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October 30, 2008

OSG reports best third quarter yet

Tanker giant Overseas Shipholding Group, Inc. (NYSE: OSG) "can face the challenges and opportunities the financial crisis throws our way in the coming year with a strong balance sheet, abundant liquidity, young fleet, heavily back- loaded liability structure, excellent banking relationships and a strong book of locked-in and hedged revenue for 2009," said Morten Arntzen, President and CEO, reporting what he said were the best third quarter results in the company's history.

"We have no need to raise new debt today so we can focus instead on running our business well and responding to opportunities that come up," Mr. Arntzen added.

You can access the full OSG press release HERE (following are some highlights).

For the quarter ended September 30, 2008, TCE (Time Charter Equivalent) revenues were $434.7 million, a $180.7 million, or 71% increase from $254.0 million for the same period of 2007. (Time charter equivalent revenues represent shipping revenues less voyage expenses). Growth in TCE revenues reflected increases in spot charter rates for VLCCs of more than 220% to $113,358 per day, Aframaxes by 160% to $52,803 per day and Handysize Product Carriers by 21% to $31,412 per day. The increase also reflected an increase of 837 revenue days across all segments of the company's fleet.

EBITDA for the quarter increased 175% to $255.5 million from $92.8 million in the comparable period of 2007. Net income for the period increased to $197.8 million from $26.6 million and diluted EPS increased to $6.69 per share compared with $0.83 per share, for the same period a year ago. Net income in the third quarter of 2008 benefited from a gain on vessel sales, net of vessel impairment, of $31.5 million, or $1.45 per diluted share, and a positive change in the mark-to-market balance of unrealized freight derivative positions of $23.3 million, or $0.77 per diluted share. Net income in the third quarter of 2007 reflected a gain on vessel sales and sale of securities of $1.5 million or $0.05 per diluted share. Period-over-period diluted EPS benefited from the company's repurchase of 9.5% of total shares outstanding since September 30, 2007.

Income from vessel operations was $192.7 million in the third quarter of 2008, a $158.8 million increase from $33.9 million in the same period a year earlier. During the period, total operating expenses increased 15%, or $36.7 million, to $280.0 million from $243.3 million in the corresponding quarter in 2007. Voyage expenses increased by $14.8 million, principally due to higher fuel expenses. Vessel expenses increased $8.7 million quarter-over-quarter primarily due to higher crew costs associated with the company's continuing efforts to attract and retain high quality crews and higher costs incurred on seven tankers under fixed rate management agreements for DHT Maritime, Inc. These management agreements terminate in January 2009. Charter hire expense increased 67% to $115.3 million from $68.9 million in the third quarter of 2007 principally due to 12 additional ships being chartered-in during the third quarter 2008 compared with the same period a year ago. In addition, profit share, a component of charter hire expense, increased $19.4 million period-over-period due to significantly higher TCE rates achieved for VLCCs and Aframaxes than in the comparable quarter in 2007. Depreciation and amortization expense of $46.4 million in the third quarter of 2008 reflects the impact of an increase in estimated salvage value of the company's owned fleet effective January 1, 2008. This change in estimate reduces depreciation by approximately $2.7 million per quarter commencing in the first quarter of 2008. The quarter-over-quarter increase in gains on vessel sales, net of asset impairment, positively impacted the change in income from vessel operations.

Gain on vessel sales, net of impairment, was $31.5 million during the quarter comprised of $55.4 million, or $1.87 per diluted share, related to the sale of subsidiaries that chartered-in two non-core vessels, and an impairment charge of $23.8 million, or $0.42 per diluted share related to a determination during the quarter that two older U.S. Flag vessels would not undergo mandatory scheduled drydockings in order to continue operations, taking into consideration additional costs associated with the possible conversion of one of the vessels. These vessels will cease operating during the fourth quarter of 2008 and will be placed in lay-up pending sale of such vessels. Accordingly the company recorded a charge of $23.8 million to write down the carrying amount of these vessels to their estimated net fair value as of September 30, 2008. These vessels have been classified as held for sale at September 30, 2008.

OSG has forward freight agreements (FFA) and bunker swaps positions that it says "create synthetic time charters." It says that "certain of these derivative positions that qualify as cash flow hedges for accounting purposes are reflected in TCE revenues in the periods to which such hedges relate. For the quarter ended September 30, 2008, the company achieved VLCC TCE rates on such synthetic time charters of $77,945 per day for 435 days. The variance from the previously estimated synthetic TCE rate of $55,535 per day is due to basis risk, which is the relationship of reported pool TCE earnings to the average settlement rate for the derivative contracts in the current period to their historical relationship. On a quarterly basis, this relationship can fluctuate around the targeted synthetic TCE rate. During the third quarter of 2008, there was high volatility both in freight rates and bunker prices. As an example, the Baltic Exchange's index TD-3 (Arabian Gulf to Eastern destinations) settled at approximately $184,000 per day for July and at approximately $37,000 per day for August. The Tankers International pool's earnings do not fluctuate as much as TD-3 because the pool's cargo system, with longer Arabian Gulf-to-Western destination and West Africa-to-Eastern destination combination voyages, levels out the pool's earnings. OSG management has analyzed the historical difference in volatility between TD-3 and Tankers International pool's earnings and optimized the volume of the hedge position to mirror the historical difference in volatility. In the third quarter of 2008, the Tankers International pool performed better than this historical relationship anticipated, primarily by better avoiding the significant drop in rates during August. The results of derivative positions that do not qualify for hedge accounting treatment are reflected in other income/(expense) and resulted in a gain of $8.6 million in the quarter ended September 30, 2008, including mark-to-market losses at September 30, 2008 of $8.7 million."

FINANCIAL HIGHLIGHTS AND KEY METRICS

Liquidity and Credit Metrics - At September 30, 2008, stockholders' equity was approximately $2.0 billion and liquidity, including undrawn bank facilities, was $1.5 billion. Total debt as of September 30, 2008 was $1.45 billion, down more than $115 million from December 31, 2007. Liquidity adjusted debt to capital was 34.0% as of September 30, 2008, substantially unchanged from 32.6% as of December 31, 2007. Liquidity adjusted debt is defined as long-term debt reduced by cash and the Capital Construction Fund. OSG says that the strength of its balance sheet and financial condition enables it to be a predominantly unsecured borrower with less than 27% of net book value pledged as collateral. In 2006 the company established a $1.8 billion seven-year unsecured credit line and as of September 30, 2008 had $940 million available in borrowing capacity under that facility.

In November 2007, the company established a $200 million five-year secured credit facility on behalf of OSG America L.P. and as of September 30, 2008, $122 million was available in borrowing capacity.

On October 15, 2008, OSG and Euronav NV (EURONEXT: EURN) jointly announced a $500 million senior secured term loan to finance the acquisition of TI Asia and TI Africa by joint venture companies owned equally by Euronav and OSG and the conversion of the ships into FSO (Floating Storage Offloading) service vessels. Once converted, the vessels will commence eight-year charters with Maersk Oil Qatar in July and September 2009, respectively. Conversion costs for the two vessels are approximately $160 million each.

From July 1, 2008 through September 30, 2008, OSG repurchased 2,025,900 shares at an average purchase price of $70.26 per share. The current $250 million program, announced June 9, 2008 has a total of $96.1 million that remains outstanding. Since authorizing a share repurchase program on June 9, 2006, OSG has repurchased 11.4 million shares, or 28.9% of total shares outstanding, at a total cost of approximately $767.6 million.

Future revenues associated with non-cancelable term charters as of September 30, 2008 totaled $1.6 billion and included $1.1 billion of time charter revenue, $410.0 million of fixed rate contracts of affreightment from the U.S. Flag lightering operation and $51.0 million of time charters entered into by the Aframax International and Clean Products International pools. Additionally, future revenues from term contracts of the Gas segment and the FSO project total approximately $1.8 billion and will be recognized in equity in income from affiliated companies.


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