Octave Specialty Group Inc (OSG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Overseas Shipholding Group second-quarter 2011 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). This conference is being recorded today, Tuesday, August 2, 2011. I would like to turn the conference over to 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 buildings and scrapping; prospects for certain strategic alliances and investments; the prospects for and amounts of future dividends; estimated TCE rates achieved for the third quarter of 2011; projected scheduled drydock and off-hire days for the third and fourth quarters of 2011; projected lock-in charter revenue and lock-in time charter days for the remaining six months of 2011, and for 2012 through 2015 and thereafter; estimated revenue and expense items; levels of equity income and capital expenditures for 2011; the profitability in 2011 of certain OSG business units; OSG's ability to access capital markets, including Title 11 financing; 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 is described in OSG's annual report on Form 10-K for 2010 and in other reports OSG files with the Securities and Exchange Commission.

For this conference call, we have prepared and posted on OSG's website supporting slides to 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 would like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?

Thank you, Jim, and welcome to the second-quarter earnings call for OSG.

With me here in New York are Myles Itkin, our Chief Financial Officer; Lois Zabrocky, our Chief Commercial Officer for all our International Flag business; Jim Edelson, our General Counsel; Jerry Miller, our Controller; and John Collins, Head of Investor Relations. Joining by phone are Bob Johnston, Head of our US Flag SBU is joining us from Tampa, Florida; and Ian Blackley, Head of International Shipping Operations who is calling in from our Newcastle office. This call follows the presentation posted on our website, so please turn to page 3.

We posted a $37.3 million loss in the second quarter or $1.24 per diluted share. The big story in the second quarter was very weak crude transportation rates, and consequently, we had an 11% year-on-year decline in TCE revenues to $207 million.

Looking more closely at our crude transportation results, TCE revenues were down 39% versus the second quarter of 2010 on 2% fewer revenue days. During the quarter, all the participants in the market suffered from an excess supply of ships in the major loading areas, and from very high bunker prices, which averaged $660 (Company corrected after the conference call) per metric ton in the second quarter.

On a positive note, we are pleased with the positive direction our International Flag product tanker business is heading, with spot rates for our MRs up 30% compared with the second quarter of 2010. And importantly, we perform much better than the overall market, reflecting the strong commercial platform we have built in this segment.

The turnaround story in our US Flag business continues with the unit's revenue performance and operating result improving during the quarter. Our investments in this segment are beginning to pay off. On the cost side, both vessel OpEx and shore-side G&A remain under strict control. Please turn to the next page.

Turning to our markets, the crude market has been much weaker than we forecast at the beginning of the year. Because of excess deliveries of new vessels, we did not budget for improvements in crude rates in 2011, expecting similar performance to 2010. Largely, we believe, because of several negative wildcards, rates have been much worse than we expected.

The earthquake and tsunami in Japan created an overnight surplus of VLCCs in the Gulf and sent rates on a downward spiral. The shut-in of Libyan crude exports has particularly damaged the Aframax market, where we have a big position. Our rates were starting to inch up in June, and then the surprise decision to release crude oil and products from the strategic reserves of the IA countries took the wind right out of both the product and the crude market, and virtually overnight.

As you know, we had a very disappointing driving season in the US as the economy continues to sputter and is creating too few jobs. For the crude tanker market to do well, we need to have a growing US economy, drawing in more long-haul crudes and this has not evidenced itself get.

As you would expect from a market in the early stages of a cyclical recovery, the international product markets remains very volatile. Over the last two months, activity and rates were impacted by the Mississippi River flooding, heavy refinery maintenance in the Atlantic basin, and more recently, by the SDR product draws in Europe. We believe these effects are temporary and that the product market remains in a cyclical recovery mode.

Most of you will call on earlier calls we expressed our view of the second half of 2011 would be better than the first half, largely on the back of greater OPEC exports and stronger worldwide demand for crude oil and refined products.

The unperceived events I referred to earlier and most recently the SPR decision have delayed this pickup in rates.

The second quarter ended on a low note in all our international vessel classes, and the rates we're booking now in the third quarter are below their second-quarter averages.

Please turn to the next page.

Clearly this year has been more difficult than we planned. The big wildcards have all been negative and the pickup in rates that we expected delayed. These are uncertain times with perhaps more uncertainty in our markets than any time in recent memory. This calls for prudent action taken to preserve capital and ensure the long-run success of the company.

As a consequence, the OSG board has taken the following action on the dividend. Reduce the annual dividend to $0.875 per share from $1.75 per share. Declare a quarterly dividend of $0.21875 per share payable on November 22, 2011, to shareholders of record on November 7, 2011.

Please note that our prior dividend declaration is unaffected by this change. The quarterly dividend of $0.437 per share declared on June 7, 2011 is payable on August 25, 2011, to shareholders of record on August 11, 2011.

This was a difficult decision to make and came after careful deliberation by the board. And as you know, the board reviews the dividend regularly. We think this action strikes the right balance among our goals of preserving balance sheet strength, investing in the business, and returning cash to shareholders.

Even after this cut, we believe our dividend remains competitive with our major competitors and believe it has been reset at an appropriate level for today's market.

As I am certain someone will ask, this resetting of the dividend is not driven by pressures from our lenders or because of any loan covenant issues. To the contrary, we have both comfortable headroom under all our covenants and adequate liquidity. The board and the management of the company have always been keenly focused on preserving financial flexibility, which, to us, means maintaining balance sheet strength and ample liquidity; retaining access to the capital markets and having a manageable profile of charter in and capital commitments. This dividend action is entirely consistent with that focus and our objective to immerse in this downturn as the winner in the tanker space and to participate in the recovery in all our markets.

Please turn to the next page.

What has not changed at OSG? The dividend action we announced today is part of an overall program that includes cost control throughout the company, the exercise of financial discipline on acquisitions, smart management of our chartered-in portfolio, and execution of our business plan.

We know we can't ask shareholders to accept lower returns if management is not taking steps to improve the company at the same time. The company remains committed to paying a dividend that is competitive and appropriate for the markets we are in. As you know, OSG has paid a dividend for 150 consecutive quarters.

Management is taking multiple actions to improve the performance of the company. We have been on a three-year program to reduce G&A and have made enormous progress. We expect to come in under the $95 million target we set for 2011, and we will find additional savings to further improve upon this number in 2012.

We did not acquire many vessels the last few years in the secondhand market. Indeed, the only two purchases we made were two opportunistic resale MRs we acquired from an Asian yard who suffered from a defaulting customer. Instead, we charted in ships as this gave us flexibility and better economics purchasing vessels at cyclical high prices.

One of the attractive features of chartered-in ships is that you can return them to owners and/or reprice them. Accordingly, during June, we returned 1.25 VLCCs to their owners and will return another full VLCC to an owner at the end of August. These 2.25 VLCCs were chartered in at a blended rate of just under $38,000 a day, rates which are not profitable today.

We have recently reduced the rates on two of the DHT Maritime ships we charter in by $5,000 a day each and expect to be lowering the rate by the same amount on three more of their ships in the coming nine months.

If the market remains soft, we may seek to charter in inexpensive vessels just as we did so successfully at the beginning of the last cyclical upswing in the tanker market.

On the US Flag side, all 10 of our chartered-in MRs are on time charters out of varying duration. We will be virtually finished with our new building program this year with just two additional Aframaxes left for delivery in 2013. We just secured further reductions in our new building obligations at this yard of $3.5 million. With these deliveries, we will have reached critical mass in our three main segments, so we can focus all our efforts on running the business well.

I am most proud of the job the men and women of OSG have done controlling costs while at the same time improving safety and delivering better customer service. Our investments in in-house technical management are paying off.

Now, by now, some of you may be getting tired of listening to me preach the virtues of patience. We have been saying this since before OMI was put up for sale. This commitment to financial discipline has served us well and we will continue it. In an uncertain world like we are in today, we will not be swinging for the fences. It doesn't mean we won't be looking at opportunities as we certainly will be, but they will be opportunities for which the benefits of will be easy to explain to our shareholders.

In the meantime, everyone in the company will focus on executing the job and managing to the best of their ability all those things that are within our control. Next page please.

Before I turn the speaker over to Myles, I encourage you to go on our website and pull down our 2010 HS&E report, our second one. It provides more information on how we run our fleet and should help you better understand how we run the business and what is important to us. Consistent with our cost-saving efforts, we will not print a paper version of this report. Myles?

Thank you, Morten, and good morning.

I would like to highlight several items on slides 9, 11, and 12 before beginning the Q&A session.

If you'll be good enough to turn to slide 9. The quarter-over-quarter decline in TCE revenues was driven by the weak rate environment in the international tanker markets. Weak market conditions were exacerbated by an increase in our spot versus fixed coverage and higher bunker costs. The increase in the average cost of bunker fuel oil was not fully recoverable from charterers, negatively impacting 2011 spot market rates.

The $24 million decline in TCE revenues reflects a $50 million decrease in international crude tanker revenues, offset by an $18 million increase in the US flag revenues and the $6 million increase in International Product Carrier TCE revenues.

Results from operations mirror TCE revenue performance. And $11.1 million in operating income in the US Flag sector contributed more than the International Crude or the International Product sectors, which each generated losses from vessel operations.

The turnaround in the US Flag sector's performance is primarily a reflection of the positive impact of both the delivery of four newbuild product tankers and two new build shuttle tankers during 2010 and 2011, as well as increased lightering volumes in the Delaware Bay and the servicing of this trade with more efficient tonnage.

The second matter of note relates to the continued positive contribution of results from the FSO joint venture. During Q2 2011, the company recognized income of $1.5 million from the FSO joint venture compared with a loss of $5.4 million during the second quarter of 2010.

The $6.9 million positive swing reflects a full-quarter's earnings for each of the FSO Asia and FSO Africa, coupled with the reduction of the loss relating to the mark-to-market value of the FSO Africa's interest rate swap. Both FSO units continued to perform well and on budget.

The third P&L item of note is that we have continued our cost control program in 2011, which resulted in containment of daily vessel operating expenses and further declines in G&A expenses. As a result, we will be at the low end of our annual SG&A guidance of $95 million to $100 million.

Please turn to slide 11.

A few points about the company's liquidity and cash flow obligations. With respect to our debt refinancing plans, we successfully extended our debt maturity profile out to the end of 2016 by closing on a $900 million forward start revolving credit agreement with a group of banks on May 26 of this year.

This action substantially eliminated any refinancing risk for the company. Borrowings under this facility will commence in February of 2013. In addition, our first Title XI project representing $211 million in funding has been approved by MARAD. The relevant 25-year US government guaranteed bonds will be offered at or around year end. The second Title XI application for $215 million is in process.

Remaining construction contract commitments at June 30, 2011, total $138 million, of which $85 million is due during the remainder of 2011, in Q3 $43 million and in Q4, $42 million.

Scheduled debt amortization totals only $24 million in the final six months of this year, and $55 million in 2012. And finally, liquidity at June 30 was $1 billion.

Please turn to slide 12. We are reducing guidance in 2011 vessel expenses, depreciation and amortization, and interest expense. Vessel expense guidance is being revised downward to a range between $290 million and $305 million compared with the prior guidance of $295 million to $310 million. This decrease primarily reflects delays in estimated dates for 2011 shipyard deliveries.

Depreciation and amortization expense guidance is being revised downward to a range between $180 million and $190 million compared with prior guidance of $185 million to $195 million.

This decrease reflects the similar delays in the 2011 newbuild deliveries and reductions in drydock amortization due to changes in the timing of drydocking.

Interest expense guidance is being revised downward to a range between $80 million and $90 million compared with prior guidance of $90 million to $100 million. This decrease reflects changes in assumed timing for the issuance of Title XI financing, which is now expected to be in place during Q4 2011.

Our guidance for drydock costs for the balance of this year is approximately $35 million. Drydocks will full be performed on 22 vessels including tugs. Q3, $24 million; Q4, $11 million.

Our guidance for capital expenditures for the balance of 2011 is approximately $88 million, which includes progress payments on newbuilds, vessel improvements on capitalized interest. Q3, $45 million and Q4, $43 million.

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

(Operator Instructions). Jon Chappell, Evercore Partners.

Good morning. Morten, you mentioned your discipline before, and I think there's some expectation that now that you are retaining some capital to the dividend cut that you will try to come out of this market trough a little bit stronger. I know you don't want to pinpoint a time horizon, but you've talked about more pain, quote-unquote, in the past. If you had to just guess and put it in a bucket, would you think six months before you moved on vessel acquisitions? Or is it more of an 18- to 24-month type of time horizon?

I think the -- I don't want to pinpoint it to a time, but I think what you are seeing now, we have two companies now that have filed -- tanker companies that have filed for bankruptcy in the last month.

We have two now that have hired outside restructuring firms, not Evercore in those two cases. So you're starting to see the buildup to real problems happening. And we know there's one more firm out there, tanker firm, hunting for a restructuring agent as we speak. Those, at these rate levels, most other companies are not generating enough cash to cover interest.

There was cargos being offered in the Arabian Gulf yesterday where an owner would be paying $2000 a day for the benefit of carrying crude oil for an oil manager. But we declined to participants in the bidding for those.

So, we're getting to that point where pain is truly being suffered. Companies can't cover interest, which means that banks will put loan on non-accrual; in some cases banks are being asked to reach into their pocket for working capital. It's in that kind of environment that you are able to find attractive opportunities. That's what we have been waiting for, for the better part of three, four years now. So we're seeing it.

Now, if the FFA market and the analyst consensus is correct, six to 12 more months of markets like we're in today is going to cause an awful lot of pain at other companies. And we will patiently, in a disciplined fashion, assess those.

Okay. And then the follow-up to that to Myles, I know you have $1 billion in liquidity, but clearly you'd have to take on some debt to make an acquisition, especially one of any size. What type of comfort level or what type of leverage ratio would you have comfort with for a transformative acquisition? And is equity at these levels a possibility?

Well, we don't have any plans currently to raise incremental equity. We do have substantial additional liquidity coming in, in the form of Title XI financing, which apparently is not reflected on the balance sheet. So I think we have substantial room.

The desirability and the size of an acquisition as well as the maximum amount of leverage we're going to be able to undertake really becomes a function of the nature of the vessels acquired, the nature of the contracts that might be attached to those vessels on a charter-out basis, and the surety of the underlying cash flows.

So, we've talked about an adjusted debt-to-capital ratio on a balance sheet basis of no greater than 50% with a recognition that during cyclical lows where the opportunities present themselves, you would pierce through that amount and that you would expect to de-lever during higher points on the cycle.

Okay. Understood. And then finally, one more industry questions, Morten. It's kind of ironic; yesterday I saw two different headlines on our news source. One said that the Saudis were producing the most since the early 1980's, and the other one said OPEC production hit its highest level since late 2008. With those types of headlines at any time in the prior five years, I feel like we would be talking about $100,000 rates instead of a $10,000 deal rate. What do you think it's going to take for this market to truly have a sustainable recovery? And those issues you pointed out on page 4, like the US long haul and the Asian increased imports of maybe sour crude, are those temporary in nature? Are those really structural and can have a lower ceiling on rates going forward?

I think it will take a combination of things. If you look at the tsunami, that led to an oversupply of tankers in the Gulf. It probably took three or four months to get that to a level where rates could start to rebound, and they were beginning to do that and then we had the SPR draw and you have the similar. So, clearly, growth in demand and growth in OPEC production is one necessity.

US long-haul imports, as you know, have been very flat, and if Iraq start pumping more oil, there's an expectation that some of that will be coming to the US. That will be helpful. Obviously the SPR draw was not helpful at all.

China has taken more from Iran and the Arabian Gulf than we would have expected. And I think you are aware that India is having some payment issues with Iran regarding crude. So if you see all of a sudden China as well as India taking more crude out of West Africa, Brazil, the Caribbean, that will be a positive thing for the market, and we think that is likely to occur.

We said at the beginning of the year that we expect a 30% slippage in the order book. I think that's what we are seeing, and that's before the real pain is being felt.

I think on the last call, I noted that there was a -- one of the orders in the order book for six VLs were the -- there wasn't a contract, there wasn't a price, there wasn't a [spot], and that order now has been canceled by a Chinese player. So you are starting to see that combination?

And there's no question, Jon how -- whenever there's a consensus in the market, whether it's everything is going to stay great forever or everything is going to stay rotten forever, we get surprises. This year, the surprises have been all negative, and I expect that there will be some positive bumps in the road along the way also. We're being cautious, clearly.

Right. I understand. Thanks, Morten. Thanks, Myles.

Greg Lewis, Credit Suisse.

Thank you and good morning. Morten, just touching up on your comments on the SPR and what that means, when we think about working through the release from the SPR, can we think about that in terms of weeks or months before that -- those releases are worked through?

I think -- let us (inaudible) on that; I think we're pretty close to what's actually physically moving.

You know, we are seeing -- we are moving on our fleet three movements on our Aframax this year in early August. And a couple of those are moved out to -- some the US Gulf, to Panama and the West Coast. And another is a very short-haul move across the Gulf. And we feel there will be some additional barrels coming out in later August. But the feeling on the market is that it's really an August event. And because you've had an inventory onshore drawdown during Q2, this sort of offsets some of that. So most of that will be absorbed so that you can continue to have your long-haul moves resumed -- should be in September.

Okay, great. And then just thinking about that trade potentially reversing, is there any benefit that either the US Flag business or the product market could see from this -- from the release of the FBR?

Definitely on the product side, I think the biggest driver right now is the extreme disparity in the light crude pricing. And the US Gulf refineries are really producing a lot of distillate barrels that are being exported. So you continue to see that happening that, and on the US Flag, I think the impact is more neutral.

Okay, great. And then does switching gears a little bit, in thinking about the two FSOs you have -- you placed on contract over the last year with Maersk Oil Qatar, Euronavt made an announcement on their call that they were establishing an offshore unit. Is this something that OSG [could] piggyback along with Euronav? Or is this something where maybe OSG goes out and establishes its own offshore type of segment?

I think we're doing this in very large, complicated baby steps.

FSO conversions are extremely complicated. FPSO conversions are extremely complicated. And if you look across the history of them, my guess is more than half end up with significant overruns of difficulty. We have two operating beautifully now from Maersk Oil Qatar and Qatar, are earnings performance bonuses. Working with Euronav, we had hoped to have the two other white strips converting to FSOs because they will, in the long run, generate a lot more cash.

If we are successful in doing that, that's where the conversion and able to put the ships to work, then we will consider next step for other parts of our business.

We have a great relationship with Euronav. I think the total group play has a bigger history in this area. But, we will consider that after we are successful with the other two ships.

Okay, great. And then just really two quick questions. In the press release, it mentioned that four US Flag vessels were sold. What type of gains or losses should we be expecting? And I'm assuming those are going to show up in Q3? Or were those part of what was realized and in the second quarter?

They've all been realized.

They've all been realized. Okay, great. And then Myles, really, just real quickly for you, you talk about the second tranche of Title XI financing. I guess what I would say is, should OSG be successful in obtaining that Title XI, is that a middle of 2012-type event?

No, that should be a fourth quarter 2011.

Fourth quarter 2011. And then, in thinking about the first Title XI tranche, then OSG then has, is it six, 90 to 180 days to actually fund that?

It really depends upon how the approval is forthcoming. The approval generally provides a six-month period for issuance with extensions up to an additional six months.

Okay, perfect. Thank you very much for the time, gentlemen, and Lois.

Natasha Boyden, Cantor Fitzgerald.

Thank you, operator. Good morning gentlemen, ladies.

I just had a question on the dividend here. Obviously, you've seen fit to reduce that given the state of the market. I'm just curious if the market stays depressed for much longer, as Morten, you have potentially said it could do, would you consider actually cutting the dividend completely? Or are you actually comfortable with where it is right now?

In setting the new dividend, the board considered a range of future market scenarios, including a deep and prolonged prorate environment. The board will assess the dividend continuously as it's always done, and we will set an appropriate level, which is what we did with the yesterday's action. Now that's about as much forward as I think I will say about it.

Okay. All right, fair enough.

I wanted to just talk to you a little bit about some of the M&A activity that's been happening in the industry. We've seen one public to public acquisition in the tanker sector, and now one in the dry bulk sector. And I just wanted to get your thoughts, Morten, on whether or not you think this trend is going to be continuing given the weakness of some of the operators, or whether or not you think public to private is going to be the way forward.

I think you're going to see really all sorts. It does cease to amaze me some time when public companies are virtually running out of cash, don't have a viable business model and are not prepared to take their upside in somebody else's equity. I think you saw a big -- the big announcement yesterday of the Diamond-S acquisition of the Cido vessels. I think that demonstrates that to be successful in these kind of markets, you need to be big, you need to have access to capital, so I think this bodes well for where we are. The combination of banks and capital markets differentiating with the stronger players, and frankly, markets just pounding smaller players.

Okay. And then, just in terms of even potentially OSG looking at possibly acquiring, are asset values attractive to you right now? Or do you think that given the state of the market, they can fall even further?

I think that the asset values have not fallen as much as you would have expected given the returns that you are getting in the market, but new building prices have not fallen much at all.

Partly that's because the Korean shipyards have plenty of other business in their other areas. And they also know that the owners are not interested in ordering a whole lot so they're not adjusting their prices. Obviously steel has gone up and things like that. But the new building prices have been a little bit of break.

We think there will be distressed opportunity, and because we have the scale we need in our business and our pools, we've been waiting for that. So at today's levels, I don't think today's levels are unattractive in certainly the product space, but we are really looking for situations where we are going to be able to tell our shareholders we just picked up a couple of very attractively or several very attractively priced vessels, and we will be patient for that because I think they're coming.

I'm just curious. Are you actually being approached by shipyards with these opportunities, or even banks to that extent?

Yes, we bought two MRs last year, high-quality at current market prices and we are quite positively will make good money with those, and they help bring down the average book value of our fleet, so the answer is yes.

One of the things that we are able to do which most companies can't is we can pay for things. We can pay charter hires, so owners will sponsor ships to us. We get some very attractively priced MR charter-ins earlier this year from a shipyard, replacing a company that got into financial difficulty, and we are a good credit. That's one of the reasons that we manage our capital structure in what I call a more balanced, prudent fashion.

We are being approached by financial institutions for everything from potential acquisitions to management of vessel. So I think the patience on the part of the number of banks is beginning to wear a bit thinner.

That's interesting. Okay, great. Thank you very much, gentlemen, for your time.

Michael Webber, Wells Fargo.

Good morning, guys. How are you? Just wanted to come back to the dividend cut here and kind of how you guys are thinking about this strategically. It certainly seems like there's a bit of a longer-term call here; it probably takes the risk of a near-term equity raise off the table -- will take a little while to build some cash. And you guys have talked a lot today about being patient and looking for assets and being able to come out of this downturn in a better position than your peers.

In terms of just being patient and looking through your three different major business units, what are you specifically looking for before you will pull the trigger on an acquisition? What measures are you specifically zeroing in on? And what is really going to give you the signal that we're close enough towards the end of the trough that you're going to start putting capital to work?

Greater certainty on being able to earn a return in excess of our cost of capital. Greater certainty that is more based upon operating cash flows in the shorter term as supposed to residual value at the end of a five- to 10-year holding period. We simultaneously look at the impact upon metrics. We'll give consideration to accretion/dilution issues. And we would give serious consideration to acquisitions that have the existence or the substantial likelihood of long-term contractual charters-in attached to those acquisitions.

Fair enough. You mentioned a little more visibility in terms of longer-term cash flow streams. Would we actually need to see longer-term charter rate starting to inch higher before you guys would start putting capital to work? Or is that more just an expectation then to [start going higher]?

I think it's more an expectation. I mean certainly on the product tanker range, you've seen they've been really edging up now over the last 18 months. That's -- on the crude rate, crude side, that's not been the case.

I think that's something that is directional as opposed to absolute. In other words, we won't need a specific rate before we enter into a transaction.

Fair enough. just want to change gears quickly. This question is actually for Bob Johnston if he's on the line. And you guys mentioned you have one ATB still on layup and I think last quarter, you said that it was in drydock. Can you give us an update in terms of when that will begin trading again?

Sure. This is Bob Johnston. I am here. And the last ATB, she's in drydock right now going through her surveys and everything, and she should be entering the market October 1.

October 1. Great.

Right now, there really are no US Flag vessels in layup. Everything is employed.

Got you. That's very helpful. And I guess finally, you mentioned in your release that you transferred the Everglades from your Aframax, pulled the lightering.

Can you give a little color -- it seems like this is specifically to replace the Brazos 1 that you guys re-delivered, but are there any more kind of strategic opportunities to move assets from the Aframax pool towards lightering? And can you talk a little bit about that, considering the difference in economics there?

Yes, definitely, we're actually looking very closely strategically ahead of the lightering operations up here with me now. And we're looking at re-delivering some expensive vessels in the next six, 12 months. And, we're looking at strategically renewing that fleet during this low point for long-low charters that should serve that business unit very well. And we do look at that in conjunction with the OSG-owned and chartered-in Aframax portfolio as well.

Got you. And is there a preference for one or the other at this point? Or does this really come down to a case-by-case basis?

Well, right now, you, I would say that we are more short in the lightering side than we are in the Aframax International pool, or OSG.

Okay, great. Fair enough. That's all I've got, guys. I'll turn it over. Thanks for the time.

Urs Dur, Lazard Capital Markets.

Good morning. If you look at what you guys discussed about NAV quite some time ago, and I know you didn't publish it this time unless I'm missing a slide.

You're not.

It probably -- if you look at it, the old calculation then, look at where asset values are and then take into consideration for instance Cido yesterday and if those numbers are correct, you guys are probably still trading significantly below that, so necessarily an equity raise doesn't seem to make much sense at all. And so cutting the dividend, and you can sort of see it. But when does it make sense to buy back some shares again possibly next year?

I think I will give the same answer there as I gave to Natasha. Our board assesses capital allocation regularly at every board meeting. And I think we have a good history of returning cash to shareholders, and we will do that at the appropriate time, in the appropriate amounts, at the appropriate level.

All right. Everything else has really been covered, other than maybe if we can discuss the current dynamics a little bit more on the US Flag market and where we are. It's a nice improvement. Are there any other nearer-term drivers there that it's going to help enhance your market share value even further (multiple speakers) on the US Flag?

Bob?

Yes; on the US Flag, the big thing is all the vessels -- we used to have a number of vessels that had been in layup, which is sort of a safety net for charterers, so if something were to happen, those vessels would be available. All those vessels now have been scrapped.

The last two tankers are now in the S&P market and they should be sold next week. So right now, when you start looking at what's the bench, what happens if something happens in the market, where is the excess tonnage, there isn't any. Everything now is employed. That's a very positive for the US market.

You are also starting to see more and more of the refineries coming online in the Gulf of Mexico. You have increased capacity there, and that has to -- that product has to be moved. There are definite positives in the oil flow movements.

We don't see the US gasoline consumptions increasing, but we certainly see where there's going to be supply from changing, and that's going to increase the ton miles in the US Flag fleet. And when you start looking at the tonnage available, it's a very big positive.

If you -- additionally, if you look at it on an OSG specific basis, we are reaching peak levels of lightering.

Under one of our lightering contracts, a refinery that was predominately bringing in vessels on Suezmaxes has expanded that to bringing it in -- crude on Suezmaxes -- on VLCCs meaning that they are lighter to extinction and that there are more lighter barrels that are needed, so, a substantial uptick in that business.

Our shuttle tankers are out on long-term profitable contracts. Our product tankers are all employed on time charter, but several of them are coming up for renewal under market situations that are likely to provide for highly attractive renewal rates. And given the overall dynamics in the market, the 25% of our fleet which is in the spot business, predominantly ATBs, have been experiencing higher spot earnings, and we expect that that continues.

Great.

Just to follow up on Myles's point on the Delaware Bay, we've had the best second quarter that we've had in the last four years.

Right. Could you remind us then in general where you are in terms of the US Flag market share? And then I guess your charterers probably won't want to hear this, but what's your -- it seems like you have a significant market share. How comfortable are you in this regard and being able to be a price maker should demand conditions improve?

In the US market, there's pipelines, there's foreign product carriers.

Sure.

There's so much competition, there's trains, trucks, new pipelines. Nobody can influence this market; nobody has price control. We have about a 30% market share of the vessels, (multiple speakers) vessels, but this is a big competitive market and we are not price makers -- never could be.

No, no; I was just a little bit hopeful. I think it's a nice -- it's a market share that you don't necessarily experience in other shipping sectors, not just OSG, but any company, frankly. (multiple speakers) value (multiple speakers)

(multiple speakers) we have a very modern, attractive fleet. It's well run, that's reliable, clean and (technical difficulty), and that's our advantage.

All right, guys. I have a question for Mr. Collins maybe off-line, just some numbers, if he can call me later. Thank you for your time.

Justin Yagerman, Deutsche Bank.

Good morning. This is actually Josh Katzeff on for Justin. Just with -- to start off with, a large competitor of yours was just quoted in the press saying that they are not fixing their VLCCs at current rates in the AG, and they have just been keeping their ships waiting in the Gulf. Are you seeing similar trends in your pools? And can you talk about how you think about fixing vessels at current rates?

I think I mentioned that earlier. There was literally a cargo offered yesterday that somebody (inaudible) at a loss of $2000 a day, and we're not going to do that.

We will earn -- even if you look at the numbers that we give you the forward glimpse in the third quarter, those are numbers that are certainly higher, with the overall market has been doing and reflects that we are going to triangulate better, and we're not going to take those kind of cargoes. And I don't see that being very long -- lasting for a particularly long period of time. And why somebody wants to subsidize ExxonMobil or Shell, I really don't know.

Got it. (technical difficulty). Sorry. Okay.

I guess on the announced dividend cut, was the decision to lower the dividend a recommendation by management to the board? Or is this initiated by the board itself? Just as a follow-on to that, can we read anything more into this change as a (multiple speakers)

Board and management has a continuous dialogue on this. I think we are very closely aligned and it's really just a continuation of what I think is a more prudent, balanced approach to our financial management, highly consistent with the way this company has been run for a very long time.

Have you, perhaps, lowered your maybe longer-term market recovery outlook?

Have we --?

Lowered your longer-term kind of tanker market recovery outlook? Are you expecting rates to remain?

I think this is more a matter of -- today we were having our earnings call scheduled on a day the US government was threatening to default on its debt. We have a civil war in Libya and Syria going on and Yemen. We have sovereign debt risk in Greece. We have an SBR draw in that state. So very uncertain times make it more difficult to forecast, and that just really requires a more prudent action and a balanced control approach to your capital, and that's what this is about.

Got it. And just one more question before I turn the call over. You guys have really been able to cut your expenses down. I was wondering if there were any opportunities to, perhaps, redeliver some of your chartered-in vessels earlier than maybe you previously thought, or get charter higher expense down earlier than currently scheduled?

One thing, if you're going to be in chartered-in business, you have to honor your commitments, and we do that. But we have people who are counting every single day to make sure that we are not paying anything extra for -- [except for] off-hiring and like that. We are putting in slow steaming clauses, piracy clauses. The details of that are being managed extremely well. And we will be returning the ships.

There will be a number of crude carriers that will get returned over the next 12 months, and that will improve the business. We mentioned there will be 2.25 Flag VLCCs that will have disappeared by the end of this month, that they're averaging just under $38,000 a day, and clearly that improves. And we are repricing double hull tanker ships. Two have done, three more to go. So, I don't know, Lois, if you want to comment more on it because you've --

We will have another three V's in 2012. These are just natural runoffs and we will be able to replace them at a much more competitive level. So -- and that point is true if we -- on the Aframaxes as well.

We have a chartered-in portfolio that has staggered re-delivery dates, which is one of the attractions of chartering-in that you can inherently hedge your debt. We have done what we are able to contractually do so that where people failed to deliver within a given window vessels that we were going to time charter in, we canceled those time charters, did not take those vessels. So, we have honored our contractual obligations, and we have created the portfolio in a way that it rolls over nicely over time.

Got it. Thank you for your time this morning.

Rob MacKenzie, FBR Capital Markets.

Great. Thanks. Actually I wanted to follow up a little bit along that line of questioning, Morten. How should we think about the business opportunities, the arbitrage opportunities for OSG going forward in terms of chartering-in vessels, and then making a spread later? I mean you've historically kind of modeled that flat line, but it seems like there's an opportunity there that we would be missing if we did that.

If you looked at our charter-in portfolio starting in 2004, we really ramped up in 2004, 2005, and 2006. And while we are not making money on charters of $38,000 and $40,000 today, I'm happy we can return them rather than having bought $100 million plus tankers. We made a lot of money during that whole period on the chartered-in portfolio.

Today, we are not looking to take in ships for one-year charters at low rates and just making a bet on one-year rates. We are looking to take in charters that we can take in for three to five years with options to extend where we expect the charter rates in initial year close to our expectations or below this year's levels, and then move them up with optionality. In a weaker market, that is what you can do.

So we're getting into the opportunity zone. And if the charter-in is so significantly better than secondhand purchases because those don't materialize, then there will be a bias in that direction. But we use the same discipline on the charter-in as on an acquisition.

Okay. How would you characterize the availability of tonnage to charter-in at these rates today?

Increasing. It's increasing. There are -- if you only have a small number of VLCCs today or Afras or supply tankers, it's pretty painful. We have big state trading systems with contracts and customer relationships. That is our model, and we are seeing more ships being offered to us today. (multiple speakers) a year or two ago.

Okay. Thanks very much. Appreciate it.

Justine Fisher, Goldman Sachs.

Good morning. Just a couple questions on the balance sheet. First of all, for the China EXIM facility, is that facility tapped out now or is there any more money available to OSG under that facility?

$25 million remains available.

And so then, for the new build payments for the rest of the year, I know that you increased that number for 2011 to $197 million, so slightly up from Q2. Are you going to make the rest of those payments with cash? Or are you planning to use cash and debt?

And then if it's cash and debt, will the debt come from remaining amounts under the China EXIM facility or from the revolver?

At the moment, more likely from the revolver. There will always be the combination of cash and debt employed in vessel acquisitions.

So there may or may not be the full $25 million additional drawn on [ten exit] -- it may be between that and the revolver?

That's correct.

And then on the mechanics of Title XI, so when that first approval comes, and then you have to -- then you have the six months that you mentioned to Greg that you have to issue the bonds, are those on unsecured bonds? I know they're guaranteed by the government, but are they unsecured or are they secured by specific Jones Act vessels?

They are secured by the two ATBs and the two shuttle tankers.

And so the proceeds of that would be -- you would use those to repay revolver drawings?

The proceeds on the shuttle tankers would be used to repay revolver drawings. The proceeds on the ATBs would be re-deposited into the CCF in accordance with the way that program operates. So it's ones who were available for a number of purposes, including repayment of debt obligations on qualifying vessels.

So I don't know if you could disclose to us the amount associated with the shuttle tankers specifically, but if the market is looking to see how much revolver could be repaid by that first round of Title XI --

It's about $225 million.

But that's from both Title XI -- that's from both (multiple speakers); the first one is only $211 million, right?

The shuttle tankers should be in the neighborhood of $215 million, right? And that would be used to pay down revolver debt. The ATBs are $211 million, and those would initially be deposited in the CCF.

Oh, okay, that's clear. And then just a question on the growth environment -- I mean obviously there could be opportunities in the international tanker business, but if this business remains weak for the next several years, would you guys look to another part of the Jones Act business?

For example, it seems like the black oil business taking black oil down from the Midwest to Louisiana, pretty tight market over there. Is that something that OSG would look at? Because it at least looks like supply and demand makes sense in that market versus the international tanker market that could be several years of a downturn?

First, let it be noted that I'm not forecasting several years of a downturn in international market. I think I've been pretty consistent in saying that we think the product tanker business is already in a cyclical recovery, albeit a volatile one.

We're going to stick largely to the businesses that we are in (technical difficulty) strong commercial and technical platforms, we can add vessels without adding any or very few people.

We have big contracts in customer relations, so the execution risk associated with that is low.

But in the area where we are venturing out with -- more carefully is on the FSO side. And because those are potentially such large earning assets, if you are successful, that's where the emphasis is. But we want to stick to our knitting and invest in the businesses we are in today. That will be at levels that make very attractive sense.

Okay. And then the last question is just back to the comment that one of your competitors made about idling some of their ships because they weren't being profitable; clearly, if OSG doesn't take charter because you'd be losing money on that charter, it makes sense because you don't want to subsidize someone like an ExxonMobil, and it certainly does help the company from that perspective. But do you think that numerous tanker companies not taking those deals could actually help the market, or is the market still fragmented enough that even if a couple of players forego loss-making deals, someone else might come in and take that business for whatever reason so that you really can't kind of slow steam to the extent that the container -- or slow steamer does not do business to the extent that that helped the container industry?

I think we had the same questions almost in March, and what we said was it will be a combination of things. It will be a few more long-haul cargoes to the US. It will be slow steaming. We are slow steaming everything now. In fact, we're actually -- we are super slow steaming and others are following suit.

You have to get the number of ships in the major loading ports to reasonable levels, which you get -- there we were just -- we were there in June and then the SPR thing was announced. So it takes a little bit while to work it through.

And the one advantage we have is that we have contracts, we have less waiting days. We are slow steaming. We are carrying cargo more, so we don't have the need as others do to sit and wait forever because we do have contract cargo to carry.

Okay. Thanks very much.

Kyle Jenke, Goldman Sachs.

When I think about some of the upside risk to tanker rates in the near term, floating storage comes to mind as one that hasn't got a lot of attention lately. Can you give us your thoughts on floating storage coming back in the near term? And are there any scenarios at all where we could see an increase in it without meaningful contango in the oil price?

You know, there was an article yesterday actually in the Wall Street Journal discussing exactly this. And we have a gentleman who watches and tracks every month whether or not it is a positive scenario to sort through. And essentially, you had -- it has been in a negative position for the last several months. And indeed, you only got -- what you're really seeing in foreign crude is largely in West Africa where the tankers are used more for terminaling.

Without a prolonged contango in the marketplace, a return to storage would really only just be if the Iranians can't market their crude and they need to use their vessels for storage, or --

SPR draws.

Yes, SPR draws where somebody may take a large parcel and store it briefly while they market it. So, we are following that very closely, but with the forward curve the way it is right now, we don't see that happening.

All right, thanks.

Fotis Giannakoulis, Morgan Stanley.

Thank you, but you have answered all my questions. Thank you very much.

Sal Vitale, Sterne Agee.

Thank you. Good morning, all.

I have a question on the -- just the rate guidance you gave for the third quarter. If I look at the VLCC spot rates for the 36% of the days that were booked, that is substantially below the current market rate according to Clarkson's. And I understand that there is always a disparity between the realized rates and the Clarkson's rates. Just that seems just substantially lower. Is there any color you can provide on that?

I mean I don't know what you are referencing, but the rates that we are quoting there are better than what I presume Clarkson's have -- rates today are below what we booked the first 36 days of the quarter, so I'm a little puzzled.

Yes, I guess what I'm asking -- I'm sorry, you're right. The most recent Clarkson's rate is below $10,000, but if I look at, say, for example, the average Clarkson global rate say for the -- understanding that the rates are usually on the lag, just if I look at the June rates, they were at about $20,000 a day.

(technical difficulty) I think Lois can answer pretty --

Yes, exactly. We can work out -- talk through the timing off-line.

Okay, sure. That's fine.

And then just another question on the dividend. Is there -- and understanding that it's something that's going to be monitored going forward -- but is there some type of -- because obviously on earnings, we can't really be looking at a payout ratio, but should we be looking at the dividend in relation to say cash flow per share -- say earnings from operation plus the D&A? Is that a good benchmark that we could use going forward?

We haven't established a capital allocation program on dividend policy that relates specifically to earnings or cash flow per share. We endeavor to set a dividend that seems appropriate for time and circumstances and is well within our competitive universe.

Okay. And then just on page 11, if I could just ask for a clarification, the construction payments of the -- for the second half of $85 million and $24 million for 2012, what assumptions should we make for that in terms of, is that going to be financed from equity? Is a portion of that going to be borrowed? Just trying to get a sense for what the balance sheet will be going forward?

Currently there is no expectation of an equity raise. So, why not assume it will come from cash and availability under unsecured revolvers.

Okay, thank you. That's very helpful.

Why don't we take your Clarkson's questions now? There's a real simple explanation.

Yes, if you look at the VLCC, typically, you are fixing out six weeks in advance. In a softer market, what you are seeing for example is that you are running closer to spot, and the lag effect that you use with Clarkson's is somewhat reduced, right?

So in today's environment, we don't have as far out fixed as we normally would, which, if we start to see the impact and uptick that we would anticipate seeing will behoove us running a spot or fleet when we get into the third quarter and into the fourth quarter.

Okay. So that lag in this particular quarter is a little bit less than usual in terms of the number of weeks?

Yes.

Okay. That would explain that. Thank you very much.

Michael Pak, Clarkson Capital Markets.

Just a couple of quick questions here; we're at the end of the call here.

On your MR rate, you saw a nice year-over-year rate realization. Can you kind of explain anything specific to the company that you guys benefited from, from the market? And I had a couple others. Thanks.

Okay. On the MRs specifically, our fleet is -- per tonnage is concentrated in the Western Hemisphere in North and South America, and we carry a lot of distillate out of the US Gulf.

You've been seeing South America has had several with ethanol [crops] this year and they've been importing more -- still more in Chile, and that has benefited the MR rate.

Okay. And just -- you may have mentioned it before, but what was the US Flag profit contribution in the quarter?

It is $11 million contribution to operating income before the allocation of SG&A.

Okay, before -- okay. And did you guys disclose the TCE rate -- average TCE in that business?

For the quarter, the lightering vessels were -- Mike, if you just turn to page 6 of the press release,

It's in there.

(multiple speakers) but, it's lightering a little under $40,000.

Okay, but for the entire segment --

It's not relevant, Mike. They're really in very discrete trades, so it's best to take a look at it by each sub trade.

Okay. Fair enough. The -- just one last point, on the charter-in strategy, over the next 12 months, you guys indicated that there would be some opportunity to return ships to the owners. What are the opportunities to re-charter out? Like, on a net basis, do you still -- do you see yourself re-chartering out -- I guess chartering-in more than re-deliveries, if you will? Can you just give us a sense on what you guys expect to do?

Are you asking do we anticipate increasing our charter-in exposure on a net basis?

Exactly. Thanks.

It -- depending upon the circumstances, depending upon the duration of the available charters-in, it really is opportunistic. We would have to see.

Okay, great. Thanks a lot for the time.

Thank you. There are no further questions at this time. I will turn it back over to management for any closing remarks.

Okay, thank you very much. A lot of good questions. If anybody has specific things they want to raise with any of us, we are available here all day. And thank you very much for joining and we will see you at the next earning call. Thank you.

Ladies and gentlemen, this does conclude the conference call. You may now disconnect and thank you for your participation.