Octave Specialty Group Inc (OSG) 2012 Q2 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Overseas Shipholding Group Inc second quarter 2012 investor conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

At this time I'd like to turn the conference over to Jim Edelson, General Counsel. Please 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 tug barge markets; changing oil trading patterns; anticipated levels and timing of new building and scrapping; prospects for certain strategic alliances and investments, including OSG's US flag business unit; estimated TCE rates achieved for the third quarter of 2012 and estimated TCE rates booked for the fourth quarter of 2012; projected scheduled drydock and off hire days for the third and fourth quarters of 2012; projected locked-in charter revenue and locked-in time charter days for the remaining six months of 2012 and 2013 through 2016 and thereafter; OSG's ability to achieve its liquidity raising objectives, including satisfactory long-term financing; 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 and sell assets; OSG's projected compliance with financial covenants in 2012 and 2013; OSG's ability to further reduce general administrative expenses and vessel expenses; prospects of OSG 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 world oil demand.

These statements are based on certain assumptions made by OSG's management based on its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. 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 expectations reflecting these forward-looking statements are described in OSG's annual report on form 10K for 2011 and in other reports OSG files with the Securities and Exchange Commission.

For this conference call we've prepared and posted on OSG's website supporting slides that supplement our prepared remarks. This supporting presentation can be viewed and downloaded from the investor relations webcast and presentations section on www.osg.com.

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

Thanks, Jim. Good morning, everyone, and thank you for joining us on our second quarter call. With me in New York are Myles Itkin, our CFO; Lois Zabrocky, Chief Commercial Officer for all International [Flag] businesses, Janice Smith, our Chief Risk Officer; Jim Edelson, General Counsel; Jerry Miller, our Controller; and John Collins, Head of Investor Relations. Joining us from Newcastle is Captain Ian Blackley, Head of our International Flag Shipping Operations and from Tampa, Captain Bob Johnston, who heads our US Flag Unit.

Please turn to page 3 of the presentation. When we spoke last May -- back in May, activity in our international flag markets was relatively healthy, especially in the larger crude classes and for MR's. Not long thereafter, demand fell off in these segments as seasonal and technical factors reversed. Spot rates fell throughout May and then spent June at levels well below where the quarter opened and at levels in some trade lanes close to operating cost breakeven levels. We were still able to generate another $10 million in operating cash flow in Q2 despite this -- about the same as the first quarter. After booking April at a respectable 15 thousand five a day, rates fell to the $10,000 level and finished the quarter at operating cost breakeven levels. Activity in the Atlantic fell off as product pricing fell on pre-summer demand on both sides of the Atlantic and the arbitrage window closed in both directions.

As weak as the Atlantic was, the Far Eastern markets were even weaker. This prompted many Eastern owners to reposition vessels to the Atlantic basin where our MRs our focused. This added competition and a loss of rate discipline exacted a heavy price on our MR spot market. So after an encouraging start to the quarter, our MR's averaged just about $10,000 a day. The same pattern materialized in the larger crude classes as market players scrambled to build crude inventories before the Iranian Embargo kicked in on July 1. This was completed toward the end of May just as the typical pre-summer slack was setting in. Then in June, the mishap at Motiva occurred, which took 10 to 15 VLCCs out of the AG-West trade. Suezmax spot rates followed the VLCCs fairly closely while Aframax activities remains subdued with spot rates similar to the past 12 months or so. Rates in international crude and products remain weak today.

On brighter note the US flag business continues to do well and perform ahead of plan. I will have more to say about that later. On cost containment, we reduced our average daily vessel expenses in our international fleet further in the Q2 and remain well inside of the budget for the year. Our US flag vessels are also being run inside budget. Our technical management teams have cost under control. With just one more vessel to go, we have almost fully executed our plan to consolidate our international flag technical operations for our crude and product tankers in Athens. The last vessel will be transferred from Newcastle to Athens late this week and we expect to realize annual savings of $3 million to $4 million a year as a result beginning next year.

Please turn to next page. In July, the Company drew down $343 million remaining available under its $1.5 billion revolving credit facility. We believe this was a prudent step to take today to ensure continued liquidity, considering the difficult market environment we're operating in, including the uncertain outlook for the global economy and the credit markets. Combined with cash already in hand, we now have over $550 million on our balance sheet. The vast majority of this money is being held in domestic accounts by our US companies as invested in short-term Treasury securities and similar high-quality, highly liquid money market instruments. We are working with our banks to put in place long-term financing for the Company that provides sufficient liquidity for us to manage through this extended downturn in our international flag markets. At the same we are exploring other options to enhance liquidity also.

I know that there will be many questions about the details of the financing we are working on but we just can't provide any details until a final deal is agreed and documented with our banks -- or to comment on any of the other liquidity options we are pursuing. So on this call, we will not comment on any of the particulars of the current discussions with our banks. We will inform the market when a long-term solution has been agreed. You can be assured that we are committed to choosing the best combination of actions to ensure our long-term liquidity and stability and that this is the highest priority for the senior management.

Please turn to the next page. The crude tanker market remains over-supplied with vessels but ordering of new ships has essentially stopped. As it concerns crude tankers, there is an order book cliff the world's shipbuilding industry faces towards the end of next year and we don't see that changing. At the same time, increasing discrimination against older ships in the trading markets will prune some ships from the fleet. Global demand for oil continues to grow, albeit at a modest pace. We expect global demand to increase by 1.6 million barrels per day in the second half of 2012 compared with the first half and 1 million barrels per day increase in 2013 compared with 2012. Now this is not enough to spur a strong recovery in rates but it is enough to lift them from the levels we've been trading at the last two months.

We acknowledge that the growth of shale oil in the US will reduce imports and don't see this trend slowing down; however, once the repairs at Motiva are completed, VLCC movements from the AG-West will get a lift. The refinery outlook in the Delaware Bay looks more promising than it did at the start of the year as both Trainer and Philadelphia refineries will stay in business, which should benefit the Suezmax market.

Asia, and particularly China, will continue to drive ton-mile demand growth in the crude sector. We expect 840,000 barrels per day of refinery capacity to be added in Asia in the second half of 2012 and another 930,000 barrels per day in 2013, which should support growth. West African exports to Asia should rebound as Brent-Dubai spread normalizes with North Sea maintenance being completed in the third quarter of 2012. We also expect to see healthy continued growth in Latin American crude exports to Asia, substituting barrels that might -- may have gone to the US in the past.

Please go to the next page. The supply side of the product tanker space still looks constrained. We are forecasting just 2.5% fleet growth in 2012 and 2013. The US Gulf is now firmly established as a key product export center and we see this growing as refineries have access to cheap domestic crude and natural gas feedstock. Demand for US products in Latin America continues to grow. As I already mentioned, the Atlantic trade has been hit by the influx of MR's from the East from last quarter combined with a disappearance of the cross-Atlantic arbitrage trade. We see this business returning spurred by demand for gasoline on the East Coast, possibly being lifted by a fall in ethanol production because of the drought the Midwest and a bottoming out of diesel demand in Europe. The better prospects for the product trade in Asia, partly spurred by refinery shutdowns in Australia, should draw back MR's that were repositioned to the Atlantic. Add these factors together and you would conclude that all that is required is a less negative attitude amongst owners for rates in the product space to rebound. There is no question that negative sentiment has hit the market but this can be overcome quickly.

Please go to the next page. The fundamentals of our US flag business remain strong and we are ideally positioned to benefit from this. We expect net fleet growth of only four ships between now and 2015. We see demand coming from Motiva once it gets restarted as well as demand to replace output from the Hovensa refinery, which was providing Florida with almost 150,000 barrels per day of product. We expect to see more Blue Water movements of crude oil from places like the Eagle Ford shale fields which could also spur demand. All twelve of our Jones Act tankers are on time charters of various durations with renewals being done at consecutively higher rates. Four of our clean ATB's are now on time charter and the prospects for our Delaware Bay lightering business improved with the announcement that Sunoco's Philadelphia and Conoco's trainer refineries would be sold and stay in business. The turnaround for our US flag business could not have come at a better time for us.

Please go to the next page. These are clearly challenging times for the Company and our industry. Everyone in the Company has to excel at their jobs and senior management has to have their priorities clear. For the senior management team at OSG, priority number one is reaching agreement with our banks to put in place long-term financing that allows us to manage through this extended downturn in our international flag markets. At the same time, we need to succeed with some of our other liquidity enhancing initiatives. I am confident we will.

I've already spoken about the strong fundamentals of the Jones Act. We are pursuing new shuttle tanker business, new COAs for our lightering business and possibly even time charters for transporting Eagle Ford shale up coast on our Jones Act product tankers. We hope to get some contract wins here in the coming months and are applying a lot of resources to that end. On the international flag market, commercial out-performance helped to sweat an extra 1,000 or 2,000 or 3,000 a day out of your ships. And in today's market that means a lot. While the absolute rates are unpleasant, 17,199 average spot rates for our Panamaxes and 19,309 for our Suezmaxes, for example, are noteworthy. We need to keep it up. We will also be focused on improving the results in performance of our FSO and LNG joint ventures.

Everyone in the Company remains focused on keeping costs under control at sea and onshore. There will be no let up on this front from anybody in OSG. Our mantra has always been and remains to run the safest, cleanest, most reliable fleet in the industry. This has not changed. We are just asking our people to do more. We need to achieve the fuel saving targets we have set and also more tightly manage our drydocking process. These are the big cost items in the fleet that we are focusing on. At the same time we are squeezing out small savings where ever we can.

With that, I will turn the podium over to Myles Itkin, our CFO.

Thank you, Morten, and good morning. I would like to highlight several items on slides 10, 11, and 12 before beginning the Q&A session.

Please turn to slide 10. Although the net loss increased by $18 million quarter-over-quarter to a total of $55 million, nonrecurring and non-cash items accounted for much of this change. Our operating loss increased by $4.8 million, reflecting $1.3 million in charges related to the consolidation of our technical management offices, $3 million in nonrecurring retention bonuses and a $7.6 million increase in depreciation. Other income was $7.2 million lower quarter-over-quarter and was attributable to two nonrecurring items -- $3.9 million in unrealized losses on bunker swaps and FFA's that do not qualify for hedge accounting and $3.4 million in net losses on investments, principally relating to 2006 investment in an activity related to our abandoned CNG business. In addition, the tax line moved from the benefit of $1.2 million in the 2011 quarter to a provision of $1.9 million in the 2012 quarter -- a negative swing of $3.1 million. This principally reflects a change in the intra-period tax allocation in 2012. It is worth noting that the non-cash nature of certain of these charges contributed to a $10 million growth in cash provided by operations compared to the prior year's quarter.

Now our review of certain of the line items. Improved results in the US flag and international crude tanker segments resulted in a 1% quarter-over-quarter increase in TCE revenues to $210 million. The increased revenue in these two segments was offset by continued weakness in the international MR product carrier fleet. MR spot rates were 30% lower quarter-over-quarter and 23% lower sequentially compared to the first quarter of 2012. The aggregate 1%, or $3 million, quarter-over-quarter increase in TCE revenues reflects an $8 million increase in US flag revenues. The US flag performance reflects the continued trend of improved market fundamentals in the Jones Act market as well as the delivery of the Overseas Tampa on a bareboat charter on April 28, 2011.

The US flag ATBs that were trading primarily in the spot market had 142 more revenue days and generated a greater than $6,000 per day quarter-over-quarter improvement in average TCE rates. Also, our US flag product carriers remain fully committed under time charters with year-to-date renewal rates in excess of expiring rates and each successive renewal rate higher than the prior charter renewal. The $6.3 million quarterly loss from vessel operations before G&A reflects a $16.7 million contribution from the US flag sector, counterbalanced by operating losses generated by our international crude and our international product sectors of $5.9 million and $16.4 million respectively. Please also note that our joint venture investments continued their solid performance providing positive and consistent returns.

Finally, our ongoing cost control program has resulted in continued containment of daily vessel operating expenses. International crude, $8,325 per day versus $8,775 per day and international product, $6,825 per day versus $7,525 per day.

Please turn to slide 11. Similar to the last quarter end, the cash balances as of June 30, reflects in part the $150 million draw-down we made on our unsecured revolver in February 2012. The current portion of debt includes the excess of the amounts outstanding under the unsecured revolving credit agreement maturing in February of 2013 over the $900 million availability under our forward start facility. A few points about the Company's liquidity and cash flow obligations. As noted as of June 30, 2012, our cash stood at $227 million. In July we drew down an additional $343 million under the unsecured revolving credit agreement, the full remaining availability under this facility. These funds are being held in US treasury bills and high-quality money market instruments. The Company now holds a cash and cash equivalent balance in excess of $550 million. Discussions are ongoing with our main banks to put in place long-term financing that provides sufficient liquidity to manage through an extended downturn in our international flag tanker markets.

We remain in compliance with the financial covenants contained in our debt agreements and expect to maintain compliance with all of our financial covenants. We expect to cover any refinancing shortfall through the use of cash on hand and the execution of one or more of the liquidity raising options available to us. We expect to be able to draw under forward start facility when it becomes available in February of 2013. Nonoperating cash outflows during the remaining six months of the year are manageable. Scheduled debt amortizations total only $13 million for the remainder of 2012. Remaining construction contract commitments through 2013 totaled $46 million, of which $17 million is due during the last six months of this year. More than 70% of our vessel net book value remains unsecured.

Please turn to slide 12. Updates to our guidance are as follows -- vessel expense guidance is being revised downward to a range between $285 million and $295 million with vessel expenses between $75 million and $77 million per quarter for the remaining two quarters of 2012. Our estimated 2012 charter hire expense guidance is being revised upward to a range between $365 million and $370 million from the $350 million to $360 million range provided on the February call. This increase reflects short-term charters and extensions executed in the second quarter at market level rates. Short-term charters less than one year in duration, at inception, are not included in our fleet list. $38 million to $43 million of the annual guidance figure represents estimates for these short-term charters.

It should also be noted that the level of quarterly charter hire expense is expected to decrease sequentially during the remainder of 2012 from the $97 million of actual charter hire expense incurred in the second quarter. Forecasted charter hire expense by quarter for the remainder of 2012 is as follows -- Q3 $90 million and Q4 $85 million. This decrease reflects the scheduled redelivery to owners of vessels in the international crude segments. Our estimated G&A expense guidance for 2012 was revised upward slightly to a range of $83 million to $89 million. We are narrowing the guidance for interest expense to a range of $89 million to $94 million from the $87 million to $95 million range previously provided. The change is attributable to reductions in our LIBOR assumptions for the balance of 2012 and the impact of the $343 million draw-down under our revolver in July.

Our guidance for drydock costs for the balance of the year is approximately $17 million. Drydocks and IRP's will be performed on 13 vessels -- Q3 $9 million, Q4 $8 million. Our guidance for capital expenditures for the balance of 2012 is approximately $20 million, which includes progress payments on new-builds; vessel improvements and capitalized interest -- Q3 $17 million and Q4 $3 million. We will now open the call to questions. Operator?

(Operator Instructions)

Our first question is from Michael Webber of Wells Fargo.

Hi. Good morning, guys. How are you? Morten, you are pretty clear about not wanting to take questions on the liquidity gap so I will try to avoid that, but I do want to touch on the full draw-down. Obviously, it comes across as an offensive move -- is that a reflection of your concern around I guess the lack of a syndicated loan market and, maybe more generally, that that forward start facility might be more difficult to access? I mean, can you just kind of help us think about that full draw-down in the context of your forward capital structure?

We think this was a prudent step to take to ensure continued liquidity for the ongoing difficult market conditions, that includes the overall economy as well as the difficulties in the banking market. That is really it. There is nothing more than that.

Okay, fair enough. I know timing is obviously difficult and with ongoing negotiations, but maybe on Q1 call you were pretty optimistic around potentially getting something done this summer and you guys were working aggressively to do that. Is that still accurate? Has there been any material change in the ways you guys are thinking about the way this should go?

I think the statement I made earlier, this is the highest priority of the senior management team. We are very focused on it and we will try to do things sooner rather than later. It is important, though, that it's a deal works for the Company as well as for our banks. And that is what we are working towards and we certainly understand the urgency of it.

Sure. Okay. Fair enough. Looking at your results, and this might a question for Myles, but you guys started breaking out your VLCC's older than 15 years and younger than 15 years. I'm just curious as to what the rationale was there? Is that just an expectation of a bifurcated market going forward or how should we think about that rationale for breaking that out?

I think it's perhaps best to explain less in terms of a bifurcated market and more in terms of an ability to compare our results to that of our competitors --

Yes.

-- many of whom just report modern vessels.

Got you, okay. That is helpful. Just a couple for me and I will turn it over. There's been speculation in the physical and equity markets around the TI Pool's COA commitment with UNIPEC and that business potentially subsiding. Is there any material update there? And if that were to slowly subside, what sort of impact do you think that has on your utilization and triangulation efforts? And I guess where the rubber meets the road, would that have any sort of impact on your TCE performance?

I think the -- I think Euronav covered it reasonably well but the UNIPEC contract remains in effect. It matures in early April next year and we are discussing with them extension or whatever modifications there would be. That TI management and board did make a determination that we had too much contract coverage and that was negatively impacting our trading flexibility and results. So we have determined to shift that. And if you go back to the founding of TI -- it had a much bigger spot focus and at the time we are in the cycle we think that is the correct thing to do. But, we intend to continue to function as a key provider for our Chinese clients but we also have a greater spot focus. And we remain fully committed to the pool concept as a way of getting market out performance in both that segment as well as Suezmax, Aframax, MRs and Panamax.

Okay, fair enough. So in terms of that shift, you think that's going to have any sort of impact on your TCE performance going forward?

We think we will be -- I think we will get a relatively better performance out of the TI pool than we've had. We think we should be doing better.

Interesting, okay. Thanks. And just one more and I'll hop back in the queue -- but around the Jones Act and, Myles -- or excuse me, Morten, you went through a lot of color there. And it seems like that title 11 application process that was difficult for you guys in the first half of the year is now being difficult for some of your competitors. At what point is that the inefficiency of that program a benefit to you guys in terms of rate in the barriers to entry to that Jones Act trade? And then as a follow-up, obviously those markets have been exceedingly strong, can you put some context around where peak level, ATB and Jones Act product tanker rates could be?

I think we are in a longer-term rising rate environment there but you always will be constrained by -- you have a market check from the international flag. So US flag can never run away from the market because the oil companies are just simply too efficient and operate their calculators too effectively. But there is no question that the adding of new trades effectively at ATbs carrying crude oil today in the Eagle Ford shale is new. The fact that we have two shuttle tankers out in the ultra deep water gulf is new and we hope to have more. So there is some very positive pressures on market. Regarding the title 11 financing, I think that there is enough news on what is on in Washington that I'll leave that question for the experts. I don't understand it.

Fair enough. Alright, I'll hop back in queue. Thank you, guys.

Justin Yagerman, Deutsche Bank.

Hi, guys. Curious to hear what trade routes you think are emerging. I mean, as we see this shale play in the United States develop and grow -- at Eagle Ford, you've got Bakken which looks like it's going to be bringing crude both east and south -- how do you expect to take advantage and what kind of demand, in terms of longer-term bids, are you guys seeing out there?

Bob do want to try to take that one?

Yes. Sure, Morten. Justin, as far as the Eagle Ford goes, we're already loading out of Corpus Christi and we're taking it to various ports in the US Gulf. We are also starting to see a lot more inquiry coming also for Eagle Ford -- coming from Corpus Christi going up coast into the Northeast. This is a trade that if you would have looked at that a year ago -- nobody saw that one coming. So this is a very important trade that's certainly going to continue to tighten Jones Act market. When you start looking at volumes, shale oil production in 2011 is about 650,000 barrels a day and is going to go to 3 million barrels a day between the '20 to '25 time frame. So it looks like almost a steady source of a new trade going forward.

Is that reinvigorating East Coast refineries and helping out the international trade over there?

Well when you look at the announcement that the Carlyle Group and Sunoco made, I mean they are looking at lowering the cost of their crude by taking more domestic crude. So I think in answer to your question, yes, it is going to reinvigorate the North East refineries if they can get a lower cost of crude oil.

Okay. Well switching focus a little bit, Myles, you mentioned that 70% of the book value of the fleet right now is unencumbered -- I think that was the number you throughout. Do you guys have that on a market value basis?

No we haven't provided that on a market value basis but I can assure you that the market value of the unencumbered fleet is sufficient to deal with our liquidity needs.

And along those lines, in the past you provided us with a number of $600 million in terms of potential secured debt raise capability prior to the forward start facility superseding the current facility. Can you give us an update of where that $600 million figure falls at the moment?

Yes. The number remains consistent. It's still $600 million.

Okay. And if I look at the quarter, it looks like you did have improvement in cash from ops but about $20 million of that came from a working cap benefit. Obviously lower receivables, higher payables helping you out in terms of that DSOs. How can we think about your cash management going forward in terms of the sustainability of that working cap benefit?

I think this is a period where most companies are making substantial efforts in accelerating collection of receivables. So you can assume that we will continue to do that. On the payable side we continue to honor all payment terms.

Have you changed terms with those that pay you? I mean in terms of the amount of time that you expect to receive funds?

We haven't changed the terms of payment. We are somewhat more aggressive on following up on overdue payments and we make a concerted effort on demurrage payments, which are typically delayed.

Okay. And I guess the last question -- as I think about the situation that you guys are contending with, when you think about all options on the table, the negotiations with lenders aside, you've got an interest in FSOs, you have the Jones Act fleet which, obviously, is a very distinct business from the international fleet, you have interest in LNG vessels and you've now broken out modern versus older vessels on the international side. It would seem to me that within at least those four categories, you have some possibility for significant asset sales and fundraising. Is that something you are actively pursuing? Are there considerations on the table? And what kind of timeframe could we expect anything to be executed in?

Justin, I think we are not going to comment on specifics, but there is nothing sacred in the Company. We want to take the best options available us without impacting the business and a negative way and to do things in a timely manner. That's -- but I think you identified some significant areas.

Okay, fantastic. Thank you, gentlemen, for the time.

Jon Chappell, Evercore Partners.

Thank you. Just a couple follow-ups, actually, to a couple of Justin's questions. First, back to Captain Johnston on the US Jones Act opportunities, when you assess the cost of shipping Eagle Ford or West Texas crude via Jones Act ship versus shipping via rail to the East Coast refineries, how does the cost layout of those two compare?

We start looking at the relative transportation, the numbers we are looking at right now, there is about a $6 a barrel differential.

Higher via rail?

Yes, that is correct.

Okay. Then another follow-up to the question without getting into any detailed on alternatives that you may pursue, but the last quarter you laid out a handful of things you're looking at. I'm just wondering -- as things have developed over the last three months, whether it is in the banking sector, maybe within the bond market in Norway or just the equity markets in the US, are there any alternatives that you laid out in May that are now off the table?

No.

Okay. So I guess another way to ask that is is equity at the current price levels still a possible alternative?

We have no plans for an equity offering right now. Would we consider it under different circumstances? The answer is yes.

Okay. Good to hear. As far as your dealings with the banks, without getting into any specifics whatsoever, there's been some commercial talk out there that a couple of your vessels have maybe been up for some time charters, medium-term time charters, at rates that are not essentially appealing. Would -- in your mind would it help with your negotiations to have more visible cash flows through time charter coverage? And could it make you do some things on the commercial side that you otherwise may not do?

No, I think I've said that -- we had not expected the recession in the international market to last over four years. I think we're now in the fifth year. So do we wish we had more time charter coverage? The answer would've been yes. We had a lot of product tanker coverage at the top of the market, that has run off. So would we have liked more? The answer is yes. In the crude market, it is very difficult to construct a portfolio of time charters with our position in the market so that would've been very difficult to do. We took in an MR product tanker -- put it out on a one-year time charter last week at a market rate significantly above the spot rate but not at rates that historically we would've liked and we will continue to do that. There are some short-term charters in the crude market that we will look at. But we are -- it's business as usual. If we think that the rate we've achieved makes sense for the period forward, we will do that.

Understood. And then my last one is just -- I know this is getting maybe too close to too much information, but I find it interesting that out of all the alternatives that you laid out a couple of months ago and have been pursuing, I'm sure, one that you didn't lay out was just an extension or amending and extending, as the phrase goes, of the current facility. Whereas some of your, let's just say, other shipping companies and maybe do not have as -- maybe worse situation in their balance sheets, have been able to get that extension. Is there any reason why just an amend and extend has been taken kind of taken off the table or is it a feasible option?

We work with our main lenders to put in place long-term financing that provides the Company with sufficient liquidity to manage this extended downturn and I think that is pretty clear.

Sounds familiar. Okay. Thanks, Morten.

Gregory Lewis, Credit Suisse.

Thank you and good morning. My first question is for Captain Johnston. I guess it sounds like -- I mean you've said as much that you're moving crude oil from the Bakken up around, I guess, to Philadelphia. Now I guess I'm interested in what type of assets are moving that product, because my understanding was that the Jones Act product tankers were product vessels. So I guess I'm interested in how many of -- what type of assets are moving the crude oil because the majority -- I thought the majority of your fleet was product coated. And I realize you can move it back, but I mean I guess -- so to make and move like that, is that something where they were contracted for a period of time to move that crude oil? If you could just sort of provide some color on that.

Yes, sure. I'd be happy to. The unit that we have -- the first unit we started loading the Bakken crude was the unit that was already in the crude trade.

Bob, we're loading shale crude. We're not loading Bakken crude. It is Eagle Ford shale.

Eagle Ford shale. That's right. So Eagle Ford shale crude coming up but that's the vessel that's loading, has been in the crude trades and is continuing in the crude trade. So you are not switching back and forth from clean to dirty all the time.

Okay.

And that vessel is on time charter. So it has good period piece of business.

Okay. But -- so at this point no more vessels have gone on to charter? No vessels have been switched from product to crude. Is that how we should think about it?

As of right now, our fleet has been that way. We just had the one crude vessel. There's another vessel that was also dirty that actually taking a load of Eagle Ford shale up to the Northeast, or Northeast refinery. But again, that was a Black oil barge so -- but nobody is switching back and forth from clean to dirty.

Okay, perfect. And then -- and just thinking about the market, Morten, you mentioned that the market for US flag is tight and getting tighter. I guess clearly the cost of building a new Jones Act product tanker probably prohibitive at this point. How should we think about -- I guess what's sort of the new construction cost on an ATB?

Bob, do you want to take that one?

Yes, I'd be happy to. When you're looking at the ATB between the tug and the barge, you're probably talking about $80 million to $90 million.

Oh wow. Okay, perfect. And then just one last question, Captain Johnston.

If I could just comment -- add one other comment on that. The other issue there is availability of shipyards because right now we are still looking at the yards that can build ATB's. A lot of them don't have any space.

Bob, it's certainly a function of the size of the ATB as well? Right?

That is correct but I'm talking about a larger scale ATB.

Sure, sure. (inaudible - multiple speakers)

-- thousand barrel ATB.

Okay. And then just real quick on the -- you mentioned that the US flag vessels are rolling off into better rate and better rate environment, could you give us any guidance on the number of ATB's and/or product tankers that are rolling off contract sort of over the next 18 months? Is that information that you have available?

You're talking about in the entire US fleet?

Yes.

Off the top of my head, I don't have that information.

Hi, Greg. Are you talking about the US fleet or OSG's US fleet?

I'm talking about OSG's US fleet.

Oh, I'm sorry. I misunderstood you then. We have three vessels rolling off next year.

Three next year. Okay, great. I guess switching gears -- maybe I'll bring -- is Lois on the line?

Yes.

Hi, Lois, how are you?

Good. Thanks.

Okay. Yes, I guess clearly OSG has been, I guess, opportunistically chartering in tonnage on the crude side, it looks like. What -- are you seeing specifically in the market that is driving that decision to sort of charter in tonnage? When we think about the market where it is, clearly there is a lot of uncertainty out there so maybe that is the opportunity. But I mean, it seems like rates are going in the reverse direction -- in other words they're going down, not up, from here. If you could just sort of provide any color on that?

No. Absolutely. The major sector where we have actually done charter-ins opportunistically this year would be on the Suezmaxes. And we've been able to do those in-charters at substantially lower than what we have been earning. So on every one of those in-charters we've been able to earn an incremental profit and we've been able to charter vessels with a lot of flexibility. So, when we're running pools and we are working with our partners, we are able to take advantage of -- at times where owners would like seek a time charter and we have the program that can take advantage and get incrementally higher rates. We've also taken in a few vessels on the Aframax side, in particular, ships that are 112 to 115,000 dead weight and fit our program.

Okay. Perfect. And then just actually two more quick questions for me. I guess yesterday American shipping announced that they were able to get their -- enable to extend their credit facility and with that, if I read the announcement correctly, OSG was actually extended the duration on those vessels, I think, from on an average of around 2014 to 2016 out to 2019. Is that's correct? In thinking about OSG's decision to extend the in-charters on those US flag tankers, without blending in -- were you able to get a lower charter end-rate in those out years? Or is it sort of just -- when we think about it, is the chartered in rate sort of flat over that period or even potentially moving higher?

The -- this is a decision -- the agreement to extend was made when we did the settlement agreement two or three years back. At the same time, when we committed to buying the vessels that became the Chinook and the Cascade, And if they got the refinancing satisfied all the conditions of it, we would do that and the rates continue at the same levels that they are at. So we are very pleased that we have those 10 chartered in tankers. They are very valuable to the Company. They are profitable. They should be increasingly profitable and I think it's positive that American shipping has managed to extend their financing at the same time because that takes any risk there off the table. But this was an agreement that has been in place for a couple of years. But having said that, we expect to be chartering in those tankers for a very long period of time.

The charter-in rates are essentially flat throughout period. At the end of 2019, when the charters coterminously expire, we again have three and five year extension options and one one-year extension option attached to each of those charters for the remainder of their lives.

Okay, guys, thank you very much.

Urs Dur, Clarkson Capital Markets.

Good morning, everybody. Hello?

We're waiting for you.

Sorry, Morten. Can you guys remind us and remind the audience on your bright spot in regards to market share for the US flag business?

We are unable to understand you. Are you on speaker or something because we couldn't --

Can you guys possibly elaborate your market position on the US flag business in regards to your competitors and what you broadly think your market share is of the overall?

Captain Johnston?

Sure. We've got about 37% of the tanker market and about 29% -- let me rephrase that. We've got about 48% of the tanker fleet and about 29% of the ATB fleet, which is about a 30% of the total Jones Act wet market.

Sorry the last was?

37% of the entire Jones Act wet market, which is tankers and ATBs.

And given that there is limited yard space and the prices are where they are, could you identify any of the yards that could build tankers right now and what are the possibilities of new entrants in that market?

As far building tankers, there's primarily two yards that can do it. One is Aker, which built our 12. And then the other one is National Steel out in San Diego. They built five product tankers. So they are certainly capable as well. But when you look at Aker, they have a contract with Exxon to build two Aframax tankers. So their space is not going to be available until after those contracts are finished. However, NASSCO in San Diego does have some space availability from what we understand.

Okay. What would be the lead time today if you want to order a large ATB -- broadly not, obviously, guarantees here but --

You're still talking in excess of two years.

Two years. Yes, excellent. Alright, that is extremely helpful. Thanks for your time, guys.

Sure, happy to help.

Brandon Oglenski, Barclays Capital.

Good morning, everyone. I think on the last couple of calls, obviously, there's a lot more enthusiasm with rates being quite a bit higher. Can you just talk about where you would like to see rates to maybe get back to a more cash flow positive stance or where you have meaningful cash flow to deal with some of these issues?

Yes. That is a difficult question to answer. I think we have said, we still expect on average 2012 to be better than 2011. I think the -- we've had a weaker -- obviously weaker economic performance in both the US and on the product side -- in Europe and the US. But we still expect -- the bottom was hit in the second half of last year on average will do little bit better. I think there is incredible psychology in this market because you are seeing fairly good volumes. Our MRs are getting hit on rates but not because we're waiting for cargo. So it really just requires -- I think I said in March, you take 10 cargoes going west from the Gulf in the VLCC, a few more MR's going back to the east to perhaps take advantage of Australian opportunities, and owners will start pushing things up. That is what -- it doesn't take that much, but we're not expecting a boom, if that is the question. But I think will have gradual improvements going into the next year. And in 2013 you look at the order book, it falls off. There's a cliff. So -- and because of the absence of financing -- really readily financing the world we don't see that changing. So the self-correcting mechanisms are happening.

And speaking of the product fleet, how many unencumbered vessels do you have there? Is there anything on the margin that you can do to help results? And I know I think in the past you've said you're moving more of that into the crude trade. Is that still continuing?

No, I think you are talking about our LR1's, aren't you? That is significant. Why don't you mentioned the LR1's.

Yes. We have six LR1's that essentially -- it's really a panamax size but with coating and deep well pumps. And all except for one of our LR1's, we are trading dirty where we are seeing superior returns and those vessels can move in and out of the dirty trade into the clean markets when we see that sustained at a higher level.

Okay. And I just want to come back to the unencumbered asset issue. You mentioned about $600 million you'd be able to raise. And just to be clear, that's not going to be impacted in any way by your unsecured covenants on unencumbered assets, right?

That is correct.

Alright. Well thank you, gentlemen and lady.

Herman Hildan, RS Platou Markets.

Hi, guys. I'm going to try to cut this short. In mid-June we saw Nakilat for the partner that you have on your LNG joint ventures acquiring four LPG vessels from the joint venture partners. In that statement they also said that LNG fleet will come under control in due course. Last year I think Morten said that the value of the LNG vessels, or the equity value, was about $170 million, which is ironically less than -- or more than your current market cap. My question is really can you say whether you stand by the last evaluation comments still and, obviously, if it is possible, if you could say something about the timing?

I mean I don't think that I would ever be as undisciplined as to put out a value of one of our joint venture interests in any type of public setting. I think that would be -- I'll disavow that number. I think it is a very valuable joint venture that gives us a steady dividend. We like the LNG business and we think it's -- and that operation is running very well.

But it is possible to say whether Nakilat or the Qataris were referring to the vessels that they have a joint venture with you?

I think you'll have to direct that question to Nakilat because I certainly don't want to speak for our partners. We have a good partnership with them.

Okay but by could you say something whether you have interested parties in LNG vessels?

What we have --

Have there been any parties approaching you with regards to your ownership in the LNG venture?

Any discussions regarding potential approaches on any our assets is something that we would deal with confidentiality. And if we ever did a transaction we would announce it. That, we are very disciplined on and that is not going to change.

Okay. Well thank you very much.

David Beard, Iberia Capital Partners.

Hi. Good morning. Just a clarification relative to moving crude from the Eagle Ford relative to rail costs -- were you saying that rail was $6 cheaper?

More expensive.

To the Gulf Coast or to the East Coast?

East Coast.

East Coast. Now that make sense, thank you.

You're welcome.

And then just two other questions, if you wouldn't mind. I noticed your SG&A included retention bonuses. Can you talk just why you felt you needed to pay that much and how many people were involved?

There was a couple of people involved, our CFO and the head of the US flag business. And if you read the proxy, I think you can see that they are both of a retirement age and have the resources for them to retire comfortably. This is a difficult issue for the board and at a time when we're going through major refinancing, at a time when our US flag business is the major provider of cash for the Company, we thought it would be very damaging for the Company if we were to lose the service of either of those two gentlemen. So while we knew it would not be a popular press release, either with our shareholders or perhaps or with our employees, we thought it would be a lot more damaging to lose either of those individuals in the environment we are in and we would like them to retire after the Company's participating in the recovery of our international flag markets. And that's why the board acted.

That's totally understandable. And lastly just as it relates to this bank line because I get the question phrased this way -- isn't OSG playing chicken with the banks and forcing their hands up? How would you respond to a question like that?

I think it was a prudent step to take to ensure continued liquidity given the different market conditions we are operating in.

Alright, good. Thanks, guys. I appreciated.

Thank you. Ladies and gentlemen that is all the time we have questions. At this time I'd like to turn the conference back over to Mr. Arntzen for any closing remarks.

I want to thank everybody for joining. I appreciate the questions and we will hope to come back to you with announcements in due course of actions we take. Thank you very much for joining. Have a great day.

Thank, sir. Ladies and gentlemen, this does conclude the Overseas Shipholding Group Inc second quarter 2012 investor conference call. I'd like to thank you very much for your participation. You may now disconnect.