Octave Specialty Group Inc (OSG) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Overseas Shipholding Group, Incorporated, Third 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 open for questions. (Operator Instructions)This conference is being recorded today, Tuesday, November 1, 2011. I would not like to turn the call over to Mr. Jim Edelson, General Counsel. Go ahead, sir.

Thank you. Before we start, let me just say the following -- this conference call may contain forward-looking statements regarding OSG's prospects, including -- the outlook for tanker and [articulated] barge markets; changing oil trading patterns; anticipated levels of new building and scrapping; prospects for certain strategic alliances and investments; estimated TCE ratings achieved for the fourth quarter of 2011 and the four quarters of 2012; projected scheduled drydock and off-hire days for the fourth quarter of 2011; projected locked-in charter revenue and locked-in time charter days for the remaining three months of 2011 and for 2012 through 2013 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 XI financing; prospects of OSG's strategy of being a market leader in the segment 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 statements. Factors, risks, and uncertainties could cause the actual results to differ from the expectations reflected in these forward-looking statements are described in OSG's Annual Report and 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 Webcasts 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. Morton?

Good morning, and thank you for joining our Third Quarter Earnings Call. In New York with me are Myles Itkin, our CFO; Lois Zabrocky, Chief Commercial Officer for all International Flag businesses; Jenna Smith, our Chief Risk Officer; Jim Edelson, General Counsel; John Collins, Head of Investor Relations; and Jerry Miller, our Controller. Also joining us from Newcastle is Ian Blackley, Head of the International Flag shipping operation.

Please turn to page 3. Driven substantially by continued weak rates in our International Crude markets, OSG reported a loss of $71.1 million in the third quarter, or $2.35 per diluted share. The adjusted net loss after special items was $66.5 million, or $2.20 per diluted share. International Crude rates weakened for all Crude classes in the third quarter when compared with the third quarter of 2010, resulting in 43% decline in Crude TCE revenues compared with the third quarter last year. VLCC rates fell by 66% compared with last year's third quarter, going from $32,000 a day to just under $11,000 a day. Aframaxes fell 33% compared with last year's third quarter, going from $15,500 a day to $10,300 a day. In the Product tanker market, spot TCEs in the third quarter of 2011 were comparable with last year's third quarter levels, but MR time-charters we had in place last year at higher rates than the spot market last year and rolled off, so we were more exposed to the spot market. The performance of our U.S. Flag units continue to improve, and we had a substantial pick-up in the operating performance of this unit compared with a year ago. As I believe you have been accustomed us saying, vessels expenses were contained and G&A continued to come down. Please turn the page.

Why are International tanker markets so weak today? There's no question that the main culprit is excess supply. The Crude fleet has grown by approximately 7% this year. On a positive note, Crude order slippage has continued, and there has been little new ordering. Clarksons has forecasted a 23% order book slippage rate for the full year 2011 and we think the number will be closer to 30% and that this will continue next year. Oil demand has been fairly resilient this year, but all the major wildcards in the world that could impact our business have been negative, starting with the tsunami in Japan. The shutting of Libya's production during their civil war was initially expected to be positive. However, by pushing up the [spreads] between light sweet crudes and dirty sour crudes, this encouraged Asian refineries to substitute cheaper Middle Eastern crudes for West African crudes, which had the effect of reducing ton-mile demand from VLCCs. With oil in [back liquidation] most of the year, inventory drawdowns have plagued the market. In the third quarter alone, a global inventory draw of 1.1 million barrels per day negatively impacted transport volume, which includes the surprise release of the strategic reserves of about 700,000 barrels a day. As a result of this steady stream of drawdowns this year, OSG inventories are well below their 5-year average, which should limit the expense of further drawdowns in 2012. A reversal of this trend would bode well for the tanker market next year.

Along with the negative wildcards, we have faced with sluggish U.S. economic growth and slack demand for long haul crude import in the States. Add to this the challenging economic environment in Europe and the difficult-to-solve sovereign debt issues that they are struggling through, which was complicated this morning by the Greek Prime Minister's call for a national referendum on the bailout. All of this has resulted in the lowest Crude transport rates we have experienced in several decades, weaknesses that persisted early in the fourth quarter. Please turn the page.

We think the third quarter of 2011 will be the trough in this [shipping] cycle. Now, Q4 was off to a slow start, as indicated by our fourth quarter forward bookings. The rates have moved up a bit since then. And keep in mind that for VLCCs, we book our October movements mostly in September. If you look to the Product market, U.S. and European refinery maintenance took out almost 3 million barrels per day of capacity in October, but most of this should be finished by December. In addition to an increase in Crude requirements as refinery runs are restored, we think you will see improved Product rates on the back of greater imports from Europe and U.S. East Coast and a reopening of the diesel arbitrage in Europe should result in additional U.S. Gulf exports.

For reasons you expect in the fourth quarter, Crude rates have also picked up off recent lows, although they were softer the last few days. The VLCC loading picture in the Gulf and West Africa is modestly better on a seasonal increase in requirements. We have seen delays in the Bosporus given a bump to the Suez- and Aframax rates, something you would expect in the fourth quarter. We are beginning to see a return of Libyan exports, which we believe will reduce sweet-sour crude spreads and stimulate West African exports. Finally, we expect increased Asian refinery runs in the fourth quarter to result in increased Crude movements. Now, while these factors are positive, it is too early to call this start of a real Winter Market rally, and improvements in rates could be tempered by inventory draws and continued fleet growth. Next page, please.

What are we doing at OSG to manage through these difficult markets? We continue to reduce shoreside G&A and to control cost at sea without sacrificing our high-quality and safety standards. We expect to come well inside of our stretch goal for G&A for the year. At sea, we have launched a major Company-wide effort to reduce bunker consumption and expect to generate material savings from this initiative. Our fleet renewal program is now virtually finished. The remaining payments we have on four vessels -- an MR and a VLCC that we'll deliver early in January and two Aframaxes to deliver in 2013 -- aggregate just $96 million.

For almost 4 years now, I have been preaching patience in OSG about acquisitions. I know this has become boring to people both in and outside the Company. Looking back, this financial discipline has served us well. It has paid to wait. We are now entering a period when real interesting transactions should happen, and they won't be the normal willing-buyer, willing-seller type transactions. We will maintain financial discipline and we will not swing for the fences, but we will be looking. The employees of OSG know that we don't and can't control the market. This is the challenge of operating in commodity markets. What we can do is focus on those things that are within our control, and that has been the guiding philosophy since the financial crisis hit. This attitude remains the key driver to the improvements you have seen at the Company. Next page, please.

One of the real drags on our earnings those last 12 months has been our time charted-in portfolio that we negotiated a different time in the cycle, but we are addressing this. We already know that the rate on one charted-in VLCC and one chartered-in Aframax will go down by $5,000 a day between now and April. Furthermore, in 2012 we will be redelivering 11.9 Crude tankers over the course of the year with the redelivery dates heavily weighted to the first half of the year. As I said, during the course of 2012 we will return 11.9 tankers. Five of these vessels were chartered-in under sale leaseback arrangements that [produced material] capital gains as well as operating profits during most of the charter period. We do not apologize for [the agreements] today. For example, we most likely will be returning [to] double-hull tankers -- to DHT -- two 1994-built Aframaxes and one 1997-built VLCC -- when their charters mature on April 16, next year. To mention this financially, if we had been able to redeliver these ships, these 11.9 ships, at the beginning of the third quarter, we would have improved the bottom line by $12.7 million or $0.42 a share on a pro forma basis, based on the third quarter's actual spot TCE rates earned. This result will be better performance from our chartered-in portfolio going forward. I want to stress, we will not just be defensive about this. Yes, we will be happy to shed loss-making time-chartering arrangement, but we will not be adverse to taking in ships at lower rates with a lot more financial upside and optionality for the Company. Please turn the page.

Summing up, we expect the rate environment for our fleet to be better in 2012 than in 2011, but we will manage the Company as if no improvement is in store. This will be the approach for both defensive and offensive moves. We have been very successful at reducing costs and controlling costs at OSG since G&A peaked in 2008. We have set ambitious targets for further G&A reductions in 2012 and we expect to generate material savings at sea from our bunker consumption reduction initiative. We will continue to do this without sacrificing quality, safety, or service standards. While it has taken a lot of sweat equity, I am pleased by the effort made in [Tampa] to transform that business into what we always wanted it to be -- a reliable source of cashflow for the Company in good times and bad. We have made a huge investment in the International Products business and we believe this will pay off, as the fundamentals of this business are strongly positive. We expect this [unit's] turnaround to be reflected in the Company's bottom line over the next [three] years. Thus, when you consider our U.S. Flag business, our International Products business, as well as our important joint ventures in LNG and FSOs, you understand that we are not dependent on the Crude markets alone to revive the results of the Company. I am confident that we have the people, assets, business mix, and resources to survive this downturn and prosper in the recovery in our market.

I will now turn the call over to Myles. Myles?

Thank you, Morten, and good morning. I would like to highlight several items on Slides 10, 12, and 13 before beginning the Q&A session. Please turn to Slide 10.

The continued combination of a weak rate environment in the international tanker markets, increased spot versus fixed exposure, and higher bunker costs have negatively impacted 2011 spot market rates, resulting in 11% quarter-over-quarter decline in TCE revenues. The lion's share of this decline was attributable to our VLCC fleet. The $22 million decline in TCE revenues reflects a $41 million decrease in International Crude tankers revenues, offset by a $21 million increase in U.S. Flag revenues. International Product carrier TC revenues declined marginally despite increased revenue [days]. The $32.3 million loss from vessel operations for the quarter reflects a $12.6 million contribution from the U.S. Flag sector, more than offset by operating losses generated by the International Crude and the International Products sector. The positive U.S. Flag segment performance reflects the delivery of [three] new build Product tankers since July 2010, earning attractive rates, as well as increased lightering volumes in the Delaware Bay and the servicing of this trade with more efficient tonnage. During the third quarter, the OSG 214 was taken out of lay-up and entered drydock for scheduled maintenance. With its recent return to the Jones Act spot market, all of our U.S. Flag vessels are now actively trading. Please also note the continuing positive contribution from equity and the income of affiliates. Finally, our ongoing cost control program has resulted in containment of daily vessel operating expenses and further declines in G&A expenses. As a result, we are revising our annual G&A guidance down to a range of $90 million to $95 million, with the likelihood of coming in closer to the low end of that range. Please turn to Slide 12.

A few points about the Company's liquidity and cash flow obligations -- as of September 30, 2011, cash and short-term investments stood at $182 million, and availability under the credit facility maturing in February 2013 at an additional $700 million. Scheduled debt amortization totals only $11 million in the final quarter of this year, and $55 million in 2012. Remaining construction contract commitments through 2013 total $96 million, of which $43 million is due during the remainder of 2011. The first of our two applications for Title XI financing, abrogating $425 million [for both] has been approved. The second application should be reviewed by the Department of Transportation at its December Credit Council meeting. Management is currently reviewing the timing of the issuance of these underlying bonds. The Company remains in compliance with the financial covenants contained in our debt agreement. If, however, the current poor operating environment were to continue, the headroom under these financial covenants would significantly contract. The Company, as will be reflected in our 10-Q, expects to maintain compliance with all of our financial covenants during the next 12 months. Please turn to Slide 13.

In addition to 2011 G&A that I mentioned earlier, we are reducing guidance in 2011 vessel expenses, charter hire expense, depreciation and amortization, and interest expense. Vessel expense guidance is being tightened to range between $290 million and $295 million, compared with prior guidance of $290 million to $305 million. Charter hire expense is being tightened to range between $385 million and $390 million, compared with prior guidance of $380 million to $395 million. Depreciation and amortization expense guidance is also being tightened to range within $180 million and $185 million, compared with prior guidance of $180 million to $190 million. And interest expense guidance is being revised downward to a range between $79 million and $84 million. This decrease reflects changes in assumed timing for the issuance of Title XI financing, previously assumed to be a 2011 event. Our guidance for drydock costs for the balance of this year is approximately $17 million. Drydocks will be performed on 11 vessels. Full year drydock expense will amount to $45 million. Our guidance for capital expenditures for the balance of 2011 is approximately $44 million, which includes progress payments and new build, vessel improvements, and capitalized interest. Full year capital expenditures will amount to $207 million. We'll now open the call up to questions. Operator?

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) Jon Chappell, Evercore Partners.

I just wanted to touch on the initiative that you touched on briefly in your press release, which is just the potential that Sunoco could sell or close the refineries, and the impact that that may have on your Delaware Bay lightering business. I know you said you're still currently evaluating the impact, but I just wanted to ask -- first of all, how many of your assets and what percentage of your Jones Act business is tied to those two refineries and Sunoco specifically? What's the profitability of that business been? And then, what are some potential other markets that you could redeploy those assets into if those refineries were to close?

I'm not sure if I can give you the percentage breakdown, but let me try to give as complete an answer as I can. The first thing -- we all have read the announcement from Sunoco, and what the Sunoco announcement brings is uncertainty on this business. We do not know if they are going to be successful in selling the refineries, we do not know if this is part of a negotiation process with the unions they have there, the government, the EPA, or whether it is part of their negotiations with prospective buyers. We do not know if they will end up idling one or both plants. We simply don't know, so it's uncertain. What we do know is that our volumes have continued, and they have been very healthy, as you see in the reported numbers. We have other business in the Delaware Bay, other contracts which would continue irrespective of what happens to Sunoco. What we are doing is preparing for all the alternatives. The alternatives are -- they retain the refinery and the business continues; they sell the refineries to somebody and our business, our contract will simply get assumed by the purchaser, or this happens for one of the refineries. Under all of those scenarios, we undoubtedly will -- not undoubtedly, most likely will require the fullest of our new ATB units will have to be serviced in those kinds of business we have up there and potentially a third. You know, that's real a function of volumes and flexibility needed. If they -- if you want the worst case, it would be that -- we're not sure if it's the worst case, and that is if Sunoco idles the refineries completely. If they do that, that takes 552,000 barrels out of the market and this is where you get into the real uncertainty. That potentially could lead to considerable increase in other Jones Act movements. But while our lightering business in the Delaware Bay would be impacted, it would have a positive impact on our Product tankers that have to pick up the slack to replace that. We could, then, reemploy one of the units -- most likely, we'll always have one of the modern units up in the Delaware Bay doing lightering [into] the Gulf. And, keep in mind, if the impact of closing is increased Jones Act movements along the coast, then one prominent U.S. [broker shop] has estimated that it would require three incremental Product tankers, and I'm not sanctioning that number or not. We would be the beneficiaries from the spot market because OSG and the U.S. Flag market, we are the main players in the spot market, and that again has been reflected in our continually improving performance in the U.S. Flag business.

So, Jon, it's a long-winded answer. We are prepared for multiple alternatives to redeploy the assets if we have to. For the time being, we will continue to service the contracts. It could be positive, it could be negative. If they do shut it -- the other thing I would add is that it will require a significant increase in Product imports from Europe and the East Coast, and so Lois and her Product tanker team will find that fairly beneficial. But right now, I'd say it's a lot of uncertainty. We are going to be prepared, and I can't tell you at this point exactly what's going to happen. That's where we are. Does that answer it for you?

Yes, I appreciate the detail, given that we still really don't know what the scenario is going to shape up like. The other major thing I wanted to talk about was what you said about potential -- you didn't say the word [distress], but that's what you were getting at -- acquisition opportunity. And rather than talk about the timing, because I think we've covered that in the past, you're in no rush right now and you know you'll do what's right -- I just wanted to get your sense of how you could potentially finance acquisitions like that. We've heard a lot about tightening in the bank market and I know that OSG has typically been viewed as a strong credit, but how do you foresee giving potential financing for that? What debt level would you be comfortable with for the right acquisition, vis a vis where you are today?

I think that any [inc] transactions that we would do today of a distress nature, we would require incremental -- debt financing would have to be in place before [consummating]. We would not go out and do anything if we did not have the requisite financing raised on terms that made sense, on terms that can handle a continued stressed market and with approval of our existing lenders, so that they accept whatever incremental [leverage, as best we have to] take on. We are not going to do any type of acquisitions that put the Company at risk, I can assure you of that. We are already seeing the opportunity to charter-in ship at levels that even work in today's market. Most of these, though, are people offering us ships for one year, and really just taking a one-year bet on a chartered-in ship today doesn't make sense. We might do it for our lightering business, because we might need the lift, but that's about it. But what we will hold out for is where we can do charter-ins with 3- or 5-year periods, and ideally also with option periods beyond that. And with the initial period being, you know, looking very much like today's market and if we continue to perform a little better in the market, we'll be okay with that. So that's really going to be the [format]. We have some [assets] like our FSOs, which we would look at large contractual revenues, and of those we would expect to be able to project-finance, providing that the terms work. They would be U.S. Flag. So, if we had an incremental shuttle tanker project, for example, we would be comfortable that we would be able to raise financing for that, provided you have reasonable contracts.

But assuming an acquisition would be an [all-that] transaction, what type of debt-to-cap levels would you be comfortable with, or do you think the banks would be comfortable with, you know, as a consolidated company posts an acquisition?

You know, I'm not sure I can give you a -- it will depend on the transaction. If it's possible that you could do relative equity exchanges with companies today, that could work for our shareholders. I think you have to do the math and see it. I think -- I think we all think we're more[levered]that we'd like to be right now. So if we're going to take on incremental acquisitions, the financing is going to have to be long-term and sensible for what we're doing.

Yes. It requires a degree of further analysis, but probably something at a maximum level of 70% debt to capital. Where we've been approached by banks who are encouraging other owners to divest of assets, the discussions have really addressed prinicipal holidays, non-recourse financing. So it will really be a function of the nature of the financing that's supporting the asset.

And then, finally, just really quickly -- as you weigh kind of weathering the storm or retaining liquidity for potential acquisitions versus a 7% dividend yield, when you made that decision three months ago -- when the Board made that decision three months ago, do you feel they kind of -- for lack of a better term, kind of kitchen sinked that number? Where maybe the third quarter ended up worse than you thought, fourth quarter started off worse than you thought -- is there a possibility that you may try to retain more cash through another cut of the dividend?

Jon, when I get this question, I always answer the same way -- that our Board reviews the dividend at every Board meeting. The next one is in December. Clearly, we're going to look at how this quarter has evolved, we're going to look at how the first quarter next year looks, we're going to look at the opportunities that have come through, and all those things will get taken into account. There's really no change there. Okay?

Okay. Thanks for all the help, Morton and Myles.

Natasha Boyden, Cantor Fitzgerald.

Wanted to just get your thoughts on -- DHC just recently wrote down the value of its vessels this quarter due to deterioration of asset values, and I know they operate under IFRS accounting rules, but I just wanted to know if you anticipate any need to do the same thing, and if so, what impact that might have on your covenant.

There is -- we will probably evaluate at year end. At this point, we don't anticipate that there is any impairment, and so it will have no effect on our covenant.

Okay, that's very helpful, thank you. And then, just quickly, you repurchased some of your [8 and 7 8ths] 8.75 bonds in August, and I just really wanted to get the sense of what was behind that and whether or not you see more opportunities there in terms of repurchasing more.

It was purely an economic transaction and with a 2013 maturity, it fell within the time frame of our existing revolver, more or less. So it was the economic benefit of an open market purchase.

Okay. And then, Morten, maybe just a general question -- can you just talk a little bit about the impact of China's support for its shipyards, and what impact that's having on the tanker market right now.

Yes, it's pretty helpful -- every day, the Chinese VLCC order grows and is keeping Western owners from ordering new VLCCs. That was a little tongue-in-cheek. No, we fully expect that the mainland Chinese companies will order some VLCCs. I think whenever I've been asked about the 60 or 80 ship number, I always thought that was a lot of hyperbole. Could you see 60 or 80 VLCCs coming to Chinese owners over 20, 13, 14, 15, 16? The answer is, you know, yes. And if they did that, that would enable them to maintain their approximately 50% of the Crude transportation going into China. I mean, the big Chinese anchor companies are producing even much more substantial red ink than we are. And we do not see an appetite to go into an ordering binge right now. But I have no doubt that there will be some orders that are there because yards have no doubt a little bit of help. But we don't expect anything to be crazy, and we think it will be consistent with the market share that they have, that they have sought to maintain. For them, both carriers and container vessels are much more important because the transport cost is a lot bigger than the cost of the product being transported.

Great, thank you. And then, just on the other side of the equation -- scrapping has come down from 2010 levels, the single-hull vessels are less of an issue, but what do you expect to see in terms of scrapping levels? Can this be a major factor in overcoming the supply issues? You know, with rates being where they are, do you expect scrapping to sort of pick up again? What are your thoughts on that?

I think the answer is this -- I don't think scrapping is the solution, but it is one component of it. And, you know, I think another -- [Scandinavian owners suggest] that the overhang of ships is probably about 50 or 60 VLCCs, it's a pretty imbalanced market. I think that's probably not a bad number. Could you see some of those VLCCs between age 15 and 20 going to the scrap yard? And the answer is, I think you will, because those are the ships that are probably losing the most from operations today. You even have to spend money on going through special surveys, and that will be really the key date. So I think you will see some of those disappear. It appears that some Suezmaxes, some older ones, are now headed towards the scrapyards, and that's a positive thing. So, it is part of the solution. We expected that it would happen, and as tight as the bank market is today, that has got to have an impact on our decision of maintain or scrap. I think you'll see that.

Great. Thank you very much for your time.

Greg Lewis, Credit Suisse.

Just real quick, I wanted to touch on the Sunoco contract. You mentioned that their contract, in the event that -- I know it's hypothetical at this point, but in the event that those refineries close down, does OSG receive any payments from Sunoco for the cancellation of those contracts, or are those just COAs?

You know, it's a very good question, but it's one that we're not allowed to disclose the details of the contract. It is a typical, long-term, COA-type contract. That's really all I can say.

Okay, great. And then, just kind of looking at your fleet -- and you touched on it, in Natasha's question -- you talk about 15-, 16-year-old vessels. I guess right now OSG has one owned 15-year-old vessel, I believe that it's called the Sovereign. Is that something where, in the rate environment that we're in -- if this rate environment persists, is that a vessel that could potentially be scrapped well ahead of its standard useful life?

Lois, want to take that one?

Yes, the Sovereign is fully employed in the Tankers International pool, and we have not at this juncture had difficulty in chartering the vessel, and we don't anticipate having that [challenged] going forward.

Okay, great. And then, just in thinking about that, I mean, you have a few older VLCCs in the fleet. I think earlier this week or maybe over the weekend, Exxon actually took a VLCC and decided to convert it to an FSO, I believe, in Singapore. You know, was that, I guess, transaction -- was that something that was out in the market, where OSG had an opportunity to bid on potentially providing the vessel for that project?

We did not look at that project, but we have had the opportunity to look at other projects. You know, our priorities have remained extending the contract on the FSO Africa or finding alternative deployment, and we're working hard on that. Secondly, to find conversion opportunities for our [TI Oceania, and [Euronav's] TI Europe], and we're working hard on that. But we will also consider as we've had some of our older VLCCs for conversion, either as -- where we do the conversion, where it gets contributed in or gets sold out right to someone who does. So, it is absolutely on the menu of things we're assessing.

And just, if you can follow up a little bit -- how has activity proceeded in that market? I mean, are there more opportunities, you know, this month than there were 6 or 12 months ago? I mean, is this a market that's actually, you know, gaining momentum, or is it just kind of -- you know, it is what it is?

You know, essentially -- this is Lois again. You know, with oil prices high, as they have been, you're certainly seeing a lot of investment. The offshore market has been at a steady state, and certainly is an area where there's a lot of investment. So, surely you see a healthy number of VLCCs that, every year, are going in that space.

So, this is part of the answer to Natasha's earlier question. These ships are going to disappear, these conversion projects, and there are a lot, and that will help [cure] some of the excess supply.

Okay, great. Lois, while we have you on the phone -- if we look at the guidance for, I guess, the Afromaxes and Suezmaxes through the fourth quarter, it looks like what, around 30% to 40% of each of those pools has been fixed. If you could give us sort of a real-time snapshot on what is the SI and the AI pools' earning, on average, as of today? Is that sort of something you have in front of you?

Well, definitely we can talk about the overall market, and where we are at there. The Aframax market continues roughly at pace where it has been. On the Suezmax market, you know, we are definitely seeing an increased level of arbitrage on those vessels. And the market is slightly higher than what had been posted.

Okay, thank you very much for the time.

Michael Webber, Wells Fargo.

Lois, I actually wanted to dig in a little bit more on where rates are right now. You guys mentioned in your release, about the delays in the Bosporus kind of hiding that market a little bit, and we've seen a little bit of a [bleed too] in the Atlantic. Are you guys seeing that kind of a persist over the last, say, week or so? And (inaudible) Lois, how do you think about that, in terms of Suezmax rates for the remainder of the quarter? Do you think we'll see the delays working themselves through kind of mid of the Atlantic, what that means for forward tonnage and what that could mean for Suezmax rates for the end of the quarter?

You know, the place where the delays actually manifested themselves outside of the [Mid] is really in West Africa and causing that market to be somewhat tighter.

Yes.

That's the balance, then, between Suezmaxes and VLCCs. So that has helped both of those sectors to be somewhat higher than what it has been. And, you know, on the VLCC side, we see about 10 cargoes from ones in the fourth quarter, more than what we saw in the third quarter. So that has been helpful. It's just a tug of war between the Vs and the Suezmaxes that keeps that market from rising too high, simply because everyone starts heading toward that region. So we definitely have seen it be stronger, and I think that if the West Africa rate will continue stronger than what we've seen in the [AG], but it's somewhat tempered by the amount of tonnage that can get in position.

Okay. No, that's very helpful. Morten, you talked a little bit a couple of times already about what's going on in the Delaware Bay in your ATB business. Forgive me if this is a little too detailed, but it looks like[GNB] is [reversing] one of their pipelines and it looks like it could draw some more volumes and kind of [heads two and three] that would need to shipped either by lightering or -- there's some sort of barge. Is that an opportunity for you guys specifically within the context of potentially having some additional tonnage that might not have employment along the East Coast, or is that something that's a little too far out in the future?

No, it's on our menu of potential different [trades] Now that you mention it, we have an ATB that is transporting food from the [Eagle Ford Shale] which was a trade that didn't exist [years ago]. You know, will that trade continue if the Eagle Ford shale production increases too much? It will probably one day be taken over by pipelines. There's a possibility that one of our big ATBs could be a lighter unit if that -- not a lighter unit, a shuttle tanker type opportunity (inaudible). While it is a push barge, it's moving at about 12.5 knots, and it loads and discharges cargo faster than a tanker. So in that area it could work. So there's multiple different trades. But for the time being, we're very much focused on providing first-rate service for the [volumes] we have in the bay. There are some interesting new markets that [are there], whether or not that's where our ships end up, we will see.

Okay. That makes a lot of sense. Myles, a couple questions for you. You mentioned that the Title XI financing -- your last traunch going before the Credit Committee in December. Give us -- the timing in terms of when that would become available should you guys make it into Committee. I assume you would, considering the first traunch has already been through. Give us a sense of the timing there.

It's often a two-meeting process. The meetings are monthly meetings, so if it gets on the December agenda, the second one should be in January. Full approval is forthcoming within 30 days thereafter. Documentation is in process and would be consistent across the two applications, so (technical difficult) would be a likelihood.

Okay. All right, that's really helpful. This is the last question, and I guess this is almost kind of a follow-up to Jon's question on the dividend, but in terms of thinking about your all's liquidity here, and specifically, I guess, your working cap -- you guys are running at a pretty normal nominal amount here at about $150 million, but your cash conversion cycle seems like it has slowed down an awful lot, and it seems like that might be some kind of low-hanging fruit in terms of building some more liquidity. Can you talk a little bit about why I guess that cash conversion cycle has slowed? And what are the [put and takes] there in terms of why that might be a little bit -- your working cap might be a little bit higher than some of your peers and how you think about that in terms of releasing some liquidity?

I'll [give it to] Myles, but (inaudible) we agree with your assessment. We intend to seek improvements in that area, but there's no [reason] our business or in the change in circumstance that has resulted in that. I think that we have an area that we can have some improvement, and we intend to apply ourselves to that.

We have, as many others in periods like this, a focus on receivables and payables management. So, indeed, we would do all that is reasonable to accelerate the question of receivables.

Thank you for the suggestion!

No problem. And I guess in terms of, just to follow up on it in terms of timing, it looks like that process continues to slow in the quarter. Is this something we should think about in terms of going back to middle ranges, kind of in the middle part of next year? How do you guys think about that in terms of the conversation with your vendors, or just -- how should we think about that?

I think that we'll come back to you, I think discussion -- I don't think that we're prepared to -- I don't think we're sitting down having [value] discussions with our vendors yet, but we see that we should be able to squeeze more cash out of that, and we will set an internal goal and that's in process. It is something that is already in process.

All right. Thanks a lot for the time, guys. I appreciate it.

Rob MacKenzie, FBR Capital Markets.

Morten, I want to actually go back to the FSO-FPSO equation that you talked about -- and you're the second company that I've heard recently talk about potentially -- owning that business, if you will, is my read on what you said. How would you characterize the potential to take that part of a role in owning and operating an FPSO or FSO versus just selling a tanker to, say, a Petrobras or someone else who can convert it and operate it?

You know, we obviously, clearly, only own -- we have a (inaudible) with Euronav for the FSO Asia and FSO Africa. In our assessment, our people, those are probably the most complicated FSOs ever built, and they were similar in scale and cost to a FPSO project. One delivered on time, one did not, and we had to scramble with that one. We've learned a lot, we've put in place some I think very good processes for managing that. We have now operated the FSO Africa for over a year. And, Ian, correct me if I'm right, but we just won an award for having one year without an [LPI] on the FSO Africa.

That's correct.

So, we are demonstrating that we can operate these units, and these are (inaudible) and they operate 24 hours a day, 365 days a year. So we are comfortable that we can operate it, we are comfortable that we have the processes to manage a bid. We are comfortable that we could manage a conversion process. I think if we had all the processes in place for the first two we would have had a better outcome than we did. Having said that, those two units have become good, reliable generators of earnings. And we expect that, long term, those will be very key, valuable assets for OSG -- are already valuable assets for OSG.

Right. I guess my question is also, what do you see a bigger market for, if you will -- just selling for conversion, and-or owning and operating? And the second part of that would be, since you guys obviously looked at the market, how much of an impact do you guys realistically think this trend can take out in terms of VLCCs or Suezmaxes going forward?

Let me come back with a number, because I think the number of projects, Lois, is over a hundred.

You know, I think that I've seen different estimates built into numbers where you're looking at somewhere from under 10 VLCCs converting a year, but somewhere around that many VLCCs to be taken out of the fleet for a year for projects (technical difficulty). It continues to develop, where in Brazil these projects are (inaudible) right now. And they're doing multiple projects a year on conversion. So, it is a very healthy (technical difficulty) market.

I think you'll see more companies just opting to sell where they can. I mean, the jump from being a seller to being a converter to being an owner-operator is an enormous jump that requires a lot of capital and a big in-house technical team. There are not -- this is one with a lot of higher (inaudible) than operating a [straight] tanker. This is where having in-house technical management has enormous value to a company.

Got it, thanks. And then, coming back to the scrapping part of the equation -- clearly, the market, as you guys have pointed out and others, is at a point where it doesn't make financial sense to spend money on a 20-year special survey or drydock, given current economics. But I'm sure you saw this recently, Bangladesh recently suspended scrapping or incremental scrapping at their shipyards due to the heightened mortality rate there. How much of a dent do you think that and its impact on the cash buyers might put in in the scrapping business and taking additional vessels out of the fleet?

I've been following the scrapping business in that part of the world since 1980, and that's pretty much been off-again and on-again there -- Pakistan, India, Bangladesh -- for as long as I can remember. And ultimately they work out arrangements. The market continues. And that's the expectation here. Can scrap prices be volatile? Yes, absolutely, but I don't think there's really any change. I don't think we've seen anything in the last few decades there.

But isn't the expectation for charter rates far more of the relevant factor in terms of whether to crap than the scrap prices?

Oh, I think people's expectations of earnings out a year or two are clearly [taken up], but you have a '97 or a '95 or '96 or '94 built VLCC, you're not going to get a time charter from anybody. You're going to be in the spot market and you're going to be the last ship chosen in most cases, unless you're with a really first-class operator in a big pool. So you are going to be looking at, potentially, as you did in the third quarter, negative earnings. You're going to be subsidizing transport. And when you combine that with the drydock, the math becomes pretty compelling to scrap.

Right.

So time charters aren't an option for those older ships. Occasionally for storage.

Right. Okay, thanks very much. I'll try it back.

Urs Dur, Lazard Capital Markets.

Everything's been asked -- I guess I got in there late, one of the last question here, but you just hit on it -- we're hearing from a lot of brokers that even attempting to get a spot charter in a weak market for something over 15 years old in the Crude market is already a challenge. Are you seeing the same thing?

All of our VLCCs are employed in Tankers International, and (technical difficulty) so we are having a healthy utilization rate. You know, I think this summer it was a very slow market and it was slack in general, but that is not the case at this point and the vessels are moving.

No, no, no, I know that. I was pointing out something more favorable for you guys, which I believe the [RV] fleet is fairly young and anything over 15 years seems to be -- even though it may have its [oil major vetting] seems to be way down the list of a choice ship. So, you know, you're in a better position, correct?

I think the answer is yes. The question to get out to people -- are the 15- to 20-year old tankers the new single hull vessels, are they going to be discriminated against the way singles were earlier on? We're going to be fairly conservative about that. I think it depends on the owner. If it's an owner who has an older ship and he's also having financial difficulties, he's really going to be discriminated against, and you're seeing that. (Technical difficulty) I don't want to in this environment sound totally optimistic -- that's contrary to how we want to manage the Company. But we're going to be careful.

Excellent. Everything else has really been covered. Thanks for your time.

Justin Yagerman, Deutsche Bank.

Good morning, this is Josh [Katz] for Justin. I just want to start off on the Product tanker market. I guess we've already spoken a bit on this call on the East Coast refineries, but we've already seen some of the capacity already idled, and maybe less up, but have you seen any pick-up in maybe the Transatlantic Product trade at all?

You know, in Q4 we're starting to see more barrels move, but there was a slack period in Q3, so it's a little bit inconsistent with what you're seeing. And you're really seeing the diesel oil pull out of the U.S. Gulf. We're actually in a position now where the rates out of the U.S. Gulf here are equivalent to the front hull of continent to the East Coast.

Good. And I guess, just maybe on the VLCC fleets, with two-thirds of the fleet booked at $9,000 a day, if there is a Winter Rally is it safe to say that that's really going to be impacting Q1 rates?

Yes, the majority of that will show up in Q1. We still have about a third of the days are unfixed in Q4, and the market is somewhat healthier than what it has been. So you'll get some of that in December and then the rest in Q1.

And then, maybe switching topics a bit -- with regard to the [Forward Star] facility and that accordion feature -- at what point do you start having discussions, or have you already, with banks about maybe further syndicating that facility? And is that still on the table?

it is still on the table. We have the ability to utilize the accordion feature through the beginning of February 2013, in terms of increasing the size of the facility. We had expectations, and still do, of having discussions surrounding that sometime during the end of the fourth quarter of this year.

And one last question before I turn it over -- you guys have done a great job on cutting costs. I'm just kind of curious on how much more you can kind of squeeze out of G&A and some of your expenses, or maybe is Q4 a good runrate going forward?

We expect G&A for 2011 to come in in the very lows 90s area call it something in the neighborhood of $92 million. Normalized, you'd be talking about a runrate of roughly 22.5 per quarter. I think it is possible that we could take out up to another 5%. So that would not be an inappropriate thought for 2012.

Thanks for the guidance, and I guess I'll turn it over. Thank you for the time.

Justine Fisher, Goldman Sachs.

Myles, I just had a follow-up question on the book value of the assets toward the end of the year. We've seen some trades in the vessel market, especially in the sort of 10-year-old VLCC bucket have been down significantly, from where vessel values were even in the middle or the early part of this year and then this whole call we've had discussions on how the useful life of tankers may be a lot less than what people had expected -- so not 25 years, but maybe 20 or even less that. And so, based on these data points, can you give us a little bit more color as to why you guys aren't looking -- aren't expecting any sort of writedown on the assets at the end of the year? And I ask because, again, to follow on Natasha's question, that seems to be where the covenants are. It's not like you guys have debt to EBITDA covenants or operating covenants, they're all book value related covenants.

Well, we look at the depreciable life of the assets. The depreciable life of the asset still remains in that 25-year category. Impairment is a function of whether or not the nominal earnings capacity of that asset exceeds the book value of the asset or actually is below it on a non-discounted basis. And we don't expect to see an impairment at year end, but of course we'll undertake an appropriate valuation at that time.

And based on your response to this previous question that you guys may look to exercise the accordion on your facility, I anticipate that that would happen after any sort of re-evaluation of the book value of any assets, or would you enter into those discussions at the same time? Would your banks entertain it if you hadn't revalued the assets yet?

Yes. Just to address it, it isn't our election to increase the size of the facilities. So, it's not our election, it would be up to the bank to agree to increase the size of the facility or to have other banks come into the facility. So, I would assume as we work through this process there would be a normal due diligence and consideration would be given to where the capital of the Company stands at that time. But we would initiate conversations prior to a determination.

Okay. And just to clarify on the Title XI timeline, it sounds like, given the bureaucratic process that it has to go through and then the fact that you guys have 6 months after the second traunch is approved to go to market with those bonds, it sounds like for investors who are looking at this, they shouldn't expect to hear anything until maybe July 2012 after all the approvals are done and given the time you have to market. I mean, is that around the time frame where we should actually expect the money to come in from the issuance of those related bonds as opposed to just the approval?

A few years ago, when we first mentioned Title XI on these calls, I openly said that to one of our competitors on Title XI told me it would take at least 2 years to get this done. And I said -- No way, there's nothing in this world that could take 2 years to get done. And here we are, and it will be 3 years later. So, I think that the timing Myles talked about was certainly right, and we have all the work done on that, so I think -- you're absolutely right, dealing with the U.S. Government on that is different than dealing with Goldman Sachs, or UBS, or JP Morgan, or [DMB] -- the answer is yes.

It is always helpful to have created a degree of momentum, so we still remain in the hopeful category.

And given that you aren't looking to increase the accordion on the revolver -- or you might have those discussions -- would the Company pursue any other type of liquidity raising between now and then, given that the Title IX process seems to be extending?

I think we're going to continue to look at alternatives out there, that's -- I think (inaudible) our finance team has been extremely good at that, and we'll continue to do that. I mean, one of the advantages of the Title XI has been low interest rates and long maturity, but it's also a very frustrating time-consuming process and if we see alternatives that work better, we'll consider them. And we are constantly assessing them.

Okay, thanks very much.

Gary Chase, Barclays Capital.

I wanted to just ask a quick one on G&A and then I had one for Morton. The slide deck refers to a roughly $2 million impact for benefit plans, and I just want to clarify -- is that OSG stock price related and where's the trigger where we would see that reversed?

Jerry Miller will take that one.

There are a couple components to that. One of the components is the [high qualified] benefits plan where employees have the right to a direct investment [plan], so the [mark] to market is a result of the overall stock market performance in the third quarter which, as you know, was down. And then there's a smaller component that's related to non-employee directors, who have the ability to elect to invest in the [banker] shares of OSG. And then, as you also know, there was a decline in the stock price of OSG over the third quarter. So that -- some of those (technical difficulty).

So, it's a non-permanent change in SG&A.

Yes, but it's an accrual item that presumably we'll see pop back up in a subsequent quarter, again.

Movements in the market.

[Potentially], yes.

Well, let's be optimistic, guys. Hopefully we can use it. For Morten, I wanted to ask, just on the commentary that you made earlier on the acquisition side -- I'm wondering what it is that's changing in your mind where you really think that now could be the time? Is it what you articulated that we're sort of troughing out at a market level. Have you been approached -- I think Myles referenced bank offering principal holidays and things like that. I'm just wondering what the catalyst for the change in your thought process is.

The answer is, we have been approached been banks, we have been approached by shipyards. We have been approached by construction people, and there are things that are going on. (Inaudible) The other thing that has changed is that the bank market has tightened, so that companies' ability to finance ships, new building (technical difficulty), older ships have become much more difficult, so that's forcing ships either out of the market share or for charter. So this is what we have been waiting for. When I said on a cautionary note is that you want to make sure you don't jump the gun and do this before the market -- you want to be comfortable that there's a recovery there and we're covered on that. That does not mean that we're trying to find the exact day the market bottoms, but we're not going to get out in front of this thing. I believe we'll be able to work with banks, and, or yards or bondholders on opportunities.

I guess I'm just -- it's hard for me to figure out how I want to word this. I'm just wondering if -- presumably what you need is an opportunity that will amount to something different than taking a market view because you can do that in a variety of different ways. Is there something suggesting that there is inefficiency and friction that will allow that opportunity? You know, and -- I'm sorry, go ahead.

I think Myles really hit on it, and that is it's picking transactions where somebody's stuck. A bank is stuck, for example, so that you are able to get -- whether it's nonrecourse financing, sensible holidays, gift payments, whether you do it on a charter basis at very low interest rates or purchase options -- they have no alternative but to sell it by auction, and they could sell it by auction and lose their shirts or not even have a buyer show up, so they would rather work [anything] and retain some of the upside while giving us some of the upside. When I was doing restructuring with shipping companies in the mid-80s that's exactly the way things ended up after the banks finally realized they had real problems.

I think what we're really beginning to see is the early stages of some financing structural opportunity. So, more flexibility -- you're not acquiring an asset and getting typical financing against the asset. The financing that's being offered against assets is highly accommodating, and provides [downside] protection.

Okay, guys. Thanks very much.

Thank you, ladies and gentlemen. At this time, I will turn the call back to Mr. Morten Arntzen for any closing remarks. Go ahead, sir.

Thank you all for joining. Great questions, very helpful. As always, if anyone wants to take anything directly up with any of us, feel free to call. We're available, and we appreciate the work you've done. Thank you.

Thank you, ladies and gentlemen, for your participation, and you may now disconnect.