Teekay Corp Ltd (TK) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Teekay Shipping Corporation fiscal 2004 year-end earnings release conference call. (OPERATOR INSTRUCTIONS). And now for opening remarks and introductions, I would like to turn today's conference over to Mr. Bjorn Moller of Teekay Shipping Corporation. Mr. Moller, 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 website at www.teekay.com where you will find a copy of the fourth 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 statement. Please allow me to remind you that various remarks we may make about future expectations, plans and prospects for the Company and the shipping industry constitute forward-looking statements for purposes of the Safe Harbor 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 most recent annual report on Form 20-F which was filed with the SEC on April 26, 2004.

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

Thank you, Scott, and good morning, ladies and gentlemen. Thank you for joining us. I am pleased to report to you on a very strong fourth quarter which capped a record year for Teekay Shipping. I will begin by reviewing the highlights for the quarter, which is on slide number three on our website.

Our net income in the fourth quarter was $225 million or $2.50 per share, the best result we have ever recorded in the fourth quarter. This figure is net of $51 million in specific items, and without this deduction, the fourth-quarter results would have exceeded our previous all-time record which was in the third quarter of 2004. We generated $329 million in cash flow from vessel operations, again an all-time quarterly record. We announced a stock buyback program, and under this program we bought 3 million of our shares back during December and January at an average price of $42.95.

We took delivery of two new buildings, an LNG carrier and a Suezmax tanker, both of which commenced long-term fixed-rate charters. And in the quarter, we entered into agreements to sell a further eight single-hulled vessels which are expected to deliver to their new owners in the first quarter.

Continuing on slide number four, we announced the filing of a registration statement for an IPO of Teekay LNG Partners. The partnership was formed to expand our operations in the LNG sector. After the offering, Teekay expects to own approximately 75 percent of the units in this MLP whose assets will initially include our four LNG carriers and five Suezmax tankers.

Turning to slide number five, there were several significant highlights for 2004 as a whole. We set new records for annual net income and cash flow from vessel operations. Net income was 757 million or $8.63 per share, and cash flow from vessel operations was nearly 980 million.

Our strategic entry into the LNG through the Tapias acquisition in March was followed by our successful tender of three additional 20-year LNG contracts for Qatar. During the year, we made new investments of $1.8 billion. We continued our broad fleet renewal program. During the year, we reduced the average age of our conventional tanker fleet from almost seven years to only 5.1 years, giving us one of the youngest fleets in the business, and we increased the percentage of double-hulled ships from 71 percent to 89 percent. We continued our disciplined management of the cycle by gradually selling off non-strategic assets in the high market. In 2004 we recorded a gain of 172 million on the sale of all the vessels and our (inaudible) shares.

Turning next to our quarterly review, our tanker market fundamentals, I will begin with tanker demand on slide number six. In the fourth quarter, world oil demand, shown here by the green bars, grew at an above-average rate of 2.7 percent compared to the same quarter one year ago. For 2004 overall oil demand grew even faster at 3.4 percent, the highest level in 25 years led by Asia in general and China in particular.

For 2005 the IEA is forecasting a slower rate of demand growth of 1.8 percent, but it has already raised its forecast twice this year due to strong observed oil demand. In fact, morning market data shows that in January demand growth accelerated from its fourth-quarter average, rising by 3.2 percent compared with January 2004.

In responding to strong demand, oil supply, which is the blue line on the chart, continued to grow in the fourth quarter, averaging 84 million barrels per day, and this led to increased tanker demand.

In December OPEC countries agreed to cut supply by 1 million barrels a day from January 1. It appears that actual January supply declined by only 600,000 barrels a day, but this was enough to drive tanker demand down in January. Recently OPEC has hinted at possible further cuts in the second quarter to avert a potential price drop during the traditionally weakest quarter. However, with global oil demand continuing to grow at a high rate and with supply shortfalls from Russia, Canada and other major non-OPEC producers, the so-called coil on OPEC oil in the first quarter is expected to be higher than current production levels. And as you can see on the chart on the right hand side, even with modest oil demand growth of 1.8 percent this year, any cuts by OPEC this spring would soon have to be reversed to meet demand going into the second half of the year.

Turning next to tanker supply on slide number seven, the world tanker fleet grew in 2004 by 17 million tons or 5.4 percent as shown by the red line. 28 million tons of new shipped delivered, while 11 million tons were deleted. The forward order book shown by the light blue bars stands at 89.5 million tons or 27 percent of the existing fleet with 31 million tons scheduled to deliver in 2005 and 26 million tons in 2006. The world's shipyards are largely full through 2007.

In recent months, there has been much debate about how many so-called Category 1 tankers, which are essentially single-hulled tankers built prior to 1982, are expected to be phased out under IMO regulations coming into effect in April of this year. Anecdotal reports suggest that some Category 1 tankers might be converted to Category 2 in order to extend their trading lives in today's strong market.

Originally about 15 million tons of Category 1 ships were expected to become obsolete in April. At this point, it would appear that this figure might be smaller, but it's not clear how much smaller. In our view, the prospect of a large number of Category 1 ships converting to Category 2 is remote because of issues such as impractical reconfiguration of cargo spaces, cost and effort and the potential discrimination by customers and authorities. However, because it is possible physically to convert at least some of these ships, we have taken a closer look at the effect this might have.

On slide number eight, we show our age analysis of the 13.7 million tons of ships in the category one fleet. According to our data, because the mandated phase out schedule for the oldest Category 2 tankers is not far behind that of Category 1, even if all Category 1 tankers were converted, they would on average gain only one year of further trading life. So such conversions were they to take place will have a limited effect beyond the very short-term.

So how much tonnage will be scrapped in 2005? Slide number nine highlights that over the past five years annual deletions have averaged 16 million tons and that more than 10 million tons were deleted during the historically strong market of 2004. With 14 million tons of Category 1 tankers and with a large number of other old tankers still operating in the world's fleet, we believe that 2005 scrapping could reach 10 to 15 million tons from a combination of mandated and voluntary phase-outs. Volatility and charter rates increase discrimination by customers, and continued high prices for scrap steel could well push this figure even higher.

On slide number 10, we compare historical tanker demand and supply based on data from Plot 2 of Oslo. The resulting quarterly fleet utilization is shown by the shaded area at the bottom of the graph. 90 percent is considered full utilization of the world fleet, but we're seeing utilization regularly being stretched above this figure during the winter season.

Slide number 11 shows how tanker rates have consistently spiked whenever utilization approaches 90 percent, and last quarter we saw how rates jumped due to the extremely high fleet utilization observed in that quarter.

Looking forward at the outlook for 2005, on the next three slides we have modeled how the balance between supply and demand could develop in 2005 based on the two main variables, namely scrapping and oil demand growth.

Slide number 12 shows projected 2005 tanker supply based on two different scenarios for scrapping. That is a low case with 10 million tons and an average case with 15 million tons. If you go to slide number 13, this shows projected tanker demand growth based on two different levels of oil demand growth in the year, remodeling what we are calling an average case using the current IEA forecast of 1.8 percent oil demand growth for 2005, and the second version is what we refer to as a high case using the 3.4 percent oil demand growth figure which was actually seen in 2004.

As you can see from the box on the chart, we are using a conversion factor of 1 to 1.75 to translate these increases in oil demand into corresponding increases in tanker demand. These figures, as you see on the right hand side of the chart, point to tanker demand growth in 2005 of 3 and 6 percent respectively.

So putting it altogether on slide number 14, we show how the various combinations of scrapping and tanker demand growth would influence fleet utilization percentages in 2005.

As before, the green shaded area represents the historical utilization levels, but this time on an annual basis, and the blue lines shows the average annual flux on Aframax tanker rates. The yellow shaded funnel shape on the right shows the range of outcomes. The lower point of the funnel, Scenario A, represents 2005 utilization based on a combination of low scrapping, coupled with average tanker demand growth. This combination of events should reduce average utilization from 92 percent in 2004 to 90 percent in 2005, but this would still be a very healthy level.

The upper point, Scenario B, represents 2005 utilization at the other end of the range, namely if we experience average scrapping coupled with high oil demand. This combination of events should result in average fleet utilization in 2005 rising to 94 percent.

As you can also see, because our starting point is very high with the average utilization for 2004 at close to 92 percent, both scenarios point to another strong year for tanker rates in 2005. Our lowest scenario of 90 percent utilization would still be above 2003 levels, a year when Aframax rates averaged $35,000 a day. Our higher scenario suggests an unprecedented high annual level of utilization of 94 percent. To provide a context for the effect this could have on '05 average tanker rates, the asterisk shown in 2004 indicates the fourth quarter utilization level, which was almost 95 percent and which resulted in average Aframax rates over $80,000 per day. Bear in mind that we are projecting annual average utilization figures and that in each case there would be or should be at least a winter peak featuring rates substantially above the annual average.

Turning next to a freight market commentary on slide 15, I will take a brief look at the key dynamics of the freight market in the quarter. The very firm freight market was caused by a number of factors. There was high oil demand, which meant there was room for OPEC to raise production, and concern about vessel availability charter assort tonnage cover further in advance than usual adding to already bullish sentiment. Production disruptions in the U.S. Gulf and the North Sea created room for longer haul replacement oil. Interestingly, there were fewer delays in the Bosphorus in the quarter than in similar periods over the past couple of years, and this actually removed one of the factors normally supporting winter rates.

On slide number 16, we have listed a number of factors we see affecting rates in 2005. In January, as I mentioned, the combination of OPEC costs, plus a hangover from the forward bookings that took place in December drove rates down significantly. But since then we have seen a recovery in rates to some extent.

Looking ahead, we see several other variables. Firstly, a realization of Venezuela's rhetoric about switching oil to China and away from the U.S. would create a big gain in (inaudible) due to an increased length of hull for both Venezuelan oil and the U.S. replacement imports.

In April the IMO mandated phase-out schedule of single-hulled tankers comes into effect, initiating the accelerated removal of Category 1, 2 and 3 ships from trading.

In April also the rest of the world will join Europe in implementing a ban on non-double-hulled tankers carrying heavy oils. That is certain heavy crude oils and residual fuel oils. On the margin, this should have a positive effect on rates by reducing the efficiency of the world fleet due to stratification. However, it is likely to have a negative impact on the trading of single-hulled ships.

China will, of course, continue to be a pivotable driver of oil demand and, therefore, tanker demand in 2005, and finally the delays in bringing onstream certain non-OPEC oil which seems to occur each year has the potential for increasing the call on OPEC oil, leading to more (inaudible) intensive Middle East oil.

I will now turn briefly to some of the developments in Teekay's main business segments. I will begin with our spot tanker segment on slide number 17.

We took advantage of the very high secondhand market by selling down a further number of single-hulled ships in our fleet. In the fourth quarter, we delivered six older vessels to new owners, resulting in a gain of $24.7 million.

Throughout our fleet renewal in 2005, we maintained a large spot fleet thanks to our active new building delivery and in chartering programs. In recent months and intensifying since the new year, customer discrimination against single-hulled ships has been on the rise, and this is one of the key drivers for our accelerated disposal program of single hulls. During the quarter, we entered into contracts to sell a further single-hulled ships for delivery this quarter for an expected gain of approximately $80 million. After the delivery of these ships, the number of single hulls in our conventional fleet will be only six vessels, down from 23 ships at the beginning of 2004. And as of January 1 this year, we still had a further eight new buildings on order due to join our spot fleet going forward.

Finally, on slide 18, I show the highlights for the fixed-rate segment. We achieved record quarterly cash flow from vessel operations in our fixed-rate segments of $89 million. During the fourth quarter, we announced a planned IPO of Teekay LNG Partners. We are seeing an increased activity in the offshore sector due to high oil prices, and this is creating positive dynamics for Teekay's shuttle and FSO businesses, and in fact as an example of this, we were awarded a profitable contract in the quarter to convert a 1991 built Suezmax tanker to serve as a floating storage unit on the Volva (ph) Field in the North Sea for a period of three to five years. This contract will not commence until 2007, allowing the ship to remain trading in our spot tanker fleet for the next two years.

We took delivery of our fourth LNG carrier in late December, and in the quarter we also took delivery of a Suezmax new building. Both these vessels entered 20-year fixed-rate contracts. And at this time, we have firm contracts in our fixed-rate segments amounting to over $6 billion in forward revenues. Overall we were very satisfied with the progress in all of Teekay's businesses in both the fourth quarter and in 2004.

I will now hand it over to Peter to discuss our financials. Peter?

Thank you. As Bjorn has said, this was our highest ever fourth quarter with net income of 224.6 million or $2.50 per share, and we reported the highest ever annual net income of 757.4 million or $8.63 per share. In addition, we generated record high annual and quarterly cash flow from vessel operations of 979.4 million for all of 2004 and 329.3 million in the fourth quarter.

Looking at the operating results of each of our segments on slide 19 of the presentation, overall cash flow from vessel operations for the fourth quarter has increased significantly to 329.3 million from 150.3 million in the fourth quarter of 2003. The contribution from our spot tanker segment increased by 150.8 million or 168 percent to 240.5 million compared to 89.7 million in the fourth quarter of 2003. This increase was due primarily to the rise in spot tanker rates, partially offset by a net decrease in calendar ship days resulting from the sale of our older vessels during the past 12 months, including four vessels in the current quarter.

Despite these vessels sales, the number of calendar ship days declined by only 5 percent this quarter compared to the prior year's fourth quarter as a result of the delivery of new buildings and additional chartered in vessels. Consequently we have been able to renew our fleet profitably while maintaining our high operating exposure to the spot tanker market.

Our spot Aframax fleet earned an average TCE rate of 58,600 per day in the fourth quarter, and this was up 33,000 per day or 130 percent over the 25,500 per day earned in the same period last year. The fixed-rate tanker segment generated a record high 75.5 million in cash flow from vessel operations during the fourth quarter compared to 60.6 million in the fourth quarter of 2003, an increase of approximately 25 percent.

This increase was primarily due to the inclusion of Teekay Shipping Spain's fixed-rate Suezmax tankers and the addition of five conventional tankers on long-term fixed-rate charter to ConocoPhillips. Our fixed-rate LNG segment generated 13.3 million in cash flow from vessel operations during the fourth quarter, representing the results of Teekay Shipping Spain three LNG carriers. A fourth LNG carrier was delivered at the end of the year, so our fixed-rate segments continue to grow as new building vessels are delivered.

Turning next to slide 20 and reviewing the remaining income statement figures in comparison to the fourth quarter of 2003. The results included specific items which reduced net income by 51.3 million in the quarter and reduced net income by 72.1 million in the fourth quarter of 2003 as outlined in Appendix B of our press release.

General and administrative expenses were 48.3 million compared to 26.4 million in the fourth quarter of 2003. This increase is primarily the result of higher accruals for performance-based bonuses in 2004 and includes the 12.5 million amount authorized by the board in addition to the regular bonus plan and to a lesser extent due to the acquisition of Tapias and higher non U.S. dollar costs due to the depreciation of the U.S. dollar, particularly against the Canadian dollar and the Norwegian Krone. We currently expect our general and administrative expenses to run in the low $30 million range for the first quarter in part due to the continuing depreciation of the U.S. dollar.

In addition, as a result of the new accounting rules that require stock options to be expensed, we expect G&A will increase by approximately 2 million per quarter commencing in the third quarter of 2005.

Gains on vessels sales in the fourth quarter of 2004 of 24.7 million are primarily from the sale of six older vessels during the quarter. The vessel write-downs in the fourth quarter of 2003 of 54 million included a 56.8 million write-down in the carrying value of vessels due to the IMO regulations, which required the early phaseout of single-hulled tankers.

Net interest expense increased to 27.6 million in the quarter from 22.1 million in the fourth 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. Income tax expense was 18.7 million this quarter compared to 13.3 million in the fourth quarter of 2003.

Our deferred income tax expense primarily consists of income taxes incurred by our Norwegian shuttle tanker operations. However included in these income tax figures is 15.2 and 6.5 million respectively in the fourth quarters of 2004 and 2003, relating to deferred income tax on unrealized foreign exchange gains. So this increase obscures the fact that we have been able to meaningfully reduce our income tax expense in Norway.

Unrealized foreign exchange losses of 33.3 million for the quarter related primarily to the Euro denominated debt of Teekay Shipping Spain and to the deferred tax liability denominated in Norwegian Krone.

Finally, our return on equity for the quarter was 42 percent, and the return on equity for the year was 37 percent, a truly exceptional performance.

Turning to slide 21, we have presented our December 31, 2004 balance sheet and compared it with the previous quarter. Cash balances are running higher than normal, primarily due to the rearrangement of our loan facilities in connection with operating in Norway and Spain. Our net debt, including capital lease obligations, decreased by 57 million in the quarter. We used our significant cash flow from vessel operations and the proceeds from the sale of vessels primarily to fund the CapEx Bjorn discussed and our share repurchase program.

Treating the mandatory exchangeable preferred issue as equity, net debt to capitalization declined from 44 percent at the end of the previous quarter to 42 percent at the end of the fourth quarter. This decrease is due to the cash flow generated from operations and the previously mentioned asset sales.

As you can see on slide 22, we have very significant operating leverage in our spot tanker segment. Our fleet renewal program on the spot side of the business, along with our increased fixed-rate revenues, has changed our EPS rule of thumb, reducing our operating leverage but also our breakeven level. Our current net income breakeven Aframax TCE rate is estimated to be between 13,000 and 14,000 per day. The size of our spot fleet means that for every 1000 per day increase in Aframax rates our earnings per share increases by approximately 6 to 6.5 cents per quarter.

Looking at the current quarter, we have fixed approximately two-thirds of our total spot voyage stage at an average time-charter rate of approximately 42,000 per day. However, the market has been volatile recently, and our current Aframax voyages are being booked between 22,000 and 45,000 per day.

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

Thanks, Peter. Just in closing, looking ahead in 2005, we believe that even though there could be a range of outcomes for the market Teekay is positioned for another great year. Should all demand growth remain at or above the IEA's forecast, we expect to enjoy high earnings. However, should tanker supply get ahead of demand in the next few quarters and we see a more volatile market, then Teekay with its successful in charter strategy should be able to add to its fleet on any dips in rates. Either way we view 2005 with a great deal of optimism.

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

(OPERATOR INSTRUCTIONS). John Chappell, J.P. Morgan.

My first question has to do with uses of cash. Obviously you have generated a lot and expected to generate a lot through the sale of your vessels in the first quarter. Peter or Bjorn, can you prioritize uses of cash as far share buybacks, dividends, fleet monetization renewal goes?

Yes, we certainly can. First of all, I think we referred to the fact that we invested $1.8 billion in our business last year. We have $800 million of CapEx. While we are comfortable with our debt level, we have lots of debt we can pay down. And so certainly we feel we have very good uses for that cash.

As you saw, we did buy back stock as an indication that that is certainly in our toolkit. But it is worth remembering that we have a somewhat different business model than many of our peer companies in that we have businesses where we are able to invest profitability even at times when asset values in the spot business are very high. And so we actually have a lot going on at Teekay, and we see some very positive opportunities to continue to build our profitable long-term businesses.

For example, the North Sea sector is growing quite a bit now because of higher oil prices, and we're seeing a lot more demand in the shuttle and offshore sector. We know the LNG business, of course, is going to be attractive. But as far as any additional stock buybacks, we are in the situation where we are close to the timing or pricing on an IPO, and I view -- the board views that this will be a good opportunity to address potential stock buybacks once we have completed the IPO of the LNG Company.

Now the LNG company will probably be your arm for expansion on the LNG side obviously. What about the shuttle tanker side? Is that something where you could place more orders for new builds? Is there secondhand tonnage available? You already have a pretty good market share of that. Or could you possibly charter in vessels on the shuttle tanker side?

We can do all of those things, and we view all of those as potential viable outcomes. We are active in chartering ships in that sector. We are active with the Volva (ph) project to give you an example that will end up being CapEx of including the vessel value plus conversion maybe 40 to 50 million. So we are seeing opportunities (inaudible).

Just one clarification question for Peter. You mentioned that G&A would go up about 2 million per quarter starting in the third quarter. Is that something that is going to ramp up by 2 million every quarter as we look out, say, the next year and a half, or would we get to like the mid-30s and kind of flat line there through '06?

Based upon the new rules that have come out on the stock option side, we should see it go flat by $2 million per quarter. So barring further growth, that is where we see the level right now based on what we can see.

Mid-30s by year-end '05?

I would say yes, low 30s to mid-30s. As I mentioned, most of our costs are non U.S. dollars because we have operations in Canadian dollars, as well as in Norway and Spain. Those we have had hedges that are rolling off there, so that is increasing our cost which is bringing up the G&A level.

Okay. Thanks, Peter.

Magnus Fyhr, Jefferies & Co.

Just two questions. First, you mentioned that the customer discrimination has intensified again single-hulled tonnage. If you could maybe elaborate on that and also talk to us on how it affected your decision on selling your single-hulled tankers as far as their utilization versus your double-hulled tankers and rates as well?

Yes, good question. Let me put it this way. We have had a clear sense just around the edges that the single hulls were being taken last year at very good rates because there were simply not enough tankers. And if we have a similar situation, single-hulled ships will get fixed. There is no doubt about it. But they are the ones that are most vulnerable to idle time.

Anytime you have fluctuations in fleet utilization and with the introduction of this ban on heavy oils on single hulls -- for example, in the Pacific region, there are a number of heavy oils and back hull businesses with fuel, and it will adversely affect the ability to do profitable combination trading. So we actually have already seen in the beginning since the beginning of this year a drop-off in the value of single-hulled tankers, and I think it is pretty satisfying that we actually got the timing exactly right on these sales. We had the benefit of their cash flow for most of the year. We sold them at very high prices, and our prices have begun to affect -- prices have begun to go down.

So we are also seeing a number of terminals, many of which are operated by major oil companies, come out early in this year and sort of discretely just reject vessels that are nominated because with our big (inaudible) they introduced a ban on single-hulled ships. So it is happening.

Those bans were they any of your vessels or just other vessels that you had seen?

Well, I think we had a couple of situations where we nominated ships in the first on the backlog, sorry we don't have take single-hull ships anymore. But when we talk to them and we were able to actually get fee-based single-hulled ships approved because of the reputation relationship we have, and I think that that is great, but I'm not sure we can rely on that for very much longer. It is a risk management issue for the oil company.

Right. And second, I guess just a comment on your graph on page 14, couldn't you argue that the Scenario A with the average oil demand growth should result in high scrapping and the scenario with high oil demand growth should result in low scrapping? I guess it would move up the low case scenario a little bit.

That is right. That is why we are saying there is a range of outcomes. There are really kind of four combinations of outcomes you could have, right? We have shown the high and the low. But I think what is going to happen is, as you see in other years, quarterly you have a significant movement around in utilization, and so scrapping is very quick to pick up as soon as you have any dips in the spring season, and especially with steel prices as high as they are, and with the pending phaseout of many of these ships. So I would say we could have high scrapping irrespective of the market, frankly.

Harvey Stober (ph), Doman Rose Investments (ph).

Can you shed a little light on the $12.5 million bonus? First, why is it not included simply in G&A? And also maybe you could discuss a little bit about how it is determined -- is it relative to stock market performance, or is it relative to the peer group, for example?

Okay. I will offer a couple of comments and, Peter, if you have any to add. Firstly, we have a bonus program in Teekay, which is very wide based in our company, and this additional award by the board also will involve a broad group of employees. The formula for our bonuses are very closely aligned to a combination of shareholder factors such as total shareholder return, return on invested capital and relative return on capital.

The board felt that 2004 was an exceptional year, and it was linked to the exceptional performance of the Company that they chose to award an additional bonus, which in the context I guess represents slightly over 1 percent of the company's results, 1.5 percent.

And I would also add that actually the 12.9 million is included in the G&A that we had -- excuse me, the 12.5 million is not included in the G&A, but we put it in Appendix B because we had not given previous guidance on it.

Natasha Boyden, Cantor Fitzgerald.

I just wanted to follow on with Harvey's question. Was the reasoning the same with the FFA, the losses from the FFAs being split put out in the appendix like that so in order to give more specific kind of guidance on what you were doing now?

Yes, that is right. We decided to include in the Appendix B because that was something that in our traditional rule of thumb when re we got these exceptional rates in the fourth quarter, our rule of thumb started to get, as I like to call it, a little squirrelly. Because we have certain contracts that are minimum, maximum, and these maximums started to kick in, which meant that our operating leverage dropped a little bit more from where it was.

So, for instance, we have very few derivatives in the set of high levels. It is only for two vessels. But they are at high enough levels that we saw such exceptional rates that it started to cap the amount of our results, so we wanted to indicate that in Appendix B.

So I guess you would say that if that does not happen going forward, that will not show up again. Is that right?

Yes, we have now incorporated it more into the new rule of thumb that I gave, and we won't see it in the future.

Okay. Then the other question I did have was on the Suezmax rate that you reported for the fourth quarter. I see did very well in the VLCCs and the Aframaxes, but we saw one of your competitors come out recently with a rate of $90,000 a day in the first quarter for the Suezmaxes and you are coming out with 68,900. I was wondering if you could maybe tell us what the discrepancy there is?

Sure. First of all, I think (inaudible) had a fantastic result and the guys did great. The reason our number is lower is while we have a lot of Suezmaxes in our fleet, many of them on we have like some on three and long-term charters with ConocoPhillips, we have five on long-term charters to Spanish customers. So as far the Suezmax fleet, it is actually only about six ship equivalents if you look at the voyage space in the quarter. And before the market picked up in earnest in late 2003 we entered into a contract of a freighter in the North Sea, which was one of our big customers, which was at a fixed-rate where the TC equivalent is significantly lower than the kind of rates we have seen. But we pad that contract with the in charter of two Suezmaxes at a level which was lower than the contract we entered into. So it was actually a lock in our profit. But when you just look at the headline number, because we only have six ships in our fleet, two of them earning maybe below 30,000 a day, that is going to drag that number down.

Okay, fair enough. Well, thank you very much.

Brandy Shaw (ph), Beakman Capital (ph).

Great quarter. I was wondering about there was a couple of expenses specifically voyage-related and the tom charter higher expenses that seem to come in significantly lower like the vessel operating expenses came in about 8.5 or so percentage down from an average of like 11 percent and the same thing with the voyage expenses, down from 20ish percent in the last couple of quarters to just under 17, and I was wondering what attributed to that?

That is really a direct result of our vessel sales that we ended up with lower operating expenses. The amount of operating expenses per day came in line with our budget. So it was just a question of having a lower fleet and selling some of the older less efficient vessels.

Okay. Thank you.

John Cortsanis (ph), Smith Barney.

Most of my questions have been answered, but just a general question on the Aframax market and what happened this year with the Bosphorus situation which was not really what happened in 2003.

How should we think about that? Is it really fluctuating that much year-over-year, and what is causing this year to be better than last year?

Yes, I think that it's probably a combination of things. Firstly, I think it's very weather-related. Part of the delays that occur there are nighttime sailing restriction-related, but there are others such as fog and snowstorms and other calamities that tend to occur. And so we have I guess just had slightly odd winter weather around the world this year. That is one factor.

I think the other factor is that based on experience some of our customers have found a way to maybe get a little smarter around how they get oil out of the Black Sea. This includes the use of certain smaller ships which are not nighttime restricted, as well as trying to use more Suezmax and less Aframax so that you are having fewer transits with more oil. But

I would say that it is certainly always prone to be able to flare up, and I think just the other day the Bosphorus were shut down for a couple of days or at least for a period of time. So there are always ships sitting there, including at this time. It is just not -- one year I think it was last year we had the equivalent of 10 percent of the world's Aframax fleet sitting waiting on either end of the Straits, and that is not happening at the moment.

Gary Yaplan (ph), Empolla Investment (ph).

For Bjorn or Peter I guess, in terms of capital structure, what is the right capital structure as you look out the next few years? I know there is some up and downs, but what feels right as you look at the marketplace? You sound very optimistic about it. I would think the Company seems pretty overcapitalized at this point in time, but I would like to hear your thoughts on it.

Well, I will offer some comments. I think that what has made Teekay very successful is our ability to be decisive in a countercyclical way. And when we've only had a spot business, that meant that the window for us growing our business was open and shut you know at varying times, and it was kind of a one trick pony.

Now because of the various businesses we have, we are glad that we have potential for investing through the tanker cycle. We historically have felt it was not inappropriate to delever our balance sheet down to a 25 to 30 percent net debt to total cap, and you know, others of our competitors have chosen to at a more aggressive dividend route, which looks good on paper. However, it does not give you a lot of firepower when the market is down, and that is where we have made some of our best acquisitions.

So we have no qualms returning capital to shareholders if we find ourselves overcapitalized. Your perception that we are overcapitalized is one view of it, and we have a better view of the projects that are coming at Teekay. But I think we have demonstrated with the various things we have done that it will be a mixture of all of those components, and you know I think we have done good with the capital. And so I think shareholders have -- we have earned the trust of shareholders, so we are not going to do stupid things.

Link Warden (ph), HG Wellington & Company.

I was wondering whether you could give us a little more fine-tuned timing on your LNG unit offering? Also, what the realistic outlook and current situation is in the Aframax rates on your vessels? The 22,000 to 42,000 a day is a pretty wide range. Just a little better feel for what the current reality is there?

Well, I guess we cannot say too much about the IPO. We are currently under review of that filing by the SEC, and as soon as they finish their review, we will get on the road. So that process has been underway for awhile, and you can certainly gain conclusions for how long these things take. But it is a process, and we will announce whatever we are ready.

On rates I guess you touched on one of the things that sometimes make all of our heads shake a little bit at Teekay, the incredible volatility. For example, you might recall that between late September and early October rates doubled and tripled in a matter of weeks. So we are seeing, for example, right now the North Sea market is 40,000 a day, but the Mediterranean market is 20,000 a day. Those types of markets will quickly equalize themselves because they are so close to each other.

You are also having in the Far East market, you know, an inflow of new tonnage, which is in the short-term depressing rates down toward 20,000 a day. But I think you are seeing the OECD rates rebound from their low in January. I think they went up to 30,000 a day, and they could go back to 100,000 a day.

So do you think that the signs point to the 20/30 shaking out as more of the world situation?

I think it is seasonal. OPEC has made a cutback. There is really not that much spare capacity in the world tanker fleet. And so we now have the IMO regulations kicking in at about I guess eight weeks, and so that will be interesting to see what that does. It is going to be volatile. This is a tight market, so I think you have to look at the horizons.

Justine Fisher, Goldman Sachs.

I just wanted to clarify the comments on potential fleet expansion and acquisitions that are related to John Chappell's question. So if Teekay decides to acquire additional LNG vessels, you will fund those at the MLP level, perhaps using additional units there rather than using, say, revolver drawings from Teekay Corporation?

I think what we will envision doing now is that Teekay will warehouse or keep the vessels on its balance sheet during the predelivery portion. If you order an LNG right now, you won't get it until 2008 or even 2009.

And so the way the MLP economics work is the investors would like to have an asset when it is up and cash generating. So we anticipate that it will be on Teekay's balance sheet.

The other point I would just point out is that we will continue to own 76 percent or 75 percent of the MLP post-offering. So it will be consolidated into Teekay's numbers.

Okay. So but I guess the question is more related to the fact that you have a significant amount of liquidity and what sort of vessels that that may go towards purchasing in the future?

Well, I think is Bjorn pointed out we have a lot of different operating segments, and so we have the ability to ration capital into those different segments depending upon which gives us the higher return. We also have the ability rather than buying vessels we can charter in from other people which doesn't use any capital per se.

So our job is to make sure that we are allocating that capital properly, and as Bjorn indicated both in the North Sea with the shuttle tankers in the LNG segment, we have the ability to invest if it is at the right return. And I emphasize that, if it is that the right return.

But right now we're seeing lots of good projects across the spectrum, and as Bjorn said, the board will look at everything after the IPO of LNG Partners. And one of the questions will be, what is the best way to fund the LNG carriers in a predelivery phase?

Okay. Then could you just clarify I guess how much you had drawn on all of your revolving facilities at the end of December? I know you had a little over 800 million available, but just to get a new amount for the total revolver capacity.

Yes. Under our revolvers we had drawn about 530 million going forward, and we had undrawn capabilities of about 830 million. We anticipate that will probably continue to increase during the quarter.

Thank you very much.

John Burbank, Passport Capital.

I just wanted to say how pleased we were to see you not only announce the buyback and actually buy all 3 million shares back and actually do it at such a good price, I got to say I thought that was an excellent use of capital, and I think proved a lot of doubters that you were going to do right by shareholders.

John, I am warmed in my heart. Thank you very much.

Well, anyway, I just remember 2001 talking through potentially your first buyback. The stock price was one quarter of this price, and I have got to say despite that I think this is just the right thing to do, it is the right message, and I'm looking forward to any other actions you take that take advantage of the pervasive pessimism that many of the analysts have not only in this sector but on your company? So that is all I wanted to say.

Thank you, John. I would love you to join our Investor Relations team.

Thank you.

Justin Yagerman, Bear Stearns.

I wanted to get a sense for the timing of the sale of the Aframax. Are they going to operate in the first quarter at all, or is this kind of a -- is the big one out already?

Two ships have delivered so far. One delivered in I think early February and one delivered just this past few days, and we have the remaining six ships will deliver in March or late February (inaudible). Sort of scattered throughout the quarter. So I guess if you had four of those ships on average in the quarter, that is probably being conservative.

Okay. And then in terms of drydocking for the year, do you have any guidance or planned drydocking that you can talk about across the fleet?

We anticipate that drydocking expense this year will be about 25 to 30 million across the fleet.

And how many days -- or is that kind of -- is there a breakdown of days and kind of which segments that is in?

I don't have that right now. I can probably get back to you with it and how many days that would be.

Okay. And then finally on the FFAs, you know you mentioned that it was only on the two vessels. Do you have plans for being more active going forward in that, and where would we expect to see any kind of movements on that in the income statement?

It is somewhat opportunistic. It is two ship equivalents that we have hedged, and I would say at the level where rates are today it will be about a neutral factor, maybe slightly negative. Certainly based on the midpoint of the TCE that Peter mentioned earlier of 20,000 to 45,000.

So you know, it is not a hugely liquid market in the freight futures market for tankers. So it is not a significant factor.

And we are using it as a hedging mechanism, so it is included in our voyage revenues. So that would reduce our voyage revenues by, for example, $13 million.

Okay. And that is on Aframax as you said?

One is a Suezmax, one is an Aframax.

John Selzer (ph), Maple Leaf Partners.

Good morning. Of the 3 million shares that were repurchased, how much of that was done in the fourth quarter?

I think 1.4 million was done in the fourth quarter and 1.6 million in January.

Okay. I was just looking at the fully diluted share count over the last couple of years, and I realized it was a convertible offering that was done. About how many shares did that account for in the fully diluted number?

About 6.6 million shares. Oh, how much was in the diluted number?

Right, yes. Of the fully diluted, how many shares are accounted for?

About 3 -- about half or 3 million of the 6.6 million shares has been accounted for in the diluted with the remaining part being the option.

Were there any other additional I guess new equity offerings included because that is a pretty big increase over the last couple of years. I guess if you throw back the share increase, you take out either -- the convertible is still what, about 6 million shares?

Yes, but what has happened -- well, of course, we did the stock split, which we went back and reflected in everything else. But basically we are accounting for it under the treasury stock method. So what is happening is that as the options become more small, we have to put more of them in, as well as on the PEP (ph) side. As the stock price has gone up, we have had to include more of that share count in the diluted shares outstanding. So that is why you have seen it increase without any stock offerings.

So, for example, you saw a close to 10 percent increase. But the share repurchase program will, of course, reduce that.

Right. Coming out of the I guess the capital of the company. All right. Thank you.

Andreas Vagatas (ph), Oceanic.

Two questions. Firstly, you have a number of conventional Aframaxes chartered in and 18 of those and four Suezmaxes. The question is, what other rates for chartering in those (inaudible)? If you don't want to give a figure, to what extent are they recent contracts or all contracts are variable rates, and how do you -- the longevity of these contracts and their all-over rates, when do you expect to roll them over? First question.

Second question, a more strategic -- regarding your customers, the (inaudible) majors and other customers, how do they view the Tanker Services at the moment strategically? Are they happy to continue outsourcing, or will they consider becoming investors?

Okay. Well, firstly on the in charters I think last quarter we had a chart that showed I believe the average in charter rates and average duration and, therefore, how much those charters were in the money. And I would direct you to that. I don't have a copy of it here. We have taken a few extra shifts in the fourth quarter, so maybe that number has gone up slightly. But we have not -- I would say it has not meaningfully increased that number. So essentially a lot of our in charter vessels are very attractively priced at this time.

We have options with some of the vessels, and we have fixed period some vessels winding up. So it is a living thing, and of course, the longer the strong market lasts, the more we're going to have to pay if we want to expand or add to our in charter fleet. So that is one of the considerations. But luckily we have a lot of new buildings coming in at a good time, which is also adding to our operating leverage and which has been ordered at a very attractive time.

As far as the oil company view of third-party providers, I certainly feel that while a couple of the oil companies have taken the route that they wish to control a certain amount of shipping in house, particularly Chevron, Texaco and BP, there is in my view very little focus on increasing those percentages. They are much more focused investing in their core business. I think they are becoming increasingly focused on becoming strategic partners with the top quality operators, and Teekay is certainly getting a lot of dialogue with the oil companies about ways in which we can be closer, because I think they recognize the quality of our systems and our operations. So we think the quality drive is playing into Teekay's hands.

Would you go as far as saying some of the them would make a strategic investment minority or controlled?

I don't think that would be likely, but we are very responsive to our customers' desires. If somebody wanted to co-invest with us, we would certainly listen to that, and I guess we do have some very strategic relationships with various customers. Who knows where it could go.

But the sale of our single-hulled ships, for example, are a good example of us responding to what it is our customers want and doing so in a way where we are doing it cyclically, very astutely I think.

(OPERATOR INSTRUCTIONS). Olaf Sluer (ph), Morgan Stanley.

I just have a quick question whether you could clarify the rationale for selling the double-hulled Suezmax tanker? I mean arguably it was a very good price you got there, but you have known the price stack your own stock you are selling at a premium Internet (ph) asset value. You are selling tankers, and you are considering buying back shares. So I'm not quite sure I understand the logic. I'm just wondering whether you could elaborate.

Well, I would say that the sale of that vessel was opportunistic. It was an asset which was -- it came to us with the Tapias acquisition, but was not really part of the core strategy of the Tapias deal. And while it was certainly usable in the (inaudible) fleet, it was not a vessel specifically ordered by Teekay. And so the combination of those factors and of the fact we were offered what we thought was a very attractive price meant that we decided to sell it. But importantly, we're going to retain both the technical and the commercial management of this vessel, so we will have that in our fleet.

Okay. There is also a follow-up to the buyback discussion. I wonder have you reflected at all about the difference in valuation on tanker stocks that the focus on the high dividend policy, flexible dividend policy compared with the companies that focus more on buyback of shares.

Well, I think we realized that there are a couple of very interesting contrast examples out there from the last quarter. I think the issue of returning capital to shareholders is a valid one. We are primarily looking at building a business here and growing it. We are focused on doing it profitably and we do so in the long-term. But -- I can only restate the value we place on having a strong balance sheet at any time in the cycle.

We are certainly looking to -- we think that our PE of 7 is very low. And there is no doubt that having had the fixed-rate business compared to other companies that are pure stock businesses in the last couple of quarters, that will have been seen as a less pure strategy. But we think it's very good long-term strategy. In fact, the focus on unlocking shareholder value is shown by the IPO of the LNG business, which is intended to crystallize the particular value of that segment. That will be a dividend play.

You know I think that is a good thing, and also I agree with you on the strong balance sheet. I think that's a very very very attractive feature of Teekay, but I think it would be equally attractively if you could also apply a sort of GMR style dividend policy with retaining financial flexibility. But anyway I'm going to leave you guys to ponder on that one. Thank you very much.

Erika Christian (ph), Legacy Investment Partners.

Great quarter. I have a couple of questions, and I understand with the IPO coming out that you may not be able answer all of them. Can you give us a better guidance for going forward with the 75 to 78 percent ownership in the LNG what kind of earnings we can look forward to trickle through the balance sheet?

Unfortunately I cannot do that because we are in registration, so everything that we say about the LNG will be reflected in the F1 registration document. The only thing that I will say is that we will continue to consolidate the LNG space. So there won't be that material changes to Teekay Shipping Corporation's balance sheet by the listing of it because it will continue to be consolidated going forward.

But just to follow-up on what Bjorn was saying, we think that the listing of Teekay LNG will help demonstrate the value of all of our fixed-rate sentiments going forward, not just the LNG side, and that perhaps is a better strategy to show shareholders the kind of value that can be created. There are many ways to do it, not just by paying a dividend, but demonstrating actual value of these businesses. So we hope to unlock that.

Now is there going to be any spinoff to shareholders with the LNG business?

No, it is not our intention to distribute any shares that we will retain. We intend to grow this business. A lot of times when people list companies, they then want to spend it off because they want to get rid of it. We're exactly the opposite on the LNG side. We want to retain and grow this business. So the reason we're doing it is to actually accelerate our growth in the LNG space.

Walter Lavoto (ph), Passport Capital.

Just a quick follow-up on the new vessel commitments in '05, '06 and '07. I know you have that arranged for all of that -- what portion -- is it now all going to be debt financed?

Well, we're putting in place revolving credit facilities on that. So it is our choice whether we're able -- whether we want to draw those specific facilities. But as a general matter, whenever we have a new building and it is of sufficient size, we will go ahead and put revolving credit facilities because that continues to keep our ability to have firepower.

At this time, with the cash flow from vessel operations as I said, we are not drawing those revolving credits. We are just building our liquidity in the form of undrawn revolving credit.

Okay, great. And do you have the breakdown of the $363 million '05 number by quarter?

(multiple speakers). I don't know if we have that here.

Is it even? We can maybe get back to you on that.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Justin Yagerman, Bear Stearns.

I just wanted to -- I don't know if I missed this -- I get an ending share account for the quarter, and what you are expecting diluted shares to be for first quarter?

Okay. If I could first answer Walter's question. We expect -- of the 363, we expect 60 million to occur in the first quarter. We expect 76 million to occur in the second quarter. We expect 135 million in the third quarter, and we expect the remaining 102 million at the end of the quarter. And your question result was, what is the -- not what is the average number of common shares outstanding, but what is the ending balance?

Yes, that is correct. Ending balance and then kind of an estimated diluted share count for first quarter.

Hold on. I only have the weighted average in front of me right now. I don't have the end count.

That is fine. We can follow-up off-line.

Okay. We will come back to you on that.

Okay. So just to answer your question, it would reduce probably by the 1.6 million in the first quarter that we have repurchased shares and we had the 1.4 million. So the ending account was probably a little bit under 83 million for the quarter.

Okay, thanks.

Gentlemen, there appear to be no further questions at this time. I will turn the conference back over to you for any additional or closing remarks.

We would like to thank you for participating in this Q&A session, and we look forward to talking to you next quarter. Have a great day.

And that does conclude today's teleconference. We would like to thank everyone for their participation and wish everyone a great day. And now at this time, you may disconnect.