Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

James I. Edelson - General Counsel

Morten Arntzen - President and CEO

Myles R. Itkin - CFO

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

Lois K. Zabrocky - Head of International Product Carrier Strategic Business Unit

Jerry Miller - Controller

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

Analysts

Doug Mavrinac - Jefferies & Company

Scott Burk - Bear Stearns

Jonathan Chappell - J.P. Morgan

Urs Dur - Lazard Capital Markets

Justine Fisher - Goldman Sachs

Gregory Lewis - Credit Suisse

John Kartsonas - Citigroup

Terese Fabian - Sidoti Company

Steven William - Simmons & Co.

Omar Nokta - Dahlman Rose

Overseas Shipholding Group, Inc. (OSG) Q4 FY07 Earnings Call February 27, 2008 9:30 AM ET

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the OSG Fiscal 2007 Earnings Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions]. This conference is being recorded today, February 27, 2008.

I would now like to turn the conference over to Mr. Jim Edelson, General Counsel. Please go ahead sir.

James I. Edelson - General Counsel

Thank you. Before we start, let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker and articulated tug barge markets, changing oil trading patterns, anticipated levels of newbuilding and scrapping, prospects for certain strategic alliances and investments, prospects for the growth of the OSG gas transport business, estimated TCE rates achieved for the first quarter of 2008 and estimated TCE rates for the second, third and fourth quarters of 2008, projected drydock and repair schedule, timely delivery of newbuildings and prospects of OSG's strategy of being a market leader in the segments in which it competes, the projected growth of the oil tanker fleet, 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 on Form 10-K for 2006.

For this conference call we prepared and posted on OSG's website, supporting slides and supplement of prepared remarks. This supporting presentation can viewed and downloaded from the Investor Relations webcast and the presentation section on osg.com.

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

Morten Arntzen - President and Chief Executive Officer

Good morning. Joining me on the call today from Mexico, Myles Itkin, our CFO; Bob Johnston, Head of Ship Operations; Mats Berglund, who runs our Crude SBU; Lois Zabrocky, who runs our Products SBU; Jonathan Whitworth, who runs the U.S. Flag Business for OSG; Jerry Miller, our Controller; and Jim Edelson you've heard from; and then Jennifer Schlueter, Head of our IR and Corporate Communications.

And we will start with slide 3. OSG delivered solid financial and operational results in 2007, overcoming a challenging global energy environment and moving the tough operational expectations of our customers.

EBITDA, to pick on number in 2007 was $476 million on $1 billion of TCE revenues. Yet another year of strong cash flow generations from OSG despite the difficult freight rate environment that existed last year. I will leave the rest of the financial details to Myles to review in his remarks.

OSG today is a well capitalized, well funded, large scale diversified shipment company; $4.2 billion in total assets, $1.8 billion in liquidity, $502 million in cash, and with a fleet whose market value is significantly in excess of book value. These results from the execution of a balanced growth strategy we put in place four years ago and that leaves us with very few direct public market competitors.

Financial stability and strength in a volatile uncertain market will continue to create opportunities for OSG and provide support for our share price. Looking today, we have leading positions in each of the primary markets we trade proving that the platform we have built is working and is scalable. Our commitment to recruiting, retaining, and motivating the best sure that is available is a competitive advantage in an industry that is primarily the cleaner, safer, more reliable and instant free shipping.

Unless you have a real demonstrable and measurable commitment to quality, you will not succeed in tomorrow's shipping world. That is why we have made this the cornerstone of our strategy as we continue building scale in the segments in which we compete.

Now, looking at the key segments, our crude tanker fleet including newbuildings, as the last fleet totaled 64 tankers, up from 53 last year. Mats Berglund and his team continue to expand this business in traditional as well as creative ways, buying, building and chartering and selling ships and making corporate acquisitions like Heidmar Lightering. At the same time, we continue to focus on faster relationships with customers and partners to expand our cargo contracts, a key part of our strategy in this sector, and a key differentiator between OSG and most of our competition. This is the main reason our spot earnings significantly outperformed the market every quarter.

On the products side, ably led by Lois Zabrocky has done far more than just rest on the laurels of the Stelmar acquisition. Our MR newbuilding program will leave us with a 100% double haul fleet by the middle of next year and will enable us to significantly lift earnings in this segment. At the same time, with an eye for the long-term and expected rapid growth in the long haul products out of the Middle East and Asia, we are committed to building a major presence in the R1 market, the market for coated Panamaxes.

Headed by Jonathan Whitworth, the U.S. Flag unit perhaps has been the biggest of all of them. Notable achievements this year include the two ship contracts awarded OSG by Petrobras, under which OSG will be the first operator, the first operator of Jones Act Shuttle Tankers in the U.S. Gulf of Mexico, drilling ultra deepwater oil to the U.S. Jonathan also spearheaded the successful IPO of OSG America, now master limited partnerships.

To our shareholders; you can expect more of the same from us in 2008. We have ambitious operating and financial goals for 2008, and if we achieve them, we will move closer to our aim of being the most respected and valuable energy transportation company in the world. We remain committed to outperforming our care group on an annual basis, at the same time as we continue to build for the long term. We are not just sitting around waiting for opportunities to fall from the sky; we are making them happen ourselves.

Move to the next slide, looking at some of the business highlights. On November 15, 2007 we completed the IPO of OSG America, a massive limited partnership, issuing 7.5 million common units at $19 per unit. The IPO generated $129 million in net proceeds which we used to pay down debt. We retained a 75.5% interest in the company, including a 2% general partner interest.

The fundamentals of the Jones Act market in which OSG America ships trades are strong. We are confident that the new built fleet delivers over the course of the next four years that OSG will be rewarded with a premium evaluation reflecting its leading position in the Jones Act market and the more dependable nature of its largely long-term contract revenue... a buyback program.

Since our initial announcement in June 2006, we have spent $570 million repurchasing approximately 22% of the total outstanding shares of OSG. Now, in the fourth quarter last year, confronted with the worst credit market since the Latin American debt crisis in the mid 1980s, we cautiously scaled back active repurchases. The deterioration in the credit markets continues and we are watching this carefully and prudently. However, we remain committed to completing the program.

We ended 2007 with $1.8 billion in locked in revenue. This is 9.5 times what we ended 2004 with, 9.5 times increase. In fact, 38% of fiscal year '07 revenues were derived from time charters, up from 31% in 2006. We are committed to increasing this number and expect to do so over the course of 2008.

On a negative note, Standard & Poor's lowered our credit rating at the end of last year from BB+ to BB. They say the increase in our chartered-in fleet, the increase in our dividends, and stock buy-back is the main reasons for doing so.

Moving to slide 5, a lot happened in our fleet last year, one of the more exciting things was this was the chartered-in two Suezmaxes, the Overseas Newcastle and Overseas London are now in our fleet and we are the only company that now is actively trading ULCCs, VLCC, Suezmaxes, Aframaxes, and Panamax. We cover the full gambit of the crew transportation market.

We had obviously, we really talked about acquiring Heidmar Lightering and now we have two of our older Aframaxes, our smaller ones the Overseas Beryl and the Overseas Eliane have been dedicated to the Crude Oil Lightering trade. We also have stationed Woodford on the West Coast to go after that market which we think will be the most rapidly expanding Lightering market in the U.S. You look at that picture, you can see the size of the spenders were used in evaporations, they are really impressive pieces of that equipment.

We exercised options to build two additional LR1 coated Panamaxes towards the end of the year we now have 6 LR1s being build with SPP that transition that two we brought last year and two we already have in the water so we are building for the product business for the future.

Within the Sale/Leaseback of Overseas Rimar, 1998 built car tanker and why I am mentioning that in particular one of the things that we have done here is very asset backed management and the older ship today tend to have higher relative value to the newer ships but we have been selling these ships to take advantage of the highest second hand value today shipped residual value exposure the third people but taking the ships back we will continue to trade them. As that gives us a lot of financial flexibility as we move forward. The Overseas Serifos joins the product carrier fleet in the year. The Overseas Los Angeles one third of our ships mark join the fleet and now we have Four LNG carriers on the water all operating on 25 year charters.

So let's talk moving to next slide and talk a little bit about the market. And the first question... what happened last year? Was it the end of the world, the end of the crude world that some analysts were broadcasting or was it a short term shift to market and we think it is the latter, what happened last year? Crude went from $7 contango to $7 of backwardation and that lead to significant stock draw downs in the Atlantic Basin and Asia. There was lower refinery utilization, there was high bunker prices, not fully recoverable in rates. In the beginning of the steady inflow of newbuilding and very low scrapping and there were no catastrophic events. And we had a weak market.

On the last call, prior to market picking up, I said that we tend to believe that the market was very tightly bound but that was not in excess surplus of double-hull ship and the market continue to be a two tier market. So the market did improve then why was that. OPEC increased production by 500,000 barrels, just 500,000 barrels and this lead to sudden increase in Middle East cargos right basically on Thanksgiving Day. And very significantly a lot of those cargos went West, and that meant you needed to have double-hull tankers in action and there was a very tight balance in rates. This was not a surprise, this is what we talked about in the last call. There have been somewhat better refinery margins I'll expect those to improve more this year. We expect to see replenishment of stocks in Atlantic Basin from which we began then.

And then we also saw the fleet growth slowing due to conversions to drive and I'll come back on that. We had normal winter demand and then we've had the Hebei Spirit. One of the things that we told you over the last couple of years that we don't forecast in catastrophic events or instance like hurricanes and such in the shipping world, but they do happen and they did and as a result of that in an already tight market, a single-hull tanker spilled 11,000 tons of cargo on the beaches in shore line of Korea and the market and the differentiation between single-hull and double-hull tankers took off.

Moving on to next slide, this is a very simple slide, If I'd done this slide any time during the 70s, 80s or 90s, the growth in production would have been in the areas next to the high consumption areas, the North Sea, Mexico, Venezuela, U.S., Europe, that is no longer the case. The incremental supply is coming from long-haul sources, the Middle East, West Africa, Brazil, the FSU. This is one of the fundamentals that has improved our business and this leads to tonne-mile demand going faster than the underlying demand for crude itself.

Moving to the next slide, the VLCC, this is showing the development in VLCC fleet from September through the end of August this year projected. The fleet will actually shrink during this period. We see 44 of these leaving the market, 39 for conversions to dry bulk. This was more than just chatter and five to FPSOs and we estimate today roughly 40 going out in the course of this year in 2008.

Now, that number you can never be 100% certain of the number, we think these are pretty good statistics. And what it means is that the VLCC fleet could shrink at a natural below 1% to 2% this year. So you have demand going up for oil, tonne-mile demand growing up in a faster and the fleet shrinking. Then you have the other big Wildcard, and that is the commercial obsolescence of single-hull fleet. I have been arguing for four years that there is a two-tier market in the tanker world, the market between singles and doubles, that gap has been widening and that the commercial obsolescence of single-hull tankers will occur sooner than the IMO mandate phase out.

Now, looking at Korea-factor. 40% of all single-hull VLCC cargo movements are to Korea. Looking at numbers, about 33% of the world VLCC fleet is single-hull, that is a 172 ships. There are 182 tankers on order right now to replace those. What's happening so far, bigger charters are likely to reconsider these to single-hulls. We know that one of the big oil majors from the beginning of this year stopped carrying crude oil in single-hull tankers. We expect more to follow. Conversions could actually accelerate because your window for trading a single-hull tanker is shrinking and the orders to dry bulk continue to be attractive. And this is without forecasting any other exogenous events. Other incidents can happen, we are not counting on them, and Korea has already accelerated the single-hull phase-out by five years and may do so earlier in one of its major refineries as they already said they will.

So where does that lead us to 2008. VLCC remains flat or grows maximum 1% to 2%. Tonne-mile demand increases by approximately 6%. No inventory draw downs forecast in 2008 versus approximately 400,000 decline in 2007. Oil demand and forecast up 1.9%. Increase in worldwide refining throughput from higher utilization rate and an increase in capacity of 1.4 million to 1.5 million barrels per day. Where does this lead? The freight rates in all of the crude sectors notably with VLCC's, expected to be well above 2007 levels.

One of the top analysts in the transportation sector started every easy right about the tanker trade with the following comment, we view the long-term outlook for the crude and product tankers, we believe attractive, however, we remain cautious outlook for 2008. Now, we really think it's time to smell the coffee. This market in 2008 is strong, is likely to stay strong, and in fact 2008 is going to be a very good year for the tanker industry, I think we need to reassess that.

Moving on to page 11, it's not just about when you order ship so that's very important, it's not just about having the best hardware and we think we have about the best hardware. Above all else shipping is about running ship safely, incident free, reliably without putting things in the water or injuring people on the ships.

Our strategy... our balance growth strategy will not be seen without getting technical operations right. This is what our customers care about. They met our ships, our crew, our office operations, our IT, our shore side of these staff are trending.

They key performance indicators that we measure a port that they do matter, and our customers are looking at them very carefully. Therefore, we have to invest across all ship operations, in people, in maintenance, in safety and quality, environmental program, insurance. The old formula of short-term savings and operations is a guaranteed rest of the people long-term carrier in the tanker world and we are committed to being a quality provider.

We are seeing a 20% increase in our operational staff in 2006, and that is delivering the important improvements in our key performance indicators. We have an internal audit group that visited 206 ship visits in 2000 to make sure that things are being operated to according to the law and following orders and procedures. And what happened after Korea as anticipated, the discussion on quality is getting even greater and greater emphasis. We are committed to this, and this will be one of the key differentiators for OSG going forward.

And with that I'll turn the speaker over to Myles Itkin who will do a financial review of the company.

Myles R. Itkin - Chief Financial Officer

Thanks, Morten and good morning. Please turn to slide 13. For the quarter ended December 31, 2007 TCE revenues were $250 million, a 4% increase over the same period of 2006. The increase in TCE revenues requested 20% or 1600 day increase in revenue days across all segments of the company's fleet. The impact of this increase in days was substantially offset by higher fuel costs and a significant weakening in spot rates for the company's VLCCs, Aframaxes, and handy sized product carriers.

Accordingly, for full year of 2007 62% of the company's TCE revenues was derived in the spot market compared with 69% in the prior year, and 38% of TCE revenues was derived from Time Charters.

Vessel expenses increased for the quarter in comparison with the prior year's quarter principally as a result of an increase in operating days for own vessels. Average daily vessel expenses for the year, however, remained essentially flat. The increase in charter hire expense was mainly attributable to the acquisition of Heidmar Lightering which added $37 million in charter hire expense for full-year of 2007 and $13 million for the fourth quarter. The balance of the increase reflects the greater number of operating vessels that we targeted during 2007 relative to 2006.

The $2 million increase in depreciation and amortization expense for the quarter relative to the immediately preceding quarter reflects increased levels of drydocks amortization. In comparison with the prior year's quarter with $13 million increase in D&A reflects three factors; one, the inclusion of the Maritrans fleet for the full quarter compared with only one month in the fourth quarter of 2006. Two, the inclusion of Heidmar Lightering in 2007. And three, increased amortization as a result of drydocks incurred.

Although for the quarters presented, G&A expense remained relatively flat. Full-year G&A expenses increased to $127 million from $100 million in 2006. Of this $27 million difference, $24 million is attributable to the expenses of both Manila office which was established as part of the crewing strategy to retain qualified Filipino-based crews as well as the increased G&A expense for the Tampa, Philadelphia, and Houston offices associated with the Maritrans and Heidmar Lightering acquisitions.

The drop in equity and income affiliated companies is due to our selling our remaining 13.4 million shares of DHT in the first six months of 2007 as well as the required expensing of balance voyages for our first two LNG carriers in November, each of which is commenced 25 year time charters. These reductions were offset in 2007 fourth quarter by higher levels of incentive hire from Alaska Tanker Company.

The combined effect of these changes was that EBITDA for the quarter decreased 48% to $89 million from $170 million on a comparable period of 2006. That incremental period decreased to $21 million and diluted earnings per share decreased to $0.67 compared with $113 million or $2.86 per diluted share for the same period a year ago.

If you are good enough to turn to slide 14 we can review certain balance sheet items. Cash and cash equivalents stood at $500 million at December 31 compared with $540 million in September 30th. The reduction in the cash balances we collected first of all the vessel acquisitions net of proceeds from sale of the vessels and funds withdrawal from the capital construction front.

Secondly, the repayment of revolver and other obligations with IPO proceeds from the sales of 24.5% limited partnership interest in OSG in America. And thirdly, the continued repurchase of OSG's stock although at the lower pace than in the third quarter.

During the fourth quarter of 2007 we withdrew an additional $24 million, $176 million year-to-date from the capital construction fund to satisfied payments on the 3 new ATBs currently been built in U.S. ship yards. We expect to withdraw an additional $109 million over the next two years from the CCF bringing our totaled qualified funds withdrawal to $285 million. That's also in deferred drydock increase by over $200 million to $2.8 billion at 12/31/07. Vessels and other asset additions for the year amounted to $550 million, while new drydock charges totaled $70 million. These additions were offset by vessel disposals of $234 million, and depreciation and amortization of $178 million.

The reduction in investments in affiliated companies to $132 million from $275 million at year end 2006 principally reflects the sound of our position in DHT. On November 8, 2007, a subsidiary of the company OSG America LP completed its initially public offering of 7.5 million common units at a price of $19 per unit, representing the 24.5% limited partner interest. At year end, the minority interest and the limited partnership amounted to $132 million.

Slide 15 highlights our future revenue stability, and as far as the actions we have taken to increase fundamental shareholders value by increasing our level of locked-in revenue and associatively our earnings stability. Details regarding this nine fold increase in locked-in revenue in days per sector are included in the appendix at the end of this slide presentation.

Please turn to slide 16 for 2008 full year guidance. With a view towards providing guidance for 2008, we expect vessel expenses to range between $305 million to $330 million. Operating days will increase by approximately 1,700 days, a 1,000 days for crude and 700 days for products in 2008. Adding close to $17 million to $20 million to total vessel expenses. Fairly, vessel expenses are also expected to rise during the year and will account for the balance of this increase. Time and bareboat charter hire expenses are estimated between $370 million and $390 million, including $36 million opposed to profit share on certain vessels.

Depreciation and amortization is forecasted between $200 million and $220 million reflecting among other items, depreciation for a full year of two LR1s that delivered in the third quarter of 2007, the full year of intangible amortization relating to crude licensing, and a shortened drydock amortization period for our pre 1990 chartered in MRs that we deliver before June 2009.

General and administrative expenses are estimated at $145 million to $160 million, reflecting the impact of Manila and Houston offices for the full year, and an increase in amortization of non-cash stock compensation. Please note that non-cash stock compensation in 2008 will approximate $12 million. Equity income of affiliated companies were ranged between $8 million and $12 million, reflecting results from our interest in the Alaska Tanker Company and our four LNG carriers during 2008.

Other income in 2008 is forecasted at $27 million to $35 million and consists primarily of interest income. Other income in 2007 as you'll recall included a gain of 41 million on the sale of our holdings in DHT. Interest expense of $85 million to $95 million reflects a higher level of average outstanding debt than in 2007, and CapEx for the year will amount to $410 million, $370 million of payments for newbuildings and 40 million for dry dockings. Of this amount, an estimated $87 million represents qualified withdrawals from the CCF in 2008.

Please turn to the next slide. Slide 17 lays out our view of OSG's net asset value in comparison with our share price. Now into the categories of NAV are included in the appendix to this presentation. We are currently trading at approximately $70 per share compared with net asset value of $108 per share. We believe the combination of this evaluation gap, the creation of a master limited partnership for OSG's U.S. flag business, our expansion into sectors characterized by the long-term stable cash flows, our program of active asset management, and our continued distribution of capital to shareholders makes us a compelling investment.

At this point, we'd like to open the floor for question.

Question And Answer

Operator

: Thank you. [Operator Instructions]. Our first question comes from the line Doug Mavrinac, Jefferies & Company. Please go ahead.

Doug Mavrinac - Jefferies & Company

: Great thank you good morning all and congratulations on a great fourth quarter. Just had a few questions, as far as Morten in your presentation you mentioned the VLCC asset class is for to extent very limited fleet growth in 2008, if any at all. My question is for you all is do you guys believe that VLCC fleet can out perform the Suezmax and Aframax asset classes over the course of this year, without drawing competition from some of those vessels which are likely to experience significantly more fleet growth in the VLCC fleet?

Morten Arntzen - President and Chief Executive Officer

Doug, there has been long-term historical relation between the various crude sizes. However what you see in this year is somewhat departure from that and what we said at the end of last year, we thought that VLCC class would relatively outperform the other segments, but there is no doubt at the end of the day that the presence of Suezmaxes in certain areas will always prevent VLCCs from departing too far from other asset classes. But because of the fleet dynamics of ships coming in and going out in the VLCC are relatively better that the others, we think that that gap will widen this year, but it could never run away from the rest of the cruise segments because the charters will just take advantage of the cost arbitrages.

Doug Mavrinac - Jefferies & Company

Right, that's kind of what we are thinking. Okay and then kind of shifting gears a little bit rather than talking about the various asset classes, just talking about what we think is a somewhat of a game-changing event that being the Korean oil spill which you all touched on. We recently came across on a portion there was a single hull VLCC being circulated for scraps last week which would mark the first one since July 2005 by our estimates. Do you have any color that you could add on that and do you think that 2008 is a year where not only could you see some conversions but also some accelerated scrapings?

Myles R. Itkin - Chief Financial Officer

I think this year we are more focused on accelerated conversions. There are more FSO and FPSO projects that are in those numbers that we give, but we don't give out an FSO number in our number until its firm, the ship has been given a contract, and it's going to have a contract with the shipyard. But I think you guys are familiar with the offshore segment and the number of projects there that will be more coming. What I've been saying for about five years, Doug, is that as you approach 2009 and as the newbuilding doubles come in and the percentage of the fleet represented by single-hulls falls to 10% to 15% that the commercial market is going to discriminate them to such a degree that you will have accelerated scrapings. I don't think that'll happen this year but it doesn't really have to happen this year because the fleet is going to be relatively flat. In 2009 we would expect that we would not be surprised by both Japan and China come up with announcements that they will put in place the IMF phase out early. I think you will see more oil companies doing that. And that will either accelerate conversions or have more of the older babies to scrap.

Doug Mavrinac - Jefferies & Company

I think 2009 is the year people are pointing as far as seeing go order book and numbers of ships that are going that are going to be delivered. So that will certainly help. My final question for you, Morten, is you mentioned during your comments about the credit environment and how that has impacted your decisions when considering pursuing additional share repurchases. We note that you guys have over $500 million in cash in the balance sheet and the stock that filtrates are our estimates and it sounds like yours as well.

Do you think at some point once the credit crisis is behind us and that some of your share prices are still about where they are that not only could you exhaust the remaining authorization, but you could potentially bump it up and then at what point do you consider your available float in any liquidity using the shares and what not. That's my final question?

Morten Arntzen - President and Chief Executive Officer

Well you answered the question for me. So obviously I don't need to answer that one, the first one. If the credit crisis ended and our share price didn't move considering all of the cash we're doing I think that you can expect that OSG and OSG's Board will assess that and will behave in a way that's consistent with maximizing shareholder value. But I have to say it's very scary when you read about banks that have already written off $18 billion to $20 billion worth of assets talking about doing that again in the first quarter.

So in this environment I think it proves us to be somewhat careful and prudent. And the last thing I'd say is for the first time in quite a number of years we are seeing some fairly big fleets particularly new building fleet circulating. And I think that's really a sign of difficulties that are starting to occur with people financing ships, newbuildings ahead and you just want to keep your eye on that. But more than anything this is a very scary external financial environment and we want to be smart about how we manage the balance sheet.

Doug Mavrinac - Jefferies & Company

Thank you. Perfect and congratulations once again on a truly great fourth quarter.

Morten Arntzen - President and Chief Executive Officer

Thanks, Doug.

Operator

Our next question comes from the line of Scott Burk, Bear Stearns. Please go ahead.

Scott Burk - Bear Stearns

Hey, good morning, guys. Just a couple of follow-up questions. I wanted to; first of all, could you tell me the number of FPSOs that you got built into your conversion number; you said 39 conversions to drive bulk and what's the number you had coverted to FPSOs?

Morten Arntzen - President and Chief Executive Officer

It's five.

Scott Burk - Bear Stearns

Just five, okay.

Morten Arntzen - President and Chief Executive Officer

We know that number is going to be more because there's projects that are out there being bid, we also know that some of those will be double-hull ships which is even more attractive for the fundamentals in business.

Scott Burk - Bear Stearns

Okay. And you went through August of '08 and if you extend that out into '09, just kind of wanted to see what the picture looks like going out into '09?

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

This is Mats, for FSO -- FPSOs we have that running at anything from 5 to 10 for conversion to drive it's very difficult to assess that future book is not longer than 9 to 12 months right now.

Scott Burk - Bear Stearns

Yeah.

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

But access the number of conversion for '09 will depend on the continued strength of the drydock [ph] market and a lot of other factors, but we have not seen any sign of slowdown in the conversion deals being done as of yet that's for sure.

Myles R. Itkin - Chief Financial Officer

Scott just to amplify, I would could call the conversions to VLCCs to the single-hull is really commercial obsolescence by other means. This is the reaction of those owners to what they can do with those ships and trading what they have. And the window just gets tighter.

Scott Burk - Bear Stearns

Okay. I wanted to ask you about your chartered in vessel. You've got quite a few A candidate I believe 21 in the fleet somewhere in the 20s that are going to -- you got several business that was chartered in right now, that are going to be growing of their charters. What are your plans for those vessels, do you plan to re-charter most of them or are you going to see your chartered in fleet decline towards the end of '08, '09 or how do you plan to do that?

Morten Arntzen - President and Chief Executive Officer

Let me add the most significant was in the product things, Let me let Lois tackle that one. It is a very important thing to understand about our product tanker business.

Lois K. Zabrocky - Head of International Product Carrier Strategic Business Unit

Scott, this is Lois.

Scott Burk - Bear Stearns

Hi.

Lois K. Zabrocky - Head of International Product Carrier Strategic Business Unit

We have 13 older product carriers that were built in the late 1980s that are on bareboat. When those vessels we deliver from our fleet this year and in July of -- with the remainder being in July of next year, those vessels will not be re-chartered, and I think that they will have at that time an increasingly challenging time in the market. So, we're actually, we have replaced those vessels throughout the last two years with a lot of long-term charters, bareboats, as well as two new buildings. So, we essentially replace those but those ships will not be re-chartered.

Scott Burk - Bear Stearns

Okay, so when you say replacing I mean you don't need go out and replace only 13 additional new vessels in 2009? You've already got those in your fleet already?

Morten Arntzen - President and Chief Executive Officer

Yeah, I think what's more important than that is the earnings capacity of what the new ones has coming in is significantly higher than what they're replacing. Those older ones for the most part are on longer term charters at rates reflect really the vintage in the ships. We would expect margin expansion from every one of those double-hulls that replaces those older ships. Since that business will be burdened with that to the next 12 months, but once those goes our earnings basically get enormous unleashing I would say.

Scott Burk - Bear Stearns

Okay, and then I guess just one last question for Myles. Thank you for the annual guidance on the expense level, is there any kind of seasonality we should look for a major seasonality in any of the expense items from quarter-to-quarter?

Myles R. Itkin - Chief Financial Officer

No, not really. Of course, that expenses can have some degree of shift depending upon timing of delivery, spares and stores.

Scott Burk - Bear Stearns

Okay, thanks.

Myles R. Itkin - Chief Financial Officer

Nothing unusually seasonal.

Scott Burk - Bear Stearns

Alright, thank you.

Operator

Our next question is from the line of Jonathan Chappell with J.P. Morgan. Please go ahead.

Jonathan Chappell - J.P. Morgan

Thank you and good morning. Lois on the product tanker fleet, if I remember correctly there was some talk last year about potentially shifting a little bit to more spot market exposure in the product tanker fleet. Are there still significant time charter coverage? Is this something you would hope to ship eventually or is this a strategy decision because there is possibly some delays in the long-haul refineries being up and running.

Lois K. Zabrocky - Head of International Product Carrier Strategic Business Unit

Jonathan if we separate the fleet into the vessel that I referenced earlier, on those vessels that are older we do endeavor to have those completely put away on Time Charter so that we can have as high as earnings as possible on those vessels. But with our double-hull fleet we have over 50% of that fleet on the spot market and they have been earning very well. But we have been seeking some Time Charters at very profitable levels over the last 12 months that provide us with some coverage in the current environment that we are in right now.

Jonathan Chappell - J.P. Morgan

And what are you seeing from the refinery standpoint? Are you seeing delays in construction of some of the export only long haul refineries or do you think most of it's coming on track at the end of this decade?

Lois K. Zabrocky - Head of International Product Carrier Strategic Business Unit

I think that in the longer term the refineries in the AG are fairly on track especially with India coming on with Reliance at the end of the year. So we are still feeling very positive about the LR1 sector and the timing of which we have the vessels entering our fleet

Jonathan Chappell - J.P. Morgan

Okay. And Myles if I can ask a follow-up on the timing of the bareboat charter and expense guidance number, does that reflect the fleet as it stands today or does that has some anticipation of more charter ends up in the course of this year. I just don't want to value short on the revenue side?

Myles R. Itkin - Chief Financial Officer

Only the committed vessels.

Jonathan Chappell - J.P. Morgan

And then one last thing.

Myles R. Itkin - Chief Financial Officer

Go ahead, I am sorry. It does include $36 million of profit sharing which is a function of what the prevailing rates will be in the spot market?

Jonathan Chappell - J.P. Morgan

Alright. And then just one last follow-up to one of Doug's pervious questions on buyback versus opportunities, I understand we are in a tough credit environment right now, but by our estimates we will be generating almost $400 million of cash this year. And when you weigh opportunistic acquisition versus buyback and Morten you mentioned that there are some big new build fleets out there and that may look attractive. At $0.67 of $1 I would still think that the buybacks look a bit more attractive. So, is this something that you will be considering with the Board, credit crunch versus potential acquisition opportunities versus buyback versus dividends, how do you kind of weigh those three things?

Morten Arntzen - President and Chief Executive Officer

Well for the first thing, I think you reluctantly can start given a credit for, we have been pretty disciplined about what we have been buying, how we have been buying it, making sure that in fact the things work in our HP 12C. And where we can't find things to buy or build we look to chartering options to reduce that. So I think you will continue to see a lot of financial discipline. We bought that close to 22% at the start of the company, so you could hardly say we have been shy about doing that. Now we had a down rate from S&P and that's certainly not the end of the world, but we would not want to see a significant deterioration in our credit rating, because one of the reasons we can charter in ships from other owners in the market because we are very strong. So that has to be balanced in there. I think we are going to be patient on anything we look at and we do things that work with other members. Our Board will look very careful at the options and we also look at probably as a long-term tax strategy. But all of those things will be taken into account and I can assure you it is the topic at every single Board Meeting and will be again a topic next week.

Jonathan Chappell - J.P. Morgan

Thanks again. And I will reluctantly give you credit for your discipline.

Morten Arntzen - President and Chief Executive Officer

Thank you.

Operator

Our next question is from the line of Urs Dur, Lazard Capital Markets. Please go ahead.

Urs Dur - Lazard Capital Markets

Hi guys. Great quarter and thanks a lot. All of my questions already have been asked. But I'd like to see on the front page of your release though, is the quick discussion of contango-backwardation. I was wondering, do you guys have a view as to when and how this might shift? Are you looking at that in your strategy going forward in terms of contango-backwardation and the oil pricing this year? Do you have any view on that?

Morten Arntzen - President and Chief Executive Officer

Do we look at this, we actually have a pretty strong economics group here that...

Urs Dur - Lazard Capital Markets

I know.

Morten Arntzen - President and Chief Executive Officer

And we probably speak to them and we do it very carefully. Predicting what OPEC is going to do on production is really difficult, and there is no question that they are cutting back on production 2007 has an impact of shifting the market from contango to backwardation. We keep a lot of flexibility in the way we trade the ships, so that we can adjust to that. One of the reasons we've built up the big TC book is we know we can't predict it.

What I would say, last year at the end of the third quarter, we made the decision to keep all of our VLCCs in the spot market because it was a very tight market. We continue to think that the market is very tight. But we are going to have to manage volatility. We do have a paper hedging desk that is pretty active in OSG and the extent that we look forward in saying that it makes sense to take some cover, we might do that. So, we have the tools available, we also know we can't call what OPEC is going to do. We have to manage around that uncertainty of volatility, and I think we are doing a pretty good job on that. Having said that, you would expect us to keep our VLCCs in the spot market for the time being and that will be a very good strategy, as it has been for the last five years.

Urs Dur - Lazard Capital Markets

Sure, if we roll into contango, that's good. Excellent, thank you very much. And then, one other thing and I guess this has been asked before, but maybe you could review your position on possibly doing further spend-offs, further MLPs, and in general it's a nice superior evaluation, any view there?

Morten Arntzen - President and Chief Executive Officer

I don't think we have any immediate plans now. Obviously we have four LNG carriers on the water right now earning money, but four LNG carriers does not an MLP make, but we built up the gas business, we were successful in some of our initiatives in CNG and LNG, that's something we'll consider yet. But in the short term we love our collection of assets and chartering ships in OSG and the cash flow that are generated, and we are hoping that you will recognize that and give us credit for it.

Urs Dur - Lazard Capital Markets

Understood. Thank you very much. Good quarter and thanks.

Operator

Our next question comes from the line of Justine Fisher, Goldman Sachs. Please go ahead.

Justine Fisher - Goldman Sachs

Good morning.

Morten Arntzen - President and Chief Executive Officer

Good morning.

Justine Fisher - Goldman Sachs

My first question is one about single hauls and maybe this is a tough one to answer, but wanted to get your opinion. You guys still have any more single hauls, single haul VLCCs left in your fleet, what would you do with them now?

Morten Arntzen - President and Chief Executive Officer

If I had them?

Justine Fisher - Goldman Sachs

Yeah.

Morten Arntzen - President and Chief Executive Officer

I would convert them to a VLOC as quickly as I could. I would be bidding on every FSO project if I could, to the extent that anybody who will give me a time charter, which I think a number did last year, I will take it. And then I would go right to the scrap yard and scrap the thing for $25 million or $30 million, that's a hell of a lot better than get putting 11,000 tons of oil on the beaches and anywhere.

Justine Fisher - Goldman Sachs

Given that there are probably half of the VLCC of the single haul VLCC is relatively young, are there options for these vessel owners to either retrofit their tankers to be double-haul to keep them operational, I mean obviously it's 25 years old you got to get rid of it but is there more optionality for the younger ships?

Morten Arntzen - President and Chief Executive Officer

: There is somewhat more optionalities. The technical risk of double-hauling a single-haul VLCC is one that I wouldn't take but there are people they are comfortable doing that. There still will be a lot of reluctance to my member charters to take them. So it's a pretty big gamble. I think the best thing you could do to VLCC is making the razor blades. And that's what I would do.

Justine Fisher - Goldman Sachs

Okay, the other question that I have is on the hedging, would you -- you said that you'll keep your VLCCs on spot market but would you put on I guess safer hedges on your VLs or would you only hedge the Aframaxes and the smaller ships?

Morten Arntzen - President and Chief Executive Officer

We would hedge the same way we would look at hedging any or all of our asset classes, if the result of that hedge is that we will lock in returns that are significantly above... that are above our immediate short-term, medium-term, and long-term positions, excuse me forecast. That's why we have a desk in place and of course we are doing that but we keep that to ourselves obviously.

Justine Fisher - Goldman Sachs

Okay. So you are you are taking hedges on your VLs given that you are operating at spot market that you are not going to dispose it or are you not going to take hedges at all for your lighter ship?

Morten Arntzen - President and Chief Executive Officer

I am saying that we look at paper hedges for all of our asset classes and we manage that along the lines of what we see as the long-term outlook for the segments.

Justine Fisher - Goldman Sachs

Okay. And then a couple of questions for Myles. First of all I know you have 370 million of new book products payments to make for '08, do you have a dollar amount for that total? New book payments that you'll have to make over I guess the next 5 years or whatever the order book is?

Myles R. Itkin - Chief Financial Officer

Yes, well sitting in Mexico now but if I can give you a call I'll let you know. The number is fractionally is circa $700 million to $800 million but I'll rather file that with you when I return.

Justine Fisher - Goldman Sachs

Okay and then the last question and I have got to ask this for all the deaf people on the phone, but given the fact that the credit environment is a little bit shakier than it has been and that your debt-to-EBITDA at the end of '07 is four times trended that it will go down in '08 and '09 probably with improved rate, why wouldn't you consider using some of your free cash flow to repay some debt?

Morten Arntzen - President and Chief Executive Officer

Myles do you want to answer that one?

Myles R. Itkin - Chief Financial Officer

Yeah sure, we do evaluate all of our options, we look in terms of what our immediate commitments are during the 12 months, we sense rate against what an optimal tax repatriation would be, but its certainly one of the things that we consider.

Justine Fisher - Goldman Sachs

Okay, thanks.

Operator

: Our next question comes from the line of Greg Lewis, Credit Suisse. Please go ahead.

Gregory Lewis - Credit Suisse

: Good morning. I guess my first question is more of a general question given the fact that -- you have a significantly strong balance sheet and you haven't really gone out and purchased any vessels, even the market potential sell vessels over the next couple of quarters?

Morten Arntzen - President and Chief Executive Officer

The only vessel that we have technically held of sale is the ship that already is committed to be sold, that's the Overseas Donna which is a VLCC that's being sold forward through an FPSO and the buyer can take the ship anytime between now and we will at that point get about $75 million to $85 million of booked gain on sales. The price has already been fixed. Right now double-hull ships are scarce. And we are not looking to unload. We will continue to sell leasebacks on our older ships, that's been a pretty consistent program and expect we would do that. We might sell some of our older U.S. flag units if we didn't have alternative uses for them. But nothing being actively shopped right now and if you look at the -- on the table in back and over earnings of these various units and keeping in mind that we have a very low book value fleet for the most parts, we are doing pretty well with these units.

Gregory Lewis - Credit Suisse

Okay, great. Moving forward you talked about the significant opportunities in the FPSO business. Is there any thought that OSG might sort of entertain entering that space?

Morten Arntzen - President and Chief Executive Officer

I think we have been very clear in our expansion strategy that we will enter the markets with a contiguous to the one's who are in. Because there we feel the execution risk is much lower and our technical compatibility taken a bit. So very clearly moving into FSO's or FPSO's considering the technical know how we built up in the company that fleet we have in this company we consider. Now keep in mind; we have shuttle tanker operations to come on in the U.S. Gulf. We have Lightering in the Delaware Bay, Lightering in the Gulf of Mexico, Lightering in the West Coast.

So we are involved in awful lot of parts in this business already, so, yes, that would be a logical jump for us. But one thing about all the FPSO projects up to now, if you look at the returns on them they have been a lot poorer than what we make trail these tankers as tankers. But we will exercise the same financial discipline we do when we buy ships. And we will try to factor in there isn't technical risk we will take, but we would be comfortable doing that. So yes, it's a long winded, yes, to your question.

Gregory Lewis - Credit Suisse

Okay, great. And then, Myles, I guess this last question is for you. It looks like quarter-over-quarter SG&A expenses were down, what you contribute that to?

Myles R. Itkin - Chief Financial Officer

They were expenses incurred in the 2006 quarter legal expenses regarding the Department of Justice settlement.

Gregory Lewis - Credit Suisse

No, I was talking about Q3 of '07.

Myles R. Itkin - Chief Financial Officer

Okay, well there is an additional compensation expenses that come in the fourth quarter.

Gregory Lewis - Credit Suisse

Okay, thanks. Thank you for taking my call.

Operator

Our next question comes from the line of John Kartsonas, Citigroup. Please go ahead.

John Kartsonas - Citigroup

Hi, couple of questions I guess one for Mort, one for Myles. First of all on the realized rate obviously we will have only one competitor out there to charge from but I think that your '07 VLCC's are much lower than last year compared to frontline. First of all how should we think about that, I mean now given the pull that you have and what is the expectation going forward?

Morten Arntzen - President and Chief Executive Officer

Let me have Mats answer that one for you.

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

I think what you are referring to is the Q4 comparison with frontline.

John Kartsonas - Citigroup

No I am talking about the full year actually.

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

Oh, but the whole year is primarily explained by a difference in the fourth quarter and as you know spot rates went from $20,000 a day to $200,000 a day at the end of the fourth quarter. So, how you come out of that depends very much on higher positions that are lined up against those dates. The difference between us and Tankers International is that we are servicing a large amount of cargo contracts much more so than which doesn't really have any contracts. And as a result of that we tend to fix earlier ahead of the loading, ahead of the lake end and frontline does. So, they were able to take quicker and larger advantage of the spike in the fourth quarter of 2007. On the other hand, as rates have substance in the first quarter, Tankers International will likely benefit a bit longer from the good rate since they fixed a little bit earlier and hence we will hang on the higher rates a bit longer. That's the main explanation for that difference in rates for '07.

John Kartsonas - Citigroup

So, would you say overtime this tends to offset chartering you are looking at the market rates going forward?

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

John I think the -- there's no question that Tankers International for me they are the two biggest operators of VLCCs. And if you compare our results with theirs over a two or three year period which is more appropriate, I think some quarters they beat us, in more quarter we beat them. We are the two leaders, the real comparison should be against the overall market. I'll give credit to frontline for running a very good chartering strategy unlike our cargo strategy much better. So far, both have resulted in superior performance overall to the market. In the long run, I would rather have a big book of cargo to take this business in the future than not. So that's the difference. You'll have to choose. But relative to the market we both do better.

John Kartsonas - Citigroup

Okay. And then for Myles, actually I just want to go back to this tax repatriation issue and from the free use of cash that you have obviously paying down debt, buying back stock and dividend. If you decide like that they have 700 million to 1 billion of share buyback roll off, let's assume that is the case. How much of this comes back and how much do you have to pay tax on that? Or is there a difference on the use of cash?

Myles R. Itkin - Chief Financial Officer

Jerry, do you have a specific number on repatriation and tax implications?

Jerry Miller - Controller

We have about -- at the end of the year we have about $550 million of earnings on which we previously paid tax. So theoretically, we could bring back $550 million without any further tax consequences.

John Kartsonas - Citigroup

And the tax was 35%?

Jerry Miller - Controller

No there will be no taxes.

John Kartsonas - Citigroup

No over to that?

Myles R. Itkin - Chief Financial Officer

In the amount of excess, yes.

John Kartsonas - Citigroup

35%. And is there any difference in treatment between let's say asset sales or Time Chartering meaning that if you generate that in here from Time Chartering you get tax at the same rate or --?

Myles R. Itkin - Chief Financial Officer

No. You're not taxable until you repatriate.

John Kartsonas - Citigroup

But revenues you generate from own vessels and from Time Chartering vessels is the same, right?

Morten Arntzen - President and Chief Executive Officer

Yes.

John Kartsonas - Citigroup

Okay. And finally on the LNG front, do you have the rate that we can use going forward for the LNG or approximately what kind of --?

Morten Arntzen - President and Chief Executive Officer

We are under the strictest confidentiality agreement that I've ever seen, and I think I'd go to jail or prison or something if I violate so I can't.

John Kartsonas - Citigroup

Okay, I don't want the answer. Thank you.

Myles R. Itkin - Chief Financial Officer

We don't want to go to jail either.

Operator

Our next question comes from the line of Terese Fabian with Sidoti Company. Please go ahead.

Terese Fabian - Sidoti Company

Hi, good morning. I don't whether you have addressed the tax credit in the fourth quarter, if so I am sorry, but can you talk a little bit about that where it came from?

Morten Arntzen - President and Chief Executive Officer

Myles you want to take it?

Myles R. Itkin - Chief Financial Officer

Jerry if you take it?

Jerry Miller - Controller

It's alright. The level of passes that we end up paying is due to a large degree by what's called far and personal holding company. So it's the earnings on the cash that is sitting offshore. That level was higher at the beginning of the year due to the previous sales of DHT stock. In a normal situation the income that we generated on the domestic side also takes into account placements of the debt that the corporation has, and for the most part, the debt fits on the U.S. side. So the reason for the credit is that you have lower non-shipping income and level amounts of interest expense on the domestic side.

Terese Fabian - Sidoti Company

Are there implications for 2008 in terms of your guidance?

Morten Arntzen - President and Chief Executive Officer

Well, we think that everything else being equal, we don't expect taxes to be very high in 2008. The tax rules basically allow you a two-year carry back, and from the taxable income perspective, we haven't had the taxable income in the U.S. in 2006 or likely in '07. So we don't expect taxes to be very high in 2008.

Terese Fabian - Sidoti Company

Okay. That's helpful, thank you. A question on the slowdown in the Florida economy, is this affecting your Jones Act product spot market rate?

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

Hi, this is Jonathan. It's funny because there certainly has been a lot of press about the downturn in the housing market on Florida past one of the states leading it, but I have to tell you the sun is certainly shining there today and its still extremely a possible place to live, to retire, to visit and to travel, and I believe that numbers last year was that the state grew by 800 people per day. So, what's more important to us is not necessarily the effect on the housing market as much as the effect on the demand for clean petroleum. And as of today, we have yet to see a downturn.

Terese Fabian - Sidoti Company

Okay, thank you.

Operator

Our next question comes from the line of Steven William of Simmons. Please go ahead.

Steven William - Simmons & Co.

Yeah, just another question about your existing assets. You suggested you might continue the sale and leaseback of the some older vessels, but you weren't generally in the market to dispose off any tonnage and can I differ from that your views on the prices of second hand vessels at the moment, I think you suggested in Q3 they might soften a bit, I mean is that still your view or is second hand tonnage priced about right at the moment?

Morten Arntzen - President and Chief Executive Officer

No, in fact, again we are going to talk about double hull assets because that is the only thing that counts. Double hull vessels, newbuilding prices have continued to go up, and steel plate is now going to be going over a $1000. So, prices continue to go up for newbuildings, order books continue to be long, so that has an effect. Newbuild second hand prices for all classes of double hull ships products and crude continue to strengthen. There's a report today of the ship being fixed, a VLCC newbuild 2009 delivery at $163 million, which means the delivery cost of $170 million, and as I said, this is a report not a verification, but the market is continuing to trend up and it is just there are lot more buyers than sellers and peoples outlook on the medium term outlook for tanker market, '08, '09, '10 and '11 has turned decidedly positive and that's pulling vessels up. The yards are full, their costs are going up, they continue to raise prices. So the asset support for the public tanker companies has never been higher and you can probably argue that, that number that Myles' share with you may be conservative.

Steven William - Simmons & Co.

Okay, so secondhand prices are being dragged up by tonnage in the newbuild market, that makes sense. And how is your own sort for internal view of the strength of the tanker market over the next few years, gone up in step with that, so from your own economic perspective that these vessels look equally attractive as they did before?

Morten Arntzen - President and Chief Executive Officer

Yes, is the answer I think. I have been pretty consistent, fortunately I've been I able to say it for several years that we see the outlook for the next three or four years that we would expect to earn the same amount as the last three or four years. In that environment we are generating tremendous margins in return to the capital we have invested in this fleet, it would be very difficult to find a lot of industries where it would be better. Yes, we are right happy which is why we none of our modern units up for sale.

Steven William - Simmons & Co.

Okay, and finally, so your -- of the market is much stronger than it was a year or two years ago.

Morten Arntzen - President and Chief Executive Officer

Correct.

Steven William - Simmons & Co.

Okay, thank you.

Operator

Our next question comes from the line of Omar Nokta, Dahlman Rose. Please go ahead.

Omar Nokta - Dahlman Rose

Thank you. Good morning. You know, we know the VLCC market has been quiet strong in past few months. We know that OPEC production has been higher and that the yield price is falling, but also you know, [indiscernible] offering their crude at big, big discounts especially to the U.S. buyers in the past couple of months or so, do you think that's been really the main reason for the huge uplift in rates, and do you think that needs to continue for the next few months to support the market?

Myles R. Itkin - Chief Financial Officer

It certainly was the one of the triggering factors what the salary is lowering the price there at Thanksgiving, but it's certainly not the only factor. The underlying factor is the tightness as Morten has described between supply and demand, and the big number of ships going out of the fleet combined with the demand. So, we don't see that, that needs to continue for the tightness to remain. The current situation is for strengthening rates. Sort of at the end of these and also in the smaller crude segments.

Omar Nokta - Dahlman Rose

Okay. And we know the product tanker rates have obviously lagged the VLCCs, why is there such a separation and do you think that the gap can tighten a bit going forward?

Morten Arntzen - President and Chief Executive Officer

I think you can see an increased differentiation on the medium term basis, the longer term, even the product rates are affected by the crude rates. It all spills over. We're seeing a situation where crude has had stronger, a short-term growth due to the convergence to drive, we don't see the same thing happening on the products side. The long-term we're very positive as Lois mentioned on the product segment as well.

Omar Nokta - Dahlman Rose

Do you think it's more of a supply reason why the VLCCs have outperformed the product versus, say demand?

Morten Arntzen - President and Chief Executive Officer

Again, that's one of the important factors, yes.

Omar Nokta - Dahlman Rose

Okay, thanks a lot guys.

Operator

Our next question is a follow-up question from the line of Justine Fisher. Please go ahead.

Justine Fisher - Goldman Sachs

Hi, sorry I just have one question on the taxes for Myles. So when you say that there is approximately $500 million in change of cash that you could repatriate without being taxed from it. Is that potentially how much you could use to repay debt without facing any negative tax consequences?

Myles R. Itkin - Chief Financial Officer

Yes.

Justine Fisher - Goldman Sachs

Okay. And then one more for Morten, if you guys aren't considering converting to FPSOs because the returns for those conversions have been lower than a lot of people, they have expected that you would make more money trading them, do you think that other people who were going to convert to FPSOs are facing the same type of the decision calculus and may not, I mean, maybe drydock is a different story but for FPSOs?

Morten Arntzen - President and Chief Executive Officer

I think, Justine, if you look at the main players out there in the FPSO market, and you look at the return of invested capital that's generated year-to-date, it is considerably less than what the own operators known as tankers have generated.

I am told there is an expectation that people will re-price, that they expect some re-pricing in that market and that remains to be seen. I would expect that margins will expand. A lot of the players that owned double hulls are looking at a project are just really looking to sell, and primarily probably because they don't have the technical capability or staff to take on that risk. And I said FSOs and FPSOs, and FSO while it has a fair amount of technical risk not generously is not the same as an FPSO which has a higher degree of technical risk.

The same thing, we would be comfortable taking on a technical risk, but we wouldn't do it if we could not earn superior returns to what we would operate the tankers in the spot market. It's that simple. But we have a capacity to consider and operate both. There's a very few that have that.

Justine Fisher - Goldman Sachs

Okay, thanks very much.

Morten Arntzen - President and Chief Executive Officer

One second. Mats, you want to add something?

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

Yeah. Just wanted to add at the end, some of our large crude tankers have some unique features that make them possibly very suitable for FSO, FPSO service, which is one of the reasons why we looking at that, and that could enable us to get more attractive projects in return than what the general market is paying.

Operator

: Our next question is a follow-up question from the line of Urs Dur. Please go ahead.

Urs Dur - Lazard Capital Markets

Hi, just a real quick thing on page 16 of your release. I think it's a little bit interesting and may be you have a comment or not, but why are Suezmaxes being outperformed by spot Aframaxes in this quarter?

Morten Arntzen - President and Chief Executive Officer

Urs, it's a very simple explanation with all that that I must give you.

Urs Dur - Lazard Capital Markets

Okay, I am sure it's easy, but just your comment will be great.

Myles R. Itkin - Chief Financial Officer

You're referring to the fourth quarter or you are referring to the first quarter?

Urs Dur - Lazard Capital Markets

Yeah, so far this... so far this quarter on page 16 of your release.

Myles R. Itkin - Chief Financial Officer

I mean there are two ships on the Suezmax side that are doing their maiden voyages.

Urs Dur - Lazard Capital Markets

Right.

Myles R. Itkin - Chief Financial Officer

You don't have the same vesting approvals. You don't have the same cargo system built up, your view on the Aframax side it's a well established system.

Urs Dur - Lazard Capital Markets

Yeah. Okay. So it's not a market wide issue or something you experienced?

Myles R. Itkin - Chief Financial Officer

No.

Urs Dur - Lazard Capital Markets

No. Thank you very much

Operator

Ladies and gentlemen that does conclude our Q&A session. I will turn the call back over to Morten for closing remarks. Please go ahead.

Morten Arntzen - President and Chief Executive Officer

Before we sign off, we want to extend an invitation to our upcoming investor event here in New York. Two weeks ago we sent down invitations to March 27th event taking place here in New York. All who attend can expect to gain a better understanding of each our primary segments and the markets in which we operate. You will have lot of opportunities to get to know the broader management team in more depth and ask any other questions that you have. We hope you will able to join us, we'll all be there and please contact Jennifer Schlueter at 212-578-1634. This is an invitation only event. We were forward to seeing you there and we thank all of you for joining us today. Have a good day.

Operator

Ladies and gentlemen that does conclude the OSG fiscal 2007 earnings call. We would like to thank you for your participation, have a pleasant day. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Overseas Shipholding Group, Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts