Teekay Corp Ltd (TK) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Teekay Shipping Corporation First Quarter 2003 Earnings Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question and answer session. At that time if you have a question, you will need to press *1 on your touchtone keypad. As a reminder, this conference is being recorded. Now for opening remarks and introductions, I would now like to turn the conference over to Mr. Bjorn Moller, president and CEO of Teekay Shipping Corporation. Mr. Moller, please go ahead, sir.

Before Mr. Moller begins, please allow me to remind you that various remarks we may make about future expectations, plans and prospects for the company and the shipping industry constitute forward-looking statements for purposes of the Safe Harbour provision under the Private Securities Litigation and Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our annual report on Form 20F dated March 31, 2003 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 gentlemen. Thank you for joining us today. This morning we are reporting a very strong quarter for Teekay and for the tanker market in general, driven by healthy fundamentals and augmented by a series of short-term factors. For the quarter ended March 31st, 2003, we reported net income of $53.6m, or $1.32 per share, net of a write down of $31.7m relating to the sale, or planned sale, of a number of our older vessels, as well as a market-to-market write down of our 10 percent holding in NAT. Excluding this write down, our EPS would have been $2.10.

As we closed our acquisition of Navion at the end of the quarter, our published figures exclude their results. Had these been included with Teekay’s income statement, it would have added approximately $1.00 per share to our first quarter figures. Thus, Teekay’s earnings for the quarter, before non-cash write downs, and including Navion’s would have been $3.10 per share.

This morning I will review tanker market dynamics and Vince Lok, our VP of finance will discuss our financial results. We also have Peter Antturri, our CFO and now president of Navion joining us in case we have any questions for Peter.

So turning first to tanker demand, we experienced strong demand throughout the quarter. Global oil supply grew steadily, averaging 79m bpd, which is up 1.4 percent from the December quarter. The majority of this increase came from Middle East OPEC countries providing an additional positive ton/mile impact on demand. March oil supply is estimated to have reached a record 80m bpd as returning Venezuela production and high production in Saudi Arabia, Kuwait and the UAE more than outweighed the loss of Iraqi and part of Nigerian oil production.

Oil demand and underlying tanker demand factor was also strong in the first quarter. Global oil demand rose by 2.4 percent from one year ago, with U.S. oil demand up by 3 percent and Asian oil demand growing by more than 5 percent.

The performance of the tanker market over the next few quarters will largely depend on whether OPEC maintains a high level of production. IEA figures suggest that OPEC has room to do this, although perhaps not quite at current levels. The data indicates an average of 79m bpd oil supply in the first quarter, and projected demand for the balance of 2003 of an average of 78m bpd. So if current supply levels remain unchanged, there will be 1m bpd surplus oil supply for rebuilding of depleted inventories. The IEA’s most recent figures show that at the end of February, OECD industry stocks were down by 230m barrels from one year earlier. Stocks would have to be replenished at an average of 850,000 bpd for the rest of the year just to reach inventory levels of one year ago.

Forecasted increases in non-OPEC production are expected to provide some of the oil for this inventory replacement. With no slack in the global oil supply system outside of the Middle East, however, there should be room for OPEC to maintain relatively high production levels on average for the rest of the year and thereby continue to drive a high level of tanker demand.

At a meeting today, OPEC is discussing cuts to oil production in response to a seasonal drop in oil demand. A cut would reduce tanker demand in the near term, however OPEC would likely have to reinstate higher production levels later in the year to meet winter oil demand.

Turning to tanker supply, according to Clarkson’s, the world tanker fleet grew by 2 percent during the quarter. Deliveries of new capacity was 8.4m tons and with scheduled total deliveries for 2003, this is likely to be a representative quarterly figure for the rest of this year.

Scrapping in the quarter fell to 2.5m tons, due to the very strong freight market. New tanker ordering rose to 14m tons, from 7m tons in the prior quarter. The order growth at the end of March stood at 65m tons or 20.7 percent of the existing fleet, up from 59m tons at the end of 2002.

In the Aframax sector, the fleet grew by 19 units to 660 ships; 25 ships delivered in the quarter while six ships were deleted. New orders were placed for 20 Aframax resulting in an order book of 125 ships, or 19 percent of the fleet, down slightly compared to the previous quarter.

Looking at overall tanker supply, we continue to expect a gross supply inflow of some 10 percent this year. On past conference calls, we’ve discussed reasons why tanker supply and demand on the whole may remain tightly balanced, despite this relatively high delivery figure, even if associated with periods of rate volatility. During this past quarter, we saw some very promising developments on what is probably the most important of these factors.

In late March, the EU Transport Council approved new regulations that would accelerate the phase out of all single hull tankers. If passed by the EU Parliament in June, the law would take effect on July 1, 2003 and would result in an estimated 41m tons of tankers, some 13 percent of the world fleet, immediately being banned from trading in EU waters, with a further 90m tons to be phased out by 2010.

As a stand-alone, regional set of regulations, this would create stratification and reduce efficiency within the world fleet. And what may be even more significant, the EU has also proposed that these same regulations be bordered on at the IMO meeting in July 2003. Adoption by the IMO would result in a phase out of the same magnitude as in the EU, but on a global basis. Needless to say, this would have an immediate, dramatic effect on global tanker supply, benefiting owners of double hull and modern, single hull tankers. Industry observers are expressing confidence that the new regulations will become law in the EU this summer. It is too early to assess the probability of an adoption by the IMO, but anecdotally, governments in key regions outside of Europe are keen to follow suit if the EU goes ahead with its proposal.

Looking at the freight market in the quarter, tanker spot rates enjoys an excellent quarter across all segments. According to Clarkson’s, Aframax rate in the inter-Pacific rose from $30,000 per day at the beginning of January to $45,000 per day in late March. [Terrafuse gulf] rates were unusually volatile, ranging from $10,000 per day to $75,000 per day in the quarter. Teekay’s realized average rate for the quarter was $33,900 per day on a Clarkson basis. We achieved a $2,200 per day premium over Clarkson’s AG East groups with our Inter-Pacific fleet, whereas we realized a negative spread of $3,200 per day against Clarkson’s [Terrafuse gulf] with our Atlantic fleet.

As we’ve seen in other quarters where rates have risen to very high levels, the normal translation from Clarkson’s figures to rates realized by our fleet becomes less reliable due to the exaggeration of factors such as timing differences are higher, or waiting time. This is particularly true during periods of high volatility. For example, our $3,200 a day deficit against Clarkson’s in the Atlantic is calculated by using the customary estimate of two week’s lag against Clarkson’s [Terrafuse gulf] rates. This deficit will be transformed into a $900 per day premium if using just a three week lag. The key point is, except for occasional minor changes to our operating leverage due to changes in fleet size from time to time, the rule of thumb that we’ve provided in the past for projecting Teekay’s earnings remains valid in all but the most extreme markets.

During the first week of the current quarter, we’ve seen a sharp raised debt on most Aframax routes, but rates are gradually recovering to the mid to high 20’s per day. This volatility in rate indicates that the market remains finely balanced. In the near term, rates may be negatively impacted if OPEC announces cuts to production. I will now hand it over to Vince who will review our financial results. Vince.

Thanks, Bjorn. Teekay’s first quarter results reflect a strong tanker rate that carried over from the previous quarter, and continued to strengthen during the first quarter of 2003. Net income for the quarter was $53.6m, or $1.32 per share, which is net of a $31.7m write down and the carrying value from seven of our older vessels and market securities, namely our investment in NAT. Excluding the write downs, net income was $85.3m, or $2.10 per share.

In looking at the per day results for the quarter, and comparing them to the previous quarter, I will refer to the table on the first page of the press release and I will first look at the international tanker fleet. The number of revenue generating ship days decreased in the first quarter due to fewer days in the calendar quarter; an increase in off hire and waiting times; a lose of the Alliance Spirit; and the conversion of the Suez Naz tanker prior to commencing its shuttle tanker contract.

The international tanker fleet TCE, calculated on a calendar day basis, was $29,609 per day. That is up almost $11,000 per day from the fourth quarter. Vessel operating expenses were $5,545 per day in the quarter, an increase of $400 per day from the previous quarter. [OPEC’s] in the fourth quarter was lower than normal, due to low repair and maintenance activity in that quarter. The [OPEC’s] for the first quarter is more representative of our run rate for the current year.

Our efficient spot affermax operation generated over $21,000 per day in cash flow per ship, per day in the quarter. That is almost double the $10,700 per day in cash flow per ship day generated in the previous quarter. The Oboe fleet also benefited from the strong tanker rate, generating a 365 day TCE of almost $18,000 per day and roughly $8,100 in cash flow per ship, per day in the quarter, compared to $2,200 per day in the last quarter.

For the UNS fleet, operating cash flow decreased to about $14,700 per day in the first quarter from about $16,600 per day in the fourth quarter, mainly due to lower operating expenses in the fourth quarter due to unusually light repair and maintenance activity. Operating cash flow for the first quarter of 2003 for the UNS is more representative of what it expected from the UNS fleet in the near term. Operating cash flow for the Australian fleet remained virtually unchanged from the fourth quarter at about $14,500 per day.

Turning next to the income statement on the fifth page of the press release, and running down to March 31st quarter figures and comparing them to the December 31st quarter, as discussed, net revenue increase due to the dramatic increase in spot tanker rates. OPEC’s was up about $2m from the fourth quarter, due primarily to lower than normal repair and maintenance activity in the fourth quarter, namely as the international and UNS shuttle tanker fleet.

Depreciation and amortization remained unchanged at $39m, as the increase in amortization from vessel deliveries were offset by the loss of the Alliance during the first quarter. Included in depreciation expense is $6.4m in dry dock amortization in the first quarter, compared to $6.6m in the fourth quarter.

G&A expenses increased slightly to $14.7m in the first quarter, compared to $14.4m in the third quarter.

Net interest expense was virtually unchanged as well from the last quarter at $13.5m in the first quarter, and EBITDA to interest coverage increased significantly from 5.8 times in the previous quarter to 9.5 times in the first quarter. The results for the quarter included a $26.8m write down in the carrying value of seven of our older vessels; $13.9m of those write downs relate to the three vessels that were sold in April, and the remaining $12.9m relates to four of the vessels which we anticipate selling during 2003.

Other losses of $9.6m includes the $4.9m write down and a carrying value of our 10 percent investment in NAT which we acquired as part of the UNS acquisition in March, 2001. The remaining $4.7m in other losses relates mainly to income tax expense, foreign exchange and minority interest expense, partially offset by joint venture incomes and a number of miscellaneous items.

With regard to our balance sheet, net debt to capitalization dropped slightly to 35 percent by the end of the first quarter, from 36 percent last quarter. Capital expenditures for the first quarter of 2003 totalled $68m, including $51m for new building instalments, $5m in dry docking costs and the remainder relating to vessel conversions and upgrades.

Forecasted capex for the next two years is roughly $200m for the remainder of 2003, and $215m in 2004. These include a rough estimate of $39m in maintenance capex for the remainder of 2003 and for 2004.

Next quarter, we’ll be revising the format of our earnings release to incorporate Navion’s results. As previously mentioned, although the effective date of Navion’s acquisition was January 1st, Navion’s results will be consolidated with Teekay’s from the closing date, April 7th. As a result, the cash flow generated by Navion from January 1st to April 7th will effectively reduce our purchase price for Navion. The acquisition was financed with a one year, $500m debt facility together with the existing cash and credit line. The one year facility will be replaced with a five year, $550m revolving credit facility which we expect to have in place by the end of May. I will now turn it back to Bjorn to conclude.

Thank you, Vince. Let me close with a few other highlights. We successfully completed the Navion acquisition in early April and as mentioned earlier during this presentation, Navion has produced strong results during the quarter due to very high conventional tanker weights and a high utilization rate in its shuttle fleet. At this time though, our previous guidance remains unchanged, namely approximate earnings accretion of $1.00 per share annually from the offshore loading business, and with Navion’s conventional tanker fleet breaking even in a typical mid-cycle, Aframax market.

Secondly, six new building tankers due to join our fleet by the end of 2003 and two converted Suezmax shuttle tankers will all enter profitable fixed rate charters at an average duration length of more than 12 years. These eight ships alone will add 55 cents per share annually to Teekay’s earnings.

Finally, we continued our fleet renewal program in the quarter by exercising attractively priced options to build a further haul, high specification affermax tankers for delivery in 2005. This takes our order growth to a total of 15 ships for delivery over the next three years. We have also sold three older vessels over the past month as part of this renewal program, and as Vince mentioned earlier, we anticipate further ship sales this year.

The combined Teekay and Navion fleet, owned and in charter fleets excluding new buildings on order, have an average age of only nine years. The addition of our new buildings will reduce the average age of our fleet by one year. Even without the beneficial impact on percentages from possible further sales of single hull tonnage, approximately 70 percent of Teekay’s combined fleet will be double-hull when our new buildings join the fleet.

Thank you for taking the time to join us today for our conference call, and we will now be happy to answer any questions you may have.

Thank you. (Operator instructions) We will take our first question today from Link Warden with H.G. Wellington.

Okay, among the write downs there was a 12 cent per share in recurring value of marketable securities. Could you give a little colour on what that entailed and what securities were involved?

The securities is our 10 percent investment in Nordic American Tankers, or NAT. We acquired that as part of the UNS acquisition. That investment has been, market to market, on our balance sheet every quarter and we are just taking that to the P&L this quarter under U.S. GAAP rules. So actually, there is no impact on our book value for that particular write down.

In terms of the vessel write down, as we mentioned, three of those vessels were sold in April and that resulted in about a $13.9m loss on those, a book lose. That is related to four vessels that we anticipate on selling in 2003.

But that was the other -- that was the 66 cents, the seven vessels, wasn’t it? Yes?

That’s right.

But the 12 cents was a write down, a 10 percent write down, in Nordic America Tankers?

That’s right. It’s not a 10 percent write down, it’s just writing down to market value.

But your 10 percent interest in.

That’s right.

Okay, thanks.

Our next question comes from Magnus Fire with Jefferies and Company.

Good morning. A couple of questions, if I may, starting with the Navion acquisition. You said you are going to deduct the cash generated during the first part of the year. What -- I don’t know if I heard it right, but did you mention the dollar amounts of that cash generated?

It is roughly about $50m.

Fifty million dollars? Okay. And second, you know, just on guidance going forward, looking at the Aframax fleet, I guess utilization averaged 94 percent for the fourth quarter and 90.6 percent in the first quarter. What should we expect for the second quarter? Should we expect to maintain the first quarter level or return to the fourth quarter level?

Hi Magnus. The percentages you are referring to, what percentages are they? The utilization percentages?

Right, for the international tankers. I guess to put it differently, the revenue generating ship days were at 4,731 for the quarter. Should we --

I am just looking for the amount of ship days to calculate. I guess there were a couple of things that affected that that would not be recurring. Vince, do you want to tell him about that?

Well obviously we lost the Alliance Spirit on February 1st, in the first quarter. So it would be an additional 30 days that you wouldn’t have in the second quarter. And for the three ship sales, one of those delivered April 9th and the other two delivered just yesterday, so I guess you could take that into account when you are doing your forecast for days of second quarter.

Okay, and just commenting on the rates currently. You know, we are almost through April right now. Can you comment on what sort of averages you’ve seen for your fleet so far on the AGA’s versus the Caribbean Atlantic?

I guess I will talk to the open market. It’s been quite volatile. We saw rates -- the across U.K. continent rate went from 75,000 to 42,000 in the last two weeks of the last quarter, and the first week of this quarter they were at 18,000. Then, they are back up at 25,000. I would sort of say right now, use the mid-20’s rate. That would probably be slightly conservative, but it is, if rates stay where they are now, that is probably a reasonable estimate.

That’s all I had. Thank you.

Thank you, Magnus.

(Operator instructions) We will now take a question from Martin Rover with MSR Capital Management.

Thank you very much, operator. I just wanted to get a little more colour on how you see this EU regulation developing. You say here that it may take effect as soon as two months from now, and 41m tons and then eventually 90m tons are just enormous numbers given the size of the world’s fleet. Do you think this will just shift the older vessels to other parts of the world for a period of time, or actually force them out of the trading totally?

Hi Marty. I think that -- let’s not underestimate the dramatic nature of this regulation. If it is in the EU only, clearly older ships will go elsewhere, there is no doubt. I’d say the trade around Europe is kind of mixed. There are big pockets and there are some trades with older tonnage, so the impact would be felt. Generally there would be a period of disruption then there would be kind of a new normalization of new trading patterns.

What would happen is though, you would have less slack or flexibility in ships and moving towards pockets or bursts of activity. That inefficiency will create more volatility and probably a high average rate. That is if it happens in the EU alone, and it is very dramatic -- 41m tons banned in three months time is hugely dramatic.

What would be even more dramatic, as you can imagine, is if it became a global regulation. What is interesting is that in the past the IMO has managed to talk the EU out of its rules, pleading global regulatory environments. This time the EU decided to say, I’m not going to be talked out of what I’m doing, so they’ve gone ahead. Now the ball is sort of in the IMO’s court. If they want to have global regulations, it is up to them to follow the EU. If they don’t, they have a pretty good chance that the U.S., Japan and Australia and other countries are going to follow the EU unilaterally. So the IMO has kind of had their backs to the wall a bit and we expect that there is a pretty good chance that they might have to adopt this.

Just a follow up. Given the magnitude of the obsolescence that this will force, do you think it is going to be phased in over a longer period of time, or there is going to be some significant modifications? Or it really is about to take effect in July?

Well, every indication including comments yesterday from a report from somebody, a politician in the EU who is sort of charged with developing the recommendation to the Parliament, again they are saying they are fully backing the Transport Commission’s recommendation, which is this is an iron curtain going down on the date of this regulation for 41m tons of tankers, and then over the next two years there is another 7m to 10m tons, and then there is sort of a bit of a lull, low numbers being phased out between 2006 and 2009, and then 2010 you’d have a huge number again.

That is a very lumpy approach and it is not particularly logical, yet they seem determined to pursue that. I guess what is hurting them is that last time they changed their mind after the [Erika] and the Prestige occurred, and had they stuck to their guns after the [Erika] the Prestige would not have been trading in Europe. That irony is not lost on European politicians.

Thank you, that is very helpful.

Our next question comes from Neil Swami with Delphi Management.

Hi. Could you comment on your insurance rates? Were they up, down?

Well we have two types of insurance. We have machinery insurance which Teekay’s insurance is fortunately locked in on a four-year, fixed rate policy that was entered into in 2001 which still runs, so we are benefiting and enjoying a competitive advantage compared to many of our competitors who have been renewing insurance annually on that sector. That is about 50 percent of insurance costs for tankers. The other sector is basically liability insurance, or P&I insurance, as it is called. That renews annually and we have seen increases of 50 percent, 25 percent to 50 percent on P&I insurance in line with what other owners have experienced. I think that is the best guidance I can give you.

Regarding the EU issue, if this actually goes through, you say 70 percent of your ships are double hull. Would you be able to then use the other 30 percent elsewhere and actually benefit by gaining share?

Two things on that. The majority of Teekay’s single hull ships, the vast majority of our ships are under 15 years of age, so they actually will be the last to be phased out under this regulation, so they will enjoy, if you will, a vacuum created by older tankers leaving. So we definitely stand to benefit from the phase out of ships of 20 to 23 years of age that would occur right away. So we generally have a 20 year kind of useful life of ships in our fleet at the maximum, even though our ships trade to the age of 25, we sell them to other operators who take them onto more marginal tanker routes.

Basically, with the exception of a couple of our ships, they will all be able to trade through these regulations. We have net beneficiaries by a wide margin.

Because you are a more modern fleet?

Much more modern, yes.

When you said mid-20’s rates, that is for the international, for the Aframax?

That’s correct. Of course, in the Navion fleet, the Navion conventional fleet is somewhat more diverse, if you will. It ranges from 15,000 ton product tankers to VLCCs, but the guidance we’ve given on operating leverage has kind of adjusted the average Navion fleet to an Aframax equivalent. It is probably good enough for now, as far as guidance is concerned, to focus on the Aframax fleet and the Aframax owners.

That guidance was like, one dollar for the year, right?

The guidance is, for Navion’s offshore loading business, one dollar per share, and their conventional fleet breaking even in a mid-cycle environment. The other way of calculating Teekay’s earnings, just to restate that, is that net income breakeven occurs in about a $12,500 a day Aframax market, and for each $1,000 day movement in rates, our earnings increase by -- it was 70 cents per share, it is probably down to 68 cents per share now that we’ve sold a few vessels. So if you assume 68 cents per share increase in earnings annually for each $1,000 per day, that rate exceeds $12,500. That is the earnings formula for Teekay.

Any impact from West Africa, Nigeria, Venezuela?

There is clearly an impact. The impact is reducing slightly now that Venezuela is ramping up oil production, but it is difficult to get hard data. It looks as if they still have not regained their production levels from prior to the strike in December, and we estimate maybe they are running around 2.5m bpd down from 3.1. Nigeria, in the last few days we’ve seen a return to gradual increase in production, but they are still running short. That is having, overall, some impact because that, combined with Iraq’s exit from the production is allowing Middle East OPEC countries a slightly more positive view on supply of oil balances, keeping balances high, which is what I guess the tanker market wants.

Thanks.

Our next question comes from Harden Versailles, with [Prince, Race and Zoyo].

Hi, this is Harden Versailles, it is [Prince, Race and Zulu]. I had a question that actually relates to something, Bjorn, you said regarding your new building schedule. Actually that is my question. I am interested in the timing of delivery of the six Aframax and two Suezmax conversions that you have slated for this year.

The Suezmaxes are actually just completing conversion roughly around this time, and will be delivering on charters in Brazil, so they will be on station by mid-year. We have one additional shuttle tanker delivering in July, I believe it is, and will be positioning to the North Sea, where it will enter charter probably at the beginning of the fourth quarter. Then the remaining five vessels are the Coneco Philips Charters, the ships are delivering in the fourth quarter and will need to reposition so they will probably be on station in the first quarter of 2004, but they will all be delivering by the end of this year, we are anticipating. So it is not necessarily going to contribute 55 cents per share this year, but it will provide annualized lift in EPS above where we are at the minute.

And as well, a question of clarification on your Navion guidance. What is breakeven for the conventional fleet?

It moves around a bit, just because they have a fairly active chartering program using third-party tonnage in the system, so the fleet moves around a bit in size and the blend of smaller and bigger ships changes as well.

What we are using, we just sort of got our feet under the desk there, but what we are using for guidance at the minute is, if you take a typical $18,000 a day mid-cycle Aframax rate, that will be a reasonable proxy for where that fleet would break even. Of course you could have occasional disconnect between how VLCC rates develop and product tanker rates develop, and with Navion having both types of ships, that may vary from time to time, but I think you can use that for now. It is built in, when we provide our operating leverage of 68 cents or 70 cents per share for each $1,000 per day of our $12,500, that of course has blended into it the Navion numbers. That is a forward-looking number.

Regarding the write down of your investment in Nordic American, that is a non-cash, it just flows through your income statement according to GAAP. How often is that? Do you do this every quarter?

Every quarter, market to market on the balance sheet, but we don’t take that to the P&L. This time we took a one-time transfer to the P&L. So unless there is significant decreases in the share price going forward, that would imply a permanent trend and we wouldn’t expect to have a full write-down at this time.

And in terms of dry docking amortization going forward, is the number you gave, the $6.4m for the first quarter a good number to assume?

There would be extra increase probably due to the addition of Navion going forward. That probably won’t be a big number, Navion’s own fleet is probably about 10 or 11 ships.

Thanks.

Mr. Versailles, did you have anything further?

No that’s all, thanks.

we will now take our next question from Walter Levado with Passport Capital.

Good morning. I just had a question on what your plan is with Nordic American.

It is a share holding. We own 10 percent through this position. We are not normally in the world of minority shareholders and passive investments, so it is not a strategic investment for us. On the other hand, it is not a bad investment either, so we will manage that. We’ve been selling down over time, gradually, in that share.

Thank you.

Thanks.

We will now take a follow-up question from Martin Rover with MSR Capital Management.

Thank you. My question regards the offshore loading business. Thanks very much for putting that discussion on page 17 in your annual report, for people like me that really don’t know much about it. In that discussion you mentioned that your investment in this segment will grow to more than $1.5b. What kind of returns do you expect that would yield on average, over a period of time? What is a reasonable range of either cash flow, return on equity, whatever number you feel comfortable talking about?

I guess the best way to look at that is our fixed rate, long-term business which has been growing very rapidly, is largely made up of the shuttle business. There are a number of other ships such as the five Coneco-Phillips ships that I mentioned which represent about a $250m to $300m investment. Out of the type of investment you are talking, the average return on equity that we project from our long-term fixed rate business is about 20 percent, and so you can assume that that is pretty evenly distributed across the various types of long-term business that we have. That is very proactive.

So does that apply to the whole $1.5b, or just the segment? I am sort of confused.

That is return on equity, I guess. We typically can carry more leverage on long-term fixed rate business because the stable cash flow that was generated from that, so we will often use about a 75 percent leverage on that kind of project.

Thank you very much.

Thank you.

We will now take our final question, a follow up from Mr. Neil Swami with Delphi Management.

Hi. Regarding the scrapping, you said that if the EU regulations went through you expect 13 percent scrapping. Now, what would be the normal scrapping rate if the EU regulation could not go through this year?

I guess just to clarify, we are saying that 13 percent would be banned from trading in the EU and of course if it were done by the IMO, 13 percent of the world fleet would be banned by all countries that are involved in that, which is basically the whole world. Whether the ships would be scrapped or find use for floating storage, we don’t know the answer to that.

Typical scrapping varies significantly. It depends on the tanker market, that is sort of what drives the commercial lifespan of tankers. What is increasingly been happening is technical obsolescence as well as charter discrimination has driven up scrapping and reduced the average age of scrapping gradually in the last couple of years. So typically ships scrap at 23 to 25 years of age. You are seeing scrapping movement anywhere from -- in the last few years we’ve seen from 10m, 15m, 18m tons scrapping annually, even in very strong markets which is quite significant.

You know, if you obviously had marginalization of a large number of ships, you’d see a lot more scrapping.

Thanks.

At this time, Mr. Moller, there are no further questions. I will turn the conference back over to you for any additional or closing comments.

Thank you very much. We appreciate you listening in today and we look forward to talking to you next quarter. Have a great day.

That does conclude today’s teleconference. We’d like to thank everyone for their participation and wish everyone a good day. At this time you may now disconnect.