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Executives

James I. Edelson - General Counsel and Secretary

Morten Arntzen - President and CEO

Myles Itkin - EVP, CFO and Treasurer

Jonathan P. Whitworth - Sr. VP and Head of U.S. Flag Strategic Business Unit

Mats Berglund - Sr. VP and Head of Crude Transportation Strategic Business Unit

Analysts

Natasha Boyden - Cantor Fitzgerald

Jonathan B. Chappell - JPMorgan

Urs Dur - Lazard Capital Markets

Justine Fisher - Goldman Sachs

Overseas Shipholding Group Inc. (OSG) Q3 FY08 Earnings Call October 31, 2008 11:00 AM ET

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the OSG Third Quarter 2008 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. As a reminder, this conference call is being recorded today, October 31, 2008.

I would now like to turn the conference over to Mr. John Edelson, Assistant, General Counsel. Please go ahead, Sir.

James I. Edelson - General Counsel and Secretary

Thank you. Before we start, let me just state the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker and articulated tug barge markets, change in oil trading pattern, and anticipated levels of new building and scrapping, prospects for certain strategic alliances and investments, prospects for the growth of the OSG gas transport business, estimated TCE rates and synthetic TCE rates achieved for the fourth quarter of 2008.

Estimated TCE rates and synthetic time charter rates for 2009, projected dry dock and repair schedule; timely delivery of new buildings and conversions of vessels, and prospects of OSG's strategy of being a market leader in the segments in which it competes. And the forecast of world economic activity and world oil demand.

Factors, risks and uncertainties that could cause the actual results to differ from the expectations reflected in these forward-looking statements are described in OSG's annual report and Form 10-K for 2007. 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 presentation section on OSG.com.

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

Morten Arntzen - President and Chief Executive Officer

Thank you very much. That Alan Edelson, he is our General Counsel. Also joining me this morning is Captain Bob Johnston, Head of Worldwide Shipping Operations, who is joining us from Manila office; Jonathan Whitworth, Head of our U.S. Flag; he'd joined us from Temp office.

With me here in New York are Jennifer Schlueter, Head of IR and Corporate Communications; Lois Zabrocky, Head of our Product and SPU, Mats Berglund, Head of Crude Transportation SPU and Myles Itkin, Executive Vice President and Chief Financial Officer.

Now I'd like to read you the presentation. So please turn to slide 3. My remarks by saying it is actually a change of pace we have some good news to talk about in an financial and economic environment which has been dominated by lots of bad news stories.

Our financial results for the third quarter were the best in OSG's history. TCE revenues were $435 million, up $181 million quarter-over-quarter. EBITDA was $256 million, up 175% from $93 million.

Net income was just under $200 million, up from $27 million in the third quarter of 2007. The only quarter in OSG's history was higher net income was the fourth quarter of 2004. EPS was $6.69 a share up from $0.83 in the third quarter of last year. And then adjusting for the sale of two non-core assets, that generated gains of $255 million.

The impairment charge on two U.S. Flag vessels, and the effect of the mark-to-market unrealized FFA positions, EPS was a strong $4.47 a share.

Indeed was a very strong and very volatile third quarter. Average spot rate for VLCCs were $113,000 rate. The Aframax has incurred a tremendous performance at $53,000 a day, and Panamax is another steady performance at $39,000 a day driving crude revenues up 132% to $295 million.

Our run rates were a strong $41,000 a day, and handy size rate of $31,000 rate growth product anchored TCE revenues up 20% to $81 million for the quarter.

Year-to-date TCE revenues are ahead of fiscal 2007 TCE due to an exceptionally strong market sub for this year. TCE revenues in the first nine months were up 52% to $1.2 billion.

EBITDA was up 51% to $585 million, net income was up close to 110% to $397 million and adjusted EPS up $11.22 per share was up for more than a 150%. Looking ahead the fourth quarter bookings are strong, include 47% of our VLCC spot days are fixed at $70,500 a day 44% of hedge VLCC days are in at $64,000 per day. And 32% of Aframax spot days and booked at $47,000 a day in the fourth quarter. And the products 20% Aframax spot days are fixed at $40,000 a day and 33% barge at $25,000 a day.

And U.S. Flag bookings are in line with luggage's packed. All in all, we are well on our way to have in the best financial year in OSG's history. Please to turn to slide 4.

Turning to several of the business high and pre highlight. During the quarter, we repurchased 2 million of shares of OSG stock an average price of $13.26.

One of the current program which the broad authorized in June, we have $96 million remaining.

This the third buyback program during the last three years. Altogether, we have purchased 29% of the total shares outstanding, or 11.4 million shares at a total cost just under $770 million.

We remain committed to returning capital to shareholders as we execute our balanced growth strategy.

Early this month, we announced financing for our FSO project. This joint venture project with Euronav are part on TI is converting two ULLCs to FSO, Floating Storage Offloading service vessels, which have been chartered to Maersk Oil, Qatar for 8 years.

These vessels will begin offshore operations next year in Maersk largest project [indiscernible] in Qatar.

A $500 million syndicated loan facility was put together in June and terms agreed to well before the current and credit market meltdown. We're through the work of our treasury group and our strong back relations, the deal closed in the fourth quarter on terms that would be deemed favorable today.

We've also just repurchased over 500 share of OSG America in October. A result of a reversed inquiry by institutional investor, who was seeking liquidity in near chaotic market conditions. This brings our stake at OSG America to 77.1%. I want to have the size that this was a one of transaction that were verged to.

We remain committed and very excited about our U.S. Flag business today and as prospect going forward. Previously the activity on the upper right of this page, two vessels delivered in the quarter. The Overseas Kimolos, a newly built 50,000 dwt and Handysize Product Carrier and the Overseas Texas City. The Texas City is the fifth and 12 shift theory under construction with Philadelphia and is the third U.S. Flag new build that BP has chattered from us in that series.

We've further expanded the Suezmax International Commercial pool without partner shale and shipping for Italy to fix shift. By chartering in Hellespont Trinity for one year, we have a 50% interest in that time charter.

We further expanded the Clean Products International Commercial pools adding carrier live also our Tankers International partner, the pool focused on trading in the Americas now totals eight operating ships with 2 sets new build set to deliver in 2009.

Turning to asset sales and sale of the bond locations. The sale subsidiary that time chartered than two cap size bulk carries of some were generated $55.5 million. We continue to be active in the SMP market.

Since January 2007, we have generated $505 million in proceeds on assets sales. Further asset sales detailed earning release totaled another $500 million in the next three quarters. And include 2 [indiscernible] and 2 Aframaxes to be sold and chartered back.

These four ships these transactions were prudently arranged when the vessels were contracted close to 1 and 2 years ago. Precisely and we can retain flexibility shift to fit all risk and rate cash. We've planned for that.

More new plans for the cash other next slide. Please go to slide 5. Now you've heard this before over the last few years. We have constantly sought a balance between owned vessels and charted in with close to 50% total fleet charted in today.

This enables us to leverage our commercial platforms in strong markets while providing flexibility in weak market.

This balance has also been achieved in our new building fleet. 13 of 37 new builds are chartered-in requiring no capital upfront from OSG.

Information on this slide and the next slide was put together as many of you haven't asking about our capital commitment in credit spending. The kind of fundamental questions that are turning equity analyst into credit analyst in these uncertain times.

65% of our newbuild fleet is of international size. Many of which are replaced that will deliveries and while others are intended to join one of our five commercial pool in order to meet cargo commitment and demand requirement.

Flexibility is critically important to us. Some how we managed the balance sheet, how we manage our fleet. Moving to the table at the bottom. Out of 38 new bells which include the Overseas Acadia that just delivered only 23 vessels are owned. This number reduces to 19% or 15%, it excludes four vessels subject to sale leased backed arrangements that are I referred to earlier.

The next third line in this table tell a very compelling story. Our newbuild capital commitment are entirely funded and then some in 2009 the end of 2009 by asset sales and a capital construction fund. Money allocated for certain construction fund like assets.

We will put it in another way; we expect to end up with at least a stronger liquidity position at December 31, 2009 as we have today while meeting all our commitments.

Please turn to slide 6.

Earlier this month we put some in together for our board detailing our liquidity positions and projections for next year. We thought doing something similar on today's call without the projection unfortunately would be useful and give us an opportunity to highlight elements that differentiate OSG for more higher leverage less well capitalized competitors.

We are first of all predominantly an unsecured borrower a rarity in the shipping world. With less than 27% of net book value pledged as collateral.

In addition this means we are not confronted with ugly loan to value calculations with the vast majority of shipping companies are struggling with today. And will continue to struggle within the coming year.

Annual principal payment obligations are less than 30 million to 2011. We have won a lowest debt to capital ratios in industry and ample liquidity of $1.5 billion available to us.

We are about $940 million available, $1.8 billion unsecured credit facility. Another $122 million available on a $200 million secured facility put in place last year for OSG America.

Dividend payments, stock repurchases and operating sub obligation round out this is cash from operations which is very strong given our mixed, fixed and spot business.

Please turn to slide 7. Our fixed portfolio position is well for 2009. Investment in growth in products in U.S. Flag fleet and the time charted booking business coupled with contracts of infringement time charters to the pool and SFA position is paying off.

In addition we have a full year of gas earnings for 2009 and FSO project coming on the line in second half of the year. At the bottom compelling forward picture of fixed revenues including $560 million in 2009 of non-cancel bookings and hedge positions.

Of the $560 million lost in TCE revenues and TCE revenues 61% is from time charters and 22% from U.S. Flag delays. The balance from FFA position in full time charges.

Joint venture revenue from the FSO project and from the gas fleet and asked to another $77 million.

Let me take this once step further on how fixed revenues faces up for the next year please turn to slide 8.

Contracted revenue in 2009 covers a significant portion of cash expenditures include 60% of cash expenditures and thus that include operating, dry dock chartering obligations, allocated D&A, debt amortization and interest expense are covered. Requiring the balance fleet to earn $18,000 a day on fixed or open days to cover the balance of cash expenditure.

This charts further show this relationship in the products in the U.S. Flag segment and further based on crude. On products, if we remove the pre-1990 MRs, all which will be turned to owners by July next year, we need to earn 18,000 a day on the open days.

Our VLCCs in 2009, we need to earn just 10,000 a day on open days to cover cash expenditures. I am confident, that is reasonable to achieve. The message we want to give away to you is that OSG is in a solid position.

Capital commitments are covered by asset sales and required no borrowings. Financing commitments and operating cash expenditures are substantially covered from locked-in revenues, leaving us to achieve a certain level of borrowings on the balance of open days. We have ample liquidity and borrowing available to us.

Let's talk a little bit about the market, what happened in third quarter. Now the strength in the market in the third quarter was due to very simple formula. Limited tonnage increases, 8 addition and 13 releases in the VLCC, plus OpEx production increase by 1.4 million barrels a day over the third quarter of '07 resulting in the highest third quarter rates in last decade.

There as there is no shortage of volatility in the 30, either was freight rate highs of $196,000 a day and lows of $7,000 a day in the VLCC market. Hurricanes significantly disrupted the market, 15 refineries totaling over 7 million barrels per day of capacity were impacted sharply, reducing refining utilization in the Gulf of Mexico.

This impacted our product and market rate with heavy concentration in the U.S. Gulf, as ships waited for refineries to reopen and restart of the shutdowns. By looking forward, long haul trades and single haul discrimination continued to factor into the market. 21% of the world VLCC fleet is single haul and the list of companies that refuses to use single haul ships for stop budge movement is growing.

This single-haul discrimination in the growth and the longer haul phase continues to provide support for the market.

On the negative side, OPEC cut production by 1.5 million barrels day on October 24th, as oil prices. There the cuts are possible. On the positive side, the global financial crises quick cost some delays and our cancellations of new built deliveries, although it will probably not have a significant impact in 2009.

Coming up, we think 2009 will be weaker than 2008 or remain at healthy levels for operators of double haul tankers. The same thing we've said in 2005, 2006, 2007, and 2008 over repeated for 2009.

Before I turn the mike over to, Myle, I want to leave you with my thoughts on what I believe is the most compelling about OSG as an investment.

Our balanced growth strategy has positioned us well in the challenging environment in which we live today. Our longstanding commitment to maintaining a strong balance sheet in the face of high dividend payout sheet, has put us in the enviable position of being able to focus on running the company for profits, rather than for cash, while still being able to consider new opportunities.

Our shareholders will be accompanied by a company with a real board process, and a real commitment to openness and transparency. Finally, and most important of all, we have the human resources HP that I'm sure that can focus on the issues in hand.

No distractions, no hobbies, or gabling other businesses. Instead you get a group of professionals focused on building and running the best energy transportation company in the world.

With that I will turn the mike over to Myles.

Myles Itkin - Executive Vice President, Chief Financial Officer and Treasurer

Thank you Morten. Good morning. May I ask you to turn to slide 11 please?

The results for the quarter ended September 30, 2008 reflect an exceptionally strong rate environment, as well as OSG's earnings power. Our ability to deliver superior returns. TCE revenues increased by 71%. Our operating margin stood at 45%, and our net profit margin at 46%.

The increase in Q3 revenues is largely attributable to a 221% increase in VLCC spot rates to $113,000 a day. A 160% increase in Aframax spot rates to $53,000 per day, and 837 additional revenue gains across all sectors.

Of the quarters, $435 million of TCE revenues and $194 million of income from vessel operations. The crude sector contributed 68% of TCE revenue, and 85% of income from vessel operations.

The product sector 18% of TCE revenue, and 11% where they can through vessel operations. And the U.S. Flag sector, 13% of TCE revenue, and 3% of income from vessel operations.

For the quarter, 64% of the company's TCE revenues were derived in the stock market, and 36% in physical and synthetic time charter markets. The positive impact, the increases in spot rates and revenue days is partially offset by higher voyage expenses, which increased by $15 million from Q3, 2007, principally due higher fuel costs.

Vessel expenses for the entire fleet increased by $9 million for the quarter, to $79 million. We continue to experience industry wide upward pressure in all areas of OpEx, but especially in the area of crew wages.

We also incurred higher cost on 7 tankers, which operate under fixed rate management agreements with DHT Marathon, a one time subsidiary. These agreements terminate in January 2009, eliminating our exposure to excess costs on these vessels, estimated a $12 million for full year 2008.

The other higher expense increased to a $115 million in the current quarter, up by $46 million or 67%. The increase was attributable to approximately 12 more vessels over 1,000 days, being chartered in during the third quarter of 2008, compared with the prior year's quarter.

Profit share component of charter higher, for the current quarter totaled $22 million, $19 million higher than the prior year's quarter, reflecting higher earnings generated on VLCCs and Aframaxes. As a result of our focused efforts, the company's G&A expense continues to moderate, registering $32.4 million in the quarter, with full year G&A, now estimated at between $145 and $150 million.

During the quarter, we sold the chartering contracts including purchase options for 2 1997 bill cape sized dry boat carriers, for an aggregate gain of $55 million. This was offset by vessel write downs of $24 million, on two older U.S. Flag vessels employed in Delaware Lightering trade.

We decided not to put these vessels through expensive dry dockings, which would have been required for the vessels to continue trading. Accordingly, the vessels will be placed in lay up pending sale, has been classified as held for sale on our balance sheet.

Other income increased by $1 million quarter-over-quarter, the impact of settlements and changes in fair value of economic hedging instruments that do not qualifies cash flow hedges are reflected in other income.

During the current quarter such results were favorable and reduced the previously recorded mark-to-market unrealized loss at June 30th by $21.7 million. This was offset by settlements of $13 million resulting in a net gain of $8.6 million for the quarter on improvement of $10 million quarter-over-quarter.

Interest income in the current quarter declined by $9 million to $2 million as a result of both lower interest rates and a reduction in cash and capital construction fund balances. As the company yields $545 million repatriated in the second quarter of '08 to repay a portion of our outstanding long-term revolving credit debt.

Interest expense is down as a results of the 220 basis point rate decline on floating debt. The repatriation of $545 million in cash and redemption of $176 million our 8.25 Senior Notes also done in the second quarter. This redemption reduces interest expense by about $7 million per annum through 2010.

Now please turn to slide 12, for a discussion of various balance sheet line items. Cash and cash equivalents stood at $343 million in September 30th. The decrease in the cash balances from December 31, '07 reflects repayment of debt offset by cash generated from operations.

Shareholders equity increased by a $143 million from year end '07 through the addition of $397 million of net income offset by a $199 million spent for stock repurchases, $45 million in dividends and the $90 million increase in unrealized derivative expenses being differed in OCI.

As a result of recent developments in financial markets we monitor the strength of our financial institutions on the daily basis. Where we felt it necessary or desirable we have moved cash deposits and recalled excess margin deposits related to derivative activity. Also we monitor charted accounted party risk at regular anecdotes.

Please turn to slide 13. Company enters into freight derivatives with the primary objective of using them as economic hedging instruments to reduce volatility. The company's VLCCs are deployed and are in revenue through commercial pools that operate on multiple routes.

Whereas the related hedging instrument... is tied to a single row therefore the FFA and bunker hedges that qualify as cash flow hedges for accounting purposes at some degree of basis risk. The cost of this basis risk on a quarterly basis, the synthetic TCE rates achieved will fluctuate within a range around the targeted level.

The degree of fluctuation around the targeted level increases in periods of high volatility. Third quarter VLCC rates ranged from $7000 a day to $196,000 per day.

In the third quarter, the TI pool performed better than the long-term historical relationship between the VLCC crude performance and the FFA markets that was expected, explaining why the synthetic positions achieved $78,000 per day versus the notional targeted rate of $56,000 per day. For the 239 hedge days from the fourth quarter of 2008 for which the TI rate has been fixed, we expect the synthetic TCE rate to be $64,000 per day.

For balance of the 301 hedge days in the fourth quarter of 2008, we estimate notional synthetic rate of $71,000 per day based on historical relationships with actual results falling within a range between $55,000 per day and $83,000 per day with a 95% confidence level.

Currently, we are hovering at the lower end of that range. For 2009, we estimate a notional synthetic rate per 9 hedged VLCCs of $62,000 per day based on historical relationships, with actual results falling within a range between $45,000 per day and $76,000 per day also based on a 95% confidence interval.

For additional details regarding FFAs and TCE correlations, you can refer to page 18 in the appendix.

Full year 2008 guidance, we've updated the annual guidance reflected on page 1 of the appendix, but would like to redirect your attention to individual two items throughout charter hire expense.

The guidance for the time in bareboat charter hire expense is updated now anticipated to be between $420 million and $430 million reflecting higher level of profit share, principally in the third quarter and additional chartered in vessel since the last update.

Capital expenditures, we have updated our 2008 full year guidance for capital expenditures from $403 million to $612 million mainly due to two new VLCCs that were ordered in July.

The acceleration of the delivery of one Panamax from 2009 into the fourth quarter of 2008 and project hauls for the FSO conversion.

In conclusion, we believe the company is well positioned to optimize shareholders values in all shipping markets. We have a diversified portfolio of assets including both owned and chartered in vessels, that provide optionality and reduce our risk.

Known asset sales and sale lease back transactions will generate proceeds, that more than more fund our 2009 new build program. Our continued fleet modernization program provides competitive advantage through customer preference.

Fixed revenues and COA contracts provide for solid earnings in cash flows, and our strong liquidity position, balance sheet and predominantly unsecured debt profile enables us to attract high margin projects, and puts us in a position to see opportunities that may not be available to more highly leveraged competitors.

With that, Operator, we'll now take questions.

Question And Answer

Operator

Thank you [Operator Instructions]. First question comes from line Natasha Boyden with Cantor Fitzgerald. Please go ahead

Natasha Boyden - Cantor Fitzgerald

Thank you. Good morning ladies and gentlemen.

Unidentified Company Representative

Good morning.

Natasha Boyden - Cantor Fitzgerald

Hi. Just seeing given the market losing, your stocks trading at significant discount to AV. Given the... you really focus now on spending your cash on purchasing shares versus the more acquisitions at this time?

Myles Itkin - Executive Vice President, Chief Financial Officer and Treasurer

I think we're going to continue with our balance growth strategy. We're going to look as always, the maintenance strong balance sheet and for liquidity, and we will lay the alternative of continuing to buyback stock with opportunities that come up in the market. Is there obviously a disconnect between the value of OSG today and the share price?

Yes, but I think you can say approximately every company listed in the stock exchange today, but we will continue to operate the company with the same approach we have up to now, and now we think we're in a good position to do so. No change.

Natasha Boyden - Cantor Fitzgerald

Okay great. Myles, I think you touched on this basically in your remarks, but talking about counterparty risk, overseas it's been a huge issue in the dry dock market. Have... any have any of your indicated that they may not be out for further obligations. How do you go about maintaining your relations with them and obviously monitoring them, and can you just sort of touch on that a little further?

Myles Itkin - Executive Vice President, Chief Financial Officer and Treasurer

Yes. There's been no indications of renegotiations or inability to be in obligations. We are in constant contact with our major charters, many of whom are major oil companies and trading companies. So based both on personal contact and typical credit analysis, we get a good sense of their current positions.

Natasha Boyden - Cantor Fitzgerald

Okay, great. Thank you. May be this one's for, Jonathan. We've heard reports that U.S. Gulf oil production was fairly significantly effect this by the hurricane season, and than that just drove some capacity offline. Is there any effect on your on U.S. operations?

Jonathan P. Whitworth - Senior Vice President and Head of U.S. Flag Strategic Business Unit

Good morning. You have attended in the third quarter; there was a dramatic decrease in refinery output, thanks to Gustav and Hurricane Ike. Fortunately for OSG, we have very little exposure to the stock markets. So the vessels that we did have during that period, or actually all term chartered out. So we really felt no financial and also more importantly saw no operational distress from those event. And we've also seen the utilization of those refinery outputs increased to somewhat about 88% within the fourth quarter. So it had come back strong.

Natasha Boyden - Cantor Fitzgerald

Okay. So it did not have any impact, in but approximately comes back on line doesn't really have any impact on you going forward?

Jonathan P. Whitworth - Senior Vice President and Head of U.S. Flag Strategic Business Unit

That's correct. And that's the refinery outage was relatively small of its type; they hit both Houston and the New Orleans area took. They did come back online by the beginning of the fourth quarter.

Natasha Boyden - Cantor Fitzgerald

Okay, great. Morten, can you talk a little bit about the single hull issue. I mean I know last quarter and may be even the quarter before, the VLCC... conversions to VLCC and for such a really hot topic, and I don't think much is happening now, but you were fairly bearish on 2009, I think previously, but can you just talk about single hull... the issue and the order of work in going forward, especially with all demand going down and OPEC cut, what you see going forward, and then for 2010, would the IMO cost coming in. How you see... going forward?

Morten Arntzen - President and Chief Executive Officer

I may have made supplement, my answer. But let me start make correction. We have never bearish on 2009.

Natasha Boyden - Cantor Fitzgerald

Okay, with that maybe I was...

Morten Arntzen - President and Chief Executive Officer

We thought 2009 as we thought that we could 2008. That's still a good year. So, we will continue to generate significant cash flow from our crude fleet just now a stronger 2008, which is one of reason we took the hedge position. The single haul discrimination continues to accelerate. A week ago, there was single haul VLCC that grounded in Singapore. It was controlled by a Korean refiner. There were no spills, but I guarantee you that people in Singapore and Korea lost a lot of sleep that following week. And led to the Korea a intruder in that case, not expecting a single haul next time around.

If you look at the top ten charters a single haul VLCCs in the world in 2008. Every single one has reduced its usage of single hauls in the course of the year.

The trend is down and heading towards zero. If you look forward into 2009, I've mentioned the OPEC and production cuts, not a good thing. There is actually a silver lighting in that and then if you run honors those production cut because of that the mix of that feels and the all equipments, they will continue to run the field and they will put then crude in the storage.

Either through this year, we put the storage the VLCCs that that run, uses the storage double hulls. As they have to do their cuts, which I think are estimated on our 160,000 barrels a day, they're going to meet nine double haul VLCCs for storage as a possibility.

You have three of the oil majors now have put 15 year maximum levels on any ships they've used for spot voyages, that again takes out some of the older double hull VLCCs.

The trend is very clear, this is Singapore incident which is just a week old was a close one and we think by 2010 of the single-hulls will be completely out of belief. There is also the possibility of Japan and China out right betting in next year.

So, well the order book is large, in fact the actual fleet growth, throughout single-hull VLCCs and taking into account some of the other things like the around storage possibilities. We think despite double-hull use the into next two years. We actually have a fairly normal fleet growth. And 2010, we believe we will be a very strong year for our industry as a result of that and hope for as the same time then to the world economy is starting to improve.

So, we feel good about 2009 and we think 2010 could be significantly better.

Unidentified Company Representative

I think you got most of it there with the discriminations on things and else even order. People needing cash and we'll choose to scrap their ship. Also there will be a reduction in the long-term order book which we'll have a positive effect with people, by considering and canceling orders, not to the degree we're seeing in the dry coral side but tanker orders will get cancelled more and more as we see the financial crisis develop.

Natasha Boyden - Cantor Fitzgerald

Great. Thank you very much. That was really helpful.

Operator

Thank you Ma'am, our next question comes from the line of Jonathan Chappell with JPMorgan. Please go ahead.

Jonathan B. Chappell - JPMorgan

Thanks, good morning guys.

Unidentified Company Representative

Good morning.

Jonathan B. Chappell - JPMorgan

Morten, dig a little deeper on the opportunities mainstream into you balance sheet, obviously cash has came to a lot more today than it was even 12 months ago. Do the returns based on current asset prices and the charters you can get in the market today, justify may be levering up little bit or taking that cash after balance sheet today as we see the market over the 12 months?

Morten Arntzen - President and Chief Executive Officer

Well John, if you are look, you could tell me what actions are actually worth today and then I could do that mathematical calculation. I think it's a little early in the game for the tanker market to rush and do deals today because we don't know what the levels of asset decline have been.

It certainly haven't gone out. Tanker space you still have a good market and people are earning good money. Newbuilding prices in fact have not come down yet though voyage offering some of better payment terms.

You see in some cancellations a VLCC so far what you managing are owners try to find buyers joint venture partners that from the other. Is there need to finance or the cash we have just either things will change. So we fully expect to see a lot of opportunities. You recall by year ago banking crisis could impact the industry and lot of people laughed at me.

The banking crisis is impacting the industry I think in momentary and did do in the mid 80s when there is a lot of problems I think you'll see a lot of bankruptcies across the industry. And then the people that will have to look for stronger partners to take shifts. We will wait patiently and do that. And we will be in position to do things if and when they come and that going to be down at levels based on we think the ships can earn going forward.

During a mask this point we've been trying to get account on how many dough full orders they are in the VLCC space, the tanker space. It's much easier than dry dock space actually. And 2010-11 we think about our third of the order book is doubt full. That's just a range, and in 2012 we think it's as high as 40%.

Right now we count 28 specific VLCCs that we think are highly doubtful of being built. But this is early in the game. It all happened so quickly, what I do expect because the bank would be leveraging with the shipping industry.

Once they get new asset values, they will enforce loan to value calculations, the longer value governance. Across the industry, lecture I contain and you name it, and that will create opportunities for those who are in a position to capitalize on it, and we will be.

Jonathan B. Chappell - JPMorgan

Oh great. There might be opportunities on the public side that may already be flushing out, that type of negative scenario?

Morten Arntzen - President and Chief Executive Officer

Without doubt.

Jonathan B. Chappell - JPMorgan

You mentioned before that you know, every stock is technically trading below than that asset value right now?

Morten Arntzen - President and Chief Executive Officer

I think there are a number of companies that could realistically consider their options because they've more upside in there stock, or they'd be better off putting their fleet into OSG, and I think that they are have a lot more upside, a lot more earning potential for their assets, and a lot better chance of wealth recovery. And I think some owners will reach that conclusion.

Jonathan B. Chappell - JPMorgan

You'll take only fleets that might have already been part of OSG?

Morten Arntzen - President and Chief Executive Officer

No comments. We have still strong commercial and technical platforms, so we can do that, and as I've said so many times and you guys have [indiscernible], we actually have people that can manage it, we are a team here.

Jonathan B. Chappell - JPMorgan

Okay. Few more. Is there any way to gauge the length of charter and fleet charters? Basically, I'm trying to get sense of as what the charter end cost might be, going into '09?

Morten Arntzen - President and Chief Executive Officer

Yes, sure. We average over the next couple of years, both bareboat and time charters of about $400 million.

Jonathan B. Chappell - JPMorgan

Okay. And then the final thing is on the G&A front. Given the guidance on the back of packet, it would look like the fourth quarter would be up about $8 million sequentially just to make the low end of the range. Good bonus accruals that are going into the fourth quarter and G&A estimate?

Jonathan P. Whitworth - Senior Vice President and Head of U.S. Flag Strategic Business Unit

Its accruals for the year, with performance as determined at the end of the year having somewhat has been a fact [ph]. But the guidance range shortfall is not the... some of the good performance [ph].

Jonathan B. Chappell - JPMorgan

Okay, great. Thanks a lot.

Operator

Thank you sir. Our next question comes from the line of Scott Burk [ph] with Oppenheimer. Please go ahead.

Unidentified Company Representative

Scott, how are you?

Unidentified Analyst

Hi, good morning. I just wanted to know if you're staying in your VLCC operations and the impact from the OPEC cut. Yes, in terms of actual charters that people are trying to arrange for firstly in November, December timeframe?

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

Hey Scott, this it's Mats. We've seen charters holding back a lot recently, both after the of OPEC holding back, and as a result of the fall in the oil price. We do believe it will come back, and the chances are we will bounce back in rates.

Unidentified Analyst

In the fourth quarter timeframe, you're talking about, or next year?

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

In the short and the short term... in the short term in the fourth quarter. We have come angle back in oil prices, we have the most stable oil price. We've also seen the oil majors take a bigger stake of the market again. The traders have reduced activity and likes of Axon and Shell as the big companies are all back during a proportionally higher percentage of the fixtures out there.

Unidentified Analyst

What's the implication there? Does that speak of the trader who's having a tough time getting out of the credit or what's the implication?

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

Likely, also against the fact that the oil prices have been dropped significantly in the last few years. It hasn't been sensible to trade on. We need a more stable environment, which I think we're getting into now.

Unidentified Analyst

Okay, so it means more stable trading environment of import? Okay. And than, Myles, this ones for you, what's the... you talk about the FSA hedging on the VLCCs. What is the... is there anything beyond that, or is that basically the full scope of your three four agreement?

Myles Itkin - Executive Vice President, Chief Financial Officer and Treasurer

Products are essentially down, given them with some out of that for mach central [ph].

Unidentified Analyst

I'm sorry?

Myles Itkin - Executive Vice President, Chief Financial Officer and Treasurer

A diminumous amount of Aframax hedging and it's sort of completed.

Unidentified Analyst

Okay.

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

And then in products in U.S. flag and gas, we have time charters.

Unidentified Analyst

Great.

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

While there have been Aframaxes, we have the fixed rate Lightering contracts, which in fact we've built up over the last period and we also have some fixed rate time charge within Aframax International. We've been able to physical market in the smaller ship.

Unidentified Analyst

Okay. And so looking into next year, just what the FSA based how much total do you have hedged for the overall fleet in terms of hedged revenue versus SPA revenue?

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

The little more than half the revenue days in a VLCCs for 2009.

Unidentified Analyst

Okay. And then Morten, I had a question for you. If you could put on your bank ahead and just you mentioned the 1980s in the way that you live through that into banking sector. And when do you think that the bankruptcy in the FED and governments are in the real comp in type of liquidity into the market. And when do you think we're actually make it way through and start potentially impacting vessel values and impacting bank flowing units to maybe open up loans to shipping company at the end?

Morten Arntzen - President and Chief Executive Officer

I think it's a different environment. If you impacted the AVs at that point and it's really from 84 to 86 before the Latin American debt crisis hit. Since that the bank themselves were in very good financial condition during the shipping crises in mid 80s and the world economy wasn't relatively good shaped. It was just with the shipping industry as a result primarily over building relates 70s and then overbuilding of already have Japan in the 80, 81 was in a horrible shape.

Today it's a little bit different. It's the banking community that's in horrible shape and the world economy is in horrible shape. I think we've entered a period of sustained de-levering for the industry, for this banking industry. I think a number of the specialized ship fleet institutions that have little light on borrowed money from other banks.

I don't think that model is sustainable at the volume that have done going forward. I see a much reduced capacity for industry to lend and right at that the banking street has less products which to make money today than they had a year ago.

They're going to have sustained continuously incurred losses in their mortgage portfolios as well as in credit card and other areas. So I see them being very strict in their enforcement of loan to value covenant and such. I see a number being unable or unwilling to increase their lending and they are going to be very selective about who they deal with.

So, I don't see a quick surge in liquidity bailing out... in this sector. Its going to be survival of the fittest here and number of companies they're just going have to... are simply going to have to retire and turn their assets over to stronger wealth capitalized companies. This is different ball game and bank is right now... most of the big shipping banks already have their work outing being organized.

Unidentified Analyst

Okay, and certainly see the stresses on the dry dock side. Tanker rise have high end, quite of it better. Are you kind of... saying that you do think that same kind of scenario [indiscernible] on the tanker side as well?

Unidentified Company Representative

I think the tanker market as I said West united agreed on it, more than some other analyst has very strong structural support. Yes all demands controlled by 1% in the air but couple of same things has happened when China starts stops importing. I know [indiscernible] time, and we have the single-hull replacement which is certainly going to provide good spot relief next couple of years.

There are number owners with mixed fleet. Both dry and red, other exposed. There are number of newcomers to West space who are exposed. It's not going to be as the dry dock space well I think it has loss 40 to 50% the order book I think that's now pretty realistic number.

But I think looking at 30% the order book in the 2010 and beyond is what we've scoped out today which I think is very good to long-term fundamentals of this business. And I don't see a huge recovery in the banking space in two or three years. It's going to change that and we're also certain that there is going to be a significant reduction in ship building capacity. If you looked at peoples projection the ship building capacity in the world through to 2010 that was now a very... is now likely the peak in 2009 and is decline or stay flat. And that's a big, big change for business.

Unidentified Analyst

We said there silver lining is it, there is a number shift gets cancelled but?

Morten Arntzen - President and Chief Executive Officer

Look I think and the Mark give us a little credit. We started focusing on G&A in 2007 we have wait till now. We started unlocking more revenues in 2009 year ago because we are concerned about that. It is any challenging and volatile environment for everybody. So it's how you came prepared for an expected event that really be the difference. We feel fairly prepared. Don't get wrong we are... and this is a challenging environment and I am sure we get some surprises.

Jonathan P. Whitworth - Senior Vice President and Head of U.S. Flag Strategic Business Unit

In order to put a little bit more color on fixed revenue. One of the slides in the presentation reflects north of $500 million with the fixed revenue. It excludes revenue derived from fixed COAs which aggregate to another $100 million. So fixed revenue for 2009 is in excess of $600 million.

Unidentified Company Representative

Deciding as well more to touched on the fundamental support of the tanker business to China. China for the last three months. It's 20% above 2007 levels including the month of October. I have new refineries coming on, in next year and throughout the year and that in our view will definitely not stop. So we will continue to see increased number of these CC cargos into China, a little bit from West Africa and some of from Caribbs and Venezuela from demand.

Unidentified Analyst

Okay, thanks.

Operator

Thank you. Our next question comes from line of Urs Dur with Lazard Capital Markets. Please go ahead.

Urs Dur - Lazard Capital Markets

Good morning guys.

Unidentified Company Representative

Good morning.

Urs Dur - Lazard Capital Markets

Ladies and gentlemen actually. I know at least I don't see in the release and we've got over this many, many times already in today's call, the valuation situation. I do not see a NAV calculation in that. Is that basically based on the drastically changing and swiftly changing environment?

Myles Itkin - Executive Vice President, Chief Financial Officer and Treasurer

We found out a number of third party sources have stopped publishing, values because of limited liquidity in the market returns of number of transactions. And we prefer to provide something that was third party actually based that are in determination.

Urs Dur - Lazard Capital Markets

I fully understood. I just think it's an interesting illustration of the market that we're in. And that's very interesting as that number is publishing. And I would presume than that it makes a very difficult no matter how cheap stocks intellectually appeared depending on how you value ship that is very difficult to see what might be available on the public front. At least at this point in this quarter would that be a proper assumption there?

Myles Itkin - Executive Vice President, Chief Financial Officer and Treasurer

I think we'd always look at what we first, what we can earn with the vessels but our practice whether it's time to add a new builds second hand purchases, but I would just say, OSG trading at 2.77 times 9 months earnings, that's cheap.

Urs Dur - Lazard Capital Markets

Yes, well, my evaluation tends to agree as well. But it is the challenging time... sensitive to OPEC production from the Arabian Gulf and then of course we always have this common discussion about cheating with OPEC what's your overall opinion about the effectiveness of an OPEC cut going forward. Do you have any more general views on this and how it may affect your business. I do... I'm aware that your conservative going forward and appreciate that but any further color in that?

Unidentified Company Representative

I think parts of the OPEC cut was already introduced when they announced it.

Urs Dur - Lazard Capital Markets

Yes.

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

We've just in holding back thing at the cost of the detailed pick in marketplace. I don't think it is that will about as big impact on the shipping as it might is down. We are aiming to the win there and people will need heat their homes and stocks are low. In the short-term, you talked to the guys on their shortening debt. They'd see possibilities for rates to improve. AT rates are weaker than West Africa and we've seen rates of $45 million in AT.

Urs Dur - Lazard Capital Markets

Yes.

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

While West Africa it's 65, 70 and as always, we encourage people to do the math and they can probably... they can increase their return if they balance with that to get from AT. Sort of taking.

Urs Dur - Lazard Capital Markets

Sure.

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

And then we see improvements and then a decrease there right now in spite of the announced OPEC cut.

Urs Dur - Lazard Capital Markets

Okay, excellent very informative and highly appreciate it. Thank you gentlemen.

Operator

[Operator Instructions] Our next question comes in the line of Justine Fisher with Goldman Sachs. Please go ahead.

Justine Fisher - Goldman Sachs

Good morning.

Unidentified Company Representative

Good morning.

Unidentified Company Representative

Good morning.

Justine Fisher - Goldman Sachs

So my first question is on the mechanics of ship guard orders when maybe a buyer may not be able to finance the vessels. So as there is... either is, if there is a slide and it's been taking up and either I guess the vessels, partially I guess less than 50% though.

If that owner has to cancel or wants they cancel the order either because they don't think they're going to and they simply can't obtain financing. Does the yard continued to build the vessel and transfer to someone like an OSG that maybe you better capitalize and able to afford it and if so, if there is slight stability on that price like yard offered to have lighter company like an OSG at a lower price. I'm just trying to move that vessel out of the price.

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

This is not the... there is really enormous amount of welcome keep in mind it takes less than 12 months to build the VLCC. There was a cancellation of two VLCCs by a Turkish owner last week. I believe they are 20% deposit and they got some of that back. It's unclear whether that vessel will be built. If a yard has ordered all the part the steel equipment as well into it, they may reach in the court with the owner. The owner may walk away and yard certainly may discount by order and try to sell it to somebody like us. I believe we've had one product tanker already proposed to us on that basis.

Justine Fisher - Goldman Sachs

Would you get to 2011, 2012?

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

I think it's a boon for the labor industry. The publicly traded law firms.

Justine Fisher - Goldman Sachs

Someone got a benefit from this right?

Unidentified Company Representative

No wonder, there are some owners in the stores that you might look into it who have significant orders in some of these Greenfield yards, we think we're getting trouble where they have partial refund guarantees but not other refund guarantees. And when shipyards go bankrupt they go bankrupt. And those would have committed that have issues. So it's really a whole range of outcomes but if something is being worked in already underway that is Hyundai, Samsung guy will run the big Japanese, Chinese yard. It's likely to get finished.

Justine Fisher - Goldman Sachs

So I guess as follow on then. Do you think that we're making some of companies risk such norm. Do you think we may see companies trying and pick up. The vessels that are completed if they got balance sheet to do so?

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

That's absolutely. I just strong are going to be taken that opportunity. We have find tankers for them. I think the art learned during the 80s that taking order ship taken stalls was a one way ticket to bankruptcy. I think you some of that.

Justine Fisher - Goldman Sachs

I knowthat everyone is turning to the credit crises as a major, major hamstring on some of the supply across you're going to see across the board and commodities. But I guess the one thing that to me is interesting is that whether you look at iron ore market or the coal market or the shipping market we also have had five years of strong commodity prices that have left us with some of the very large very well capitalized companies. And still have the way without to typically what like OSG does. To what degree do you think this might offset some of the star companies' cancellation? Is there way we can think about that now?

Morten Arntzen - President and Chief Executive Officer

Well I think there was a referred to it earlier as high dividend payout sheet we have in our industry, So they were building up equity but they were giving it back. We gave a reasonable and growing dividend but we continue to build strong balance sheet. So we would be around from long terms. So why that equity has impact disappeared if you put down payments down to yards recent guarantees when gets in trouble, and so that what we think practically all the Greenfield yards in China and Korea are going to get in trouble.

You may have a problem, but are there strong well capitalized companies out there? Yes, absolutely. But if you have un-financed new buildings, you going to first prioritize that before you go start picking above the other people's bargains, and because this credit crunch has stop... comes so quickly and abruptly, in some of the strong companies stays [ph] with that.

Justine Fisher - Goldman Sachs

And then another question. Just because I haven't heard really what's going on with you people [ph]. What's happening to other vessels that were going to be converted to the VLCC. It's like are people trying to scrap them, are the scrap yards having issues to the credits as well? Like, what are the companies we're going to VLCCs during now, a tape size rate or as they are?

Morten Arntzen - President and Chief Executive Officer

I think if you brought a singe whole VLCC for conversion and got a go, and you probably converted it. If you didn't, you're sitting in there scratching your head and worrying because you have a single whole ship and you probably don't have a commercial operation traded, and you have a very unresponsive market, so you have problem. You really got determined, do you lose more money scrapping it or trading it as a single whole tanker, or do you got ahead with your conversion. I think that's a difficult choice.

Justine Fisher - Goldman Sachs

Okay, and than last question.

Unidentified Company Representative

Positions you've seen?

Justine Fisher - Goldman Sachs

No, no. I know. I think it's a really interesting position for those players, because you kind of came through the one and you came to the other either so, that's the desktop file [ph],I just want now if you have any other current?

Unidentified Company Representative

Shipping market.

Justine Fisher - Goldman Sachs

So could an island change that one? And than the last question I have is just on the vessel financing for 2010. Its impressive that the company can finance its 2009 commitments, and the rest of their '08 commitment with assets or purchasing cash, but there's 46 million for 2010, and I'm wondering, first of all whether you expect to fund those with additional growing [ph] on either your unsecured or additional secured facilities. And the second of all, whether you may look to use some of the cash flow to repay debt in '09, in order to better prepare the balance sheet for 2010. If you do, have to finance a decent amount of that 486 a set.

Mats Berglund - Senior Vice President and Head of Crude Transportation Strategic Business Unit

As it relates to 2010, as you know, we have over a billion dollars, billion one with credit availability and various facilities as well as the remaining balance under the CCS to complete the instruction of certain ATPs. So the net amount is below the stated amount? Yes, we continue to utilize free cash flow to pay down debt as appropriate. We'll do manage, we will in the future [ph]. We have rocks on some of that debt, that will influence our media tryst to pay down or not, but we have full financial flexibility. And cash flow from operations; even under a break even it's very strong.

Justine Fisher - Goldman Sachs

Thanks very much.

Operator

Thank you, Ma'am. At this time there are no further questions. I'd like to turn the conference back Mr. Arntzen for any closing remarks.

Morten Arntzen - President and Chief Executive Officer

Well thank you for joining us today. If you have further questions about any issues, please contact Jennifer Schlueter, or Myles, or Myself, Mats, and we look forward to working with you in the coming weeks, months, years. Thank you.

Operator

Ladies and gentlemen, this concludes the OSG third quarter 2008 earnings conference call. Thank you for your participation. You may now disconnect. Have a pleasant day and a good weekend. .

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