Oil Tanker Industry | Jp Morgan Chase | Price Of Oil

North America Equity Research

22 January 2009

Oil Tanker Industry
2009 Outlook: Can Oil Tankers Remain the "Teflon" Industry for 2009? We Don't Think So
Despite all the gloom prevalent in the global economy and the equity markets, tanker rates have shown resilience in 2009, increasing by the largest magnitude to start a new year in 10 years. Oil demand worsens by the day and OPEC supply decisions have been swift and brutal, both of which should be negative catalysts to tanker rates. Meanwhile, a 35+ year record of new capacity is set for delivery this year. However, it seems that this “Teflon” industry always finds a way to exceed expectations, and thus far this year the lifeboat has been supplied by an oil market in deep contango, resulting in the use of tankers to store oil in an arbitrage trade. We cannot predict the timing of an unwind, but we believe the storage is temporary and that the macro outlook will catch up to the tanker market later this year, driving material underperformance of the tanker stocks in 2009. • Supply/demand outlook for 2009 continues to deteriorate . . . . A vicious cycle will likely continue to hurt tanker demand this year, as slowing global economic activity translates to falling oil demand and an associated decline in oil prices. OPEC has responded by announcing 4.2 million barrels per day (mbd) of production cuts since last fall (OPEC production has the strongest correlation with tanker rates of any macro factor we have examined). We estimate that each 1 mbd of production cuts removes demand for 30 VLCCs, thus even if OPEC only complies with half of its stated cuts, which appears unlikely as oil prices continue to plummet, tanker demand would be lowered by 60 VLCCs. Meanwhile, the orderbook calls for another 68 VLCCs to enter the fleet in ’09. • . . . but storage delays the inevitable. Despite weakening fundamentals, VLCC rates have spiked in ’09 as the deep contango in the oil curve and limited spare storage capacity have led to the removal of 25-35 VLCCs for storage as traders look to profit on a price arbitrage. We believe this event has had an exaggerated benefit on rates given heavy post-holiday fixtures and the fact that they have come before the bulk of the newbuild deliveries and the full impact of the last OPEC cuts. Thus, we believe rates will fall in 2Q09, with a soft market lasting into 4Q, as storage ships are redelivered, new ships hit the water, and further production cuts are made (see new quarterly rate forecasts inside.) • Material rate recovery forecast for 2010, but demand is key. Like the storage issue of today, the tanker industry has another lifeline that could render the forecast rate trough in 2009 short term in nature: the IMO scrapping phase-out in 2010. We estimate that accelerated scrapping will nearly offset deliveries next year and that with the help of an economic-recovery-driven improvement in demand, we look for tanker rates (and stocks) to rebound in ’10. • Tanker stocks to underperform in ’09, but balance sheet strength and cash flow visibility could temper declines. We don’t believe that most tanker stocks can hold onto recent gains in the rate scenario we forecast for this year, though those of companies with better balance sheets and cash flow visibility (e.g., OSG, DHT, CPLP) should hold up better than those with more spot-market (e.g., NAT) and financial (e.g., FRO, VLCCF) risk.
Small-Mid Cap Transportation Jonathan B Chappell, CFA
(1-212) 622-6412 jonathan.chappell@jpmorgan.com
AC

Darren T Hicks
(1-212) 622-6571 darren.t.hicks@jpmorgan.com J.P. Morgan Securities Inc.

See page 9 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.

Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com

North America Equity Research 22 January 2009

4Q08 Recap: Raising (Most) Estimates
Tanker rates closed 4Q08 much higher than we had forecast, particularly in the midsize categories, with Suezmax and Aframax rates easily exceeding our estimates for the quarter. Consequently, in our pre-earnings season estimate adjustments, we are raising our 4Q08 forecasts for 5 of the 11 tanker companies under our coverage (CPLP, GMR, OSG, TK, and TNP), while we are modestly lowering our estimates for 3 companies (FRO, SFL, and VLCCF) and maintaining our forecasts for the remaining 3 companies (DHT, NAT, and TNK). See our note also published this morning, “Oil Tanker Industry: Updating EPS Estimates on New Rate Outlook.”
Table 1: New 4Q08 EPS Estimates versus Old 4Q08 EPS Estimates
New Old % Change CPLP 0.40 0.36 11.1% DHT 0.32 0.32 0.0% FRO 1.08 1.10 (1.8%) GMR 0.52 0.47 10.6% NAT 0.46 0.46 0.0% OSG 1.46 1.16 25.9% SFL 0.71 0.85 (16.5%) TK 1.13 0.23 391% TNK 0.63 0.63 0.0% TNP 0.85 0.75 13.3% VLCCF 0.45 0.46 (2.2%) Avg. 4.0%

Source: J.P. Morgan estimates. Note: Average excludes TK.

Although the first signs of OPEC production cuts began to weigh on the VLCC market through the quarter, the aforementioned impact on vessel supply from the use of ships for storage also began in 4Q, offsetting much of the negative demand dynamic. All told, we estimate 4Q08 VLCC rates were roughly $55,000 per day, versus our prior forecast of $57,000 per day. However, the Suezmax and Aframax sectors had far stronger than expected quarters, with the latter category helped by refinery strikes that tied up capacity for weeks in the Mediterranean and Black Seas. As a result, we believe that Suezmax rates ended the quarter at roughly the same level as VLCCs ($52,000 per day versus our prior forecast of $39,000 per day) and Aframaxes likely came in at around $30,000 per day versus our previous estimate of $23,000 per day. The magnitude of the upside in these smaller asset classes is the primary driver of the upside to our EPS forecasts for TK, OSG, TNP, and GMR.
Table 2: New 4Q08 Spot Rate Estimates
US$ per day New Old % Change
Source: J.P. Morgan estimates.

VLCC 55,000 57,000 (3.5%)

Suezmax 52,000 39,000 33.3%

Aframax 30,000 23,000 30.4%

Panamax 31,000 24,000 29.2%

Handymax 18,000 19,000 (5.3%)

2009: Can’t Stay This Good for Too Long
With negative economic and financial news dominating the headlines and endmarket demand for most goods and services appearing to be at or about to enter recessionary levels, it is difficult to believe that any global industry could be doing well in January 2009. But that’s the tanker industry for you. Just when you think that the fundamentals are pointing to a trough earnings year not seen since 2002, rates are off to the best year-to-date start in a decade. With the primary driver of tanker demand – OPEC production – deteriorating in the same year in which newbuild deliveries are scheduled to set a generational record, it is difficult at first glance to explain why the tanker market remains the “Teflon” industry to the global economic
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Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com

North America Equity Research 22 January 2009

malaise. As usual, though, the industry has been thrown a lifeboat, this time in the form of a deep contango in the oil price curve that is enabling traders to lock in a pricing arbitrage by hiring tankers to store oil. This trade has removed an estimated 25-35 VLCCs from the trading market at the same time that a post-holiday flurry of January bookings were lifted from the Middle East, driving a temporary shift in the balance of tonnage in the market to the owners’ favor and an associated near doubling in VLCC rates from the beginning of ’09. However, we believe that this contango storage event is only masking the supply/demand imbalance in the tanker segment in 2009 and is delaying the inevitable freight rate collapse that a capacity surge would normally cause in a period of contracting demand. In fact, we do not believe that a reversal of this storage issue is required to drive a material decline in rates beginning in the second quarter, as we look for the full impact of OPEC production cuts and newbuilding deliveries (see below for all the figures) to weaken rates on their own. The return of the ships used for storage today to the trading fleet will only exacerbate a rate collapse, and, in our view, it is just a matter of timing.

Demand: Worst Annual Outlook in at Least 26 Years
Global oil demand is forecast to decline for the second consecutive year for the first time since 1982/83 as the financial crisis ravages economic activity in developed and emerging economies alike. Indeed, J.P. Morgan’s global energy strategists forecast a 1.2 mbd year-over-year decline in global oil demand for 2009, with OPEC and the International Energy Agency (IEA) now forecasting year-over-year demand contraction of 0.84 mbd and 0.5 mbd, respectively. Consequently, our tanker demand forecast for 2009 is based on an average projected decline in global oil demand of 0.85 mbd. However, as we have explained in the past, tanker demand and oil demand can vary quite substantially. Recall in 1H08, when OPEC was exporting higher levels of oil to respond to record-high oil prices at the same time that demand forecasts were being trimmed. This time, though, we believe that oil demand and tanker demand are moving in the same direction, except that tanker demand declines will likely be even higher than oil demand contraction. As we have mentioned several times in previous notes, OPEC production offers a stronger correlation to tanker rates than any other macro driver we have analyzed (including inventories, oil prices, GDP, etc.) and over the last five months OPEC has responded to deteriorating demand and a collapsing oil price by pledging to remove 4.2 mbd of production from the peak summer levels. We estimate that 1 mbd of OPEC production translates into roughly 30 VLCCs, or nearly 6% of the fleet, and although almost nobody expects the cartel to fully adhere to the announced levels, even 50% compliance would lessen demand by 60+ VLCCs. In our supply/demand model, we conservatively forecast 50% OPEC compliance; however, we believe the risk to this estimate is for more production cuts as its current efforts have yet to stem the ongoing decline in oil prices. Therefore, if OPEC has better than 50% compliance with announced cuts or if it announces further cuts, there could be downside to our tanker demand, rate, and earnings forecasts for the last three quarters of this year.

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Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com

North America Equity Research 22 January 2009

Supply: Worst Annual Outlook in 36 Years
While some investors may not have been alive during the aforementioned demand demise of 1982/83, we weren’t even around for the last time that newbuild tanker deliveries exceeded 2009 forecasts, in the early 1970s. The bull market in this industry from 2003 through 2008, coupled with the forthcoming IMO regulations mandating the elimination of single-hull vessels in 2010, led to a flurry of newbuild ordering over the last several years and the biggest of the annual bubbles is set to emerge this year. Brokers estimate that 64.3 million deadweight tons (mdwt) of new tanker tonnage is scheduled to be delivered in 2009, which would represent a 15.2% gross year-overyear addition to the global fleet. Even when we assume accelerated scrapping of older tonnage and slippage of deliveries owing to financial problems at yards and with owners, we still forecast net fleet growth of 32.9 mdwt (or 8.1%) in 2009, which exceeds even the most aggressive forecasts of tonnage removed for storage presently by more than threefold. Furthermore, unlike in some other sectors of shipping, we believe that there is very little risk to the 2009 orderbook given the quality and financial health of the yards where a majority of the orders are placed as well as the fact that construction has likely already begun and significant cash deposits have been paid. Still, our models assume that 10% of the orderbook is either canceled or delayed in 2009 owing to issues related to the global financial crisis. We also project that 25.0 mdwt of tanker tonnage will be permanently removed from the trading fleet in 2009, which would be 30% higher than the prior annual high posted over the last 15 years (as far back as our reliable data go). We believe that the forthcoming mandated phase-out of single-hull ships next year and the weaker rate environment we forecast in 2009 will drive a larger number of older ships to the scrap yards. However, we estimate that only 71.0 mdwt of single-hull tonnage remains in the fleet today, and although our scrapping forecast for this year represents more than one-third of this total, we believe that a majority of these antiquated ships will continue to trade until their absolute drop-dead date next year as most have been fully written down and paid for at this point, lowering the rates required to be earned for the vessels to break even. Scrapping can provide upside or downside risks to our current rate and earnings forecasts, as owners’ decisions to scrap can be based on several differing factors from rates to scrap prices. Another risk to our supply forecast is the aforementioned storage issue. If more vessels are used for storage throughout 2009, temporary reductions in capacity could occur, thus adding further volatility to an already extremely unpredictable spot market.

Earnings: Raising Estimates, But Still Down Big from ’08
Despite our lower 2009 tanker demand forecast (-0.85 mbd of global oil demand growth and -2.0 mbd of OPEC production versus our prior forecasts of 0.39 mbd and -0.5 mbd, respectively), we are maintaining our 2009 spot rate forecasts for VLCCs and Suezmaxes owing to the strong start to the year associated with storage benefits and positive owner sentiment. In addition, we are raising our annual Aframax, Panamax, and Handymax forecasts to also reflect stronger-than-expected 1Q09 bookings. Still, we are forecasting year-over-year declines in tanker rates from 18% (Handymaxes) to 59% (VLCCs) owing to the unfavorable supply/demand balance we describe above, and our new quarterly rate forecasts for this year highlight severe
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Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com

North America Equity Research 22 January 2009

declines projected in the historical seasonally soft 2Q and 3Q periods, with rates in the latter quarter approaching break-even levels for some asset class segments.
Table 3: New 2009 Spot Rate Estimates
US$ per day New Old % Change
Source: J.P. Morgan estimates.

VLCC 40,000 40,000 0.0%

Suezmax 32,000 32,000 0.0%

Aframax 28,000 25,000 12.0%

Panamax 25,000 22,000 13.6%

Handymax 18,500 18,000 2.8%

Based on our new rate forecasts, our new quarterly models, and other fleet adjustments, we are raising our 2009 EPS forecasts for 8 of the 11 tanker companies under our coverage, with the largest upward revisions for those companies with more Aframax spot market exposure (i.e., TK, TNP, OSG). Once again, though, we highlight that our new forecasts still represent large year-over-year declines for most of the companies under our coverage, with the companies with more spot market exposure, particularly for the largest asset classes, forecast to post the largest declines. Importantly, our quarterly models show a modest sequential decline in 1Q09 earnings before much more material decreases appear in 2Q and 3Q, and we believe that those significant sequential declines in EPS and dividends could prove to be negative catalysts for many tanker shares over the next 6-9 months.
Table 4: New 2009 EPS Estimates Still Show Significant Year-over-Year Declines
US$ per day New 2009E Old 2009E % Change New 2008E % Change yoy CPLP 1.49 1.48 0.2% 1.81 (17.7%) DHT 0.69 0.67 3.0% 1.18 (41.5%) FRO 2.10 1.90 10.7% 7.48 (71.9%) GMR 1.55 1.30 19.0% 2.24 (30.8%) NAT 0.90 0.91 (1.4%) 3.58 (74.9%) OSG 4.00 3.80 5.3% 12.70 (68.5%) SFL 2.62 3.00 (12.7%) 3.05 (14.4%) TK 1.95 1.30 50.0% 4.62 (57.8%) TNK 1.48 1.32 12.1% 2.72 (45.6%) TNP 2.75 2.30 19.6% 4.55 (39.6%) VLCCF 2.00 1.81 10.8% 2.81 (28.8%) Avg. 10.6% (44.7%)

Source: J.P. Morgan estimates.

2010: Rebound Ahoy (Demand Permitting)
We forecast that tanker rates will rebound by 8% (Panamaxes) to 30% (VLCCs) next year as modest capacity additions resulting from the 2010 mandatory phase-out of single-hull tonnage couple with a pickup in demand as J.P. Morgan projects an economic recovery to begin in 2H09. Of note, rates would still be down significantly from 2008 levels (47-48% for VLCCs and Suezmaxes), but we believe that the elimination of a majority of the remaining single-hull tankers from trading and a recovery in OPEC production next year will help drive a sequential improvement in rates beginning in 4Q09 and advancing throughout 2010. Specifically, we estimate that roughly 83% of the remaining single-hull tonnage entering next year (after a projected 25.0 mdwt is removed in 2008) will be scrapped in 2010, resulting in the elimination of 38.0 mdwt. The orderbook schedule for 2010 currently calls for 51.4 mdwt of newbuildings to be delivered, but we are conservatively estimating that 10% of this orderbook is either delayed into 2011 or canceled outright owing to financial issues either at the shipyards or with owners. All told, we forecast total fleet growth of only 8.3 mdwt (or 1.9%) next year. Clearly, the largest risk to this supply forecast is scrapping. We believe that single-hull ships will
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Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com

North America Equity Research 22 January 2009

be economically unviable for the most part after 2010, as very few regions will accept the ships, and that discrimination will lead to massive disutilization. However, if some countries, traders, and/or oil companies continue to employ these ships through the loopholes provided in the IMO regulations, then fleet growth may exceed our forecast. Of course, if the financial crisis deepens and newbuild financing becomes more difficult to attain, newbuild deliveries could be in jeopardy as well. On the demand side of the equation, J.P. Morgan economists forecast that the global economy will begin a modest recovery in 2H09, with further growth attained next year. Based on that underlying assumption, we are introducing a global oil demand growth forecast for 2010 of 1.5 mbd. Furthermore, we expect OPEC to reverse some of its recently announced production cuts in 2010 at that same 1.5 mbd year-overyear growth level, which, coupled with our ton-mile multiplier forecast of 9.0, results in total tanker demand growth of 13.5 mdwt next year. Consequently, we forecast that tanker demand growth will exceed capacity expansion by 5.2 mdwt, helping to drive the rebound in rates we project for 2010. We note that the risk to our forecast of an improvement in demand and an associated recovering rate environment is the timing and magnitude of the rebound in global economic growth. Indeed, if the current financial crisis and slowing industrial production deepen further this year or last well into 2010, we would likely lower our oil demand growth and tanker rate forecasts considerably.
Table 5: New 2010 Spot Rate Estimates versus New 2009 Spot Rate Estimates
2010E 2009E % Change
Source: J.P. Morgan estimates.

VLCC 52,000 40,000 30.0%

Suezmax 40,000 32,000 25.0%

Aframax 33,000 28,000 17.9%

Panamax 27,000 25,000 8.0%

Handymax 21,000 18,500 13.5%

We have introduced our 2010 EPS estimates for the 11 tanker companies under our coverage, with year-over-year increases forecast for nearly all of these companies owing to our projection of strengthening freight rates next year. The companies with more earnings leverage to rates through either more spot-market exposure or larger fleets appear to offer the most earnings upside next year, and we would look for the stocks of those companies to outperform the peer group all else equal next year. However, in the meantime, it is many of these same stocks with the higher operational leverage that could suffer the most downside if 2009 turns out as weak as we currently forecast.
Table 6: New 2010 EPS Estimates versus New 2009 EPS Estimates
2010E 2009E % Change CPLP 1.70 1.49 14.3% DHT 0.59 0.69 (14.5%) FRO 3.65 2.10 73.8% GMR 1.95 1.55 25.7% NAT 1.92 0.90 113.2% OSG 7.65 4.00 91.3% SFL 2.15 2.62 (17.9%) TK 4.10 1.95 110.3% TNK 1.83 1.48 23.6% TNP 4.20 2.75 52.7% VLCCF 3.30 2.00 64.9% Avg. 48.9%

Source: J.P. Morgan estimates.

Stock Picking: Favor Liquidity and Visibility
It would be naïve to believe that any tanker stock would be likely to post a positive total return in 2009 if our rate forecasts come to fruition, as the sequential earnings and dividend declines we project in a segment that had been a top performer of late would likely result in material share-price depreciation. Consequently, we would
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Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com

North America Equity Research 22 January 2009

label few, if any, of the 11 tanker equities under our coverage as absolute “buys” over the 6- to 9-month investment horizon. However, our rating system is relative in nature and, that said, we expect our Overweight-rated stocks to outperform the peer group average in 2009 owing to factors including superior balance sheet liquidity and cash flow visibility through extensive time-charter coverage. We believe the former competitive advantage should help Overweight-rated OSG outperform other VLCCexposed peers such as Underweight-rated FRO and VLCCF, while the latter should help names like Overweight-rated CPLP, DHT, and SFL maintain recent dividend distributions and outperform more volatile cash flow and dividend-paying stocks like Underweight-rated NAT or Neutral-rated TNK. We would especially be taking profits on stocks with likely material sequential dividend declines forthcoming, such as NAT, as distribution cuts have historically acted as a negative catalyst to the stocks in this industry. In the table below, we list the new end-December 2009 price targets that reflect our new 2009 EBITDA and cash flow estimates. (Please see our other note today, “Oil Tanker Industry: Updating EPS Estimates on New Rate Outlook,” for the formal introduction of these targets, the valuation methodologies used to derive them, and the risks associated with each.)
Table 7: New December 2009 Price Targets
Ticker CPLP DHT FRO GMR NAT OSG SFL TK TNK TNP VLCCF Price 1/21/09 $8.97 6.51 30.13 10.06 30.90 39.78 12.90 16.98 11.50 20.07 14.66 Rating OW OW UW N UW OW OW OW N N UW Historical Multiple EV/EBITDA P/CF 9.4 6.6 9.4 6.6 9.4 6.6 8.6 4.8 9.4 6.6 8.6 4.8 8.6 4.8 8.6 4.8 9.4 6.6 8.6 4.8 9.4 6.6 Discount (15%) (15%) (25%) (15%) 0% (15%) (20%) (15%) (15%) (15%) (25%) December 2009 Price Target New Old $11.00 $11.00 7.50 7.50 18.00 16.00 13.00 11.00 19.00 20.00 64.00 60.00 17.00 15.00 23.00 22.00 13.00 12.00 18.00 16.00 14.00 14.00 Upside / (Downside) 23% 15% (40%) 29% (39%) 61% 32% 35% 13% (10%) (5%)

Source: J.P. Morgan estimates. Note: Please see our December 22, 2008 note for a full description of how we arrive at our price targets.

Tanker Valuation and Rating Analysis
Despite the recent strength in tanker rates, we have a far more negative view on the stocks for 2009 than we had even a month ago as tanker demand is poised to slow materially this year given OPEC’s aggressive pledges to cut production amid a deepening global economic slowdown and given a collapsing oil price, which is not timed well with the record newbuild delivery schedule for this year. However, we believe that the near-term benefit from the storage of oil in tankers, effectively removing them from the trading fleet, has provided some expectation of another better-than-expected year in 2009, lending support to some of the tanker stocks, particularly those with more volatile spot-exposed earnings and cash flow streams. If the three main negative catalysts that we foresee occurring this year (impact of OPEC production cuts, record newbuild deliveries, and reversal of storage trade) play out as expected, we believe rates could plummet in 2Q and 3Q, driving quarterly earnings to near (or below) breakeven for some of the more spot-exposed names in our coverage universe. All told, we would expect that unfavorable rate momentum to weigh on all of the stocks in our coverage universe, though we believe that those
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Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com

North America Equity Research 22 January 2009

stocks of companies with better balance sheets and cash flow visibility (i.e., OSG, DHT, CPLP) should hold up better than those with more spot-market (i.e., FRO, NAT) and financial (i.e., FRO, VLCCF) risk. On valuation, we have adjusted our December 2009 price targets to reflect our new earnings and cash flow forecasts for this year (see table above). Importantly, though, we are maintaining our rating allocations, as our Overweight-rated stocks (e.g., OSG) still offer more total return upside potential based on our price targets than most of our Underweight-rated stocks (e.g., FRO and NAT), mainly owing to the visibility and stability of the cash flows provided by many of our Overweight-rated stocks through their time-charter coverage. As such, we continue to believe that pair trades are an effective way to maintain exposure to the tanker stocks, with our top recommendation to fund a long position of Overweight-rated OSG with the proceeds from a sale of Underweight-rated FRO.

Risks to Our Tanker Industry Thesis
A primary risk to our unfavorable investment thesis for 2009 would be increased oil supply from OPEC in response to higher oil prices or stronger-than-expected demand, driven by either a resilient global economy or oil stockpiling in a contango oil price environment. Given the current economic outlook these risks appear unlikely, though we note that this volatile industry can benefit from short-term rate spikes associated with capacity dislocations (e.g., vessels used for storage) and/or weather disruptions (e.g., delays in the Bosporus Straits in the winter). Another upside risk to rates and the tanker stocks would be an event that threatens the supply of oil (e.g., military conflicts in oil producing regions) that could lead to a temporary spike in rates and thus upward EPS estimate revisions.

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Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com

North America Equity Research 22 January 2009

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures
Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgan’s website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406) Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Jonathan B Chappell, CFA: Capital Product Partners L.P. (CPLP), DHT Maritime, Inc. (DHT), Diana Shipping Inc. (DSX), Eagle Bulk Shipping Inc. (EGLE), Frontline Ltd. (FRO), Genco Shipping & Trading Ltd. (GNK), General Maritime Corp. (GMR), Horizon Lines, Inc. (HRZ), Kirby Corp (KEX), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Holdings Inc. (NM), Navios Maritime Partners L.P. (NMM), Nordic American Tanker Shipping Ltd. (NAT), Overseas Shipholding Group (OSG), Ship Finance International (SFL), Teekay Corporation (TK), Teekay Tankers Ltd. (TNK), Tsakos Energy Navigation (TNP), World Fuel Services Corp (INT)
J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2008 Overweight (buy) 38% 54% 37% 76% Neutral (hold) 44% 52% 49% 71% Underweight (sell) 18% 43% 14% 62%

JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients*

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

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Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com

North America Equity Research 22 January 2009

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Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com

North America Equity Research 22 January 2009

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. “Other Disclosures” last revised January 16, 2009.

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