Teekay Corp Ltd (TK) 2004 Q3 法說會逐字稿

Welcome to the Teekay Shipping Corporation third quarter 2004 earnings release conference call.

[Operator instructions].

Now for opening remarks and introduction I would like to turn the conference over to Bjorn Moller, President and CEO of Teekay Shipping Corporation, please go ahead sir.

Before Mr. Moller begins and before I read the forward-looking statements, I would like to direct all participants to our web site at www.teekay.com, where you will find a copy of the third quarter of 2004 earnings presentation. Mr. Moller and Mr. Evensen will review this presentation during today's conference call.

I will now read the forward-looking statements. 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 constitutes 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 20-F, dated December 31, 2003, on file with the SEC.

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

Thanks Scott, and good morning, ladies and gentlemen, thanks for joining us for today's conference call. As usual I am joined by our Chief Financial Officer Peter Evensen, who will discuss our financials. Let me begin by saying that these are exciting times in the Tanker business.

We are in the midst of an outstanding tanker market. In my comments last quarter, I post the rhetorical question whether that would actually be enough tankers to meet global demand. Well, since then tanker rates are doubled and in some cases tripled making that question more relevant than ever.

I will first turn to the highlights of the quarter on slide number 3. Our net income in third quarter was $245 million or $2.77 per share, a record result. And for the first nine months we had net income of $533 million or $6.12 per share, which was also a record.

Our results for the quarter included $144 million in gains on vessels, sales and sale of our shares in time. On September 30th, we announced the dividend increase for the second consecutive year. We progressed a schedule with the integration of the Tapias acquisition and our third LNG new building delivered during the quarter. We are operating in an environment of strong global economic growth, with global oil demand growing at the fastest pace in almost 30 years and due to the cumulative effect, our positive tanker demand fundamentals, we have seen rates serge in October, with Aframax rates now ranging from $60,000 to $100,000 a day and in some cases higher.

Turning now to an overview of tanker market fundamentals starting with tanker demand, slide number 4 shows the continued high rate of growth in global oil demand, as well as, the normal seasonality. In the third quarter demand grew by 3.5% from one year ago.

OECD demand rose by 2%, while non-OECD rose by 6%. In its October report, the IEA again raised its forecast for 2004 predicting 3.4% growth overall, the highest rate of growth since 1978. The IEA reduced its 2005 growth forecast slightly to 1.8% but I will come back to that forecast in a minute.

Turning to slide number 5, we see the same picture as last quarter namely that world oil supplies shown by the blue line continued to grow driving up tanker demand in its weight. Yes with global inventories stuck below that 5-year averages, oil supply, is simply keeping up with the underlying demand, that's shown by the bars on the chart. And with oil demands expected to continue to grow, we can look forward to further increases in tanker demand.

Coming back to the IEA 2005 forecast, for a minute it's interesting to look back on the history of its forecast for 2004 and compare these to global economic growth on slide number 6.

On the left side of the slide, the red line shows the progression of the IEA monthly growth forecast for 2004. At the time of its initial forecast in July 2003 the IEA projected that oil demand would rise by only 1.3% this year, and that was at a time when the IMF was predicting over 4% GDP growth shown by the blue line.

And while the IMF forecast of GDP growth was subsequently raised to 5%, it is clear from the upward provisions made by the IEA to its forecast in 10 out of the next 15 months that its initial forecast that oil demand growth would lag GDP growth by 2.8 percentage points was overly conservative.

This gap has gradually been halved to only 1.4% points today. And this raises the question of weather the IEA is again being overly conservative in its estimate for 2005 Oil demand growth. And on the right hand chart we have shown the latest IEA and IMF growth forecast, for 2005.

As you can see with the GAAP back up to 2.5% points, the IEA is starting up almost as far below the IMF as it did last year. If the economy grows as protected by the IMF, it would appear to us that the 2004 forecast will also hold true in 2005 and that oil demand will grow by more then 1.8% next year, and this is the specially likely given that the highest rate of economic growth is occurring in some of the world's most energy intensive economies such as China and India.

Looking at the second key drive of tanker demands and the resistance factor on slide number 7, we see that over the past 15 months, Middle East supply shown by the red line has been growing three times faster than other supply sources and there by lengthening the average voyage of a tanker, and that's actually illustrated on slide 8 in search of how critical it is for tanker demand just where the oil is produced.

The past show how a 1% increase in global all supply translate into global tanker demand growth which you can read of the horizontal axis depending where the oil originates from. As you can see from the bottom bar the Middle East middle oil is a huge drive of tanker demands with an increase in tanker demand of almost 3% for every time the Middle East produces an incremental 1% or 800,000 barrels of world oil supply. So overall, the tanker demand side looks very solid going forward and may even be understated.

Turning next to tanker supply on slide number 9, this is the slide you are familiar with. The third quarter saw on increase in the world tanker fleet of 1.5% new deliveries remained in line with prior quarters at 6 million tons well strapping dropped to 1.5 million tons due to the higher radar rates and more over to period of ship owners with old tonnage that must be scrapped by next April under the IMO we will wait until the last moment.

The forward order book shown here in the light blue bars was unchanged overall from the last quarter, but the amount of tonnage that remains to be delivered through 2005 were up to 38 million tons and 19 million tons is expected to be traced out under the IMO regulations through the end of next year, but has noted very little scrapping is likely to occur during the rest of 2004 due to the strong market. So we can expect this is higher 19 million tons to be strapped in 2005.

Turning to slide number 10, we show the updated map around the tanker supply and demand balance for the next two years, we have used the IEAs very conservative demand assumption for 2005 of 1.8% oil demand growth and we have used the traditional factor of 1 to 1.75 when translating this into tanker demand growth, it's certainly easy to argue that both of these factors should be higher.

But even using these conservative assumptions we came up with the market balance roughly unchanged in 2005, and for 2006 we are showing a 3% weakening in that balance. Of course the figures for both years are based on the unrealistic assumption that there would be zero voluntaries scrapping over a period of 2 years, and the reality is that since 2000, during a period of very high charter rates on average, annual scraping has averaged 18 million tons annually, practically all of it voluntary.

However if you turn to slide number 11, what is even more interesting in our view is to look beyond 2006 at the longer-term supply and demand picture through 2010 by, which time the worlds remaining single oil tankers are due to be faced out.

On this chart we have added a third column to the map covering 2007 to 2010, and our projection calculates the total amount of new tonnage that needs to be delivered from the shipyards to maintain the status grow in market balance during that four-year period. Lets go through it: If we assume a 2% annual growth in oil demand, it would create a need for an additional 55% tons of tankers by the end of 2010 to meet rising demand.

During the same four-year period an estimated 7 to 8 million tones of tankers would be mandated out of the fleet by IMO regulations and would need to be replaced. This means that we would need a total of 133 million tons of new tanker delivers over this four-year period.

With 2007 yards based pretty much sold out, we can comfortably project that 2007 deliveries will not exceed 25 million tons. This needs a requirement of 36 million tons of new tanker delivers each year during 2008, 2009 and 2010. In the modern era of shipbuilding the highest rate of deliveries in a single year is in fact the 32 million tons that we are expecting in 2005. Even if ship yards were to continue to allocate the same share of that capacity as in the past to building oil tankers, they would thus come up short.

Turning to slide number 12 the key point is that yards are not allocating the same amount of space to tankers. They are in fact reducing their focus on tankers. As you can see from the area graph on top, which shows the amount of tanker deliveries by shipyard, looks it broken down by country that the overall deliveries are on a declining trend.

And you can see it is clear that the yards are switching away from tankers, instead they are focusing on meeting the huge appetite for container ships and LNG carriers, which are more profitable for the yards and as you can see in the chart on the bottom of slide 12 between 2003 and 2007, the significant shift away from tankers and towards container ships and LNG carriers.

To take the situation beyond 2007 where the order book is not very extensive yet. We have recently held discussions with a number of leading shipyards about that 2008 capacity and they have made it very clear to us that tanker construction is at best, their third priority at this time. It's apparent to us that when yards stop taking orders in earnings for 2008 even left space will be allocated to tankers, well then that was the case for 2007.

So in summary, the long time supply picture in our industry is tight. And while the lumpiness of the IMO phase are scheduled we will lead to volatility in this picture along the way. We believe that any spells of over supply during this period will be temporary and self-correcting.

During any such spells weaker tanker rates, customer discrimination and classification survey investment hurdles would quickly push any old surface tonnage to the scrap yards. Looking next at the trade market on slide number 13, average rates moved up in the third quarter from the already firm level seeing in the previous three months.

The chart shows that rising OPEC production was a key factor in this move. Not shown on this slide is the fact that world fleet capacity utilization is once again exceeding 90% the level normally considered full use leading to despite in charter rates.

What you can also see from the slide is the surge and trade rates, which has occurred since October 1st, which corporate knew more than doubling in just a few weeks. There was no single event, that precipitated this move rather they reacted to the cumulative effect of positive underlying fundamentals, which in turn have lead to a sustained high oil production from all producers OPEC and non-OPEC alike. These long term fundamentals have been coupled with temporary events such as the beginning of the seasonal delays in the stride for phosphorous continued shut downs of Japanese nuclear power plants and hurricane related loss of US oil production for up to six months.

Well, low oil inventories -- with low oil inventories providing no platform and with the tanker fleet already stretched, we see no let up in high freight rates. Turning next to the developments in our main business segments. I will begin with our Spot Tanker segment of slide number 14. Aframax we generated $31,100 per calendar today in the quarter up from 27,600 in the second quarter.

We continued our actively renewal programs and we are in the midst of a major new building delivery program that will still see us take delivery of nine owned and two in-chartered new buildings in the coming two years.

Our fleet renewal program is being conducted in a very profitable manner. Let me give you an example. In the third quarter we took delivery of an Aframax new building at a total cost of $37.5 million a ship that was ordered in 2002. In a parallel move earlier this month we agreed to sell an 11-year old Aframax old boat for $35 million and it is our ability to execute on the timing of such arbitrage deals thus allows us to realize significant gains on ship disposals on a regular basis.

Our average fleet age has now dropped to only 7.5 years excluding our new buildings still to come. And as we sell our older ships into the rising asset market as part of our fleet renewal, we are ensuring continued high operating leverage to a combination of new building deliveries and in-charters. Let me show you on the slide number 15; just how active we have been in our fleet renewal this year.

A total of 23 ships have left our spot fleet through the sale of ships or the expired in-charters. But these ships are being replaced by a total of 19 owned or in-chartered ships that have joined the fleet and as I said we have another 11 ships lined after delivery of the next two years.

Slide number 16 is a new slide and a future picture of just how large and how profitable are in-charters strategy is. Our in-charters spot fleet comprises 41 ships on chartered from other owners.

As you can see from the second column the average remaining length of these charters excluding options that we hold to extend them further is just under two years. You can see from the column mark letter P at the average break even rate repaying for these ships are very low and based on the average spot market rates the TK earned over the past 12 months in each of these segments shown in column C.

Our in-chartered spot fleet generates annualized net cash flow of $144 million. Of course at today's rates this figure is far higher. For the first nine months of the year in an Aframax market averaging $33,000 a day, our owned and chartered spot market ships combined to generate an industry leading return on invested capital of 36%. This high figure is a function for our efficient fleet utilization from low average cost of our own ships and the low invested capital in our in-charted fleet.

Finally slide number 17 provides the highlights for the quarter in our fixed rate segments, of note is that TK was awarded a five-year contract of assignments by Marathon Oil to service the new Alvheim field in the North Sea starting in 2007. Alvheim is one of several fields being developed in that region underscoring the future potential out of significant shuttle tanker franchise. I will now hand it over to Peter to discuss our financials.

Thanks. As Peter had said the third quarter was a record for quarter for TK in terms of net income reflecting a combination of strong corporates, the continued growth of our fixed-rate business and gains from the sale of asset. Consequently TK generated a highest ever-quarterly net income of 245 million for $2.77 per share and net income for the nine months year-to-date of 533 million has already exceeded the net income of any previous whole fiscal year in the company's history.

The current quarter's results include a 143.6 million gain from the sale of our investment in term and 8 of our older vessel and 9.9 million in non-cash expenses related to foreign exchange related items. If you exclude these non-operating items, TK's net income would have been a 111.6 million per $26 per share, which is $0.3 per share higher than the annual expenses.

Looking at the third quarter operating result of each of our segments on slide 18 of the presentation. Overall cash flow from Vessel operations for the 3 months ended September 30th has increased significantly to 206 million from 99.5 million in the third quarter of 2003. The contribution from our spot tanker segment increased by 76 million or a 141% to a 129.5 million compared to 53.7 million in the third quarter of 2003 this increase was too primarily for the raising stock market rate.

Partially offset by a net decrease in terms of ship rate resulting from the sale of our older vessels during the past 12 months including 8 vessels in the current quarter. Despite these vessel sales the number of calendar ship sales decline by only 3% this quarter compared to prior years third quarter as a result of the delivery of new buildings and additional charted in vessels is given in detail.

Consequently we have been able to renew our fleet profitably by maintaining our high operating exposure to the spot tanker market. The fixed rate tanker segment generates 63.6 million in cash flow from vessel operations during the third quarter compared to 45.8 million in the third quarter of 2003, an increase of 39%. This increase was primarily due to the inclusion of Teekay Shipping Spain's fixed rates Suzemax tanker results and the addition of high conventional tankers on long term fix rate charted Conoco Philips.

Our fixed rates LNG segment generated 12.9 million in cash flow from vessel operations during the second quarter we representing the results from Teekay Shipping Spain's the LNG carriers which includes one LNG carrier vessel level delivered during July. We expect a fourth LNG carrier to be delivered at the end of the fourth quarter of 2004. So at fixed rate segment continues to grow as new buildings are delivered. The integration of Navia Tapias winning Teekay Shipping Spain as you heard is on track.

Turning next slide 19 and reviewing the remaining income statement figures in comparison to the third quarter of 2003 general and administrative expenses for 29 million compared to 23.5 million in the third quarter of 2003. This increases primarily the results of the acquisition of Tapias as well as higher accruals for performance based bonuses in 2004 and the higher non US dollar cost due to the depreciation of the US dollar. Net interest expense was 29.3 million in this quarter compare to 21 million in the third quarter of 2003 primarily due to the additional interest expense resulting from our purchase of Tapias and the delivery of new buildings during the past 12 months.

The Income Tax expense was 8.1 million this quarter compared to 6 million in the third quarter 2003. Our deferred income tax expense primarily consisted Income taxes incurred by on reach in several thing for operations included in this income tax figures is 4.3 million and 4 million in the third quarter for 2004 and 2003 relating to the deferred income tax relating to unrealized foreign exchange gains.

Gain on sale of marketable social securities was 90.1 million this quarter due to our sale of remaining shares into one. This gain combined with the gain realized in the second quarter resulted in a total realized gain of 92.3 million on the $37.3 million investments made in July 2003. Other loss of 4.6 million includes an unrealized foreign exchange loss of 5.6 million relating to the year denominated that of Teekay Shipping Spain partially offset by a number of smaller items.

Turning to slide 21, 20 excuse me we have presented our September 30, 2004 balance sheet and compared it with the previous quarters. Our net GAPP including capital lease obligations decreased by 280 million in the quarter. The funds used to repay the asset came primarily from cash flow generate from vessel operations, the proceeds from the sale of our investment return and the sale of vessels.

We also use cash to make installment payments stored on new building programs. Treating the mandatory exchange for prepared issue as equity, net debt to capitalization declined from 49% at the end of the previous quarter to 44% at the end of the current quarter. This decrease is due to the previously mentioned asset sales and cash flow generated from vessel operation.

If this strong stock market continues, we expect net debt to capitalization to decline below 40% by the end of 2004 and this would bring our net debt to capitalization down to what it was at the end of 2003. This is noteworthy given that we have invested over 1.3 billion in vessels and the purchase of Tapias, which includes the assumption of debt during the first 9 months of 2004.

As you can see on slide 21, we have very significant operating leverage in our spot tanker segment. The size of our spot rate means that for every $1000 per day increase in Aframax rate, our EPS increases by approximately by $0.08 to $0.09 per quarter and our current income break-even is estimated to be between 14000 and 15000 per day, which is increased slightly because of a higher chartering in activity and the sale of our older depreciated vessels.

Finally, because of the tight availability of tonnage, we are booking 3-4 weeks in advance instead of the more normal 1 to 2 week, so we have fixed approximately 43% of our total spot (inaudible) in the first quarter and an average of approximately 44000 per day.

However, as you heard the market has been much higher recently as current Aframax voyages have been booked at 60,000 to 100,000 per day. I will now turn the mike over to Bjorn to conclude.

Thanks Peter. I think you have been on the statements to say that we are enthusiastic about this tanker market. We are very excited about the current high tanker rates at today's rates we are generating about 6 million daily in cash flow from vessel operations.

We are also excited about the potential longevity of the cycle driven on the supply side by the huge need for fleet replacement after decade of under investment and on the demand side by the world's two most popular nations simultaneously undergoing enormous industrialization.

Above although we are excited about how well keep their position to benefit from the economics and while we expect volatility to continue throughout this decade, we believe the term super cycle is well as a well suited description of our Teekay is experiencing today. Thanks for listening and we will now turn it over to the questions.

[Operator instructions]

We will take our first question from Magnus Fyhr, Jefferies & Co.

Good morning, congratulations to the great quarter. Couple of questions, looking at your average TCE rates for the quarter and comparing that with Clarkson it looks like this count has narrowed over the last, you know, nine months from the first quarter, close at 20%, 15% in the second quarter and on a 7.5% in the third quarter, could you elaborate a little bit there has been a change there, if you are doing more triangulation?

Hey Magnus thanks for the positive comments. I think you know that if you look at a two key routes and we have a blended average in our rates and as we track, how we perform against Clarkson and those routes we have in fact back seen is if we considered a premium on the routes that we will be comparative, so basically there hasn't been any very significant change on operating patterns, we always use a lot of triangulation and therefore achieved very good fleet utilization and TCE as we have reduced the single hull fleet, I mean we had a single hull fleet of about 35 ships if you go back 18 months, today we have, I think 15 single hull ship (ph) and so the higher percentage of double hull fleeted ships, there is some what of a gap in the rates between single and double with the half a portion double hull ships, I think that may be further reason you are seeing that ships.

OK and a just another one question from me. There is still a lot of talk about, you know the mandatory scrapping is a lot of different numbers out there seeing your number has come down here in the last two quarters, I guess from the slightly below 20 million, that rate ton for next year, how confidence are you with that number and may be you can also elaborate a little bit on the differences between the numbers out there?

I guess we are doing a lot of analysis work on that Magnus, just of important thing, I think the industry, I guess the issue is you have 3500 odd (inaudible) out there and some of them are doing various way of things close to trading, storage and other functions and some of the configurations of the ships is, you know the database in the global tanker fleet is not 100%, so some ships do they have protectively allocate (inaudible), I think like that as we begin to take much more in to it just the worlds scrutiny is turning to that.

Then basically, you know, I think more completeness of data is forth coming. I would say that this really a high degree of uniformity in the number of, a sort of 15 to 20 million tons being the number for an extreme. The longer thing, the one we use for 2010 is, I think a lot more solid because single hull is much more definitive and for prudence category 1 and category 2, the double fleet that we see in next year.

So I think it is pretty solid number basically but data is not scientific but it's pretty accurate in our view.

OK, thanks a lot.

Thanks.

OK, we will now hear from John Chappell, JP Morgan.

Thank you. We want your opinion in China is obviously in the pass route mainly in, I think from the talks with the IEA (ph) last week, a kind of super stock market today for the couple of days, have you seen any slow down in Chinese imports to Chinese demands, are you concerned about that going forward?

Then another thing people think that over luggage, just how much figure the US economy and if China was the slow, you know significantly for the US economy stay strong, would the shake to the tanker market to be sad as some people as expect?

Well, I guess, you know let me put in this way, I was in China last week, stayed 5 days traveling around and there listened to some other top economist in China and had a dinner with the Vice Chairman of the Finance Committee of the Peoples Party of China and those guys are not focused on slow down and say they are very focussed on managing the economy but they are expressing a great deal of confidence that there is room to absorb double digit growth rate for long time to come.

So, I would say we are not seeing it and we are not hearing it from, you know being on the ground they order. So, you know, it is a significant part of the growth in 2004, the IEA is already assuming a lower number for 2005 I think that's probably if anywhere the area where they will come in lot with the IEA.

And how this is first to quantify that can you just, you know great deal, US versus China as more important towards the tanker growth, tanker demand.

I guess, I mean in absolute terms the US consumes three times more or more than three times more than China so in terms of percentage growth, of course if you have the much bigger engine in the US, but the intensity of the energy intensity of the Chinese and the Indian economy is tremendous, so I think there would be, you know - there will be a double profit situation.

If I can assess few more questions at the end of the presentation, new trend a header that will be being the leverage down a bit on the balance sheet, will be generating a lot of cash in the fourth quarter at these rates, you sign a bonds of ships in the fourth quarter for a lot of cash coming other companies are looking at thing for its share buybacks, special dividends, what's your priority for these cash in the near term?

Well, as I said during my remarks we have invested a lot and we have more comings as we detailed in the press release. We are going to be paid down the debt, we want to get it under 40% and we would like to get it down may be to the mid 30's, which is where we bottomed up the last time.

We are not to find what assets just for preparing to target in but this is a good problem that we have right now and so this is something that we are going to look at in the new year but as we said to investors so we can find anything to do with the money then we will find the way to return it to the shareholders.

OK thanks Bjorn.

Thanks.

Miss Sidoti, Natasha Boyden.

Hi and congratulations on a great quarter. I think most of my questions were answered, I just wanted to touch upon your entering to the LNG sector, which we would see with the last acquisitions, and do you continue to look in that area or just in terms of expansion strategy or are you focussing on different areas or have you come to any conclusion?

We are certainly considering and look at it very closely, we have a clear strategy of fill through suit against long-term contracts and you know there are many long-term contracts but there is also, you know a lot of, a lot of choice and I think we are comfortable that there will be sufficient projects in the next five to ten years that we can afford to be selective right now.

So, we are looking at it, we are optimistic, we are excited about our platforms that we have created in that sector and it's a huge storage for the energy, you know, for the energy shipping business and we are right in the pick of it. So we will follow it and we will certainly announce it if we have anything to announce but in the same time and our business is on.

OK thank you and then, I just want to get your opinion on the third quarter was it the rate for significantly higher than the second quarter and you know, you see that's the record quarter guidance seasonality and do you think this trend is going to continue just given the fact that all demand is so strong or do you think this is perhaps just an operation for this year?

Well, I guess, I think what we are showing in one of our charges that is higher loss and higher highs and in fact if you look at the season hardly this year the passion has been in line what it has been another US sequence it was high first quarter or lower second quarter by the higher third quarter and we now well into the fourth quarter and seeing a much higher level there.

But actually pretty close to following the all demands as you have so I don't think it's an aberration I think what's what makes it feel different is that the rates were so strong in the first quarter for that's just a sign of where that market is overall and that we moving up from that third quarter is I think what's encouraging.

OK, great thank you very much.

Thank you.

We will now hear would (inaudible) capital.

Hi I have two questions, the first is I just want to make sure I understand the slide 21 with your operating leverage if I make the assumption of roughly half of your business in the fourth quarter is going to appraise that I have already booked at (inaudible) a day and that I assume that for the rest of the quarter you as much as say the mid point of 62100 or a 80,000 I am sort of coming up with the 375 each years number if those assumptions are correct is my right on the earnings.

Yes if we average that we would make about that year.

OK. And then my second question is this regarding the that the reasons that are scheduled for a and its seems that between the supply of Aframax's or the additions between and now April 1st and the deletions are actually be a net reduction of 1 million metric tons is your analysis the same or different.

Well I haven't counted the numbers between now and April 5th. Last quarter we had a slide in our presentation that showed that over the preceding 18 months the Aframax fleet grown 8% and the VL Suezmax's fleet had grown 2 to 5% after the 3% then we slip forward for the next 18 months because those if this proportion of the high number all that from in that 19 million tons and we are at the number max on the order is not you know is can I continue at a normal pace you could in fact see a 0% change in the 18 months in Aframax while the bigger fleet segments would go up of it more so it certainly stands for reason than that in the period right around that actual cut off date of April 5 you would see a net reduction Aframax fleet but I haven't won those numbers but it sounds as unreasonable.

If that wards a happen instead of majestically what happens in the business due other Suezmax's come in our or is there some sort of prices or would there be a lot of pressure from own governments to relax those IMO restrictions or how would that manifest itself.

Well that's a great question I mean there is no of pass in the world fleet what's going to happen when overnight 19 million tons or 6% of the world fleets suddenly is gone. I mean its not like the OP scraped on April the 4th in the afternoon so if the become ineligible to fleet as they do under the law they would simply have to stop operating and lay-off somewhere on way 4 this has lots of scrap that's going to force rates up rates could spike and there is really no limits to where rates could go but the issue about the in elasticity in tanker rates and tanker demand.

Thank you very much.

Thank you.

Justine Fisher with Goldman Sachs has our next question.

Good morning I just have a quick question regarding an additional possible vessel field I know that I think they have don't mention that we know when you are buying new builds for $37 million and then selling over tankers for $35 million you know in this sort of environment its attractive to get rid of that older tonnage I was wondering I know you probably can't tell us your precise schedule of you know how many additional older tanker Are you planned to sell that is you know are you looking to get rid of all the tankers of a certain age of this single hauler is there any way you can give us some colors as potential vessels sales schedule are going forward.

I can give you these parameters of how we are thinking about it and that something I mentioned 15 single hall ships remaining in our fleet and you know that's part of an ongoing fleet renewal program that will long hold and imagine the next couple of years so at with the rising values that's helpful that we are able to sell the ships into very strong market and we are actively in trading ships I think we also mentioned in last quarter that we were charting ships in the high 20's of 28 to $29,000 a day the highest rates we have ever paid but we are still happy with it so I think that's a very great good arbitrage I am relying of the schedule risk on ships that have a shorter life span that modern ships or than double holed ships and as we if you ask a question would we cash in on the higher value of modern ships the answer is probably not because that's aqua business and we are very bullish about the future so if we the benefits that we have because the size of actually and than we have 85% double holed ships and now average age for fleet to 7 years and we are going to great to be opportunistic and so we will be optimistic and we are very disciplined in the cycle as you know and so that's what we continue to do.

OK thanks.

John (inaudible) with Smith Barney has our next question.

Hi guys my question of first do with the ex-rates and I just read cost into the higher and the previous quarter is there any change in the cost should have been a (inaudible) annualized factual number that have been indicated to be lower at 0.4

Well in the fixed rate segment we were hurt by the normal seasonality that you in the shuttle tankers in the North Sea that we had lowered utilization in terms of the cost coming to we still have to gain the synergies on (inaudible) which we are in the process of getting through when we are looking at it and so that's what is one of the drivers coming through that we are looking at it but the basically we worked on getting our shuttle tanker made in self during even higher level and that's given us a few more cost that effect through.

I think its also just to add I guess in the summer period we try to do as much as maintenances we can and so is lumpiness in that as well I think the long term prognosis for the cash flow in that segment remains as previous about it.

Yes

OK thank you.

[Operator instructions].

We will now hear from Martin Ross from NSR Capital Management.

Thank you already pre-matured to talk about this but it is been some press that details from the joint venture to possibly develop a new formal to compress natural gas vessels, if it is any thing you can bring us up to date on analyses?

Hai Martin well I guess C&G as is called compressed natural gas is one of the foundries for the industry there is a lot of what's called stranded gas at locations where there is not enough volume to justify pipeline or liquid faction plant that would allow to be LNG and there are also increasing the straight environmental rules against clearing the gas off which is happening or has happened in the past.

So the issue is how do you get this gas removed and if you are removing it one out move it to commercial market so a technology of compressing the gas into special types of vessels is what's you know the industries is looking for commercially viable solution it technically as possible but it hasn't been demonstrated to be commercial viable yet for 5 desk prices are nothing and you know the level drive towards natural gas, so we are one of a number of companies that are looking to commercialize that and its little bit earlier I think to say well that will lead to but is not exciting area and once if you do break through I think that is could be a profitable business.

Thank you and good luck.

With NPower Asset Management here you have Robin (ph) with our next question.

Hi guys how are you, just two questions beyond - on the rates you have seen most recently could you just talk a little bit a seasonalities so this is all new to me as you go for the balance of the quarter is there any historical pattern you see so we can start to put this range you get out of 60-to-100 in some kind of a framework?

Well lets talk about each of the factors very directly the demand side all demand decisional but the lead indicator for a tanker rates is our production and so if our production stays steady in a market of moving all demand that's going to be all inventories themselves the seasonality is not there for tanker rates, what's happening right now is that there is no seasonality in our production there is just increasing all production and therefore we are seeing rising tanker rates that's not necessary on the seasonal its fundamental and if the all demand continues to be strong and beyond the winter because of economic growth then we could see all production to consider will continue especially in very hard price environment.

And on the supply side of course the only seasonal fact on the supply side would be inefficiency in vessel utilization that occurs during the winter one of which is the highly prophesied phosphorus strait delays where last winter the equivalent of 10% of the worlds Aframax actually proceeding part did either end of the (inaudible) you know one end of the other of the (inaudible) because of my time sailing restrictions that's beginning to built up again in a force there are more weather delays in the north sea and there is ice in ports somethings like that, so that's the seasonal factor there.

OK.

So what used to happen is all time we used to play he was playing, you know cutting back in the spring time and ramping our production in the Autumn, because they were afraid of inventories building too much and we are not seeing that now they just pointing hard as they can.

OK, can I follow and ask you anyone in the presentation you have talked about as the multiplier effect I think when you created to supply demand equation it says something on the other of 1.7 its kind of an historically where it has been, some folks up there believe that change that would decline and the (inaudible) would actually lose share going forward, can you talk that little bit?

Well I mean I have heard that, (inaudible) has historically had agreed to be the swing supply except when they got really irritated then they became just went on a price they have been the swing suppliant. But it also rare first of all this not prepare this were the only spare to past in the world exists, so as long as all demand is going up I think they will gain market share not loose it.

Secondly if you had any kind of profits of slower all demand growth and if non opaque oil is probably going to find ways to increase as well because of oil prices that's a natural reason, I think I have to look at the global trading pattern is also changing in a way that make some other traditional models a little bit optionally. Is obvious seeing a lot of movement of oil from the Atlantic basin to China and Japan and Korea, something that was pretty rare in the past and so when Russian oil just places North Sea oil in the North West European market then the North sea oil that used to go to rather them if I goes to China that's a very interesting development in the ton mile demand.

So I think it's a little bit too simplest, to look at opaque and non opaque I think you have to look at the fact that global trading patterns are becoming quite interesting and a lot of new oil sources coming from West Africa which is actually not that's sure of all of a start looking at web weather went up. I would say it's a pretty aggressive picture.

OK, if your just one more balance sheet question if I could, I think it was discussed in the Q&A about getting the laboratory issues some where down to the mid 30% range I guess I'm not 100% sure why, why that low given the long life nature of the asset based giving the outlook which you are seeing in the market place, why not a bit more aggressive with balance sheet in the modern year term?

Two reasons for that first TK has a very discipline financial policy and that enables us to get 20 year contracts with our customers because they know we are not going to be cyclical we are going to be profitable throughout the cycle, so that gives them the confident to enter into long term contracts with us, which differentiates us from other shipping companies. And we think that our straight financial policies helps us to get that kind of business along with the TK brand that we have on the operating side. That's what we have.

The second reason is when the right deal comes along we want the ability to use the balance sheet, so it has you seen over the last 5 years starting with the acquisition of going in 1999 and in 2003 with the acquisition of (inaudible) for 800 million the acquisition of Tapias earlier this year for 1.3 billion we want the ability to be able to make the big strategic acquisition after right time and only by having that capacity can you show up and be the cash buyer at that critical time so that cannot cyclical investing is the key requirement for us to make out tons returns in the shipping market.

OK, thank you.

Thank you.

Mr. Moller there appears no furthers questions. I will turn the conference back to you for any closing or additional comments.

OK, well thanks very much for joining us this is certainly the most exciting time, I ever had in the Tanker business. So fasten your seat belts and we will talk to you after the next quarter. Thank you.

And thank you every one and that does conclude today's conference, we do thank you for your participation.

And we have a Mr. Moller in TK Shipping.

I would like to wish everyone a great day.