Teekay Corp Ltd (TK) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Teekay Shipping Corporation Third 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.

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 CEO 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 Private Securities 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 20F, dated March 31st, 2003, which is on file with the SEC. I will now turn it over to Mr. Moller to begin.

Good morning, ladies and gentlemen. Thanks very much for joining us on today's call. We're pleased to report to you on our third quarter results. In terms of earnings, we recorded net income of $20.3 million, or $0.50 per share, reflecting a decline in the tanker market over the summer.

In terms of strategic growth in fleet development, we made significant strides in the quarter. This morning, I will review the latest developments in our business, and Peter Evensen will discuss our financial results. I will first review our spot tanker business, in which we have approximately half of our capital employed. We operate 84 owned and chartered tankers, and have 8 ships on order in this segment.

Spot business produced EBITDA of $54 million-down from $126 million in the prior quarter-due to weaker spot tanker charter rates. With the recent sale of a number of older ships from our spot tanker segment, our operating leverage is down slightly, yet it's still very significant. For each $1,000 a day increase in day rates, our EPS increases by $0.65 to $0.70 annually. Our net income breakeven remains roughly $13,500 per day.

Looking in turn at each of the demand and supply fundamentals affecting the spot tanker market, oil demand-an underlying driver of tanker demand-rose in the third quarter from the June quarter, with the bulk of demand growth coming from non-OACD, and in particular from China and the former Soviet Union. Comparing the quarter to figures from* one year earlier, demand rose 0.9% over the past year, according to the IEA.

Global oil supply, the most direct driver of tanker ton-mile demand, averaged 79.5 million barrels per day-up by almost 2% from the June quarter. Two-thirds of this increase came from non-OPEC producers, whose oil is less ton-mile intensive on average than OPEC oil.

In late September, OPEC surprised the market with its decision to cut oil production by 900,000 barrels per day, beginning November 1st. At first glance, one would expect this to have a negative effect on tanker demand. Yet this quarter reduction was agreed by OPEC to make room for Iraqi oil-oil which would make up for any tanker demand lost from the OPEC cut. Also, with oil demand now approaching its peak season and with oil inventories modest by historical standards, oil prices have remained strong-leading to speculation that OPEC may unwind these cuts before they take effect. We therefore believe that there is no reason to expect good tanker demand over the winter season. Looking beyond the seasonality in our demand, the IEA's forecasting average oil demand for 2004 as a whole to increase by 1.3% over 2003.

Turning to the supply side, tanker supply was up marginally from the previous quarter. According to Clarkson, the world fleet rose by 0.4%--a high pay for scrapping largely offset an active delivery schedule of new tankers. The pace of ordering of new tankers was still high, at 9 million tons in the quarter-slowed considerably from the pace of the first six months of this year. The total order book remained unchanged, at 23% of the existing world fleet.

Despite a significant delivery schedule of new tankers over the next two years, we appear to be on track for a continued [tie] balance in global tanker supply through the end of 2005. By then, approximately 40 million tons of tanker capacity will have been regulated out of the market, adding the typical annual growth in tanker ton-mile demand of 2.5% would call for an additional 18 million tons during this period, for a total requirement of 58 million tons of new tankers.

This figures is very close to the total schedule of[to let] *new building deliveries through 2005, which essentially capped at 62 million tons. This balance equation does not take into account the potential positive effect of above-average economic growth in oil demand over the next couple of years, nor does it take into account any of the voluntary early scrapping that is likely to occur over the next two years, beyond that mandated by regulation.

The world's shipyards are now busier than at any time since the early 1970s. Lead times for new deliveries have risen to between 36 and 42 months. Soaring demand for container ships, drive-out vessels and L and G carriers is crowding out yacht space for tanker construction. With the combination of greater demand, higher steel prices and a weakening dollar, yards are now forcing prices upward, underpinning the net asset value of tanker companies.

For example, over the past 12 months, since Teekay placed its most recent orders for spot-trading new buildings at the bottom of the ship price cycle, the quoted price for new Aframax tankers has risen by 20%. Based on these factors, it seems likely that tanker deliveries will slow considerably, beyond 2005.

Turning to the freight market, crude oil tanker rates weakened in the quarter, despite a rising oil supply and a static world fleet size. Short-term factors such as bunching of tonnage in main loading areas and North Sea oil field maintenance are likely to have driven sentiment downward, despite the positive underlying fundamentals.

Toward the end of the quarter, we saw a rapid firming in Aframax and Suezmax freight rates-again demonstrating the finely balanced nature of the market. This has continued into October. According to Clarkson, Aframax rates are currently averaging $27,000 per day. Rates are being driven upward by several factors. There's been a sharp rebound in the short-haul trade in the North Sea. There is systematic traffic congestion in the Basra Straits, causing waiting time for a large number of ships-and this is expected to be a factor for the next six months.

Finally, there has been a reduction in tanker supply, due to OBO carriers switching out of the oil trades and into dry trades, where rates are at an all-time high. OBOs, which are included in tanker fleet statistics, represent 4% of the world tanker fleet.

These regional- and segment-specific factors are likely to maintain a positive impact on medium-sized tankers over the next several months. Whether VLCC rates will also recover from their current low levels and drive further strength through the rest of the tanker market will hinge on the strength of oil consumption in the coming winter market. Iraqi oil production levels and OPEC quoted decisions.

Next, I'd like to turn to development in Teekay's spot tanker activities. During the quarter, we continued our fleet modernization program in our spot tanker segment with two new Aframaxes joining the fleet, and with the sale into a strengthening market of several more of our oldest vessels during the quarter, and continuing into early October.

As a result of these changes and other changes done earlier in the year, the average age of our spot trading fleet has been transformed from 12 years at the beginning of this year to only 7.6 years. We now have no tankers in our spot fleet over the age of 15 years.

In a significant development which occurred at the end of the quarter, we acquired 50% of Skaugen Petrotrans, the world's premier provider of ship-to-ship lightering services to all companies, in locations such as the Gulf of Mexico. SPT arranges for the transfer of oil from deep drop VLCCs to Aframax tankers some 50 miles offshore. These ships in turn deliver the oil at shallow water oil terminals along the Gulf Coast.

SPT provides a turnkey service which includes guaranteed, on-time availability of Aframax off-tech tankers, support boats, transfer equipment and supervisory personnel. If you'd like to know more about the lightering business, you'll find an interesting overview of SPT's business Lightering 101 on our website at Teekay.com.

SPT is acknowledged by oil companies as the leader in quality and service in its field. On the strength of its reputation, it has built a leading market share-handling 14% of US crude oil imports. SPT utilizes an in-charter core fleet of around 10 double-hulled Aframax tankers plus regular in-chartering of spot tonnage to balance its requirements. With virtually no invested capital, SPT has consistently produced high margins, due to its expertise, and efficiently bundling these complex logistics-averaging approximately $20 million in annual operating cash flow over the past 3 years.

The lightering business is a logical extension of Teekay's business. It extends our involvement in our customers' logistics chain. In the case of [Stat] oil, for example, we will now be moving their oil from North Sea oil fields to nearby terminals via our shuttle tankers, lift this oil on VLCC tonnage from the North Sea to the Gulf of Mexico, and then trans-ship and deliver it to its end destination through SPT.

Teekay's involvement as a partner in SPT significantly expands SPT's fleet access, and allows enhanced scheduling. In addition, Teekay's global reach offers SPT a broad platform from which to expand its business geographically in the future.

Finally, on our spot tanker segment, we took further steps in the quarter in developing our product tanker involvement through our investment in TORM, as well as through operating two of our Aframax new buildings to product tanker specifications known as LR2 product tankers. The product tanker market is another natural extension of our customer relationships, including our access to all of [Stat] Oil's products' movement.

Next, I'd like to talk about developments in Teekay's fixed-rate segment. Our fixed-rate segment provided $46 million in EBITDA during the quarter-down from $56 million in the second quarter. The decline was the result of a seasonal variation in Navion's shuttle business, after a very strong [June] quarter. While Navion's shuttle rates are fixed, volumes vary through the year with the low point occurring during the summer, when oil field maintenance causes reduced oil production, and when calm weather reduces the number of days spent on each voyage.

I would like to emphasize that the figure we've given you in the past of $1 per share in EPS from Navion's fixed rate business is an average annual figure. This figure remains our guidance, going forward.

During the quarter, we concluded several valuable new transactions in our fixed-rate business segment. In the shuttle segment, we took over the North Sea shuttle activities of Fortum Oyj's , the leading Finnish energy group. In this transaction, we acquired one Aframax shuttle tanker, along with two fixed-rate contracts of [enfreightment], which will employ the vessel for a number of years into the future, providing an attractive return.

Also in the shuttle sector, we secured two 13-year charter contracts from TransPetro, and in this connection acquired two [inaudible] new buildings for conversion. The growth in Brazil's shuttle trade has increased the world's shuttle business by 10%. With our latest contracts, we will have six of seven shuttle tankers on charter, through TransPetro. This demonstrates the scalability of our shuttle business.

In August, we announced that we had secured a contract from Unocal to provide a floating storage and Offtake tanker in Thailand on a minimum 10-year fixed-rate contract. We will convert a 15-year old single-hull tanker for this project, allowing this ship to earn an attractive return until and possibly beyond the age of 25 years. In any event, significantly longer than it would have been tradable as a conventional tanker, under new regulations. This will be our fourth FSO. This project demonstrates both the ongoing potential in this business, and its synergy with our conventional tonnage.

These three transactions are expected to increase our annualized operating cash flow from fixed-rate contracts by $25 million, taking our projected annualized fixed-rate operating cash flow to $285 million by the fourth quarter of 2004.

There were a number of other developments in our fixed-rate fleet. We completed construction and delivered the first 2 of 5 conventional tankers on 12-year charters to ConocoPhillips. The third vessel is scheduled to deliver in the current quarter, and the two remaining ships in January, 2004. During the third quarter, we also took delivery of a new Suezmax shuttle tanker, which will serve in the Navion Shuttle Seaway business.

It is worth highlighting that there is a continuing stream of small but valuable developments occurring in our shuttle operations. During the quarter, we achieved milestones on two oil fields where we commenced service under contracts concluded some time ago. These involve the deployment of a total of three of our older, smaller shuttle tankers, which have undergone field-specific conversion work.

One vessel received [First Oil] from the [Sable] Oil Field of South Africa-representing the first use of shuttle tonnage in that part of the world. The second project involved the [ADMOVILE] in the UK North Sea, where our subsidiary UNS delivered a low-cost, turnkey solution involving two shuttle tankers and a sub-sea mooring system. We recently commenced loading on this field.

This project is significant, because it's the first time that a previously abandoned oil field has been brought back into production in this region. [Ardmore] is the former [Argyle] field, which was the first production field in the UK, started back in the 1970s. This project has been followed closely by the offshore industry as a potential role model for extending or restarting marginal fields in the North Sea. Its successful commencement could establish a positive trend for this type of operation, with Teekay's shuttle fleet decision to benefit from such further investments.

In another shuttle-related development during the quarter, Navion was awarded a contract by a consortium of major oil companies to procure and install on a number of shuttle tankers, plants that reduce emissions during cargo operations. Navion, which has already successfully delivered a number of these sophisticated $15 million plants in the past, is expected to invest a further $50 million over the next two years. These are full pay-out contracts with attractive, guaranteed returns. We expect to finance the investments off balance sheet. As you can see from all these developments, there's a great deal of momentum in our fixed-rate segment.

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

Thanks, Bjorn. Our third quarter was a good quarter, financially. While spot rates in the summer months were lower than the first two quarters of the year, following a normal seasonal rate cycle, it is important to note that the average rates we reported in the third quarter declined only to mid-cycle rates. In the month of October, rates have rebounded upward, again following the normal seasonal pattern, and are currently at historically strong levels.

Net income for the quarter was $20.3 million, or $0.50 per share, which includes $9.9 million in non-cash charges. These non-cash charges resulted from two factors--$5.8 million or $0.14 per share related to the write-down on 5 vessels sold during the third quarter and the beginning of the fourth quarter. And $4 million, or $0.10 per share, related to deferred income tax expense in Norway, arising from unrealized foreign change gains in connection with the financing of Navion. Excluding these non-cash charges, net income was $30.2 million, or $0.74 per share.

Teekay generated $99.5 million of EBITDA during the quarter, of which $45.8 million was from long-term fixed-rate contracts. Compared to the third quarter of 2002, the results primarily reflect the inclusion of Navion in the fixed-rate segment. In the spot tanker segment, the increase in charter rates as our Aframax spot fleet generated an average time charter equivalent of $18,318 per day, compared to $13,833 per day during the same period last year.

Rates in the third quarter were lower than in the second quarter of 2003, which averaged $27,327 per day. But we are encouraged by the start of this present quarter, which so far has seen a rise in Aframax rates back to the levels of the second quarter.

In looking at the segment results for the quarter, and comparing them to the third quarter of 2002, I will refer to the operating results section, beginning on the second page of our press release. Our fixed-rate segment includes the company's shuttle tanker operations. Both Navion and Ugland Nordic Shipping. FSO vessels and LPT carriers and certain conventional crude oil and product tankers on long-term fixed-rate contracts. We will not be giving out separate information on Navion, going forward, as the company is being integrated into our overall shuttle tanker operations.

The fixed-rate segment generated $45.8 million in EBITDA during the third quarter, compared to $21.9 million in the third quarter of 2002, primarily due to the inclusion of Navion's shuttle tanker fleet. It is worth nothing that the third quarter figure was below the second quarter figure of $56.2 million. This was because Navion's shuttle tanker business experienced lower utilization, caused by normal scheduled maintenance of oil production platforms and facilities in the North Sea. However, as Bjorn mentioned, this was factored into the guidance we gave at the time of our acquisition-that the shuttle tanker operations activities* of Navion were accretive to our annual earnings by $1 per share.

EBITDA generated by our fixed-rate segment will continue to ramp up with the earnings from the shuttle tanker recently acquired from [Portham] Shipping. And the delivery of a series of five vessels to ConocoPhillips, which commenced in early September, and will be completed by the end of January, 2004.

Looking further into 2004, we have the NAMSAN SPIRIT FSO commencing operations in April, 2004, and two Suezmax shuttle tankers commencing operations in Brazil in the third quarter of 2004. With these contracts in place, the company expects the fixed-rate segment to generate annualized operating cash flow of approximately $285 million by the fourth quarter of 2004.

Turning to the spot tanker segment. The acquisition of Navion added 2,182 ship days to our spot tanker fleet, compared to the prior year. With the exception of two owned vessels, a Navion conventional tanker fleet and [inaudible] consists of* chartered-in vessels at different rates for different periods, and may vary-depending upon the requirements of our customers.

The additional ship days were partially offset by a reduction in ship days from the sale of four older Aframax vessels that were delivered to their new owners during the third quarter. Our Aframax fleet generated a 365-day time-charter equivalent of $18,318 per day, compared to $27,000 per day from the second quarter. This drop in our average TCE rate reflects a decline in market rate from the high levels seen in the previous two quarters for the reasons cited earlier. The ship dates for the [OGUL] fleet also decreased in the third quarter, due to the sale of three vessels from this fleet in September.

Turning next to our income statement on the sixth page of the press release, and running down the September 30th quarter figures, and comparing them to the June 30th quarter, net voyage revenues have decreased by $79 million over the prior year, to $275 million. Ninety percent of this decrease is attributable to the company's spot fleet, which earned lower spot pay tanker rates than in the previous quarter. Our operating expenses were virtually unchanged from the prior quarter. Our time-charter expense grew by $2 million over the prior quarter, due primarily to an additional in-charter spot tanker.

Depreciation and amortization remained substantially unchanged from the prior quarter, as the increase from new *buildings delivered was substantially offset by decreases by vessels sold during the quarter. Included in depreciation expense is $7 million in dry dock amortization in the third quarter, compared to $6.7 million in the second quarter.

G and A expenses increased to $24.1 million in the third quarter, compared to $21.9 million in the second quarter, due primarily to expenses related to the closure of our Oslo office, and a one-time expense related to [stock grants].

Net interest expense increased slightly to $21 million from $20.4 million in the second quarter. EBITDA and interest coverage decreased from 8.1 times cover in the second quarter to 4.6 times in the third quarter, due primarily to the reduction in spot tanker rates and lower utilization of the shuttle tanker fleet previously discussed.

The results for the third quarter included $5.8 million of non-cash charges related to five vessels sold during the third quarter, and the beginning of the fourth quarter of 2003. When we took the larger write-down in the first quarter of this year, it was not anticipated that two of these vessels would be sold, and these two vessels counted for the bulk of the extra write-downs, this quarter.

Deferred income taxes has decreased to $6 million from $13.8 million in the previous quarter, due primarily to lower operating profit from Navion spot and shuttle tanker fleets in the third quarter, counter-balanced by a $4 million increase in deferred taxes on unrealized foreign exchange gain.

Other income of $3.5 million relates mainly to income from joint ventures, dividend income, and a number of miscellaneous items, partially offset by the foreign exchange losses and minority interest expense.

Looking at the balance sheet, and treating the mandatory exchange [inaudible] preferred issue as equity, net debt to capitalization increased slightly from the second quarter, at 42%, as a result of the delivery of several new *buildings in the quarter. Our liquidity, consisting of cash, cash equivalents and undrawn availability under the revolving credit, was $697 million.

Capital expenditures for the third quarter totaled $121 million, including $93 million in new building installments, $9 million in dry-docking costs, and the remainder related to vessel conversions and upgrades.

Forecasted Capex, excluding annual maintenance, Capex was approximately $30 million. Until 2005, it's roughly $37 million for the remainder of 2003. $305 million in 2004, and $118 million in 2005. I will now turn the mic*ke back to Bjorn, to conclude.

Thank you, Peter. Teekay has entered into almost $1.5 billion of new, highly profitable investments over the past 12 months-growing and significantly modernizing every segment of our fleet. These investments and those made previously will generate a significant amount of cash. We intend to put this cash to good use, and we believe that we have demonstrated over the past quarter the ability of our growing franchise to do exactly that.

In the September quarter alone, we committed to approximately $265 million of new investments in our fixed-rate segment and in SPT. These investments are expected to generate approximately $37 million in operating cash flow annually-a 14% yield.

We remain in active but disciplined growth mode for as long as we continue to see attractive new investment opportunities. We also continue to carry a large amount of debt, which we wish to reduce toward the lower end of our target range, in order to maintain our financial flexibility.

Despite these compelling uses of our cash, Teekay's board recently approved a 16% increase in our quarterly dividend payouts after 8 years of unchanged dividend policy. This decision signals that the board believes the growth in our business is sustainable, and that our business model will remain profitable through any shipping cycle. This permits us to return more of our cash to shareholders, without negatively impacting future revenue and earnings growth. It also signals that in the future, the board will monitor developments of Teekay on a continual basis, and when appropriate from time-to-time, act to further increase dividend payouts.

Thank you very much for listening in today, and we'll be happy to take your questions, now, please.

Thank you, Mr. Moller. 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 touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us, and we'll take as many questions as time permits.

Once again, please press *1 to ask a question. If you've found that your question has been answered, you may remove yourself from the queue by pressing the # key. Also, anyone using a hands-free phone, please pick up your handset when asking your question.

Our first question will come from Magnus Fyhr, with Jefferies and Company.

Yes. Good morning. Just a question on the OBO carriers. You had mentioned 4% of the total fleet consists of OBOs. Have you guys done any analysis on recent changes there, on how many are changing to dry instead of wet?

I don't have the numbers, [Magnus], but you can be assured that it's a very high number trading in dry. I'd say that certainly the majority of those ships are [Suez Macs] *Suezmax, Aframax and Panamax OBOs-all of which are red-hot, in terms of that size of dry bulk activity. It moves around. Presumably they're still doing combination trading, which they were meant to do, but we know that [Front Line], [GenMar] and [Yetsin], for example, are using their ships extensively in the dry market-so that is having an effect.

Yes. Just [GenMor] and [Front Line] would be like $2 million deadweight tonnage, which would be pretty significant.

Yes. Right.

Also, in a recent presentation, on evaluation of your stock, you have a presentation showing a value of $63 per share. I was just curious, given that valuation, are you guys going to start buying back stock at these levels? It's been lagging the groove down here at $43 and $44. That looks very attractive. I just wanted to see what your take on that is.

Well, I guess we'll say what we've said previously. We have extremely attractive uses of our cash. We have increased the dividend, which is a reflection that we would like to return some more cash to shareholders. I do think we want to educate people who may not fully understand our very rapidly growing fixed-rate business. I think that process, as far as making sure our stock is fairly valued, is something we're working on. Stock buy-back is something we monitor continually, and it's one of the options that always remains open to us.

Lastly, a question on Navion. You mentioned still that you guys are sticking to your dollar accretion per year, with the third quarter being somewhat a smaller contribution in the third quarter. What should we expect, if it's $0.25 per quarter? My calculations are looking at maybe less than $0.10 additionally in the third quarter. Should we expect more like $0.35 per share in the fourth quarter?

Magnus, this is Peter Evensen here. Your figures for the third quarter are light, as they relate to Navion. We don't have that much volatility in the seasonal results, going forward, as you see it. We wouldn't expect to see that much oscillation.

Okay, so we're sticking to the $0.25 a quarter?

Yes.

Thank you.

Our next question will come from [Jon] Chappell with JP Morgan.

Good morning. I had a question on the Aframax spot rates. Pre-Navion, when you went around and talked about how to forecast the rates, you had a split between the Pacific and the Atlantic base of 60/40. Then you had premiums of $3,000 and $1,000 that you put on there. You could take the Clarkson rates and kind of figure out where the rate should be. It didn't necessarily jive, this time. The Aframax [inaudible] came in much lower than I expected. Is there any reason for that?

I know that in Navion, fixed-rate business changes the Teekay business, but the Aframax spot rate should kind of still be the same.

From our standpoint, we are holding to the 60/40%. You are correct that there was some weakness in the North Sea, which moved the rates around a little bit, as it relates to our conventional fleet that we operate for Navion. But the 60/40 is the general bellwether that we're sticking to.

Jonathan B. Chappell J.P. Morgan Chase: What about the $1,000-3,000 typical triangulation premium that you had historically had in that range. Are they still there? Do they vary based on current conditions?

We're sort of a little reluctant to using that guidance, because of the noise of having bigger and smaller ships in the spot fleet. This particular quarter, we did outperform the Atlantic by about $2,000 a day. Clarkson [inaudible]. We outperformed Clarkson's [AGE] by about $300 a day-so quite a bit lower, *quite a bit lower if you will, than the normal premium. I think what's happening is also that the dynamics in the Indo-Pacific are changing. The [AGE] route is pretty liquid, and there are very steep kind of two-tier rates. I think the reliability of that number is not as obvious as it was.

I think that if you compare us to our peers, we are outperforming the numbers that are being published by others.

True.

That's sort of the real benchmark, frankly. Clarkson's a bit of a theoretical number. It's a helpful guide to analysts and investors. But we keep monitoring. We're only two quarters into the Navion fleet, and it's a slightly wider range of ships in our spot fleet. So we'll keep monitoring, John, and try to see if we can help you guys with some good tools along the way.

We'd appreciate that.

I would also point out that we're quoting our TCE on a calendar ship day. That includes [inaudible] *everything in it where as Clarkson doesn’t assume any waiting time at all.

If I could ask one follow-up-the income tax expense. If you exclude that $4 million charge that you talked about on the front page, it's $2 million of expense. The June quarter had about $14 million. Were there any non-recurring issues in that $14 million in June? Or is that differentiation that large on a quarter-to-quarter basis?

We have [inaudible] maybe [inaudible]

Yes, John. A lot of that was the Navion conventional spot business, as well, which earned a bigger profit in the second quarter. There were no non-recurring items in the second quarter that were material.

That $12 million swing in the quarter-to-quarter basis is quite a large amount of EPS. Is there a normalized level we should look for? Or is it going to be that volatile base on the spot environment* [inaudible]?

It might be a little bit higher. We had some timing differences in the quarter-to-quarter. So it might be a little bit higher, going forward. Again, that's depending on spot rates.

All right. Thanks a lot, guys.

At this time, we have one question remaining in the queue. If you'd like to ask a question or if you have a follow-up question, please press *1 to signal. As a reminder, if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll take our next question from [Fred Wadler] with Eagle Capital.

Yes. Thank you. I just wanted to ask about the volume of scrapping that's happening. Which countries may be responsible for this, and how do you see the volume of scrapping for this quarter and the near future? You'd discussed it briefly, but I'm just wondering if you could expand on it a little bit.

I'll try. The majority of scrapping is occurring in India, Pakistan, and China. Scrap steel prices are very high. That certainly is helping attract all the ships toward the scrapping option. We thus expect to see a fairly active level of scrapping.

One of the characteristics of the last two or three years of very strong market is that scrapping levels have been high, where typically scrapping is low during strong freight markets. That's a signal that scrapping is occurring because of regulatory pressure and because of customer discrimination.

Now of course, as of the 21st, the EU put into place its new regulations, so the IMO is going to look at [twilight needs] regulations in December, for implementation in the spring of 2005. There's a huge amount of tonnage that's going to be regulated out, and these ships-some of them will come up against expensive surveys between now and the spring of 2005. Even in a strong market, we will see a lot of shipped scrap, under those circumstances.

Scrapping has been, I think, the positive surprise or positive story when it came to fleet supply in the last several years, where the capacity of shipyards otherwise could have been a negative event. We're surprised that the world fleet is really quite stable and continues to be stable.

Thanks very much. I appreciate it.

Moving on, we'll go to [Walter Levado] with Passport Capital.

Good morning. I had a question regarding the 40 million ton that you listed as would be mandated out by the end of 2005. First of all, did I hear that correctly? Secondly, is this in existing regulations, or does this include a potentially new IMO regulation?

The number is correct. It's 40 million. The IMO did not finish its work in July, when it met. There are several things before the IMO. One is the accelerated phase-out of Category I tankers, and then there's the accelerated phase-out of Categories II and III tankers.

In the Category I, there was unanimity or at least a clear majority at the IMO that basically made the decision that they would accelerate the phase-out of the schedule of Type I tankers. However, there was disagreement at the back end, should it be 2010, or the 20th anniversary or other methods to phase out the rest of the ships. That was what was left unfinished, and will be worked on again in December.

In effect, the early end is pretty much locked in, both by the IMO and the EU. Therefore, it's a global situation. The regulation just hasn't been written up, because they have some blank pages behind it.

So the 40 million would include the Category I phase-out?

That's correct.

Another* Then the question-you mentioned the write-down included vessels that were subsequently sold, or sold in the fourth quarter.

That's not quite correct. I think what we meant was that in the second quarter, we took a write-down in the second quarter, of ships anticipated to be sold in the third quarter. We did sell those ships, but then we sold a couple extra ships in the third quarter that we had not previously [indicated]. Therefore, the second quarter write-down was not adequate, and we had to do a write-down in the third quarter for the particular two ships that we sold.

It's on subsequent sales that I mentioned on our press release, and I think we're saying that there's going to be a marginal gain from those ships. Obviously, if other transactions take place, that could change.

The other thing I notice is that the expected Capex for next year has gone up by about $150 million-from what I recall. You mentioned $50 million worth of Navion investment. Is the sort of rating 65 in your regular Aframax?

I believe that's our two contracts that we have for shuttle tankers in Brazil, where we put 10% down and we have the balance due in 2004. Those will be coming on in the third quarter of 2004.

And the Navion $50 million#,000 investment is spread out over the next two years, so that isn’t just* business is next year.

Okay. Great. Things got very [inaudible]-just checking my numbers. It seems that by the end of Q4 of 2004, you could be generating almost $7 of EBITDA from your fixed-rate business.

That's what it looks like-yes.

Dividend coverage on a normal rate environment would be enormous. It could be-maybe perhaps not at that point having passed the bulk of your capital expenditure-free cash flow would be significant. I'm thinking ahead 6-12 months. You mentioned that the board would be sort of monitoring the dividend payout on an ongoing basis. Would it be fair to say that dividend payouts would increase?

I guess we've given the guidance that we think it's reasonable to give, at this point. What is so exciting, Walter, is that we're seeing so many attractive investment opportunities, and we're clearly going to be disciplined, I think. I hope you see that what we're doing is very disciplined.

Yes.

As long as there are these opportunities, we certainly feel that it's a entirely [valid] opportunity * for Teekay to grow its business, and strengthen its franchise. I think what we're saying is there may be room for both. Time will show, but things are looking extremely good.

How many more opportunities for the type of investments in Navion and the ones you just-I believe in the third quarter-I don't exactly know what the names are-but these conversion facilities, I guess, on your vessels.

Yes.

How much more opportunities for 14-15% cash return investment is there?

I can only say that nine months ago, I don't think any of the investments we concluded in the third quarter were known to us. I think what's happening is that there's a bit of a gravity pull going on now with Teekay's business. The breadth of our place in the logistics chain is really offering up a number of doors that we can open and look through.

I think for example, floating storage is an area with new potential. Brazil is moving along. Other countries are doing increasing amounts of offshore oil exploration. I [inaudible] to point to percentages. It will be lumpy, no doubt. We certainly are pretty busy here, let me put it that way.*.

Sorry for all these questions. The final one is the strength-Y*you went into the strength of the current Aframax environment. It's really kind of showing how segmented the market actually is between the VLCC and Aframax, I guess because of the Mediterranean-[Basra]. That's they key-am I correct?

I would say that generally, you say, "segmented." It is generally highly correlated. Typically, what drives a very strong tanker market is a good market for VLCCs and a triple effect all the way through the market. However, it's true that the smaller ships can encroach on the bigger ships' business. That's why it's fundable. However, when occasionally you have disruptions in the business with smaller ships, it isn't always necessarily fundable the other way. You can have some anomalies.

I think that also if we have another cold winter, we see a lot of delays of traffic in the Baltic, for example. That's another place where a lot of Russian oil is coming out. It You* could have a pretty strong event in segments, even if the large tankers are not enjoying such good risks.

You mentioned congestion in the Baltic for example, as a potentially six-month phenomenon. When I look at it in the terms of between $20-27,000 a day Aframax rate, you look at the VLCCs at breakeven or below. Normally, I'd be afraid, thinking, "Oh, Aframax rates are coming down. But what I'm hearing is that for at least the next couple of weeks, that's in no way the case.

We certainly see that the rates have been very firm, despite the mediocre of the VLCC markets. We're estimating that the voyage lengths are sometimes doubling in the Mediterranean, around ships trying to transit in and out of the Black Sea. Normally anywhere between 10-30 Aframaxes and 20 SuezMaxes are sitting on either side, waiting transit. There's a night-time transit restriction, which of course when days get shorter, causes a lot less traffic opportunity with the straits.

With the amount of oil coming out of that region and the number of ships hauling in and out, that's a very significant expert demand artificially that's created.

Thank you very much, and thank you very much for the dividend increase.

Moving on, our next question will come from [Lincoln]Werden, with HT Wellington.

Hi. I've been asked by several of our accountants if I could have a definitive answer on whether as a Bahamian corporation, your dividends qualify for the 15% US tax treatment?

Technically, we are a Marshal Islands Corporation.

And we have received legal advice that we do qualify for the 15% dividend tax treatment

You're Marshal Islands-not Bahamas?

Yes. We're incorporated in the Marshal Islands, and we're headquartered in the Bahamas.

Yes. You do qualify.

We're listed on the NYSE, which is our primarily listing.

Right. No, I'm aware of that. But you do qualify for the US 15% rate on the dividend?

Yes.

Okay,*; thank you.

Moving on, we'll go to [Jordan Alleger] with Lazard.

Yes,*; hi, guys. Just a question. I don't know if you touched on it directly, but realizing that the EU ban has just very recently gone into place, do you have any sense from your chartering guys if they're seeing implications of that? Is it sort of working its way through at this point? Or has it been working its way through before the 21st as ships sort of repositioned? Just curious if you have any sort of market color or chatter, in this regard.

I would say it's probably worked its way through in this last six months, and there was no sort of major part when it came into effect. Coincidentally maybe, or maybe some sort of influence psychologically, you have had a real surge in freight rates in the North Sea and in the Mediterranean in the past three or four weeks. My sense is that it's really only when the IMO comes in, Jordan, that it's going to be a real event.

And to that end*, from an IMO standpoint, has there been anything that sort of leaked out around the edges as to what they're thinking? Is it pretty much full-speed ahead in terms of working out something in terms of the Category II and III tankers?

No, there hasn't been anything like that, as I indicated in an earlier question. The front-end phase-out is already a done deal.

Right.

*But I guess in the meantime, there have been some unfortunate incidents involving older ships in the Eastern hemisphere, for a change. Some of those have received quite a high profiling, including some of the countries that probably were not as supportive in the IMO as before. So if anything, I think that the kettle's still boiling pretty good.

Great. Thanks very much.

[Anis Chopra] with [Tiger] Management has our next question.

Good morning.

Good morning.

Bjorn had mentioned that the current breakeven rate is about $13,500. Did I hear that correctly?

That is correct, and it's likely to be moving down, as more of the long-term fixed-rate contracts come into place over the next 12 months.

Great. I wanted to ask you how they progressed into the fourth quarter of 2004, if there is a number for that, right now.

I think we're expecting it to arrive at $12,500 a day by the fourth quarter.

That's right, Bjorn. With the delivery of the five vessels to ConocoPhillips by the beginning of next year, it'll drop down to $13,000, and it will progress down to $12,000 by the end of 2004.

Okay. Given the shift in the vessels in the fleet, how should we think about the mid-cycle rate, which was previously thought of at about $18,500 per day, on the average*[Afra]?

I think Teekay's average earnings are probably going to improve on a per-ship basis in any given market, considering that we've shed 16 of our older ships. The average age of the ships we sold in the past 6 months have been 20 years of age. Those are typically ships with less utilization. However, the number we have used as a mid-cycle market for Teekay is based on a ten-year average. I think our fleet has moved around in age, so I'd use that as a guide, for the moment-until we see better changes.

Okay. Thank you.

And we have one question remaining in the queue. It comes from Jim [Pesson], with [Delphi] Management.

Hi, Bjorn.

I'm sorry, Mr. [Pesson], could you re-queue, please? *1. Go ahead, Mr. Pesson.

Sorry about that. Just quickly, you mentioned about working the debt down. What is the target level now that you're looking for on your debt?

We're at 42%, measured on net debt to cap. We would like to see ourselves down below 30%.

Okay. Thank you.

At this time, there are no further questions. Mr. [Mueller], please go ahead.

Well, thank you very much for taking part, this morning. We're pretty excited about what's going on at Teekay. Thanks for listening in. We'll talk to you early next year.

That concludes today's conference. Thank you for your participation.