Octave Specialty Group Inc (OSG) 2011 Q4 法說會逐字稿

Welcome to the Overseas Shipholding Group, Inc. fourth-quarter 2011 earning conference call. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Tuesday the 28th of February, 2012. I would now like to turn the conference over to Jim Edelson, General Counsel. Please go ahead.

Thank you. Before we start, let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker and articulated tug barge markets, changing oil trading patterns, anticipated levels of new building and scrapping, prospects for certain strategic alliances and investments, estimated TCE rates achieved for the first quarter 2012, and estimated TCE rates for the second, third, and fourth quarters of 2012, projected scheduled drydock and off hire days for each quarter of 2012, timely delivery of new buildings in accordance with contractual terms, projected locked-in charter revenue and locked-in time charter days for 2012 through 2015 and thereafter, estimated revenue and expense items, levels of equity income and capital expenditures for 2012, the profitability in 2012 of certain business units and OSG’s LNG and FSO joint ventures, OSG’s ability to access capital markets, raise additional debt financing, sell assets, enter joint ventures, securitize charter revenue, and achieve its liquidity goals, OSG’s projected compliance with financial covenants in 2012, OSG’s ability to further reduce general and administrative expenses and to achieve fuel cost savings across the OSG’s fleet, prospects of OSG’s strategy of being a market leader in the segments in which it competes, the projected growth of the Jones Act and world tanker fleets, and the forecast of world economic activity and oil demand.

Forward-looking statements are subject to a number of risks, uncertainties and assumptions, many of which are beyond the control of OSG which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. Factors, risks and uncertainties that could cause the actual results to differ from the expectations reflecting in these forward-looking statements are described in OSG's annual report on Form 10-K for 2010, and 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. This supporting presentation can be viewed and downloaded from the investor relations webcast and presentations section on OSG.com. With that out of the way, I would like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?

Good morning and thank you for joining us today on our fourth quarter and full-year 2011 earnings call. In addition to Jim Edelson, our General Counsel, with me here in New York are Myles Itkin, our CFO; Lois Zabrocky, our Chief Commercial Officer for International Flag Business; Janice Smith, our Chief Risk Officer; John Collins, Head of Investor Relations; Jerry Miller, our Controller; and joining us from Newcastle is Ian Blackley, Head of International Flag Shipping Operations.

Please turn to page 3. I think everyone on the call knows that 2011 was another tough year in the International tanker markets, particularly the last six months of the year. As a result, we booked a net loss of $193 million for fiscal 2011 against a loss of $134 million in 2010.

Our fourth-quarter revenues of $190 million were up 4% on the same quarter in 2010, about the same as the growth in total revenue datas. This produced a $50 million loss for the quarter, or $1.65 per share versus $55 million, or $1.83 a year ago.

The tanker markets always surprise, but last year all the surprises were negative for the tanker markets. We planned for weak markets last year because of supply additions and poor global economic conditions. We did not plan on the tsunami in Japan. We did not forecast global refinery outages from accidents that took out over 1 million barrels a day in production including over 400,000 barrels of refinery capacity in [Daliel] alone.

The Arab spring caught everyone by surprise, and the complete shut-in of Libyan oil production even more so. We did not foresee that the Obama administration would advocate tapping the OECD countries' strategic petroleum reserves to combat high oil prices. 2012 is off to a better start than the last six months of last year, and so far no big negative surprises.

Switching gears, I have been highlighting the better performance of our US Flag unit throughout 2011, and the fourth quarter was no different. For the year, operating income from our US Flag unit was $45 million compared with $3 million in 2010. As you have all heard on earnings calls since the end of 2008, we have been attacking costs at OSG both onshore and at sea.

G&A came down to $83 million in 2011. This means we've taken down overhead by 42% since 2008 when G&A peaked at $144 million. Our entire team is pulling together to find new ways to reduce costs, work smarter, and improve our processes, and we are not finished. We will continue to pursue further savings this year and beyond. This positions us much better for the future. Please turn the page.

Following the announcement on the dividends, there was a lot of negative press about the Company. Let me be emphatic. We have more than ample liquidity, close to $650 million net of the revolver step down to run the Company.

We expect to remain in full compliance with all our financial covenants throughout 2012. We are also confident that we will get a healthy contribution from our US Flag unit and our LNG and FSO joint ventures this year. We believe that our International Product expenses will benefit from stronger freight [rockets]. We also expect the results of our Crude business to improve somewhat this year. As a result, we expect cash flow from operations to cover almost all our requirements in 2012.

Considering all our options and ample liquidity on hand, we are confident of our ability to enhance the financial flexibility of the Company over the course of the year. Let me list a number of liquidity-enhancing transactions that we have in various stages of development.

We can raise over $600 million in potential new secured debt on our existing unencumbered assets. We are assessing individual vessel sales. We are exploring joint ventures on some of our assets. We are talking with existing and new banks about incremental credit availability. We are evaluating securitization of some of our long-term charter revenue [inaudible]. We are exploring US tax leases for selected US Flag assets. Finally, when the financial markets move more in our favor, we could tap our new shelf registration.

This list is not exhaustive and I am deliberately not being too specific about what our preferences are. We have multiple options available to us, and management is intensely focused on pursuing the right transaction, or combinations thereof, for the Company. The target amounts management has set to raise are well within reach for us. We are not just exploring ways to increase liquidity to manage through the downturn, but also to grow with.

Our target is based on management's stress scenario plus a margin for safety. If the markets perform better than the stress case, as we believe they will, the additional cash flow will reduce the liquidity needed for surprises and be redeployed as growth capital in a patient, disciplined manner. Please turn the page.

I told you that we expect rates to be somewhat better in 2012 than in 2011, which they are doing so far. Nevertheless, we will run the Business as if rates are not going to improve this year or next. They have been too many negative surprises the last couple years to behave otherwise. This means that we need to make take measures to strengthen the Business without help from the market.

You are probably getting tired of hearing us talk about our ongoing campaign to reduce overhead, but we are very serious about this. We have made significant headway on pushing down G&A, which will reduce by a further $17 million in 2011. Management is fully committed and the entire OSG team is committed to keep looking for and capturing new efficiencies in our daily workloads and sourcing needs.

I've challenged all our employees to seize any and all opportunities to reduce costs. Big or little things can and do add up. I think the numbers we have delivered speak for themselves. We were successful in keeping a lid on our vessel operating costs again in 2011, but at the same time we held up our escuity and operating stats. We are not willing to sacrifice operational integrity to make inroads on costs. The two are not mutually exclusive. Our commitment to service, safety, and environmental performance remain unwavering.

Fuel is our single biggest expense on our spot foot trading fleet and has a major impact on those TCEs. We launched a new initiative early last year to save on bunker consumption, and it has already paid off. We expect to capture material savings with this effort and the benefits will be ongoing. To dimension it, 1 ton per day, per vessel would save us $20 million across the year.

Our portfolio of chartered-in International flag tankers, which includes the double-hull tanker ships, lost money last year. We expect to improve results on this portfolio from a combination of actions. The return of loss-making ships to their owners, including 11.9 VLCCs, Suezmax, and Aframax tankers in 2012.

Renegotiation of the turns in some of the charters we will maintain. Indeed, in Singapore this morning, we finalized charter rate reductions on four chartered-in MRs, which will save us, in total, close to $6 million over the next two years. Finally, as our legacy charter-in roll off, the lower charter rates now available across our International segment should enable us to greatly improve the margins in our chartered-in fleet.

Commercial out-performance. We are intensely focused on commercial out-performance in all our markets. For example, we now have 37 owned or controlled International flag MRs in our Product Tanker fleet. We think we are very well-positioned with scale and a leadership position in the Atlantic basin to participate in recovering this market segment, which we believe is already underway.

On the crude side, I am satisfied with the performance of the four tanker pools in which we participated so far this year. We are very pleased, as, fortunately, are our customers with the technical performance of the vessels in our FSO and LNG joint ventures. We are actively working on actions that will improve the performance of these two joint-venture companies and expect to increase distributions from both of them as a result.

Finally, we have just about completed our multi-year new building program. All we have left are two Aframaxes that are being constructed at STP South Korea with only $53 million in construction payments still due. Please turn the next page.

You've all read about our withdrawal of our Title XI application for our two Jones Act shuttle tankers. The two shuttle tankers are the Overseas Cascade, built in 2010, and the Overseas Chinook, built in 2011. They are both on attractive charters to Petrobras for four-plus years with options for three more years. Both are debt free.

We would have liked to have seen our application approved on the terms that it was submitted on. It's always better to have multiple options in hand than not. As soon as we recognized that the process was going to drag on for two or more years, we started exploring financing alternatives for the shuttle tankers.

As time went on, the likely terms of the deal drifted further and further away from the structure that attracted us in the first place, lower advance rates, shorter maturity, more trapped cash, and so on. We have a number of options already underway for our two shuttle tankers. The shuttle tankers are very attractive assets and we intend to optimize how they are financed. Title XI was nice to have, but not a necessity.

I have also been asked by a couple of analysts if we are going to pursue the Title XI financing for our ATB that was approved in spring of 2011 and originally applied for in 2009. Primarily because the need to redeposit the proceeds from the Title XI bond back into our capital construction fund, or CCF fund as it is more commonly known, the financing is less attractive to us than other options and therefore we are unlikely to pursue it.

For those not familiar with CCF rules, let me elaborate on the redeposit requirement. Because we financed our lightering ATBs initially with funds taken from our CCF fund, which was established at OSG in 1970, they could not be employed until we acquired Maritrans and their lightering ATB new buildings. If we went ahead with the Title XI ATB financing, would have to redeposit the proceeds into our CCF fund in 2013, so it could not serve a long-term source of liquidity in the Company in contrast with the shuttle tankers.

We could not use the proceeds from this issuance, for example, to permanently pay down revolver borrowing. Therefore we are unlikely to pursue it. Please turn the page.

We believe the International Tanker markets bottomed out in the second half of 2011. 2011 was the most difficult year for the industry since the onset of the great recession. While our outlook remains guarded due to the uncertainty about global economic prospects, we believe that our International flag markets bottomed out last year. You can see from the freight rates we have achieved so far this year, notably 23,000 a day for VLCCs and 25,000 a day for Suezmaxes, that rates have improved over the last six months of the year.

Given where current spot rates are, we expect to hit or exceed these levels for the balance of the quarter. Now these rates are nothing to get excited about it, but they do result in much higher cash flow for the Company. I will cover each of our main markets later on this call.

The main take away on this slide is, we expect better rates on International markets this year than last, and that the performance year-to-date is indicative of where we expect the year to turn out. We are more bullish on products than crude as we think the fundamentals are healthier in the product rate and we'll be a major beneficiary of the upturn when it comes. Please turn the page.

Let's go to International crude. We expect modest pickup in crude rates this year from the combination of reasons. The imminent start up of the 325,000 barrel a day Motiva refinery expansion in Port Arthur, Texas, which is owned by Shell and Saudi Aramco, will result in the first jump in westbound VLCC movements from the Arabian Gulf in several years, as the refinery will be processing Saudi barrels. Westbound movements are key in increasing tonne-mile demands.

There is 800,000 barrels per day of new refinery capacity coming on stream in India and China this year, and we expect to pan refinery runs to revamp from last year's tsunami-depressed levels. In China, during 2011, the ESOP pipeline handled most of the growth in Chinese oil demand. There are no such additions to pipeline capacity this year, so all the Chinese demand will have to come by sea to [command growth].

In 2011, a surge in Brent-Dubai crude spreads to record highs, primarily as a result of the Libyan oil production shut-in, encouraged Asian buyers, and most notably the Chinese, to source more crude in the Middle East. Reduction in the Brent-Dubai spread that has occurred as Libyan production has been restored has brought West African crude back into favor which buoys tonne-mile demand.

And then there [inaudible] wildcard. I will mention two that could be positive. Asia is poised to increase its strategic petroleum reserves. Both India and China may need to do this in the face of greater oil supply uncertainty. Also, Iran sanctions are beginning to bite.

This may result in additional long-haul movements from West Africa and other loading areas and Iran may be forced to increase its floating storage. [Inaudible), a negative wildcard, would be another draw on American's strategic petroleum reserve. I could go on with wildcards but I think you get the point. Please turn the page.

The supply bulge of the product new building order book is now behind us, and fleet growth should be more constrained the next two to three years. At the same time, we expect the International flag products markets to grow faster than fleet growth.

One of the big drivers of this growth is the rising exports of gasoline and diesel from the US to Latin America, Europe, and Africa. The refinery shutdowns on the US East Coast will have to be serviced partly with more Jones Act movements, but primarily from long-haul refiners in Europe, Russia, and Asia. We see the entire Atlantic basin, where we happen to have most of our product anchors positioned, as the place to be in the products world and therefore expect better results from our product business in 2012. Please turn the page.

We believe that the Jones Act fundamentals remain strong and result in continued upper pressure on rates. There are currently no ships in lay-up, and we expect minimal fleet growth. The trade could get a lift this year from Motiva barrels going into Florida, and/or additional Gulf Coast barrels moving up to the East Coast to replace refineries being shut down there. Our investments in the Jones Act are beginning to pay off. Please turn the page, and I will summarize.

Management at OSG remains committed to managing the Company conservatively and controlling costs vigilantly. We expect some improvements in International markets, as reflected in rates year-to-date 2012. We have substantial operating leverage, and will be a major beneficiary of any market upturn. We expect solid contributions from our US Flag business and our LNG and FSO joint ventures this year.

We have ample liquidity, available growth, and we expect remain in full compliance with all of our financial covenants this year. Our remaining capital commitments are minimal and our refinancing requirements are manageable. We are pursuing a wide array of options to strengthen liquidity and provide capital for growth and are confident about our ability to execute on them.

I will now turn the mike over to Myles.

Thank you Morten, and good morning. I would like to highlight several items on slides 13, 15, and 16 before beginning the Q&A session. Please turn to slide 13. Increased contributions from the US Flag and International Product Carrier segments resulted in a 4% quarter-over- quarter increase in TCE revenues. Revenue growth in these two segments was offset to a large degree by the continued weak rate environment in the International crude tanker market.

The $7 million increase in TCE revenues reflects a $20 million increase in US Flag revenue, along with $11 million increase in International Product Carrier revenue. These increases were offset by a $23 million decrease in International Crude Tanker revenue. The $25.2 million quarterly loss from vessel operations reflects a $14.8 million contribution from the US Flag sector, more than offset by the operating losses generated by the International crude in the international product sector of $34 million and $5.4 million respectively.

The positive US Flag segment performance reflects quarter-over-quarter growth from the delivery of two new build product tankers since March 2011, as well as increased lightering volumes in the Delaware Bay. With the return of the OSG 214 to the Jones Act spot market in October, all of our US Flag vessels are now actively trading.

Approximately 67% of the US Flag segment's business was under fixed rate contracts during the quarter. Please also note that our joint venture investments continue to perform well providing both positive and predictable returns and distributions.

Finally, our ongoing cost control program has resulted in containment of daily vessel operating expenses and further declines in G&A expense. As a result, our 2011 annual G&A totaled $83 million compared with $100 million for 2010. The $83 million reflects headcount reductions. It also reflects significant cutbacks in actual 2011 incentive compensation in December against accruals made through September. Our ongoing program of efficiency improvements has resulted in a $60 million per year reduction in G&A expenses during the period of 2008 through 2011. Please turn to slide 15.

A few points about the Company's liquidity and cash flow obligations. As of December 31, our cash and short-term investments stood at $55 million and we had $723 million of availability under our credit facility maturing in February 2013. That would translate into $573 million after the $150 million step-down in availability in February 2012. We've accessed cash through draw-downs from our unsecured revolver and have recently restored the cash balance to over $200 million through a $150 million draw under the revolver on February 10. Our non-operating cash flows during 2012 are manageable.

Scheduled debt amortizations total only $15 million in 2012, reflecting the Company prepaying $38 million in debt principal installments during December 2011 that were otherwise due in 2012 and 2013. This was employed as a preferred means of addressing loan to value ratios. Remaining construction contract commitments for 2013 total $78 million of which $48 million is due during full-year 2012, more than half of which has already been satisfied. We remain in compliance with the financial covenants contained in our debt agreements and expect to maintain compliance throughout the year. Please turn to slide 16.

As is usual during this meeting, we will address guidance for full-year 2012. Vessel expenses are projected to be in the range of $300 million to $315 million compared with 2011 actuals of $288 million. The increase is due to the full-year impact of 2011 and 2012 deliveries. Charter higher expense is expected to be in the range of $350 million to $360 million, which is a decrease from the 2011 expenses of $384 million.

The decrease reflects the planned re-deliveries of high-rate, loss-generating, chartered-in vessels. In 2012, we will be re-delivering, weighted by ownership, 11.9 crude tankers over the course of the year with the re-delivery dates heavily weighted to the first half. Depreciation and amortization expense is expected to be the range of $195 million to $205 million, an increase over 2011 actuals of $180 million, and resulting from a net increase in owned vessels during 2012.

G&A expense for 2012 is estimated to fall in the range of $80 million to $87 million excluding any one-off costs and the impact of stock market movements on certain, unfunded benefit programs. Equity income from affiliates is expected to be in the range of $25 million to $30 million in comparison with 2011 actuals of $22 million. This number does not reflect the impact of changes in long-term interest rates on the mark-to-market of the interest rate swaps on the FSO Africa.

Interest expense is expected to be in the $87 million to $95 million range compared with 2011 actuals of $80 million. Higher interest expense is driven by commitment fees for the forward start facility, which was signed at the end of May 2011 of $4.6 million, and a reduction in amounts capitalized in connection with vessel construction of $5.4 million.

Our guidance for drydock costs for the year is approximately $40 million. Drydocks will be performed on 33 vessels, Q1, $14 million. Q2, $15 million. Q3, $3 million, and Q4, $8 million. Our guidance for capital expenditures for 2012 is approximately $56 million which includes progress payments on new builds, vessel improvements, and capitalized interest. Q1, $27 million, Q2, $10 million, Q3, $7 million, and Q4, $12 million. We will now open the call up to questions. Operator?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Doug Mavrinac, Jefferies & Co.

I just had a few a follow-up questions, and the first ones are going to be more related to the market itself, since that tends to drive everything in the tanker business, and the first relates to the VLCC market. Obviously, given your scale and logistical infrastructure, I know that you guys track every single VLCC on the planet at all times. My question is, given today that US oil demand is at a 15-year low, about how many, too many, VLCCs are in the market right now, such that we need to find something to happen to those before the market can get in a little bit better balance, more sustainably then just for seasonal reasons?

Doug, I will go ahead and take that. This is Lois Zabrocky. We estimate somewhere around 30-plus VLCCs, but what is interesting is that if you look at the AG/West fixings for February over last February, you have an additional 16 going to come online, like they have 325,000 barrels a day that is going to start up. So you are starting to see some of those get absorbed.

Got you. Perfect, great, Thank you, Lois. I know that everyone talks about oversupply this, oversupply that, but the reality is US oil demand is at lowest level since 1997, and so if it is something less than 40 VLCCs, then one would think that if US oil demand just goes up a million barrels a day, that could also clear out some of that excess capacity. Is that the right way to kind of think about it?

Yes, or alternatively, if because of sanctions you get a buildup of floating storage in the Gulf, which is possible. That can deal with it. The other thing, as a rule, whenever you get a consensus in these markets that things are going to be lousy or things are going to be great, the rule is always to bet against that consensus, because they are always wrong.

Right. Yes, very true, Morton. Just one other question on the market before looking at a couple of questions on liquidity. You guys mentioned, and we know about the East Coast refinery capacity decreases that are going to be affecting the market throughout the spring and summer. My question is, which market is poised to benefit more for you guys, since you are in both, the US Jones Act or the international products tanker market? I mean, what do you see economically filling that void as a result of those decreases in capacity?

I don't think we have tried to -- what we have tried to figure out is where would you source the incremental products for? So [Aldenza] was sending something like 150,000 barrels a day up the East Coast. In the Jones Act, if you needed three to five product tankers to service that, which is what you would need, that has a material impact on the supply and demand equation of the market. So that could have a more powerful effect on rates. On the other hand, if you have to bring up with long haul from Europe, it also has a positive impact on rates, but you are obviously spreading it on a much bigger area. Our expectation is that there will be some Jones Act movements in there, but there will been more coming on the foreign flag. It will open up [arb] opportunities as well as volume. So both, we think, should benefit, but please don't hold me to precisely how those flows are going to look. That oil is going to have to be sourced, and that needs to be -- that is a long haul over the next few months.

Right. Yes, makes total sense. Okay, thank you for that. Then just a couple of final questions as it relates to some of the options that you guys are pursuing in terms of enhancing your liquidity. You talked about the potential to raise additional secure debt due to all of your unencumbered assets. Also kind of potential [vested] sales, and several things that you guys are pursuing simultaneously. My question is, of the $600 million in potential new secured debt on existing unencumbered assets, how much of that do you feel comfortable taking on, or, I mean, do you consider it just kind of as part of a mosaic in terms of all the levers you can pull, that is just one of them and the capacity is as much a $600 million?

Yes, Doug. It is Myles. I think as you look at it. It will be a function of a series of individual actions that provide sufficient liquidity to both get through this period and provide some type of base for subsequent growth.

Jon Chappell, Evercore Partners.

Morten, one thing you did not put on your list of potential levers to pull, which is probably because it is in the early stages, but we had read that you were down in Washington asking for some just level playing field as far as taxes on repatriation of cash. Can you give us an update as to where that process stands right now, and then also the magnitude of any cash repatriation if that were to be approved at some point?

I think it was reported in the press, the mention is about $500 million of income that we could bring back. I think what was positive in Washington was that we have support on both sides of the aisle from probably the most liberal Democrats to the most conservative Republicans on the House Ways and Means Committee. In fact, we haven't found one Senator or Congressman who objects to what we are trying to do, which is just a fix, almost more of a fairness. The problem is that since legislative gridlock in Washington, that I think we have all read about, and it is strictly getting it appendaged to a Bill that then moves forward. We have been operating without a budget in Washington for three years, and typically that would be the kind of thing that these types of corrections would be attached to. So we have very solid bipartisan support, and as soon as we can get it into a Bill, there are no objectors to it. So we think it can go forward, but it is Washington and it is an election year, and so that is the uncertainty.

What could you do (inaudible) unlimited? Could you pay down the revolver, or does that have to be strictly for US --

I think we could pay dividends, we could do anything we want with it.

That is pretty meaningful. Myles, a couple of questions for you. You mentioned the prepayment of debt in the fourth quarter to get back in line with your loan-to-value covenant. Did you give yourself a big buffer there, or if that (inaudible) were to fall again, could you foresee another prepayment that could be required in 2012?

We simultaneously renegotiated the level of coverage that is required. So the asset maintenance clauses were modified downwards as well. We viewed it as the more efficient way of addressing it because we are going to be paying those amounts in 2012 anyway. So through a prepayment, we were able to bring about alignment.

Got it. So not likely a risk, then, in the near term?

No.

Okay. Then on your guidance page, a couple things. First on the G&A, your midpoint of your guidance range is exactly in line with what you did in 2011, but it seemed like you were still focusing on costs. And then on the equity and income and joint ventures, if you just took the fourth-quarter number and annualized that, it would be way above your guidance range. So are you just kind of low balling with those numbers, or is there something in the fourth quarter specific that made those run rates not accurate for a kind of go-forward basis?

I think, let me answer the joint venture, because what we do not want to do is to give you guidance on things that we have not -- if we haven't extended the contract or increased the contract or have gotten certain improvements to the contracts, we don't put it in there.

Yes. I think the other thing is that the flows from ATC are weighted heavily in either the fourth or the first -- fourth quarter. So it will be a disproportionate weighted, so you can't annualize the fourth quarter.

And the second and third quarter also suffered from mark-to-market losses on the (inaudible) swap whereas the fourth quarter had a little bit of a pickup.

Yes, and we are not forecasting adjustments in the mark-to-market on the swaps when we provide the guidance.

Okay, and then the final thing is the time charter in guidance range that you gave. Does that include the rate reductions that you just announced today on the four MRs from Singapore?

No, it does not.

So that could be $6 million lower, and then also, just what is the amortization?

$6 million over two years, Jon. About $3 million a year.

Over two years, okay.

Remember that is cash, right? Because there is a reduction that will be followed by subsequent increases. So we will be reporting on an average basis. So it will have a cash impact and not any meaningful P&L impact.

Okay, and Myles, what is the amortization of the deferred gain for 2012?

Probably about $10 million.

$10 million? This number is gross of that, right?

This number is net of it.

Net of it, okay. Thank you for your time, everybody.

Gregory Lewis, Credit Suisse.

Yes, real quick on the time charter guidance, when we think about that, does that include the potential for additional charter hires or is that really just where the chartered-in fleet is today?

It is based on the existing fleet. It does not anticipate chartering in any incremental tonnage.

Okay, great, and just to that point. I mean, when you look at the outlook, it sounds like you were a little more optimistic in 2012 then, say, versus last year. When we think about like longer-term charters, is this an opportunity over the next couple of quarters where we could see OSG potentially drawing a line in the sand and chartering in more tonnage, just given the weak state of the time charter end market?

This is Lois here. Absolutely. We are definitely seeing a lot of vessels put in front of us, some of them from our full members where they are looking for time charter coverage, and we are able to work out a win-win situation there. So you are definitely seeing opportunities to take in (inaudible) for anywhere ranging from a year to three years at significantly lower levels then what we have seen in the past.

Okay, great. Then just touching on the leverage that the Company can pull. When we are thinking about the securitization of long-term chartered revenue, in other words, is that something where the revenue is the baseline, but I mean, how should we sort of back out the costs associated with the securitization of those revenues? I mean, I guess my question is, how would something like the securitization of a long-term contract work?

Securitization of receivables can essentially work in lots of different ways. I don't want to be vague in my response, but you could either be deriving a financing based upon the value of the vessel and the incremental value of the charter hire, right, which would be viewed, really, as a pure asset financing. So other then the costs associated with the debt incurred, it would not otherwise have an impact. The other thing is an actual transfer of ownership, which at this point you really have to know the terms and conditions in order to quantify. What we are currently looking at falls more into the category of securitizing the asset and the revenue stream, and is more akin to the financing than it is to a sale where you would have to make an adjustment for the income statement and the balance sheet beyond the financing.

Okay. So in that type of financing, then, you would just have sort of a restricted piece of that would meet the--?

I would view it as monetization as opposed to a pure securitization in terms of street parlance.

Michael Webber, Wells Fargo.

I wanted to jump back a second and talk a little bit about your Title 11 financing. Maybe you guys can give a little bit more color on this. I do not want to dwell on it because it does not seem like it is going to happen, but can you maybe just give a timeline, I guess, in terms of how that process kind of fell apart, kind of how those terms specifically changed, and then I guess it was a tranche that you guys just took off the table. It seems like that capital construction fund issue has kind of been there since you guys applied. So just maybe a little bit more clarity on why you are pulling that now, kind of outside of the capital construction fund issue?

I will let Myles do most of it. Just on the ATB financing, we went, in 2009, when we first started the application for it, we had plans for [auto rig] incremental Jones Act qualifying assets that would have been ideally suited for that. Those plans have changed. We have no such plans. So you are just putting money on the balance sheet going up the yield curve and hitting earnings, and then we are locking up that money. So it did not make sense. If we had a qualifying asset, that would be a different game. I will let Myles walk through the --

Yes, sure. Probably the point at which there was more of a shift in attitude was based upon the failure of another significant government guaranty program, where there was a default on $500 million worth of government guarantees. There was a greater concern that was developing among the politicians as to how effective these programs are, and basically just general concerned about overall government guarantees. From that point forward, it became increasingly apparent that the only way that we could get something potentially approved was by shortening the term, reducing the magnitude, and agreeing to cash sweeps that are not part and parcel of the original application. We were still subject to the same level of government guarantees. So we were winding up with expensive financing that would not have otherwise provided us with the level of availability that we would seek, and would functionally provide a lower loan-to-value ratio against those assets then we might be able to get through some alternative monetization. So really, that is how it proceeded. During the interim as well, we did suffer some rating agency downgrades, which would trigger a discussion in any event.

Okay. All right. That is very helpful, thank you guys. I wanted to touch on, and you talked about this a little bit already, Morten, but in terms of kind of restructuring the balance sheet a little bit. You talked about vessel sales are levering up some of your unsecured assets, and you have also said you are a little bit more bullish on the product tanker space, and your Jones Act assets are starting to be more profitable. Can you talk about how you prioritize vessels that you want to keep in-house and lever up versus those you are specifically looking to sell? I know you guys cannot get into specifics, but maybe some broad guidelines in terms of how we should be thinking about that.

This is, I think, where we are talking -- it s going to be a mosaic. We have to establish what the various options do. There is not one single option here that is necessarily more attractive than all the rest. Long-term, I think the most equity upside we have is going to be in our product tanker and our crude fleet when those markets recover. We have enormous operating leverage, we have brought on a number of new buildings the last four years, so we will participate in that. So you would not want to do something that would damage that. Where you have vessels that might have perceived less upside, either because of age or because they are locked into something, you probably put those higher up on the totem pole, but the nice thing is we have about north of $2 billion of unencumbered assets. So we have a lot to choose from, and we are going to be very flexible in how we do that, and it also partly be a function of how the year evolves. (technical difficulty) day more than MR rates for us is north of $13 million a day more operating income. So we can generate a lot of cash very quickly from operations, if markets give us a little bit of help.

Fair enough, and you kind of just touched on my quick follow-up. I know you cannot get into specifics, but how should we think about timing? Obviously there is nothing that says you need to do this tomorrow, but in terms of addressing this, how should we think about that throughout the course of the year?

A lot of these things, the options we are looking at were things we commenced really almost last summer, but I think that we would hope to make progress on some front in the first half of this year, but we are going to take our time because the options we have until we get optimal structures and do not commit to sales structures, loans, leases that we would be unhappy with.

Right, okay. That actually is really helpful. Myles, I wanted to follow up on Jon's question on the prepayment of the secured debt, and he did not really get specific but I kind of wanted to ask on it. Can you kind of talk about where you guys were on an LTV basis for those facilities, kind of where you are now, and kind of where that new level is? Maybe kind of quantify the breathing room that he was alluding to earlier?

Let me just flip through the K and get the appropriate section there. Do you have another question in the meantime?

Yes. Just on the working capital, it looks like it moved up again, and you would think it was moving in the other direction. I am just curious as to how kind of your suppliers are acting in this environment, whether you guys are having any credit issues from a bunker perspective, or kind of what is kind of going on within your working cap right now? It seems to be going, not in a bad direction, but it is in a direction that would think it would be going the opposite.

I was just flipping through here. We are seeing some changes in credit terms on the bunkers, but nothing that is consistently material and we are following up in terms of receivable management. So we have that well under control. So we are not seeing any significant deterioration, either in receivable collections or in terms of payment, but we are increasingly vigilant about those. In the case of one of the facilities, we have renegotiated it to a 100% asset coverage, and we currently end at 111%. In the other case, we have reduced it to 105% from its original 125%, and we now stand at 110%. If you want me to translate that into dollars for you, I will do it after the call. I just do not have that in front of me.

Yes, I can follow up with you after the call. That is all I have, I will follow up later.

Ladies and gentlemen, please limit your questions to one question and one follow-up question, then re-queue for additional questions. Justin Yagerman, Deutsche Bank.

Questions get cut off just in time for me, I do not get this. Wanted to ask, on the potential for an increased amount of crude developing in the US Gulf, how do you see that potentially impacting both the international and the Jones Act fleet? We have got the potential reversal of the CUA pipeline, and Keystone bringing crude down from Cushing. Do you think you could start to see some international tankers, internationally flagged tankers switch over to US flag and be allowed to move any of that, if we needed to see that come to different parts of the US?

No, in short. I think if there was a situation in Iran, whether they do a hostile action that results in military action and a spike in oil prices, I think the Jones Act owners and operators will encourage the government to provide flexibility wherever necessary and to do what is necessary to keep things going in the United States, but in terms of normal shifts in production and trade, no. I do not see any need or would it be appropriate to change any of that. I do think you are going to see a lot more foreign flags on oil tankers going out of the US to Europe, Latin America, and Africa, as America exploits the advantage we have there. I do think you will see more Jones Act movements, and there are Jones Act ships available to handle what has to come up from Florida may have to come up to the East Coast. I think that is sort of the balanced view on it.

That is interesting.

I hope we do not face any hostilities out there.

I know. Myles, on the current credit facility and your comments on your ability to raise $600 million of secured debt, I am just curious if that number stays the same as we roll over into the forward start facility in 2013, and then I guess my other question along those lines, tied into that, would be if you guys could talk a bit about the definition on the minimal tangible net worth covenant, how you guys calculate that $2 billion plus, and then if that changes materially under the new facility that you will be starting at the beginning of next year?

As it relates to the $600 million, it is what we are able to do based upon both leverage limitations and effective dates, asset calculations. So that remains under the existing facility that provides full availability. Since it is an incurrence test, as long as we incur prior to the start of the forward start, we are fully in compliance. The effective date assets then get reset for a later date and time. Under the tangible net worth covenant, we have had the benefit, under that covenant, of being able to address treasury stock as an add back.

Okay. Is that benefit going to carry over when you start your newer facility?

It will not carry over in the newer facility as currently constituted.

So to what extent will that allow you to either remain or not remain within compliance of the covenants of the new facility?

We will remain in compliance with the covenants on the new facility, but with reduced head room.

Justine Fisher, Goldman Sachs.

So the first question that I had is just on the $800 million of vessels that you can lend against. It seems that the limiting factor on how much secured debt you can issue is that $800 million number in terms of the minimum unencumbered assets. Is that correct? So it does not seem to be that the $600 million is the limit, it is the $800 million. Is that right, Myles?

I think I would rather take that question in a different way. We have no plans to go out and raise $600 million or $800 million of secured debt. We are really trying to indicate that we have enormous flexibility in our income (inaudible) to do so, but we do not remotely think we have to raise any amount like that. I think that is a better way to look at it.

You are asking where the limit sets in. The limits would be in excess of $600 million, and it is a function both of leverage and the limitation under effective date assets. So, and it assumes a certain loan-to-value ratio. The absolute limit in terms of dollars would be closer to the $800 million that you are referring to. We are just assuming a loan-to-value ratio that is below that, or (inaudible) ratio.

Okay, and when banks are doing lending in the current market environment, are they lending against book value or are they lending more against market value? I think we have seen in some previous shipping loans, that the banks are taking into account the market value of vessels as opposed to their book values. So you are assuming that they would lend against the book value?

The test that we have is a book value test. Banks today are typically lending against the market value as opposed to the book value of the vessel, assuming that the market value is somewhat lower. However, for those assets that have employment, there has been credit given to the value of the employment.

Okay, and then given that the banks, obviously they have some covenants in the forward start facility, you still have room to raise debt despite those. So you do not necessarily need their explicit permission, but I feel like I am on Fiddler on the Roof here, but do you need their blessing in order to pursue some of these secured debt transactions?

No blessing, no religious experience.

Have you been in discussions with the banks about any of this? Have you received calls from them kind of being concerned that they might get layered by this much secured debt?

No. We are in regular dialogue with our banks. They understand the options that are available to us. Some of them are eager to participate in secured facilities. So there would be no surprise, but of course we have engaged them in dialogue.

Are there material adverse change clauses in the forward start facility, vis-a-vis the market or vis-a-vis credit metrics et cetera? Are there any of those types of clauses?

No, not against the market. The credit stats were as of a given date. So there has not been a material deterioration.

Okay, thanks for the time. I have one last question for Lois. Given what is going on with Iran and tankers not being able to deliver oil there anymore. We noticed you even put out a press release about that via TI, and given the insurance issues that some tankers may have delivering crude there, is it possible that -- or not delivering there but engaging in that trade. Is it possible that the tanker market becomes more segmented and you get a glut of tankers that can only do ex-Iran business, and then a significantly attractive opportunity for those that are willing to still do, say, the Iran-China or the Iran-India trade, and so you see a negative affect on rates for other routes? How does that work out in terms of segmenting the market like that?

Let me answer that, Justine. First of all, trading with the boycott countries as a main business for us is something that other shipping companies do. It has been immaterial business for us, as well as for the members in our pool, and we would not see the opportunity to exploit that. We comply with both the letter and the spirit of the law. There are publicly listed competitors of ours that do take advantage and go to places like Sudan, and may take advantage of things that evolve in the Middle East, but we will not. There is no question that the inability of Western, as well as Japanese insured tanker owners should bring their ships in there because we do not have insurance certificate is a problem that Is going to require some -- it is a problem for Iran.

Fotis Giannakoulis, Morgan Stanley.

I just want to ask about the JV income. I see that this JV income has been reversed in the cash flow statement. When do you expect to get the actual cash from these JVs?

I do not think it has been reversed, but what the cash flow statement does is it takes the difference between the P&L and what is actually distributed. So the amount that is distributed on an annual basis is roughly $7 million to $8 million from the LNGs and $4 million to $5 million on APC at this point.

Michael Pak, Clarkson Capital Market.

Just one last question on the US flag business, if I may. Can you just talk briefly on the sort of your fundamental outlook and your fixed coverage going into 2012? I guess it is fair to say you swung a $42 million profit swing in 2011 that would be hard to replicate in 2012. Wondering if you could just comment on that guys, thanks.

We would expect our [product] tankers will benefit from higher rates as they get re-fixed. In fact, the first partnerships became (inaudible) were fixed at substantially higher rates. The lightering business from the Delaware Bay had a banner year last year. We think that it is unlikely to duplicate that because of the refinery reductions there, and how that all transpires could end up being very beneficial to us. It also could be neutral and it could be negative. So it is a range of outcomes, but I think that having a year like or better than last year is certainly in the cards. Anything else?

Brenden Oglinsky, Barclays Capital.

I will keep it quick. I am sorry, I joined the call a little bit late, but coming back to the international crude markets, there have been a lot of speculation that the rate run ups that we saw in the vessel classes had been more seasonal in nature, and now it sounds to me like you guys are shifting a little bit more positively on the rate outlook for this year. I know there are numerous developments that have occurred since then, but can you give us an update on where you see order slippage and the scrappage rates, at least year-to-date? Has that improved at all in your view?

Yes. Actually you have seen on the couple of VLCCs, but what was impressive is actually five to six [suez maxes] or aged craft in the year, which if you compare to last year, the suez maxes only saw eight for the full year. So you see a lot of vessels that, in particular when they come up against a special survey and they are getting older where they may opt to scrap. We see maybe 20 to 30 VLCCs potentially being either ordered destruction or being pushed into further years, and in that number maybe around 15 removals, including conversions to FSOs, from the number against whatever new billings are coming in.

From your perspective at least, has order slippage increased at all?

We have been tracking that for the last three years, and we have been fairly consistent, steady on the amount that we are seeing. We see a continued rolling forward of deliveries, and we have been fairly acted on having somewhere around -- this year we had sustained about 20.

That concludes the question-and-answer session. Please proceed.

Thank you very much everybody for joining. Thank you for very good questions, and we look forward to meeting with you and taking your questions, or talking again in the next earnings call. Thank you.

Ladies and gentlemen, this concludes the Overseas Shipholding Group Incorporated fourth-quarter 2011 earnings conference call. Thank you for your participation. You may now disconnect.