Filed with the SEC from July 10 to July 16:
Overseas Shipholding Group (OSG)
Frontline Ltd. (FRO) may seek control of Overseas Shipholding. Frontline expects to contact the company's management and other big shareholders to discuss how to boost shareholder value. Frontline has about 1.5 million shares (4.9%).
Overseas Shipholding Group, Inc. ("OSG" or the "Company") is one of the world's leading bulk shipping companies engaged primarily in the ocean transportation of crude oil and petroleum products. At December 31, 2007, the Company owned or operated a modern fleet of 112 vessels (aggregating 12.2 million deadweight tons and 432,400 cubic meters) of which 93 vessels operated in the international market and 19 operated in the U.S. Flag market. OSG's newbuilding program of owned and chartered-in vessels totaled 44 and extends across each of its operating segments, bringing the Company's total operating and newbuild fleet to 156 vessels.
OSG's vessel operations are organized into four strategic business units and focused on market segments each serve: crude oil ("International Flag Crude Tankers"), refined petroleum products ("International Product Carriers"), U.S. Flag vessels ("U.S. Flag") and gas ("Gas"). The International Flag Crude Tankers unit manages International Flag V-Plus, VLCC, Suezmax, Aframax and Panamax tankers; the International Product Carriers unit principally manages Panamax and Handysize Product Carriers; the U.S. Flag unit manages most U.S. Flag vessels; and the Gas unit at year end had two LNG Carriers under management with two additional vessels delivering in the first quarter of 2008. For 2007, the Gas unit was not a reportable business segment for financial reporting purposes. Each business unit has dedicated chartering and commercial personnel while the Company's technical ship management operations and corporate departments support the Company's global fleet and corporate operations.
The Company generally charters its vessels either for specific voyages at spot rates or for specific periods of time at fixed daily amounts. Spot market rates are highly volatile, while time and bareboat charter rates are fixed for a specific period of time, and provide a more predictive stream of Time Charter Equivalent Revenues. For a more detailed discussion on factors influencing spot and time charter markets, see Operationsâ€”Charter Types later in this section.
A glossary of shipping terms (the "Glossary") that should be used as a reference when reading this Annual Report on Form 10-K can be found later in Item 1. Capitalized terms that are used in this Annual Report are either defined when they are first used or in the Glossary.
The Company's strategy is to be the most respected energy transportation company in the world and to have a balanced portfolio of vessels in its fleet. As a major international shipping company, OSG intends to achieve its strategy by focusing on three goals: maximizing returns to shareholders throughout all markets; providing reliable transportation to its customers while protecting its crews, vessels and the environment; and creating a rewarding and challenging workplace for its sea and shore-based employees.
To achieve its strategy, OSG seeks to be a market leader in each of the segments in which it operates, International Flag Crude Tankers, International Product Carriers, U.S. Flag and Gas. To support this goal, OSG balances the expansion of its International and U.S. Flag fleets on an opportunistic basis, continuously improves its operations and seeks to maintain a strong balance sheet and financial flexibility to support future growth. OSG believes that it differentiates itself from its competitors through the scale and diversity of its fleet, the skills, experience and capabilities of its sea-based crew and shore-based personnel, and its provision of reliable, safe transportation services to customers.
Balanced Growthâ€” The Company believes that by balancing the types of vessels it deploys and actively managing the mix of charter types as well as the ownership profile of its fleet, it can maximize returns on invested capital while making it less dependent on any particular market sector.
Operational Excellenceâ€” The Company is committed to technical excellence across its fleet. The Company's high quality, modern fleet, which is operated by experienced crews and supported by experienced shore side personnel, has in place a program of standardized operational practices and procedures that have been designed to ensure that seafarers and vessel operations comply with all applicable environmental, regulatory and safety standards established by International and U.S. maritime laws. The Company has a philosophy of continuous improvement in its systems and technologies designed to support such compliance. For more information, see Technical Operations later in this section.
Financial Flexibilityâ€” The Company believes its strong balance sheet, high credit rating and high level of unencumbered assets give it access to both the unsecured bank markets and the public debt markets, allowing it to borrow primarily on an unsecured basis. This, in turn, reduces its financing costs and cash flow breakeven levels. This financial flexibility permits the Company to pursue attractive business opportunities.
Summary of 2007 Events
During 2007, the Company pursued numerous initiatives that supported its balanced growth strategy, some of which are highlighted below.
Fleet Diversification, Fleet Expansion and Active Asset Management
International Flag Crude Tankersâ€”The crude oil fleet expanded from 49 operating vessels and four newbuilds at the end of 2006 to 53 operating vessels and 10 newbuilds at the end of 2007. The crude oil transportation unit executed a number of sale, purchase, diversification and charter-in transactions in order to better serve its customers. Key events and transactions included:
Forward sale. The Company agreed to sell the Overseas Donna, a 2000-built VLCC for forward delivery. At the discretion of the purchaser, the vessel will be delivered no later than July 2009, at which time OSG will recognize a gain on the sale in excess of $75 million.
Acquisition of Hiedmar Lightering. On April 20, 2007, OSG completed the acquisition of the Heidmar Lightering business from a subsidiary of Morgan Stanley Capital Group Inc. for approximately $41 million. The Houston-based operation provides crude oil lightering services to refiners, oil companies and trading companies, primarily in the U.S. Gulf. The business manages a portfolio of one-to-three year fixed rate cargo contracts with a fleet of five dedicated International Flag Aframaxes and three U.S. Flag workboats. Subsequent to the acquisition, the International Flag lightering operations expanded to the U.S. West Coast.
Purchased vessels. In January 2007, OSG acquired 49.99% interest in a company that is constructing two VLCC tankers in China, which are expected to deliver in 2009.
Fleet diversification. In the third quarter, OSG announced the planned addition of four Suezmax tankers to its crude oil fleet, giving the Company the distinction of being the only ship owner that offers service across all crude vessel classes: V-Plus, VLCC, Suezmax, Aframax, Panamax and Lightering. The Company purchased two secondhand vessels that were then sold and bareboat chartered-back for seven and 10 years. Two newbuilding Suezmaxes were time chartered-in for three years commencing upon their delivery, which are expected in the fourth quarter of 2008. The first of the two secondhand vessels, the Overseas Newcastle, was delivered and began trading in December 2007. The other secondhand vessel, the Overseas London, commenced its 10-year bareboat charter to the Company in late-January 2008.
Fleet expansion through charter-in arrangements. The Watban, a 1996-built VLCC, was chartered-in through 2011 replacing 50% interests in two VLCCs that redelivered during the year. OSG took a 50% interest in three-year time charter-in commitments for two newbuild Aframaxes, the Aqua and the Action, which entered the fleet in the second and third quarter of 2007, respectively; and OSG took a 50% interest in a five-year time charter-in of a VLCC, the KHK Vision, which delivered in the second quarter of 2007. All of these vessels trade in Commercial Pools in which the Company participates.
International Product Carriersâ€”The product carrier fleet expanded from 32 operating vessels and 12 newbuilds at the end of 2006 to 35 operating vessels and 16 newbuilds at the end of 2007. Key events and transactions are highlighted below:
Vessel Deliveries. The Overseas Cygnus delivered in the first quarter of 2007 and the Overseas Sextans delivered in the second quarter of 2007. Both vessels have been time chartered-in for 10 years. The 2007-built vessels are IMO III certified, which gives them the flexibility to transport vegetable oils.
Vessel sales. The Overseas Almar, a 1996-built Handysize Product Carrier, was sold and a gain of approximately $5.6 million was recognized in the second quarter of 2007.
LR1 Fleet Expansion. In an effort to diversify its portfolio of vessels to better serve customers and enhance its competitive position as product trades shift and globalize, OSG expanded its large size coated Panamax fleet, or LR1 tankers. The Company purchased two 2006-built LR1s, the Overseas Visayas and the Overseas Luzon, which delivered in the third quarter. In August, OSG announced that it will build four LR1 vessels, which are expected to deliver in 2010 and 2011, and in the fourth quarter, OSG exercised an option to build two additional LR1 vessels, which are expected to deliver in late 2011. This expansion brings the OSG's operating and newbuild LR1 fleet to 10 vessels.
Sale-leasebacks. OSG sold and bareboat chartered back two 1996-built Handysize Product Carriers, the Overseas Nedimar and the Overseas Limar. The $10.8 million gain from the sales has been deferred and is being amortized over seven and one-half years (the term of the charter-backs) as a reduction of charter hire expense. OSG has renewal options at the end of each charter-hire period.
U.S. Flagâ€”The U.S. Flag fleet of 19 operating vessels and 16 newbuilds as of December 31, 2007, contracted slightly from 20 operating vessels and 14 newbuilds at the end of 2006, primarily a result of selling older tonnage and ordering shuttle tankers and ATBs for transporting refined petroleum products. Key events and transactions were:
Fleet Expansion and Modernization. In the first quarter of 2007, OSG announced a definitive agreement to build three new Articulated Tug Barges. The vessels are scheduled to be delivered in the fourth quarter of 2009 and the second and fourth quarters of 2010. Further expanding its Jones Act Product Carrier newbuild program, OSG announced a definitive agreement to expand its Aker newbuild series by two additional MT-46 Jones Act Product Carriers during the fourth quarter of 2007. This agreement brings the total number of ships OSG will bareboat-charter in from Aker to twelve.
The M211 was taken out of service to be expanded and converted to a double-hull configuration in April 2007 and is expected to rejoin the operating fleet in the first half of 2008. During the year, the Company sold three older Dry Bulk Carriers: the Overseas Harriette, the Allegiance and the Perseverance.
Vessel Deliveries. Three U.S. Flag Jones Act Product Carriers delivered in 2007. The Overseas Houston delivered and began trading in the first quarter, the Overseas Long Beach began trading in July and the Overseas Los Angeles began trading in November. An ATB, OSG 242, reentered the fleet after being converted to a double-hull configuration and expanding its capacity by 38,000 barrels using a patented methodology.
New Trade. In October 2007, OSG announced that it has signed a definitive agreement to charter two 46,000 dwt Jones Act tankers to Petrobras America, Inc., marking the first U.S. Flag shuttle tankers to transport oil from ultra-deepwater drilling projects in the U.S. Gulf of Mexico. OSG will provide shuttle tanker services from a Floating Production Storage and Offloading facility, or FPSO, at the Chinook and Cascade ultra-deepwater fields in the Walker Ridge area of the Gulf of Mexico. Ultra-deepwater discoveries are located in water at least 8,000 feet deep and require an additional 15,000 feet of drilling beneath the ocean floor. FPSOs and shuttle tankers are a cost-effective means of transporting offshore oil where pipeline infrastructure is too costly or technologically not feasible to construct. This will be the first FPSO and shuttle tanker project in U.S. waters.
Gasâ€”The first two of OSG's Q-Flex LNG Carriers delivered during the fourth quarter of 2007 and began trading. The Al Gattara, delivered on November 6 and commenced its 25-year time charter on November 23. The Tembek delivered on November 19 and commenced its 25-year time charter on December 6. Two additional LNG Carriers delivered in the first quarter of 2008. OSG has a 49.9% ownership interest in each of the LNG Carriers.
Financial Strength and Stability
During the year, the Company repurchased a total of 8.3 million shares at a cost of approximately $551 million through open market purchases and one single block transaction of 5.1 million shares. As of December 31, 2007, approximately $45 million remained available for further share repurchases under the $200 million repurchase program that was approved by the Company's Board of Directors in April 2007.
On June 6, 2007, the Company's Board of Directors announced a regular quarterly dividend of $0.3125 per share, a 25% increase from $0.25 per share, which had been in place since April 2006.
During the first half of 2007, OSG sold its entire 44.5% interest in Double Hull Tankers (NYSE: DHT) and recognized total gains from the sale of approximately $40.6 million. OSG continues to time charter-in DHT's initial fleet of seven vessels that remain subject to valuable extension options.
In May 2007, OSG formed OSG America L.P., a master limited partnership ("MLP"), and on November 15, 2007, completed an initial public offering, issuing 7.5 million common units (representing a 24.5% limited partner interest), priced at $19.00 per unit. OSG America L.P. trades on the New York Stock Exchange under the ticker "OSP". At December 31, 2007, the OSG America L.P. fleet consisted of 19 U.S. Flag product carriers and tug barges, a newbuild fleet of five product carriers and options to purchase an additional 10 vessels upon delivery. OSG executed this transaction in order to enhance the valuation of its U.S. Flag assets, which have generally predictable cash flows generated by medium and long-term charters. The MLP structure should also lower its cost of capital, enabling it to pursue growth opportunities more competitively. The transaction generated $129.3 million in proceeds to OSG, which the Company used to pay down debt in the fourth quarter.
In November 2007, OSG America L.P. entered into a five-year senior secured revolving credit agreement. Borrowings under this facility bear interest at a rate based on LIBOR. The facility may be extended by 24 months subject to approval by the lenders.
Active Asset Management
In support of its balanced growth strategy, OSG seeks to balance the mix of owned and chartered-in tonnage of both its operating and newbuild fleet. As noted in the summary of events and transactions by business units above, the Company entered into a number of transactions whereby it sold or sold and leased-back vessels during the year. Fleet disposition activity during 2007 resulted in proceeds on vessel sales of $224 million resulting in $7.1 million in gains. Sale and lease-back transactions allow the Company to monetize assets in a favorable secondhand market, thereby transferring residual risk of older tonnage to third parties while retaining control of the tonnage. Amortization of deferred gains from sale and lease back transactions, which amounted to $47.3 million in 2007, is recorded as a reduction of charter hire expense.
Tax Changes Benefiting OSG's International Shipping Operations
In October 2004, Congress passed the American Jobs Creation Act of 2004 which, for taxable years beginning in 2005, reinstates the indefinite deferral of United States taxation on international shipping income until such income is repatriated to the U.S. as dividends. From 1987 through 2004, the Company's international shipping income was subject to current taxation. The tax law effectively restored the pre-1976 tax treatment of international shipping income beginning in 2005 and placed the Company's international fleet on a level playing field with its offshore competitors for the first time since 1986. For more information, see Taxation of the Company later in this section.
As of December 31, 2007, OSG's owned, operated and newbuild fleet aggregated 156 vessels. Of this total, 121 vessels are International Flag and 35 vessels are U.S. Flag. The Marshall Islands is the principal flag of registry of the Company's International Flag vessels. The Company has one of the industry's most modern and efficient fleets in the international market. At a time when customers are demonstrating an increasingly clear preference for modern tonnage based on concerns about the environmental risks associated with older vessels, 100% of OSG's owned International Flag fleet is double hull.
Additional information about the Company's fleet, including its ownership profile, is set forth below under Operationsâ€”Fleet Summary, as well as on the Company's website, www.osg.com.
To increase vessel utilization and thereby revenues, the Company participates in Commercial Pools with other like-minded ship owners of similar modern, well-maintained vessels. By operating a large number of vessels as an integrated transportation system, Commercial Pools offer customers greater flexibility and a higher level of service while achieving improved scheduling efficiencies. All of the Company's V-Plus and VLCC vessels are managed in the Tankers International pool which, as of December 31, 2007, operated an aggregate of 47 VLCC and V-Plus tankers that trade on long haul routes throughout the world. All of OSG's Aframax tankers except for four dedicated lightering vessels operate in the Aframax International pool, which at year end 2007 consisted of 40 Aframaxes that generally trade in the Atlantic Basin, North Sea and the Mediterranean on short and medium haul routes. Nine of the Company's 11 crude oil Panamax tankers participate in Panamax International, which operated a total of 21 Panamaxes as of December 31, 2007 on short haul and medium haul routes between South and Central America, the U.S. and the Caribbean. Five of OSG's Handysize Product Carriers participate in the Clean Products International Pool, a regional pool comprising six vessels that concentrates on triangulation trades in South America. These commercial ventures negotiate charters with customers primarily in the spot market. The size and scope of these pools enable them to enhance utilization rates for pool vessels by securing backhaul voyages and Contracts of Affreightment ("COAs"), thus generating higher effective TCE revenues than otherwise might be obtainable in the spot market while providing a higher level of service offerings to customers. For more information on the pools, see Operationsâ€”International Fleet Operations.
OSG believes that its commercial success depends in large part on the Company's compliance with safety, quality and environmental ("SQE") standards mandated by worldwide regulators and customers. The Company's integrated technical management centers in the U.S. and Europe manage its operating fleet of International Flag crude oil tankers and refined petroleum product carriers, the U.S. Flag fleet and the gas fleet. In addition to regular maintenance and repair, crews onboard each vessel and OSG's technical management teams of shore side personnel are responsible for ensuring that the Company's fleet meets or exceeds SQE regulations and standards established by customers and the U.S. Coast Guard, SOLAS (the International Convention for the Safety of Life at Sea) and MARPOL. This is achieved by hiring highly qualified crews and personnel, developing and deploying standardized, fleet-wide operational practices and procedures, continuous education and training and the reinforcement of Company policies through integrated systems and technology, open reporting programs and shore side support. In connection with the Company's philosophy of continuous improvement, OSG's operational integrity group, an audit and investigative function, audits both compliance by vessel crews with operating procedures and vessel compliance with environmental regulatory requirements and vessel safety and maintenance standards and responds to the Company's anonymous self reporting system of possible violations of Company policies and procedures. Furthermore, the Company's Operational Compliance Officer, who reports to the President and the Board of Directors, has independent oversight of fleet-wide vessel operating practices and procedures and global training programs. OSG believes it has one of the most comprehensive environmental compliance programs in the industry with checks and balances throughout its system. As a result of the settlement with the U.S. Department of Justice in 2006, the Company agreed to an environmental compliance program, which was substantially the same as its existing environmental management programs.
OSG's commercial teams based in offices in Houston, London, New York, Singapore and Tampa enable customers to have access, at all times, to information about their cargo's position and status. The Company believes that the scale of its fleet, its commercial management skills and its extensive market knowledge allow it to consistently achieve better rates than smaller, independent shipowners. OSG's strong reputation in the marketplace is the result of longstanding relationships with its customers and business partners. Investments in technology, including database and software tools, have enabled OSG to improve the speed and quality of information it provides to its customers.
OSG's customers include major independent and state-owned oil companies, oil traders, and U.S. and international government entities. The Company believes that it distinguishes itself in the shipping market through an emphasis on service, safety and reliability and its ability to maintain and grow long-term customer relationships.
The Company believes that the strength of its balance sheet, and the financial flexibility that it affords, distinguishes it from many of its competitors. In 2007, stockholders' equity declined by $389 million to $1.8 billion, principally due to the Company's repurchase of $551 million of its shares, and liquidity, including undrawn bank facilities, stood at more than $1.8 billion at December 31, 2007. During 2007, OSG America L.P., a subsidiary of OSG, entered into a new $200 million secured credit facility, which is nonrecourse to the Company.
Liquidity adjusted debt to capital was 32.6% at December 31, 2007, compared with 14.8% as of December 31, 2006. The increase was principally the result of $551 million in share repurchases in 2007, which were substantially funded through borrowings under the Company's unsecured credit facility. For this purpose, liquidity adjusted debt is defined as long-term debt reduced by cash and the balance in the Capital Construction Fund.
As of December 31, 2007, the Company had 3,754 employees comprised of 3,278 seagoing personnel and 476 shore side staff. The Company has collective bargaining agreements with three different maritime unions covering 599 seagoing personnel employed on the Company's U.S. Flag vessels. These agreements are in effect for periods ending between March 2008 and June 2015. Under the collective bargaining agreements, the Company is obligated to make contributions to pension and other welfare programs. OSG believes that it has a satisfactory relationship with its employees.
Mr. Arntzen was employed by American Marine Advisors, Inc., a U.S.-based merchant banking firm specializing in the maritime industry, as Chief Executive Officer for at least four years prior to January 2004. Mr. Itkin served as Senior Vice President for at least five years prior to his appointment as Executive Vice President. Mr. Berglund was an officer of Stena Rederi AB of Sweden, a company which supports and coordinates the shipping activities of Stena AB, one of the largest privately-held shipping companies in the world, serving as President from January 2003 to August 2005. Mr. Johnston served as Chief Commercial Officer of the Company for at least five years prior to becoming Head of Shipping Operations. Mr. Whitworth was employed by Maritrans Inc., a publicly traded shipping company, as President and Chief Executive Officer from May 2004 until the Company acquired such company in November 2006. From 2000 until May 2004, Mr. Whitworth was Managing Director of Teekay Shipping (USA), Inc., a shipping company. Mr. Blackley was employed by the Company in numerous positions, including Assistant Treasurer and Vice President, Treasury of OSG Ship Management, Inc. for at least five years prior to becoming Chief Operating Officer of OSG Ship Management (UK) Ltd. Mr. Campbell served as Operations Director of OSG Ship Management (UK) Ltd. for at least four years prior to becoming Head of the Company's Gas Strategic Business Unit. Mr. Dienis worked for Stelmar Shipping Ltd., a publicly traded shipping company that the Company acquired in January 2005, in several management capacities including Chief Operating Officer for at least five years prior to becoming Managing Director and Chief Operating Officer of OSG Ship Management (GR) Ltd. Prior to becoming General Counsel of the Company, Mr. Edelson was employed as Associate General Counsel of the Company from January 2000 until January 2005. For at least five years prior to becoming Head of Worldwide Human Resources for the Company, Mr. Mozdean served as Vice President of Human Resources and Legal Affairs at the Dannon Company, Inc., a leading producer of yogurt products in the United States. Ms. Zabrocky worked for the Company in various management capacities relating to chartering and other commercial functions for at least five years prior to becoming Head of the Company's International Product Carrier Strategic Business Unit in September 2005.
MANAGEMENT DISCUSSION FROM LATEST 10K
The Company is one of the largest independent bulk shipping companies in the world. The Company's operating fleet as of December 31, 2007 consisted of 112 vessels aggregating 12.2 million dwt and 432,400 cbm, including three vessels that have been chartered-in under capital leases and 50 vessels that have been chartered-in under operating leases. In addition to its operating fleet of 112 vessels, charters-in for 21 vessels are scheduled to commence upon delivery of the vessels between 2008 and 2011 and 23 newbuilds (including one U.S. Flag ATB that is being converted to a double hull configuration) are scheduled for delivery between 2008 and 2011, bringing the total operating and newbuild fleet to 156 vessels.
ACQUISITION OF HEIDMAR LIGHTERING
In April 2007, OSG acquired the Heidmar Lightering business from a subsidiary of Morgan Stanley Capital Group Inc. for cash of approximately $41 million. The operation provided crude oil lightering services to refiners, oil companies and trading companies primarily in the U.S. Gulf with a fleet of four International Flag Aframaxes and two U.S. Flag workboats. The business manages a portfolio of one-to-three year fixed rate cargo contracts. Under the agreement, OSG acquired the lightering fleet, which was time chartered-in, including a 50% residual interest in two specialized lightering Aframaxes. The operating results of the Heidmar Lightering business have been included in the Company's financial statements commencing April 1, 2007.
ACQUISITION OF MARITRANS INC.
On November 28, 2006, the Company acquired Maritrans Inc. ("Maritrans"), a leading U.S. Flag crude oil and petroleum product shipping company that owned and operated one of the largest fleets of double hull vessels serving the East Coast and U.S. Gulf Coast trades. The operating results of Maritrans have been included in the Company's financial statements commencing November 29, 2006. Maritrans' fleet consisted of 11 tug barges, one of which was in the process of being converted to a double hull configuration, five product carriers, two of which had been redeployed to transport grain, and three large ATBs under construction. Holders of Maritrans' common stock received $37.50 per share in cash for an aggregate consideration of approximately $450 million. Taking into account the assumption of Maritrans' outstanding debt, the total purchase price was approximately $506 million. OSG financed the acquisition through borrowings under existing credit facilities.
ACQUISITION OF STELMAR SHIPPING LTD.
On January 20, 2005, the Company acquired Stelmar Shipping Ltd. ("Stelmar"), a leading provider of petroleum product and crude oil transportation services. The operating results of Stelmar have been included in the Company's financial statements commencing January 21, 2005. Holders of Stelmar's common stock received $48.00 per share in cash for an aggregate consideration of approximately $844 million. Taking into account the assumption of Stelmar's outstanding debt, the total purchase price was approximately $1.35 billion. The Company funded the acquisition of Stelmar and the refinancing of its debt with $675 million of borrowings under new credit facilities and $675 million of cash and borrowings under long-term credit facilities in existence as of December 31, 2004. Stelmar's 40 vessel fleet consisted of 24 Handysize, 13 Panamax and three Aframax tankers. Stelmar's fleet included two chartered-in Aframax and nine chartered-in Handysize vessels.
SALE OF SEVEN TANKERS TO DOUBLE HULL TANKERS, INC.
In October 2005, OSG sold seven tankers (three VLCCs and four Aframaxes) to Double Hull Tankers, Inc. ("DHT") in connection with DHT's initial public offering. In consideration, OSG received $412.6 million in cash and 14,000,000 shares in DHT, representing a 46.7% equity stake in the new tanker concern. The total consideration to OSG valued the transaction at $580.6 million. In November 2005, the Company sold 648,500 shares of DHT pursuant to the exercise of the over-allotment option granted to the underwriters of DHT's initial public offering, and received net cash proceeds of $7.3 million. During 2007, the company sold the remaining 13,351,500 shares of DHT and received net cash proceeds of $194.7 million. Such sales reduced the Company's interest in DHT to 0.0% as of June 30, 2007. OSG has time chartered the vessels back from DHT for initial periods of five to six and one-half years with various renewal options up to an additional five to eight years, depending on the vessel. The charters provide for the payment by the Company of additional hire, on a quarterly basis, when the aggregate revenue earned, or deemed earned, by these vessels exceeds the sum of the basic hire paid during the quarter by the Company. Under related agreements, a subsidiary of the Company technically manages these vessels for DHT for amounts that have been fixed (except for vessel insurance premiums) over the term of the agreements.
OSG booked a gain on the sale and charter back of these vessels of $232,159,000 in the fourth quarter of 2005. The gain was deferred for accounting purposes and is being recognized as a reduction of time charter hire expense over the initial charter periods. The cash proceeds from the sale were used to reduce debt and for general corporate purposes.
The Company's revenues are highly sensitive to patterns of supply and demand for vessels of the size and design configurations owned and operated by the Company and the trades in which those vessels operate. Rates for the transportation of crude oil and refined petroleum products from which the Company earns a substantial majority of its revenue are determined by market forces such as the supply and demand for oil, the distance that cargoes must be transported, and the number of vessels expected to be available at the time such cargoes need to be transported. The demand for oil shipments is significantly affected by the state of the global economy and level of OPEC's exports. The number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service, principally because of scrappings or conversions. The Company's revenues are also affected by the mix of charters between spot (Voyage Charter) and long-term (Time or Bareboat Charter). Because shipping revenues and voyage expenses are significantly affected by the mix between voyage charters and time charters, the Company manages its vessels based on time charter equivalent ("TCE") revenues. Management makes economic decisions based on anticipated TCE rates and evaluates financial performance based on TCE rates achieved.
Average freight rates for VLCCs, Aframaxes and Product Carriers in 2007 were below the rates realized in 2006 while 2007 Panamax tanker rates were slightly higher. The U.S. Flag Jones Act Product Carrier rates continued their upward trend in 2007.
Crude oil prices adversely impacted demand during 2007, increasing from a first quarter average of $58 per barrel for West Texas Intermediate crude to $91 per barrel during the fourth quarter of 2007. Crude price increases were attributable, in part, to OPEC production cuts that began in the fourth quarter of 2006. The reduction in available supplies caused a worldwide decline in inventory levels to meet oil demand. In addition, higher crude oil prices resulted in the market moving from contango (future prices above current prompt prices) to backwardation (future prices below current prompt prices), which further exacerbated inventory drawdowns. In a backwardation market it is generally preferable to use inventories to meet current demand since replacing inventories is more economical in the future.
Global oil demand in 2007 was 85.9 million barrels per day ("b/d"), an increase of 1.4%, or 1.1 million b/d, above the 2006 demand level. Non-OECD demand increased by 3.7% against an OECD demand decline of 0.3%. Demand growth in non-OECD countries was led by a 4.5% increase in China where naphtha and middle distillates use was particularly strong. A 5.4% increase in Other non-OECD Asia and a 4.8% increase in the Middle East accounted for much of the rest of non-OECD demand growth. Demand in North America, the world's largest consuming region, increased by 1.0% while demand in OECD Europe and OECD Asia declined by 1.9% and 1.4%, respectively.
World oil demand in the fourth quarter of 2007 was 87.2 million b/d, an increase of 1.5 million b/d (1.8%) from 85.7 million b/d in the fourth quarter of 2006. Demand increased by 0.5% in OECD areas and by 3.4% in non-OECD countries. Demand in OECD North America and OECD Europe increased by 0.9% and 0.2%, respectively, primarily due to increased consumption of middle distillate products. There was no change in demand in OECD Asia. Higher demand in non-OECD areas was led by a 7.5% increase in Other Asia, principally reflecting the increased use of transportation fuels in India. China oil demand increased by only 4.4% as shortages of gasoil resulted in lower sales volumes than might have otherwise occurred.
Rates in 2007 were adversely impacted by OPEC's decision in late 2006 to reduce its official production quota by 1.2 million b/d. As most of the production cut was allocated to Arabian Gulf OPEC members, the volume of long-haul crude shipments was reduced, lowering tonne-mile demand for VLCCs. The lower quota level remained in effect until December 2007 when OPEC announced a 500,000 b/d increase in production. This increase had an immediate positive impact on long-haul shipments as this incremental volume was largely sourced from Arabian Gulf OPEC members, particularly Saudi Arabia.
OECD refining runs in 2007 were lower than in 2006, especially in the U.S. and Europe, reflecting the impact of planned and unplanned downtime. Refinery utilization in the U.S. averaged 88.7% during 2007 compared with 89.7% in 2006 and a six-year average of 91.7%. Much of the downtime in North America in the first half of the year was unplanned, which presented arbitrage opportunities that generated additional trans-Atlantic product movements from Europe to the U.S. Despite this, European refinery runs were approximately 100,000 b/d lower in 2007 than in 2006 as a result of increased planned downtime and discretionary run cuts due to poor refining margins primarily in the last half of the year.
Commercial inventories in OECD countries ended 2007 5% below year-end 2006 levels reflecting a drawdown of approximately 335,000 b/d. North America experienced the largest drawdown of 52 million barrels, followed by a 37 million barrel reduction in Europe and a 34 million barrel reduction in Asia. As a result of the inventory declines, forward cover in OECD areas ended 2007 about three days below the year-end 2006 level. The OECD drawdown coupled with declines in non-OECD inventory levels dampened demand for crude imports and adversely impacted tanker demand during the year.
Crude oil imports into China during 2007 rose by 13% relative to 2006. While movements from West Africa were stable, increases in crude oil imports from the Middle East and North Africa generated a significant boost to China's tonne-mile demand during 2007 compared with 2006.
Crude oil exported from Ceyhan, which is sourced from Azerbaijan transported through the Baku-Tbilisi-Ceyhan ("B-T-C") pipeline, averaged 550,000 b/d in 2007, an increase of 400,000 b/d over 2006. Crude oil shipped through the pipeline to Ceyhan reached 670,000 b/d in November 2007 and is forecast to increase to over 1.0 million b/d in 2008.
Tanker rates during the fourth quarter of 2007 were extremely volatile in all market segments. This volatility was in response to OPEC's announcement of a 500,000 b/d increase in production. The sudden surge in oil shipments from the Middle East resulted in a temporary shortage of available tonnage, which boosted VLCC rates to over $280,000 per day in December from a low point of $6,800 per day in early November. Strength in the VLCC sector carried over into both the Aframax and Panamax markets, lifting rates in these sectors to multi-year highs as well. This positive rate environment was reinforced by a collision on December 7 between a single hull VLCC ( Hebei Spirit ) and a barge off the coast of South Korea that resulted in that country's worst oil spill. In addition to having a positive influence on rates, the oil spill caused a significant widening in the premium in TCE rates for double hull tankers compared with single hull tankers.
Higher costs for raw materials, a significant order backlog and continued strong demand for newbuildings both in the tanker and dry cargo markets during 2007 led to further vessel price increases at shipyards of approximately 10% from year-end 2006 levels. Partly as a result, prices for modern second hand vessels also remained strong.
Overall tanker supply increased by 7.5%, or 26.8 million dwt, from year-end 2006 levels. The largest increase was in Panamax tankers (13%) and the smallest increase in the VLCC category (6.2%). The total tanker orderbook at the end of 2007 represented 39.2% of the total fleet based on deadweight tons.
The tables below show the daily TCE rates that prevailed in markets in which the Company's vessels operated for the periods indicated. It is important to note that the spot market is quoted in Worldscale rates. The conversion of Worldscale rates to the following TCE rates required the Company to make certain assumptions as to brokerage commissions, port time, port costs, speed and fuel consumption, all of which will vary in actual usage. In each case, the rates may differ from the actual TCE rates achieved by the Company in the period indicated because of the timing and length of voyages and the portion of revenue generated from long-term charters. For example, TCE rates for VLCCs are reflected in the earnings of the Company approximately one month after such rates are reflected in the tables below calculated on the basis of the fixture dates.
Rates for VLCCs trading out of the Arabian Gulf averaged $46,300 per day during 2007, a decline of 14% from the 2006 average. This decline was attributable to a 400,000 b/d reduction in Middle East OPEC production, a 6.2% increase in the VLCC fleet, lower refinery utilization rates in all OECD areas and a worldwide oil inventory drawdown as the oil market moved into backwardation. These factors were somewhat offset by a 140,000 b/d increase in West African OPEC production, primarily from new deepwater projects in Angola and an increase in long-haul movements from the Middle East and North Africa to China.
VLCC rates in the first quarter of 2007 were 30% below the average in the first quarter of 2006. Rates were lowest in the beginning of January as crude oil liftings from Middle East OPEC countries declined in the wake of production cuts, resulting in surplus tonnage. Rates rose to their highest level of the quarter at the end of March as U.S. refiners began to increase throughput and as tensions with Iran rose. In addition, VLCC loadings increased out of West Africa due to a temporary lack of available Suezmax tonnage as a port strike in southern France left many Suezmaxes stranded.
Average VLCC rates in the second quarter of 2007 remained at first quarter levels. Rates were bolstered by an increase in exports of African crudes to China, an increase in Venezuelan fuel oil movements to Asia and the expanded use of VLCCs to store crude oil in the Gulf of Mexico owing to the contango in crude oil prices. The positive affect on rates was, however, offset by lower refinery utilization in all OECD regions due to both planned and unplanned downtime and a reduction in Arabian Gulf OPEC crude oil production, which was approximately 700,000 b/d below levels in the second quarter of 2006.
VLCC rates declined in the third quarter of 2007 and averaged 70% below the average for the third quarter of 2006, which had the highest quarterly average during 2006. The lower rates reflected ongoing reductions in OPEC crude oil production levels, which significantly reduced long-haul crude oil shipments. A counter-seasonal decline in inventory levels also occurred during the third quarter, as the crude oil market moved from contango to backwardation, discouraging inventory accumulation. This contrasted with a significant inventory build-up during the third quarter of 2006 in anticipation of an active hurricane season.
VLCC rates reached their highest average levels of the year in the fourth quarter of 2007, about double the average rates for the fourth quarter of 2006 and significantly above those attained in the third quarter of 2007. Fourth quarter Middle East OPEC production increased by 560,000 b/d (including a 235,000 b/d increase in Iraq, which is not subject to OPEC quotas) over third quarter 2007 levels following OPEC's decision in December to increase production quotas by 500,000 b/d. Concurrently with increased production, Saudi Arabia readjusted its pricing formula providing a sharp discount on its crudes that would be sent West. This discount provided strong incentives for refiners in the U.S. and Europe to increase purchases of Arabian crude oils. As a result, there was a 60% increase in westbound cargoes in the November 12 to December 11 period compared with the same period in 2006.The sudden pickup in Middle East production moving West combined with a lack of available tonnage in the Arabian Gulf resulted in a significant increase in rates. A serious oil spill off the coast of South Korea in December also helped lift rates to $283,500 per day in December.
The world VLCC fleet expanded by 29 tankers from 497 tankers (145.5 million dwt) at the beginning of the year to 526 tankers (154.5 million dwt) at December 31, 2007. The year-end 2007 VLCC orderbook totaled 182 vessels (55.8 million dwt) representing 36.1% of the existing VLCC fleet, based on deadweight tons.
Rates for Aframaxes operating in the Caribbean averaged $29,900 per day during 2007, a decline of 11% from the 2006 average. Lower rates reflected a net reduction in liftings at key Aframax ports, an 8% increase in the size of the Aframax fleet, lower refinery runs and inventory drawdowns, especially in Europe.
Crude oil production in key Aframax loading areas, which include Mexico, the North Sea and Venezuela, declined by approximately 610,000 b/d from 2006 levels. Mexican production decreased by approximately 5% primarily due to normal age-related declines in the Cantarell field and from the precautionary shut-in of production in August, October and November due to storms. Venezuela's crude oil output declined by approximately 170,000 b/d mainly because of a curtailment in investments by major oil companies stemming from the Venezuelan government's renegotiation of contracts to increase its ownership interest and tax revenues from heavy oil upgrade operations. Diminishing output from mature fields and heavier than normal maintenance activities resulted in a 5% decline in North Sea production. Reduced supplies in these three areas were somewhat offset by higher production in Brazil as new offshore fields, located primarily in the Campos Basin, came on line. In addition about 550,000 b/d of Azeri crude, transported using the B-T-C pipeline, was exported from the port of Ceyhan in 2007, up from 150,000 b/d in 2006, its first year of operation.
Aframax rates in the first quarter of 2007 were, on average, down approximately 2% from the first quarter of 2006. A year-over-year decline of approximately 200,000 b/d in the North Sea production and a 15% drop in Mexican production accounted for the lower rates. Aframax rates in the Caribbean were driven to their highest levels of the first quarter in January by weather-related delays in the U.S. Gulf of Mexico and in the Bosporus Straits. Rates then dropped to their lowest levels of the quarter in the first week in February as these weather delays abated. Rates increased again in March, especially in the Black Sea and Mediterranean Sea, primarily due to port strikes in France, bad weather in Trieste, renewed delays in the Bosporus and increased liftings from Ceyhan, which averaged 470,000 b/d in the first quarter of 2007.
Average rates during the second quarter of 2007 were 7% higher than in the second quarter of 2006, benefiting from the impact of increased liftings of Azeri crude at Ceyhan. In addition, ongoing port strikes in France as well as other related port delays significantly increased waiting time early in the quarter, placing upward pressure on rates. Rates then declined in May as the strike was settled, reducing port congestion, and fell further in June as both North Sea production and Russian crude oil exports declined.
Aframax rates in the third quarter of 2007 averaged 40% below those in the third quarter of 2006. More extensive-than-usual platform maintenance activities in the North Sea during the quarter, which shut-in approximately 570,000 b/d of crude oil, and precautionary field closures in Mexico in anticipation of Hurricane Dean, which shut-in approximately 520,000 b/d in August, reduced liftings in these two key loading areas. Weak refining margins in Europe resulted in discretionary cuts in refining runs that reduced crude demand, resulting in a build-up in surplus tonnage in Europe. Some of this surplus tonnage moved into the Caribbean, negatively affecting rates there as well.
Rates in the fourth quarter of 2007 rates were highly volatile, ranging from a low of $8,400 per day early in the quarter to a high of $108,600 per day late in the quarter and averaged 11% below fourth quarter of 2006 rates. Declining refinery utilization rates in Europe and lower crude oil production in key Aframax loading areas caused the initial weakness in rates. The dramatic improvement in rates later in the quarter was driven by the run up in VLCC rates in December that favorably impacted the Suezmax and Aframax markets. A number of other factors also had a positive influence on rates, including fog-related delays along the Texas coast and an ice storm that reduced crude oil shipments by pipeline from Canada to U.S. refineries.
The world Aframax fleet expanded during 2007 from 714 vessels (72.5 million dwt) as of December 31, 2006 to 764 vessels (78.3 million dwt) at December 31, 2007. The Aframax orderbook increased to 292 vessels (32.1 million dwt) at December 21, 2007 from 230 vessels (25.3 million dwt) at the beginning of the year. The current orderbook now represents 41.0% of the existing Aframax fleet, based on deadweight tons.
Rates for Panamaxes that move crude and residual fuel oils averaged $26,100 per day during 2007, slightly higher than the average of $25,900 per day in 2006. Rates during the first half of 2007 were higher than the first half of 2006 while rates during the last half of 2007 were lower. Higher fuel oil imports into the U.S. and extended delays in port turnarounds on the U.S. West Coast during the first quarter of 2007 were largely offset by a 13% increase in the Panamax fleet during 2007.
Average rates in the first quarter of 2007 were 10% above the average for the corresponding quarter in 2006. Refinery maintenance programs on the U.S. West Coast took longer than anticipated, resulting in extended delays in port turnarounds. This reduced tanker availability and benefited freight rates on the Ecuador- to-U.S. West Coast route.
Panamax rates during the second quarter of 2007 averaged 13% above the corresponding quarter in 2006 primarily because utilities with fuel-switching capability chose to substitute comparatively cheaper fuel oil (on a dollars per BTU basis) for natural gas. As a result, residual fuel oil imports increased 17% in the second quarter compared with the second quarter of 2006.
Rates for Panamaxes during the third quarter of 2007 averaged 15% lower than the third quarter of 2006 as imports of Colombian and Ecuadorian crude oil into the U.S. declined by approximately 20,000 b/d. Utilities with fuel-switching capability chose to switch back to comparatively cheaper natural gas from fuel oil, the reverse of the situation in the second quarter.
Fourth quarter 2007 rates were 5% below average rates in the fourth quarter of 2006. This decline was mainly attributable to the delivery of 11 Panamaxes, which more than offset a 60,000 b/d increase in residual fuel oil imports into the U.S. compared with the fourth quarter in 2006.
The world Panamax fleet at December 31, 2007 stood at 389 vessels (26.6 million dwt), an increase from 346 vessels (23.6 million dwt) as of December 31, 2006. The current orderbook of 133 vessels (9.7 million dwt) at December 31, 2007 represents 36.4% of the existing Panamax fleet, based on deadweight tons.
Rates for Handysize Product Carriers operating in the Caribbean and trans-Atlantic trades averaged $21,000 per day in 2007, 7% below the 2006 average. Product Carrier rates were higher in the first and second quarters as unplanned refinery downtime in North America opened the gasoline arbitrage window from Europe. Rates in the last half of 2007 averaged below the comparable period of 2006 as U.S. gasoline production increased, reducing trans-Atlantic movements, and the Handysize fleet increased by a net of 60 vessels.
Average Product Carrier rates during the first quarter of 2007 were 12% above the average rates for the first quarter of 2006. Rates were buoyed by an increase in gasoline and diesel demand in the U.S. compared with year-ago levels. At the same time, the domestic supply situation became strained as planned refinery downtime on both the U.S. East and West Coasts and unplanned downtime at two key refineries, resulted in lower volumes of products being produced in North America. While part of the increased demand was met by inventory drawdowns, the remainder was supplied by product imports.
Rates for Product Carriers during the second quarter of 2007 were almost 50% higher than average rates for the second quarter of 2006. Second quarter rates, which are typically below first quarter rates, were higher in 2007 largely due to a gasoline deficit in the U.S. as the result of lower refinery utilization rates from both planned and unplanned downtime combined with increased demand. Additional product imports were obtained from Europe to make up the shortfall, boosting rates.
Product Carrier rates averaged $12,900 per day during the third quarter of 2007, 45% below average rates for the third quarter of 2006. Refinery utilization rates in the U.S. increased to 90.6% (compared with the second quarter utilization rate of 89.3%) that closed the European gasoline arbitrage window, reducing trans-Atlantic product movements relative to second quarter levels. Iran also initiated a gasoline rationing program in late June and reduced gasoline imports in the third quarter from second quarter levels.
Fourth quarter 2007 rates were 33% below the average for the fourth quarter of 2006 but slightly higher than rates in the previous quarter. Fourth quarter rates reflected increased middle distillate imports into China, as a record level of imports was reached, as well as increased backhaul movements of middle distillates from the U.S. to Europe. The impact of these increases in product movements was offset by the delivery of 23 Product Carriers during the quarter.
New IMO regulations enacted at the beginning of 2007 ban existing product carriers from transporting vegetable oils unless the vessels are able to meet certain requirements. The required use of IMO II (or IMO III product carriers with waivers) has resulted in additional long haul trades as well as owners retiring older vessels. This has had a beneficial impact on Product Carrier rates throughout the year.
The world Handysize fleet reached 1,332 vessels (55.0 million dwt) at December 31, 2007, an increase of 72 vessels (3.6 million dwt) since December 31, 2006. The orderbook now stands at 544 vessels (25.1 million dwt), equivalent to 45.7% of the existing Handysize fleet, based on deadweight tons.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Average spot rates during the first quarter of 2008 for VLCCs were significantly higher than rates realized in the first quarter of 2007 while rates for crude Panamaxes and Aframaxes were slightly below last yearâ€™s first quarter levels. First quarter 2008 Product Carrier rates were significantly below the comparable quarter last year.
OPEC production, excluding Ecuador, rose 5.2% to 31.8 million barrels per day (â€śb/dâ€ť) relative to the first quarter of 2007 and was a major factor behind the strong performance in the crude oil tanker markets during the first quarter of 2008. There were also increased shipments of West African crude oil to China as refiners there maintained a high refining utilization rate to meet their growing domestic demand. Weather related delays in the Black Sea and in the Caribbean led to increased tanker utilization rates, bolstering freight rates in the Suezmax, Aframax and Panamax sectors. Lower clean product rates reflected a reduction in trans-Atlantic shipments from Europe to the U.S. as gasoline demand declined relative to the first quarter of 2007, resulting in an increase in gasoline inventory levels on both sides of the Atlantic, closing the gasoline arbitrage window.
Worldwide oil demand during the first quarter of 2008 was approximately 87.3 million b/d, an increase of 1.3 million b/d, or 1.5%, compared with the first quarter of 2007. Demand in Non-OECD countries increased by 4.0% against an OECD decline of 0.4%. The demand increase in non-OECD countries was centered in China where demand grew by 410,000 b/d, or 5.6%, led by increased gasoline, aviation fuel and diesel fuel consumption, and in the Middle East, where demand expanded by 320,000 b/d, or 5.0%. Demand in North America, the largest consuming area in the world, declined by 2.6% as gasoline use fell below last yearâ€™s levels while demand in both OECD Europe and OECD Asia increased slightly.
Production in Middle East OPEC countries during the first quarter of 2008 increased by approximately 1.4 million b/d over the first quarter of 2007 and by approximately 400,000 b/d over the fourth quarter of 2007. Higher first quarter production compared with the first quarter of 2007 reflects a 500,000 b/d increase in the official OPEC production quota as well as an increase of 500,000 b/d in Iraqi production, which is not currently subject to production quotas. A lower level of field maintenance in the UAE relative to the fourth quarter of 2007 accounted for much of the first quarter increase in overall Middle East OPEC production. The higher Middle East liftings enhanced tanker utilization rates for VLCCs and had a positive impact on rates in all crude tanker sectors.
Crude oil inventories increased by approximately 29.6 million barrels in the U.S. from beginning-of-the year levels as total U.S. refining utilization rates declined to 85.5% in the first quarter from 87.9% in the fourth quarter of 2007. The increase in crude oil inventories was primarily due to planned refinery maintenance activity as well as unplanned downtime at a few U.S. Gulf Coast refineries.
Crude oil imports into China increased by approximately 12% during the first quarter 2008 compared with the first quarter of 2007. This increase was sourced from long-haul areas such as the Middle East and North and West Africa, providing a boost to tonne-mile demand.
Newbuilding prices remained strong during the first quarter of 2008 due to higher raw material costs and the continuation of a substantial amount of contracting for tanker and dry cargo newbuildings. Newbuilding prices increased by approximately 3.5% for VLCCs since the beginning of the year while prices for Product Carriers remained stable. Prices for modern second hand vessels have also remained strong.
Scrap prices reached record high levels in the first quarter of 2008. As a result of the high scrap prices as well as the strong dry cargo markets there were approximately 30 tankers that were either scrapped or converted to dry bulk carriers.
The tables below show the daily TCE rates that prevailed in markets in which the Companyâ€™s vessels operated for the periods indicated. It is important to note that the spot market is quoted in Worldscale rates. The conversion of Worldscale rates to the following TCE rates required the Company to make certain assumptions as to brokerage commissions, port time, port costs, speed and fuel consumption, all of which will vary in actual usage. In each case, the rates may differ from the actual TCE rates achieved by the Company in the period indicated because of the timing and length of voyages, waiting time and the portion of revenue generated from long-term charters. For example, TCE rates for VLCCs are reflected in the earnings of the Company approximately one month after such rates are reflected in the tables below calculated on the basis of fixture dates.
Rates for VLCCs trading out of the Arabian Gulf in the first quarter of 2008 averaged $83,600 per day, an increase of 89% over first quarter 2007 rates and approximately 12% higher than rates in the last quarter of 2007. Higher first quarter 2008 rates reflect additional movements of Middle East crude oil as well as a net reduction in the size of the VLCC fleet.
Movements of Middle East crudes to China increased by over 200,000 b/d during the first quarter of 2008 compared with the first quarter of 2007. Chinaâ€™s West African crude oil imports also increased with record volumes delivered in February 2008. West African crudes yield a high level of middle distillates, particularly diesel, which is in short supply in China. Demand for diesel in China is highest during the planting season in the second quarter.
Additionally, Venezuelan crude and fuel oil exports to China significantly increased in the first quarter from the same quarter in 2007. Venezuelaâ€™s disagreement with ExxonMobil resulted in an increase in crude oil shipments to Asia, specifically China. This change in supply pattern is favorable to tonne-mile demand given both the length of the Venezuela-to-Asia voyage and the additional tonne miles generated by ExxonMobil sourcing alternative crudes to be processed at their U.S. Gulf Coast refinery.
In response to the Hebei Spirit accident, the use of single hull tankers into South Korea declined from an average of 50% during the first quarter of 2007 to approximately 30% during the first quarter of 2008. This has increased the demand for double hull tankers and has resulted in a daily rate differential of approximately $17,000 per day between double and single hull tankers.
There was also a reduction in the VLCC fleet during the first quarter as there were six deliveries compared with 11 conversions or deletions. Lower available tonnage combined with additional tonne-mile demand provided the environment for strong first quarter VLCC rates.
The number of VLCCs in service as of April 1, 2008 was 499 vessels (147.2 million dwt). The world VLCC tanker fleet is expected to further decline during the second quarter of 2008 as tanker conversions and scrappings are forecast to exceed deliveries. The number of deliveries during the second half of 2008, however, is forecast to exceed conversions and scrappings. The VLCC orderbook totaled 196 vessels (60.4 million dwt) at April 1, 2008 equivalent to 41.0% of the existing VLCC fleet, based on deadweight tons.
Rates during the first quarter of 2008 averaged $47,600 per day. Suezmax rates were positively influenced by a 16% increase in long haul North African crude oil shipments to China relative to the first quarter of 2007 and from an increase in long haul cargo movements from the Caribbean to Far East destinations. The longer ballast legs resulting from these long haul movements reduced available Suezmax tonnage in the West African and Black Sea cargo trades.
Ten to 12 day days of weather-related delays in the Turkish Straits in February had a favorable impact on Suezmax rates in the first quarter. Additionally, there was a decline in relatively short-haul crude oil exports from Russia to Europe in the first quarter due to an increase in Russiaâ€™s own demand and to higher export taxes. These short-haul supplies were replaced by shipments from longer-haul OPEC sources, including West Africa and the Middle East.
Refinery utilization rates on the U.S. East and Gulf Coasts in the first quarter of 2008 averaged about 83%, well below historical levels and were the primary reason for the increase in crude oil inventory levels in the U.S. since the beginning of the year. Refinery utilization rates are forecast to increase in the coming months with the restart of a number of Gulf Coast refineries and waning refinery maintenance activities, which should have peaked in March.
The world Suezmax fleet increased by one vessel during the first quarter of 2008 to 366 vessels (55.4 million dwt) at April 1, 2008. The Suezmax orderbook of 140 vessels (22.1 million dwt) at April 1, 2008 represented 39.9% of the existing Suezmax fleet, based on deadweight tons.
Rates for Aframaxes operating in the Caribbean during the first quarter of 2008 averaged $35,900 per day, a decrease of 4% from the first quarter of 2007 and 1% below the average for the fourth quarter of 2007.
Aframax rates were strong in the Caribbean during the first quarter as weather-related delays on Mexicoâ€™s East Coast and along the U.S. Gulf Coast tied up tonnage, which improved tanker utilization rates. Lightering activity also picked up in the first quarter as the large quantity of Middle East cargoes that were loaded late in the fourth quarter of 2007 arrived at the U.S. Gulf.
Aframax rates in the Mediterranean were not as strong as those realized in the Caribbean. Refiners in Europe reduced discretionary crude runs as margins weakened significantly due to the closing of both the gasoline arbitrage window to the U.S. and the heavy fuel oil arbitrage window to Asia. Moreover, a decline in first quarter 2008 North Sea production of approximately 300,000 b/d compared with the comparable period a year ago negatively impacted Aframax demand.
Strong demand for larger tonnage, particularly for long haul voyages to Eastern destinations, had a beneficial knock-on effect on rates for Aframaxes operating in the Black Sea. Weather delays in the Turkish Straits also boosted tanker utilization rates, which had a positive effect on freight rates.
The world Aframax fleet expanded by five vessels since December 31, 2007 and reached 760 vessels (78.1 million dwt) at April 1, 2008. The Aframax orderbook was 285 vessels (31.4 million dwt) at April 1, 2008, representing 40.2% of the existing Aframax fleet, based on deadweight tons.
Rates for Panamaxes that move crude and residual oils averaged $28,500 per day during the first quarter of 2008, 20% higher than the previous quarter but 9% below the corresponding quarter in 2007. In March, there were extended delays in the Panama Canal and in Puerto Rico, which constrained tonnage and lifted freight rates relative to the previous quarter. Rates relative to the fourth quarter were also buoyed by an increase in fuel oil shipments from Brazil to Europe.
Fuel oil inventory levels in the U.S. stood at 39.7 million barrels at the end of the first quarter of 2008 compared with 39.6 million barrels at the end of December 2007. It is unlikely that inventory levels or fuel oil demand will increase in the near-term since fuel oil prices currently remain above natural gas prices on a BTU basis.
The world Panamax fleet at April 1, 2008 stood at 388 vessels (26.7 million dwt). The fleet increased by five tankers during the first quarter of 2008. The orderbook of 130 vessels (9.5 million dwt) at April 1, 2008 represented 35.6% of the existing Panamax fleet, based on deadweight tons.
Rates for Product Carriers operating in the Caribbean and trans-Atlantic trades averaged $17,300 per day during the first quarter of 2008, about 39% below rates in the first quarter of 2007, but 30% above rates in the last quarter of 2007.
U.S. gasoline demand declined in the first quarter relative to the first quarter of 2007 as gasoline inventories increased by approximately 17 million barrels compared with an inventory decline of approximately four million barrels during the first quarter of 2007. The combined effect of reduced gasoline demand and rising inventory levels effectively closed the gasoline arbitrage window, which curtailed trans-Atlantic product movements and negatively impacted Product Carrier freight rates.
Despite a significant increase in product imports into China, especially diesel, Product Carrier rates in Asia remained relatively weak. Weak refining margins in Asia resulted in discretionary refining cuts in Japan and South Korea, reducing intra-Asian product movements just as additional tonnage arrived in the region. A decline in naphtha imports into Asia from the Middle East also exerted pressure on Asian Product Carrier rates.
Due to a strike by farmers in Argentina that affected soybean oil production, there was a reduction in long haul Argentine soybean oil exports to China in the first quarter. This also had an adverse impact on triangulation opportunities for movements of palm oil. Specifically, after unloading Argentine soybean oil in China, Product Carriers frequently ballast to Malaysia to take on palm oil, which is then delivered to Europe.
The world Handysize fleet increased by 29 vessels during the first quarter of 2008 and reached 1,369 vessels (56.9 million dwt) at April 1, 2008. The orderbook stands at 579 vessels (26.7 million dwt) at April 1, 2008, equivalent to 47.0% of the existing Handysize fleet, based on deadweight tons.
James I. Edelson - General Counsel
Thank you. Before we start, let me just say the following. This conference call may contain forward-looking statements regarding OSG's prospects, including the outlook for tanker and articulated tug barge markets, changing oil trading patterns, anticipated levels of newbuilding and scrapping, prospects for certain strategic alliances and investments, prospects for the growth of the OSG gas transport business, estimated TCE rates achieved for the second quarter of 2008 and estimated TCE rates for the third and fourth quarters of 2008, projected drydock and repair schedule, timely delivery of newbuildings and prospects of OSG's strategy of being a market leader in the segments in which it competes, the projected growth of the world tanker fleet and the forecast of world's economic activity and world's 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 2007. For this conference call, we have prepared and posted on OSG's website supporting slides to supplement our prepared remarks. This supporting presentation can be viewed and downloaded from the Investor Relations Webcast and Presentations section on osg.com.
With that out of the way, I would like to turn the call over to our Chief Executive Officer and President, Morten Arntzen. Morten?
Morten Arntzen - President and Chief Executive Officer
Good morning, and thank you for joining our conference call this morning. Let me introduce the management team members that are here with me in New York. Jonathan Whitworth, the CEO of our OSG America and Head of our U.S. Flag Business Unit; Jennifer Schlueter, Head of Corporate Communications and Investor Relations; Jim Edelson, General Counsel; Lois Zabrocky, Head of our International Product Tanker Strategic Business Unit; Mats Berglund, Head of our Crude Transportation Business Unit; Captain Bob Johnston, Senior Vice President and Head of Ship Operations; and Myles Itkin, our Chief Financial Officer.
As Jim indicated, our remarks will follow a presentation that is posted on the website, so if you'd please now turn to slide 3. Well, the first bullet. As anticipated, the first quarter of 2008 was another quarter of strong performance by the company. Net income came in at $112.4 million and EBITDA at $178.4 million. EPS was up 67% quarter-over-quarter and up 88% when adjusted to exclude first quarter '07 special gain.
And what particularly pleased me about our performance is that these greatly improved numbers compared with last year came almost entirely from earnings from operations, no significant special items and with expenses substantially in line with our internal budget and guidance. We had solid year budget performance from our U.S. Flag and International Product Tanker businesses and exceptional results from our Crude Transportation business.
Second bullet. The big story of the first quarter was our Crude Transportation business, and within this... that segment, it was the very strong performance of the VLCC's spread out. Powered by 99,000 a day VLCC rates, Crude revenues rose 70% during the quarter compared to last year. This enabled U.S. to grow first quarter top line revenues to $376 million, the best first quarter in the company's history.
Now, our numbers ended up below the consensus forecast, which was disappointing, especially considering how good the first quarter numbers were. The differences can be explained by four line items, of which the weaker performance were V-Pluses or ULCC's during the quarter accounted for slightly more than half the shortfall. The positioning of the Suezmaxes upon joining the fleet was also... also contributed in the shortfall. Now, with the V-Pluses, they are heavily impacted by loading activity in the Arabian Gulf. So when Saudi Aramco cuts back on allocations of crude to the U.S. customers, which they did in the first quarter, this has a direct result on the V-Pluses, which were forced to wait longer than usual for cargo.
In addition to the cutbacks, the TI Oceania encountered significant waiting time waiting for employment following her first quarter scheduled drydock. Now, while the... results of the V-Pluses were below expectations, in absolute terms, they remained very healthy, well in excess of our cost of capital. In addition, in seven months, two of the four ULCC's that we own jointly with Euronav will exit the market in order to be converted to FSOs and then moving onto profitable eight-year charters to Maersk Qatar.
The bottom line is the ships have done well even though they have been challenged due to trade and now we're attacking this challenge by moving two V-Pluses onto attractive alternative long-term employment. The way I've looked at these ships, I have said that with four V-Pluses we're low on one ship, with two V-Pluses we'll be short one V-plus.
Moving on, we continued with our share repurchase program during the first quarter. We repurchased 400,000 shares at an average price of $57.33. We used... $21.8 million remains outstanding under the current program. We have now bought back close to 23% of our outstanding shares since the buyback program commenced two years ago. We intend to complete this program in the near-term and we will be reviewing both our dividend and buyback programs at the June Board meeting coinciding with our annual shareholders meeting.
Point five. We gave notice this month of our intention to call our eight-and-a-quarter senior notes due 2013, in the principal amount of $176 million. They will be redeemed on May 15th at 104.125%. We will draw under our revolving credits from the redemptions and have locked in the interest expense on this amount. Thus we anticipate interest savings of $7 million per annum on the same amount of debt.
Just as with the first quarter, we are pleased to put forward strong second quarter bookings so far. I am confident now that you have seen our... now that you have seen our second quarter bookings to date that the analyst consensus forecast will go up from the $1.85 per share that currently stands at the second quarter, through April 18th. We've locked in 67% of our second quarter VLCC revenue days at $78,000 per day. Our Aframax and Suezmax rates are so far running ahead of what we've seen in the prior quarter, and international Product Tanker spot rates are also up. Right now, there appears to be more upside risk in rates than downside in the balance of the quarter, reflecting the tight balance in the double-hull VLCC markets.
Moving to the next page, in order to stabilize earnings in OSG America and to manage some newbuilding delivery delays encountered and importantly, as an owner with a 75% interest in the success of a newly public MLP, OSG has entered into a charter arrangement on seven vessels with OSG America. This involves the chartering in of five vessels from OSG at fixed rates and chartering out to OSG America two of the vessels we have currently handling the lightering in the Delaware Bay. Now, while beneficial for the MLP, these transactions are not material for OSG.
Now, I already mentioned the solid performance by our international Product Tanker unit in the first quarter. It is important to recognize that this unit's performance while good remains burdened by bareboat arrangements on 13 older non-double hull product tankers. We'll redeliver the first two of these units in the second quarter of '08. Two would be redelivered in the first quarter of '09 and the remaining nine in July 2009. Over time, these 13 ships will be replaced with 15 double-hull vessels, which will enable U.S. to significantly increase the margins of this business.
We forecast that the double-hull vessels should be able to earn in excess of 5,000 per day more than the older non-double hull units they replace and in the process transform our international Product Tanker business.
Moving to the next slide, when we laid out our balanced growth strategy, which was predicated on strong in-house technical ship management, one of our objectives was to capture premium long-term business. The first award to this strategy were the initial time charters we obtained from nine of our ten Aker Philadelphia Jones Act newbuildings.
In the last 12 months, the scalable platform we have built has enabled U.S. to secure the first U.S. Flag Jones Act shuttle tanker business and then the last quarter, the eight-year FSO contract with Maersk Qatar. We would not have won these premium high margin contracts unless we had in place a high quality scalable operating and technical platforms. We will continue to pursue incremental high margin business like this and believe that our shareholders will benefit enormously as a result.
Moving onto the next slide, the strength of the VLCC market has surprised most analysts, but it shouldn't. We have kept our fleet trade spot for clear reasons, of which the supply side of the equation is the most obvious, and I think the slide speaks for itself. The VLCC fleet was 483 units at the beginning of '07, exactly the number of units where it ended the year. Today, it stands at 475 trading units.
Next slide, living in the USA and particularly in New York, it is very easy to get caught up in the gloom of the sub-prime crisis and the debate on whether or not the U.S. is in recession or not. The fact shows the USA has imported slightly less crude in 2008 than it did in the same period in 2007. This is not the case in the rest of the world and notably in China, where crude imports were up 6% in the first quarter. This slide shows the strong demand we saw in January from China, which is reflective of how the year has evolved so far.
Moving onto the next slide, we have been telling investors for several years that the commercial obsolescence of the single-hull tanker fleet would precede the mandatory phase-out and that the gap in earning between single-hull ships and double-hull ships would widen as the double-hull fleet grew and this will keep rates at attractive levels. The current market demand for double-hull VLCC's has resulted in now $30,000 a day earning premium to single-hulls. Now, if you look at the slide here, which shows the number of rating Gulf fixtures in '07 and '08 by month. And what you see in '07 was that the ratio of those cargos taken by double-hull vessels, and when you look at '08 and you compare month to month, in every single month but March, the ratio... the number of cargos percentage taken by double-hulls had going up dramatically; from 47 to 53 in November to 64 in December, 61 in January. This is a trend that is not going away, and as you see the average of 58 double-hull VLCC's fixtures in the month in '07, was 74 so far in '08.
Another way to look at this percentage of... is the percentage of voyages done by double-hull vessels in the key discharge areas, and I am now at slide nine. Those areas still accept single-hull vessels. If you look at Japan for example and look at spot only, in '07, 18% of the cargos were taken by double-hulls, in '08, 56. The number in Korea, 23% rising to 45, China 63 to 71%. This trend is irreversible and will gather steam as we approach the mandatory phase update and as the single-hull fleet becomes a smaller percentage of the overall tanker fleet. Today, that number is approaching 20%.
I am now into my... next slide, I am now into my fifth year with OSG. I have never felt better about the prospects for our company and the technical and commercial platform we now have in place. Combine this with a much better market outlook and I feel good about our ability to generate sustainable growth in shareholders returns. Looking at some of the key catalysts for growth, the balance of 2008 looks strong, more upside risk than downside risk, and 2009 outlook looks much better than prior expectations, notably for our Crude business. The rate outlook now for 2010 and 2011 is compelling as the single-hull tank fleet is phased out completely. I already mentioned OSG's international Flags Product fleet is poised for significant earnings jump when the 13 older double-sided MRs were replaced with 15 new double-hull MRs and R-1s.
The U.S. Flag segment cash flows have been stabilized and that fleet will nearly double in the next three years. New long-term contracts have improved margins in U.S. Flag and Crude Oil segments, now that the FSO will provide incremental earnings growth for OSG also, and then the appreciating value of OSG's newbuilding program. With that said, we are very happy that we have a 41-ship newbuilding program today and that we committed this program in many cases two or three years back. We will be taking delivery of our new crude tankers in 2009 and 2010 as opposed to waiting more than into '11 and '12. So, we have built in growth into this system already and we have done that ahead of this... rapid increase we've had in newbuilding prices.
Going to the last page, our aim at OSG is to build long-term sustainable value for our shareholders. Now, we understand the need to both deliver good current returns and long-term value. We think we have the platform that can do this and we think we have the market with us.
Looking at the key elements of our strategy, and this will not be new news to a lot of you, we will continue the expansion of our crude oil sector and retain our heavy spot trading focus. As mentioned, we have 10 new vessels that delivers through 2010. The FSO project is now moving forward. This is the new high growth market and we will look for incremental opportunities in this segment.
We have the lightering business in the Gulf and we're expanding on the West Coast and we believe the U.S. will be importing more, not less crude in the coming years and this will provide growth for that business. And as you learnt at the investor day, we have been active users of the FFA markets to hedge attractive rates.
In addition to crude, the offset... the balanced growth, we have expansion in sectors that provide for earnings growth and stability. And the second quarter of '08 will be the first time we have all four LNG vessels on the water for the full quarter. In the Products, you will see the effect of the... modernization will fully come into our numbers in the second... in the second half of '09. I already mentioned that Jones Act fleet will double and the overall majority of those ships are already on long-term contracts. I should mention the U.S. shuttle tankers' first mover advantage in the first new Jones Act trade in 25 years and our intention is to go after incremental business in that area, and we believe we are the best positioned to capture that. The core of what we do and everything depends on focused, best-in-class technical operations. Technical performance is critical, particularly in time-chartered customers and if we are to win incremental premium long-term business.
We have very proactive efforts underway to recruit, retain, train and motivate high quality crews, and this is going to be one of the biggest challenge the industry faces the next decade. And as I said before, regulation and legislation will only increase over time and demands on shipping companies will grow. The other core part of the strategy we've had long is the importance of scale. This provides U.S. opportunities to invest in projects that deliver superior returns. We would not have gotten the FSO business if we didn't have a large technical staff at Newcastle that is able to allocate the people resources and imagination to pursue it. Technical excellence in fact is a critical differentiator to the higher margin long-term business. On top of that, scale gives you superior market information with the global businesses like we are in is critical.
Finally, and something we've talked about before and we are grateful for today, we will maintain a solid balance sheet and financial flexibility. We always want to be the best or among the best rated companies in our segment and that's the case today. Today, we sit with $1.9 billion in liquidity. We have liquidity-adjusted debt of 30.8%. We have the best liability structure we think in the industry. And we are able to pursue as a result capital efficient growth. All this adds up to easily the formulas of building sustainable long-term value for our shareholders.
With that, I am going turn the microphone over to Myles Itkin, our CFO, to continue with financial review.
Myles Itkin - Executive Vice President, Chief Financial Officer and Treasurer
Thank you, Morten, and good morning. Please turn to slide 13, the results for the quarter ended March 31, 2008 reflect robustness of the crude tanker market, the company's earning power and our ability to deliver superior returns as evidenced by a 30% net profit margin for the quarter and a similar margin in the prior year's quarter.
Slide 14 outlines the composition of Q1's time charter equivalent revenue. Of the $376 million of time charter equivalent revenue earned during the first quarter, $249 million or 66% is attributable to the Crude sector, $66 million or 18% to the Product sector and $53 million or 14% to the U.S. Flag sector. The 45% increase in Q1 revenues over the prior year's quarter reflects an over 1000-day increase in revenue days and over 100% increase in spot rates for VLCC's. For the quarter, 73% in the company's TCE revenue was derived in the spot market compared with 64% for Q1 2007.
Please turn to slide 15 for a discussion of expenses. The positive impact of the increases in spot rates and revenue days was partially offset by higher voyage expenses, mostly in fuel costs and core charges. Average fuel cost per day was $15,000 in the current quarter, about double the average daily rate in Q1 '07. Vessel expenses across the entire fleet increased by $12 million for the quarter to $73 million from $61 million in Q1 2007.
Vessel expenses for the Crude sector increased by $9 million to $29 million in the first three months of 2008, reflecting an increase of 184 owned and bareboat chartered-in days and an increase in average daily vessel expenses, principally as a result of increases in crude costs than repairs. Similarly, Product sector vessel expenses increased by $2.5 million to $21.5 million in the first quarter due to an increase in operating days attributed to the purchase of two Panamax Product Carriers and an increase in average daily vessel expenses resulting from increases in crude costs, environmental compliance costs and the timing of delivery expires. Vessel expense for the U.S. Flag sector remained essentially unchanged quarter-over-quarter.
Charter hire expense increased to $91 million in the current quarter, up by $42 million or 86% including $14 million in charter hire expense associated with the April 2007 acquisition of Heidmar Lightering. The increase was further attributable to a greater number of vessels charted-in during the first quarter, 4,500 days, relative to the first quarter of the prior year 3,250 days. Profit share component to charter hire expense was 8 million higher in Q1 as a result of the higher earnings generated on VLCC's.
Compared with Q1 2007, there was a $5 million increase in depreciation and amortization due to the inclusion of Heidmar Lightering representing $2.3 million of this amount, the 2007 purchase of two LR1s and increased amortization from drydocks incurred, reflecting first drydocks on the former Maritrans fleet and the impact of shortened amortization periods on the older double-sided MRs. Depreciation and amortization for the quarter also reflects the effect of the change in accounting estimates with salvage values increasing to 300 per lightweight from $150 per lightweight, constituting $2.7 million for the quarter and $10.9 million for the full-year 2008. Please note that current salvage values exceed $700 per lightweight.
G&A expenses increased by $8 million in Q1 '08 to $37 million from $29 million in the first quarter of the prior year. The increase is attributable to increase in salaries and stock-based incentive compensation of $4 million, incremental costs associated with the Manila and Houston offices of $1 million, and higher travel and consulting cost associated with newbuild activities and systems integrations.
Equity income decreased to $1.3 million in the first quarter from $3.3 million in Q1 2007. The decrease was primarily due to the loss of earnings following the sale of our holdings in DHT as well as a $1.4 million non-recurring severance charge applicable to an entity, which the company accounts for under the equity method. This $2 million decrease was offset partially by earnings from our four L&G carriers.
Other income for the quarter was $3 million, a decrease of $20 million from the prior year's quarter. Please note however that Q1 2007 included a $15 million gain on the sale of shares in DHT. In addition, Q1 2008 concludes a $3.3 million loss on derivative transactions $2.8 million realized and $0.5 million unrealized, and a $600,000 reduction in interest income due to a drop in interest rates. The combined effect of these changes was that EBITDA for the quarter increased by 22% to $178 million from $146 million in the comparable period of 2007. Net income for the period increased to $112 million and EPS to $3.60 per share compared with $85 million or $2.16 per share for the same period a year ago.
The guidance we provided earlier this year remains essentially unchanged for all categories other than D&A where the change in accounting estimates for depreciation reduces depreciation by $10.9 million for the full year, other income where our lower earning rates and lower cash deposits will cause results to be at the lower end of guidance, and adjustments to interest expense reflecting the repurchase of the bonds as well as the costs associated with the repurchase of those bonds.
In furtherance of our strategy, if you'll turn to slide 16, to provide an increased level of stable earnings, we have expanded in markets characterized by a higher level of term coverage. As a result, the amount of locked-in revenue has grown nine-fold from $186 million at the end of 2004 to more than $1.7 billion at the end of March 2008. 77% of this amount is attributable to our U.S. Flag business unit and 11% to our International Flag Product Carrier business unit. The fixed revenue streams associated with our Gas business unit and our new FSL joint venture, which are accounted for as equity income in affiliated companies, amounts to an additional $1.8 billion, bringing aggregate locked-in revenue to $3.5 billion, a 1900% increase over year-end 2004. Details regarding both locked-in revenue and days per sector are included in the appendix at the end of the slide presentation.
Slide 17 lays out our review of OSG's net asset value in comparison with our share price. An analysis of each category of NAV is included in the appendix to this presentation. As of the market close yesterday, we were trading north of $77 per share in comparison with a net asset value of $110 per share. Please note that the $110 per share net asset value excludes the difference between the fair market value and estimated delivered cost of our newbuilding portfolio as well as the value of our in-the-money vessel purchase options and charter extension options.
We believe the combination of this valuation gap, the contracted growth in our U.S. Flag business, our expansion into sectors characterized by long-term stable cash flows, our active asset management program, and our continued distribution of capital to shareholders makes U.S. a compelling investment.
This concludes my formal remarks. Before opening up the call for questions, I would like to turn the call back to Morten.