Teekay Corp Ltd (TK) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Teekay Shipping Corporation second quarter 2005 earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question and answer session. At that time, if you have a question, you will need to press *1. As a reminder, this conference is being recorded. Now, for opening remarks and introductions, I would like to turn the conference over to Bjorn Moller, President and CEO of Teekay Shipping Corporation. Please go ahead, sir.

Before Mr. Moller begins and before I read the forward-looking statement, I would like to direct all participants to our website at www.teekay.com where you will find a copy of the second quarter of 2005 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 in the shipping industry constitute forward-looking statements for purposes of the Safe Harbor Provision under Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent annual report on Form 20-F dated December 31, 2004, on file with the SEC.

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

Thanks, Scott, and good morning, ladies and gentlemen. Thank you for joining us today. I’m pleased to report to you on another very positive quarter for Teekay Shipping. I’ll begin with the highlights for the quarter on Slide #3.

We recorded net income of $104.6 million, or $1.23 per share. Our earnings were positively impacted by Aframax rates averaging $34,500 a day, the highest ever recorded in the second quarter.

We completed the IPO of Teekay Energy Partners in the quarter and this highly successful launch of the partnership adds to the competitive advantage Teekay is rapidly building in the LNG sector. It also highlights the significant value represented by Teekay’s fixed-rate businesses.

Yesterday we announced that we had been awarded 20-year contracts with two new LNG carriers to service the Tangoo (ph) project in Indonesia beginning in late 2008.

We have a continued strong cash flow and, based on our view that cyclical asset prices remain very high, we maintained our strict financial discipline during the quarter by returning surplus capital to shareholders through an aggressive repurchase of our shares. Yesterday we announced a further $250 million increase to this share repurchase program.

This morning I’ll provide you with an overview of the main developments in our business segments. I’ll give you a brief overview of our second market fundamentals and, also, commentary on the background for our share repurchase program and Peter Evensen will review our financials before we open it up to questions.

Turning, first, to the developments at Teekay’s LNG segment on Slide #4, a major highlight in the quarter was our successful IPO in May of Teekay LNG Partners, an innovative transaction involving the first ever listing of a non-U.S. master limited partnership. We priced the deal at the upper end of the range of $22 per unit, representing a 7.5 percent yield, which was a record low IPO yield for an MLP. The success of the IPO was driven by a significant interest in LNG, the stable nature of the cash flows and the strong sponsorship by Teekay Shipping. Considerable investment with (inaudible) since the IPO has resulted in the unit price increasing, in fact, to over $34 today, that’s up almost 50 percent, and this makes Teekay’s 78 percent share of the LNG worth, we have on the slide $780 million, or $9 per share, but it’s been higher today.

At the targeted minimum cash distribution per unit, Teekay expects to receive approximately $40 million in annual distribution from Teekay LNG. We expect distributions to increase as future projects come on stream, such as the three vessels delivering on 20-year contracts to Rascas (ph) Two in 2006, 2007. Teekay will offer to Teekay LNG all future LNG projects that we secure, including the recently concluded Tangoo project. Tangoo is an Indonesian flagship project which is being developed by Consortium, led by a subsidiary of BP. The LNG production is expected to supply gas to the U.S. and Korea.

Next, turning to Slide #5, in our fixed-rate tanker segment, cash flow from vessel operations was $75 million, up from $70 million in the first quarter, mainly due to high overall utilization in the shuttle tanker fleet and the transfer of a sole VLCC to the fixed-rate segment, which relates to previously announced three-year fixed-rate time charter of that vessel.

During the quarter we secured our first ever shuttle contract in Australia. The contract involves a profitable three-year deal where Teekay will provide shuttle tankers to support the development of a marginal oilfield. When we first became in the shuttle business in 2001, our shuttle tankers were all employed in Europe. Upon the commencement of this new Australian contract, Teekay will have shuttle tankers in service on four continents. We expect that third quarter shuttle utilization will be slightly lower than normal due to a series of scheduled maintenance dry dockings. We’re generally seeing upward movement in the price we’re able to charge on new shuttle contracts in response to the active off-shore market.

Looking at our spot segment on Slide #6, Teekay’s spot tanker earnings continued at historically firm levels in the quarter. Our spot Aframax fleet generated a TCE of 34,500, which is mentioned was a record for the second quarter. While our TCE figure was down by $5,000 per day from the March quarter, the decline in Teekay’s rates was much less than the drop seen in the general marketplace thanks to the high vessel utilization we generate from our efficient scheduling within the Teekay trading system. Our spot Suezmax fleet earnings a TCE of $42,500 a day. This was, in fact, up by more than $3,500 a day in the quarter despite Clarkson’s Suezmax TCE’s dropping by one-third from the first quarter and despite the slight drag effect on our results from a derivative last link to one in-charter vessel.

The strength of our TCE performance in the quarter reflects that our fleet is now almost double-hulled. It has become evident that our systematic single-hull disposal program over the last year was well timed as there is now considerable customer discrimination against single-hulls. This type of vessel now generates substantially lower cash flows than double-hull ships because they compete in lower paying trades, face much higher idle time, and incur greater maintenance costs due to strict inspection regimes. By selling our single-hulls at high prices, we, effectively, realized the future EPS of these ships before their earnings power started eroding.

In the quarter we delivered all single-hull ships to their new owners, three Aframaxes and one Suezmax, generating a gain of $26 million. This, essentially, completes our single-hull sale program with only two owned single-hulls remaining in our conventional tanker fleet. We also re-delivered two in-charter Aframaxes at the end of their charters, two Aframaxes joined our spot fleet, one new building and one in-charter vessel. We also chartered in two MR product tankers, as we continue to enhance our presence in the product tanker market. We expect two spot Aframax new buildings to deliver into our fleet during the second half and allow two product tankers in August and an ice-class 1A Aframax in October, which is well-timed for the 2005, 2006 winter trade.

We are updating our Rule of Thumb guidance of our earnings formula. Previously, the guidance was 60 percent weight in AGE and 40 percent in weight in Carriage U.S. Gulf, but based on changes in trading presence due to vessel sales over the past year, we are amending this guidance to 50/50 weight in going forward.

Turning next to a brief overview of the tanker market fundamentals, I’ll begin with tanker demand on Slide #7. In the second quarter, world oil demand, shown in the green bars, showed a typical seasonal decline from the previous quarter, but continued to grow versus one year ago, albeit at a slower pace of one percent. As shown by the bars on the right, the IEA is projecting oil demand to return to a high rate of growth, estimating year-on-year growth of 2.4 percent during the second half of this year and 2.1 percent for 2006.

On the graph we have also highlighted the rise in global oil inventories during the first half of this year circled on the red line. This growth in inventories is in line with OPEC strategy. Because of continued high oil prices and limited spare production capacity, OPEC earlier this year decided to maintain high oil production over the summer months to build inventories. They saw this as the only way they could provide enough oil to meet peak demand during the upcoming winter where demand is expected to exceed second quarter figures by an average of four million barrels per day. Global oil supply, shown by the blue line, rose in the second quarter following a drop in the previous quarter when OPEC did cutbacks and this provided support for global tanker demand.

Looking forward at tanker demand for the second half of the year, on Slide #8, we highlight the fact after a two-year period of relatively flat non-OPEC supply, non-OPEC production growth is once again about to become a more important factor going forward. As you can see from the bars, over the next three quarters non-OPEC supply is projected to grow by 1.7 million barrels a day, which translates into an estimated incremental tanker demand of 2.5 percent by the first quarter of 2006. A large proportion of this oil is likely to be carried on short to medium length routes by Aframax and Suezmax tankers.

Turning to tanker supply, the tanker fleet grew by 1.2 percent in the quarter. There was a slowdown in the delivery of new tankers, but scrapping also continued to be slow. On Slide #9, we have highlighted the fact that the recent fleet growth has not had the same effect on different parts of the market. On the slide, we have compared average TCE rates in the second quarter of last year in the left column with rates during the same period this year shown in the third column, as reported by Clarkson’s. As you can see from the second column, all of the major crude oil tanker segments experienced similar supply growth over the past year.

While this translated into real TCE ratings dropping by 40 percent, Aframax rates have remained unchanged. This fits into with anecdotal evidence that there is considerable discrimination against single-hull ships in the Aframax segment while there is probably less discrimination in the VLCC segment. The reason is that Aframaxes tend to navigate deeper into ports and into rivers making added safety of double-hulls more important to customers, therefore, new Aframaxes tend to immediately marginalize old Aframaxes, thus leaving mainstream supply effectively unchanged.

New VLCC’s, on the other hand, have to compete against older ships to a much greater extent because VLCC’s are often unloaded through live rings (ph) far from land, some customers tend to be more pragmatic around double-hull versus single-hull when it comes to VLCC chartering. With this in mind, perhaps it is not surprising that 2005 Aframax scrapping is running ahead of 2004 year-to-date, while there has been practically no VLCC scrapping as older ships, which are still able to find employment, are choosing to remain in the fleet.

On Slide #10, we have summarized our outlook for the market. Since the end of the quarter we have seen some volatility between the different segments. VLCC rates have firmed up, finally responding to several months of increased sailings from the Middle East. Aframaxes, on the other hand, have weakened substantially in the Atlantic due to a variety of short-term factors such North Sea oil field maintenance, a temporary shortfall in Libyan export cargoes and hurricane-related disruptions in the U.S. gulf. We consider this type of volatility to be part of normal seasonality.

We see the upcoming winter market in a positive light. We’re starting the second half of the year with a utilization of the world fleet slightly down from its peak, but still at historically very high levels. Clarkson predicts a gross inflow of new tonnage of five percent for the rest of this year, but this will be partially offset by scrapping and conversions of tankers for off-shore use. But, high oil prices make it likely that OPEC will maintain or, possibly, further increase its current high-level of supply and non-OPEC supply growth should underpin the strong level of tanker demand. Finally, the winter months typical create fleet inefficiencies as vessels are delayed due to weather, ice and reduced daylight hours and this should influence rates in an upward direction.

On Slide #11, we are showing some of the parts slide, which some of you may be familiar with from our past presentations. One of the reasons for the IPO of Teekay LNG was to attract an investor base that appreciated the special characteristics of the long-term stable nature of the LNG business and to provide access to capital to fund Teekay’s growth in that sector. As I mentioned earlier, the value of Teekay’s share of Teekay LNG is over $9 per share, shown on the middle box on the slide. In the box on the left we have calculated the value of our remaining fixed-rate business, applying a conservative 10 times multiple to the CFVO that indicates an equity value of $25.80 per share for that part of our business. On the right, we have calculated the value of Teekay’s spot tanker fleet. This is based on Teekay’s 2004 CFVO to which we have applied a multiple of 5.6 times, which is the average multiple for our peer group. This calculation implies an equity value from our spot segment of $29.10 per share. In total, this method values Teekay at $64.07 per share, compared to our current price of $45.

A different way of looking at this value gap, is that with Teekay at $45 a share and our fixed-rate segments valued as shown in the boxes on the left and in the center, the resulting value of our spot fleet equates to $38 million for an Aframax new building, compared to today’s value of $65 million. This gives no value to the fact that Teekay’s spot chartering franchise outperforms the market.

We are continuing to generate strong cash flow, including the stable cash flows from our fixed-rate business and it is surplus to our needs because we have already brought our leverage down towards the bottom end of our target range. We’re not acquiring spot assets at significantly high prices and our LNG new building projects are largely debt financed. We, therefore, find ourselves with excess capital at a time when, in our view, Teekay shares represent compelling value. For this reason, we are aggressively buying back our shares.

On Slide #12, we provide an overview of our repurchase program. We completed our first program, a three million share purchase, in early 2005 and announced a second 225 million program. Today I’m pleased to report that in the second quarter we executed on the majority of the second program with only $55 million remaining. Yesterday we announced that our Board had approved a further increase in our buy-back authority involving an additional 250 million for a total outstanding authority of $305 million. If we complete the entire program, we will have bought back more than 16 percent of our shares outstanding in November 2004. We believe that this return of capital demonstrates management’s continued focus on ensuring an optimal financial profile for Teekay.

I’ll now hand it over to Peter Evensen to discuss our financials. Peter.

Thank you. One of the highlights for us of this quarter was the successful IPO of Teekay LNG Partners, which we’re very excited about and believe will allow us to grow our LNG business.

I would like to point out, when discussing Teekay Shipping’s results for the quarter, that the consolidated balance sheet and income statement of Teekay continues to include 100 percent of Teekay LNG in each individual line item of our statements. The 22 percent public interest in Teekay LNG is reflected in the Teekay statements as minority interest on both the balance sheet and income statement.

As Bjorn indicated, our net income this quarter was $104.6 million, or $1.23 per share, which included a number of items that, on a net basis, have the effect of increasing net income by $12.7 million, or 15 cents per share. Excluding these items, net income would have been $91.8 million, or $1.08 per share, for the quarter.

Looking at the operating results for each of our segments, on Slide #13 of the presentation, overall cash flow from vessel operations for the second quarter decreased from $165.9 million from $182.5 million in the second quarter of 2004.

The contribution from our spot tanker segment decreased by $33 million, or 31 percent, to $73.6 million, compared to $106.5 million in the second quarter of 2004. This decrease was due, primarily, to the 20 percent net decline in revenue days resulting from the sale of our older vessels during the past 12 months, including four spot trading vessels sold in the current quarter, partially offset by an increase in the number of in-charter double-hull vessels and an increase in time charter rates. Our spot Aframax fleet earned an average TCE of $34,500 per day in the second quarter of 2005, up from $28,100 per day earned in the same period last year.

It’s worth pointing out again this quarter that our change in fleet composition, i.e., more chartered in new or double-hull tankers and less older single-hull owned tankers, gives rise to an exaggerated drop in operating cash flows, but not in net income. This is because the contribution to the cash flow from vessel operations, or CFVO, from chartering in double-hull tankers is less than owning older single-hull tankers because time charter expense includes an interest expense element. However, the impact to the net income line is not as great because a chartered in vessel does not have any interest expense below the income from the operation.

The fixed-rate anchor segment generated $74.6 million in cash flow from vessel operations during the second quarter, compared to $70.5 million in the second quarter of 2004. The increase was primarily due to the inclusion of Teekay Shipping Spain, fixed-rate Suezmax tankers for a full quarter, compared to only two months in the prior period and the commencement of the three-year fixed-rate time charter that Bjorn spoke of.

Our fixed-rate LNG segment generated $17.7 million in cash flow from vessel operations during the second quarter of 2005, compared to $5.5 million in the second quarter of 2004. This increase was, again, mainly due to the inclusion of two of Teekay Shipping Spain, fixed-rate LNG tankers for a full quarter, compared to only two months in the prior period and the delivery of two LNG carriers during the latter half of 2004.

Turning next to Slide #14 and reviewing the income statements figures in comparison to the second quarter of 2004. The results for the second quarter of 2005 included a gain of $26.1 million from the sale of the four older vessels. In the second quarter, we took a non-cash write-down of $10.2 million to the carrying value of some off-shore equipment that was deployed on a short-term contract servicing a marginal oil field which had prematurely shut-down due to a lower than expected oil production rate. We expect to be able to re-deploy this equipment on other off-shore projects, especially in the current strong off-shore market. In fact, we’re close to entering into a contract to employ some of this equipment on another field. However, for accounting purposes, we decided to write-down the carrying value of the equipment to a conservative level. This incident has no impact on the rest of our shuttle tanker business since this was a unique project to revive a previously abandoned oil field in the UK sector of the North Sea and, thus, the expected lifespan of this field was relatively short to begin with.

General and administrative expenses were $40.2 million, compared to $25.8 million in the second quarter of 2004. This increase is primarily the result of the appreciation of non-U.S. dollar currencies, higher accruals for performance-based bonuses, and the acquisition of Teekay Shipping Spain in April 2004. We currently expect G&A expenses to run at this level for the remainder of the year, subject to the impact that changes in our share price will have on stock compensation expense related to our long-term incentive plan.

Net interest expense decreased to $24.9 million in the quarter from $25.8 million in the second quarter of 2004, primarily due to the reduction in interest expense from the pre-payment of term loans and settlement of interest rate swaps in connection with the initial public offering of Teekay LNG, partially offset by additional interest expense resulting from the addition of Teekay Shipping Spain’s fleet on April 30, 2004.

We recognize an income tax recovery of a half a million this quarter, compared to an income tax expense of $6.1 million in the second quarter of 2004. The half a million income tax recovery includes a recovery of $4.3 million relating to unrealized foreign exchange losses.

Other Loss this quarter included foreign exchange gains of $16.6 million, net of the minority interest share of these gains, primarily resulting from the foreign currency translation gains related to the Company’s euro denominated debt and deferred tax liability denominated in the (inaudible). In addition, we incurred losses totaling $24.1 million resulting from our pre-payment of term loan, settlement of interest rate swaps and the repurchase of $56.8 million of our .875 percent bond. These items are also outlined in Appendix B of our earnings release.

Turning to Slide #15, we have presented our June 30 balance sheet and compared it with the March 31, 2005 balance sheet. Cash balances have returned back to normal levels as we have completed our rearrangement of our loan facilities in Spain, in connection with the IPO of Teekay LNG, including repaying debt and resetting interest rate swaps as indicated. Minority interest has increased to161 million at June 30, 2005, from 15 million at December 31, 2004. This increase is primarily the result of the net proceeds we received from IPO.

Our net debt, including capital lease obligations, remains substantially unchanged from the prior quarter. We used our cash flow from vessel operations, the proceeds from the sale of our vessels and the proceeds from the IPO of Teekay LNG to fund capital expenditures for vessel construction, repurchase shares, repay debt and settle the interest rate swaps. Treating the mandatory exchangeable for preferred issue is equity. Net debt to capitalization was 34 percent at the end of the quarter, substantially unchanged from the prior quarter. Our total liquidity at June 30th was over $1.4 billion.

Turning to Slide #16, we retained significant operating leverage in our spot tanker segment, however, our EPS Rule of Thumb has changed slightly. Our net income breakeven Aframax TCEE rate for the third quarter is estimated to be approximately 15,000 per day. This has increased, mainly due to the additional in-charter vessels and a lower than expected shuttle tanker utilization in the third quarter than Bjorn spoke of. However, as a result of the share repurchases, our operating leverage has increased from 5.5 cents to 6 cents per share per quarter. This means that for every 1,000 per day increase in Aframax rates, our earnings per share increases by approximately 6 cents per quarter. Looking at the third quarter, rates have declined in a normal seasonal pattern and we have fixed approximately 40 percent of our spot voyage days at an average Aframax TCE of approximately 23,000 per day.

As Bjorn mentioned, during the second quarter, we repurchased approximately 170 million of our common stock, or 3.9 million shares, at an average cost of $43.37 per share. Together with yesterday’s announced 250 million increase in the share repurchase plan, we now have a total share repurchase authorization of $305 million remaining. If we complete this based on the $45 share price today, we will have repurchased over 16 percent, or 600 million, of our outstanding shares since November 2004, when our first share repurchase was announced. The execution of our share repurchase program not only reflects the strength of our balance sheet and the strong cash flows, but also demonstrates our strong view about the underlying value in our stock price.

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

Thanks, Peter. For your information, Peter Evensen will be hosting the first quarterly conference call for Teekay LNG Partners starting at 1:00 P.M. East Coast time today and we invite you to listen in. You’ll find a link to the web cast on www.teekayLNG.com. Thanks for listening in this morning and we will be happy to take your questions.

Once again, if anyone in our audience would like to ask a question, you may signal by pressing *1 on your touch-tone telephone. (OPERATOR INSTRUCTIONS) The first question is from Justin Yagerman with Bear Stearns.

Good morning, fellows. I wanted to get a little bit more color on the Aframax rates you just went into. You said that 40 percent of the days in third quarter are fixed at $23,000 a day. Is that the whole fleet on an Aframax equivalent basis or is that just the Aframax fleet?

We give a Rule of Thumb and if you apply an Aframax, then you synthetically assume that it was actually Aframax, we found that Rule of Thumb to guide pretty well on how our earnings go, so I would just use the Aframax assumption on that.

But the actual $23,000 per day only pertains to Aframaxes. Our Suezmaxes, for example, are making much more than that.

But I was wondering if the difference in the magnitude of rate in the different asset classes was skewing that one way or the other, if you were setting everything to an Aframax equivalent basis?

Yes, I think some of our smaller product tanker, obviously, a lot less (inaudible), but I would still guide that, if you used the Rule of Thumb, that’s going to get you in the right neighborhood.

Okay. That takes us through about 40 percent of the quarter. Where would you expect rates, at this point, to be for the other part of the quarter on a relative basis?

Obviously, Clarkson numbers, in the very short-term, are jumping around quite a bit. The Atlantic Aframax has indicated it’s quite weak, but it’s also not uncommon for it to be very volatile. Last year, for example, in the third quarter, at one stage, we had Caribbean Aframax rates at $16,000 a day and six weeks later it was $75,000 a day. Suezmax rates you saw go down to $30,000 or $40,000 a day and a month later, they were about $160,000 a day. So, I think its short-term volatility and I think it has probably over-swung in the short-term as it often does. We can best guide you to look at Clarkson reports, as we all do.

Okay. When looking out, obviously, it was very fortunate timing to have gotten rid of as many single-hull vessels as you have. What are you seeing in the market in terms of discrimination in double-hulls and single-hulls? What’s the rate differential right now on an Aframax and, maybe, what is an approximate waiting time differential as you’re looking to fix those voyages on those vessels?

It jumps around a lot. I think that some of it has to do with the reputation of the owner, for example. Teekay is fixing its single-hull ships in the Pacific Basin without any significant waiting time because we have contracts and close customer relationships. If you kind of go to a more open spot market situation, it’s not uncommon for single-hull Suezmaxes to sit for a month with Africa looking for business. They might have to reposition somewhere else to get the cargo, so it’s a little bit binary and, of course, in periods of weak markets, it really widens out, whereas, if you get a pickup in activity, they will suffer less. It can be very substantial difference.

That makes sense. I know that usually you can’t discuss too many terms around the new LNG contracts, but can you just refresh our memory on kind of a target return that you look at when evaluating those contracts and whether they’re worthwhile for you and how you go about estimating the rates and what have you on those?

We’re not giving specific guidance on the new contracts. Those will be given later in the year in connection with Teekay LNG. What we generally look at is that we’re trying to get a return above our weighted average cost of capital. We compute our weighted average cost to capital and then we have a margin that takes into account the risk adjustment for each specific project. It’s on a project by project basis. Of course, we make sure that both are above our weighted average cost to capital and it’s accretive to our earnings.

Okay. Thank you very much.

Your next question comes from John Chappell with J P Morgan.

Good morning. I just have one question today. TGP has been a superstar since you brought it public and, really, the value of the move in that stock hasn’t been reflected in the Teekay share price. Other than your “Some of the Parts” slide and the occasional analyst writing about the value they should have in Teekay, is there anyway that you can monetize the success of TGP? I know you really want to holdout and, maybe, distribute more shares for the growth of that business, but does it make sense for Teekay to, maybe, distribute a secondary portion of its 78 percent holdings to monetize the success of TGP?

We certainly are gratified by the success of TGP and it’s demonstrated the fact that there was considerable value in our fixed-rate business. We have certainly highlighted that value and, I guess, the fact that we’re buying our shares back demonstrates that there’s evident value here. Whether we can use the strength of TGP, we don’t think we’re done going up with that company by the way, so we will continue to try to optimize our capital structure based on what we see in the market. I think there are no plans for Teekay to dispose of any of its 78 percent units. There will be more capital raised, obviously, as new LNG projects get delivered. It’s been very positive.

Okay. Thanks, Bjorn.

Your next question comes from Jordan Nallinger with Deutsche Bank.

Good morning. Just a couple of questions. The new breakeven rate, is that - - should we consider that longer term, like looking beyond the third and fourth quarter of this year or could that move around depending on, I think, some of the factors you talked about?

Right now, we’re only saying that that’s for the third quarter and that was brought up because of the additional in-charter vessels which takes a little bit longer term as well as the lower utilization on the shuttle tanker side. But you shouldn’t take it that it’s up to a permanent level of $15,000 a day. It could very well come back down.

Okay. Can you, maybe, talk a little bit about your thoughts on the charter-in strategy? You do have a number of those vessels. I imagine those renewals have and will start coming up in the next 12 to 24 months. What are your thoughts on that?

Well, first of all, I guess our in-charter strategy is very helpful because it puts us in a win-win situation. We have significant exposure to the spot market, but if we should have any period of weakness, it will enable us to go back in and replenish our spot tanker in-charter fleet, which is really a strategy of, which I’ll remind you, none of our competitors are really executing on anywhere near this scale. We don’t have a significant redelivery program for the next six or nine months. In our in-charter fleet we have several spot vessels joining our fleet, a couple of new buildings, an in-charter Suezmax in January. So, I think you’ll see a fairly stable fleet for some time and it gives us the time to look for periods of weakness to step into the market.

Okay. Then, just a final question, the run rate on the fixed fleet seems to be a little bit better than we might have been looking for. Is the general expectation, in terms of fixed revenues, working off this new level, which, I think, was $196 million or so?

Sorry. What was the $196 million?

Sort of just looking at the total fixed tanker fleet revenue, LNG plus the conventional, I mean, at least for the time being, that kicked up versus the first quarter. Is that the run rate we should be looking at going forward?

I would say that that is, with the exception that we’re probably a little weaker in the third quarter based on the shuttle tanker utilization being abnormally low for a quarter. Yes, that run rate is kicking up as we had forecast it to.

Okay. Thank you very much.

Your next question comes from Magnus Fyhr with Jeffries and Company.

Good morning. Congratulations on a third great quarter. A question on “Some of the Parts” valuation, maybe, referring to your spot tanker segment, let’s say the market knows how to value your spot tanker segment, since there are several peers out there trading between 5 to 6 times EBITDA, putting a value around $25 on your spot tanker business and we know that this Teekay LNG Partners is getting close to $10 here. That would, effectively, put a value of about $10 per share on your fixed-rate tanker business, or about 4 or 5 times EBITDA. Could it be that the market is not understanding that part of the business and, given the success of the TGP spin-off, what are your thoughts about, maybe, monetizing that part of the segment?

Thanks, Magnus. I think it’s always a great question why you have this discrepancy. As Bjorn said, you could say that the spot tanker market is cheap or you could say, as you’re saying, that the fixed-rate side is cheap. I think that’s something that we have to look at. We’re getting a lot of response from investors who understand the Sum of Parts, but, more importantly, they understand that Teekay is not a spot tanker company. They are saying to us that Teekay should be valued differently than a spot tanker company. We hope to be able to close that gap and hope to get a relatively good out performance rather than from our pure spot tanker peers. Obviously, the success of Teekay LNG Partners could be replicated in some of our other fixed-rate segment should we not get the valuation that we want.

Okay. Just a follow-up question on discrimination against single-hull vessels, there’s been some scrapping of Aframaxes this year, what are your thoughts there going forward as far as, maybe, can you share with us the internal scrapping forecast at Teekay for all segments, if you can?

It’s going to be influenced, I guess, really, the rate levels and, also, people’s expectations as we move into the winter. I think a lot of people expect a strong winter market and nobody is going to throw in the towel early. There are quite a lot of ships being pulled out for off-shore conversion projects. I think that pace is probably the highest we’ve seen, maybe, at least since the mid-90’s and, maybe, as high as we’ve ever seen. That, of course, if you will, may influence that some ships don’t go for scrap, but go for conversion. We’ve kind of eyeballed a number of 10 million tons for the year at the beginning of the year. It looks like, as we reach the middle of the year, we are right on that mark, half-way. I guess that’s sort of my own personal forecast, but it could leave the floodgates open if you had any sort of adverse incident on an older tanker or if you had appear a weakness over the third quarter.

Thank you.

Your next question comes from Harvey Stober with Dahlman Rose.

Thank you. Can you give us some sense of how you intend to replace your charter-in vessels when they roll off?

As we will continue to be opportunistic, again, it’s an extra, I guess, tool in our inventory and an extra weapon in armory, if you will, that we have the in-charter strategy. As I said, there isn’t any particular rapid run off in our in-charter fleet for the next six to 12 months. We have had periods where we’ve been very active in the market and other periods where we step back, so it’s really a matter of price sensitivity and, of course, when it comes to replenishing our spot fleet longer term, we will be looking for a cyclical window to open around new buildings and second-hand acquisitions and industry consolidation. We have a short-term strategy and a long-term strategy.

Okay. Thank you.

Your next question comes from Phillip Linear with Banc of America Securities.

Good morning. I’ve got a couple of questions. First of all, on the product market in Asia, I noticed that you continue to increase your in-charter product fleet. I wanted to ask you how you’ve done the successes of that strategy in terms of is the product market exceeding your expectations or meeting them in that market and in terms of a more concrete investment in products, are there any large-scale fleet on the Asian side of the business that is potential acquisition targets out there?

Firstly, let me clarify that, actually most of our product activity is in the Atlantic Basin with some of our recent in-charter strategy. It’s worth it to remind that we cooperate very closely with (inaudible) as part of the Navion (ph) transaction, in fact, a crew operating around certain ships with them and have a base and various contracts, including with (inaudible). That’s working out very well and we are building that fleet gradually, both in the MR segment and in the LR1 and LR2 segments. We do have three LR2 product tankers on order, one, which I mentioned, will deliver in August. We’ll look at the best trading options for those ships, whether it be in the Middle East or whether it will be Middle East to Asia or Middle East to the Atlantic and around the Atlantic. The Asia product tanker strategy is something we’ll turn to at the appropriate time, but it’s mainly an Atlantic strategy at the moment.

Okay. I didn’t realize that. Thank you. Another question on the in-charter strategy, following the weak period in the VLCC market and, now, the reciprocal weak period in the Aframax market, do you see much more attractive rates to charter tonnage now than you did, say, six or nine months ago?

It’s been a little slow to react, I think. There’s still a lot of optimism around the winter markets, so I think it’s been slow to react. We’re seeing rates come down a little bit, but not as much as they did last year in the second quarter when - - second and third quarter - - when you had some weakness. I think people are not prepared to crawl into the cycle yet.

Then, just one last question, I don’t know if you have a perspective on this, but with all the new Aframaxes that are coming out of the ship yard, are you noticing a trend on whether those prefer to stay in Asia or come over to the Atlantic market or is it pretty much across the board?

I would say that it depends a little bit on the rate differential. We had, I guess, periods where the Asian market has been a lot more stable than the Atlantic. I think we saw some ships stick around in the Far East. At some point, then, we had some strength in the Atlantic Basin and we saw ships piling through to the Atlantic. Now, it’s flipped around. So that’s also, I think, part of what’s driving short-term. The rate volatility we’re seeing in the Mediterranean, perhaps 75 ships show up at the Suez Canal from Asia saying that we’re ready for business. These things quickly get absorbed and diluted out, but it can get a little choppiness. I’d say that the trend is for them to go to the Atlantic on the whole.

Okay. Thank you very much.

Our next question comes from John Kartsonas with CitiGroup.

I have a couple of modeling questions actually. Can you give us the minority interest line, how much it was for the quarter, please?

How much it was?

Yes.

It was about $6.5 million.

Also, maybe I missed that, but on G&A, what would be your guidance going forward for this year?

We expected to stay, roughly, at the level that it’s at, about $40 million tracking per quarter.

Lastly, on the tax issue, for the rest of the year do you expect any taxes or are you going to see a tax deferral kick in?

On the tax side, we will continue to see some, I would guess about $3 to $4 million per quarter, but it’s trending down as we’re able to get our tax position more under control.

Okay. That’s all I have. Thank you very much.

Our next question is from Jin June (ph) with Maxim Group.

Good morning. First, I’d like to congratulate Teekay on its asset management and execution. You’ve mentioned, Bjorn, about a lot of interest in the conversions in this market. I was just wondering why we haven’t seen some more activity on Teekay’s front end in ownership of floating storage and off-take?

The majority of the ships that have been sold for conversion have actually been sold for floating production storage and off-take at PSO, which is quite a lot more complex than FSO, and these are typically VLCC or Suezmax tankers that get sold for that. I guess the people who are disposing of those ships really don’t have their own off-shore engineering business. It’s simply selling the hulls as a disposal option. In many cases, the ships are sold subject to the buyer obtaining the project so they can tie the ships up for three to six months, which can be kind of unfortunate if your backing doesn’t get the project and there you get the ship back and missed a window to, maybe, sell it or whatever. I guess the cloning (ph) storage business, which Teekay is involved in, is not a very significant volume business. We pursue those projects in which we think we can add value and continue to manage our floating business. At the end of the day, what’s important is ships get taken out of the active trading fleet and that’s to help the macro picture.

Even despite the attraction of the upcoming winter market, isn’t there a sort of limitation where some of these vessels can’t operate at minimal levels for customers? In other words, they sought every waiver possible, they’ve pushed off maintenance as long as possible. At the end of the day, they still have to “pay the piper”, is that not the case?

Clearly. There, clearly, is a drop-dead date. I think we’ve described in one of our calls a quarter or two ago, that the IMO category one ships, some have sought a little bit of life extension by converting to category two. That brick wall is 12 to 24 months away for most of those ships, so you will see more scrapping. The question is will you see scrapping ahead of deadline because of the pressures of enhanced survey, customer discrimination, poor cash flow and any other milestone that come up with regular survey investment hurdles. One things for sure, death and taxes, so these ships will have to go.

I guess my last follow-up is can we expect more activity on the FFA front in the Aframax segment? I know you use it strictly as a hedge on some of your short-term time charters on Suezmax, but as that market gets more liquid and more developed, should we expect Teekay to be more active?

Yes. I would hope we would be one of the kind of market leaders in developing liquidity in the derivatives market, but it is a very embryonic market still, so it will take a lot of work. We will be part of that, we hope.

Thank you very much.

Our next question comes from Daniel Burke with Johnson Rex. (ph).

Good morning. Just a few macro level questions left. First, I was curious about your rationale for you using a flat times multiplier on non-OPEC supply growth in terms of framing tanker demand, is there sides behind that or is that sort of historical Teekay Rule of Thumb?

I guess its tracking, just to peal the carpet back and see the exact trading paths on all the world’s 3500 tankers. It’s not an accurate science, but you can roughly - - there are some Rules of Thumb that one percent in oil production, if taken pro rata across all trades, OPEC and non-OPEC, increases tanker demand by 1.75 percent. If you take OPEC production alone, that’s probably a one to 2.5, and if you take non-OPEC, which tends to be shorter, it’s probably one to 1.5. That’s somewhat scientific, but probably not to atomic standards.

Thanks. I appreciate that. The other question, I think on your last conference call you had indicated you expected the North Sea maintenance season to proceed, if anything, a little bit earlier than it typically does. Do you still feel that way or has some of that activity sort of been pushed back here?

It’s been a little bit of a tough year in the North Sea. There have been some fields that were out of service unplanned and that actually became quite a significant factor in the end of the first quarter and at the beginning of the second quarter. I think it distracted away from the timing, so we’re actually going to see some maintenance on the North Sea in the third quarter as well, which is not uncommon, but we actually thought we were going to have more of it in the second quarter. That’s why we’re also taking the opportunity to dry dock a number of our shuttle tankers while the volumes may be down a bit.

Thank you.

I would like to remind our audience, if you would like to ask a question, you may signal by pressing *1. Next, we’ll hear from Justine Fisher with Goldman Sachs.

I just have a quick question about the financing for the new LNG new builds, I know that you’re going to offer them to Teekay LNG Partners. If you do, will they be financed with units issued there or will Teekay still have to use, mainly, debt to finance those?

Our general model is that we finance up to 80 percent on a non-recoursed Teekay Shipping Corporation basis. Then, Teekay Shipping will provide the equity during pre-delivery. When those assets are sold down into Teekay LNG Partners, the debt - - we have worked it out with the banks that the debt will be automatically assumed by Teekay LNG Partners. Then, Teekay Shipping can either receive cash from the sale of units at Teekay LNG or we can elect to take some units ourselves.

So, it’s initially financed with debt at Teekay, but, then, once the ship is delivered?

That’s right. We draw up to 80 percent on a project-financed basis and for the equity installments, Teekay will use its revolving credit facilities so that when it’s sold down into Teekay LNG Partners, Teekay will be repaying debt at the Teekay Shipping level.

Okay. I guess you guys haven’t given a number for how much these new builds will cost, so it’s hard to predict what the peak set level would be. Are there any numbers that you could give out as far as that’s concerned, including the new builds?

We’re not giving guidance yet, given how far they are in the future. Basically, from the guidance you’ve seen in the past, the economics of LNG hasn’t changed.

Okay. Thank you.

We will take a follow-up question from Justine Yagerman with Bear Stearns.

I just had a quick question. With the approaching stock option expense and regulations in 2006, I was wondering what your projected impact is in 2006 from the dilution of stock options?

That would be about $3 million per quarter. As you know, that’s a foreign filer, it’s delayed to 2006, as you mentioned, so it would have a run rate of about $3 million per quarter at present.

$3 million per quarter. Thank you. What line is that coming in on?

That would come in the G&A expenses.

G&A. Great. Thanks.

At this time it appears there are no further questions. Mr. Moller, I’ll hand the conference back to you for any closing comments you may have.

Thanks very much for the discussion this morning and enjoy the rest of your summer. We look forward to talking with you next quarter and Peter Evensen will be performing at 1:00 P.M. Eastern. Thanks a lot.

Thank you. That does conclude our conference call. Thank you all for your participation. We hope you enjoy the rest of your day.