OVERSEAS SHIPHOLDING GROUP INC - Quarter Report: 2012 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                                                                                                            YES x  NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Shares outstanding as of May 4, 2012– 30,848,818

Form 10-Q

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

DOLLARS IN THOUSANDS

See notes to condensed consolidated financial statements

Form 10-Q

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

(UNAUDITED)

See notes to condensed consolidated financial statements

Form 10-Q

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

DOLLARS IN THOUSANDS

(UNAUDITED)

See notes to condensed consolidated financial statements

Form 10-Q

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

DOLLARS IN THOUSANDS

(UNAUDITED)

See notes to condensed consolidated financial statements

Form 10-Q

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

DOLLARS IN THOUSANDS

(UNAUDITED)

See notes to condensed consolidated financial statements

Note 1 — Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The consolidated balance sheet as of December 31, 2011 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Dollar amounts, except per share amounts are in thousands. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Note 2 — Earnings per Common Share:

The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share assumes the exercise of all dilutive stock options and restricted stock units using the treasury stock method. The components of the calculation of basic earnings per share and diluted earnings per share are as follows:

There were no dilutive equity awards outstanding as of March 31, 2012. Awards of 2,390,385 and 1,842,289 shares of common stock for the three months ended March 31, 2012 and 2011, respectively, were not included in the computation of diluted earnings per share because inclusion of these awards would be anti-dilutive.

Unvested share-based payment awards that contain non-forfeitable rights to dividends are considered to be participating securities and have been included in the computation of earnings per share pursuant to the two-class method.

Note 3 — Debt and Liquidity:

Debt consists of the following:

The weighted average effective interest rate for debt outstanding at March 31, 2012 and December 31, 2011 was 3.4% and 3.6%, respectively. Such rates take into consideration related interest rate swaps.

Financial Covenants

Agreements related to long-term debt provide for prepayment privileges (in certain instances with penalties). As noted below, certain of the Company’s debt agreements contain loan-to-value clauses, which could require the Company, at its option, to post additional collateral or prepay a portion of the outstanding borrowings should the value of the vessels securing borrowings under each of such agreements decrease below their current valuations. In addition, the financing agreements impose operating restrictions and establish minimum financial covenants, including limitations on the amount of total borrowings and secured debt and provide for acceleration of principal payments under certain circumstances, including failure to satisfy certain financial covenants. Failure to comply with any of the covenants in the financing agreements could also result in a default under those agreements and under other agreements containing cross-default provisions. The Company was in compliance with all of its financial covenants under all of its debt agreements as of March 31, 2012. The Company's forecasts for the twelve months ending March 31, 2013, indicate significant reductions in the headroom that the Company has under the financial covenants in its debt agreements; however, the Company believes that it will maintain compliance with all of its covenants over the twelve months ending March 31, 2013, including those associated with the $900,000 forward start facility, which do not become effective until December 31, 2012. Additional information with respect to unsecured and secured long-term debt agreements to which the Company is a party follows below:

Unsecured Revolving Credit Facilities

In 2006, the Company entered into a $1,800,000 seven-year unsecured revolving credit agreement with a group of banks, which matures on February 8, 2013. In accordance with the terms of the credit agreement, the maximum amount the Company can borrow under its unsecured revolving credit facility decreased to $1,500,000 in February 2012. Borrowings under this facility bear interest at a rate based on LIBOR.

At March 31, 2012, the Company had unused unsecured credit availability of approximately $343,854, which reflects $10,146 of letters of credit issued principally in connection with collateral requirements for derivative transactions and certain arbitration proceedings. The Company forecasts that it may need to further draw down upon this facility through its maturity date in February 2013, but anticipates generating sufficient cash flows to sustain its operations during this period without having to utilize the facility’s full capacity.

The Company has taken steps to replace the borrowing capacity under the unsecured revolving credit facility, including entering into a $900,000 unsecured forward start revolving credit agreement on May 26, 2011, with a bank lending group that matures on December 31, 2016. Under the terms of the agreement, OSG may begin borrowing under the forward start facility on February 8, 2013, the date on which OSG’s existing unsecured revolving credit facility expires. Financial covenants under the forward start facility, which are more restrictive than those contained in the $1,800,000 unsecured credit facility (due principally to differences in definitions between the two agreements) first become applicable on December 31, 2012.

The excess of the amount outstanding plus letters of credit issued under the unsecured revolving credit agreement as of March 31, 2012 over the $900,000 capacity of the replacement forward start facility, of $256,147, has been included in the current portion of long-term debt in the accompanying consolidated balance sheet.

The Company is evaluating how best to increase liquidity and how to bridge the potential gap between the amounts that it anticipates may be outstanding under the existing unsecured revolving credit facility as of February 8, 2013 and the amounts that will be available under the forward start credit facility. These options include increasing the borrowing capacity of the forward start credit facility; obtaining incremental bank financing; raising debt or equity capital using the Form S-3 shelf registration that was filed on February 13, 2012; selling or entering into sale and leaseback transactions for one or more vessels; or a combination of these or other options. The Company believes that it will be able to execute one or more of these liquidity raising options. If market conditions, however, continue to remain weak, OSG may be unable to enter into suitable vessel sale or leaseback transactions, raise additional equity capital or obtain debt financing on acceptable terms, which could have a material adverse impact on the Company’s financial position.

Secured Loan Facilities

As of March 31, 2012, 15 vessels representing approximately 29% of the net book value of the Company’s vessels, are pledged as collateral under certain term loans maturing between 2018 and 2023.

On January 18, 2012, the Company prepaid the outstanding principal balance of $49,000 associated with term loans maturing in 2016 with borrowings from its unsecured revolving credit facility. The two vessels that were pledged as collateral under these term loans are no longer encumbered.

Interest paid, excluding capitalized interest, amounted to $29,123 and $27,795 during the three months ended March 31, 2012 and 2011, respectively.

Note 4 — Business and Segment Reporting:

The Company has three reportable segments: International Crude Tankers, International Product Carriers and U.S. vessels. Segment results are evaluated based on income/(loss) from vessel operations before general and administrative expenses, severance and relocation costs and gain/(loss) on disposal of vessels. The accounting policies followed by the reportable segments are the same as those followed in the preparation of the Company’s consolidated financial statements. Information about the Company’s reportable segments as of and for the three months ended March 31, 2012 and 2011 follows:

Reconciliations of time charter equivalent revenues of the segments to shipping revenues as reported in the consolidated statements of operations follow:

Consistent with general practice in the shipping industry, the Company uses time charter equivalent revenues, which represents shipping revenues less voyage expenses, as a measure to compare revenue generated from a voyage charter to revenue generated from a time charter. Time charter equivalent revenues, a non-GAAP measure, provides additional meaningful information in conjunction with shipping revenues, the most directly comparable GAAP measure, because it assists Company management in making decisions regarding the deployment and use of its vessels and in evaluating their financial performance.

Reconciliations of income/(loss) from vessel operations of the segments to loss before income taxes, as reported in the consolidated statements of operations follow:

Reconciliations of total assets of the segments to amounts included in the consolidated balance sheets follow:

Note 5 — Vessels:

Purchase and Construction Commitments

As of March 31, 2012, the Company had remaining commitments for vessels to be wholly owned by the Company of $53,179 on non-cancelable contracts for the construction of two Aframaxes. These vessels are scheduled for delivery in 2013.

Vessel Impairments

The Company performed an impairment test on all of its owned operating and newbuild International Crude and Products vessels as of December 31, 2011. Based on tests performed it was determined that the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the International Crude and Products vessels exceed each of the vessels’ carrying values as of December 31, 2011. The Company gave consideration as to whether events or changes in circumstances had occurred that could indicate that the carrying amounts of the vessels in the Company’s International Flag fleet may not be recoverable as of March 31, 2012. The Company concluded that no such events had occurred to warrant a change in the assumptions from those utilized in the December 2011 impairment tests. Furthermore, the Company believes that given the relatively long remaining useful lives that its International Flag vessels have to generate sufficient cash flows to offset their carrying values, it is unlikely that any of the vessels in its International Flag fleet is impaired as of March 31, 2012.

In September 2011, Sunoco announced that it will make its Marcus Hook and Philadelphia refineries available for sale. Subsequently, in December 2011, Sunoco announced that it expects to begin idling the Marcus Hook facility immediately while it continues to seek a buyer and also pursues options with third parties for alternate uses of the facility. Sunoco also announced that it intends to continue to operate the Philadelphia refinery as long as market conditions warrant. However, if a suitable transaction cannot be implemented, Sunoco intends to permanently idle the main processing units at the Philadelphia refinery no later than August 2012. Sunoco is the core customer of the Company’s Delaware Bay lightering business. The closures, if they were to occur, could result in the Company’s redeployment of the two new ATBs currently used in the Delaware Bay Lightering business to other locations with possible reductions in revenues earned. These two ATBs, the OSG 350 and the OSG 351, are recent newbuilds with relatively high cost bases and redeploying one or both of these vessels into the clean products trade would require modifications to be made to the vessels. Based on the tests performed in December 2011, it was determined that the estimated undiscounted future cash flows would exceed the carrying values of each of the vessels. No new information has come to the Company’s attention during the quarter ended March 31, 2012 that would warrant a change in the assumptions from those utilized in the December 2011 impairment test.

Management will continue to monitor developments, which could result in a change in the above conclusions.

Vessel Sales

There were no vessels sold during the quarter ended March 31, 2012. During the quarter ended March 31, 2011, the Company delivered its two remaining single-hulled U.S. Flag Tankers to buyers. The Company recognized a gain of $1,070 on the sale of these vessels.

Vessel Acquisitions and Deliveries

During the quarter ended March 31, 2012, the Company completed construction of a VLCC and an International Flag Handysize Product Carrier. There were no vessel acquisitions or newbuild deliveries during the quarter ended March 31, 2011.

Note 6 — Equity Method Investments:

Investments in affiliated companies include joint ventures accounted for using the equity method. As of March 31, 2012, the Company had an approximate 50% interest in two joint ventures. One joint venture operates four LNG Carriers. The other joint venture converted two ULCCs to Floating Storage and Offloading Service vessels. In addition, the Company has a 37.5% interest in Alaska Tanker Company, LLC that manages vessels carrying Alaskan crude for BP.

Floating Storage and Offloading Service Vessels (“FSO”) Joint Venture

Maersk Oil Qatar AS (“MOQ”) awarded two service contracts to a joint venture between OSG and Euronav NV to provide two vessels, the FSO Asia and the FSO Africa, to perform Floating Storage and Offloading (“FSO”) services in the Al Shaheen field off shore Qatar. The Company has a 50% interest in this joint venture. The joint venture financed the purchase of the vessels from each of Euronav NV and OSG and their conversion costs through partner loans and a long-term credit facility, which was secured by the service contracts. Approximately $277,029 and $294,937 was outstanding under this facility as of March 31, 2012 and December 31, 2011 respectively, with the outstanding amount of this facility being subject to acceleration, in whole or in part, on termination of one or both of such service contracts. In connection with the secured bank financing, the partners severally issued guarantees. As of March 31, 2012 and December 31, 2011, the carrying value of the Company’s guaranty, which is included in other liabilities in the accompanying balance sheet, was $89 and $122, respectively.

The joint venture entered into floating-to-fixed interest rate swaps with major financial institutions. The interest rate swaps, covering notional amounts aggregating $374,796 and $396,993 as of March 31, 2012 and December 31, 2011, respectively, pay fixed rates of 3.9% and receive floating rates based on LIBOR. These agreements have maturity dates ranging from July to September 2017. As a result of the delays in the completion of conversion and commencement of the service contract for the FSO Africa, the joint venture concluded that it was no longer probable that the forecasted transaction applicable to the FSO Africa swaps would occur. Accordingly, as a result of the de-designation of the FSO Africa swaps, all changes in the market value of the swaps have been recognized in the joint venture’s statement of operations. The Company’s share of amounts recognized in equity in income from affiliated companies were losses of $97 and $65 for the quarter ended March 31, 2012 and 2011, respectively. As of March 31, 2012 and December 31, 2011, the joint venture had a liability of $30,157 and $33,040, respectively, for the fair value of the swaps associated with the FSO Africa and FSO Asia. The Company’s share of the effective portion of such amounts, aggregating $7,076 and $7,790, at March 31, 2012 and December 31, 2011, respectively, is included in accumulated other comprehensive loss in the accompanying balance sheet and is associated with the FSO Asia swaps only, since the swaps associated with the FSO Africa have been de-designated and deemed to be ineffective.

LNG Joint Venture

In November 2004, the Company formed a joint venture with Qatar Gas Transport Company Limited (Nakilat) whereby companies in which OSG holds a 49.9% interest ordered four 216,200 cbm LNG Carriers. Upon delivery in late 2007 and early 2008, these vessels commenced 25-year time charters to Qatar Liquefied Gas Company Limited (II). The aggregate construction cost for such newbuildings was financed by the joint venture through long-term bank financing that is nonrecourse to the partners and partner contributions.

The joint venture entered into floating-to-fixed interest rate swaps with a group of major financial institutions pursuant to which it pays fixed rates of approximately 4.9% and receives a floating rate based on LIBOR. The interest rate swap agreements have maturity dates ranging from July to November 2022 and cover notional amounts aggregating $783,274 and $790,946 at March 31, 2012 and December 31, 2011, respectively. These swaps are being accounted for as cash flow hedges. As of March 31, 2012 and December 31, 2011, the joint venture recorded a liability of $124,250 and $148,699, respectively, for the fair value of these swaps. The Company’s share of the effective portion of the fair value of these swaps, $61,917 and $74,133 at March 31, 2012 and December 31, 2011, respectively, is included in accumulated other comprehensive loss in the accompanying balance sheet.

A condensed summary of the results of operations of the equity method investments follows:

Note 7 – Variable Interest Entities (“VIEs”):

As of March 31, 2012, the Company participates in five commercial pools and three joint ventures. Two of the pools and the FSO joint venture, described in Note 6 above, were determined to be VIEs. The Company is not considered a primary beneficiary of either of the two pools or the joint venture.

The following table presents the carrying amounts of assets and liabilities in the balance sheet related to the VIEs as of March 31, 2012:

In accordance with accounting guidance, the Company evaluated its maximum exposure to loss related to these VIEs by assuming a complete loss of the Company’s investment in these VIEs and that it would incur an obligation to repay the full amount of the VIE’s outstanding secured debt. The table below compares the Company’s liability in the consolidated balance sheet to the maximum exposure to loss at March 31, 2012:

In addition, as of March 31, 2012, the Company had approximately $30,093 of trade receivables from pools that were determined to be VIEs. These trade receivables, which are included in voyage receivables in the accompanying balance sheet, have been excluded from the above tables and the calculation of OSG’s maximum exposure to loss. The Company does not record the maximum exposure to loss as a liability because it does not believe that such a loss is probable of occurring as of March 31, 2012. Further, the joint venture debt is secured by the joint venture’s FSOs. Therefore, the Company’s exposure to loss under its several guaranty would first be reduced by the fair value of such FSOs.

Note 8 —Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures:

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and cash equivalents—The carrying amounts reported in the consolidated balance sheet for interest-bearing deposits approximate their fair value.

Short-term investments—The carrying amounts reported in the consolidated balance sheet for short-term investments, which consisted of interest-bearing time deposits or marketable securities held for trading purposes, approximated their fair value.

Debt—For publicly-traded debt, estimates of fair value are based on market prices. For unsecured revolving credit facilities and secured term loans, fair value is estimated based on a model-driven approach using U.S. forward swap interest rate yield curves.

Forward freight agreements and bunker swaps—The fair values of forward freight agreements and bunker swaps are the estimated amounts that the Company would receive or pay to terminate the agreements at the reporting date, which include an adjustment for the counterparty or the Company’s credit risk, as appropriate.

Interest rate swaps—The fair values of interest rate swaps are the estimated amounts that the Company would receive or pay to terminate the swaps at the reporting date, which include adjustments for the counterparty or the Company’s credit risk, as appropriate.

Foreign Currency Contracts—The fair values of foreign currency contracts are the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date, which include adjustments for the counterparty or the Company’s credit risk, as appropriate.

The estimated fair values of the Company’s financial instruments other than derivatives and marketable securities that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy, are as follows:

Since the Company's publicly-traded debt is not actively traded, their fair value is categorized within Level 2 of the fair value hierarchy.

Derivatives

The Company is exposed to certain risks relating to its ongoing business operations. The risks, managed by using derivative instruments, are volatility with respect to spot (voyage) charter rates, fuel prices, interest rates and foreign currency exchange rates.

Spot Market Rate Volatility Risk

The Company enters into Forward Freight Agreements (“FFAs”) and bunker swaps with an objective to utilize them as (i) economic hedging instruments, some of which qualify as cash flow hedges for accounting purposes that reduce its exposure to changes in TCE revenue earned by some of its vessels operating in the spot market; and (ii) from time to time for trading purposes to take advantage of short term fluctuations in the market. The FFAs and bunker swaps involve contracts to provide a fixed number of theoretical voyages at fixed rates, which generally range from one month to one year and settle monthly based on a published index. As of March 31, 2012, the Company was party to FFA contracts entered into for trading purposes. These contracts, representing aggregate volumes of 130,000 metric tons (“mts”) of cargo, expire on various dates through May 2012 and do not qualify as cash flow hedges for accounting purposes.

Fuel Price Volatility Risk

The Company enters into standalone bunker swaps to protect the Company against future increases in fuel prices in the normal course of its International Crude Tankers lightering business, which includes a number of fixed rate Contracts of Affreightment. As of March 31, 2012, the Company is party to three bunker swap agreements, the details of which are as follows:

These contracts settle on a net basis at the end of each calendar month, based on the average daily closing prices, as quoted by the Baltic Exchange, of the commodity during each month. These swaps do not qualify as cash flow hedges for accounting purposes.

Interest Rate Risk

The Company uses interest rate swaps for the management of interest rate risk exposure. The interest rate swaps effectively convert a portion of the Company’s debt from a floating to a fixed rate and are designated and qualify as cash flow hedges. The Company is a party to seven floating-to-fixed interest rate swap agreements with various major financial institutions covering notional amounts aggregating approximately $220,412 at March 31, 2012 pursuant to which it pays fixed rates ranging from 3.3% to 4.7% and receives floating rates based on three-month LIBOR (approximately 0.47% at March 31, 2012). These agreements contain no leverage features and have various final maturity dates ranging from December 2012 to August 2014.

Foreign Exchange Risk

The Company seeks to reduce its exposure to fluctuations in foreign exchange rates related to recurring monthly foreign currency denominated general and administrative expenses through the use of foreign currency forward contracts and through the purchase of bulk quantities of currencies at rates that management considers favorable. At March 31, 2012, the notional amounts of the foreign currency forward contracts aggregated approximately €4,000, settling monthly through May 2012. Such contracts were not designated as cash flow hedges for accounting purposes.

Tabular disclosure of derivatives location

Derivatives are recorded in the balance sheet on a net basis by counterparty when a legal right of setoff exists. The following tables present information with respect to the fair values of derivatives reflected in the balance sheet on a gross basis by transaction. The tables also present information with respect to gains and losses on derivative positions reflected in the statement of operations or in the balance sheet, as a component of accumulated other comprehensive loss.

Fair Values of Derivative Instruments:

The effect of cash flow hedging relationships on the balance sheets as of March 31, 2012 and December 31, 2011 follows:

The effect of cash flow hedging relationships on the statements of operations for the three months ended March 31, 2012 and 2011 are shown below:

The effect of the gain/(loss) recognized on derivatives not designated as hedging instruments on the statements of operations for the three months ended March 31, 2012 and 2011 are as follows:

Fair Value Hierarchy

The following tables present the fair values, which are pre tax, for assets and liabilities measured on a recurring basis (excluding investments in affiliated companies):

Cash Collateral Disclosures

The Company does not offset fair value amounts recognized for derivatives by the right to reclaim cash collateral or the obligation to return cash collateral. The amounts of collateral to be posted are defined in the terms of respective master agreements executed with counterparties or exchanges and are required when agreed upon threshold limits are exceeded. At March 31, 2012, the Company did not hold collateral related to its derivative transactions. At March 31, 2012, the Company has a $1,000 letter of credit issued in relation to its derivative activities.

Note 9 — Taxes:

On October 22, 2004, the President of the U.S. signed into law the American Jobs Creation Act of 2004. The Jobs Creation Act reinstated tax deferral for OSG’s foreign shipping income for years beginning after December 31, 2004. Effective January 1, 2005, the earnings from shipping operations of the Company’s foreign subsidiaries are not subject to U.S. income taxation as long as such earnings are not repatriated to the U.S. The Company intends to permanently reinvest these earnings, as well as its share of the undistributed earnings of its less than 50%-owned foreign shipping joint ventures, in foreign operations. Accordingly, no provision for U.S. income taxes on the shipping income of its foreign subsidiaries or its less than 50%-owned foreign shipping joint ventures was required to date in 2012 or at any time in 2011. As of March 31, 2012, undistributed earnings on which U.S. income taxes have not been provided aggregated approximately $2,200,000, including $119,000 earned prior to 1976; the unrecognized deferred U.S. income tax attributable to such undistributed earnings approximated $770,000.

The components of the income tax benefits/(provisions) follow:

At December 31, 2011 the Company had a reserve of approximately $4,804 for benefits attributable to tax positions taken during the current and prior tax periods for which the probability of recognition is considered less than “more likely than not.” There was no material change in the reserve during the three months ended March 31, 2012.

Note 10 — Capital Stock and Stock Compensation:

On February 13, 2012, the Company filed a Form S-3 shelf registration with the SEC that will allow it to issue common stock, preferred stock, debt securities, warrants or units (as defined) up to an aggregate of $500,000, from time to time as market conditions permit.

Restricted Common Stock, Performance Related Grants and Options

During the three months ended March 31, 2012 and 2011, the Company awarded a total of 401,409 and 82,544 shares, respectively, of restricted common stock at no cost to certain of its employees, including senior officers. Restrictions limit the sale or transfer of shares of restricted common stock until they vest, which occurs over a four or five-year period. During the restriction period, the shares will have voting rights and cash dividends will be paid if declared. The weighted average fair value of the restricted stock issued during the three months ended March 31, 2012 and 2011 was $10.09 and $34.90 per share, respectively (the market price at date of grant).

During the three months ended March 31, 2012, the Company granted certain of its senior officers performance awards valued at an aggregate of approximately $1,307 on the grant date. Each performance award represents a contingent right to receive cash or, at the Company’s option, shares of common stock of the Company, based upon certain market related performance goals being met and the covered employees being continuously employed through the end of the three-year period over which the performance goals are measured. The performance related grants were valued using a Monte Carlo pricing model that takes into account the market related performance goals described in the grants. It is the Company’s intention (but not an obligation) to settle the awards in shares of the Company’s common stock to the extent such shares are available for issuance under the 2004 Stock Incentive Plan (the “2004 Plan”) on the settlement date. To the extent sufficient shares are not available for issuance under the 2004 Plan or the Compensation Committee of the Board of Directors determines not to settle the awards in shares, the awards shall be paid in cash. As a result of the current and expected availability of shares under the 2004 Plan and the Company’s intent to settle these awards in shares of the Company’s common stock if such shares are available, these cash based performance awards are being accounted for as equity awards. The Company will evaluate at each reporting date, the sufficiency of shares available under the 2004 Plan to settle the awards in shares. If at any reporting date in the future the shares available under the 2004 Plan are not sufficient, these awards would be bifurcated into the portion that can be settled in shares and the portion that would have to be settled in cash, with the latter portion being classified as a liability award.

There were no performance related restricted stock units awarded during 2012. During the three months ended March 31, 2011, the Company granted a total of 54,329 performance related restricted stock units to certain of its employees, including senior officers. Each performance unit represents a contingent right to receive shares of common stock of the Company based upon certain market related performance goals being met and the covered employees being continuously employed through the end of the period over which the performance goals are measured. The performance units have no voting rights and may not be transferred or otherwise disposed of until they vest. Dividends will be paid when the performance period expires and are conditioned upon the attainment of the performance goals. The estimated weighted average grant-date fair value of the performance stock units awarded during the three months ended March 31, 2011 was $40.19 per share. The performance related grants were valued using a Monte Carlo pricing model that takes into account the market related performance goals described in the grants.

Stock Options

During the three months ended March 31, 2012 and 2011, options covering 377,653 and 176,312 shares, respectively, were granted at or above the market price at the date of the grant. Such options were valued using the Black-Scholes option pricing model and expire ten years from the grant date. The exercise price of options granted during the three months ended March 31, 2012 and 2011 was $12.50 and $34.90 per share, respectively. The grant date fair value of options granted during the three months ended March 31, 2012 and 2011 was $3.83 and $10.04 per share, respectively.

Note 11 — Accumulated Other Comprehensive Loss:

The components of accumulated other comprehensive loss, net of related taxes, in the consolidated balance sheets follow:

Included in accumulated other comprehensive loss at March 31, 2012 are the following amounts that have not yet been recognized in net periodic cost: unrecognized transition obligation of $24 ($15 net of tax), unrecognized prior service costs of $1,568 ($1,019 net of tax) and unrecognized actuarial losses of $21,638 ($14,065 net of tax).

Note 12 — Leases:

1. Charters-in:

As of March 31, 2012, the Company had commitments to charter in 46 vessels. All of the charters-in are accounted for as operating leases, of which 21 are bareboat charters and 25 are time charters. The future minimum commitments and related number of operating days under these operating leases are as follows:

The future minimum commitments for time charters-in have been reduced to reflect estimated days that the vessels will not be available for employment due to drydock because the Company does not pay time charter hire when time chartered-in vessels are not available for its use.

2. Charters-out:

The future minimum revenues, before reduction for brokerage commissions, expected to be received on noncancelable time charters and certain COAs for which minimum annual revenues can be reasonably estimated and the related revenue days (revenue days represent calendar days, less days that vessels are not available for employment due to repairs, drydock or lay-up) are as follows:

Future minimum revenues do not include (1) the Company’s share of time charters entered into by the pools in which it participates, (2) the Company’s share of time charters entered into by the joint ventures, which the Company accounts for under the equity method and (3) COAs for which minimum annual revenues cannot be reasonably estimated. Revenues from those COAs that are included in the table above, $4,244 (2012) and $2,446 (2013), are based on minimum annual volumes of cargo to be loaded during the contract periods at a fixed price. The largest COA in the Delaware Bay lightering trade is excluded from the table above because the minimum annual revenues for that contract cannot be reasonably estimated. Revenues from a time charter are not generally received when a vessel is off-hire, including time required for normal periodic maintenance of the vessel. In arriving at the minimum future charter revenues, an estimated time off-hire to perform periodic maintenance on each vessel has been deducted, although there is no assurance that such estimate will be reflective of the actual off-hire in the future.

Note 13 — Pension and Other Postretirement Benefit Plans:

The net periodic benefit cost for the Company’s domestic defined benefit pension (for which the benefits have been frozen) and postretirement health care and life insurance plans was not material during the three months ended March 31, 2012 and 2011.

The Company expects that its required contributions in 2012 with respect to its domestic defined benefit pension plan will be approximately $1,832, of which $755 was funded during the three months ended March 31, 2012.

Note 14 — Other Income:

Other income consists of:

Note 15 – Severance and Relocation Costs:

In the first quarter of 2012, the Company announced the relocation of the technical management of its conventional International Flag crude oil tanker fleet from its Newcastle, U.K. office to its Athens, Greece office. In connection therewith, approximately 50 employees will be terminated or relocated from Newcastle to Athens. In connection therewith, the Company expects to record approximately $2,100 in costs related to severance and transfer of vessel management during 2012. As of March 31, 2012, the Company has recognized severance and relocation related costs totaling $905.

Note 16 — Contingencies:

The Internal Revenue Service (“IRS”) imposed penalties totaling approximately $3,600 against certain U.S. Flag vessel owning subsidiaries of the Company due to alleged delinquent excise tax registration applications and delinquent filing of information returns. The Company has denied the applicability of the penalties in question and is vigorously contesting the matter with the IRS. As a result of certain administrative protocols, the Company had to pay the assessed penalties in order to formally file suit for a refund. As of March 31, 2012, the Company has paid $3,500 in penalties and such amounts are included in other receivables in the accompanying consolidated balance sheet. The Company believes, based on the merits of the case, that the likelihood of an unfavorable judgment is more than remote but less than probable. Accordingly, no provisions have been made in the Company’s financial statements for a potential loss as of March 31, 2012, as the Company does not believe there is any one amount within the range of likely losses (from $0 to $3,600) that is a better estimate than another.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General:

The Company is one of the largest independent bulk shipping companies in the world. The Company’s operating fleet as of March 31, 2012, consisted of 113 vessels aggregating 10.8 million dwt and 864,800 cbm, including 46 vessels that have been chartered-in under operating leases. In addition to its operating fleet of 113 vessels, two newbuilds are scheduled for delivery in 2013, bringing the total operating and newbuild fleet to 115 vessels.

All dollar amounts are in thousands, except daily dollar amounts and per share amounts.

Operations:

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 revenues 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 exports. The number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service, principally because of storage, 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 TCE revenues. Management makes economic decisions based on anticipated TCE rates and evaluates financial performance based on TCE rates achieved.

Overview

Average first quarter 2012 spot rates for all crude oil tanker segments, except Panamax, and for Product Carriers were significantly higher than the first quarter of 2011. First quarter 2012 spot rates for all vessel categories were substantially higher than those in the fourth quarter of 2011.

The quarter over quarter increase in rates primarily reflects a rise in worldwide oil inventories of approximately one million barrels per day (“b/d”) that occurred in the first quarter of 2012 compared with an inventory drawdown of about 700,000 b/d that occurred in the first quarter of 2011. The buildup in oil inventory levels thus far in 2012 has been a key factor in boosting additional seaborne movements as opposed to the inventory drawdowns that occurred in every quarter of 2011 that reduced the need to move crude oil and refined products. Longer haul crude oil movements, including incremental cargoes of Arabian crude to the U.S. Gulf Coast in conjunction with the start-up of the 325,000 b/d Motiva refinery expansion, benefitted tanker rates in the first quarter. Increased crude oil imports into China and increased shipments of direct burn crude oil and low sulfur fuel oil into Japan due to the shutdown of most of their nuclear facilities in the wake of the 2011 earthquake / tsunami also positively impacted rates.

The European Union (“EU”), in support of more stringent financial and trading sanctions imposed on Iran by the U.S. in order to deter Iran’s nuclear ambitions, announced its own sanctions against Iran’s energy and banking sectors that would halt Iranian crude oil imports into EU countries beginning July 1, 2012. Imports into Europe of approximately 500,000 b/d of Iranian crudes would be impacted, resulting in refiners seeking alternative crude sources. U.S. sanctions adversely impacts Iran’s crude oil exports to Asia, including its largest customers (China, India, Japan and South Korea) who imported approximately 1.5 million b/d of Iranian crudes during 2011 and result in marginalizing the Iranian fleet and discourage tanker owners from moving or storing Iranian crudes. As of the end of the first quarter of 2012, Iranian crude oil exports to Japan, Turkey, South Africa, South Korea, China and India have been reduced with further plans in place to substitute other crudes, such as those from Iraq, Saudi Arabia, Libya, Oman, the Former Soviet Union (“FSU”) and Latin America that will further reduce or eliminate future imports from Iran.

The International Energy Agency (“IEA”) estimated world oil demand during the first quarter of 2012 to be 89.4 million b/d, an increase of 320,000 b/d compared with the first quarter of 2011. Demand in OECD North America declined by 630,000 b/d primarily due to warmer weather and lower prices for natural gas that significantly reduced heating oil demand. Oil demand in OECD Europe also declined by 500,000 b/d as a result of sharply higher prices for transportation fuels that lowered both diesel and gasoline demand. Oil demand in all other areas rose led by a 320,000 b/d increase in Japan where the closure of nuclear power plants resulted in an increase in the use of fuel oil and direct burn crude to generate power. Oil demand growth in China reached 270,000 b/d, followed by an increase of 200,000 b/d in the Middle East as transportation fuels (gasoline and diesel) remain subsidized at prices significantly below International levels. Oil demand increased elsewhere and grew by 190,000 b/d, 170,000 b/d and 130,000 b/d in Latin America, the FSU and in Other Asia (primarily India), respectively.

First quarter 2012 OPEC production averaged about 31.2 million b/d, or 1.3 million b/d more than the first quarter of 2011, led by an increase of approximately 1.1 million b/d in Saudi Arabia. Production in the first quarter reached 31.4 million b/d in March, the highest level since the middle of 2008 as production in Saudi Arabia reached just over 10 million b/d, its highest level in almost three decades. Production in Libya reached 1.3 million b/d, only 300,000 b/d below its pre-civil war level. First quarter 2012 production in the Middle East also reflected growth of about 300,000 b/d in Kuwait that was offset by lower production in Iran as its customers reduced their purchases in anticipation of stricter sanctions.

Product Carrier rates in the first quarter improved compared with the first quarter of 2011. Product exports from the US achieved record levels as gasoline movements increased to Latin America, primarily Mexico and Brazil, and middle distillate movements rose to both Europe and Latin America. The U.S. Gulf Coast refining center has emerged as a key product export hub given its cost advantage in being able to run its refineries using lower-priced natural gas instead of higher cost fuel oil. Additionally, reduced product demand in the U.S. has enabled refiners along the Gulf Coast to export incremental volumes of refined product while still satisfying domestic demand levels.

Crude oil tanker tonnage increased 7.1% during 2011 and by 1.2% in the first quarter of 2012. The largest increase in fleet size in the first quarter of 2012 was the 1.7% increase in tonnage in the VLCC fleet. This was followed by about a 1% increase in tonnage in both the Suezmax and Panamax fleet while there Aframax fleet was relatively unchanged. The increase in the Product Carrier fleet was below 1% during the first quarter of 2012.  

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, except for U.S. Flag, which is based on the American Tanker Rate Schedule and quoted in American Rates (“AR”). The conversion of Worldscale and American Rates to the following TCE rates required the Company to make certain assumptions as to brokerage commissions, port time, port costs, speed, fuel prices 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.

International Flag VLCCs 

* Based on 60% Arabian Gulf to eastern destinations and 40% Arabian Gulf to western destinations

Rates for VLCCs trading out of the Arabian Gulf in the first quarter of 2012 averaged $20,200 per day, 42% above those in the first quarter of 2011 and almost double those in the fourth quarter of 2011. First quarter 2012 rates were higher than those in the same timeframe of last year primarily due to an increase in Middle East OPEC production, especially in Saudi Arabia and Kuwait that resulted in additional long haul crude movements to both Western and Eastern destinations.

The planned start-up of the 325,000 b/d refinery expansion at Motiva’s Port Arthur, Texas refinery, which is designed to process crude oil from Saudi Arabia, resulted in an increase in long-haul cargoes moving from the Middle East to the US Gulf Coast. This incremental refining capacity requires a VLCC movement once every six to seven days and therefore resulted in additional VLCC tanker requirements compared to 2011.

Seaborne crude oil imports into China during the first quarter of 2012 increased by approximately 14% compared with the first quarter of 2011. Crude oil imports from South America increased by about 25% led by an increase in imports sourced from Venezuela of approximately 100,000 b/d. Crude oil imports from the Middle East increased by about 15% with incremental volumes from Saudi Arabia and Kuwait more than offsetting a reduction in imports from Iran.

Japan imported crude oil from West Africa in the first quarter of 2012 compared with none during the same timeframe of 2011. Japan required additional volumes of low sulfur crudes for use in power generation and West Africa is a prime source for light sweet low sulfur crudes.

Saudi Arabia produced over 10 million b/d of crude oil and moved some of this volume to its storage facilities in Asia and Europe. The rise in crude oil shipment from the Middle East to both Eastern and Western destinations was a major factor that contributed to increased tonne-mile demand.

Many countries that ordinarily import Iranian crudes began to diversify their sources of supply that resulted in importing crude oil from more distant sources. This development, which required longer haul voyages, benefitted the larger crude oil carriers.

The number of VLCCs in service as of March 31, 2012 was 580 vessels (176.9 million dwt), including seven single hull tankers.  Fourteen vessel deliveries were offset by five vessels that were scrapped, resulting in a 1.7% increase in tonnage during the first quarter of 2012. The VLCC orderbook totaled 116 vessels (36.7 million dwt) at March 31, 2012, equivalent to approximately 21% of the existing VLCC fleet, based on deadweight tons.

International Flag Suezmaxes 

* Based on West Africa to the U.S. Gulf Coast

Rates for Suezmaxes during the first quarter of 2012 averaged $21,900 per day, approximately 45% higher than the corresponding year ago quarter and 48% more than the fourth quarter of 2011. Stronger rates relative to a year ago mainly reflected an increase in tonne mile demand as countries began to source crude oil from more distant supply sources.

There was a significant increase in first quarter crude movements from the Caribbean to Asia. Higher volumes of crude oil from Mexico, Ecuador, Venezuela, Argentina and Colombia, which are similar in quality to Iranian crudes, were exported to India, China and Japan during the first quarter of 2012. Suezmaxes were also able to secure additional cargoes from the Caribbean that are traditionally carried on Aframaxes.

Suezmax rates also benefitted as more Atlantic Basin crude oil was shipped to Asia on VLCCs. This reduced competition with VLCCs, especially in the West Africa to U.S. trade where minimal co-freighting occurred, resulting in most West African crude shipments to the U.S. being carried on Suezmaxes. Crude oil production in Angola increased in the first quarter of 2012 by 100,000 b/d relative to a year ago primarily due to the startup of the Pazflor field. Production in Angola is forecast to increase in the second quarter of 2012 as production continues to increase in the deepwater Pazflor field and as production from the Greater Plutonio offshore complex recovers from technical problems experienced in the first quarter of 2012. Production in Nigeria is also forecast to increase from the startup of the 180,000 b/d Usan deepwater field.

The world Suezmax fleet at March 31, 2012 totaled 448 vessels (69.2 million dwt) which included seven single hull tankers. The Suezmax orderbook of 117 vessels (18.0 million dwt) at March 31, 2012 represented 26% of the existing Suezmax fleet, based on deadweight tons.

International Flag Aframaxes 

*Based on Caribbean to the U.S. Gulf and Atlantic Coasts

Rates for Aframaxes operating in the Caribbean during the first quarter of 2012 averaged $17,200 per day, up 75% from the first quarter of 2011 and more than double the fourth quarter of 2011.

Libyan crude oil production reached 1.3 million b/d in March 2012, enabling additional movements of Libyan crude oil to Europe, which had a beneficial impact on Aframax utilization. The start-up of the Baltic Pipeline System 2 provided additional volumes of Russian crude oil at the port of Ust-Luga that were moved on Aframaxes. Oil shipments from this port will increase over the coming months and should provide support to rates in the Baltic / North Sea area. Weather-related delays, including fog and low tides in the U.S. Gulf Coast in January and heavy fog in mid-February, resulted in additional waiting time that also benefitted rates.

The use of fuel oil and the direct burning of crude oil in Japan to generate power have significantly increased since the March 2011 earthquake / tsunami. Fuel oil and direct burn crude oil demand averaged over 600,000 b/d in the first quarter of 2012, an increase of approximately 400,000 b/d compared with the first quarter of 2011. To meet this demand, Japan imported increased volumes of crude oil from Australia, Indonesia and Vietnam and fuel oil from various sources within Asia, boosting Aframax demand in the Pacific Basin.

Crude oil production in Europe averaged about 3.8 million b/d during the first quarter of 2012, down about 300,000 b/d compared with the same period in 2011. Weather, pipeline outages and unplanned downtime plagued North Sea production and resulted in lower production levels.

Refinery utilization in the U.S. averaged about 84.4% during the first quarter of 2012, slightly higher than last year’s first quarter level. This helped lift Caribbean to the U.S short-haul crude shipments somewhat during the first quarter. U.S. refinery maintenance activities are expected to decline from first quarter levels and refineries will require additional imported crudes as runs increase over the next two quarters.

The world Aframax fleet reached 912 vessels (97.1 million dwt) at March 31, 2012, including 22 single hull tankers. The Aframax orderbook totaled 81 vessels (8.9 million dwt) at March 31, 2012, representing 9% of the existing Aframax fleet, based on deadweight tons.

International Flag Panamaxes 

 *Based on 50% Caribbean to U.S. Gulf and Atlantic Coasts and 50% Ecuador to the U.S. West Coast

Rates for Panamaxes that move crude and residual fuel oil averaged $10,800 per day during the first quarter of 2012, 27% lower than the first quarter of 2011 but 50% above the fourth quarter of 2011.

Panamax rates during the first quarter were adversely impacted by a fire at the Cardon refinery in Venezuela that reduced Ecuadorian cargoes lifted by Petroleos de Venezuela S.A. (“PDVSA”). Additionally, Valero decided to shut down its Aruba refinery in the first quarter of 2012 because of poor refining margins, which reduced shipments of vacuum gas oil (VGO) to both the U.S. Gulf and West Coast areas. This refinery had been reopened in February 2011 after having been closed for 17 months due to low margins earned. Rates in the Caribbean market, nevertheless, did manage to strengthen in March as a result of fog related delays along the U.S. Gulf Coast and a pipeline bombing in Colombia that delayed loading and discharge activities.

The world Panamax fleet totaled 451 tankers (31.8 million dwt) at March 31, 2012, including 14 single hull tankers. The orderbook of 36 vessels (2.7 million dwt) at March 31, 2012 represented approximately 8% of the existing Panamax fleet, based on deadweight tons.

International Flag Handysize Product Carriers 

*Based on 60% trans-Atlantic and 40% Caribbean to the U.S. Atlantic Coast

Rates for Product Carriers operating in the Caribbean and trans-Atlantic trades averaged $11,000 per day during the first quarter of 2012, 11% and 34% above rates in the first and fourth quarters of 2011, respectively.

Product Carrier rates in the first quarter continued to be supported by gasoline and diesel exports from the U.S. Gulf Coast to both Latin America and Europe. Diesel exports from the U.S. Gulf Coast averaged over 800,000 b/d during the first quarter of 2012, an increase of over 100,000 b/d compared with the same period in 2011. Gasoline exports were at about the same level as the first quarter of 2011, averaging approximately 400,000 b/d, primarily to destinations in Latin America. The arbitrage window for gasoline movements from Europe to the U.S. East Coast opened in February, but closed in early March as vessel supply increased and demand in the U.S. declined.

Trade flows from the Caribbean to the US Atlantic Coast were sharply curtailed by the closing of the 350,000 b/d Hovensa refinery at St. Croix in the Virgin Islands. This refinery shipped approximately 155,000 b/d of gasoline and middle distillate to the U.S. East Coast during 2011 and provided backhaul opportunities for vessels that discharged cargoes in Latin America. Hovensa refinery also supplied products to the Caribbean and Latin American markets and its closure will necessitate incremental product imports into Latin America that could be sourced from the U.S. Gulf Coast, the Middle East and South Korea.

The recent startup of upgrade capacity at Repsol’s Cartagena and Bilbao refineries has resulted in increased output of middle distillates including a surplus of 30,000 b/d of jet fuel that Spain will export to other European countries. The additional middle distillate capacity also increased the manufacture of diesel by approximately 50,000 b/d, reducing Spain’s diesel import requirements.

Clean product movements from Asia to Europe declined by approximately 130,000 b/d during the first quarter of 2012 compared with the same timeframe in 2011. Product flows from Asia to the U.S., however, increased by approximately 40,000 b/d while movements from Asia to Latin America remained at about a constant level.

The world Product Carrier fleet in the 29,000 to 53,000 dwt range increased to 1,562 vessels (68.0 million dwt) at March 31, 2012, including 98 single hull vessels. The orderbook stood at 188 vessels (8.9 million dwt) at March 31, 2012, equivalent to approximately 13% of the existing Handysize fleet, based on deadweight tons.

U.S. Flag Jones Act Product Carriers and Articulated Tug Barges ("ATBs") 

Rates for Jones Act Product Carriers and ATBs averaged $51,700 per day and $31,800 per day, respectively, during the first quarter of 2012. Rates for Jones Act Product Carriers were 6% above rates in the fourth quarter of 2011, while rates for ATBs were flat. Relative to the first quarter of 2011, rates for Product Carriers and ATBs were both up over 40% as utilization rates were higher for both types of vessels compared with the same year-ago period.

Higher utilization rates reflected both an increase in demand and a reduction in tanker supply. There were 54 large ocean-going vessels engaged exclusively in the coastwise trades at the end of the first quarter of 2012 compared with 58 at the end of the first quarter of 2011. Demand for Jones Act vessels that move products to Florida and other U.S. East Coast destinations increased as the closure of the Hovensa refinery in the Caribbean and Sunoco and ConocoPhillips refineries in the Philadelphia area provided additional opportunities for Jones Act vessel movements. As a result, there were no Jones Act vessels in commercial layup during the first quarter of 2012.

U.S. Gulf Coast refinery utilization rates increased from 84.7% during the first quarter of 2011 to 85.5% in the first quarter of 2012, increasing the availability of oil product cargoes. There was an increase in gasoline shipments from Gulf Coast refineries to Brownsville, Texas, which were then shipped via pipeline into Mexico.

Delaware Bay lightering volumes averaged 226,000 b/d in the first quarter of 2012, a decline of 21,000 b/d, or 8%, compared with the first quarter of 2011. The decrease was a result of the closure of Sunoco’s Marcus Hook refinery and ConocoPhillips Trainer refinery, both of which are currently up-for sale.

The total Jones Act fleet of Product Carriers and ATBs declined by one vessel during the first quarter of 2012, from 55 to 54 vessels. There were no deliveries and one single hull vessel was scrapped during the quarter. It is expected that three vessels, one ATB and two Product Carriers, will be delivered and that there will be no vessels scrapped over the last nine months of 2012. The Jones Act Product Carrier orderbook for deliveries scheduled from 2013 through 2016 consist of two Product Carriers and ATBs in the 160,000 to 420,000 barrel size range. During this same period, one vessel should be retired in accordance with OPA-90 phase-out regulations. This should result in a net increase in the fleet of only one vessel during the period from 2013 through 2016.

 Outlook

The International Energy Agency (“IEA’) currently forecasts that global economic growth in 2012 will be about 3.3%, down from 3.8% in 2011. High oil prices, slow growth in Europe and rising gasoline prices in the U.S. are expected to have an adverse impact on demand. World oil demand in 2012 is forecast to average 89.9 million b/d, an increase of about 1%, or 800,000 b/d from 2011. Oil demand levels are forecast to decline by approximately 500,000 b/d in OECD countries and increase by about 1.3 million b/d in non-OECD areas, led by strong growth in Asia and the Middle East.

Demand in the second, third and fourth quarters of 2012 are forecast to average 88.6 million b/d, 90.6 million b/d and 91.0 million b/d, respectively, reflecting increases of 0.7%, 1.1% and 1.3%, respectively, relative to the same year ago quarters. Oil demand increases of approximately 3% per quarter in non-OECD areas should mitigate declining oil demand in OECD areas, specifically both OECD North America and Europe in the second quarter and Europe in the third quarter.

Refinery capacity in Asia is forecast to significantly increase during the remainder of this year. Refining capacity and runs in India will increase as a result of Essar’s 80,000 b/d expansion and upgrade at its Vadinar refinery, the start-up of the 180,000 b/d Bathinda refinery and the 80,000 b/d expansion of the Mangalore refinery in Southern India. China’s refining capacity is forecast to expand by approximately 600,000 b/d during the first half of 2012 with another 300,000 b/d of capacity to be added over the last six months of 2012. Refinery maintenance activity in both the U.S. and Europe has peaked and refinery runs should increase during the summer before the fall / winter maintenance occurs. Expansion of refining capacity in China and India and the anticipated increase in summer-time runs in the Atlantic Basin, including the startup of the Motiva refinery expansion project on the US Gulf Coast, should have a positive impact on tonne-mile demand.

Geopolitical events will also impact trade flows during the remainder of this year. The cutoff of over 200,000 b/d of crude oil exports from Sudan to Asia (primarily China) will require that these supplies be sourced from other areas such as West Africa, which would result in longer voyages and increased tonne-mile demand. Sanctions against Iran have significantly reduced its ability to export oil and have already altered trading patterns and complicated logistics in a way that has had a positive impact on tanker utilization and freight rates. Additionally, the Iranian fleet, which consists of 28 VLCCs, nine Suezmaxes and four Aframaxes, has been effectively removed from trading as a consequences of these sanctions, tightening the tanker supply / demand balance. The switch from Iranian crudes to alternative crudes such as Latin American, West African and Other Middle East crudes has and will continue to generate incremental tonne-mile demand that will be supportive of rates.

However, should Iran ultimately accept the international demand to cease its nuclear program, sanctions could be eased and pre-sanction oil trade flows between Iran and its customers could return to normal and reduce tonne-mile demand and tanker utilization rates to below first quarter 2012 levels.

World oil inventories are estimated to have increased approximately one million b/d during the first quarter of 2012. This increase was at least partially attributable to the anticipated supply disruptions that would occur once the sanctions against Iran became fully effective on July 1, 2012. Changes in inventory levels in the last half of the year, especially a drawdown of both commercial and strategic inventory levels, would have a significant impact on tanker activities.

The closure of Atlantic Basin refining capacity has tightened product balances. The reduction in product supplies due to refinery closures in the Caribbean and on the U.S. East Coast will likely require additional gasoline imports from Europe, India and Canada to meet product demand levels especially when the driving season in the U.S. begins. Increased refinery runs on the U.S. Gulf Coast, including the incremental output from the Motiva refinery startup, will increase the amount of products available for exports to Latin America and Europe. The larger Gulf Coast refinery output could also provide clean products that could be moved on U.S. Flag tankers to meet demand in Florida and other South Atlantic States that previously relied on imports from the Caribbean. Additional capacity from the startup of incremental refining capacity in India will exceed its domestic oil demand growth and allow it to export additional products to Europe, the US, Africa and other Asian countries.

In 2012, the world crude tanker fleet is forecast to grow by approximately 5% and the Product Carrier fleet is forecast to grow by approximately 3%. It is anticipated that most, if not all, of the remaining single hull vessels in the crude trading fleet will be scrapped in 2012 but that single hull Product Carriers will continue to be used for coastal trades in Africa and Asia. It is likely that, in a repeat of the pattern experienced in the last couple of years, a sizable number of newbuildings initially planned for 2012 delivery will be delayed or cancelled as shipowners and shipyards continue to experience problems obtaining financing.

Freight rates remain highly sensitive to severe weather and geopolitical events. Hurricanes in the Gulf of Mexico could have a pronounced effect on freight rates for both crude oil and product movements depending on the extent to which upstream and downstream facilities are affected. Geopolitical events, such as violence in Nigeria’s oil producing Niger delta, escalating tensions with Iran and other regional conflicts in the Middle East and North Africa, could also cause changes in supply patterns that could significantly impact rates. The rate of economic recovery and pace of restructuring activities in Japan and decisions concerning their nuclear plants could also influence trade flows.

Update on Critical Accounting Policies:

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments and opinions of management. For a description of all of the Company’s material accounting policies, see Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Results from Vessel Operations:

During the first quarter of 2012, results from vessel operations improved by $2,199 to a loss of $23,642 from a loss of $25,841 in the first quarter of 2011. This increase reflects the impact of the quarter-over-quarter growth in TCE revenues coupled with a decrease in general and administrative expenses, partially offset by increases in vessel and depreciation expenses.

During the first quarter of 2012, TCE revenues increased by $7,467, or 4%, to $214,029 from $206,562 in the first quarter of 2011 due to (i) the U.S. segment contributing increased TCE revenues in the first quarter of 2012 resulting from the 2011 deliveries of a newbuild Jones Act Shuttle Tanker and a newbuild Product Carrier, which are employed on time charters at attractive rates, as well as the strengthening of the overall Jones Act market, which allowed for the Company’s final U.S. Flag vessel to be broken out of lay-up in the third quarter of 2011 and (ii) the expansion of the International Product Carrier segment’s Handysize Product Carrier fleet coupled with slightly higher spot rates earned by the Handysize Product Carriers during the current quarter. These positive factors were partially offset by a decrease in TCE revenues in the International Crude Tankers segment which resulted from the redelivery of loss making chartered-in VLCCs and Aframaxes, along with a decline in average daily TCE rates for the smaller Crude vessel classes (Aframaxes and Panamaxes).

Increases in vessel and depreciation expenses in the first quarter of 2012 compared with the first quarter of 2011 were principally the result of changes in the U.S. Flag operating fleet, deliveries of four owned newbuild International Flag Product Carriers and two owned newbuild VLCCs since the first quarter of 2011. The changes in the U.S. Flag fleet included the delivery (after completion of the conversion) of one owned newbuild shuttle tanker, one bareboat chartered-in Jones Act Product Carrier and one owned ATB employed in the Delaware Bay lightering business since late-March 2011.

See Note 4 to the condensed financial statements for additional information on the Company’s segments, including equity in income of affiliated companies and reconciliations of (i) time charter equivalent revenues to shipping revenues and (ii) income/(loss) from vessel operations for the segments to loss before income taxes, as reported in the consolidated statements of operations. Information with respect to the Company’s proportionate share of revenue days for vessels operating in companies accounted for using the equity method is shown below in the discussion of “Equity in Income of Affiliated Companies.”

International Crude Tankers

The following table provides a breakdown of TCE rates achieved for the three months ended March 31, 2012 and 2011, between spot and fixed earnings and the related revenue days. The information in these tables is based, in part, on information provided by the pools or commercial joint ventures in which the segment’s vessels participate.

During the first quarter of 2012, TCE revenues for the International Crude Tankers segment decreased by $13,310, or 15%, to $75,500 from $88,810 in the first quarter of 2011 reflecting lower average blended rates for the Aframax and Panamax crude sectors. The Company’s ULCC experienced idle time during the first quarter of 2012, which contributed to the reduction in the segment’s results quarter-over-quarter. In addition, the OSG Lightering business experienced a 23% reduction in the number of lighterings performed in the first quarter of 2012 compared with the first quarter of 2011. When combined with a weakening in rates achieved, the results from vessel operations for OSG Lightering were $3,053 lower in the first quarter of 2012 than the first quarter of 2011. Revenue days decreased by 166 days during the current quarter. The decrease in revenue days reflects the sale in June 2011 of one double-sided Aframax, which had been chartered in by the OSG Lightering business and had generated poor returns since the second quarter of 2010. In addition, there were 353 fewer chartered-in days in the VLCC and Aframax fleets, partially offset by an increase in Suezmaxes that were chartered-in at current market levels on a short term basis and operate in the Suezmax International pool, as well as the delivery of two newbuild VLCCs, one in the third quarter of 2011, and a second in early January 2012. The return of the VLCC and Aframax charters-in had a positive impact on results from vessel operations since such charters-in were fixed at levels above those currently achievable in the market.

Vessel expenses decreased by $954 to $24,197 in the first quarter of 2012 from $25,151 in the first quarter of 2011. This decrease reflects a decline in average daily vessel expenses of $1,204 per day resulting from lower crew and repair costs in the current period as well as the timing of deliveries of stores and spares. Partially offsetting the impact of the decrease in daily expenses was a 176 day increase in owned and bareboat chartered-in days due to the fleet changes discussed above. Charter hire expenses decreased by $3,715 to $39,551 in the first quarter of 2012 from $43,266 in the first quarter of 2011, principally as a result of 298 fewer chartered-in days in the current quarter. The decrease reflects reductions for VLCCs and Aframaxes, partially offset by an increase in chartered-in days for Suezmaxes. In addition to the redelivery of VLCCs and Aframaxes referred to above, the decrease in charter hire expense reflects a $5,000 per day reduction in daily time charter-in rates for two VLCCs and two Aframaxes. Depreciation expense increased by $2,683 to $20,371 in the first quarter of 2012 from $17,688 in the first quarter of 2011, as a result of the delivery of the two newbuild VLCCs referred to above.

International Product Carriers

The following table provides a breakdown of TCE rates achieved for the three months ended March 31, 2012 and 2011 between spot and fixed earnings and the related revenue days. The information is based, in part, on information provided by the commercial joint ventures in which certain of the segment’s vessels participate.

During the first quarter of 2012, TCE revenues for the International Product Carriers segment increased by $6,627 to $51,898 from $45,271 in the first quarter of 2011. This increase in TCE revenues reflects an increase in revenue days of 526 during the current quarter, resulting from the expansion of the Handysize and Panamax Product Carrier sectors through the delivery of two owned and three time chartered-in Handysize Product Carriers since early-February 2011 and two owned Panamax Product Carriers since the first quarter of 2011. Also impacting the TCE revenues of the segment was a marginal period-over-period decrease in average blended rates for the fleet as a whole, with the lower rates earned in the Panamax Product Carrier sector offsetting the strengthening returns contributed by the Handysize Product Carriers, which operated primarily in the spot market in both periods.

Vessel expenses increased by $1,152 to $18,109 in the first quarter of 2012 from $16,957 in the first quarter of 2011, principally due to a 357 day increase in owned and bareboat chartered-in days, which resulted from the vessel deliveries discussed above. Partially offsetting this increase was a decrease in average daily vessel expenses of $635 per day. This decrease in average daily vessel expenses resulted principally from lower crewing and repair costs. Charter hire expenses increased by $2,042 to $30,929 in the first quarter of 2012 from $28,887 in the first quarter of 2011, which reflects a 145 day increase in chartered-in days in the current period. This increase primarily relates to the delivery of the time chartered-in Handysize Product Carriers referred to above. Depreciation and amortization increased by $3,111 to $12,155 in the first quarter of 2012 from $9,044 in the first quarter of 2011 principally due to the four newbuild vessel deliveries discussed above.

In 2005 the Company reflagged two Handysize Product Carriers (the Overseas Maremar and the Overseas Luxmar) under the U.S. Flag and entered them in the U.S. Maritime Security Program (the "Program"). Each of the vessel owning companies receives an annual subsidy, which was $2,900 for 2011 and increased to $3,100 in 2012, that is intended to offset the increased cost incurred by such vessels from operating under the U.S. Flag. Since these vessels trade primarily in the international market, they continue to be reflected in the International Product Carrier segment.

Other International

As of March 31, 2012, the Company operated two other International Flag vessels, a Pure Car Carrier and a Chemical Tanker. The Pure Car Carrier, which is owned by the Company, is employed on a long-term charter expiring in August 2012. The Chemical Tanker has been time chartered-in by the Company for five years, commencing upon the vessel’s delivery from the shipyard, which occurred at the end of September 2011. The Chemical tanker is currently employed on a one year time charter.

U.S. Segment

The following table provides a breakdown of TCE rates achieved for the three months ended March 31, 2012 and 2011 between spot and fixed earnings and the related revenue days.