Teekay Corp Ltd (TK) 2002 Q3 法說會逐字稿

Good day ladies and gentleman. Thank you for standing by. Welcome to the Teekay Shipping Corporation third quarter 2002 earnings results conference call. During the presentation, all participants will be in a listen-only mode. After that, you will be invited to participate in the question and answer session. At that if you have a question, you need to press *1. As a reminder, this conference is being recorded. Now for opening remarks and introductions, I would like to turn the conference over to Mr. Moller, President and Chief executive Officer, Teekay Shipping Corporation.

Before Moller beginning, please allow me to remind you that various remarks that we may make about future expectations, plans and prospects for the company and the shipping industry constitutes forward-looking statements for purposes of the Safe Harbor Provision under the private securities litigation reform act of 1995. Actual results may differ materially from those indicated by these forward-looking statements. As a result, these various important factors including those discussed in our annual report on form 20-F dated March 29, 2002, which is on file with the SEC. I will now turn it over to Mr. Moller to begin.

Thank you Jerome. Good morning ladies and gentleman. Thank you for participating in our conference call. For the quarter ended September 30, 2002, Teekay Shipping recorded net income $643,000 or $0.02 per share a result that reflects a weak tanker market in the quarter. This morning I will provide an overview of tanker market dynamics and Peter Anturri will discuss our financial results. Looking first the tanker demand, all demand and underlined driver of tanker demand remained relatively weak in the quarter reflecting a weak global economy. However, oil demand did record its first positive year-to-year growth since the spring of 2001 growing by 0.6% according to the IDA. Early indications of September demand show an even greater increase of 1.8% versus one year ago with the early TD finally returning to positive figures. Global oil production, the most driver of tanker demand rose by 0.8% compared to the June quarter, the thirst that has increased in global supply since the third quarter of 2001. OPEC supply rose by an average of 1 million barrels per day during the quarter while the non-OPEC production fail by 500,000 barrels a day. The increased production and the ships in market, share a favor longer haul of OPEC crude provided a welcome, if modest, increase to tanker demand. Towards the end of the quarter, the OPEC production increased further to an estimated 2.2 million barrels a day above its official quarter. The OPEC is still producing 2.5 million barrels below its level at the height of the tanker market in early 2001. The IEA is forecasting oil demands growth for the fourth quarter of 2002 of 1.2% compared to one year ago and expect 2003 demand to grow by 1.4% above 2002 levels. Oil inventories are reported to be tighter than usual. For the first time since 1999, global oil inventories posted a countered seasonal drop in the third quarter and the US crude oil inventories have reached 25-year lowest. These factors coupled with the expectation of a substantial seasonal stock going to the fourth quarter, imply the need for further oil production increases, boding well for tanker demand. Thanks to tanker supply. Tanker supply was roughly unchanged in the quarter at 303 million tons. New tanker deliveries of 4.9 million tons were offset by 4.5 million tons of scrapping. New tanker ordering brought to 3.6 million tons from 6.3 million tons in the June quarter, and year-to-date new ordering is down by more than 1/3 from last year. At the end of September, 2002, the world tanker order book stood at 61.9 million tons or 20.4% of the existing fleet, sound like become 20.9% three months ago. In the Aframax sector, 12 new ships delivered in the third quarter and three ships were sold for scrap was helping in the order Aframax fleet increasing to 635 ships. New orders were placed for 9 ships reducing the Aframax order book to 133 ships or 20.9% of the fleet. The scheduled newbuilding deliveries for 2003, reported to be close to 30 million tons or almost 10% of the existing world fleet. It appears very likely that there will be some fleet growth next year. However, this figure must be seen in the context of scrapping activity, which over the past 12 months has amounted to 8% of the world's fleet, given the large number of tankers in the fleet which will be 25 years or older by the end of 2003 and would added pressure of Imopeda regulations, we expect a high level of scrapping to continue next year. Moreover, when taking intra-account at 3% fleet decline that has already occurred over the past year, it is possible to draw scenario in which the world tanker fleet at the end of 2003 is roughly the same size as the fleet during the 2000, and 2001 strong tanker market. In addition, one must consider increases tanker demand resulting from growth in oil demand between 2000 and 2001, and 2003. Sending next to tanker grade rates, Teekay rates softened in the quarter across all segments of the crude oil tanker markets from already weak levels. Low tanker demand was compounded by bunker fuel prices rising to their highest levels since 1990, it our record of high crude oil prices. Compared to average bunker prices in 2001, the estimated negative TCE impact of bunker prices at the end of September 2002, range from $2000 from modern Aframax to $9000 a day on hold of the LCC. Average open market Aframax rates on the AGEs route; they have increased slightly on the paper at least to $13,000 a day, from $11,500 a day in the June quarter. On the Gulf routes, rates fell from $16,400 to $15,000 a day. The LCC see in SuezMax rates dropped to their lowest quarter average of $13,000 a day. Teekay has realized TCU rates in the quarter of $16,175 per revenue generating day was slightly below the figure that would derive from applying our usual conversion formula. This was due to our premium about AGEs, narrowing to $1000 a day in the quarter due to short-term factors. Our premium in the Atlantic was approximately $2200 per day. Subsequent to the end of third quarter, we have seen significant improvement in rates due to the combination of factors. Increasing oil production is beginning to take its toll on near term availability in some areas, whether delays the course to some disruption on the orderly flow of freight, there has been nervousness in the charting markets post attacks the terrorist attacks on Limberg in Yemen, and there has been an increased in tourist sentiment in the market standing from the specific factors, I just mentioned. We also see rates for the first to move rising from $15,000 a day to $50,000 a day in a matter of two weeks. During the past week Aframax rates have followed suit and have increased on average from $12,000 a day to $18,000 a day. These jumps in rates suggest that the global tanker supply and demand situation is not that far from being in balance. This creates an interesting outlook for freight rates considering the expected needs for further oil production increases over the next few years even a good portion of this oil comes from non-OPEC sources. I will now hand it over to Peter to discuss our financial results for the quarter.

Thanks Bjorn. Teekay's third quarter results reflected tanker market that continue toward the end of the second quarter in a range for charter rates of slightly above Teekay's current net income break-even level. We continue to make use of this weak market to accelerate maintenance on our vessels in the quarter, which had the effect of temporarily reducing revenues generating days and therefore earning by about $0.10 per share compared to a typical dry-docking quarter. Despite the weak tanker market, we generate $55 million in EBITDA in a quarter, which is more than we are achieving in peak tanker markets four years ago and almost half of that quarter's cash flow is generated by long-term contracts, which of course has not been affected by decline in tanker rate. New long-term contracts that will come on stream light by the end of next year will add another $10 million in the quarter of stable EBITDA. In looking at the today results for the quarter, I will refer to the table on the first page of our press release and looking first at our international tanker fleets, the number of revenue generating ship days is slightly higher than the immediately preceding quarter due to the addition of the SuezMax tanker acquire at the end of June 2002. Our international tanker fleet had quarter had 7 dry-dockings in the third quarter, and we expect three dry-dockings in the fourth quarter which is more reflective of our typical pattern of 2-3 dockings per quarter. The international tanker fleet TC calculated on a calendar day basis was $13,772 per day down $900 per day from the second quarter. Vessel operating expenses were $5,616 per day down $31 a day from the previous quarter and roughly inline with our expectation for the whole year. Despite the weak tanker market, our efficient spot Aframax operation generated $5,528 per day in cash flow in the quarter. The overall fleet which now averages 20 years of age operated at cash flow break even at low for the quarter TCE rates in the Atlantic and an increase in front caused revenues to decline from the previous quarter, although this was partially offset by a $405 per day reduction in vessel operating expenses. The value of the profitable long-term contract business supporting the UNS and Australian fleets were clearly demonstrated during the quarter. As the rate of cash flow being generated from these vessels continues to be well above the stock market. UNS cash flows is down about $800 per day from the second quarter due to higher vessel operating expenses as a result of the increased repairing and maintenance activity during the summer maintenance period and also the appreciation of the Norwegian cruise. Turning next to our income statement, on the fourth page of the press release and running down to the September 30 quarter figures and comparing them to the immediately preceding quarter that is the second quarter 2002. As we have discussed, net voyage revenue was lower due to lower Aframax and overall charter rate, OPEC was up by about $1.7 million from the second quarter on higher repairs and maintenance activities mainly in the UNS settle tanker fleet. Depreciation and amortization was up $500,000 over the last quarter due to the purchase of the SuezMax tanker and included in depreciation and amortization as $5.3 million in the write off amortization. G&A expenses were about the same as last quarter and again this is indicative of our on going run rate. Net interest expense was unchanged from the previous quarter and EBITDA interest coverage was 3.5 times. Other income loss includes $2.7 million in deferred income tax expense offset by $2 million in foreign exchange gains and some income from joint ventures and a number of smaller items. Going forward, our foreign exchange, against the losses were reported to average 0, so this is slightly unusual number and of course some of this is offsetting the affect of the appreciation of Norwegian Crowner on UNS operating expenses. Capex this quarter was approximately $52 million, which includes the purchase of the SuezMax tanker through a 50% on joint venture, $10 million in new building installment, and $30 million in maintenance Capex. Our Capex commitments for the fourth quarter approximately $50 million, which includes $8 million in maintenance Capex. Forecast Capex for the next two years is roughly $260 million in 2003 and $150 million in 2004 including roughly $25 million in maintenance Capex in each year. With regard to our balance sheet net capitalization increased slightly to 36% up from a record low of 33% recorded earlier this year and with virtually all of our debt either in the form of long term bonds or long term contracts by project our debt structure is also more solid than ever. We can therefore add significantly to the capital expenditure market without comprising our strong balance, sheet should attract opportunities that arise in this difficult tanker market. I would now turn this to Bjorn to conclude.

Thanks Peter. Tanker market dynamics this year provide a good illustration of the benefits of Teekay's business strategy. Our growing fixed rate business has allowed us maintain positive net income during the quarter of the weaker tanker marketing quite sometime and to generates substantial cash flow onto the tough conditions. Yet, we have raised the flow and our earnings without sacrificing any of our considerable operating leverage, something that will enable our earnings to benefit immediately to current pick up in the spot charter rates. During this past quarter, we have engaged to varying degrees in three of the four means that we have targeted opportunistically putting our balance sheet to work in profitable ways. First we continued our stock buy back program, second we acquire modern second hand tonnage and this instant SuezMax tanker for the UNS Brazil projects, and thirdly after having held tax our prices decline by 20% from their 2000 peak. We placed an order for seriously of attractive priced highest specification Aframax newbuilding for delivery in 2004. All of these initiatives will be accredited to our earnings. We will continue to look for opportunities to grow our earnings power. Thank you for listening and we are very happy to put on to your questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing the * key followed by the digit 1 on your telephone. If you are using a speakerphone, please make sure that your mute function is turned off to reach our equipment. We will proceed in the order that you signal us and I will take as many questions as time permits. Again, if you would like to ask a question please press * 1. We will take our first question from Jordan Alger with Goldman Sachs.

Hi, Jordan Alger from Goldman. Just a couple of questions, do you have any sense where the new builds may be heading as they come out, where they are leaning to more on the other, are they going right to the gulf given what could be a need for them from all indications?

I have to say that the phase of new building has not been that high. Generally, they have send to move into the Atlantic very soon. A few of them have lingered around in the far east, and I guess has contributed to some weakness in shorter terms. Quite a few of the tankers have been kept in for the clean product market because of being coded, but even the uncoded sort of crude on new buildings, when they come out of yards they can contribute to participate in the clean petroleum trades. As a part, few ships have done that. My sense is that majority of the ships are headed for Atlantic, which is by far the biggest Aframax market.

Okay just a followup touched on this. Would the cash that you are generating, and you obviously have the new builds on order. Is it the goal to still be on the look out for high quality second hand vessels?

That definitely forms part of the strategy. It is matter of finding people to have the right ships and also the willingness to sell in the low market. That can be challenging. So but clearly that is the strategy that we have used in the past and we will use again if the opportunity show up.

Just a final, may be this is for Peter, what possibility did you have to pay down debt, with regards to interest expense as well as you used for cash?

We do have that capability to pay down debt over the years and that is our first priority at this point in time and we do have debt that we can pay down without penalties.

Great. Thank you.

We will take our next question from Magnus with ?? Company.

Good morning. Just a couple of questions starting with the current rates, which are dumped in from the fourth quarter. Can you give us the flavor on what current rates have done, October versus November and your expectation for December?

There is some fundamental factor at work in the form of middle east OPEC production that is clearly taking the toll and punishment availability and that is going to continue to be a real factor for as long as that production is at these levels or higher. But I think there are also some short-term factors that have played in. The hurricanes that affected the US gulf held up a number of LCCs and delayed their return to middle east. There is a problem in Japan the nuclear power which is driving some utility companies to increase the imports of crude oil, you know whether that is intra-phenomenon but if it has caused them to try to cover their dates further ahead of time and when that happens you change in the market and that can have a little effect in that people continue to pitch forward. I would say there are enough fundamental practice there to indicate that this not just a flashed panel there is clearly an increase in tanker demand over the last month, but the question is whether the rates little over heeded in short-term or whether it will remain at that level.

Right. Would you comment on what kind of rates that you have benefit booking in October versus November and kind to get a flavor on the fourth quarter, if I can?

We would say that it has been in the last week to 10 days that rates have really moved up. We were booking orders, to look at lot of options in the Atlantic base in October, rates were pretty quite in mid teens and they have come up probably by 2,000-5,000 depending which market you look at. In the pacific, rates remain very weak at around 12,000 at A level until probably a week ago and I would say now it is up around for the 16,000-19,000 a day. Looking at options, I think we are looking even that we are already one month into that quarter. We are probably looking at the, if things are well as of now and continued and you are probably looking at 3,000-4,000 a day above the previous quarter and average proxy numbers.

Okay. You mentioned the premium had declined during the quarter. Do you expect to regain that premium you have seen so far that the rates picking up?

It is difficult to measures that close up. I would say traditionally we have always manage to maintain the premium with some short-term stockiness it has been high, it has been low and there was quite lot of idle time in the third quarter because of a very weak market so even though we had many contracts that permits us to higher than a average utilization, everybody suffered the waiting time, but of course options does not take into account the waiting time. We believe in short term we might expect to regain it.

Okay. If you could comment on the insurance with the recent incidence in Yemen, it is in past 2002, but how does that increase in the last couple of weeks?

Certain regions have had increased insurance premiums for calling as you point out that this is flow through item, logic stands to a customer. So it obviously affects the entire industry and these issues are of some concern, but for insurance standpoint, it is not impacting the bottom line.

Okay. Just a final question. On your stock buyback how much have you bought back in the year till today?

I just give you the quarter's number, which is new from last quarter; it is 49,000 shares at $31.60 a share. It is what we got in this last quarter.

Okay. Thank you very much.

We will take our next question from Jim Winchester with Lozareck. Please go ahead.

Good morning Bjorn and Peter. Two questions, first one is whether you give any update on, what do you think the status of the navy on differential out-sourcing may be sale or beyond. Secondly, on what fundamental side of the business, I keep looking at scrapping activity and not seeing very much. I am wondering if you have the thesis as to why auditors over the last five or six months have held back from scrapping even in the face of quite depressed rates and whether you think is there any particular timing, in the past we saw a lot of scrapping in the first quarter, whether do you think is there any particular timing that we can look to where we should begin to be expecting bigger increase in scrap rates? Thanks.

I cannot comment on that beyond, nor can I comment on any other transactions that we may or may not be pursuing so I appreciate the question, but I cannot really help you with that one. As far as the fundamentals are concerned, I know you are not looking at the same numbers, sometimes we interpreter them differently. Looking at the scrapping, scrapping I agree we have not been sensation reactive, but if you look at the numbers it is entirely effective, quarter by quarter over last four quarters scrapping has ranged from 1.5% to 2% of the whole world tanker fleet being scrapped. So that I would disagree with your that scrapping has been slow. As I indicated, it is running at 8% scrap over the past four quarters of the fleet, that is a very substantial number. There has been less scrapping on the Aframax side and there it has the large tankers, I would agree with that. We think that there really is much more the two team in the Aframax business. There are a number of short term trades for the more coastal along countries that do not impose a high restrictions on quality and where major international companies are really not involved so these ships has slightly different dynamics and scrapping. While the LCCs really have to be approved among all companies because of the trading pattern they are engaged in. We are looking at the Aframax fleet, which is of course interesting for us partly because there are 70 ships due for delivery next year, which is a big number. Also while we think that it is part of the overall global fleet pattern and we look at the total supply, the Aframax market is of course also very dynamic. There is a very significant number of ships in the 20+ age range and I think by the end of next year there would be about a 170 Aframax tankers out of the fleet of 630 that will be 20 years or older. I can tell you again I may would have told you this in past calls, that the discrimination we are facing in the scrutiny on any thing that is slightly older than 15 years, we get around the course because we have invested in keeping our ships at very high standards and have approvals, but it is a lot of work. I can only see this possibly in saying that ships of 20 years of age really do not compete against our fleet. I think that we view that dynamics are being favorable although there will be a challenge for the inflow of new tonnage next year.

Do you have a sense as to which month you would anticipate peak delivery of new ?? in 2003?

The highest quarter for Aframax delivery is in the fourth quarter, but the first quarter typically is also busy because you have some delays of ships from previous year. People just do not like to get ships delivered in December so they typically creep into January to get the 2003 sticker deal on it. So we typically see as an active first quarter, but just looking at the way the quarters are recorded, the second and third quarters are somewhat low and the fourth quarter is high, it is not too choppy, it is fairly pleasant and also fairly even.

Okay Thanks.

We will take our next question from Sam O'Brien with Lehman Brothers.

Yeah good morning. Just a question by your new building program, I understand that four vessels were quite high specification of the great cost or price, the question is looking forward, at what point do you weigh the price at which you get the ships versus what can be computed as a quite a full order book, as how many versus too many, I guess that is the question?

I think that is right. What we have to look at, can we run or add our or add our capital based on our assessment of the future trading of a share that will be the main criteria that we would apply. Our assessment is that they have done average Aframax market in and out of the cycle; we cannot have capital in these issues. I am not sure whether that is true from many of the other orders that have been in place. We benefit from scale and trading flexibility to a degree specifically that others do not. Ideally you would like to increase you fleets with ships of your own and without adding to the global supply and that will also be one option that we would pursue through consolidation or acquisition of resale of new building's from other people. But there is really is very little activity in that area and it is not a big order for Teekay, this is a one-year fleet renewal for us. So this is not a big order, but we obviously look at what is best for Teekay.

Great. Thank you very much.

We will take our next question from Martin Monroe with MSR Capital Management.

Thank you operator. My question goes back to this insurance issue. I recall in the prior conference calls that Peter mentioned much of your insurance premium is fixed for at least a couple of years? Does that give you a kind of competitive advantage in a market like we are now in the rising across the board?

The answer would be yes, but not necessarily due to hostile facility. The underwriting market has turned very considerably in the last 18 months. Just the ongoing insurance premium that people pay for the ordinary course of insurance will be a liability or asset insurance has risen, our insurance has not risen and therefore we have a competitive advantage. As far as this specific hostility related insurance, this premium is paid as underwriters charge or extra cost for entering risky areas as it has from time to time and in a way some of the new high cost ships facing a little bit of discrimination because the whole value is high and the insurance premium is assessed as a percentage or fraction of a percentage of the whole value and so I guess on some routes where there is particular cost parts that can be a short time frightener.

Thank you very much.

We will now have from Howard Blinkers with Blinkers and Company.

Hi. I have a question that you will comment about the overall market and the inventory. You said they are 25 years old. Is that absolute or relative to daily consumption?

The information that I have is that the physical US crude oil inventories are as high as 25-26 years low actually. The product inventory is not quite in the same situation, but they are certainly they will grow as US stock situation is tied. I believe that as in absolute terms.

Is that number coming from the energy information administration or from the IEA overseas?

I think it is the US, the EIA.

Okay, Thank you.

And there is a final reminder. If you would like to add a question, please press *1. We will take up a follow-up from Magnus??? with Company.

Just a follow-up on the scrapping. Looking at your fleet, the Aframax that is 20 years of age, what are your plans for that and how long you seem to be trading with them, utilization has been less poor for these vessels?

I would say that we will play that by, the fleet is serving a number of contracts that are profitable and are using the remaining part of the spoilage days in this spot market. These ships do trade both in, mainly requiring petroleum and in dry cargo. This is going to pickup the dry cargo market in the last couple of months, which we have not yet had the opportunity to benefit entirely from that, but which we believe would be a positive factor in the trading of the ships. As far as the clean petroleum products are concerned, these ships are very well maintained in the hands of a single owner since they were build, and they have been carefully maintained. We have invested in the last 2 years money and maintaining them to do a lot of trade for 2-3 more years, without any major Capex. The other element is that they are carrying non-persistent oil, which in the views of the customers represent less of a pollution risk and so some of the ships are very suited for non-persistent oil trades and are serving contracts. So the assured answer is we expect we will have involvement in this segment for several more years over time as the contract run off we might match the fleet size to the declining contract base.

Once earliest, these will be the subjects to any?

That will not be for 3-4 years.

Okay. Bye. Thank you.

We will take our next question from Walter Lavato from [Stanford] Capital.

Good morning. I have couple of questions. Mentioned the inventories in the US being extremely low, what are the Asian inventories like on your AG East markets?

Probably the information that I have been reading is that the markets in Europe and Asia, they had actually been building a little bit in the last couple of months. Looking at it on a global basis all inventories are tied. Looking at it regionally, US inventories are very tied, Asia is not very tied and Europe is in the middle of the road.

Is there a reason in commentary that perhaps the storage is going on, they use tankers to store production, is that something you are seeing in the market?

We have not seen that. We read some reports indicating that may be Saudi Arabia is storing oil in different locations, but I am mainly reading it to be land-based storage in Saudi Arabia, they have land-based storage in one or two places in the western hemisphere. There is some discussion in some oil publications about inventories, we have not heard of it. Sitting on tankers idle anywhere, instead of sitting old to locations, if it is being stored outside of the Middle East. But I do not think that we have any significant short-term contraction supply as a result of that.

Also speaking a little about a month or two ago, you had mentioned that, sort of the level of opportunities in the secondary market for purchase of vessels of fleet have picked up. Is that versus what they earlier in the first half of the year, is that still the case or has the ships being dropped off because of the pick up in rate.

I would characterize the environment as being one of a variety of opportunities that continue to appear on horizon and that we continue to assess. Certainly as far as the resale individual ships, be they on order or they in service, that has not been a very significant traffic because I guess the order book is placed, the price of the ships has come down in the last 18 months. So people who ordered ships previously would have record a loss if they sold now. There is a lot optimism and thank that tomorrow is another day. If you have a ship delivering in 4-6 months, you would obviously hang on as long as possible before selling that ship to someone else at a loss, hoping the market would rescue you. Similarly in modern second hand ships there are not many that we see that are on hands, that really jumping to try to raise capital in a distress way. But there are some fleets that are rumored to be for sale and there are number of opportunities. So we continue to analyze that, I would say we would be disappointed if we do not get an opportunity to do some growth in this cycle.

Also a question on the gain on the sale of 350% on vessels, was the cash generation to you and what is that showed up in the income statement in what kind of transaction was that?

That transaction was a year ago in the third quarter 2001. This was a joint venture. We hired it from the full acquisition involving two single hall SwezMax tankers build in 1992 and 1990 built up from a single hall and we sold our 50% of assets to the partner. So that was a year ago.

Okay. I did not hear the maintenance Capex that you had in the third quarter.

It was $13 million.

Okay. Thank you very much.

Our final question from Charles [Richard] with Salomon Smith Barney. Please go ahead.

Hi good morning. Just a follow-up on this disposal question again and I had a second part related to that as well. The booking of the three vessels, could you just explain again where it went and the sales of place in third quarter of 2001, and what other types of assets or partial stakes do you have that are similar to this that are possibly still available for sale?

There is some confusion about that sale, it was not booked now, it was booked a year ago. It is in the comparative figures for September 30, 2001.

There is no $10 million disposal in the 3Q, 2002?

No, it is 3Q, 2001.

Okay. Okay. The other question that I was trying to get out was it seems that we had about a $1000 decline in the international TCE from last quarter, but we ended up with and again it is clearly consensus numbers, non- numbers that don't reflect the inconsistency of your business. Basically I was getting revenues and costs pretty much in line with the numbers reported, but I am still ended up a number that seem to be bit off, I was just wondering, I was going with the assumption that the $10 million number, that was related to this number reported safe, but in fact, there is absolutely no relationship at all. So over looking at this, I just want to clarify, over looking at this $1000 lower TCE resulting in about $0.7 drop in EPS from the second quarter. Will that be correct?

That is roughly correct. We had some in our other income we had some slightly more positive items in there than we normally would that is more or less correct. You could expect other income interest, which is mainly made up of income tax expense that number to be a little bit larger negative number in the next quarter until we do something with our tax planning efforts to reduce that number, but this quarter was slightly unusual but only by a couple of million dollars, $2 million or $3 million, positive relative to the last couple of quarters.

Okay. Thanks.

We do have a follow-up question from Walter Lavato from [Stanford] Capital.

Just a quick question. The expense line, I guess was in line with some historic levels, but in the second quarter this year, it was $5 million less. What exactly is and what cause the second quarter to be so low?

I guess these expenses would be forward expenses and phone calls expenses. Fuel has become lot more expensive this quarter than previous quarter.

Okay.

We do have another question from John Chaput with J.P. Morgan.

Hi guys, I just have a quick question about the UNS fleet. Peter you mentioned in your remarks that there is some higher maintenance cost in the third quarter that was true for the UNS operating costs are. Going forward, shall we expect that to go back down to the 5.5 to 6 million for quarter level. How did you accelerate some of the fourth quarter costs into the third quarter and we can expect that fourth quarter cost to be even lower than the historical averages?

It is hard to, you cannot number down exactly from quarter to quarter obviously that will fluctuate, it is smaller fleet, though it is easy to get a low bit of facility to get a number depending on the timing of the repairs and maintenance. Part of that was driven by the appreciation of the kroner but the way our accounting works this looks like hedge came through effectively in the other income number, so I would not expect operating expense to stay out of higher levels in UNS, I would expect them to come back to more average level of the last four quarters.

Okay. We have seen some modest declines in the last few quarters in the UNS revenue year over year. How many of these vessels has had time charters come out off, or how is it the time charter business, did you had a lot of time charters coming off from the last couple of quarters, you had to book new contracts average at lower rates, or is there issues involved?

There really has not been any shuttle tanker contracts ending and renewing in lower rates, There was one ship which was trading I the conventional shuttle tanker market in the UNS fleet, which was earning very high numbers in 2001, which is now earning much lower market lowers. That would be the main factor I think.

Okay. Thanks Bjorn and Peter.

That there was an older Panamax tanker, which is scheduled for conversion and for using of projects outside the North Sea incidentally.

There are no further questions at this time, I would like to turn the conference back otherwise you, host for closing remarks.

Thanks again for your participation and active questions. It is always very stimulating and we will talk to you again in the quarter.

That does conclude today's conference. Thank you for your participation and you may now disconnect.