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Executives

James I. Edelson - Senior Vice President, Secretary and General Counsel

Morten Arntzen - Chief Executive Officer, President and Director

Myles R. Itkin - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Chief Executive Officer of OSG America LLC and President of OSG America LLC

Robert E. Johnston - Senior Vice President and Head of the U S Flag Strategic Business Unit

Lois K. Zabrocky - Senior Vice President and Chief Commercial Officer of International Flag Strategic Business Unit

Analysts

Michael Webber - Wells Fargo Securities, LLC, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Gregory Lewis - Crédit Suisse AG, Research Division

Urs M. Dür - Clarkson Capital Markets, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

Herman Hildan - RS Platou Markets AS, Research Division

David E. Beard - Iberia Capital Partners, Research Division

Overseas Shipholding Group (OSG) Q2 2012 Earnings Call August 1, 2012 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Overseas Shipholding Group Inc. Second Quarter 2012 Investor Conference Call. [Operator Instructions]

At this time, I'd like to turn the conference over to Jim Edelson, General Counsel. Please go ahead, sir.

James I. Edelson

Thank you. Before we start, let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker and articulated tug barge markets; changing oil trading patterns; anticipated levels and timing of newbuilding and scrapping; prospects for certain strategic alliances and investments, including OSG's U.S. Flag business unit; estimated TCE rates achieved for the third quarter of 2012 and estimated TCE rates booked for the fourth quarter of 2012; projected scheduled drydock and off-hire days for the third and fourth quarters of 2012; projected locked-in charter revenue and locked-in time charter days for the remaining 6 months of 2012 and for 2013 through 2016 and thereafter; OSG's ability to achieve its liquidity-raising objectives, including satisfactory long-term financing; estimated revenue and expense items, levels of equity income and capital expenditures for 2012; the profitability in 2012 of certain business units and OSG's LNG and FSO joint ventures; OSG's ability to access capital markets, raise additional debt financing and sell assets; OSG's projected compliance with financial covenants in 2012 and 2013; OSG's ability to further reduce general administrative expenses and vessel expenses; prospects of OSG's strategy of being a market leader in the segments in which it competes; the projected growth of the Jones Act in world tanker fleets; and the forecast of world economic activity and world oil demand.

These statements are based on certain assumptions made by OSG management based on its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate in the circumstances. Forward-looking statements are subject to a number of risks, uncertainties and assumptions, many of which are beyond the control of OSG, which may cause actual results to differ materially from those implied or expressed by the forward-looking statements. Factors, risks and uncertainties that could cause the actual results to differ from the expectations reflected in these forward-looking statements are described in OSG's annual report on Form 10-K for 2011 and in other reports OSG files with the Securities and Exchange Commission.

For this conference call, we have prepared and posted on OSG's website supporting slides that supplement our prepared remarks. The supporting presentation can be viewed and downloaded from the Investor Relations Webcasts and Presentations section on osg.com.

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

Morten Arntzen

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

Please turn to Page 3 of presentation. When we spoke last May -- back in May, activity in our international flag markets was relatively healthy, especially in the larger crude classes and for MRs. Not long thereafter, demand fell off in these segments as seasonal and technical factors reversed. Spot rates fell throughout May and then spent June at levels well below when the quarter opened, and at levels in some trade lanes close to operating cost breakeven levels.

We were still able to generate another $10 million operating cash flow in Q2 despite this, about the same as the first quarter with products. After booking April at a respectable $15,500 a day, rates fell through the $10,000 level and finished the quarter at operating cost breakeven levels.

Activity in the Atlantic fell off as product pricing fell on weak pre-summer demand on both sides of the Atlantic, and the arbitrage window closed in both directions. As weak as the Atlantic was, the Far Eastern markets were even weaker. This prompted many Eastern owners to reposition vessels to the Atlantic basin where our MRs are focused. This added competition and a loss of rate discipline exacted a heavy price on our MR spot market. So after an encouraging start to the quarter, our MR has averaged just about $10,000 a day with crude.

The same pattern materialized in the larger crude classes as market players scrambled to build crude inventories before the Iran embargo kicked in on July 1. This was completed towards the end of May just as the typical pre-summer select was setting in. Then in June, the mishap of Motiva occurred, which took 10 to 15 VLCCs out of the AG-West trade. Suezmax spot rates followed VLCCs fairly closely, while Aframax activities remain subdued with spot rates similar to the past 12 months or so. Rates in International Crude and Products remain weak today.

On a brighter note, the U.S. Flag business continues to do well and perform ahead of plan. I'll have more to say about that later.

On cost containment, we reduced our average daily vessel expenses in international fleet further in the Q2 and remain well inside of the budget for the year. Our U.S. Flag vessels are also being run inside budget. Our technical management teams have cost under control.

With just one more vessel to go, we have almost fully executed our plan to consolidate our International Flag technical operations for our crude and product tankers in Athens. The last vessel will be transferred from Newcastle to Athens late this week, and we expect to realize annual savings of $3 million to $4 million a year as results beginning next year.

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

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

Please turn to the next page. The crude tanker market remains oversupplied with vessels, but ordering of new ships has essentially stopped. As it concerns crude tankers, there is an order book flip the world's shipbuildings do faces towards the end of next year, and we don't see that changing. At the same time, increasing discrimination against all the ships in the trade markets will prune some ships in the fleet.

Global demand for oil continues to grow albeit at a modest pace. We expect global demand to increase by 1.6 million barrels per day in the second half of 2012 compared with the first half, and 1 million barrels a day increase in 2013 compared with 2012. Now this is not enough to spur a strong recovery rate, but it is enough to lift them to the levels we've been trading at the last 2 months.

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

Asia, and particularly China, will continue to drive tonne-mile demand growth in the crude sector. We expect 840,000 barrels per day of refinery capacity to be added in Asia in the second half of 2012 and another 930,000 barrels per day in 2013, which should support growth.

West African exports to Asia should rebound as the Brent-Dubai spread normalizes with North Sea maintenance being completed in the third quarter of 2012. We also expect to see healthy continued growth of Latin American crude exports to Asia, substituting barrels that may have gone to the U.S. in the past.

Please go to next page. The supply side of the product tank [ph] space still looks constrained. We are forecasting just 2.5% fleet growth in 2012 and 2013. The U.S. Gulf is now firmly established as a key product export center, and we see this growing as refineries have access to cheap domestic crudes and natural gas feedstock. Demand for U.S. products in Latin America continues to grow.

As already mentioned, the Atlantic trade has been hit by an influx of MRs from the East the last quarter combined with the disappearance of the cross-Atlantic arbitrage trades. We see this business returning spurred by demand for gasoline on the East Coast, possibly being lifted by a fall in ethanol production because of the drought in Midwest and the bottoming out of diesel demand in Europe. The better prospects for the product trade in Asia, partly spurred by refinery shutdowns in Australia, should draw back MRs to where we position in Atlantic. Add these factors together and you would conclude with that all that's required is a less negative attitude amongst owners for rates in the product space to rebound, there's no question that negative sentiment has hit the market but this can be overcome quickly.

Please go to next page. The fundamentals of our U.S. Flag business remains strong, and we are ideally positioned to benefit from this. We expect net fleet growth of only 4 ships between now and 2015. We see demand coming from [indiscernible] once it gets restarted, as well as demand to replace output from the Hovensa refinery, which was providing Florida with almost 150,000 barrels per day of product. We expect to see more Bluewater movements of crude oil from places like the Eagle Ford Shale fields, which could also spur demand. All 12 of our Jones Act tankers are on time charters of various durations with renewals being done at consecutively higher rates. Four of our clean ATBs are now on time charter, and the prospects for our Delaware Bay Lightering business improved with the announcement of Sunoco's Philadelphia and Conoco's Trainer refiners would be sold and stay in business. The turnaround of our U.S. Flag business could not have come at a better time for us.

Please go to next page. These are clearly challenging times for the company and our industry. Everyone in the company has to excel at their jobs, and senior management has to have their priorities clear. For the senior management team at OSG, priority #1 is reaching an agreement with our banks to place long-term financing that allows us to manage through this extended downturn in our International Flag markets.

At the same time, we speak with some of our other liquidity enhancing initiatives. I am confident we will. I've already spoken about the strong fundamentals of the Jones Act. We are pursuing new shuttle tanker business, new steel lays [ph] for our lightering business and possibly even time charters for transporting Eagle Ford Shale up coast on our Jones Act product tankers. We hope we get some contract wins here in the coming months and are applying a lot of resources to that end.

On the international flag market, commercial outperformance helped to sweat an extra 1,000 or 2,000 or 3,000 day of [ph] the ships. And in today's market, that means a lot. While the absolute rates are unpleasant, 17,199 average spot rates for our Panamaxes, and 19,309 for Suezmaxes, for example, are noteworthy. We need to keep it up. We also need focus on improving our results and performance of our FFO and LNG joint ventures.

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

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

Myles R. Itkin

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

Although the net loss increased by $18 million quarter-over-quarter to a total of $55 million, nonrecurring and noncash items accounted for much of this change. Our operating loss increased by $4.8 million reflecting $1.3 million in charges related to the consolidation of our technical management offices, $3 million in nonrecurring retention bonuses and a $7.6 million increase in depreciation.

Other income was $7.2 million lower quarter-over-quarter and was attributable to 2 nonrecurring items, $3.9 million in unrealized losses on bunker swaps and FFAs that do not qualify for hedge accounting, and $3.4 million in net losses on investments, principally relating to a 2006 investment and inactivity related to our abandoned CNG business.

In addition, the tax line moved from the benefit of $1.2 million in the 2011 quarter to a provision of $1.9 million in the 2012 quarter, a negative swing of $3.1 million. This principally reflects a change in the intra-period tax allocation in 2012.

It's worth noting that the noncash nature of certain of these charges contributed to a $10 million growth in cash provided by operations compared to the prior year's quarter.

Now a review of certain of the line items. Improved results in the U.S. Flag and International Crude tanker segments resulted in a 1% quarter-over-quarter increase in TCE revenues to $210 million. The increased revenue in these 2 segments was offset by continued weakness in the International MR product carrier fleet. MR spot rates were 30% lower quarter-over-quarter and 23% lower sequentially compared to the first quarter of 2012.

The aggregate 1% or $3 million quarter-over-quarter increase in TCE revenues reflects an $8 million increase in U.S. Flag revenues. The U.S. Flag performance reflects the continued trend of improved market fundamentals in the Jones Act market, as well as the delivery of the overseas Tampa on a variable charter on April 28, 2011. The U.S. Flag ATBs that were trading primarily in the spot market had 142 more revenue days and generated a greater than $6,000 per day quarter-over-quarter improvement in average TCE rates.

Also our U.S. Flag product carriers remain fully committed under time charters with year-to-date renewal rates in excess of expiring rates and each successive renewal rate higher than the prior charter renewal. The $6.3 million quarterly loss from vessel operations before G&A reflects a $16.7 million contribution from the U.S. Flag sector, counterbalanced by operating losses generated by our International Crude and our International Product sector of $5.9 million and $16.4 million, respectively.

Please also note that our joint venture investments continued their solid performance providing positive and consistent returns.

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

Please turn to Slide 11. Similar to the last quarter end, the cash balances of June 30 reflects in part the $150 million drawdown we made on our unsecured revolver in February 2012. The current portion of debt includes the excess of the amounts outstanding under the unsecured revolving credit agreement, maturing in February of 2013, over the $900 million availability under our forward start facility.

A few points about the company's liquidity and cash flow obligations. As noted, as of June 30, 2012, our cash stood at $227 million. In July, we drew down an additional $343 million under the unsecured revolving credit agreement with full remaining availability under this facility. These funds are being held in U.S. Treasury bills and high-quality money market instruments. The company now holds a cash and cash equivalent balance in excess of $550 million. Discussions are ongoing with our main banks to put in place long-term financing that provide sufficient liquidity to manage through an extended downturn in our International Flag tanker markets.

We remain in compliance with the financial covenants contained in our debt agreements and expect to maintain compliance with all of our financial covenants. We expect to cover any refinancing shortfall through the use of cash-on-hand and the execution of one or more of the liquidity raising options available to us. We expect to be able to draw under the forward start facility when it becomes available in February 2013.

Nonoperating cash outflows during the remaining 6 months of the year are manageable. Scheduled debt amortizations total only $13 million for the remainder of 2012. Remaining construction contract commitments through 2013 totaled $46 million, of which $17 million is due during the last 6 months of this year. More than 70% of our vessel net book value remains unsecured.

Please turn to Slide 12. Updates to our guidance are as follows: Vessel expense guidance is being revised downward to range between $285 million and $295 million, with vessel expenses of between $75 million and $77 million per quarter for the remaining 2 quarters of 2012. Our estimated 2012 charter hire expense guidance is being revised upward to a range between $365 million and $370 million from $350 million to $360 million range provided on the February call. This increase reflects short-term charters and extensions executed in the second quarter at market level rates.

Short-term charters less than 1 year in duration at inception are not included in our fleet list. $38 million to $43 million of the annual guidance figure represents estimates for these short-term charters. It should also be noted that the level of quarterly charter hire expense is expected to decrease sequentially during the remainder of 2012 from the $97 million of actual charter hire expense incurred in the second quarter.

Forecasted charter hire expense by quarter for the remainder of 2012 is as follows: Q3, $90 million; and Q4, $85 million. This decrease reflects the scheduled redelivery to owners of vessels in the International Crude segment.

Our estimated G&A expense guidance for 2012 was revised upward slightly to a range of $83 million to $89 million. We are narrowing the guidance for interest expense to a range of $89 million to $94 million from the $87 million to $95 million range previously provided. The change is attributable to reductions in our LIBOR assumptions for the balance of 2012 and the impact of the $343 million drawdown under our revolver in July.

Our guidance for drydock cost for the balance of the year is approximately $17 million. Drydocks and IRPs will be performed on 13 vessels, Q3, $9 million; Q4, $8 million.

Our guidance for capital expenditures for the balance of 2012 is approximately $20 million, which includes progress payments on newbuilds, vessel improvements and capitalized interest, Q3, $17 million; and Q4, $3 million.

We'll now open the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Michael Webber of Wells Fargo.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Morten, you're pretty clear about you not wanting to take questions on liquidity gap. So I'll try to avoid that. But I do want to touch on the full drawdown. Obviously, it comes across as a defensive move. Is that a reflection of your concern around, I guess, the lack of a syndicated loan market and maybe more generally, that forward start facility might be more difficult to access? I mean, can you just kind of help us think about that full drawdown out on the context of your forward capital structure?

Morten Arntzen

I mean, I think -- well, we think this was a prudent step to take to ensure continued liquidity given the ongoing difficult market conditions that includes the overall economy, as well as the difficulties in the banking market. So that's really it. Nothing more than that.

Michael Webber - Wells Fargo Securities, LLC, Research Division

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

Morten Arntzen

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

Michael Webber - Wells Fargo Securities, LLC, Research Division

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

Myles R. Itkin

I think it's perhaps best to explain less in terms of a bifurcated market and more in terms of an ability to compare our results to that of our competitors, many of whom just report modern vessels.

Michael Webber - Wells Fargo Securities, LLC, Research Division

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

Morten Arntzen

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

Michael Webber - Wells Fargo Securities, LLC, Research Division

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

Morten Arntzen

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

Michael Webber - Wells Fargo Securities, LLC, Research Division

Interesting. Okay, nice. Just one more, and I'll hop back in the queue. But around the Jones Act, and Myles, or actually Morten, you went through a lot of color there. And it seems like that Title 11 application process that was difficult for you guys in the first half of the year is now being difficult for some of your competitors. Now at what point is that -- the inefficiency of that program a benefit to you guys in terms of raising the barriers essentially to that Jones Act trade? And then kind of as follow-up, obviously, those markets are -- have been exceedingly strong. Can you kind of put some context around where peak level ATB and Jones Act product tanker rates could be?

Morten Arntzen

I think we're in a longer-term rising rate environment there. But you always will be constrained by -- you have a market check [ph] from the International Flag. So U.S. Flag can never run away from the market because the oil companies are just simply too efficient and operate their calculators too effectively. But there's no question that the adding of new trades, effectively at ATBs carrying crude oil today, and the Eagle Ford Shale is new. The fact that we have 2 shuttle tankers out in the open [ph] Deepwater Gulf is new, and we hope to have more. So that's been very positive pressures on the market. Regarding the Title 11 financing, I think that there's enough news on what's going on in Washington that I'll leave that questions for the experts. I don't understand the question.

Operator

Our next question is from the line of Justin Yagerman of Deutsche Bank.

Justin B. Yagerman - Deutsche Bank AG, Research Division

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

Morten Arntzen

Rob, do you want to try to take that one?

Robert E. Johnston

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

Justin B. Yagerman - Deutsche Bank AG, Research Division

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

Robert E. Johnston

When you look at the announcements that the Carlisle group and Sunoco made, I mean, they're looking at lowering the cost of their crude by taking more domestic crude. So I think in answer to your question, yes, it is going to reinvigorate the Northeast refineries if they can get a lower cost of crude oil.

Justin B. Yagerman - Deutsche Bank AG, Research Division

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

Myles R. Itkin

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

Justin B. Yagerman - Deutsche Bank AG, Research Division

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

Myles R. Itkin

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

Justin B. Yagerman - Deutsche Bank AG, Research Division

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

Myles R. Itkin

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

Justin B. Yagerman - Deutsche Bank AG, Research Division

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

Myles R. Itkin

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

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay. And I guess the last question as I think the about the situation that you guys are contending with -- when you think about all options on the table, the negotiations with lenders aside, you've got an interest in FSOs, you have the Jones Act fleet, which, obviously, is a very distinct business from the international fleet. You have interest in LNG vessels, and you've now broken out modern versus older vessels on the international side. It would seem to me that within at least those 4 categories, you have some possibility for significant asset sales and fundraising. Is that something you're actively pursuing? Are there considerations on the table? And what kind of time frame could we expect anything to be executed in?

Morten Arntzen

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

Operator

Our next question is from the line of Jon Chappell with Evercore Partners.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Just a couple follow-ups, actually to a couple of Justin's questions. First, back to Captain Johnston on the U.S. Jones Act opportunities. When you assess the cost of shipping Eagle Ford or West Texas crude via Jones Act ship versus shipping Bakken via rail to the East Coast refineries, how is the cost layout of those 2 compare?

Robert E. Johnston

And so looking in the rail transportation, the numbers we're looking at right now is about a $6 a barrel differential.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Higher via rail.

Robert E. Johnston

That's correct.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Okay. And another follow-up to the questions without getting into any detail on alternatives that you may pursue. But the last quarter, you laid out a handful of things you're looking at. I'm just wondering as things have developed over the last 3 months, whether it's in the banking sector or maybe within the bond market in Norway or just the equity markets in the U.S., are there any alternatives that you laid out in May that are now off the table?

Morten Arntzen

No.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

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

Morten Arntzen

We have no plans for a third [ph] equity offering right now. Will we consider it under different circumstances? The answer is yes.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

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

Morten Arntzen

I think I've said it best -- we had not expected the recession in our International markets to last over 4 years, and we're now in the fifth year. So did we wish we had more time charter to cover? The answer would have been yes. And we had a lot of product tanker coverage at the top of the market that has run off. So would we like more? The answer is yes. In the crude market, it's very difficult to construct a portfolio of time charters, but this isn't the market. So that would have been very difficult to do. We took in an MR product tanker, put it out in a 1-year time charter last week at a market rate significantly above the spot rate but not at the rate that historically we would've liked. And we will continue to do that. There are some short-term charters in the crude market that we will look at, but we're -- it's business as usual. If we think that the rate we've achieved makes sense for the period forward, we'll do that.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

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

Morten Arntzen

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

Operator

Our next question comes from the line of Gregory Lewis from Credit Suisse.

Gregory Lewis - Crédit Suisse AG, Research Division

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

Robert E. Johnston

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

Morten Arntzen

Bob, it's shale crude. We're not loading Bakken crude, Eagle Ford Shale.

Robert E. Johnston

Eagle Ford Shale, that's right. So Eagle Ford Shale crude coming up, but that's the vessel that's loading. It has been the crude trade, and it's continuing in its crude trade. You're not switching back and forth from clean to dirty all the time. And that vessel is on a time charter. So it's a good period piece of business.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay, but -- so at this point, no more vessels have gone on to charter, no vessels have been switched from product to crude, is that how we should think about it?

Robert E. Johnston

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

Gregory Lewis - Crédit Suisse AG, Research Division

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

Morten Arntzen

Bob, you want to take that one?

Robert E. Johnston

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

Gregory Lewis - Crédit Suisse AG, Research Division

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

Robert E. Johnston

And if I can just comment -- and one other comment on that, the other issue there is availability of shipyards. Because right now when you still look in the yards that can build ATBs, a lot of them don't have any space.

Morten Arntzen

Bob, it's sort of [indiscernible] function of the size of the ATB as well, right?

Robert E. Johnston

That's correct. But I'm talking about a large-scale ATB.

Gregory Lewis - Crédit Suisse AG, Research Division

Sure. Sure.

Robert E. Johnston

A 62,000 [ph] barrel ATB.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay. And then just real quick on the -- you mentioned that the U.S. Flag vessels are rolling off into better rate -- a better rate environment. Could you give us any guidance on the number of ATBs and/or the product tankers that are rolling off contract sort of over the next 18 months? Is that an information that you have available?

Robert E. Johnston

You're talking about in the entire U.S. fleet?

Gregory Lewis - Crédit Suisse AG, Research Division

Yes.

Robert E. Johnston

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

Morten Arntzen

Greg, are you talking about the U.S. fleet or OSG's U.S. fleet?

Gregory Lewis - Crédit Suisse AG, Research Division

I'm talking about OSG's U.S. fleet.

Robert E. Johnston

I'm sorry, I misunderstood you then. We have 3 vessels rolling off next year.

Gregory Lewis - Crédit Suisse AG, Research Division

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

Morten Arntzen

Yes.

Gregory Lewis - Crédit Suisse AG, Research Division

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

Lois K. Zabrocky

Yes, absolutely, the major sector where we have actually done charter in opportunistically, this year would be on the Suezmaxes. And we've been able to do those in-charters that substantially lower than what we have been earning. So on everyone of those in-charters, we've been able to earn an incremental profit. And we've been able to charter vessels with a lot of flexibility. So when we're running pools and we're working with our partners, we are able to take advantage of -- at times where owners would like to seek a time charter. And we have the program that can take advantage and get incrementally higher rates. We've also taken in a few vessels on the Aframax side, in particular, ships that are 112,000 to 115,000 dead weight and fit our program.

Gregory Lewis - Crédit Suisse AG, Research Division

Okay, perfect. And then just actually 2 more quick questions for me. I guess, yesterday American Shipping announced that they were able to get their -- and able to extend their credit facility. And with that, if I read the announcement correctly, OSG was actually -- extended the duration on those vessels, I think, from -- on an average of around 2014 to 2016 now to 2019, is that correct? And thinking about OSG's decision to extend the in-charters on these U.S. Flag tankers, with that blending in -- where you able to get a lower charter-in rate in those outyears? Or is it sort of just -- when we think about it, is the chartered-in rates sort of flat over that period or even potentially moving higher?

Morten Arntzen

This is a decision -- the agreement to extend was made when we did the settlement with them 2 or 3 years back, at the same time when we committed to buying the vessels that became the Chinook and the Cascade. And if they got the refinancing and satisfied all the conditions of it, we would do that. And the rates continue at the same levels that they're at. So we're very pleased that we have those 10 chartered-in tankers. They are very valuable for the company. They are profitable. They should be increasingly profitable. And I think it's positive that America Shipping has managed to extend their financing at the same time because that takes any risk there off the table. But this was an agreement that's been in place for a couple of years. But having said that, we expect to be chartering in those tankers for a very long period of time.

Myles R. Itkin

That charter in rates are essentially flat throughout the period. At the end of 2019, when the charters coterminously expire, we again have 3- and 5-year extension options and 1-year extension option attached to each of those charters for the remainder of their lives.

Operator

Our next question comes the line of Urs Dür with Clarkson Capital Management -- or Markets. My apologies.

Urs M. Dür - Clarkson Capital Markets, Research Division

Can you guys remind us and remind the audience on your bright spot in regards to market share for the U.S. Flag business?

Morten Arntzen

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

Urs M. Dür - Clarkson Capital Markets, Research Division

Can you guys possibly elaborate your market position on the U.S. Flag business in regards to your competitors, and what you broadly think your market share is of the overall?

Morten Arntzen

Captain Johnston?

Robert E. Johnston

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

Urs M. Dür - Clarkson Capital Markets, Research Division

Sorry, that last was?

Robert E. Johnston

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

Urs M. Dür - Clarkson Capital Markets, Research Division

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

Robert E. Johnston

As far as building tankers, there's primarily 2 yards that can do it. One is Ocker, which built our 12. And then other one is National Steel out in San Diego. They built 5 product tankers. So there's certainly capable as well. But when you look at Ocker, they have a contract with Exxon to build 2 Aframax tankers. So their space is not going to be available till after those contracts are finished. However, NAASCO at San Diego just have some space of availability from what we understand.

Urs M. Dür - Clarkson Capital Markets, Research Division

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

Robert E. Johnston

You're still talking in excess of 2 years.

Operator

Our next question comes the line of Brandon Oglenski with Barclays Capital.

Brandon R. Oglenski - Barclays Capital, Research Division

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

Morten Arntzen

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

Brandon R. Oglenski - Barclays Capital, Research Division

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

Morten Arntzen

No, I think it's our LR1s, aren't you? Well, I don't know Lois if that's significant. Why don't you mention the LR1s.

Lois K. Zabrocky

Yes. We have 6 LR1s that essentially it's really a Panamax size but with coating in deep well pumps. And all except for one of our LR1s, we are trading dirty where we are seeing superior returns. And those vessels can move in and out of the dirty trade into the clean markets when we see that sustained at a higher level.

Brandon R. Oglenski - Barclays Capital, Research Division

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

Morten Arntzen

That's correct.

Operator

Our next question comes the line of Herman Hildan with RS Platou Markets.

Herman Hildan - RS Platou Markets AS, Research Division

I'm going to try to cut this short. In mid-June, we saw [indiscernible] that you have in your LNG joint ventures acquiring 4 LPG [ph] vessels from your joint venture partners. In that statement they also said that the LNG fleet will come under control in due course. Last year, I think Morten said that the value of the LNG vessels or the equity value was about $170 million, which is ironically less -- or more than your than your current market cap. Now my question is really can you say whether you stand by that evaluation comment still, and obviously if it's possible could you say something about the timing?

Morten Arntzen

I don't think that I would ever be as undisciplined to put a valuable in one of our joint venture interests in any of type of public settings. I think that would be -- I'll snip [ph] out that number. I think it's a very valuable joint venture that gives us a steady dividend. We like the LNG business and we think it's in -- and the operations are running very well.

Herman Hildan - RS Platou Markets AS, Research Division

But is it possible to say whether [indiscernible] were referring to the vessels that they have a joint venture with you?

Morten Arntzen

I think you'll have to direct that question to Nokov [ph] because I certainly don't want to speak for our partners, we have a good partnership with them.

Herman Hildan - RS Platou Markets AS, Research Division

Can you say something whether you have interest in bars [ph] in the LNG vessels?

Morten Arntzen

Whether we have...

Herman Hildan - RS Platou Markets AS, Research Division

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

Morten Arntzen

Any discussions regarding potential approaches on any of our assets are something that we would deal with confidentiality and if we ever did the transaction we would announce it. That we were very disciplined on. That's not going to change.

Operator

Our next question is from the line of David Beard with Iberia Capital Partners.

David E. Beard - Iberia Capital Partners, Research Division

Just a clarification relative to moving crude from the Eagle Ford, relative to rail cost. Were you saying that rail was $6 cheaper to the Gulf coast or to the East Coast?

Morten Arntzen

More expensive, East Coast.

David E. Beard - Iberia Capital Partners, Research Division

And then just 2 other questions if you wouldn't mind, I noticed your SG&A included retention bonuses. Can you talk just why you felt you needed to pay that much? And how many people were involved?

Morten Arntzen

There was a couple of people involved. Our CFO, the head of our U.S. Flag business. If you read the proxy, I think you can see they are both of a retirement age and would have the resources therefore to retire comfortably. This was a difficult issue for the board. And at a time when we're going through a major refinancing, the time when we -- our U.S. Flag business is the major provider of cash for the company, we thought it would be very damaging for the company if we were to lose the service to either of those 2 gentlemen. So while we knew it would not be a popular press release, either with our shareholders or perhaps with our employees, it would be lot more damaging to move either of those individuals in the environment we're in, and we'd like them to retire after the companies participate in the recovery of our International Flag markets. And that's why the board acted.

David E. Beard - Iberia Capital Partners, Research Division

That's totally understandable. Lastly just as it relates to this bank line because I get the question phrased this way, "Isn't OSG playing chicken with the banks and forcing their hands?" How do you respond to a question like that?

Morten Arntzen

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

Operator

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

Morten Arntzen

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

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the Overseas Shipholding Group Inc. Second Quarter 2012 Investor Conference Call. I'd like to thank you very much for your participation. You may now disconnect.

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