Teekay Corp Ltd (TK) 2004 Q1 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. Welcome to the Teekay Shipping Corporation first-quarter 2004 earnings release conference call. During the presentation all participants will be in a listen-only mode. Afterwards you'll be invited to participate in a question-and-answer session. At that time, if you have question (Operator Instructions). As 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. Muller begins, and before I begin read the forward-looking statement, would like to direct all participants to our website at, www.Teekay.com, where you'll find a copy of the first quarter of 2004 earnings presentation.

Mr. Muller and Mr. Evensen will review this presentation during today's conference call.

I'll now read the forward-looking statements.

Please allow me to remind you that various remarks we may make about future expectations, plans and prospect for the Company, and the shipping industry, constitutes forward-looking statements for the purposes of the Safe Harbor Provisions 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 20-F dated March 31, 2002, on file with the SEC.

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

Thanks, Scott, and good morning, ladies and gentlemen. Thank you for joining us on this morning's call, and just to restate what Scott said, will be referring to the number of slides posted on our website at Teekay.com.

I will start with slide number three.

We're very pleased to report to you on outstanding quarter for Teekay. We achieved record financial results with quarterly net income of $189 million, an increase of 253 percent over the same period one year ago. We earned $4.37 per share, also a record.

Both our stock tanker and fixed-rate segments delivered their best results ever, combining to generate cash flow from vessel operations of $262 million.

We announced the acquisition of Naveria F. Tapias which will establish Teekay in the strategically important LNG shipping market. And our Board has authorized a 2-for-1 split of Teekay shares effective May 17th.

During today's call, I will provide you with an overview of tanker industry dynamics and the highlights in our main business segments. Our CFO Peter Evensen will review the Company's financial results.

I will begin with a look at the tanker market dynamics beginning with tanker demand on slide number four.

Global oil demand -- an underlying driver of tanker demand -- continued its high rate of growth in the quarter with demand rising by 1.4 percent from one year ago. As you can see from the chart, a large majority of this demand increase came from China, which recorded 17 percent year-on-year growth in the first quarter.

OECD oil consumption was flat compared to one year ago, when demand was unusually high due to a cold winter, stock building ahead of the Iraq war, and the shutdown of a large number of Japanese nuclear power plants.

The IEA is forecasting demand growth to accelerate further in the coming months, predicting a 2.4 percent increase on average for the rest of 2004. The IEA expects old OECD countries to return to demand growth in the second half of the year, and it also expects China to continue to grow rapidly.

If you turn to slide number five, this shows the development in oil demand in a slightly different way.

First of all, the chart reminds us of the high degree of seasonality in oil demand. We're now in the slowest quarter of the year in terms of demand, so it's no surprise that there is talk of oil inventory build in the oil markets.

Secondly, the chart highlights how steep the upturn in oil demand is expected to be later in the year.

And finally, the chart also clearly shows just how fast oil demand is growing year on year.

On slide number six, we have compared changes in OPEC and non-OPEC oil production -- the most direct driver of tanker demand -- to changes in the price of WTI crude oil. The high correlation between oil price and OPEC production shows that OPEC has done a good job acting as the swing producer, reducing supply when prices were low, and raising it when prices were high.

As shown by the circles on the chart, it is customary for oil prices dip every spring. Global oil supply in the first quarter was at an all-time high, and has remained high into April with OPEC continuing to produce well above its official quota. While this may lead to some decline in today's very high oil prices, the absolute price of oil and a series of upgrades to demand forecasts by the IEA should encourage OPEC to maintain high oil production levels through the current quarter and throughout the year.

Next, I will review tanker supply starting with slide number seven. In the quarter, the world tanker fleet increased by 1.2 percent compared to the end of 2003. New tanker deliveries totaled 7.8 million tons, while 4 million tons were deleted from the fleet.

The forward orderbook through 2006 remained unchanged, as capacity is locked in through mid 2007. 2004 and 2005 are expected to see relatively high deliveries of new tankers, but this will coincide with the mandatory phaseout of a large number of older ships.

Deliveries in 2006 are expected to fall to only 18 million tons and for 2007 there is a limit to the amount of additional tankers that could be built beyond the 10 million tons already on order, because yards have limited space left in 2007, and because there will be strong competition from other shipping segments.

The next slide on page 8 is an updated table we have shown you in the past. It shows all of you of how the tonnage supply and demand picture should develop through 2006. In 2004 and 5, we can expect total deliveries of 59 million tons of new tankers according to Parsons (ph). As I mentioned, this number is fixed because if you order a tanker today, you have to wait until 2007 or 2008 for delivery.

During that same period, 2004 - 2005, 34 million tons is expected to be forced out by IMO regulations, leaving net fleet truck of 25 million tons before voluntary scrapping.

We're estimating that tanker demand will grow by 23 million tons during this same period, assuming a conservative 2 percent annual growth in oil demand. Therefore, we expect that the market balance on average through 2005 will remain unchanged from where it is today -- and possibly even a bit tighter, should some scrapping continue to occur voluntarily ahead of schedule as it has in the past.

Looking at the corresponding equation for 2006, we see 18 million tons of new capacity, only 1 million tons of mandatory phaseout for (ph) further 12 million tons of demand growth -- leaving a slight increase in tonnage availability by the end of 2006.

This leads us to the comparison on slide number nine, between quarterly estimates of world tanker fleet utilization, and Aframax tanker rates.

In practical terms, at 90 percent, the world fleet is considered to be at full utilization -- causing freight rates to spike to very high levels, even with only small changes in utilization above 90 percent.

For many years, full utilization used to be almost unheard of. But in recent years, it has been occurring on a regular basis. In late 2000, in early 2003, and again in late 2003 -- with rates in each case spiking to new highs.

While we do not yet have first quarter utilization estimates, we know that tanker rates in that quarter went even higher than during the fourth quarter, suggesting that utilization remained above 90 percent.

When the starting point, going forward, is one of zero spare capacity in the world fleet, the significance of the previous slide, which showed rapidly growing tanker demand absorbing net fleet growth for the next three years, suddenly becomes very obvious.

On the next slide, number ten, we show you the dramatic events that have been taking place in the shipbuilding sector over the past year or so.

A synchronized upturn in commodities and global trade, driven to a large extent by China, has created huge demand for new buildings from every sector of shipping.

Over the past year, this has led to a run on shipbuilding capacity. As you from the top left chart on the slide, the average waiting time for a new ship Korea, the world's largest shipbuilding nation, has almost doubled from 1.9 years in early 2003 to 3.6 years today.

During the same period, yard construction costs have risen substantially, exemplified by the price of steel plates which is up by 55 percent on the year, and still rising. That is, it if yards can even obtain timely supply.

The strong demand for all types of ships and increases in raw material and labor costs are driving ship prices up on an almost weekly basis. Tanker prices have increased by approximately 30 percent over the past year.

Next, I will briefly address the freight market on slight number eleven. Tanker rates strengthened in the first quarter from the already high levels seen in late 2003, reaching near record levels. Rates responded to fleet utilization being stressed due to high demand from record oil production, coupled with ship turnarounds delays in some locations.

So far in April, we have seen the normal seasonal pattern of rates declining from their highs from the last quarter. This has been mainly due to higher effective supply, as weather and transit delays have largely disappeared while demand has remained high.

Despite this decline, overall tanker rates remained high by historical standards. And as illustrated on the slide, we're essentially experiencing higher highs and higher lows due to the continued tight fundamentals in the tanker industry.

The prospect for tanker rates for the remainder of 2004 appear very positive, with tanker supply constrained by the upcoming IMO phaseout deadline, and high global oil consumption growth driving strong demand.

Looking briefly at our business segments -- I will turn first to the spot tanker business -- there's no slide for this section. But, there were no major changes to the fleet composition in the segment during the first quarter.

We're pleased with the 192 million in cash flow from vessel operations generated by our 82 ships spot tanker fleet. This is an outstanding result and reflects in part well timed decision-making by our chartering group to charter in more vessels last summer, increasing our operating leverage further.

Turning to our fixed-rate segment, the absolute highlight of the quarter was of course the announcement in March regarding the Tapias acquisition. If you turn to slide number 12, you will see that the Tapias deal will contribute to the quantum leap that is occurring in Teekay's fixed-rate cash flow.

From a solid base of $100 million in annual fixed-rate cash flow in 2002, we have achieved significant organic growth in addition to acquiring the Navion franchise. We're now on track to complete the Tapias on April 30th, and once concluded, it should bring our annualized cash flow from vessel operations, in our fixed-rate segments alone, to approximately $400 million by the end of 2004. This represents a compounded annual growth rate of more than 50 percent over the last four years.

Turning to slide number 13, let me just briefly remind you of the main details of the Tapias transaction. We have agreed to acquire Naveria F. Tapias, Spain's largest marine transport of energy. We're paying $810 million in cash and assumed debt, and are taking on 540 million in new building commitments.

We get a modern fleet of 4 LNG ships and 9 Suezmax crude oil tankers. We're creating a joint venture with the existing shareholders in Tapias to pursue further opportunities in Spain.

The transaction is scheduled to close on April 30th, and is expected to be immediately accretive to earnings and to generate 125 million in annual cash flow.

On number 14, are the key investment highlights -- again, you have seen these before -- possibly. But Tapias provides an attractive low-risk entry for Teekay into the high-growth LNG shipping sector. The acquisition further extends our position as the world's leading shipper of seaborne oil.

Through our new joint venture, we will be well positioned to gain new business in Spain -- the world's third largest importer of LNG.

As mentioned a moment ago, Tapias significantly increased our cash flow in the fixed-rate segment, and the highest debt carrying capacity of Tapias' contracts minimizes our cash outlay. In fact, after paying the cash component in late April, we expect to have the same amount of remaining liquidity that we had at the beginning of 2004.

We're are really excited about the Tapias transaction, due to the attractiveness of its existing contracts, and the platform it provides us to grow our LNG business (indiscernible) in the future.

I will now hand it over to Peter to talk about our financial results.

Thanks. As Bjorn has said, the first quarter was a record quarter for Teekay in terms of both net income and cash flow from vessel operations -- reflecting higher spot rates and further growth in our fixed-rate segment.

Teekay generated $262 million in cash flow from vessel operations in the first quarter -- an 84 percent increase over the same period last year. Of this, 192 million came from our spot tanker segment and 70 million from our fixed-rate segment.

Consequently, Teekay generated its highest ever quarterly net income of $189 million or $4.37 per share.

Looking at the results of each of our segments on page 15 of the presentation, cash flow from vessel operations from our spot tanker segment increased by 75 million or 64 percent, to 192 million in the first quarter, compared to 117 million in the first quarter of 2003.

The increase is due to the significant rise in spot tanker rates, and the inclusion of Navion's conventional tanker fleet. Which added over 2,200 ship days to our spot tanker segment, but was partially offset by the sale of older vessels during 2003.

Our spot Aframax fleet generated a 365 day calendar DCE (ph) of 40,200 per day in the first quarter, compared to 28,700 per day in the same period last year, and 25,400 per day in the previous quarter.

Our fixed-rate segments generated 70.3 million in cash flow from vessel operations during the first quarter, compared to 25.3 million in the first quarter of 2003 -- an increase of 178 percent. Primarily due to the inclusion of Navion shuttle tanker operations in the addition of five conventional tankers’ on long-term fixed-rate charter.

It is also worth noting that the first quarter figure has increased from the fourth quarter figure of 61 million. This was because Navion shuttle tanker business extends high utilization due to the typically higher oil production during the winter months in the North Sea, the delivery of the remaining two new buildings on charter to ConocoPhillips, and the delivery of the shuttle tanker NORDIC BRASILIA during the first quarter.

Our existing fixed-rate segment is on pace to generate annualized cash flow from operations of $285 million by the end of 2004. Including the vessels in the Tapias acquisition, we expect this figure to increase further to approximately $400 million, as Bjorn said.

Turning next to slide 16, and reviewing our first quarter income statement figures in detail comparing them to the December 31st prior quarter. Net voyage revenues -- that is, voyage revenues less voyage expenses -- increased by $170 million over the prior quarter to 447 million. 90 percent of this increase is attributable to the Company's spot segment, which earned higher spot tanker rates than the previous quarter, and the balance is attributable to the Company's fixed-rate segment.

Our vessel operating expenses decreased by $8 million over the prior quarter, due to lower repair and maintenance costs. The sale of vessels during the last quarter, including the sale and leaseback of the three Aframax vessels in December, and an insurance claim recovery of $1.3 million -- which was partially offset by the delivery of three new buildings during the first quarter.

Our time charter expense grew by 6.4 million over the prior quarter due primarily to several additional in charter product tankers and the sale and leaseback of the three Aframax vessels in December 2003.

Depreciation and amortization increased by 1.1 million over the prior quarter as a result of the acceleration of depreciation on the vessels affected by the IMOs accelerated phaseout of single hull tankers, and the delivery of new buildings, which was partially offset by decreases from vessel sold during the fourth quarter.

Included in depreciation expense is 5.7 million in Drydock amortization in the first quarter compared to 6.4 million in the fourth quarter.

G&A expenses increased to 27.6 million in the first quarter, compared to 26.4 million in the fourth quarter -- which is due primarily to performance bonuses paid during the first quarter, but which were related to 2003.

Net interest expense decreased slightly to 20.3 million from 22.1 million in the fourth quarter, due primarily to the repayment of approximately 100 million of our most expensive secured debt, our 8.32 percent bonds during the fourth quarter of 2003, and continuing into the first quarter of 2004.

Cash flow from vessel operations interest coverage increased from 6.5 times cover in the fourth quarter, to 12.2 times in the first quarter, due primarily to the increase in spot tanker rates.

Deferred income tax expense decreased to 2.1 million from 13.3 million in the previous quarter, due primarily to a strengthening U.S. dollar in the first quarter. This resulted in a deferred income tax recovery of 4.5 million related to an unrealized foreign exchange loss arising from our U.S. dollar-denominated intercompany debt in Norway -- which partially reverses the deferred income tax expense of 6.5 million we reported in the fourth quarter -- relating again to the same unrealized foreign exchange gain.

Other income of 1 million relates primarily to gain on the sale of our remaining shares in (indiscernible), dividend income -- partially offset by foreign exchange losses -- minority interest expense and a member of miscellaneous items.

Our fully diluted number of shares outstanding for the first quarter increased from 41.8 million at December 31st to 43.3 million at March 31, 2004, as a result of the effect of the increase in Teekay's stockprice on the outstanding stock options and the mandatory convertible preferred units. And this method is computed using the treasury stock method.

Looking at the balance sheet in July 2003, Teekay purchased a 16 percent investment in the product tanker Company form for $37.3 million. The market value of this investment at March 31st had appreciated to 173.3 million, which results in an unrealized gain of 136 million. This gain has been included in the Company's stockholder's equity, and has increased Teekay's book value at the end of the quarter by approximately $3.30 per share.

Turning to slide 17, capital expenditures in the first quarter totaled 94 million, including 88 million in new building installments and the remainder relating to vessel conversions, upgrades and other equipment. Including the Tapias acquisition, forecast CapEx related to the Company's 20 new buildings on order, is roughly 260 million for the remainder of 2004, 238 million in 2005, 83 million in 2006, and 147 million in 2007 and early 2008.

Long-term financing arrangements totaling approximately 466 million exists relating to these new building commitments.

Turning to slide 18. And treating the mandatory exchangeable preferred issuers equity, net debt to capitalization decreased from just under 40 percent at the end of 2003 to 35 percent at the end of the first quarter of 2004 -- which is due primarily to the significant amount of cash flow generated from vessel operations during the first quarter.

It is interesting to note that our leverage is currently back down to the level of where it was prior to the Navion acquisition, which was only one year ago. Furthermore, the majority of our existing debt over the next several years is tied to fixed interest rates. And thus we have limited exposure to spot interest rates increases over the next few years.

Our liquidity at March 31st, consisting of cash, cash equivalents and undrawn availability under revolving credit facilities, was 786 million.

We will be acquiring Tapias for a total enterprise value of 810 million, through a combination of cash and the assumption of existing debt. Assuming the acquisition of Tapias occurred on March 31, 2004, Teekay's net debt to capitalization would increase from 35 percent to 48 percent, excluding new building commitments. We expect the majority of the 540 million in new building commitments to be fully debt financed prior to vessel deliveries.

Although our leverage will increase as a result of the acquisition, our fixed-rate cash flow from vessel operations will increase by approximately 40 percent, which allows for greater debt carrying capacity and should allow us to quickly delever the balance sheet under any spot tanker market conditions, but more rapidly under the current strong spot tanker market -- similar to what was recorded under the Navion acquisition.

Liquidity after closing on the April 30th date is expected to the over 600 million in the form of cash and undrawn long-term credit lines. Therefore, although this transaction is large, its unique characteristics preserve Teekay's strong balance sheet and financial flexibility, to pursue further growth opportunities.

This point is further illustrated on slide 19 of the presentation. On a combined basis, the cash flow from vessel operations from the fixed-rate segment by itself, relating to Teekay and Tapias, of approximately 400 million in 2005 is more than enough to cover the Company's total fixed charges of the combined entity.

In other words, in the unlikely event that Teekay's spot segment earned 0 cash flow from vessel operations, overall, Teekay would still generate positive free cash flow.

The Tapias acquisition is on schedule to close April 30, 2004, and as we indicated earlier, it is expected to be immediately accretive to our earnings. Tapia's results will be consolidated with Teekay's commencing approximately May 1, 2004. However, the acquisition is effective January 1st -- which means that the net cash flow generated by Tapia's for the first four months of 2004 will effectively reduce the acquisition price by approximately $15 million. Incidentally, the cash flow from operations generated by Teekay in the first quarter of 262 million is roughly the same amount of the cash component that will be paid for the Tapia's shares.

So, the Company's already strong financial condition should continue to improve, and leave Teekay well-positioned for profitable growth. And it is determined to be the best use of cash to return capital to its shareholders.

As you can see on slide 20, we have very significant operating leverage in our spot market segment.

The size of our spot fleet means that for every $1,000 per day increase in rates, our earnings per share increases by 16 to 17 cents per quarter. And our net income breakeven in 2004 is estimated to be $13,000 per day.

Based on the first quarter's average Aframax timecharter equivalent rate of 40,000 per day, there is the resulting EPS was $4.37. Based on Clarkson's (ph) average Aframax CTE (ph) rates reported thus far in the second quarter, of approximately 30,000 per day -- and assuming this average prevails for the entire quarter -- the resulting EPS would be approximately $2.75 for the second quarter.

Currently, we have fixed approximately 60 percent of our total spot voyage days in the second quarter. Please note that the EPS figures have not given effect to the two-for-one stock split which Bjorn spoke about.

Teekay's Board of Directors has authorized a two-for-one stock split relating to our common stock, which will be affected in the form of a 100 percent stock dividend.

All stockholders of record on May 3, 2004, will receive one additional share of common stock for each share held, to be distributed beginning May 17, 2004. We believe that the stock split should enhance the liquidity of our shares, and thus help broaden our shareholder base.

Furthermore, it reflects our confidence in Teekay's future growth prospects.

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

Thanks, Peter. Just a couple of concluding remarks before we open up to questions.

Over the past five years, Teekay has steadily expanded the scope of its business to meet the growing needs of its customers. We continue to leverage our core competencies by entering new areas of activity, adding to the services we offer.

Our entry into LNG shipping is the latest building block in the customs service platform we're creating.

Teekay is more than a conventional tanker Company. Our unparalleled network of people, technology and ships make us an essential link between upstream oil production and downstream refining. With the breadth of our services, the quality of our operations and the strength of our balance sheet, we are more than any other Company in our industry an integral part of our customers' logistics chain. We are the marine midstream Company.

Thank you for listening in and we would be happy to take your questions.

(Operator Instructions). Magnus Fyhr, Jefferies & Co.

Just maybe a couple of questions, starting on the LNG side. With LNG imports in Spain expected to double here by 2010, maybe you can give us an update on some of the projects, new terminal vis-a-vis, the opportunities for you with now the Tapias under your belt to capitalize on some of these expansion projects?

Hi, Magnus. That is certainly an exciting area for us to explore in the future. I won't pretend to have all the answers yet -- exactly how we're going to build opposition in Spain. There are four existing LNG reclassification plants in Spain, and there are the two planned, or one under construction. That will lead to increase demand.

Some of that demand has already been accounted for through existing contracts that customers have entered into. But we're pretty confident that Spain will continue to be one of the most rapid growth areas for LNG.

So, we are going to be very well connected down there, through our joint venture partner and through some excellent customer relationships. So that continues to be a very promising base for us as well as of course pursuing LNG outside of Spain.

Okay. And do you think they're primarily going to be opportunities in Spain or -- I mean since you have large concentration there now, are there opportunities elsewhere?

I guess some estimates suggest that there is a need for another 100 LNG carriers beyond what is already on order by 2010. And, as I think said before, there are a number of Companies wanting to get into the business. But there will be a lot of capital required. And of course, the customers are extremely sensitive to the quality of the operation of this type of asset.

So, I would say there should be ample opportunity for us to get up to the plate. Whether we see something that is worth swinging at will be a different matter.

Great. What is your strategy -- if you compare with some of the other competitors out there, there has been some spec building of LNGs -- would you order LNGs without contract? Or is a long-term contract a must before you enter into new billing contracts?

Our primary strategy would be built to suit. We think that makes a lot of sense. Because that is about following our customer, and that is what we're trying to do. So that is our current strategy.

Okay. Just two quick questions, if I may? With interest rates expected to move up here, any -- what do you think as far as locking in more on long-term, since you have quite a lot of floating rates out there?

Well, actually, Magnus, we have fixed well over $1 billion of our net debt prior to the most recent increase in interest rates. So we feel very comfortable with our net debt that we have fixed in and we're not really exposed to any increase in spot LIBOR rates at the present time due to our prior fixing in -- either through contracts that have interest rate adjustments, or through swaps in our fixed-rate debt.

We are taking on some exposure with the Tapias acquisition but we expect that to be netted away by the cash flow from vessel operations that we're currently operating.

Okay. And just a final question on referring to page 20. What would EPS, using the (indiscernible) actual (indiscernible) for the first month of the second quarter?

Well, you would take the level -- I mean for the first quarter?

I'm sorry, the second quarter.

For the second quarter, you would take the $2.75 and you would divide by 3 -- if you wanted what April would be for the first month. That would be approximately 90 cents. If you wanted to do it on a monthly basis.

But, as we pointed out, if you take April's figures and you annualize it and you assume that they would extend all the way through the quarter, you would get approximately $2.75 for the second quarter, if the rates stay where they have been during the quarter to date

Okay. I guess my question was, what would the Teekay versus the Clarkson would have been?

What would the Teekay versus the Clarkson?

Yes.

I guess we gave you a rule of thumb, Magnus. And I guess we still believe that that rule of thumb holds pretty good. So I think there's no change in that guidance.

Okay. I figured I would try. Thank you.

Jon Chappell, J.P. Morgan.

I have a question regarding the Tapias acquisition. After the Navion acquisition, you had disclosed (indiscernible) some of your financials -- that you paid about $116 million for the long-term contracts, in excess of five years. Have you disclosed a total yet for the long-term contracts that you're paying for Tapias?

Well we have disclosed that of the 810 million -- the cash component of that will be approximately 260 to 265 million. As I indicated, we took over that -- we are going to take over that Company with effects in January 1st, so we got a reduction in the purchase price because we were able to get the cash flow and get the benefit of the high spot tanker rates. So, if you look that figure of 260 to 265 million, and you look at $35 million of cash flow we will receive on that cash, you are looking at a cash-on-cash return on that cash of 13 to 14 percent per annum, stretching out for the annuity nature of that contract.

Bjorn. I have a question for you regarding the Caribbean market. Obviously, (indiscernible) to U.S. Gulf Aframax is one of your primary trading routes. And the volatility in that region over the last three months has been quite extreme.

Has there been any extenuating circumstances causing rates to really spike (indiscernible) over the last few weeks? Or is that just the normal run of the business, I guess?

The last time I spoke to our guys in Houston, not long ago, the impression I got was that there are no so very specific factors. Just a little bit of volatility -- length in tonnage, which is short-term. There has been some movements in rates in other sub regions of the Atlantic, where ships are being pushed around a bit.

I think there were some refinery turnarounds in the U.S. Gulf. But I think they were in February and March. Although I think the Laro (ph) is doing some turnarounds now.

So, I would say it's volatile because utilization is high in the world fleet overall. But Caribbean is notorious, I think, for volatility. So, I'm not really concerned that it is other than a passing phenomenon, and we expect the market to firm again in the very near future.

Okay. Nothing political with what has been going on in Venezuela, you don't think?

I don't believe so.

Okay. And then finally, operating expenses came down quite significantly sequentially, I know that a part of that had to do with more ships going on a timecharter and it was offset to a degree by timecharter higher expense. But, the gap was not exactly the same. So, are you seeing any operating synergies that are causing the cost per day for your vessels -- whether it be the spot side or the fixed-rate side -- driving the cost per day down?

Well, we did get a surprise on our Navion shuttle tanker fleet, because those expenses came in a little bit better. And, as you know, we get some seasoning as we get better control over those operating expenses. But, the other factor that is affecting our operating expenses is the fact that we sold older vessels, and we're taking in newer vessels. And those newer vessels are -- have lower operating costs than the ones that we sold. So, that is helping us. And then there's just the general timing of selling vessels and getting new vessels (indiscernible).

So we're very happy about the reduction in the vessel operating expenses.

Jin Chun (ph), Belmen Rose (ph).

A fantastic quarter. The Tapias acquisition has certainly bulked up the fixed-rate segment revenues. Is there any thought of rebounding back to continue your former higher spot charter exposure?

Hi, thanks for the question. Well, let me mention that in 19 -- sorry, 2003, the average size of our spot tanker fleet increased from 70 ships to 85 ships. And so we certainly have not neglected that segment.

In addition, we have 12 Aframax tankers currently on order, destined for our spot tanker segment. And we have been active in (indiscernible) vessels, at a time when we sold some of our oldest ships, to avoid reducing operating leverage.

So, basically, I think we are definitely focused on both segments. And, as you have seen, our operating leverage has remained or grown to a very high level.

Absolutely. But I guess, excluding the timing issues, is there a general rule of thumb in terms of targeting operating days you are looking to have on spot and on (indiscernible) with them? Or is this (indiscernible) something that is very dynamic, as you read a market?

I think it is really about having a trader mentality for operating the spot market. Of course, it's a customer service business. But, at the end of the day, you have to accept there is a deep cyclicality in spot assets -- both in freight rates and in asset prices. So we try to do our shopping when the market is below midcycle. Right now, I would say asset prices are fairly high.

Absolutely. And just one last follow-up on LNG. Do you expect a -- develop a critical mass in (indiscernible) spot market in the next few years or -- I understand you're primarily interested in building to suit. But, it's just a more generic market question.

Well yeah. I think that you will find most people would say there is not really a spot market for LNG. It's very much driven by projects and infrastructure. You could characterize them as floating pipelines, those ships.

But there are some ships speculative on order. There are some ships either unfixed or on short-term contracts. One of the interesting aspects may be looking five or ten years down the road, at the potential emergence of a submarket. And that will I think cater to Teekay's skills on that side of the fence as well.

In addition, it would require, I think, a lot stronger balance sheet. Because you could not project finance vessels by trading in that kind of operation. And again, Teekay's strong balance sheet would become a competitive advantage -- even more than it is today

I guess that leads to my final question -- is how long do you expect to take to be comparable -- getting fully comfortable with LNG via Tapias before you take the next plunge, so to speak.

I would characterize our skills as being adequate to secure LNG business even before we acquired Tapias. We have a great deal of experience and talent within our organization. We in fact man four LNG shifts in Australia for the Northwest job project, which includes the VHP (ph) Phillips and Shell and so on.

So, we certainly felt comfortable we could pursue projects.

The benefit of the Tapias acquisition is twofold. It gets us into the market right away and establishes beyond any doubt our credentials, should anybody feel that physical LNG experience was an absolute requirement.

Secondly, it's broadens the number of birth (ph) or ships you could say on which we could train crews as we look to grow the LNG business -- something which will be a real (indiscernible) factor of trained crews in LNG.

Fantastic. Thank you very much.

Manus Chopra (ph), Tiger Management.

Just, Bjorn, I was hearing some controversy regarding the deadweight tons of mandated scrapping through '05. There are some numbers as low as 18 million deadweight tons and this is at 34? I'm not sure why this gap exists? And on wondering if you could shed some color of that?

I'm also looking for your latest estimated (indiscernible) scraping number through '05? I believe it was 9 million tons last time I met Peter in January. And could you just remind me on why that might happen again? Thank you.

Sorry. What was the last thing you asked? Voluntary scrapping -- okay, right.

Well, as far as the numbers are concerned, let me try and be brief. Clarkson (ph) does a great job in providing data. But even as good as they are, it is not an absolute science. So you get a little bit of movement in numbers. But I can assure you that even after a lot of scrutiny by Clarksons and a lot of dialogue that we have with them, the numbers are as stated on (indiscernible) our knowledge -- as said on page eight in our presentation.

The numbers have moved down about 1.5 million tons since our conference call in February, because it was determined that certain smaller carriers -- like vigil (ph) carriers and easy chemical carriers -- are exempt from the IMO regulations but are governed by some other regulations. So they were pulled out.

But you can also reduce both the numerator and denominator on that calculation, and pretty much get to the same percentages.

So the 18 million, I have not heard from anyone. I have no idea where that comes from. But, we spent a lot of time looking at this and I know you have a dialogue with tankers from time to time. Feel free to call tankers, or we can call you --

Great.

As far as voluntary scrapping, I guess the beauty of voluntary scrapping is -- nobody knows until it gets sold. (indiscernible) rate that scrap prices remain very high -- 350 to $400 per ton. Which means an old VL CC (ph) could be worth $50 million in scrap.

Knowing that you have some hard brick wall deadlines coming at you, will definitely cause some people to voluntarily scrap at investment hurdle times, where they otherwise might have taken a punt (ph).

So I would say -- the fact that 400 million tons left the fleet in the strongest tanker market 30 years in the first quarter, that is pretty remarkable.

I was surprised by that as well. Well thank you. Continue the good work.

Walter Lavato, Passport Capital.

Just continuing on the last line of questioning -- on page 8, (indiscernible) the mandatory scrapping, or new building deliveries -- does that take into account what was delivered in Q1 '04?

Correct. We looked at it two ways. In fact, this is the more conservative way of looking at it. I looked at also with Q1 gone. And actually adjusting the oil demand forecasts to the last nine months of the year, where IEA is focusing 2.4 percent. And you could actually arrive at a slightly negative number in the change in supply and demand doing that.

But, just because the reconciliation between quarters and months -- we went with the number that everyone else can dig out and go back and look at.

So, I think 2 percent is a pretty conservative number right now. The March year-on-year oil demand grew by 3.2 percent globally.

And so, the potential upside to this analysis is that oil demand is running way higher than 2 percent, and there's no voluntary scrapping assumed in these numbers.

Right. On the -- you mentioned also about (indiscernible) 2007 new tonnages -- it is currently 10 million. But you feel that that is, or is going to be, limited by birth space being taken by other vessel categories. Do you have a sense of what that limit is? Is a 20 million? Or is it 15 million? Or you just don't know?

It would be a complete guess. I would stress. My sense is there is so much LNG business going on -- there is so much dropout business, container business, car carriers -- so on -- that I would say 15 million is probably a high number.

You have to remember that with a fleet of 320 million tons and an average life of 25 years, you have to replace 12 or 13 million tons every year just to stand still. You would add any demand growth.

Given that you do have now exposure to the bulk business through torm (ph) -- do you have a view on that? People are talking about how it's coming down, people are afraid that keep the rates are going to come crashing down. Do you have any anecdotal evidence or just a view on that?

Our view is -- we got very lucky.

No, we don't really have any insight. I would say that I can offer you beyond what we can all read in publications -- we're not really looking at the drop-off business as the Teekay business.

Okay. Given all that, Peter mentioned, on slide 18 and 19, kind of walk-through how solid sort of the cash flows look on let's say normal -- even weak markets. And he specifically mentioned that reduction and share -- returning money to shareholders may be the focus. So, question is how are you going to go about doing that?

Well, the first thing we're going to do is to delever -- similar to what we have done with the Navion acquisition. And it's one of those things that we will be looking at later on in the year, as the year develops. So that is something that our Board will look at and respond to later this year.

So what kind of -- at what point of sort of net debt to cap (indiscernible) become an issue anymore? Assuming no other transactions?

Well, for us, getting down below 40 percent has always been a sort of that we like. With our fixed-rate business growing, I think we have moved that figure from 30 percent -- which was the old net debt to cap figure we wanted to bring ourselves down to -- up to 40 percent. So anywhere between 30 and 40 percent.

Okay, great, thank you very much.

(Operator Instructions). Magnus Fyhr, Jefferies & Co.

Just a follow-up on the G&A. I don't know if I missed this or not -- but it was up slightly from fourth quarter. I think at the last conference call you had guided down to the $23 million level. Can you elaborate on that, maybe, for Peter?

At the last conference call, I indicated that we would probably trend that back down toward the 23 million. And what happened was, was that there was greater incentive-based compensation that was put into the quarter, that was unforeseen, that was as a result of our bonus program.

So we have not -- when you look at that, that accounted for the bulk of the rise above 23 million or approximately 4 million. And looking forward, we see on an annualized basis -- or on a run rate basis -- that will be at 23 million. But I would caution you that we would have to add in Tapias to that going forward. And we are not yet giving guidance on what the overhead change will be to reflect Tapias.

So maybe conservatively do a 25 million run rate?

Yes, to be conservative, yes.

All right. Thanks.

Ethan Silverman, Lexford (ph).

This is a question, I think, affects all shareholders -- there is a lot of good news in this Company and exciting acquisitions, supply demand picture of capacity looks very positive, rates have been terrific, and the numbers you've been generating had been quite impressive. Why do you think the stock is trading at such a low valuation relative to your cash flow -- I see you are coming to New York to an investor day. Is this something that frustrates you? Given the fact that you're generating so much cash?

That is a great and deep question. We definitely think a lot about that. I will take the view that a couple of factors. Overall I would say -- I agree with you. There's a lot of great news on Teekay. And we think that our job is to make sure we keep talking about that.

But among other things, why we talk you for 35 minutes this morning. The point I think partly is that the section as of the spot business has been a bit euphoric for the market looking at tankers. And I think Teekay sometimes is marked down in that kind of environment, because of the fact that we are investing in profitable long-term business. Which, by the way, ROEs that are superb.

I think, secondly, that if people were to give us credit for that fixed-rate long-term business, the shipping industry is frankly littered with lots of broken promises. And for people to talk about future results, even though Teekay I think has a lot of credibility, I think it helps when those numbers start coming in.

And in this quarter, we did deliver $70 million in fixed-rate EBITDA which brings us to 280 million annualized -- in line with what we said we would be at towards the end of this year.

And so, I think the Navion transaction was very transformational for us. It is a-year-old. Which is a Quantum leap, as I said. And I think it's very hard to value our segment. And I would think we want to continue educating our constituents as much as we can.

Now if I can follow-up with two questions. Relative to your fleet, and your book value, it would seem to me that your book value is significantly understated relative to your current NAV. Would you agree with that?

Yes. I would say with the uptick in the amount of the value of vessels -- that is true for us. And, I would also say that our net asset value does not take into account our charter contracts that we have.

And if I may, one final -- given what you just projected about the second quarter in terms of current rate and earnings, and given the fourth quarter being really a peak seasonal quarter, it would seem to me that with the demand picture, the fourth quarter is going to be quite significant -- even relative to what you did in the first quarter. Is that a correct assumption?

Well, the first quarter was very strong I think. The current quarter, where I think we have given a little bit of guidance, is down because of seasonality. We expect to have new record high oil consumption over the winter. And a little bit depends on OPEC. They might maintain very high production through the summer, in which case we might borrow a little bit from the winter. Vice versa, they might try and reign in supply. In which case, I think we could have a real big uptick in the fourth quarter.

So, I personally believe that we are in for another very strong winter market. But how it will exactly play out will be volatile.

Thank you so much.

Henric Wits (ph), DNB.

It's actually Deron speaking. Just a follow-up question -- it's a minor thing, actually. Concerning the Tapias acquisition. A lot of talking about the cash flow. But what about the operating costs of those ships? We understand that running ships under Spanish flag is sometimes 70 to 100 percent above the comparative OpEx for other flags. Will this affect the operating costs for the Teekay fleet going forward?

Well, we have not begun our detailed integration planning at Tapias yet. That will be one of the questions to answer when we get underway. I cannot really give you a lot of guidance right now.

Okay. What about the Spanish flag requirements? A lot of those vessels are under long-term contracts. Are contracts requiring Spanish flag?

There are some contracts that have flag requirements and others that do not.

Good. Just one question, Peter. I'm not sure if I got you right. But, did you say that 60 percent of your spot fleet was fixed for the second quarter?

Yes.

Okay. That's -- thanks.

60 percent of our spot days are fixed for the second quarter.

Okay. Thanks.

Mr. Moller, I will turn the conference back over to you for any additional or closing remarks.

Great. Well, we again thank you for being patient to listen to our many slides. We have a lot to talk about. And we thought it was worthwhile going through the very exciting supply and demand fundamentals in particular.

So, enjoy the rest of your day and thank you for joining us. Bye.

That does conclude today's teleconference. Thank you for your participation. You may now disconnect.