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August 5, 2009

Red ink at OSG

What President and CEO Morten Arntzen called "a convergence of events," saw Overseas Shipholding Group, Inc. (NYSE: OSG), report a second quarter loss of $ 8.8 million. Still, that was better than analysts had expected and the company's stock ended the day 4.59% up.

For the quarter ended June 30, 2009, OSG reported time charter equivalent (TCE) revenues of $248.4 million, a 36% decline from $386.1 million in 2008, with lower daily TCE rates earned by all of its international flag vessel classes offset by a 77 day increase in revenue days. Net loss attributable to the company was $8.8 million, or $0.33 per diluted share, compared with net income of $86.9 million, or $2.81 per diluted share, in the same period a year ago. Special items that totaled $1.0 million, or $0.04 per diluted share, increased losses in the second quarter 2009, compared with special items that totaled $14.7 million, or $0.36 per diluted share, that decreased earnings in the same period a year ago ,

Morten Arntzen, President and CEO said, "As we expected, a convergence of events caused tanker markets to deteriorate in the first half of 2009. The global economic contraction led to a sharp decline in world demand for oil, notably in OECD countries, which in turn resulted in significant OPEC production cuts. This situation was exacerbated by an increase in vessel deliveries across our core segments. We expect the trend toward an oversupplied vessel market to moderate as very tight ship finance markets and the weakening financial condition of less well-capitalized ship owners and shipyards result in a contracting tanker orderbook. The single hull phase-out over the next eighteen months will further benefit the economics of the global tanker trading fleet."

Arntzen continued, "For the remainder of 2009, we remain focused on controlling costs and managing projects that can deliver attractive returns in both the short and long-term. The core of our long-term strategy-conservative financial management and balanced growth-remains intact, and we have ample liquidity to manage the turmoil ahead and take advantage of opportunities as they arise."

For the six months ended June 30, 2009, the Company reported TCE revenues of $541.2 million, a 29% decrease from $761.9 million in 2008. The year-over-year decline in TCE revenues was due to lower TCE rates earned across nearly all vessel classes. Earnings for the first six months were $113.0 million, or $4.20 per diluted share, compared with $199.4 million, or $6.42 per diluted share, a year ago. Earnings in the first half of 2009 included special items that increased Earnings by $93.8 million, or $3.49 per diluted share, compared with special items that totaled $15.2 million, or $0.37 per share, that reduced Earnings in the same period a year earlier.

Segment Information

TCE revenues in the second quarter of 2009 for the Crude Oil segment were $128.1 million, a 50% decrease from $254.9 million in the same period of 2008. The decrease was principally due to dramatically lower average spot rates earned across all crude oil vessel classes. Quarter-over-quarter spot charter rates for VLCCs decreased 68% to $32,020 per day, Aframaxes decreased by 70% to $16,757 per day and Panamaxes decreased 47% to $18,776 per day. TCE revenues for the Product Carrier segment were $63.6 million, a decline of $8.0 million, or 11%, from $71.6 million in the year earlier period. The decrease was principally attributable to a 33% decrease in average daily spot TCE rates for medium-range (MR) product carriers to $16,715 per day. TCE revenues for the U.S. Flag segment were $54.7 million, an increase of $3.0 million, or 6%, from $51.7 million in the same quarter last year. The increase was principally due to revenue days associated with four product carriers that delivered subsequent to March 31, 2008 and commenced time charters.

Additional Detail on Quarterly Results

Total operating expenses before severance and relocation costs, shipyard contract termination costs and gain/(loss) on disposal of vessels declined 7%, or $22.3 million, to $282.8 million compared with $305.1 million in the corresponding quarter in 2008. Period-over-period changes included:

Voyage expenses decreased to $34.3 million, or 19%, from $42.1 million, principally due to lower fuel costs. Lower fuel costs were attributable, in part, to the Suezmaxes moving from the spot market to Suezmax International after June 30, 2008 and the removal of the Overseas Integrity and M 300 from service in the fourth quarter of 2008;

Vessel expenses decreased to $69.9 million, or 10%, from $77.8 million principally due to the timing of delivery and stores and spares, reductions in repairs, a reduction in costs related to a fixed rate technical management agreement with DHT Maritime, Inc. and the redelivery of nine older product carriers;

Charter hire expenses were relatively flat at $104.6 million from $103.4 million despite a 557 day increase in charter-in days, principally due to lower profit share due to owners;

Depreciation and amortization was $44.9 million, a 5% decline from $47.3 million, principally due to two U.S. Flag vessels being classified as held for sale (for which depreciation ceased), the sale of the Overseas Donna in the first quarter of 2009 and the redelivery of four non double hull MR product carriers in December 2008 and January 2009;

G&A expenses decreased by $5.4 million, or 16%, to $29.1 million. Lower G&A was due to Companywide cost control efforts that included reductions in compensation and benefits paid to shoreside staff, lower consulting, travel and entertainment and other discretionary expenditures and a favorable change in foreign exchange rates, partially offset by higher legal expenses.

The second quarter Loss was reduced by a $3.0 million tax benefit related to reversals of previously established deferred tax liabilities.

Other items that impacted reported results in the second quarter of 2009 aggregated $1.0 million, or $0.04 per share, and included:

$2.4 million, or $0.09 per diluted share, related to a loss on vessel sales;

$3.0 million, or $0.11 per diluted share, related to a net loss on other investments;

$786,000, or $0.03 per diluted share, related to a positive change in the mark-to-market balance of unrealized freight derivative positions; and

$3.7 million, or $0.14 per diluted share, benefit related to the adjustment of previously recorded shipyard contract termination charges.

Liquidity

At June 30, 2009, total equity was $2.0 billion and liquidity, including undrawn bank facilities, was approximately $1.8 billion. Total debt as of June 30, 2009 was $1.4 billion, unchanged from December 31, 2008. Liquidity-adjusted debt to capital3 was 26.8% as of June 30, 2009, a decrease from 35.5% as of December 31, 2008, adjusted to reflect the reclassification of the noncontrolling interest to equity in accordance with accounting guidance that became effective in 2009.

OSG's financial strategy, balance sheet strength and financial condition have enabled it to be a predominantly unsecured borrower with only 29.2% of net book value of vessels pledged as collateral. OSG has $976 million available in borrowing capacity under its $1.8 billion seven-year unsecured credit facility and $170 million in borrowing capacity under its $200 million secured credit facility. Principal debt repayment obligations are less than $35 million per annum through 2011.

Fixed Revenue --Aggregate future revenues associated with noncancelable time charters as of June 30, 2009, totaled $939.2 million, down from $1.2 billion at June 30, 2008. Fixed revenue for the balance of 2009 totaled $166 million and includes $156 million of time charter revenues and $9 million from time charters entered into by certain of the Company's commercial pools. OSG's share of future revenues from term contracts related to its Gas segment and the Floating Storage Offloading (FSO) project aggregate approximately $1.8 billion. The Company's level of fixed revenue, expected cash generated from operations, including asset sales, and current debt capacity, well exceed its lease, debt, capital and other operating commitments in 2009.

Quarterly Dividend Announced - On June 9, 2009, the Board declared a quarterly dividend of $0.4375 per share to stockholders of record on August 7, 2009, payable on August 27, 2009.

Quarterly Events and Other Activities

OSG says it continues to execute its balanced growth strategy by expanding and renewing its fleet across multiple market segments; managing the mix of owned and chartered-in assets; trading its fleet in both the spot and time charter markets; and exploring opportunities to add assets to each of its core segments at attractive prices. Chartering-in vessels gives OSG greater flexibility in both contracting and expanding markets through an ability to exercise redelivery, purchase or charter extension options.

On July 29, 2009, OSG announced that it intends to initiate a tender offer for all of the outstanding publicly held common units of OSG America L.P. (OSG America; NYSE: OSP) for $8.00 in cash per unit. The tender offer, expected to commence in late August, will be conditioned upon, among other things, more than 4,003,166 common units being tendered such that OSG would thereupon own at least 80% of the outstanding common units of OSG America. OSG owns 8 million units of the 15 million total common units outstanding.

Crude Oil

The Phoenix Alpha and Phoenix Beta redelivered on May 19 and June 4, respectively. OSG had a 30% interest in the time chartered-in Aframaxes.

The C. Dream, a VLCC, and Cape Aspro, an Aframax, redelivered on April 20 and April 24, respectively. OSG had a 15% and 50% interest in the time chartered-in tankers, respectively.

The Hellespont-Trinity redelivered on July 31. OSG had a 50% interest in the time chartered-in Suezmax and exercised its option to redeliver the vessel early.

The TI Asia and TI Africa, currently being converted to FSO service vessels, are expected to deliver by the end of the third and fourth quarter of 2009, respectively. Upon delivery, the vessels will begin time charter contracts to Maersk Oil Qatar AS. The project is a 50% joint venture between OSG and Euronav NV.

Products

OSG modified its product carrier orderbook as it seeks to renew its core MR fleet. Orders were cancelled for two coated Panamax (LR1) tankers that were scheduled to deliver in 2010 and replaced with two MR product carriers delivering in 2011 and one MR bareboat charter newbuild expected to deliver in 2010.

The Overseas Reginamar and Overseas Reinemar were sold on May 11 and June 3, respectively. The charterer of the LR1 tankers exercised its purchase options on the vessels, which generated proceeds of approximately $58 million to the Company.

Eight non-double hull product carriers redelivered: the Overseas Camar, Overseas Colmar and Overseas Capemar in June, and the Overseas Athens, Overseas Ermar, Overseas Fulmar, Overseas Allenmar and Overseas Primar in July. The Overseas Jamar is expected to redeliver in August. OSG's remaining international flag product carrier fleet is fully double hulled.

On July 20, the Overseas Atlantic Pisces delivered. The vessel, a 47,000 dwt MR product carrier, has been time chartered-in for 10 years.

U.S. Flag

The Overseas Nikiski delivered on June 11. The vessel, a 46,815 dwt U.S. Flag Jones Act product carrier, is bareboat chartered-in for five years and the company has extension options for the life of the vessel. The vessel has been chartered-out for three years to Tesoro.

The Overseas Integrity and M300 were sold on June 26 and June 22, respectively. The vessels had been held for sale since December 31, 2008.

As a result of continuing weak demand levels and low refinery utilization in the Jones Act market, the Overseas Galena Bay was put in lay up in July. The Overseas Puget Sound, previously in lay up, recommenced trading in August for a grain voyage. The company has three U.S. Flag vessels currently in lay up.


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