Teekay Corp Ltd (TK) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Teekay Shipping Corporation Second Quarter 2003 Earnings Result 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. 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. Bjorn Moller, President and Chief Executive Office of Teekay Shipping Corporation. 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 Harbor provision under the Private Securities and Litigation 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 20-F dated March 31, 2003 which is on file with the SEC.

I will now turn it over to Mr. Moller to begin.

Thanks Jerome. And good morning ladies and gentlemen. Thank you for joining us today on today's call. We're pleased to report on another very good quarter for Teekay Shipping. For the quarter ended June 30, 2003, we reported net income of $96.9m or $2.39 per share, our third highest quarter ever.

Our results were boosted by the Navion acquisition which was completed earlier in the quarter and whose figures are included for the first time. Navion contributed to our net income with $28.8m or 71 cents per share.

This morning, I will provide an overview of key dynamics in our two business segments that is our spot tanker business and our long-term fix freight business. Peter Evensen, our new Chief Financial Officer will take you through our financial results and Vince Lok, Vice President of Finance will join us for the question and answer session. I'll begin this morning's discussion with an overview of Teekay's conventional spot tanker segment.

With the addition of Navion, our spot tanker fleet grew during the quarter from 75 to 100 ships, including vessels on order. Of 70 ships Aframax tank fleet remains the corner stone of our spot market franchise, but Navion has expanded Teekay's involvement in larger crude oil carriers and in the product carrier market.

Our spot business benefited from strong tanker charter rates in the quarter producing $126m in EBITDA compared to $36.4m in the previous quarter. I'll briefly review the demand and supply dynamics that influenced our spot business in the quarter and the resulting freight market. Turning first to tanker demand, oil demand growth and underlined driver of tanker demand slowed in the second quarter after a strong first quarter.

According to the IEA, global oil demand declined from the March quarter in line with typical seasonal demand pattern or what's up 0.8% from figures one year ago. Global oil supply, the most direct driver of tanker turn-mile demand gradually declined during the quarter and resulting in an average supply of 78.1m barrels per day, down 0.9% from the previous quarter. Most of the decline was a result of OPEC and in particular Saudi Arabia reigning in production to comply with lower quarters.

Having come through the June quarter, which is typically the weakest part of the year in terms of oil demand, we look ahead to the next three quarters of which the IEA forecast average oil demand of 2.5m barrels per day or 3.2% above June quarter figures. And with global inventories still well below normal levels, this pick up in oil demand will require equivalent production increases.

The leverage facts are normally used to translate oil demands to tanker demand points to an increase in tanker demand of around 5% from levels in the June quarter. The Middle East OPEC countries are likely to supply the majority of this incremental oil from that significant spare capacity; tanker demand would grow even more. We believe that the stage is set for strong tanker demand beginning late in the third quarter and extending through to the first quarter 2004.

Turning to tanker supply, the June quarter provided a surprisingly positive result, namely, a decline in the world tanker fleet. According to Clarkson, the world fleet declined by 0.4% in the quarter, deliveries of new tankers slowed to 6.7m tons while scrapping and other deletions increased to 7.9m tons. At an annualized pace of 10% of the world tanker fleet, the amount of tonnage scraps in the quarter was remarkable in and of itself. Even more remarkable is that this level of scraping occurred during a strong freight market.

Although assisted by the current very high prices for scrap steel, this does underline the impact on ship owners of the pending regulatory phase out of old ships, and the effect of chartered discrimination on the cash flow of such ships. New tanker ordering slowed in the quarter to 10.7m tons from 14.8m in the prior quarter. The total order booked at the end of June stood at 69m tons or 22% of existing fleet, up from 21% three months ago.

In the Aframax sector, the fleet grew by three ships to 663, the 14 ships delivering and 11 being deleted. New orders were placed with 20 Aframaxes the quarter bringing the order booked to 132 units or 20% of the existing fleet, up from 19% three months earlier. The tanker supply outlook is shaping up to be very interesting as a result of the regulatory developments over the past month. As wildly anticipated in June EU parliament passed laws had accelerated the phase out of single-hull tankers from European waters and create strict inspection machines for older ships. These laws are expected to take effect later this year.

Last week the IMO, the global marathon governing body agreed to phase or accelerate out of so called category one tankers, in tankers build products in 1982 thereby following the EU. In addition, the IMO considered an accelerated phase out of the world remaining single-hull tankers know as categories two and three. But in the end differed its decision this issue until it's meeting next December in order to more carefully consider alternative time schedules for this phase out.

As a result of the July IMO decision, approximately 37m tons or 12% of the world fleet will become obsolete and require replacement by mid 2005. Assuming annual in tanker demand of 2.5% the market will require an additional 16m tons of tanker capacity by mid 2005. And this adds up to a total requirement of 53m tons tonnage replacement by mid 2005 in order to maintain status quo in the fleet.

We scheduled deliveries between now an mid 2005 locked in at 55m tons, the prospect of sizable fleet growth in the near term which some observers were predicting due to the size of tanker order book now seems less likely. In our view, the new IMO regulations have set the stage for a continuation of the tight balance tanker supply pick up for at least two more years.

Looking beyond the IMO phase out in mid 2005, the further 30m tons of category two tankers will be the scrapping zone when average age of over 22 years by the end of 2006. This is particularly relevant because of the TIDA [ph] inspection machine soon to come into effect for older tankers. Already, before the condition assessment scheme has come into effect, almost one-third of tankers sold for scrap this year were under 25 years. This additional lot left of old ships has the potential to offset new tanker deliveries through 2006.

The lead-time for new building berth availability had grown during the past six months and is now three years or more with berth space becoming tight before mid 2006. Shipyard capacity is being rapidly absorbed by very strong demand for container ships, LNG carriers and other types of ships being ordered to meet growing international sea borne trade. This is placing a limit on the space being allocated to the construction of tankers.

Turning to the freight market, the tanker freight rates were relatively strong in the June quarter or be it below the first quarter's very high levels. Rates did, however, gradually slide down almost tropic [ph] bottom mainly due to the ripple effect of production cuts in the Middle East. Aframax rates in the Indo-Pacific were representative of this beginning the quarter at $38,000 a day but dropping to $19,000 per day by end of June.

During the first three weeks of July we've seen a further weakening in rates across all sectors of the crude oil market. Rates are not expected to recover until all production levels grow which as stated earlier we expect to occur later in the quarter. In past quarters' earnings conference calls we've discussed our Aframax day rates against Flux [ph] and AGE and carry-it yourself numbers. We are more diversely compositioned and its broader geographic distribution after the addition of the Navion fleet. This comparison has become less relevant as a royal firm [ph] particularly during periods of high volatility in charter rates.

As we become more familiar with the impact on our earnings of the Navion spot business, we shall develop a revised guideline that can be used by you to estimate Teekay's earnings based on changes in the open tanker market.

Just touching briefly on changes in our spot tanker fleet in the quarter. There were number of changes which were all part of ongoing fleet renewal. We exercised options for four Aframax new buildings with delivery in 2005 bring this series of ships to eight. We took delivery of two in-chartered of new buildings, an Aframax and the VLCC.

We entered into two additional Aframax in-chartered transactions of two to three year duration, due to commence later this year. And we exercised options to expand existing in-chartered on two Suezmax tankers and one large product tanker. These are business to our fleet to support our increase tonnage requirement arising from the Navion acquisition.

During the quarter, we sold three older vessels built between 1983 and 1987. Early in the third quarter, we sold a further three Aframaxes built in 1985-86. And two of these ships have already delivered to the buyers and the third vessel will change hands in September.

Next, I'll provide a brief update on our long-term fixed rate contract segment. During the quarter, this segment produced $56.2m of EBITDA compared to $22.9m one year ago. Our shuttle subsidiary UNS successfully completed the conversion of two Suezmax shuttle tankers, which has been delivered 15-year contract to Brazil. Between August 2003 and January 2004, we expect six new ships with long-term employment to join the fleet.

As Suezmax shuttle tanker delivering into the UNS fleet in August and three Suezmax and two Aframax tankers, conventional tankers delivering on 12-year charters to ConocoPhillips between September and January. EBITDA from these ships is expected to be $35m per year and brings the number of ships in this segment to 51. We're currently forecasting $260m of EBITDA form our long-term contract segment in 2004. We continue to pursue interesting new projects and expect to add to this contract portfolio going forward.

I'll now hand it over to Peter to discuss our financial results. Peter.

Thanks, Bjorn. Our second quarter was a very good quarter both measured with and without the acquisition of Navion. As previously mentioned, Teekay completed this acquisition of Navion in April, and now our results include a full quarter of Navion from April 1st. Net income for the quarter was $96.9m or $2.39 per share, which includes the $3.8m write-down in the carrying value of three of our older vessels that were sold in July. Excluding this write-down net income was $100.7m, or $2.48 per share for the quarter ended June 30, 2003.

As a consequence, we have redefined our segments based upon their cash flow characteristics. The spot tanker fleet revenues are more variable reflecting the inherent volatility of the spot tanker market, although long-term fixed rate contract fleet revenues are stable and much more predictable given the attributes of these contracts.

Looking at the segment results for the quarter and comparing them to the second quarter of 2002, I'll refer to the operating result section beginning on the second page of our press release. Our long-term fixed rate contract fleet segment includes the company's shuttle tanker operations both Navion and Ugland Nordic Shipping, FSO vessels and LPG carriers and certain conventional crude oil and product tankers on long term fixed rate contracts.

This segment generated $56.2m and EBITDA during the second quarter compared to $22.9m in the second quarter of 2002, primarily due to the inclusion of Navion shuttle tankers fleet. Navion shuttle tanker business returned 22 cents in the second quarter is more profitable on net income basis than our previous guidance of 25 cents per quarter because higher utilization of the shuttle tanker fleet cost by favorable seasonal factors.

As Bjorn mentioned, our long-term contract fleet will increased by early 2004, with the delivery of five conventional crude oil tankers to ConocoPhillips and UNS to Aframax shuttle tanker.

Turning to the spot tanker fleet segment, the acquisition of Navion had a 2,366 calendar days to our spot tanker fleet. With the exception of two owned vessels, the Navion conventional tanker fleet consisted charted-in vessels at different rates for different period and may vary depending upon the requirements of our customer. The additional calendar days were partially offset by a reduction in days from the sale of two Aframax vessels, during the beginning of the second quarter.

Our Aframax fleet generated 365-day time charter equivalent or TCE of 27,327 per day from the second quarter, compared to 28,761 per day from the first quarter. This drop in our average TCE rate reflects the decline in market rates from the high levels seen in the previous quarter for the reason here incited earlier. The calendar ship days for the Opal fleet, decreased in the second quarter, due to the sale of one vessel in its fleet in April.

The Opal fleet continues to earn strong tanker rates generating a 365 days TCE of 17,209 per day in the second quarter, compared to 17,775 in the first quarter. Turning next to our income statement on the sixth page of the press release. In running down June 30th quarter figures and comparing them to the March 31st quarter, net voyage revenues increased by $140m over the prior quarter to $353m.

Navion added approximately a $157m in net voyage revenues, which were partially offset by lower spot tanker rates this quarter. Our OPEC was up by about $13m from the first quarter, due primarily to the addition of Navion's own fleet. Otherwise, OPEC was substantially unchanged from the prior quarter.

Our time charter expense grew significantly by almost $80m to $93.5m, due to the acquisition of Navion. Depreciation and amortization increased by $10.6m from the first quarter to $49.8m, again mainly due to Navion. Included in depreciation expense is $6.7m in dry dock amortization in the second quarter, compared to $6.4m in the first quarter.

G&A expenses increased to $21.9m in the second quarter, compared to $14.7m in the first quarter due primarily to the acquisition of Navion. Also included in the second quarter, is the onetime cost of $1.4m, relating to the merger of our offices in Australia. Net interest expense increased to $20.4m from $13.5m in the first quarter due to the debt financing taken on with the acquisition of Navion.

EBITDA interest coverage decreased slightly from 9.5 times cover in the first quarter to 8.1 times in the second quarter. The results for the second quarter included a $3.8m write-down in the carrying value of three of our older vessels sold in July. When we took the larger write-down in the first quarter, it was not anticipated that one of these vessels would be sold and that vessel accounted for the bulk of the extra write-down this quarter.

Deferred income taxes, has increased to $13.9m from $3.3m in the previous quarter, due to the tax on Navion's results of operations for the second quarter. Other income of $2.5m relates mainly to income from joint ventures, dividend income and foreign exchange gains, partially offset by minority interest expense and a number of miscellaneous items.

Looking at the balance sheet, treating the mandatory exchange book proffered issue as equity, net debt to capitalization increased to only 41% at the end of the second quarter, up from 35% at the end of the first quarter. The acquisition of Navion was initially a 100% debt financed with a 364-day $500m debt facility, together with existing cash and credit line.

The one-year debt facility was subsequently replaced this quarter with a 5-year $550m revolving credit facility. Through its significant internal cash flow generation and the issuance of the 144m mandatory exchangeable proffered issue. We have already made substantial progress in both delivering the balance sheet and increasing our liquidity by freeing up capacity on our corporate revolving credit.

Our liquidity consisting of cash, cash prevalence and undrawn availability under revolving credit, totals over $700m. Capital expenditures for the second quarter, excluding the acquisition of Navion totaled $62m, including $39m in new building installments, $9m in dry-docking cost and the remainder relating to vessel conversions and upgrades.

Forecasted CAPEX, excluding maintenance CAPEX, for the next two and one-half years, is roughly $125m for the remainder of 2003, $190m in 2004 and $120m in 2005. As Bjorn mentioned in terms of earnings guidance going forward, we have in the past asked you to base earnings based on 60% spot Aframax rates in the Pacific and 40% spot rates in the Atlantic. The addition of Navion's conventional spot tanker business has made precise guidance using Aframax rates more difficult.

While we develop a more effective formula, we would guide you to use 13,500 a day, as the company's net income breakeven Aframax TCE rate for 2003 with every $1000 a day increase in Aframax rates based on Pacific and Atlantic trades contributing an incremental 65 cents to 70 cents in EPS.

I will now turn the mike back to Bjorn to conclude.

Thanks, Peter. To conclude, over the past several years we have focused on the dual strategy. Building our spot tanker franchise and customer service organization and leveraging our precision in that business into a large portfolio of premium, stable contract business in some of the most complex trades in the industry. The financial strength that this strategy has brought about is evident from the acquisition of Navion through which we have grown our company by 30%.

Navion was in all debt finance transaction, yet as Peter said, has had a limited effect on our financial leverage, has had no adverse effect on our credit ratings, and has left a significant liquidity largely intact. We are pleased to be able to demonstrate to you this quarter the positive financial effect of this strategy, and we are excited about the capacity that it has created for future profitability and growth of the TK franchise.

Just before I open it up to questions let me just go back and restate my tanker demand information. I think I got it a little bit confusing for you. What I wanted to just restate is that the IEA is forecasting that average oil demand for the next three quarters will be 2.4m barrels per day or 3.2% above June quarter figures. I wanted to clarify that.

So we're going to be opening it up to your questions now. Thank you very much.

Thank you, Mr. Moller. Today's question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the "*" key followed by the digit "1" on your touchtone telephone. We ask for anyone, who is using a hands-free phone or speakerphone to please pick up the handset when you're asking your question. Additionally, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll take as many questions as time permits today. Once again, press "*" "1" for a question. Once again, if you do have a question at this time, you may press "*" "1".

We'll take our first question today from Magnus Fyhr with Jefferies and Company.

Thank you. Good morning. Congratulations for a great quarter. Couple of questions, starting, just following up on the Navion acquisition. Half way through the third quarter, can you give us some guidance on the comfort level you have with achieving similar results to what you did in the second quarter? Are you still sticking with the 25-cent guidance that you have given earlier?

You're referring to the shuttle business?

Yes the shuttle tanker business.

Well, what happens in the shuttle business is that, as you probably know, during the summer periods, there is field maintenance, and that causes some shortening up capacity and typically leads to lower utilization of the Navion shuttle fleet during summer months. I guess June, which is in the second quarter, would have captured some of that, but I would suspect that the utilization is typically budgeted below in the third quarter than the second quarter. So I think if you use the 25 cents, it's a bit early yet, but we assume that would be a good average number. It might fluctuate as we saw here. So I would say use it but with slight grain of salt until we get a little more in to Navion management.

Okay, so it's a little to early to see if you've seen the seasonal impact so far reflecting the June results or the July results.

Well, we're seeing pockets of a waiting time, which isn't normal for the time of year. So I would say we're seeing a normal seasonal slowdown, what I can't give you yet, because I guess the whole schedule of maintenance tends to be little different each year is exactly what impact it will be. I think it'll be reasonable to expect that to be a little bit lower in earnings in the first quarter.

Okay. And just another question on recently announced 16% stake in Torm. Could you elaborate a little bit on what attracts you to the product tanker markets? I mean you have some in your own fleet now and may be it would be interesting to see what your outlook is for that market segment?

First of all, it's a very natural extension of our customers' requirements, customers and those of Torm, for example, are quite similar. There's a lot of overlap. And secondly, the product business is an attractive growth business. And Torm shares our philosophy, I guess, of consolidation in their case through the crew concept but the idea of having a large footprint in a particular market is something we believe in greatly, as you know. And so we think Torm is an interesting investment opportunity for us at this point.

Okay. Great. And just a final question on the -- we've seen some write downs for the older vessels. What's the status on the Opal fleet currently? Are you expecting to take some writedowns there as well?

The Opal fleet is a segment of our tonnage that's under consideration. We would not expect any meaningful writedown based on current projections should we sell that fleet.

All right, thank you. That's all I had.

Great. Thanks, Mike.

Jim Besone with Delphi Management has the next question

Hi guys great quarter. With the acquisition of Navion now, will there be further expenses that you can trim out of that -- haven't taken that on?

When we made the acquisition, we said that we were looking to get 20 to 30 cents by early 2004, and with the acquisition going so well we remain on track for that.

Okay. Great, and what are the prevailing rates right now in the marketplace for the Aframax that you're getting?

The open market at the moment in Far East is around $17,000 per day and in the Atlantic basin it's moving around. Caribbean rates were way down; it's 12,000 or 13,000 a day. They've jumped back up back up in to high 20s this past week. Where as other region markets have been sliding in to the low 20. So it's somewhat volatile, but on a blended basis, the open market is probably slight down to 20,000 a day.

Okay. Going forward here, is the strategy to go to any more long-term contracts, or will you keep the same percentage that you're currently...

That the strategy is not necessary it's a shift tonnage from one segment to the other because the tonnage revenue spot segment is not necessary the tonnage that is suited for long-term special project. However, we are looking to grow both segments and depending on the momentum at any give time and in succeeding in growth in one segment or the other the percentage will shift. So there's really no, kind of, target blend. We have a number of ideas or projects we're looking at in the long-term sector, which hopefully will grow that business.

Okay. How about any more interest on the acquisition front?

Well, I guess we will continue to look at how we can add value to shareholders through accretive acquisitions and we certainly have the fire power to do it, but we wont be disciplined, and we continue to monitor the market. I can't give you more guidance on that at the minute.

That's fine, what would be your comfort level on the what's the high end of your debt de-cap?

The comfort level? I guess we've typically kept our net debt to total cap in the mid 50s -- would be kind of the outer range for us. Right now, as Peter mentioned they're on 41%. However, I guess, it's probably influenced by the amount of long-term fixed rate cash flow and that we enjoy a number that has been growing very rapidly. So it's not an absolute sign but certainly we tend to manage our accelerated balance sheet of Teekay but with the liquidity and size of our balance sheet, we can certainly manage significant growth without getting beyond that debt to total cap range.

Okay. Great, thank you.

Thanks.

We'll now hear from Jordan Alliger with Lazard Freres.

Yes. Hi, morning. Couple of things, one -- is it safe to say roughly trying to get the 10m tons under the IMOs sort of decision on the category 1 tankers would be pulled forward from the original schedule on those '06, '07 to mid '05? Is that about the number? Could you say?

I haven't looked at it that way. I guess, what I have looked at is that by 2005 you'll have 12% going.

Okay.

And you have another, as I mentioned, 30m which is sort of another 10% that would be possibly kind of falling over the edge, within the following 18 months based on just being economically in the scrapping zone. So regulatorily you'll have 12% and possibly a bit more because there is some category 3 tankers [ph] that I think we believe the IMOs agreed to phasing out by 2005 but it's kind of left for the December meeting. And so, I think, you probably will have about 40m tons in total gone by the middle of '05 on the regulatory pressure and then, as I said, another 30m that really is very exposed over the next 18 months.

Okay. And then just the second question, been reading lately more and more about two things in terms of oil production, (1) Russia and sort of their plan to expand production and secondarily, have you, ask me, rely more on Africa going forward than in the past? I'm just curious, your thoughts on both of those regions and what if any implications that will have sort of the tanker proportion or tanker demand proportions as you see it over the next 3 to 5 years.

It is a big question, Jordan. But I think there are couple of comments straightly, I think, the market and the IEA, each year is very quick to suggest that OPEC will be squeezed out more and more, yet we're finding almost consistently every year that OPEC is in fact keeping its place and growing it also from time to time. So even if OPEC agrees to be a swing producer, I think, there is very little slack in the non-OPEC system and that tends to be downward provisions in the production levels, maybe Russia is the exception.

Secondly, there's the issue of whether OPEC will agree on an ongoing basis to be the swing producer, whether they will quantify for market share and we all know that they have done at times and are capable of doing it any time in the future. So if treated with Iraq eventually coming back on, it would be very tend to see whether the Middle-East will gain market share or whether the rest of OPEC is going to step down.

So I don't know more about that than anyone else but it tends to be that OPEC plays a much more central role than people talk about. Secondly, I guess, the issue is also what oil is of Russia and West Africa we are replacing. If it release Middle EAST 50s. It's a good place as Middle-East oil that would be -- it will still have -- if it replaces otherwise would occur and believe you still have accreted tanker demand or you will have less accretive tanker demand and of course to the extent of it replaces a US production or North Sea production, it actually would be quite similar -- kind of stimulating for the tanker demand.

So, I think that short haul, our production is not good for tanker demand but some of the West African production is actually not that short haul. It's the thing about it. So we're not concerned about that. We just think that it's part of a very dynamic market in which we are operating time.

Great. Thank you very much for the time.

Thanks, Jordan.

Our next question comes from Manish Chopra [ph] with Tiger Management.

Morning, gentlemen.

Hi Manish.

Couple of questions, announcing the casual statement, first in place of Navion is listed $698m with earlier and I guess initially I announced $800 and I guess $50m of cash flow was credited in the first quarter. So I wanted to reconcile the $698, I guess with the 750ish number?

May I ask Vince to comment on that.

Yes. Manish, that's the acquisition as previously, announced was $800m. There is also roughly about $50m in working capital that we assumed on the closing and then so if you net out the cash flows in the first quarter for Navion that I will get to you for a close September. Remember we also paid $76m in December as a 10% of project. That's not part of the $698m.

Okay. How much -- I'm sorry -- in December.

$76m.

$76m, okay. What did we end up financing? What was the cause of financing on this transaction at the end of the day?

It's around 1% to 1.25% based on the grid over live [ph] board.

Okay...Over live board and have we fixed that, is that slow.

We fixed that for 3-year period.

Okay. Now that you've been in there only so the returns on capital are materially higher than this cost of capital I think. Can you give us a little bit of color on the nature of the duration on the seaways - now that you've been in there for three months versus over six months. Three months into taking over the company or the contract lengths going up down more opportunities - less opportunity.

While we had a pre-talk to diligence before we bought the company and I'm glad to say that we found everything diversifying, so that's - there is no surprises when we came in and the portfolio of contract is significant. I think its 45 to 50 contracts were afraid when covering different fields buts actually use full vessel use, so I have to go through that. It's quite complex. However, I think we've used the there was to guidance that the average contract length in a fixed rate business is 7 years. Now that's a whole blend of long term fixed rate vessel charters to conquer Philips to seaways in the offshore loading.

Okay.

Some of the contracts are for life appeal that might be anywhere 10/12 working years. We have a frame agreement with Statoil, which has a finite period, but some of the ships that we have on to them are really the only suited ships for those types of fields and so on. It's a long-term business.

Okay. Can you give us an update on the unilateral stances of the US, Japan, Australia some of the other countries relative to what the use purpose and what the IMO is working on.

I'll try and its pretty fluid but I think what we can first of all say that's very positive is that the IMO affirm that we can use decision to phase out the older ships very, very quickly and so that's extremely positive news for tankers and for tanker balance - market balance.

Secondly, as far as the period beyond the oldest tankers beyond 2005 is still open and there is the EU version of what's to phase off the majority of all the ships by 2010, irrespective of the age those single house ships are and that could mean that ships are young at 15 years of age would be banned. The EU or the IMO led by the Japanese and another delegations feel that they accept an accelerate phase out. However, they think that there should be a minimum 20 years of life and some people say 23 years of life and the current rules are 25 years of life.

So that's what's going to be resolved in December and so its in my personal view I would think that there will be a compromise probably on 20 years of life for single hull tankers in category two.

Joe, that isn't really significantly diluted to the phase out because the bass majority of single hull tankers are built prior to 1990. It's still going to be extremely positive for the tanker market.

But in terms of category one, I address somewhere that India had unilaterally gone ahead and followed the EUs rule. I guess requiring those?

How about the rules you're talking about and I believe most recently that India has sort of step back from those.

Okay.

Those regulations in anticipation or a global outcome later this year.

Okay. Last question is there an update on the Airport in Japan that was supposed to use a lot of tanker building capacity?

We hear about that every year, I guess, does this make a project to build the floating airport which would take up, you know, huge amounts of Japanese ship building space to build the structural units and would take up, you know, 50 to 100 VLCC spaces. I can't say that I know of it being any closer duration than it has been each other, you have heard about it so.

Okay, thank you.

As a reminder, press "*" "1" if you have a question. From the line of John Burbank with Passport Capital.

Yes, hi. I was wondering how you're thinking about your fix rate businesses? What kind of return capital you're acquiring, when you are comparing what to do with your profits. Also interested to know how much you're considering getting into the LNG business given your size, probable long-term contracts and safer nature of the business?

Okay, good questions. I'll say on the long-term business we certainly look at it on a risk-adjusted basis. I guess, the best guidance I can give you is really looking historically in the long-term business we build up. The return on equity exceeds 20% on average and that's very attractive. So what we're capable of doing and the reason why we should not strive for that kind of returns going forward in the long-term business.

As far as LNG is concerned, it certainly is a growth market. It would be market going more rapidly than other all will also grow. And so it's a market we will start very closely. One thing is that there's a lot of demand. The question is how much supply will it be and that will determine whether it will be profitable or not. But there are some players that have decided to enter the market speculatively by ordering ships whereas the majority of other entrants have done so against long-term contract. We think the entrance you get in long term contracts is the most practical way of doing it and at some point we'll turn our attention to that and decide based on the prevailing opportunities whether to enter or not.

Well, a follow up question then is, given that you're trading six, seven times earnings you made, you know, almost $4.58 approximately this last six months and you can borrow, this bank that you can borrow rate cheaply. How are you thinking about growing this long term business, getting 20% returns on equity trading in that evaluation, but what point do you think about using your cash to buy back stock or just managing your cash in that respect?

Well that's a good question. We right now are trying to digest the acquisition of Navion. It was relatively large acquisition. So we want to try to bringing the net debt to cut down under 40% into the 30%. And I think that's our priority right now. Navion is a rather large acquisition as you've seen from the income statement affect and so that's where we're concentrating most of our efforts, right now, going forward.

Okay and then one comment, I appreciate very much and I think it's a very smart thing to separate those two businesses in your quarterly statements, just I think it will lead to a higher multiple given the security of earnings on that side of the business so?

Great. Thanks a lot.

I appreciate that.

Thank you very much.

Magnus Fyhr with Jefferies and Company has a follow up question.

Just one follow up question on the question on oil demand. I know you look at these IEA numbers very closely. Are you surprised for next year to see non oil big production growth at a faster pace than global oil demand growth and I know there's been to be a lot of downward relations in the past, but I guess assuming that most of that coming form Russia.

Well I'm not really that surprised given by oil prices down. I think you have to accept that in a high oil price environment you're going to get a lot of over production and I am sure that's one of the thing OPEC will be looking at very carefully. At some point, they're going up to make up their minds. Are they going to fight for price or market share and it's difficult to know that where that political realize.

So, I'm not surprised and I also think one should accept that the forecast for non-OPEC tend to be always high at the beginning of the year than you have at the end of the year. That's certainly been the vast majority of outcomes. It's difficult to say I'm surprised. I just think that, you know, we'll find that OPEC will make room for itself and I think that will be, what we have to watch. We have to track OPEC absolute supply, in addition to it's relative market share.

Okay, thank you.

Thanks.

Our next question comes from Helene Becker with Benchmark Company.

Thank you very much operator. And Hi, Bjorn.

Hi, Helene.

I just have two questions. One I noticed on the rate end in the quarter on the order equipment. Have you guys looked at the idea with the way accounting rules have changed in the US I'm ticking writing down further goodwill off the balance sheet.

Yes, that is something we look at every quarter. The way we had accounted for good will, we put down in the sense the auditors have reviewed so there is no impairment of good will this time.

Okay.

That is something we followed at the US, GAAP rules in the third quarter.

Right, okay. And then the other question is with respect to TORM, did you say that starting in the third quarter you would be consolidating some of their results.

No, we didn't say that.

How will you account for that investments?

Those will be accounted for as marketable securities similar to our Nass [ph] Investments.

Okay. Great, okay. Well thank you for your help.

Thanks, Helene.

We'll now hear from Lincoln Werden with HG Wellington and Company.

Okay. Some people in light of the recent tax bill have commented that perhaps you are in a position to consider liberalization of your cash dividend under this circumstances with the current earning power provided tanker rates and your earnings stay anywhere near current quarterly levels, would you comment on them?

Yes, as you know, our dividend policy has been unchanged since we went public in 1995, and we are evaluating our divided policy in light of the new tax law.

So we will revert on that, as we make our policy decision.

Okay. Thank you.

And there are no more questions in the queue at this time. I'll turn the call over to Mr. Moller for any additional closing remarks.

Thank you very much and thanks for joining us. We are very excited about the quarter we had and about Teekay's position. So we look forward to talking to you next quarter. Have a great day.

That concludes today's conference call. We thank you for your participation and have a nice day.