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Edited Transcript of OSG earnings conference call or presentation 9-Nov-18 2:00pm GMT

Q3 2018 Overseas Shipholding Group Inc Earnings Call

New York Jan 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Overseas Shipholding Group Inc earnings conference call or presentation Friday, November 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Richard L. Trueblood

Overseas Shipholding Group, Inc. - VP & CFO

* Samuel H. Norton

Overseas Shipholding Group, Inc. - President, CEO & Director

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Conference Call Participants

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* Elvis Pellumbi

CF Partners (UK) LLP - CIO & Portfolio Manager

* Ryan Vaughan

Needham & Company, LLC - Principal

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Presentation

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Operator [1]

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Good morning, and welcome to the Overseas Shipholding Group Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Sam Norton, Chief Executive Officer. Please go ahead.

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [2]

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Thank you, Gary. Good morning, everyone, and thank you all for joining Dick Trueblood, Molly Arcia and Princeton McFarland and me, for our 2018 third quarter earnings calls. We welcome the opportunity to provide added depth and perspective to our written public disclosures and appreciate your taking the time to listen in on this call. Prior to beginning our review of the past quarter, I would like to direct everyone to the narrative on Pages 1 and 2 of the PowerPoint presentation available on our website regarding forward-looking statements, estimates and other information, which may be provided during the course of this call. The contents of this narrative are an important part of this presentation, and I urge everyone to read and consider them carefully. We will be offering you more than just a historic perspective on OSG today. And our presentation includes forward-looking statements, including statements about future results. These statements are subject to uncertainties and risks. Actual results may differ materially from projections and could be affected by a variety of risk factors, including factors beyond our control. For a discussion of these factors, we refer you specifically to our annual report on Form 10-K for the fiscal year ended December 31, 2017; our Form 10-Q for the first and second quarters of 2018; and our other filings with the SEC, which are available at the SEC's Internet site, www.sec.gov as well as our own website, www.osg.com. Forward-looking statements in this presentation speak only as of the date of these materials, and we assume no obligation to update forward-looking statements or reasons why actual results could differ. In addition, our presentation today includes certain non-GAAP financial measures, which we define and reconcile to GAAP in our third quarter earnings release furnished to the SEC and which is posted on our website.

Turning now to the specifics of the recently completed quarter. OSG made meaningful progress in executing in our strategic business plan on multiple fronts, which has resulted in our securing greater visibility to and a broader mix of future revenue streams. We believe these developments position the company well to benefit from the continuing arc of improving market fundamentals. Specifically, of note, we have, since the end of the second quarter, concluded time-charter contracts on 5 of our tankers at average rates well in excess of $50,000 per day, covering nearly all available days for these 5 vessels over the next 12 months. Coupled with fixtures done early in the year, these recent contracts now provide for forward fixed-rate coverage on close to 70% of available days for our conventionally trading tankers per calendar year 2019. We have also concluded extension agreements for 2 of our ATBs securing fixed employment for these assets through much of 2019 and increasing our forward cover for 2019 to over 70% of ATB available trading days. We have extended the contract of affreightment with the Government of Israel through the end of 2020, providing welcome employment visibility for the next 2 years for our NSP (sic) [MSP] tankers. We have concluded contracts with Hyundai Mipo Dockyard in Korea for the construction of 2 new tankers for delivery during the second half of 2019. We have contracted for the construction of 1 firm and 1 optional tank barge to be built at Gunderson Marine's Portland, Oregon shipyard, both of which are scheduled to be delivered in 2020. We have signed a letter of intent, including agreement on principal terms for a bareboat lease of a Jones Act compliant MR tanker. Detailed contractual terms are now under negotiation to provide subject to completion for the delivery of this vessel to OSG during the first quarter of 2019. We have received commitments for 2 debt facilities, which would result in the refinancing of $352.5 million of term debt maturing in 2019. When, as anticipated, these facilities are closed in the coming weeks, the financing will provide welcome stability to our balance sheet and clear the path for the pursuit of additional expansion opportunities.

Finally, we have concluded an IRS audit and review of matters dating back several years, which have allowed for the realization of $23 million in tax assets, previously held in reserve on our balance sheet, giving final closure to the last messages of our former international tanker operation. The cumulative effect of all of these developments is to have removed considerable uncertainty as to the future financial performance and have affirmed our long-term commitment deploying a leading role of U.S. Flag petroleum distribution sector. We have largely succeeded in our stated goal of opportunistically moving from short-term trading in the spot market to attaining profitable time-charter contracts with majority of our fleet.

Our efforts have given us the confidence to commit to new capacity, specifically in the form of the bareboat lease of the additional Jones Act tanker and to capital investment in one of potentially 2 Jones Act barges and to 2 new U.S. Flag tankers. These additions give promise for incremental revenue growth in the future and our tangible commitments to asset renewal in our core operating businesses. In addition, during 2018, we have secured forward employment commitments for our MSP tankers through the end of 2020 and extended lightering commitments at increased minimum volumes, providing greater forward visibility of the cash flows to arrive from these niche activities.

Throughout the past 24 months, we worked hard to reduce cost and improve efficiencies across the organization, without compromising our commitment to safety and quality of operational performance. Real progress have been achieved in all of these efforts. Notwithstanding the positive long-term impact of these achievements, our short-term financial results continue to be disproportionately affected by soft spot market condition in both our conventional tanker and ATB businesses. A deceleration of the velocity of spot fixtures has been apparent over the second half of this year, as inventory management decisions by our core customers have led to a persistent duress of spot clean product cargoes. The moderation in the tanker spot market appears to be rooted in a short-term shift and clean product transport demand, a consequence of a build in clean product inventory levels that has persisted beyond conventional peak seasonal trends. Let me provide additional details. Utilization rates for our 3 spot trading conventional tankers dropped to 35% during the third quarter. Roughly half the 70% utilization rates achieved across the first half of the year. Utilization rates for the spot trading ATBs were 60% of available days. Historical patterns suggest that we should anticipate a seasonal upturn in the spot market demand to occur as we move through the fourth quarter. However, the sharp swings in utilization rates achieved across the 3 quarters of 2018 have made short-term chartering decisions a continuing challenge. As we have emphasized in past presentation, the erratic swings of trading in the spot markets is the cost to be borne for achieving the longer-term chartering objectives that we have chosen to pursue.

Though the immediate costs were high during the just completed quarter, we are firm in our belief that the broader benefits of our approach will manifest over time. In contrast to the muted demand in the spot trading cargoes and the clean product sector, demand for transporting crude oil domestically remains strong during the quarter. 3 of the 5 recent period charters concluded have been made with the intention of supporting crude oil trades. As noted in past presentation, the pricing differentials between domestic and international crude prices are an important factor in demand for domestic crude oil transportation. Domestic crude prices sold at a discount on the delivered cost basis during much of the third quarter and expectations are that these pricing dynamics will be present more often than not through the end of 2019. In byproducts of the wide domestic to international crude price spread is to make crude oil available at U.S. Gulf Coast Marine terminals a cost effective option for Gulf Coast and East Coast refiners, with what we have seen to be favorable implications on Jones Act freight rates. The developing recovering narrative is the Jones Act market was never likely to proceed in an even step-like progression. Rate and utilization volatility through the evolving market transition has been and will likely continue to be a feature that amplifies swings in quarter-to-quarter comparison. Multiple variables, many of which are beyond our control, may affect short-term results. As can be seen in our most recent quarterly financial performance, which Dick will explain in more detail in his commentary. Nevertheless, we still consider the evolving fundamental to be supportive of our continuing progression towards a healthy balance of supply and demand. More regular and active discussions with our customers in the period-charter arena, standard commitments with our contract of affreightment end users and what now appears to be a sustained demand for crude transportation within the Jones Act trades offer encouraging evidence that our core customer base as a similar perspective of the shape of what the future may hold. All told, we see these developments as offering considerable promise for the future of our business. Before I hand things over to Dick to take you through a review of the past quarter's financial results, it is useful to recall that as of the end of October, OSG owned or operated an active fleet of 22 vessels. Our active fleet includes tankers and articulated tug barges of which 20 operate under the Jones Act and 2 operate internationally as the U.S. Maritimes Security Program.

With this picture now having been refreshed, I will turn the call over to Dick to provide additional details on our third quarter results for 2018. Dick?

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Richard L. Trueblood, Overseas Shipholding Group, Inc. - VP & CFO [3]

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Thanks, Sam. Now let's review the third quarter of 2018 results in more detail. Please turn to Slide 10. First, I want to provide some context to assist in understanding the company's performance during the quarter. The third quarter is typically a seasonally slow quarter with lower levels of spot market activity and reductions in Delaware Bay lightering volumes. During the 2018 third quarter, we operated 1 fewer vessel than in the same period of 2017. Further, we experienced 61 dry dock days compared to 9 days in Q3, 2017. This results in the mandated inspection schedules, which start on the vessel build date. Accordingly, we experienced time periods with increased dry dock requirements when compared to other periods. We had a total of 89 repair days, including 46 repair days for the OSG 243. During the year-ago quarter, we experienced 4 repair days. The combined effect of this was to reduce TCE revenues by approximately $8.5 million.

Our short-term financial results continue to be negatively affected by soft spot market conditions in both our conventional tanker and ATB businesses. The moderation in tanker spot market appears to be rooted in short-term shift, in clean product transport demand, resulting from an increase in clean product inventory levels above and beyond conventional peak season quantities. Utilization rates for our 3 spot trading conventional tanker dropped Telkomseo 35% during the quarter, roughly half to 70% utilization rate achieved across the first half of the year.

As a result, these vessels achieved negative vessel operating contributions in excess of $8 million. We anticipate a seasonal upturn in spot market demand to occur as we move through the fourth quarter, with an expectation of return during the winter months to the utilization rates seen during the first half of 2018. ATB operating results in the third quarter were in line with expectations, with vessel operating contribution of $2.4 million, a reversion to levels experienced in the first quarter of this year. Utilization rates for the spot trading ATBs were 60% of available days. Repairs to the OSG 243 independents were completed during the quarter, and the unit returned to service under an existing time-charter contract. While repair costs of this unit are largely covered by insurance, we experienced an estimated revenue loss of $1.2 million, most of which fell within the third quarter. This will form the basis of a claim against the bulk carrier that was involved in the elution incident in June. We may not be successful in pursuit of this claim, and even if we are, we cannot predict how much we will recover.

Turning to our niche businesses. Our lightering barges generated effective time-charter equivalent earnings during the quarter of $65,000 a day, an increase of 2% from the prior quarter and 6% from 2017, and this in spite of 24 out-of-service days to complete statutory surveys and vessel repairs that we experienced within the quarter. We have seen consistently higher-than-minimal volumes with our customers in the Delaware Bay in recent months, and with minimum take-or-pay volumes now established at higher levels than has historically been the case, we remain confident that the financial performance of this activity will likely exceed historical comparisons for the balance of the year. Our 2 tankers operating in the Maritime Security Program performed only 1 voyage under our Government of Israel contract of affreightment during the quarter and had limited success in obtaining fuel and voyages in the spot market, resulting in a drop of time-charter equivalent earning during the quarter to $16,500 per day. A return to the normal 2 voyage scheduled during the fourth quarter can see a rebound in the contribution of these vessels during the quarter. The Overseas Chinook was redelivered to us in May and is currently trading under a time charter as the conventional tanker. The average time-charter earnings from our shuttle tanker assets, including the Overseas Chinook, saw a slight reduction in gross revenue contribution when compared to prior year results and continued to average close to $70,000 per day across the group of 3 assets. These quality cash flows are expected to continue with this level throughout 2019.

Please turn to Slide 11. TCE revenues for the quarter totaled $72 million, a decrease of $12.8 million or 15% compared with the third quarter of 2017. Our total revenue days decreased 223 when compared to the prior year ago period. The utilization rate for our Jones Act tankers, trading in the spot market, decreased from 70% in the first half of 2018 to 35% during the third quarter because of fewer spot market trading opportunities, due to the seasonal slowdown and reduction in clean product movements. The timing of Government of Israel shipments shifted 1 voyage from the third to the fourth quarter of this year.

During the third quarter of 2018, the impact of fewer operating rebuilt ATBs, including the OSG 243, reduced total ATB revenue days by 176. Pretax loss increased $2 million in the same comparable time periods. In third quarter of 2017, loss included a $7.4 million loss from the sale of 1 ATB. The Jones Act revenue tanker's revenue contribution decreased $6,100,000 due to the reduction in revenues days previously discussed and a limited number of spot market days available during the quarter. We executed a significant proportion of the available trades but nevertheless experienced a reduction in utilization rates.

During the third quarter of 2018, 9% of our Jones Act tanker revenues resulted from spot market activities compared to 19% in the comparable prior year period. At Delaware Bay, lightering revenues decreased $700,000, principally due to the decrease in revenue days, resulting from dry dock and maintenance. Even so, lightering volumes remain consistent with those experienced in the second quarter of 2019 with an average daily rate increase to $65,000. Our non-Jones Act tanker revenues decreased $3.3 million to a large measure to the previously mentioned shift in the timing of Government of Israel voyages, which resulted in 1 less voyage during the quarter. That, coupled with a loss of -- lack of fill-in voyages, to compensate, resulted in a decrease to daily TCE rates. Sequentially, TCE revenues decreased $13.9 million or 16% from the 2018 second quarter. There is a decrease in our tanker spot utilization rates during the quarter to 35%. Spot market activities -- keep in mind, spot market activity shifts utilization risk to the vessel operators, while time-charters place utilization risk with the charter risks. Our rebuilt ATBs experienced a $3 million sequential decline in TCE revenues due to the OSG 243 elution and intermediate survey on 1 ATB and the reduction of spot market demand.

As a reminder, Q2 2018 saw an increase in TCE revenues of $2.4 million from Q1 2018, interrupting the revenue reduction that has been occurring in our ATB fleet size decreases. And our customers and terminal operators continue to find order ATBs less desirable to use. Our niche business activities continue to provide a strong, stable platform to our business. Our shuttle tankers continue to perform well. Our business is characterized by a high level of operating leverage with the result the changes in revenues translate directly into changes in earnings.

Moving to Slide 12. Taking a more granular look at TCE revenues. During the third quarter of 2018 compared to the 2017 third quarter, we experienced revenue declines across all elements of our business. Lightering revenues with the exception of the fourth quarter of 2017 have remained relatively consistent while quarterly performance of our non-Jones Act tankers decreased during the current quarter, primarily due to the previously discussed Government of Israel voyage timing shift. During the second quarter of 2018, we saw a customer preference for smaller cargo moves, which favored ATB utilization and a result in $2.4 million increase in revenues. And during the third quarter, those revenues returned to our first quarter 2018 levels.

Our Jones Act Handysize product tanker recorded a revenue decrease of $6,100,000 compared to the third quarter of 2017. And the current quarter's Jones Act tanker performance experienced a $7.3 million revenue decline from the second quarter of 2018. Seasonal markets often has resulted in lower utilization rates for our tankers trading in the clean product spot market. Additionally, there was an increase in nonearning days due to dry dock and maintenance requirements. The average spot market daily earnings decreased from $24,466 a day to $17,133. Spot market TCE rates remained in the mid-$50,000 range. Spot market day decreased from 367 in the third quarter of 2017 to 276 days in 2018's third quarter, or 25%.

Moving to Slide 13. Vessel operating contribution decreased $14.4 million compared to Q2 2018. $6.7 million of the decrease resulted from the reduced spot market activity of our 3 conventional tankers trading in the spot market, compounded by the mandatory dry dock and required maintenance performed during the quarter. The estimated revenue impact of the maintenance activity is $3,400,000. Additionally, the ATB vessel operating contribution returned to levels experienced during the Q1, 2018, due in large part to the loss revenue days from the OSG 243 elution and required maintenance. Niche market vessel operating contribution declined $5.1 million from the prior quarter. The decreased results from fewer revenue days were our lightering vessel, 1 less Government of Israel voyage and the current time-charter use of the Chinook as a conventional tanker.

Moving to Slide 14. For all the reasons stated above, third quarter 2018 adjusted EBITDA was $9.2 million down 59% from $22.6 million in Q3 of 2017. The decrease was driven primarily by the previously discussed decline in TCE revenues.

Please turn to Slide 15. Net income in the quarter was $11.9 million, up $18.3 million from the net loss recognized in the third quarter of 2017. The IRS completed the audit of our tax returns for the period 2012 to 2015 during the third quarter. We had previously reserved the beneficial effect of losses recognized in the connection with the disposition of 2 vessels in earlier years. The results of the audit permitted us to recognize those tax benefits in full during the quarter.

Please turn to Slide 16. Moving from left to right. We began the third quarter of 2018 with total cash $131 million, including $200,000 of restricted cash. During the third quarter, we generated $9 million of adjusted EBITDA. Working capital changes contributed $6 million of cash. We expended $6 million on dry docking and improvements to our vessels. We invested $10 million in new vessel construction, and we incurred $6 million of cash interest expense. The result was, we ended the quarter with $124 million of cash, including $200,000 of restricted cash.

Before we turn to Slide 17. Continuing our discussion of cash and liquidity. As we mentioned on the previous slide, we have $124 million of cash at September 30, 2018, including $200,000 of restricted cash. Our total debt was $381 million. This represents a $119 million reduction in outstanding indebtedness since September 2017. We also have a $75 million revolver, which is presently undrawn. Combining our undrawn revolver with cash, we had a $199 million of liquidity at quarter-end. We are not subject to any amortization on our term loan. We do remain subject to the excess cash flow sweep provisions of this loan. However, considering the $47 million prepayment we made in March, we do not anticipate having to make the cash flow sweep payment in February 2019. With $333 million of equity, our net debt-to-equity ratio is 0.8x, down from 1.2x at September 30, 2017. Our $380 million term loan matures in August 5, 2019. We began evaluating alternatives in early 2018 to refinance this loan. We have commitments for 2 loans, which, in the aggregate, will provide $352.5 million to be used in repayment of our current term loan. We will also make a $27.5 million payment in conjunction with the closing of these transactions. This concludes my comments on the financial statements. I would like to now turn the call back to Sam for his closing remarks. Sam?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [4]

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Thank you, Dick. Altogether, we have cause to believe that our commercial strategy remains sound for the long term. Time-charter activity at sustainable rates for both our conventional tankers as well as for some of our barges has been on the rise, evidencing a willingness for our customers to accept a larger exposure to utilization risk. We remain confident that the mix of our revenue streams will continue to provide a solid foundation to capture the benefits of improving fundamentals. Even with seasonal softness in spot tanker rates. We expect our niche businesses to return to form in the coming quarters and progress in securing more long-term charter contracts during recent months. We believe that our chartering strategy of leveraging spot market availability to secure more attractive long-term charter commitments is proving to be successful, and we will continue executing on this strategy. As tightening age restrictions imposed by our core customer base progressively limit acceptability for use and service of vessels exceeding 20 years of age, our commitments to construct new vessels position OSG well to address such concerns.

We will now open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Ryan Vaughan with Needham.

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Ryan Vaughan, Needham & Company, LLC - Principal [2]

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Sam, couple of questions for you. One, can you comment on your decision to lock in on the 5 one-year contracts versus something longer term? And then two, I didn't totally follow the spot weakness in 3Q, but more importantly, can you clarify why you expect the spot rates to turn through the rest of 2018?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [3]

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Thank you, Ryan. First of all, I don't think we have specifically commented on the length of our charters, but I would point out that we have decisions to make with respect to extension of some of the lease contracts that we have with AMSC, coming up this quarter. To a large extent, duration of charters that we have been fixing have been -- have been focused on the exploration of the current lease contracts that we have. So as we move to this quarter and we take decisions on if and when we extend the bareboat leases that we have with AMSC, that probably opens up a broader opportunity to look for longer charters than we currently have been looking at. As far as the spot market, the spot market is, by definition, difficult to project or to forecast. I mean, I will be hesitant to make any firm projections in that respect. What we can say is that there is a high level of seasonality, as I have highlighted in earlier presentations. Florida is the largest destination for clean product transport -- the transport of clean cargoes. And Florida is seasonally a little bit different from the normal driving seasons in the United States. And that peak season is really February to April, which represents the peak tourist season here in Florida. And the slow season is August, September, as it's hot and hurricanes and other things keep the tourist volume relatively low here. So typically, in the past, as we have moved from the low August-September season into the peak season of February to April, we've seen a pickup in volume and demand for our clean product movements, and we would normally expect that to see that kind of pickup, again, as we move into the winter.

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Operator [4]

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The next question comes from Elvis Pellumbi with CF Partners.

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Elvis Pellumbi, CF Partners (UK) LLP - CIO & Portfolio Manager [5]

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Could you comment a little bit more on the new lease for the MR for the Q1 '19 deliveries, that you talked about the duration, in particular?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [6]

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Well, as I said, it's a letter of intent. So we are in the midst of finalizing documentation for that. Our expectation is the vessel will give delivery sometime in the first quarter of 2019, that the vessel will be delivered with survey due. So it will take us some weeks to complete special survey and necessary repair works for the vessel. We would expect to see the vessels beginning to contribute to revenue streams during the end of the second quarter of next year. Other than that, I really can't comment specifically on the terms, as they are subject to confidentiality provisions.

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Elvis Pellumbi, CF Partners (UK) LLP - CIO & Portfolio Manager [7]

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I understand. Okay. Dick, on the new facilities on the commitments for $352.5 million, are the 2 -- I presume the second piece is not pari passu. It's different, is that why you're characterizing it differently from the first piece? And could you give us a sense in terms of the cost? Or is that also something you're going disclose later?

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Richard L. Trueblood, Overseas Shipholding Group, Inc. - VP & CFO [8]

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See, the 2 loans are not pari passu. I mean, they are different -- will be secured by different pools of collateral. And so each have their own particular set of terms and conditions. I guess, I would characterize the cost as being slightly greater on an interest-rate basis than the current loan but not much.

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Operator [9]

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(Operator Instructions) As I'm showing no further questions, this concludes our question-and-answer session. Mr. Norton, would you like to make any closing remarks?

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Samuel H. Norton, Overseas Shipholding Group, Inc. - President, CEO & Director [10]

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Thank you, Gary. Just wanted to thank you for hosting the call, and thank all the participants for joining us. We'll look forward to speaking you again in subsequent quarters. Have a good day.

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Operator [11]

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Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.