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Overseas Shipholding Group Reports Third Quarter 2011 Results

Arntzen concluded, “In the midst of the weakest markets in decades, we remain focused on strengthening the Company on a number of fronts. We continue to control costs at sea and ashore, and are redelivering or renegotiating higher cost charters-in wherever possible. Our joint ventures are now producing a steady stream of earnings and our U.S. Flag unit continues to perform ahead of plan. Our employees remain focused on taking all actions within their power to improve the competitiveness of the Company, while providing safe, clean and reliable service to our customers.”

For the nine months ended September 30, 2011, the Company reported TCE revenues of $600.1 million, a 10% decrease from $670.1 million in 2010. Loss for the first nine months of 2011 was $142.9 million, or $4.74 per diluted share, compared with a Loss of $79.0 million, or $2.71 per diluted share, in 2010. Adjusted for special items, the Loss for the first nine months of 2011 was $137.3 million, or $4.55 per diluted share, compared with a Loss of $39.4 million, or $1.36 per diluted share, in the prior year period.

Select Income Statement Detail
  • The $22.4 million decrease in TCE revenues for the quarter ended September 30, 2011 from the year-earlier quarter is principally due to a $40.9 million, or 43%, decrease in TCE revenue earned in the International Crude Tankers segment to $54.4 million on 128, or 3%, fewer revenue days. Spot TCE rates realized by the Company’s VLCCs in the third quarter of 2011 fell by 66% from the year-earlier period, while spot TCE rates in the quarter for Suezmaxes, Aframaxes and Panamaxes were lower by 21%, 33% and 27%, respectively. Crude spot markets were driven lower by continued vessel overcapacity and higher bunker prices. In the International Products segment, TCE revenues were essentially unchanged. Revenue days increased by 528 days reflecting the delivery of two owned and four time chartered-in MRs and two owned LR1s, as well as the return to full operation of two LR1s that were in drydock undergoing repairs during the prior year’s quarter. This was effectively offset by a decrease in the average blended TCE rate earned by the segment’s vessels of 15%, or $2,214 per day. In the MR sector, time charter cover was 27% of revenue days in the 2010 quarter; this fell to 9% in the current quarter. In the LR1 sector, the average spot TCE rate fell by 29%. TCE revenue in the U.S. segment increased by $20.5 million, or 33%, to $81.8 million, on an increase of 320 revenue days reflecting the deliveries of three newbuild product carriers and the return to service of the OSG 209, which was in layup in the prior year period. Additionally, the U.S. segment continued to benefit from increased Delaware Bay lightering volumes.
  • Vessel expenses were $75.7 million, an 18% increase from $64.0 million in the same period a year ago. Vessel expenses reflect the return to full operation of the two LR1s referred to above and an increase in operating days of 205 days, primarily as a result of the changes in the International Products fleet described above. Vessel expenses also increased in the U.S. Flag fleet as a result of the fleet changes described above and a 425-day decrease in layup days (during which operating expenses are reduced) from the prior year period.
  • Charter hire expenses increased by $4.3 million to $95.4 million, reflecting the delivery of time chartered-in International Flag product carriers and bareboat chartered-in U.S. Flag product carriers partially offset by the redelivery of in-chartered International Flag crude vessels and the return to full operation of the two LR1s referred to above.
  • General and administrative expenses were $19.8 million, a 21% decrease, or $5.3 million, from $25.1 million in the third quarter of 2010 as reductions in compensation and benefits ($5.7 million) and consulting expenses were partially offset by the impact of unfavorable exchange rate movements on foreign currency denominated expenses. The change in general and administrative expenses in the current quarter reflected a total benefit of $1.7 million arising from market-related reductions in the Company’s liabilities under certain unfunded benefit plans.
  • Equity in income of affiliated companies increased by $3.7 million to income of $3.5 million in the third quarter of 2011 from a loss of $0.2 million in the prior year quarter, primarily as a result of the improved operating result of the FSO Africa, which was fully employed in the current period after commencing its current service contract in August 2010. Additionally, a reduced mark-to-market loss was recorded on the interest rate swaps covering the FSO Africa’s debt, which are not effective hedges.

Special Items

Special items that affected reported results in the third quarter of 2011 increased the quarterly Loss by a net $4.6 million, or $0.15 per diluted share, and included:
  • OSG’s share, $2.5 million, or $0.08 per diluted share, in the mark-to-market loss on the de-designated interest rate swaps in the FSO joint venture;
  • Reduction in the unrealized gains on bunker swaps of $1.1 million, or $0.04 per diluted share; and
  • Net loss on sale or write-down of securities and early retirement of debt of $0.8 million, or $0.03 per diluted share.

For a detailed schedule of these special items for the three and nine months ended September 30, 2011 and the corresponding historical periods, see Reconciling Information, which is posted in Webcasts and Presentations in the Investor Relations section of www.osg.com.

Liquidity and Other Key Metrics
  • Cash and cash equivalents and short-term investments (consisting of time deposits with maturities greater than 90 days) decreased to $182 million from $274 million as of December 31, 2010;
  • Total debt was $2.13 billion, up from $1.99 billion as of December 31, 2010;
  • Liquidity 3, including undrawn amounts of $711 million under the $1.8 billion credit facility that matures in February 2013, was approximately $0.9 billion. Liquidity-adjusted debt to capital 4 was 54.1%, an increase from 48.0% as of December 31, 2010;
  • As of September 30, 2011, vessels constituting 30% of the net book value of the Company’s vessels were pledged as collateral;
  • Construction contract commitments were $96 million as of September 30, 2011, including $43 million due in the fourth quarter of 2011. All such commitments are fully funded;
  • Principal repayment obligations are $11 million for the fourth quarter of 2011 and $55 million in 2012; and
  • On August 5, 2011, the Company repurchased and retired $9.665 million par value of its outstanding 8.75% debentures due in 2013.

Segment Activity

Crude Oil
  • On August 21, 2011, the TI Watban, a time chartered-in VLCC, was redelivered to its owner;
  • On September 11, 2011, the Minerva Gloria, a time chartered-in Aframax, was redelivered to its owner; and
  • Effective November 2011, PDV Marina, which is wholly owned by PDVSA and a founding member of the Aframax International pool, will withdraw its four vessels from Aframax International. The Company does not expect PDV Marina’s announcement to have a negative impact on pool returns and expects to continue moving substantive volumes for CITGO, also wholly owned by PDVSA and a source of the pool's Venezuelan cargos.

Products
  • On August 31, 2011, the Overseas Milos, a newbuild 50,378 dwt MR product carrier, delivered; and
  • On September 29, 2011, the Valorous Queen, a newbuild 19,900 dwt chemical carrier, delivered under a five-year time charter-in and simultaneously commenced a one-year time charter-out.

U.S. Flag
  • In September 2011, Sunoco announced that it will make its Marcus Hook and Philadelphia refineries available for sale, and set a deadline of July 2012 for the sale of these facilities. Sunoco is the core customer of the Company’s Delaware Bay lightering business. The Company is currently evaluating the impact that Sunoco’s decision to sell these refineries could have on the Company’s Delaware Bay lightering business and the deployment of the three ATBs that are currently operating in that business;
  • During the third quarter, the OSG 214 was taken out of layup and entered drydock for scheduled maintenance. With its recent return to the Jones Act spot market, all of OSG’s U.S. Flag vessels are now actively trading;
  • On October 4, 2011, the articulated tug barge (ATB) unit consisting of the OSG 400 (barge) and the OSG Constitution (tug) was sold. The ATB had been trading in the Delaware Bay lightering fleet and has been replaced by the OSG 351; and
  • OSG’s U.S. Flag unit has taken delivery of two newbuild tugs, the OSG Courageous and the OSG Endurance, since June 2011. These tugs have been married to the barges OSG 244 and OSG 192, respectively, replacing the OSG Liberty and the OSG Seafarer, which were sold in October 2011.

Spot and Fixed TCE Rates Achieved and Revenue Days

The following table provides a breakdown of TCE rates achieved between spot and fixed charter rates and the related revenue days for the three months ended September 30, 2011 and the comparable period of 2010. Revenue days in the quarter ended September 30, 2011 totaled 10,040 compared with 9,399 in the same period a year earlier. A summary fleet list by vessel class can be found later in this press release.

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