Overseas Shipholding Group, Inc. Q4 2008 Earnings Call Transcript

| About: Overseas Shipholding (OSGB)
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Overseas Shipholding Group, Inc. (NYSE:OSG) Q4 2008 Earnings Call Transcript March 2, 2009 11:00 AM ET


Jim Edelson – General Counsel and Secretary

Morten Arntzen – President and CEO

Myles Itkin – EVP, CFO and Treasurer

Bob Johnston – SVP and Head of US Flag Strategic Business Unit

Mats Berglund – SVP and Head of Crude Transportation Strategic Business Unit


Jon Chappell – JPMorgan

Greg Lewis – Credit Suisse

Scott Burk – Oppenheimer


Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Overseas Shipholding Group fiscal year 2008 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) As a reminder, this conference is being recorded today, on Monday, the 2nd of March 2009. I’ll now turn the conference over to Mr. Jim Edelson, General Counsel and Secretary. Please go ahead, sir.

Jim 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, the outcome of negotiations with American Shipping Company ASA and Bender Shipbuilding & Repair Company, 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 and synthetic time charter rates achieved for the 2009, projected drydock and repair schedule, timely delivery of new buildings and conversion of vessels in accordance with contractual terms, credit risks of counterparties including charterers, suppliers and shipyards, and the impact this may have on OSG, and prospects of OSG's strategy of being a market leader in the segments in which it competes, the projected growth of the world 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 2008. For this conference call, we have prepared and posted on OSG's website supporting slides that supplement our prepared remarks. This supporting presentation can be viewed and downloaded from the Investor Relations, 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

Good morning. Thank you for joining our call. Let me introduce the management team that’s with me. Myles Itkin, our CFO; Jennifer Schlueter, Head of Corporate Communications and Investor Relations; Lois Zabrocky, Head of our Product Tanker SBU; Mats Berglund, Head of our Crude Tanker SBU; and Captain Bob Johnston, Head of our US Flag SBU.

As Jim indicated, our remarks will follow a presentation that is posted on the website. So if you’d now turn to slide three. Before I get into the numbers on the full year ’08, I want to highlight a few things about OSG and the tanker market. This is a departure from the way we normally hand our earnings calls, but these are not ordinary times. For the corporate world in general and the shipping world in particular, the lack of functioning credit market has had and likely will continue to have a profound impact on equity valuation and business prospects for the shipping industry well into next year.

While the tanker business has held up better than all other segments – shipping segments, OPEC cuts, the downturn in gasoline demand worldwide, and increased newbuilding deliveries will make for a challenging 2009. For those companies that came into this financial headwind unprepared, these are times for survival tactics. Fortunately, we saw back in 2007 that weaker markets were ahead and we are prepared for the downturn that has hit us.

Although there is no escaping that 2009 will not be nearly as good as 2008, this troubled financial environment could end up being highly beneficial for those of us that are in strong positions, those of us that are being managed for the long run. The most important takeaway from this earnings call is that OSG’s balanced growth strategy has positioned us to handle even the extraordinary difficult economic times we are operating in.

In 2009, we will focus on reducing cost on shore and at sea, performing flawlessly for our customers, continuing to improve the quality of our operations, mostly incremental liquidity even though we need it today, and fixing those aspects of our business that are not performing adequately. The alternative for many is hunting for money and negotiating with their banks.

Our balance sheet strength, liability management and health of liquidity means we can manage through a prolonged downturn in the market. Unlike many companies in all industries, we are not facing looming debt repayments or covenant issues. Later in this call we will give you details of our financial flexibility at a time when most have none. We will let the facts speak for themselves.

As a result of the overall world economy and the OPEC production cuts, 2009 will be a weak year for the overall tanker industry. But the combination of our time charter portfolio, FFA coverage, COA business and cargo systems will enable OSG to remain profitable and generate positive cash flow. As far back as early 2007, we expected 2009 to be challenging. In anticipation of this, we took more term cover than we have ever had in this period to shield ourselves from the serious falling rates.

We also accelerated our program at vessel sales and sale leasebacks, and we took on incremental financing. We know that the unexpected always surprises our industry. We have built the business so surprises could be managed. This belief has guided our balance sheet management strategy for decades.

The performance of our US Flag unit has been extremely disappointing. But we are taking decisive actions to turn around. The write-downs, order cancellations and impairment charges taken by our company in the fourth quarter in our US Flag business impacted our financial results in the fourth quarter significantly. However, in the first two weeks of 2009 we generated $127.5 million in gains on vessel sales, largely offsetting the write-down in this unit. We have put new management in place, and they are decisively sorting out the problems.

Please turn to page four. Looking to the coming years, we expect the phase-out of the 98 remaining single hull VLCCs in the world in 2010 will spark a recovery in tanker rates. We have highlighted the difficulties single hull vessels have competing against double hull vessels for several years. This increased discrimination against single hull tankers continued throughout 2008 and was one of the reasons for the high rate environment last year. We expect the phase outs we adhere to strictly, and this should result improving tanker markets during 2010 and beyond. More ships will exit and enter the market next year.

Now, the almost complete, complete absence of bank financing for new buildings, except from government, will have a profound impact on the tanker order book, the global ship building industry, and could result in much healthier tanker markets than what the static order book suggests today. If you’ve looked at the newbuilding order book in June of 2008, it was easy to get concerned about the earnings outlook for most shipping segments.

While it is early in the game, we believe this outlook is changing. We have already seen a number of bankruptcies, order cancellations, contract extensions, and a stressed sales, all of which we expect to accelerate as the year progresses. We are seeing shipyard bankruptcies and a lot more shipping company bankruptcies. Owners will be walking away from newbuilding orders even when it means forfeiting 20% to 30% down payment. Owners will get 2010, 2011, and 2012 deliveries pushed back to 2013 and beyond. Orders will be reduced. It will be messy. The owners will try to hide what they consent to. But before this banking crisis is behind us, we will have a better order book.

In many ways, this is the best thing that could have happened for the strongest players in the industry. Or another way to put it is that too many ships were ordered by companies that should not have ordered, to be built yards that should not have been built, to be financed by memories of the banks that no longer lend. The graphic collapse of the global credit market along with the global recessions has been disastrous for most shipping segments.

If your company entered this period with bank financing to raise, no term cover, looming debt maturities, unfinanced newbuildings or poor commercial management, your company has a challenge. In most respect, it mattered more what condition your company was in when the banking market collapse hit and what steps you have taken since.

These problems with the banking system that we are all aware of, which is even more acute amongst the historically key ship-lending institutions, will create enormous opportunities for the stronger shipping companies during the next few years. But patience, patience, and discipline are key. There is simply no new bank financing available for the industry worldwide right now. This is what is driving secondhand values for ships down.

Not many buying opportunities have emerged yet, but they will. Only the companies with liquidity and strong operating platforms will be able to take advantage of the situations when they arise. OSG is one of those few companies, but we are in no hurry, no hurry to chase deals. We would monitor the markets closely, focus on running our business well, and then make investment moves when the time is right. Today is not that day.

When the global economy recovers, OSG will emerge as one of the clear winners in the tanker trades. We have the privilege today of not having to worry about survival, thanks to our long-term approach to managing the business. Instead, we can focus on addressing certain issues, including those in our US Flag unit, reducing costs and improving service. At the same time, we can patiently wait for opportunities to fall our way. They will, and we will take advantage of them. Thus when the global economy eventually turns around, we will be one of the winners.

Please turn to page five. Turning to the financial results, TCE revenues of $1.5 billion in 2008 was the highest in the company’s history, up nearly 50% year-over-year. Annual results were driven by very strong spot rates across nearly every spectrum we trade in. Reported net income of $380 million included among other things charges associated with our US Flag unit, which in aggregate were $201 million or $5.64 per share, and included $168 million of non-cash goodwill and asset impairment charges.

Adjusted net income and EPS was $449 million and $13.83 per share, including gains on vessel sales of $78 million. Details of all special items affecting net income are in the Index of this presentation, page 22, on the website. Cash generated from operations was $367 million in 2008 compared with $168 million last year, an increase of just under $200 million year-over-year.

During the year, we’ve purchased 4.5 million shares or 14% of the total outstanding for $259 million. In the fourth quarter, 1.6 million shares were repurchased at an average price of $36.26 per share. We have $37.2 million left in our current program.

With the annual dividend raise in June to $1.25 per share, we paid $45 million in dividends last year. Today, our liquidity position is very healthy, and more on that later, totaling $1.5 billion and a modest 36.8% liquidity adjusted debt-to-capital. Cash balances as of Friday last week stood at $500 million.

Please turn to slide six. If you look at the two charts on the right, 2008 rate performance is compared to with that in 2007. So the important takeaway from 2008 is that, once again, we delivered superior performance to our major competitors. The out-performance in the Aframax and Panamax structures is particularly noticeable. What delivers this is our scale, our cargo systems, our customer relationships, and our key partnerships.

In this market, cargo is king. In the weak markets, that’s especially true. The key is not to wait for cargos. If you have cargo commitments, cargo systems, we will wait less than our competitors, and that will result in better performance across the year.

We’ve talked for many years about scale. Scale matters. Scale is what we get to our commercial pools. It improves our ballast ratios. It enables us to beat our competition. It enables us to build our cargo systems, the virtuous circle. Scale creates cargo systems. Cargo systems also create scale.

We also get new business derived from the key partners and customers that we have, and we’ve mentioned a few of them. You all know that Unipec is a key client of ours in tankers international, our VLCC pool while China this year will be one of the few markets we expect actually have growth in imported oil. We have a key relationship with SONAP in both the Panamax pool and they became a co-founder of Clean Products International, our products pools. Korea Line, which was a TI partner, has joined us in Clean Products. Then we have Seaarland, one of our key partners in Aframax International, was a founding partner in our new Suezmax International pool. This best-in-class platform leads to higher margin projects and business and better results.

Turning to next slide, just so it’s clear, OSG remains strongly committed to best-in-class in-house technical management. No doubt weaker markets will benefit the better operators. When we speak with our big clients, they are concerned that weaker companies will start cutting their standards. We will not. We are vetted and approved by all the oil majors, and we will commit even more to maintain than that in 2009.

We have a tenacious focus on results. In 2008, crew retention for US mariners was 90% and international 97%. Terrific numbers. We’ve improved our training programs. We have dedicated facilities in Manila and Tampa. We have a long-term commitment sea staff and clients that is paying off, and that commitment is going to help us in these difficult times. And we also talked about it a lot, the cost of regulatory compliance will continue to escalate. Those that fail to plan for this can plan to fail. We will be planning for it.

Turning the page, 2009 is going to be a challenging year for everyone. Nevertheless, all is not bad. We have a number of things we have done, and that will happen in 2009 that will strengthen our business going forward. Let me start with crude. We closed on the sale of Donna at the beginning of the year and had a gain of $77 million. You have picture there of the two FSOs in – two VLCCs in Dubai drydock getting converted to FSOs. That project is on schedule, has very healthy returns, and those ships will be on full-year contract in 2010 and on part contract in 2009.

We acquired lightering business a couple of years ago, which we said would help us in weaker markets. Lightering is a contract-oriented business and a good hedge in weaker markets. It is and it will service that way in 2009 and 2010. And then we have much tighter control and emphasis on daily running costs in our crude fleet.

If you look at the products fleet, we are in the midst of a nine-ship MR expansion, two have already delivered and we have seven more to go. And most importantly, if you look at the bottom of that box, we have 11 old vessels redelivering in 2009. We believe that as they are replaced by the modern ships, we will increase earnings per day by $4,500, or $1.6 million per year, adding $18 million to the bottom line and reducing the drag on earnings represented by the older ship.

We will continue with our LR1 expansion, which we think is one of our exciting segments, growth segments in the products trade. And Clean Products International pool has continued to take on new members. If you look quickly at the US Flag, we have six Aker ships trading. We recently took delivery of the Overseas Boston. The higher-yielding Aker vessels all deliver through the first quarter of 2011, including two shuttle tankers and that will improve our results in the US Flag business, as we go into 2010 and beyond.

Turning to the next page. Most of our shareholders are singularly focused these days on the creditworthiness of the companies in which they hold shares. Considering the state of the world banking markets, this is not misguided. In a world where AAA GE has returned to the US government to liquidity, financial viability matters. Fortunately, for our shareholders, the credit story in OSG is a good one.

Another key takeaway from those on the call today is that you can drive a truck through our loan covenants. And this is not because we got great deals that were too favorable to my banks, but because as many of you have heard we mention time and time again, we had a goal, always having one, the strongest balance sheet in the industry. So we are prepared for the good and bad times.

Let’s go to the numbers. We’ve put together a similar slide for you last quarter and I’ve used it in every meeting with investors in the past four months. The financial flexibility this slide demonstrates is one of the key themes the investors should take away from today’s call. Let’s look at it. We are predominantly an unsecured borrower with 28% of net book value pledged as collateral. This means we are not constricted, confronted with loan-to-value calculations that the vast majority of shipping companies are struggling with today.

Long-term debt totals $1.4 billion, with annual principal payment obligations of less than $30 million this year and next, and rising to $33 million in 2011. There has been an increased focus across the board by investors on covenant obligations, but it’s early to put them out for all of you to see. That is, no matter how you look at it, plenty of room for OSG. We have no need to negotiate with any of our banks on relaxing covenants.

Let’s look at them. If you look at the max leverage, we have the ability to add another $963 million of additional debt, assuming that our net worth stays constant today. If you look at the minimum net worth, we can incur $1.2 billion in losses or out of share dividends and still be in compliance with our minimum net worth covenant. Assuming a 70% advance rate, we have the ability to take on $965 million on additional debt on newly acquired vessels or newbuildings. And we have the ability to take on $275 million of secured debt on existing assets. Again, the other takeaway here is that OSG is well-positioned to capitalize on opportunities without going to the equity or debt capital markets for funding.

Please turn to slide ten. I talked about our debt capacity, cash balances, healthy levels of cash generated by operations, all of which give OSG ample coverage of our newbuilding commitment. So let’s take a look at them. In 2009, we have $256 million due on six vessel delivering. We can cover these from just our asset sales and what remains in our capital construction fund. This is why we expect to end up at December 31, 2009 with as much liquidity as we ended 2008. In 2010, we have $357 million in commitments on five vessels, and in 2011, $209 million in commitments on (inaudible). We already have these commitments covered.

While we are in the enviable position of not having to raise incremental loan or equity capital to finance our newbuilding programs, this does not mean that we won’t. Indeed, probably because we don’t need to raise incremental debt means that we will be able to do so. We are pursuing alternative long-term financing for some of our newbuildings and look forward to share the details with you when things are finalized.

Please turn to slide 11. Our contract portfolio has grown significantly since we committed to doing so in 2004. We entered 2009 with more locked-in revenue than we have ever had before. Our fixed contract portfolio of $507 million positions us well for 2009. The investment in growth in our Products and US Flag fleets and their time charter books of business coupled with COAs, time charters to the pools and FFA positions will pay off in any market.

In addition, we have a full year of gas earnings in 2009 and the FSO project coming on line in the second half of the year, adding another $77 million in fixed revenues. Of the $507 million locked in TCE revenues this year, 65% is from time charters or $331 million, another 6% from pool time charters, the balance from FFA positions. The chart on the lower left is the revenue days emphasized on fixed versus spot. Let me take this one step further and how fixed revenue sets us up for this year and next year.

Please turn to slide 12. Contracted revenue in 2009 covers a significant portion of cash expenditures. In crude, 54% of cash expenditures, operating drydock charter-in obligations, allocate G&A, debt amortization and interest expense are covered requiring the fleet to earn 20,000 a day on unfixed or open-days to cover the balance of cash expenditures.

These charts further show that this relationship in the Product and US Flag segments and further breaks down crude by vessel class. I should add in the Products, that includes covering five drydocks this year, which does increase that number. So it’s a fully loaded number. The messages on these last four slides is that OSG is in a solid position. Capital commitments are covered by asset sales and required no borrowings in 2009 when we have ample debt capacity to fund.

Our covenant room – well, we think most competitors would like to be in a similar position not to have to think about what they need to get from the banks in this environment. Enhancing commitments and operating cash expenditures are substantially covered from locked-in revenue living up to achieve a certain level of earnings in the balance of open days. We have ample liquidity and borrowing available to us.

This concludes my introductory remarks. Let me turn the call now over to Myles and I will come back to conclude.

Myles Itkin

Thank you, Morten. And good morning. Please turn to slide 14. The results for the quarter ended December 31 reflect once again a strong yet volatile rate environment in our Crude and Product sectors, as well as OSG is operating earnings power and our ability to deliver superior operating returns. The 39% increase in Q4 revenues is largely attributable to a 60% increase in VLCC spot rates to $57,000 per day, a 38% increase in Aframax spot rates to $34,000 per day, and $1,240 additional revenue days across all sectors.

Of the quarter’s $349 million of TCE revenues and $96 million in income from vessel operations before asset and goodwill impairment write-downs, the Crude sector contributed 59% of TCE revenue and 75% of income from vessel operations. The Product sector 23% of TCE revenue and 18% of income from vessel operations, and the US Flag sector 18% of TCE revenue and 8% of income from vessel operations. For the quarter, 61% of our TCE revenues were derived from the spot market and 39% in physical and synthetic time charter markets.

Please turn to slide 15 for a discussion of other income statement items. The positive impact of increases in spot rates and revenue days was partially offset by higher voyage expenses, which increased by $19 million from the fourth quarter of 2007 principally due to higher fuel costs. Vessel expenses for the entire fleet increased by $17 million for the quarter to $85 million. In addition to a 411-day increase in owned and bareboat chartered-in days in the quarter, we experienced the effective upward pressure on crew wages and insurance premiums.

We also incurred higher costs on seven tankers, which operated under fixed rate management agreements with DHT Maritime. These agreements were scheduled to terminate in January 2009. New technical management agreements have been executed at market terms, eliminating the $11.5 million subsidy provided by us to DHT in 2008.

Charter hire expenses increased to $121 million in the current quarter, up by $49 million or 68%. The increase was attributable to approximately ten more vessels, 1,300 days being chartered in during the fourth quarter compared with the fourth quarter of 2007. The profit share component included in charter hire expense for the current quarter totaled $13 million, $9 million higher than the prior year’s quarter reflecting higher earnings generated on VLCCs and Aframaxes.

G&A expenses increased by $7 million to $39.8 million in the fourth quarter of 2008 versus $32.8 million for the same period in 2007. This increase was primarily attributable to an increase in salaries and stock-based incentive compensation of $4.4 million and higher legal and consulting costs of $4 million. However, the company has initiated a program to reduce G&A in the coming year to an annualized level, ranging between $125 million and $130 million, generating savings of up to $20 million over 2008’s level.

During the fourth quarter of 2008, the combination of the decline in the unit price of OSG America together with the economic downturn were considered triggered [ph] events in accordance with accounting standards, requiring the company to perform a goodwill impairment test at year-end. There were a number of market-related events in the fourth quarter that resulted in the deterioration in the forward supply demand balance in the Jones Act market. This together with the reduction in the company’s US Flag newbuild program is expected to negatively impact the company’s US Flag operations in the near and medium-term. Consequently, the company has reduced its estimates for future cash flows used to estimate the fair value of its US Flag operations and accordingly recorded an impairment charge of $62.9 million, representing the entire value of goodwill related to the US Flag segment.

During the quarter, we also recognized an impairment of $105 million related to a series of vessels being constructed by Bender Shipbuilding & Repair Company. Repeated delivery delays by Bender caused concerns that the yard would not be able to complete the six ATBs and two tug boats within contract terms due to both Bender’s failure to perform under such agreement, its lack of its liquidity and its core financial condition.

In early 2009, OSG began negotiations with Bender to end construction agreements covering the eight units associated with our US Flag expansion plans. There is no assurance that OSG and Bender will reach an agreement on the termination of their existing contracts and the transfer of the vessels to OSG in their current state of completion.

The company intends to complete two of the six ATBs and two tug boats at alternative shipyards. And based on accounting rules, the company expects to record an additional impairment charge and contract termination cost of between $20 million and $35 million against earnings in the first quarter of 2009 related to these four ATBs.

In addition, we recorded a further $8.8 million write-down on two older US Flag vessels that had operated in the Delaware lightering trade, which units were placed in layout pending sale and have been classified as held-for-sale on our balance sheet after the company decided not to put these vessels through expensive drydockings, which would have been required for them to continue trading. Now, these vessels were written down by $24 million in the third quarter of 2008.

Other income decreased by $5 million quarter-over-quarter. Interest income in the current quarter declined by $6.5 million to $2 million as a result of both lower interest rates and a reduction in capital construction fund and cash balances, all of this resulting from the repayment of a portion of our outstanding revolving credit debt through the application of $545 million of funds repatriated in the second quarter of ’08. The decrease in interest income was partially offset by a $2.7 million favorable gain through freight derivative transactions compared with the fourth quarter of 2007.

Interest expense is down $11.6 million as a result of a 250 basis point decline on our floating rate debt, 3.3% from 5.8%, and lower outstanding average debt balances decreasing to $1.4 billion from $1.6 billion. Additionally, during the second quarter of 2008, the company redeemed $176 million of our 8.25% senior notes. This redemption reduces interest expense on an annualized basis by about $7 million a year through 2013. As it relates to minority interest, the $53.5 million net loss incurred by OSG America multiplied by the 22.5% interest in that company held by the public explains essentially all of the offset – the $12 million offset reflected on our financials.

The income tax benefit increased by $28 million to $32 million in the fourth quarter of 2008. The income tax calculations are based on pretax results of the company’s US subsidiaries and adjusted to include non-shipping income of the company’s foreign subsidiaries. The major drivers for the tax benefit for 2008 are the carry-back of approximately $4 million of 2008 tax losses against the non-shipping income of the company’s foreign subsidiaries generated in 2007. In addition, the vessel write-downs on the US Flag fleet gave rise to the reversal of previously established deferred tax liabilities in the amount of $26 million.

As it relates to specifics, the write-down taken on the ATB, 3.52 of $50.7 million times 35% amounts to approximately $17.8 million of this reversal of deferred tax liability, the write-downs on the Integrity and the M300 of $24.3 million multiplied by 35% or $8.5 million, the same reversal of deferred tax liabilities, and then the carry-back I have mentioned to you, as well as other reversals of previously established deferred tax liabilities that would determine no longer to be required.

Please turn to slide 16 for a discussion of various balance sheet items. Cash and cash equivalents stood at $344 million at December 31st. The decrease in the cash balances from December 31, 2007 reflects repayment of debt and purchase of treasury stock, offset by cash generated from operations. Investments in affiliated companies decreased by $33 million from December 31, 2007, largely attributable to a $94 million decrease in our LNG investment balance related to the mark-to-market measurement on interest rate swaps, as well as distributions received from the LNG joint venture of $20 million and a decrease of $26 million relating to the termination of a joint venture earlier in 2008 that was constructing two VLCCs.

Long-term debt and capital leases decreased by $135 million from December 31, 2007, mainly reflecting the use of cash repatriated in the second quarter of ’08, $184 million was used for the redemption of high coupon debt and $25 million in capital lease obligations with an implicit rate of 10%. These reductions were offset by increases in net revolver drawdowns to fund share repurchases of $259 million in 2008.

Shareholders’ equity decreased by $95 million from year-end ’07 through the additions of $318 million of net income, offset by $255 million spent for stock repurchases of 4.5 million shares, $45 million in dividends, and a $118 million increase in unrealized derivative expenses being deferred in OCI.

Please turn to slide 17 for comments on 2009 guidance. As it relates to vessel expenses, our guidance for the year is in the $300 million to $320 million range, consistent to 2008 level. Our guidance for time and bareboat charter hire expense is in the $415 million to $435 million range. Depreciation and amortization is estimated in the $175 million to $195 million range consistent with last year.

As mentioned earlier, we expect that steady-state general and administrative expenses for 2009 will end up in the $125 million to $130 million range. This reflects lower expected incentive compensation, reductions in expected legal fees, and ongoing efforts to reduce cost. These estimates exclude one-off items such as severance agreements and the like.

For equity income of affiliated companies our guidance is in the $12 million to $16 million, and we will include the equity earnings for the FSO joint venture commencing in the third quarter of this year. Our guidance for drydock costs for the year is approximately $35 million, which includes the drydocking of the number of the older pre-1990 MRs, which redelivered towards the end of the second quarter.

Our guidance for capital expenditures for 2009 is approximately $286 million, which includes progress payments, vessel improvements, and capitalized interest; Q1 $80 million, Q2 $52 million, Q3 $62 million, and Q4 $92 million.

With that, I now return the discussion to Morten.

Morten Arntzen

Thank you, Myles. Before we get to Q&A, I’d just like to make a comment. I think we all have accepted that 2009 is going to be a very forgettable year for practically everyone, everywhere, except perhaps people doing snowplows in New York City. While we will share [ph] better than most in this environment, we are happy that we have built a lot of positive momentum for 2010. Let me just go through those and highlight those.

Our balance sheet strength, strong liquidity and superior liability management means that we can focus on running the business well, taking advantage of opportunities and reducing costs, not on meeting with our banks for covenant or maturity relief. Our Product tanker segment redelivers nine old double sided problem tankers by July 6, 2009 and eliminates the drag on earnings they represent.

In 2010 we will get a full year contribution from the FSOs stationed in Qatar. By the middle of 2010, we will have six more of the Aker ships deliver, all with terms – term charters, time charters, and all higher rates than the first five. Our US lightering business, which we acquired to provide stable contract revenues in weaker markets, should do just that in 2009 and with greater market share is well-positioned for 2010.

The crude tanker fleet will benefit from the single-hull phase-out in 2010. The banking crisis will both winnow down the newbuilding order book and create opportunities for the strong companies with liquidity and real operating platforms. We have already identified $15 million of G&A cuts in 2009 and intend to make further progress in the coming two years. We are confident that OSG will emerge a winner in this difficult environment.

Before we turn to Q&A, I’d just wanted to extend an invitation to investors to join OSG’s management at the company’s Annual Investor Event in New York on May 21st. Please contact Jennifer Schlueter for details. And with that, we will turn it over to the Q&A period.

Question-and-Answer Session


All right. Thank you, sir. (Operator instructions) Our first question is from the line of Jon Chappell with JPMorgan. Please go ahead.

Jon Chappell – JPMorgan

Thank you. Good morning, guys.

Morten Arntzen

Good morning.

Jon Chappell – JPMorgan

Morten, you made it perfectly clear that you are not ready to do anything on the acquisition front today. Just wondering – is that because there are not a lot of opportunities available? Is it because the returns that you’re seeing on the time charters don’t really make sense now given asset prices? Or is it because you see some potential kind of desperation sales for the next couple quarters as things play out as bearishly as you’ve kind of laid out?

Morten Arntzen

I think it’s a combination of things. You’ve actually hit on some of them. But in many respects, this financial crisis, the shipping industry is not that old. We have yet to see the kind of spectacular shipyard bankruptcies that we saw back in the early ’70, the last time the industry had a real tough time, or in the mid ‘80s. We expect there will be more pain to come. You talk to very good ship owners across the world, and they are unable to get their traditional banks or new banks or any banks to finance their newbuilding commitments. And that is a big problem for a huge part of the industry. You bring all those factors together and there will be added pressure. And when things – when levels fall – when values fall to levels that we think make no-brainer spends, that’s when we will be moving.

Jon Chappell – JPMorgan

As far as the asset prices are concerned, I know there is a lot of illiquidity in the market still, but by best estimations, dry bulk assets fell – cut up 70% from their peak and maybe tanker asset prices never got to the lofty levels of dry bulk. But do you think that the tanker prices can fall that 60% to 70% level as well?

Morten Arntzen

No, I don’t think so, I mean, really for a variety of reasons. One – I think any asset, in any class, in anything, anywhere in the world when you don’t have a banking market, is going to fall. So, we’re not suggesting things haven’t fallen. One, the tanker earnings have continued to be reasonably strong, reasonably strong. Secondly, the outlook is, because of the single hull phase-out, is for much healthier tanker market than what you had in dry bulk, it continues [ph], for example. We didn’t have the benefit of the structural support of the single hull phase-out. And that is real and it will happen. I think that’s the big difference. And then within the tanker market we have owners, big owners with very strong equity basis. And thirdly, the yards are simply not quoting prices for newbuildings today. There is no indication of that. The yards are going to wait a year or two I think before they start closing and I think it will be before them – before owners start ordering new vessels.

Jon Chappell – JPMorgan

Okay. One final one – one final question on cash and then I’ll turn it over. As far as the buyback is concerned, $37.2 million last, you’re buying at $36. I would probably assume you’d be buying at these levels too. Or do you want to be holding back cash in this type of environment? And let me just put one follow-on. The dividend, you did increase it last year. Obviously, the banks aren’t on you about cutting your dividend like some other companies in the public markets. But do you think it’s maybe prudent to scale back the dividend a little bit given this market environment?

Morten Arntzen

Jon, you know that I’m going to give you the same answer that I gave you. The Board looks at this at every Board meeting. We have a Board meeting next week. We will discuss it. We got criticized for not bringing our dividend up quickly enough. Excuse me, it’s tomorrow, not next week. We’ve been working all weekend (inaudible). We were criticized for not bringing it up high enough as some of our competitors did. We raised the divided based on our long-term view of the company, its prospects, the market trends, the balance sheet. And we obviously have to take into account the banking markets, and we both look at dividend increases, maintaining it, and doing any incremental stock buybacks.

Jon Chappell – JPMorgan

Okay. Thanks a lot, Morten.


I take our next question from the line of Greg Lewis with Credit Suisse. Please go ahead.

Greg Lewis – Credit Suisse

Yes. Thank you and congratulations on a solid quarter.

Morten Arntzen

Thank you.

Greg Lewis – Credit Suisse

My first question is regarding to – could you just provide some color in relation to the Bender situation and also on the alternative yards where you’re looking to maybe push on a few of those vessels?

Morten Arntzen

I think the color is the – you know, we’ve had repeated delays from the Bender yard. Clearly it’s very difficult for shipyards anywhere in the world today to get external funding for working capital and such. Clearly, financial condition has been impacted by that. When we combine that with the delays, we just do not think that we could continue to wait for them to be able to deliver those vessels. So we are negotiating to move those vessels to alternative yards. Clearly we have identified alternative yards were taken to. And we have brought really the full resources of the OSG newbuilding team in, in both assessing alternative yards, planning for the moves and how we’re going to do it. I don’t know, Bob, do you want to add little more color on that?

Bob Johnston

I’d say, transitional move that we will do, it’s something that we just can’t wait any longer. We’ve done a complete assessment of the various yards we’re looking at, and I think it will be a very positive move to get those boats out working as soon as we can.

Greg Lewis – Credit Suisse

Okay. Given the near-term headwinds facing the US product tanker market, could we see the number of vessels on order potentially come down?

Bob Johnston

A number of the vessels that are on order are contracted for going out. So with that in mind, probably not many cancellations beyond a set that applies to an entity in bankruptcy and the four ATBs that we’re canceling.

Greg Lewis – Credit Suisse

Okay. And Myles, I just have a couple – two questions for you. One, in running through the numbers that you gave and detailing out the minority interest credit, it looked like – it sounded like it was $17.8 million and $8.5 million for about $26.5 million per vessel write-down and that about $4 million in carry-back related to the depreciation and then, what, there was another $2 million to $3 million related to – did you mention that?

Myles Itkin

Yes, it’s reversals of previously established deferred tax liabilities that are no longer necessary. But you’re referring to the tax, right?

Greg Lewis – Credit Suisse


Myles Itkin

Okay, all right. Yes.

Greg Lewis – Credit Suisse

Okay. And then just – could you also provide us some more detail on the tax credit?

Myles Itkin

That basically is the tax credit.

Greg Lewis – Credit Suisse

Okay, thank you.

Myles Itkin

You’re welcome.


Thank you. (Operator instructions) Scott Burk with Oppenheimer, please go ahead with your question.

Scott Burk – Oppenheimer

Hi, good morning, guys.

Morten Arntzen

Hi, Scott.

Scott Burk – Oppenheimer

I had a just couple industry questions. There has been a lot of talk about VLCCs being used for storage. What – do you guys have a count of how many vessels are being used for storage now? And are you seeing that contract with contango kind of slimming down?

Morten Arntzen


Mats Berglund

Yes, we count 28 – just below 30 today. The terms that these are contracted for vary between very short to three months, six months, some up to nine months. So some of them come off. We do not see a new recent activity in the last couple of weeks due to the smaller contango. It’s likely the number will come down slightly, but we do not see a dramatic change in that number.

Scott Burk – Oppenheimer

Okay. And on a similar vein, we’ve seen OPEC actually do pretty well – actually do pretty well at their production cuts and that’s coming close to matching what they have said they will cut. Have you guys seen any sign that we are getting to an end of those production cuts or should we continue expecting another million barrels or so after that, off current production?

Morten Arntzen

No. I mean, I think that’s – I think that what they have committed to has been reflected in what the loadings have been in the Gulf. And until they announce additional, there is nothing that we are going to see in the trading pattern. They reflect the cuts they have done today. There is no question that’s had an impact upon our markets.

Scott Burk – Oppenheimer

Okay. And then I had a question about – towards the end of the fourth quarter – I mean, in the third and the fourth quarter and then little bit of the first quarter, Suezmaxes outperformed pretty healthily what the VLs were doing, at some times trading at a premium in terms of day rates. And just going forward, if you look out into 2010 you’ve got a lot of VLs being delivered in the Suezmaxes. I’m just wondering if there is any structural – something structural in the Suezmax’s VLCC market that would prevent the VLs from being able to compete away strength that you sometimes see in the Suezmax market.

Morten Arntzen

No, I do not think so. They do hang together. I think the recent better performance on the Suezmax side has been due to the OPEC cuts mostly affects the AG [ph], while let’s not forget the biggest market for the Suezmaxes and we’ve seen better activity there. Long-term the markets hang very closely together and (inaudible) to combine two Suezmax cargos and it evens out over time.

Scott Burk – Oppenheimer

Okay. And then, do you have any other plans to reduce your chartered-in fleet? I mean, you mentioned the nine product tankers that are rolling out. And then similar – do you plan to cancel any more charters? And then similarly, have you had any charters approach you on your chartered out fleet though looking to renegotiate?

Morten Arntzen

No. I mean, I think the tanker industry unlike the dry bulk industry hasn’t been faced with that, primarily because if you look at the rates at which time charters have been done in the tanker market, they are at historically sensible rates. They didn’t get it (inaudible) three or four multiples of historical earnings. So we have not had a single approach on that basis. Remember, we were very disciplined throughout – I think the process that when we took charters in, and that is we make sure that we could – we would be able to base them on long-term earnings basis, take into account some history, that’s why we refrain from a lot of secondhand purchases during this period because the chartered-in rates are more attractive. Obviously, in the US Flag we have the chartered-outs to cover that. In the US Flag they are absolutely needed. The FSOs are absolutely needed. So we have not seen that. I think we will be opportunistic if we see rates being offered at times when it is at very low levels. So far we haven’t seen that. There is an opportunity to cancel either because a shipyard is late or an owner gets in trouble. We will consider it at the time. But we are not under pressure to do that. We are comfortable with the rate levels we have. Having said that, Mats, is there a couple –?

Mats Berglund

We cancelled two Suezmaxes and two Aframax charter-ins. We’ve reported them. So they are in our release, and one was informed before. But the two Suezmaxes at Rongsheng [ph] newbuilding are late, which gave us the right to cancel without penalty, which we did, and we also cancelled two Aframax time charter-ins.

Scott Burk – Oppenheimer

Okay. All right. Thanks.


All right, thank you. And there are no further questions at this time. Please continue with any closing comments you may have.

Morten Arntzen

I want to thank you for joining. These are difficult times, but I think we have a program that will see us into 2009, ‘10, ‘11 and beyond. So, thank you for working. I hope you all are working with us and hope you will all join us on Investor Day on the 21st. Thank you very much.


All right, thank you. Ladies and gentlemen, that concludes the Overseas Shipholding Group fiscal year 2008 earnings conference call. We thank you very much for your participation. You may now disconnect. Have a very pleasant rest of your good day.

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