery in this market segment and that our decision to invest heavily in this segment the last six years will be rewarded. This does not mean that we will not have rate volatility for we most certainly will. However, we think the vessel supply bubble is behind us and for the next two to three years ton mile growth in the MR sector will exceed supply growth, which portends well for spot rates.

For instance, we are seeing increased movements of diesel from the U.S. Gulf Coast to both Europe and Latin America, two areas with their diesel deficit position increasing. Indeed, in the first quarter we achieved just under $13,000 a day for our spot MRs. So far in the second quarter we have achieved closer to $19,000 a day and lately have been fixing north of $20,000 a day, levels we have not seen for a couple of years. It is satisfying to start seeing smiles and high fives in our products desk once again.

Turning to the U.S. Flag, the story is really less about the market, even though the Jones Act Market has improved, and more about what Captain Johnston and his team in Tampa have done to turn this business around. Nine of the ten product tankers we took from (inaudible), Philadelphia are a medium term time charters to the likes of Shell, BP and Tesoro.

Of our two shuttle tankers, one is already on charter to Petrobras and the other will commence on charter to Petrobras in the coming days, this week. With the delivery of the OSG 351 on April first, we now have both of our two large new building ATBs that we had to finish ourselves working in our Delaware Bay lightering fleet.

Going forward we will have three dedicated ATBs providing lightering services to Sunoco, ConocoPhillips and PBF Energy to supply their Philadelphia area refineries under multi-year contracts or freightments.

Finally, the seven ATBs and one product tanker that just delivered overseas Tampa are positioned to benefit from a gradually improving Jones Act spot market. In conclusion, the turnaround of our U.S. Flag business is on track and delivering results. Next page.

Summing up, we believe that we have turned the Company around and expect to deliver better results for our shareholders. We have strengthened our commercial platforms and renewed key contracts. We have dramatically reduced cost on shore and kept costs at sea under control while at the same time improved service levels and delivered safety in environmental performance. We have completed difficult projects and put these assets on attractive charters and continued to modernize and upgrade the fleet and while we have done this we have maintained financial flexibility at a time we invested heavily building our three main businesses.

Like all tanker operators, we need some help from the market. We have already seen this in the Jones Act market, are seeing it in the national products market and expects that increased global economic activity will do the same for our crude business.

With that, let me turn the platform over to Myles Itkin, our CFO.

Thank you, Morten. I'd like to highlight four items on slides 10, 12 and 13 before beginning the Q and A session. Please turn to slide 10.

The first item of note is that the quarter-over-quarter decline in TCE revenues was driven by the weak rate environment in the international flag markets exacerbated with both the increase in our spot versus fixed coverage and the higher bunker costs incurred.

In the current year's quarter spot exposure increased to 69% from 64% in the prior year's quarter and bunker expense exceeded that incurred in Q1, 2010 by approximately $11 million. The $23 million decline in TCE revenues reflects a $43 million decrease in international crude tanker revenues and a $5 million decrease in international product carrier revenues, offset by a $23 million increase in U.S. Flag revenues.

Results from vessel operations mirror revenue performance with results from operations for the U.S. Flag sector at $6.56 million, contributing more than the international crude or the international product sector.

The quarter over prior year's quarter turnaround in the U.S. Flag sector's performance is largely attributable to one, the delivery of two new build product tankers and one new build shuttle tanker during 2010 and 2011 that upon delivery commenced multi-year charters at attractive rates; two, increased lightering volumes in the Delaware Bay and the servicing of this trade with more efficient tonnage; and three, the sale of four single hole Jones Act tankers that had been in layup for significant portions of 2010.

The second matter of note relates to the stabilization of results for the FSO joint venture. During Q1, 2011 the Company recognized income of $3.7 million from the FSO joint venture compared with the loss of $4.2 million during Q1, 2010.

The $7.9 million positive swing reflects the full quarter's earnings for each of the FSO Asia and the FSO Africa coupled with stabilization in the mark-to-market value of the FSO Africa's interest rate swap. Both FSO units are performing well and Q1 earnings are indicative of the quarterly earnings we can expect from this venture for the balance of 2011.

And the third and final P&L item of note is that we have continued our cost control program in 2011, which is expected to result in containment of daily vessel operating expenses and further declines in G&A expenses. Please turn to slide 12.

A few points about the Company's liquidity and cash flow obligations; remaining construction contract commitments at March 31st, 2011 were $177 million of which $107 million is due during the remainder of 2011; Q2 $56 million, Q3 $18 million, Q4 $33 million. Scheduled debt amortization totals only $35 million in the final nine months of 2011. Liquidity at March 31st was $1.1 billion, reflecting 2011's $150 million step-down in availability under our unsecured revolving credit agreement.

And our debt refinancing plans are proceeding in accordance with plan. Our first Title 11 project representing in excess of $200 million in funding has been approved and our forward start facility is likely to be concluded within the next two months. Please turn to slide 13.

Our expectations for 2011 are in line with the guidance provided on our February 28th conference call. The only change to P&L guidance is the interest expense. Interest expense guidance is being revised downward to a range between $90 million and $100 million compared with prior guidance of $95 million to $110 million.

Our guidance for dry dock costs for the balance of the year is approximately $40 million. Dry docks will be performed on 25 vessels; Q2 $15 million, Q3 $12 million, Q4 $13 million.

Our guidance for capital expenditures for the balance of 2011 is approximately $125 million, which includes progress payments on new builds, vessel improvements and capitalized interest; Q2 $71 million, Q3 $19 million, and Q4 $35 million.

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

(Operator Instructions). Our first question comes from the line of Doug Mavrinac of Jefferies & Company, please go ahead.

I just had a few follow-up questions from your presentation. First, as it relates to ton mile demand, we were expecting an increasing in early March in ton mile demand once Libya went down and the Saudi's increased production. Low and behold rates went from -- VLCC rates went from $20,000 a day to $40,000 a day rather quickly and then Japan happened and then obviously we've seen what has happened with Saudi rates since. My question is are we still seeing the underlying diversion of West African cargos to the EU and is that the primary reason why if you look at U.S. imports we've seen a real decrease in recent weeks is that you're seeing more West African crude no longer going from the U.S. and it being diverted to the EU. Is that still taking place, guys?

This is Lois Zabrocky, Doug and the first part of your question, the West African crude going to EMED is largely being taken on Suezmaxes and that is improvement that we continue to see, but in the first quarter you also have a lot of refinery down time in the U.S. Gulf and you'll start to see those refineries come out of turnaround now and so we think that you'll see a general overall pickup of barrels moving into the Gulf.

Right see and that's what I was trying to figure out, Lois, is that if we're still seeing North African crude being diverted to the EU the U.S. has got to get it from somewhere and the thought would obviously be that once demand comes back, that if your spare capacity still resides globally in Saudi Arabia, that you should start to see that happening. So I'm just making sure that the flows from North Africa were still going to the EU?

Yes.

And so the answer is yes?

Yes and we believe that Saudi Arabia will be producing somewhere around 9 million barrels per day in April, which is a pick up of over 0.5 million barrels a day from the end of Q4 so you're seeing -- we're going to start to see that increased refinery run and that pick up in the U.S. Gulf and should have more imports from the AG.

Got you, Lois, thank you and then kind of similar but somewhat different is that when you look at what has happened in Japan and clearly we've seen an increase for refine tanker rates as a result, but is there any timing when you guys expect to see some of their refineries start to come back and that we should start seeing increased crude runs to Japan as well to kind of complement what we've seen under refined products tanker side?

Well, essentially what we've seen there is that a lot of refineries have started to come back but we don't believe they will all be back until the third quarter, but the second quarter you'll see a large amount of those refineries coming back on line. And we're also seeing the Korean refiners stepping up and taking advantage of the increased margin. So we do think that you'll start to see that increase throughout Q2 but more into Q3.

Okay, so just in totals, Lois, since we're kind of on the topic, I mean are you guys still seeing about maybe 3 million to 4 million barrels a day of global refining capacity down currently?

You know, it's interesting our numbers are more along the lines of refinery runs increasing by between 2.5 million to 3 millions barrels a day, so it seems like your numbers are a little bit on the higher side.

Okay but about maybe three-ish or somewhere in that ballpark is not out of the realm of too far off?

It's a reliable number.

Okay sounds great. Thank you, Morten. And then finally, as it relates to the fleet growth, we've seen and I guess you guys have been talking about, how slippage was going to become more of an issue going forward and we've seen that slippage number come up to as high as 35% to 40% really beginning in mid 2010. My question is do you guys have a feel or even a gut feel for how much of that slippage is outright cancellations or how much of it is delivery delays that are eventually going to happen? I mean is there any way to kind of know what the breakdown is of that slippage?

The reality is nobody has an absolute clear view on this. Right now the deliveries in 2011 are just marginally higher than -- as a percentage of the expected deliveries than they were last year, but that's before a few of the Korean Companies got in trouble. We've seen one Korean in the yards go bankrupt. We've seen some conversions to alternate asset classes.

So there's been some substitution. There's been some orders that appear to be new orders but I think that they're just recycled orders from existing owners. It's unclear, but right now what I would I'd say is we would have the -- still expect to see a repeat of last year's slippage and, as a percentage of the book, you see similar amounts of slippage this year as last year.

Yes because, Morten, because we're trending. I mean I'm sure, as you know, it's 1.1% year-to-date in terms of fleet growth, which is well short of what I guess what the headline number was expecting.

Yes and I think we've also been pretty consistent on the MR side that the book was grossly overstated and that has continued to be correct, which one of the reasons we're rather bullish on that segment.

Got you, guys. Great. Thank you very much. That's all I had.

Gregory Lewis, Credit Suisse.

Yes thank you and good afternoon. Lois, real quick, in the press release you sort of outlined the fact that you OSG in charter or Suezmax is, I guess, on short-term time charter rates. Could you sort of walk us through I guess what sort of rate those are in-chartered at and sort of what was the rationale for in-chartering those?

You know I think that we in general don't disclose our actual in-charter rates but essentially you can trust that we anticipate in making a sizable several thousand dollars per day on those vessels and what we found is that the Suezmax we had a high level of triangulation above what we would have expected when we initially entered that sector. So we've been able to grow that fleet and really optimize those results. So it's been very opportunistic and it's an opportunity to really bring in more value.

Those are also, I should add, those in-charter ships are high [pull-point] ships and fairly good consumption levels, though in the kind of environment those have those will give us an added benefit just from the vessel characteristics themselves.

Okay great; just sort of looking at your balance sheet, Myles, you mentioned the forward start facility that maybe OSG is able to accomplish in the next few months. Could you give us an idea of how that might look?

It would be an unsecured facility. The margin would be in excess of the 75 basis points we're currently paying. The facility would run from the expiry date of the existing facility, which is February of 2013 through the end of 2016. We would be undertaking a transaction that's kind of two-thirds the size of what the maturing commitment would be. That is how it would look.

So about two-thirds? Okay. And then has there been any progress on any kind of Title 11 financing? I mean I've seen that you filed two applications. Is there any update on either of those?

Yes the first tranche, which applies to the ATBs, has been approved by the governmental authorities. There is a letter commitment that is forthcoming within the next 10 days. Thereafter we would go to documentation and have the ability to issue in the marketplace. The second project should go before the Credit Council in either June or July. Approval is generally a two meeting process so July/August approval and then it will go through the same appropriations request as the first project.

Okay and then, I'm sorry -- I'm sorry, did someone want to add something?

No, I was just going to say you get your commitment letter from the office of Management and Budget and for some reason people seem to think getting the whole U.S. budget sorted out is more important than our commitment letter. That's caused a little bit of time.

Okay, great and then Myles, also I mean when you think about the balance sheet, and sort of when you talk about your financial position, it seems like that the big focus is on the assets of the Company. Are there any operational covenants that OSG is sort of looking at? And the reason that I mention that, I mean clearly you EBITDA was about somewhere in the low $20 million range in Q1. I mean are there any covenants related to EBITDA?

No the covenants will conform to the covenants we have in the existing agreement.

Okay, great and then just really I guess, Bob I guess my last question is for you. It looks like right now you have one ATB in layup. Is there any opportunity for that ATB to come back into the market in the next couple of quarters sort of as you sort of look at how the U.S. market plays out?

What I'm looking at right now on the ATB, which is a lay up which is a 214, number one, we have to dry dock her before we bring her back into service, but do I see her coming back in the next one or two quarters? No I don't.

Okay great; thank you very much for the time.

Justin Yagerman, Deutsche Bank.

So 30,500 on the VLs, 33% of the spot based covers for the quarter, that's a pretty big number given where the market has been. Can you talk a little bit about the mix of how you got there and I was curious if there were bunker swaps that helped you out in getting to that type of a number and any color on that would be appreciated?

You know, there's nothing speculative in there. If you went back to after Libya but before the earthquake in Japan [V] rates were actually picking up fairly nicely and our guys in Tankers International are pretty good about fixing when they can. They did and that reflects that. I think what you're seeing the other segments is just continued out performance by OSG in the segments we're in because we commercially manage our ships better than most of our competitors. So there's nothing; there's no magic in there. It's just hard work and good commercial savvy.

There's no question that the V rates were impacted by Japanese [relets] since that pick up and had we not seen that we would likely have had a somewhat different rate environment. But this is just good old fashioned hard work, sweat from the commercial platforms we have invested in and I think you could expect that to continue throughout the year.

Lois, maybe can you put some color around that in terms of talking to lading percentages on a triangulation basis in the crude and product areas?

Well, essentially our base of West Africa to China cargos has been continuous at steady levels, if not increased, so we've been seeing our trading pattern be very similar. We are of course, as are many, really exercising slow steaming and really trying to save fuel where we can to optimize our TCEs and that has a big impact as well. So I think it's really just a combination of not only the base key of rates and but also lowering the expense on the bunker side.

When we look at the data I mean it looks like there's been at least a nice uptick in westbound voyages and when I think about that relative to kind of forward position lists I mean is your expectation that we should see those position lists starting to dwindle as more of these barrels are heading west and maybe those ships don't tread back to the AG right away?

Yes absolutely. You're certainly seeing a lot of stress in the fleet right now and you have people that are [adjusting] back to West Africa from China and you have people taking West -- the AG, the Gulf so that as you eventually clear out the AG when you have greater demand in the second half, you have a more dislocated fleet and it puts the vessels in better position to have longer ton mile and some upside.

And did I hear you right when you were talking on the call that you thought Q3 was one we'll start to see Japanese refineries come back on line? That sounds earlier than what we've actually heard and, if so, have you gotten any early indications in terms of cargo demands to get there in time for those refineries to be up and running?

Well, certainly there have been actually other refineries in Japan that stepped up their utilization rates and we have seen the majority of the refineries come back more quickly than anticipated so there's really at this point less than 1 million barrels per day that's out and I think a lot of that will -- we do believe will come back by Q3. So, as far as inquiries, you definitely do see inquiries. There are still a lot of Japanese relets in the marketplace right, so that's not completely cleared out at this time.

And then the last question on just kind of lead composition, the answer is probably that you'll just be opportunistic but I was curious how you're thinking about the charter in and charter out market here right now? I mean, when you guys had obviously taken advantage of taking in some tonnage at I would imagine what you consider favorable rates. What's the liquidity in that market right now? Are there owners looking to tie up vessels for any length of time? Obviously, given the rates being low, that can be an opportunity as well as a hit on your earnings.

The answer is yes we have seen there are a number of owners that are seriously financially stressed that are looking at multi-year charters at levels that are -- that I would deem attractive. There are stronger owners that are prepared to charter for one year at levels that are lower than we've seen now probably for five years. We're going to be selective about what we do. we want to charter in ships that we can make spreads on so the product tankers we mentioned in the press release, those were timely and based on what we're booking we'll make attractive spreads with that. Setting the (inaudible) the also complement our fleet plans there.

Are you having to give profit share provisions on a lot of that right now?

Absolutely not. We won't contemplate that today.

All right thanks, guys, appreciate the time.

Michael Webber, Wells Fargo.

I just wanted to follow up with a couple of quick questions. Morten, you mentioned expectations for kind of post Gulf maintenance like old imports into the U.S. Gulf and maybe some more longer haul barrels there. Do you think that's really kind of permeated the view of most of the market participants or do you think that we could get to a point in the next couple of months where you'll see owners start pulling assets from the market, given where V rates are? Which one I guess do you think happens first and is owners pulling tonnage from the market something that you think is going to happen over the near term?

I mean some owners have idle tonnage already. A couple of the big owners have done that, to the best of our knowledge, so that's on the big ships. But in the other ships you're still making operating margins trading the ships and obviously in the product tankers you're doing significantly better margins than you had so I think you're seeing a fairly rational behavior on the part of most of the players. Not sure what else I can really add there.

No that's fair enough. With regards to the Suezmax charters and I know you didn't just mention it but -- or talked about it but with regards to the term of the charters I know you can't disclose the rate and you said they were short term. Can you give us maybe give some sort of range in terms of timing and how we should think about this short term? Are you talking six months to nine months to a year?

12 months with an option for another 12 months.

But we have optionality built in there so that we can take advantage of it on the flip side.

And I think if you went back to 2004 and 2005, which is the last time we really made significant charter ins, most of that was done with optionality. Very little of it was done with profit sharing and you're really at that kind of market today. So we're being very discriminating both in the ships that we'll take in -- they're at full point characteristics -- and the terms that we get. We are not jumping at first offer.

And those charters that also put us at a more optimal size in that sector so that we can build up the customer base.

Got you, no that makes sense. I guess then just finally just more kind of a conceptual question. I know you guys are kind of focused on the balance sheet right now but in terms of long-term where you think you're going to be incrementally adding exposure, what are your thoughts around LNG right now and I guess on a long-term basis is that something that you guys are actively looking at now or is it something you're kicking out down the road?

I'll make it very clear. Our -- we are focusing on our three main segments and we expect through optimistic purchases or charters in from owners that have different financial standing than we have or in some cases where banks forced them, forces upon them as you've seen lately. We like our LNG carriers. We are getting good returns from them and we spend a lot of time making sure that they are technically as well managed as they can be and we certainly will contemplate new projects in the LNG space provide we can make sensible returns on there, especially consider the capital and cost. We are not contemplating ordering spot LNG carriers if that is the question and that's just -- and we like the three businesses we have.

I'd say the last one is that where we will be looking, we have one ULCC and Euronav, our partner in the FSO joint venture has one more ULCC. These are these 3.2 million double barrel ULCCs. We will be looking to try to move them into FSO type arrangement, long-term contracts, and are actively working on projects now with those ships and those are unique ships, which we think have a competitive advantage over a straight VLCC for that kind of business.

Got you, not that's very helpful. I appreciate it. That's all I have. Thanks for the time, guys.

Urs Dur, Lazard Capital Markets.

Everything has really been very clear and answered for me so thanks a lot for your time.

Fotis Giannakoulis, Morgan Stanley.

We spoke a lot about the VLCCs. I want to, if you can your view about the product anchors and talk a little bit more about the flows towards Latin America and Europe and how do you see this developing the next few months? We have some drought in Latin America. Do you view this trade continuing and also if you can comment Far East market and the elapsed product time because we have them lagging a little bit compared to medium range vessels.

Okay, Fotis, we'll start there with the MRs first, which is the U.S. Gulf export market is marginally focused on MR and we've seen record amounts of diesel being exported from the U.S. Gulf so when South America, especially the west coast of South America, doesn't get supplies from Korea because Korea is supplying Japan, that creates an arbitrage opening. And we've been moving a lot of barrels from the U.S. Gulf down through the Canal and into South America, not only into the west coast but you also have a situation in Brazil where their ethanol is short on the sugar cane products and therefore they're importing a lot of gasoline.

So we're really moving not only diesel, which is coming out at record levels, but also gasoline down into South America and we're also moving a lot of diesel, which is fairly typical but over to Europe. So you're seeing a strong response from the MRs because they're very tradable. They're in all the ports and the traders can use them in the arbitrage situation.

When you move on to the Far East, we have not seen the product market on the MR side really even on the LR1 and LR2 size be very sustained and strong. The LR1s have increased but you were previously in levels that were returning single-digits so it has been a situation where it's been tougher for product areas in the east. The vessel that we have delivering this month we're working very hard to achieve a veg oil cargo on that, which will really double your return there, so those are IMO 3 capable vessels and if you can take a load of veg oil, whether an MR or an LR1, when you come out that can really help you substantially on your relocating and put you in the right basin.

So from what I understand, these are -- the MR is moving more because of the trading activity and do we just with west see the loss falling on the (inaudible) or this is not a vessel that is suitable for the trader?

Essentially the U.S. Gulf exports have been more focused on the MRs and I do think it is a more tradable size to sell the forwards. The LR market is more structurally AG east, AG west and a lot of NAFTA going into Japan so you've just seen a lot of disruption on the LR1s and the LR2 markets. So you just have not a seen a complete recovery there.

Is it true that right now our LR1s are trading in the ton of Panamax international pool so they're trading (inaudible) and that pool, as you've seen the numbers, continues to out perform the market and that gives us the flexibility with our LR1s Panamaxes that others don't have and, as long as that business continues, we will probably keep optimizing.

And I want to ask you is do you see some increasing number of period fixes in the this market or it is still predominantly a spot market for the moment and if you foresee that we will see more period activity in the MR market?

Yes in the MR market it is the most liquid of the product markets and you see time charters going on all the time. There has been more of an emphasis on the shorter periods, under a year, but now that the market is starting to move you are seeing charters being concluded for inquiry for up to three years. So the levels are not -- you're still in more of a charter in situation and the levels are not fantastic yet but they are moving upward and have moved upward in the last month by $2,000 per day.

Okay thank you very much. I am pretty much covered from the previous questions. Thank you.

Justine Fisher, Goldman Sachs.

I just have a few clarification questions on the credit side. First of all, so Myles, the facility reduces by $150 million this year. Has that reduction already taken place so there's $1.65 billion actually available under the $1.8 billion facility now?

That's correct, which is why liquidity is at $0.1 billion.

Okay and then I know that you said that you were looking to roll the facility on the unsecured basis but is there any chance, especially just given the delay that we've seen in rolling the facility, is there any chance that you roll it on the secured basis as though it was the handicap of that? I mean, is that even a discussion that's being had?

No we expect to complete an unsecured facility before the end of this quarter.

Okay and is it a similar group of banks and other lenders that are in the -- that are going to roll into the new facility potentially?

It's the major shipping banks.

Okay and then, as far as liquidity goes, I guess if the new facility is going to be two-thirds the size of the old one, then the total size would be $1.2 billion and the facility though if you with a few hundred million of excess liquidity, is there a minimum liquidity number that the Company does not want to go below, given the state of the tanker market is sort of $300 million to $400 million -- or million, I guess 300 or 200 even sufficient for OSG for the next couple years?

There's a -- I guess there are a couple of ways to look at that, Justine. At maturity the facility will be $1.5 billion and so will be replacing something that approximates two-thirds of it at that point in time. The existing facility remains in place still February of 2013 so we'll be carrying $1.5 billion in availability through February of 2013. We're likely to have $400 million plus of Title 11 financing coming in, which really constitutes additional availability and liquidity to us. And during the course of the next couple of years if we find the need for incremental liquidity, we will add to our existing facility.

But the title funding, the Title 11 funding, sorry, that's not just going on the balance sheet. I mean, that's going to pay for vessels, right?

Vessels have essentially been paid for so in many ways it's a refinancing.

Somebody from OSG is in the phone a little bit too close to their breathing apparatus so if you could move it back.

Okay sorry so that $400 million or so so that's going to go to repay revolver drawings or other secured debt?

There is certainly half of it goes to repaying revolver drawings. A portion of it will be deposited into the CCF and be available for a number of alternate purposes.

Okay so investors should anticipate some revolver drawing decline let's say over the next year such that in 2013 we're not looking at no liquidity if the facility is reduced to $1 billion.

Exactly.

Okay and then one last quick question, I know that you're only going to look to roll at unsecured but if it is still secured if my memory steers me correctly, the bonds do not have a springing lien covenant. Is that correct there? No your funds pretty much have investment grade covenants (inaudible)?

That's -- yes that's correct. There's no -- there is not a typical springing lien covenant in the public bonds but I'd like to assure you that we expect to complete an unsecured revolver.

Okay thank you very much. I appreciate the time.

Sal Vitale, Sterne Agee.

I have just a quick question on the Aframax side. I noticed that -- just want to make sure that I have the relationship between the Aframax lightering spot rate and the Aframax rate accurate. If I look at last year so first quarter 2010 there was roughly a 34% spread between the Aframax lightering rate and the Aframax rate. This is a spot I am referring to so that's about 23.5 versus 17.5 last year, whereas this quarter it was more like a 75% spread. So I am just wondering what caused the widening of that and is that the right way to think about the Aframax lightering rate going forward?

You know, I don't think that you can have a fixed percentage but the rule of thumb is that the Aframax lightering fleet does much better in a very low market because they have fixed rate contracts that they can rely upon and then they really optimize the scheduling, where the Aframax is in the spot market are precisely that where the earnings are completely variable. So, although we triangulate with those vessels as well, but the lightering fleet does better in a lower market due to the fixed rate contract.

Okay so then that would apply to the spot rate on the Aframax lightering days as well, correct? Is that what you're saying?

Yes.

Yes, yes.

Okay that makes sense. And then, if I could just go back to the VLCC rates that have been booked thus far, 30,500 seems like a really solid rate. How much of that -- I mean, can you just to pick a number, I mean do you have any sense for how much you slow steaming initiatives have helped that in terms of how many thousand dollars per day you think that you're realizing better rates on the VLCCs or even some of the other vessel classes just due to the slow steaming? Can you pinpoint that?

We have gone over that in length with the chartering staff but everything depends upon how slow you are able to achieve acceptably with each customer on your laden [legs] and exactly the length of your voyages. When you do have an AG East market, let's just say for example that at 13.5 knots would be $7,000 per day if you are able to really, really get the speed down to say somewhere around below 11 knots, then you can basically double that TPE. But everything is unique to the length of the voyage to each charter party and what you can do on every one of the vessels.

Okay and that makes sense but I guess I am asking on that 30,500 that you've done so far this quarter is there a sense for how much of that, because it seems there that that's a little better than the market, even if I look at the VLCC market say prior to the Japanese Tsunami. Is there a sense--?

I think it would be very difficult for us to give you a number that we'd be satisfied with. I can tell you that this is -- we are spending an awful lot of time determining this, not just for VLCCs but for all our asset classes and, as we are able to better measure this we will try and share it with you but this is a work in progress. The main benefit you have than in the earlier part of this quarter is the contract of freight business we have for the VLCCs, as we've said in the past, in weak markets that is going to benefit us because we are going to wait less than our competitors and we're going to be laden more because of other contracts. That's the main reason. It's not the -- it's not anchoring special on the fuel side.

Okay and since the last conference call, which at this point is a couple of months ago, are you seeing greater -- I mean, you mentioned that earlier that you're seeing a greater embrace of slow steaming amongst your peers. Are there any companies in particular or would you say that in terms of what percentage maybe of the global say VLCC fleet that's employing slow steaming now versus a couple of months ago? Has there been a marked increase in your opinion?

Nobody really -- nobody has fully reliable data. I will say that all the big companies that I come across are slow steaming in various degrees and the container market showed the way and clearly [A.P. Moller] showed the way of what slow speed means, technically what you can do and its impact on both the environment and earnings. And I don't think there is a tanker operator in the world that is not looking at slow steaming now and figuring out how they're going to save fuel because we're living in a higher bunker world. That's a reality.

I'd like to be more precise with you but you've got to factor in lots of things. When we go through piracy waters we don't slow steam. We go full speed ahead and we have to factor that in. Most of the Japanese fleet so far has not been slow steaming. They have the same calculator as we do. I expect that they will start adopting that also so it is a work in progress but it is happening and it is a one-way trend in my opinion.

Okay if I could just switch gears real quick, and this is the last question, to the impact of the Japanese Tsunami and the VLCC market, would you say -- I mean, in your opinion, is that the predominant driver of VLCC rates on say the Arabian Gulf to achieve around declining from the say high 30s down to now it's I think below $10,000? Or is there something else going on that drove that precipitous decline or was it the solely the Japanese Tsunami? And, if that is the case, do you see any reason why it should remain at this level for any more than a few more weeks?

You definitely never have one event and you have a lot of refinery turnaround in Q1 and the beginning of Q2 that also affects the utilization rates worldwide, so you have a higher demand situation in the back side of the year and we anticipate that you'll have higher oil demand the order of around 2 million barrels per day on the second side of the year so you also had the Libyan situation then roll into the Japanese situation so the response to the Libyan situation caused rates to actually go up and then you have the need for cargo removed from the Japanese so I think it's significantly more complex than simply saying that it's the Japanese situation, although when Japanese demand does resume that will bring -- take those relets out of the market and add to [decreased] level of demand as well as when they start to do the direct crude burning for the nuclear plants, which we anticipate to be 200,000 barrels a day. So--

(inaudible). I'm sorry; go ahead.

No I was basically done.

Okay and then just the clarification on the 2 million barrels a day increase you mentioned a little earlier, were you saying a second half incremental sequentially from the first half incremental 2 million barrels per day?

We're talking an annual change by essentially the majority of the demand increase and there's the numbers go anywhere from different agents say 1.4 million barrels per day up to about 1.8 million barrels per day and the majority of that demand increase does come in the second half of the year. And those are annual numbers.

Okay and you're saying a significant portion of that is because of less refinery down time?

Well, you know, you have a higher demand, just base level demand, in the second half of the year as you gear up for winter.

Correct okay. Okay that makes sense. Thank you very much.

[Michael Pack], Larsen Capital Markets.

Just a couple quick ones. The U.S. flag business guys, given the performance in 1Q, is it fair to say that it's going to do better than break even this year the way things are kind of turning around nicely?

Yes it's currently operating at better than breakeven in terms of results from vessel operations. We would expect that to continue.

Great, great and the other last question here regarding the Middle East, Libya disruption, it was discussed that the flows from West Africa to Europe, what about the -- have you guys evaluated the substitution effect from the Black Sea? Do you think that could provide a trade that could reduce the flow from the West Africa region?

I can't really just supplement but the crude coming out of there is also fairly light and a lot of that was already staying in the Mediterranean area so I think you have a supplemental situation as opposed to really a displacement.

Okay that's all I had. Thanks, guys, good quarter.

Welcome back, Michael.

Thank you. Ladies and gentlemen, that is all the time we have for questions. I would like to turn the call back over to Mr. Arntzen for closing remarks.

Well, thank you, everybody, for joining. Thank you for a lot of very good questions and we look forward to either hearing from you in the course of the quarter or at the next quarter's earnings call. Thank you.

Ladies and gentlemen, that does conclude our conference for today. I would like to thank you for your participation and you may now disconnect.