Teekay Corp Ltd (TK) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Teekay Shipping Corporation third 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. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded. Now, for opening remarks and introductions, I would now like to turn the 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 third quarter 2005 earnings presentation. Mr. Moller and Mr. Evensen will review this presentation during today's conference call.

I will now read the forward-looking statements.

Please allow me to remind you that various remarks we may make about future expectations, plans and prospects for the Company and the shipping industry 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. Thanks for joining us. I am pleased to report to you on our results for the third quarter, and let me begin with the highlights on slide number three.

We recorded net income of $42.7m, or $0.52 per share. Our Aframax fleet earned $24,850 a day, reflecting a seasonal dip in rates, but still representing a good rate level from a historical viewpoint. In October we saw a strong rebound in tanker rates, setting the stage for a very firm winter market.

During the quarter, Teekay was awarded two major long-term LNG projects in Qatar and Indonesia. Yesterday we announced plans to sell to Teekay LNG Partners the three Suezmax tankers we have on long-term charter to Conoco Philips.

We increased our annual dividend by 51% to $0.83 a share, linked to the predictable and growing dividends we receive from Teekay LNG Partners. And we continued our aggressive share repurchase program, which has seen us buy back more than 14% of our shares over the past year.

This morning I will review the market and the key developments in each of our business segments, and Peter Evensen will discuss our financials before we open it up to questions.

I'll start the market overview by highlighting the development in tanker rates. Slide number four is the weekly Clarkson Aframax rates for 2004 and 2005 year to date. It shows that charter rates this year have followed a typical seasonal pattern with a weaker market during the spring and summer quarters. As the red line shows, this same seasonality has now led to rates rebounding strongly in the fourth quarter, with October rates more than twice the average in the third quarter. And you can see that we are now tracking towards last year's market, where Clarkson Aframax rates averaged over $80,000 a day in the fourth quarter.

What's unusual about this year is that, due to the particular effects of the recent hurricanes, the Aframax segment is leading the current upturn in the tanker market, with Aframax rates at times exceeding those of larger ships during September and October, whereas in 2004 it was the VLCCs that led the market upturn. However, as always, these short-term differences tend to quickly even out and we're now seeing all of the major segments moving upwards in concert.

On slide number five we look at what's driving rates upwards this quarter. As we've seen in the past, the tanker market tends to thrive whenever disruptions occur, and over the past two months the three major events listed on this slide have helped kick-start the turnaround.

Firstly, Hurricanes Katrina and Rita caused an increased in ton-mile tanker demand in a number of ways. For example, through cross-trading of different grades of crude oil over longer distances, higher U.S. crude oil and product imports to replace the loss of domestic production, increased oil flows into and out of Asian refineries in response to global product requirements, and some tankers being tied up for storage purposes.

Secondly, there was a series of port delays affecting available tanker supply, which included hurricanes caused port delays and led to the diversion of cargos to alternative destinations. A French port strike in late September, which tied up 30 tankers. And the beginning of the season, where transit delays occur through the Bosphorus Straits, due to nighttime sailing restrictions.

And the third event was that high natural gas prices have caused some industrial users to switch fuel to oil instead of gas, thereby driving up tanker demand. However, we know that, from the past, unless it is supported by healthy market fundamentals, the impact of such events tend to be very short-lived.

And fortunately, fundamentals are indeed in very solid condition right now, for the reasons outlined on the bottom of slide number five, namely the continued good economic growth in the U.S. and China, the principal drivers of global oil demand growth; entering the season of peak global energy consumption; OPEC oil production now running at an all-time high; North Sea production having returned to normal levels after the end of the maintenance season; and while scrapping remains low, an increasing number of tankers exiting the active fleet permanently to serve on offshore oil fields.

In the fourth quarter, world fleet utilization is projected to be close to 90%, a figure which represents full utilization. Certainly the rate spikes we've already seen confirms the high utilization this quarter.

On our July call, we predicted a good winter market, based on how we saw market fundamentals stacking up at that time. Now that we're getting an additional boost from market dislocations, things look even better and we appear to be in for another winter of exceptionally high tanker rates.

Looking at the tanker market outlook for 2006 on slide number six, we expect market fundamentals to remain finely balanced for the year as a whole. Tanker demand growth looks promising, based on the positive economic outlook from the IMF and the projection of above-average oil demand growth by the IEA. The necessary production increases are indeed expected to be met by a combination of OPEC and non-OPEC oil. We expect the high demand for product tankers to continue, due to refinery bottlenecks.

On the tanker supply side, Clarkson is projecting a slowdown in new tanker deliveries compared to this year. We expect to see a continued exit of ships for use in offshore, in addition to some scrapping. And on top of the changes in physical supply, we expect the effective supply to be constrained by the widening discrimination against older single-hulled tonnage. This is especially true for Aframaxes and smaller-sized ships, which have more frequent port calls.

Overall, we believe that the stage is set for a continued tight tanker market next year, with rates remaining above that historical average. We expect to see the usual volatility through the seasons, but we view the risk as being to the upside, in particular in the event of further unexpected supply chain disruptions.

Turning next to the developments in our main business segments, I'll start with our spot tanker segment on slide number seven. Our spot Aframax earnings averaged $24,850 a day, moving down from $34,000 -- $34,500 a day last quarter, in line with changes in the open market. Our Suezmax fleet earnings dropped to $24,600 per day, down from $42,500 last quarter. The decline was mostly due to the weaker market, although we did slightly under-perform the benchmarks because of the $3,000 a day drag effect of an out-of-the-money fixed rate contract.

Our spot crude oil fleet declined by three ships, through the sale of one single-hulled tanker and the redelivery of two in-chartered tankers at the end of their contracts. Subsequent to the end of the quarter, we agreed to sell our remaining single-hull Aframax spot tanker for delivery in the current quarter. And after the delivery of that vessel, our owned spot tanker fleet will be 100% double hull.

On slide number eight, the employment of our growing fleet of large and medium range product tankers consists of a combination of spot trading and fixed-rate Contracts of Affreightment. Our spot trading ships benefited from the strong rise in spot rates that occurred in the aftermath of Hurricane Katrina. On a blended basis, this part of our fleet earned $27,350 a day in the third quarter. And during the quarter we continued to grow our position in the product tanker sector, with the delivery of another LR2 newbuilding. We also in-chartered one MR product tanker and redelivered another vessel -- another in-chartered vessel.

In October, we declared an option to convert an existing Aframax newbuilding order to LR2 specifications, bringing our order book of large product tankers to three units.

Next I will cover our fixed-rate tanker segment on slide number nine. Cash flow from vessel operations was $59.6m in the quarter, down from the previous quarter, as we entered the traditionally weakest quarter in the utilization of our shuttle tanker fleet, due to seasonal oil field maintenance. However, one-time factors in the North Sea cost us $0.12 per share in the quarter as well. Peter will describe these variances during his comments.

We expect shuttle utilization and revenues to recover in Q4, in line with peak seasonal oil production. In terms of new business, a highlight in the quarter was our first ever shuttle tanker contract to serve an offshore platform in deep water Gulf of Mexico. While expected to last only a couple of months, this charter is expected to demonstrate that dynamically positioned shuttle tankers provide greater flexibility in the aftermath of a hurricane than sub-sea pipelines, which is the current preferred off-take solution.

This charter underscores the growing potential for expanding our shuttle tanker franchise outside of the North Sea. You will recall that last quarter we secured our first ever shuttle tanker contract in Australia. During the quarter we sold a surplus 1981 built Panamax shuttle tanker for an offshore project, with the vessel having subsequently delivered to its new owners in October.

During the quarter a Suezmax newbuilding joined the fleet and commenced a long-term fixed-rate charter. And finally, we announced yesterday the intention to sell to Teekay LNG Partners three Suezmaxes, currently serving on long-term fixed-rate charters to Conoco Philips. The driver behind this transaction remains the same as the initial flotation of Teekay LNG, namely to place assets that produce long-term stable cash flows in the hands of those investors who most highly value these assets' characteristics.

On slide number 10, the cash flow from operations -- vessel operations, our LNG segment, was $17.7m, unchanged from the previous quarter. During the quarter, we secured two major new strategic LNG projects. On July 27, we announced that we had been awarded 20-year fixed-rate contracts covering two 155,000 cubic meter ships for the Tangguh LNG project in Indonesia, with Teekay holding 70% interest in the ships. On August 2, we announced that we had been awarded 25-year fixed-rate contracts for four 217,000 cubic meter ships for the RasGas 3 project in Qatar, with Teekay holding a 40% interest in the ships.

Teekay currently receives approximately $10m in quarterly distributions from Teekay LNG. This amount is expected to grow steadily as Teekay LNG acquires accretive projects.

Before I hand it over to Peter, given the current positive outlook for the market and for all of Teekay's business segments, let me take you through how we think about the use of our strong cash flow and how this fits in to our overall strategy. Over the past couple of years, we have steered clear of buying historically high-priced cyclical assets, which we felt offered inferior risk reward characteristics over their investment life.

During the current high cycle, we have nevertheless been able to upgrade our spot fleet to an all double-hull configuration. We have done this by gradually selling our single-hull ships at high prices, taking delivery of newbuildings ordered during the low and mid cycles, and maintaining an active in-charter strategy. While in retrospect we may have adopted this view a little too early in the cycle, directionally we remain comfortable with the overall strategy.

Most other companies in the tanker sector rely entirely on the ups and downs of the spot market. As we've described in the past, our mix of fixed-rate businesses and our significant operating leverage towards the spot tanker market provide us with the flexibility at any given time to direct our cash to where we see the best risk-adjusted returns.

Over the past couple of years we've chosen to use our cash on a combination of profitable fixed-rate projects, debt reduction and the return of capital to shareholders. During this time we have built the world's fifth largest independent LNG shipping franchise. We have brought our debts to the low end of our target range. We have almost doubled our regular dividend payments, and we have repurchased 14% of our shares.

We intend to continue our strategy of strict capital discipline, but we remain ready to reinvest in our spot tanker business at the appropriate time. The listing of Teekay LNG has confirmed that investors value stable profitable businesses at a much higher cash flow multiple than cyclical businesses. Teekay is today being valued as a purely cyclical business, while in fact fixed-rate business has made up the majority of our activities.

On slide number 11, we show our updated sum-of-the-parts calculation. As shown on the left, our fixed-rate tanker segment is worth $27 a share based on a 10 times multiple of the expected normalized CFVO. In the middle, you'll see the $8.60 per share relating to the current market value of [own] shares in Teekay LNG, and the $3 per share from our other assets.

The value of these three components alone add up to $38.50, or roughly the level where Teekay shares have been trading in recent weeks. What this means is that when Teekay shares trade at $38.50, investors are effectively acquiring zero value for industry leading spot tanker franchise. With Teekay shares representing such a compelling investment, I am sure you can see why we continue to aggressively buy back our shares.

I'll now hand it over to Peter, to discuss our financials.

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

As Bjorn indicated, our net income this quarter was $42.7m, or $0.52 per share, which includes a number of items that on a net basis had the effect of increasing net income by $8.1m or $0.10 per share. Excluding these items, net income would have been $34.6m or $0.42 per share for the quarter, which is slightly above the consensus estimate.

Looking at the operating results for each of our segments on slide 12 of the presentation, overall cash flow from vessel operations for the third quarter has decreased to $106m from $206m in the third quarter of 2004. The contribution from our spot tanker segment decreased to $28.7m compared to $129.5m in the third quarter of 2004.

This decrease was due primarily to a decline in spot tanker rates, a 23% net decline in revenue days resulting from the sale of our older, single-hull vessels during the past 12 months, including one spot trading vessel sold in the current quarter, which was only partially offset by the delivery of newbuilding. Our spot Aframax fleet earned an average TCE rate of $24,800 per day in the third quarter of 2005, down from $31,700 per day earned in the same period last year.

Our fixed-rate tanker segment generated $59.6m in cash flow from vessel operations during the third quarter, compared to $63.6m in the third quarter of 2004. The decrease was primarily due to lower utilization of the shuttle tanker fleet because of longer than normal seasonal maintenance of offshore oil facilities, and the delayed start-up of certain fields in the North Sea, as well as waiting time incurred in the redeployment of two shuttle tankers and some sub-sea equipment.

Given the higher than normal seasonal drop in utilization, we took the opportunity to perform additional maintenance on our shuttle tankers. So in the fourth quarter, we expect the cash flow from vessel operations for the fixed-rate tanker segment to rebound and return to a level similar to what we saw in the second quarter, in the low $70m range.

Our fixed-rate LNG segment generated $17.7m in cash flow from vessel operations during the third quarter, compared to $12.9m in the third quarter of 2004. This increase was mainly due to the delivery of one LNG newbuilding in December of last year.

Turning next to slide 13, and reviewing the remaining income statement figures in comparison to the third quarter of 2004. The results for the third quarter of 2005 included a gain of $8.6m from the sale of an older vessel. General and administrative expenses were $40.6m compared to $29.1m in the third 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 additional costs associated with Teekay LNG Partners.

We currently expect G&A expenses to run at this level for the remainder of the year. Net interest expense decreased to $21.3m in the quarter, from $29.3m in the third quarter of 2004, primarily due to the reduction in interest expense from the repayment of debt over the past 12 months and the settlement of interest rate swaps in connection with the IPO of Teekay LNG.

We recognized a net income tax recovery of $2m this quarter, compared to an income tax expense of $8.1m in the third quarter of 2004, due primarily to the corporate reorganization of some of our shuttle tanker operations earlier this year, as well as the tax yield from interest expense reductions from inter-company loans within Teekay LNG's corporate structure.

Other losses this quarter included foreign exchange gains of $2.8m, net of the minority interest shares we've gained, primarily resulting from the foreign currency translation gains relating to the Company's euro-denominated debt. In addition, we incurred a loss of $1.3m from the repurchase of 8.3m of our 8.875% bonds.

We recorded minority interest expense of $5.4m and miscellaneous income of $2.7m.

Turning to slide 14, we have presented our September 30, 2005 balance sheet and compared it with the June 30, 2005 balance sheet. Advances on newbuildings in contracts has increased $77m, from $260m at June 30 to $337m at September 30, primarily due to further advances made on newbuildings, partially offset by a reduction due to the delivery of two newbuildings during the third quarter.

Minority interests has increased $58m to $219m at September 30, from $161m at March -- at June 30. This increase is primarily the result of the net proceeds received from the equity from our joint venture partners toward the construction of our LNG carriers. Treating the mandatory exchange preferred issue as equity, and net of restricted cash, net debt to capitalization was 38% at the end of the quarter, an increase from 34% at the end of the prior quarter. This increase is primarily due to the payment of newbuilding installments and our share repurchases.

As a reminder, please note that the interest expense associated with the debt relating to our advances on newbuilding contracts, which was $337m as of September 30, is capitalized and not expensed in the income statement.

Our total liquidity at September 30 was over $1.1b.

Turning next to slide 15, since November of 2004 we have announced a series of three share repurchase programs authorized by our Board. To date we have successfully repurchased 11.8m shares at a cost of $505m, in connection with those programs. If the remaining share repurchase authorization of approximately $98m is completed, at an average price of $39.44, which was Teekay's closing stock price on November 1, we will have repurchased over 17% or 604m of our outstanding shares since November 2004, when our first share repurchase was announced. When you also consider the $60m of dividends we will have paid over the same period, we will have returned $665m to our shareholders over a 12-month period.

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 of the underlying value in our stock price. In addition, on September 13, we announced a 51% increase in our quarterly dividend, bringing it to $0.2075 per share per quarter, representing the third consecutive annual increase in our dividend. This reflects the growth of our business segments, the stability of our cash flow, and the success of the IPO of Teekay LNG Partners, from which Teekay is receiving regular cash distribution.

As we have indicated earlier, we will continue to review our dividend in light of future increase in cash distribution Teekay may receive from Teekay LNG, and the growth in our other business segments.

We've also been repurchasing our highest cost debt, our 8.875% bonds. For the nine months ending September 30, we have repurchased $65m of the $350m that was outstanding at the beginning of 2005.

Turning next to slide 16, we retained significant operating leverage in our spot tanker segment. Our EPS rule of thumb is unchanged. Our net income breakeven Aframax TCE rate for the fourth quarter is estimated to be approximately $15,000 a day. As a result of the share repurchases over the past six months, our operating leverage has increased from $0.055 to $0.06 per share per quarter. This means, for every $1,000 per day increase in Aframax rates, our earnings per share increase by approximately $0.06 per quarter.

Looking at the fourth quarter, rates have gradually increased, as Bjorn mentioned, and we've fixed approximately 50% of our spot [voyage saved] at an average Aframax TCE of approximately $37,000 per day. However, current Aframax spot rates are in the range of $50,000 to $80,000 per day.

In addition -- Teekay has agreed to sell to Teekay LNG three Suezmax class crude oil tankers and related long-term fixed-rate charters for an aggregate price of $180m. These vessels have an average age of two years. Teekay LNG intends to finance the acquisition with the net proceeds of a proposed public offering of its common units, together with a combination of borrowings under its revolving credit facility, and cash balances.

Teekay LNG has filed a registration statement with the U.S. Securities and Exchange Commission for the public offering and the acquisition of the vessels will take place upon the completion of the offering. As part of Teekay LNG, these three vessels will continue to be consolidated within Teekay's financial results. However, interest expense will decline by an amount roughly equal to the increase in minority interest expense related to Teekay LNG.

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

Thanks, Peter, and thanks very much for listening in, and we'll hand it over to you for your questions now.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question will come from Jonathan Chappell with JP Morgan.

Thanks. Good morning, guys. Bjorn, everyone thinks of Teekay as a crude carrier, Aframax player, but you have a lot of time chartered-in product tankers. Can you talk a little bit about the market for chartering-in further product tankers? Is it financially feasible right now, given the way that the spot market has moved?

And also, can you help us think about your spot market versus time charter exposure and the large product versus the small product tankers?

Sure. Well, I think clearly that the strategy, as you can see on the numbers of our product tankers, as it has grown over the last two years, has been an organic growth. Of course, once we acquired Navion, we built on that base. And using the various customer relationships we had, we've ordered a total of four LR2s, one of which has delivered this last quarter.

The in-charter market, of course, became quite frothy here after the hurricanes, so we actually had chartered in several ships earlier this year at rates that were quite full, we felt, but nonetheless represented reasonable value. It turned out they were very good value, but of course it also meant that [owners'] time-charter ideas jumped quite a bit. So I'd say that the window is shut right now for anything - that makes a lot of sense?

But I think we have to consider that it's another element of following our customers, that we offer them the product transportation, so this is a future growth area for us.

Of the nine large and medium product tankers and the 11 small product tankers that you have in your vessel breakdown in the press release, how many of those 20 extend through 2006, and what's the spot market exposure of those 20 vessels?

Well, we have a segment of a sizeable fleet of smaller ships where the in-charter -- the smaller segment of in-charter, that's relatively long. Like charters. Say, three to five year average. The larger segment, we own a few of the ships, but most of them are on in-charters ranging from one year to various periods, six or seven year charter of an LR2. But it's a relatively short charter strategy.

Okay. And then finally, given the pace that you've been buying back your stock, it seems that this $98m that's remaining on the authorization should be completed by year-end. When's the next Board meeting, or could you authorize another share repurchase without a formal Board get-together?

We have frequent contact with our Board, and they're certainly available if we ever felt a need to consult them. But we, I think, have demonstrated our focus on shareholder value and if we see that as the way to proceed, then we'll act on it.

Thanks, Bjorn.

We'll go next to Harvey Stober with Dahlman Rose.

First question is the comment on slide six regarding refining bottlenecks is persisting in the short term. What are you seeing in that? Most people are looking at that as the stopgap or the problem in the whole sector for an extended period of time that may restrict usage of crude oil. What are you seeing more specifically behind that?

Well, what we've seen, according to our data, is that you had about 30% of U.S. refining capacity shut in immediately following the hurricane situation, and you had about 20% of U.S. crude oil production. Out of those short -- out of those oddities, it looks like something like 80% of refineries are back up, 80% of the refineries that were affected. So a relatively small percentage remains.

Whereas on the crude oil side, only about a third of the outages are back on stream. And what this means is, in our view, that there will be an increased movement of crude oil imports to the U.S. because of that shortfall. So that's very positive for the crude oil ton-mile demand.

However, because of the consistent need for imports of products to backfill that remaining gap, as well as the general growth in product demand and the fact that there isn't any particular spare refining capacity, you are going to see a lot of products moving from various locations, including further afield locations than you've seen in the past, for some foreseeable future.

Okay. And on the inventory side, the crude oil inventories in the U.S. sector - obviously it's not the whole world, but - have approached or exceeded 10-year highs by certain measures. How -- obviously some of these dislocations have been the result of the hurricanes, but are you seeing any changing demand patterns as a result of that near term or are there dislocations that you see will be reversed or offset any potential weakness?

I think that the lead -- the driver of pricing of oil has been product need, not crude oil inventories. So I think crude oil inventories are not sparse by any stretch. It's simply a bottleneck on the refining. So I feel that obviously there's been some temporary reduction in regional demand for products in the U.S. but that isn't, I think, part of the fundamental picture. In fact, we expect the recovery in the Gulf region will be stimulative to the economy in general in the U.S. and therefore to product demand long term.

Okay. Thank you very much.

We'll go next to [John Woodbury] with Independence Capital.

Hey, guys. Just mainly to get my head around a couple of numbers. Is it reasonable to look at your sum of the parts page and say that -- in one sense one could say that your net debt would be the combination of $627m and $279m, because if you sell down your ownership stake, not to imply that you would, you wouldn't be consolidating any other debt at Teekay LNG. Is that correct?

That is correct, yes.

Okay. And so if I take the aggregate value of those two properties, I guess that gets to about $950m. So in effect one could say that you're a net cash company at this point, if you looked at it that way.

No, because we have $900m of net debt.

Okay, but you also have a publicly monetized value that's close to that amount.

Yes, so we have $900m of net debt, and we have only --

$950m

$700m of --

In other assets. Okay.

Yes. That's correct.

And then I guess what I want to do is just get a sense for your appetite to continue to repurchase shares. I would assume that you are probably close to -- you may or may not want to complete the 2.5, but I guess that would get you to about 80m shares, and the family I think has about 32. Is there a point in time when you really say, okay, we've bought enough stock?

I think that we look at the options that are available to us, which is to acquire assets that have a good risk-reward profile on investments. We obviously are focused on not investing if we don't think it's a reasonable risk-return profile. Then we'll return capital to shareholders, if we have excess capital. I think the best guidance I can give you is we expect there'll be lots of growth opportunities for Teekay in our various segments over time and we will stand ready to act with our deep liquidity. But we are not -- as you've seen, we have no intention of sitting back and hoarding the money if there is no direct investment opportunity for us.

Now the sale of the Suezmax, that doesn't have any -- that's not going to take your net debt down, you're just going to be taking in $180m of cash. Is that right?

Actually that will -- we will -- TeeKay Shipping will receive $180m, so on the sum of the parts valuation it will have that effect. But on a consolidated basis, it will not.

Sure, but there's not -- you're just getting -- if I think about the transaction the right way, you're selling 100 -- you're receiving cash of $180m. There's no debt that you're also reducing on your balance sheet?

Well, the equity offering will of course re -- the equity offering in TeeKay LNG of approximately $120m will of course increase -- or decrease the total debt.

Sure. So I should take the $950m of the net debt that I would use, taking the spot and the fixed, and reduce that by $180m?

Yes, by approximately $60m.

Okay. Well, thanks.

Thank you.

We'll hear next from Philippe Lanier with Banc of America Securities.

Yes, good morning. A couple of questions, first of all just on the U.S. Gulf market. As I understood it, part of the tightness there is that some of the Venezuelan and Mexican crudes were being shipped across the Atlantic as opposed to the U.S. refineries. And now that Pascagoula should be up and running soon, and some of the other refineries, are you already seeing a shift back to the normal trade of those crudes to the U.S?

Yes, we are seeing the emergence of that but it's still is disrupted somewhat and it is, obviously, as you point out, those particular types of crude oil, which are normally very short-haul, any relocation or any re-destination of that crude is quite accretive to [indiscernible] demand. Especially since other refineries are importing lighter crude from West Africa at greater pace to backfill because some of the less sophisticated refineries, of course, now have a bit of a hey-day, an ability to process more while other refineries are down.

So, yes, those events are still ongoing, but it is -- it's going to be a temporary thing.

Right. And then the secondary question still is in the Gulf, and I recognize that some of your contracts are confidential, but could you give a little bit more light as to that shuttle tanker business you were talking about and how long it might last?

It would probably be two to four months. It involves using dynamic repositioned shuttle tankers to take oil off the platform instead of it being piped ashore.

Interestingly, it wasn't the pipelines that were damaged; it was the shore tanks out of commission due to flooding and electricity outages. So I guess it's interesting that, even if a pipeline isn't damaged, it doesn't afford the flexibility of handling the oil because it's part of an integrated chain. Whereas a shuttle tanker is a discrete unit that can redirect and move and avert bad weather and move oil into new locations.

So it's quite an interesting test ground, really, for us to demonstrate that.

And it's at similar pricing to your regular business?

It is. To our shuttle business, yes.

Right. And then just one, third, question, just very detailed on the model. I notice that you guys don't specifically break out a minority interest line related to your ownership of TeeKay LNG. But the way I'm doing this, I'm calculating something around $2m. Is that correct and is that recorded in the "Other" line?

You're calculating $2m for?

For the third quarter, something -- it's somewhere between $2 and $2.5m.

Yes, it would be more closer to $3 to $4m.

And is that a component of the "Other" line? Is that where it's buried?

Yes.

Great. Thank you.

We'll hear next from Justin Yagerman with Wachovia Securities.

Hi. Good morning, gentlemen. I wanted to just get -- is the in-charter market, right now, becoming more competitive as more people are looking to diversify their asset exposure?

Are you referring to any particular market or in general?

Just in general. What are you seeing in terms of the competitive landscape in the different markets that you participate in?

Well, I guess the characteristic of the in-charter or time-charter market is that it obviously moves less dramatically than the spot market. But it certainly tends to -- it trends in the same direction. So when you have a real surge in weight, as we've seen here in the fourth quarter, of course it immediately galvanizes people's view on how much their ships should be worth as they charter them out. So we are seeing some firmness in that area. But then again, it didn't go down that much.

Currently, when you look out over the next 12 months or so, what's your asset value outlook in the crude market and maybe in the product market as well?

In terms of vessel values, we expect to see continued firmness. There is very few willing sellers out there. The shipyards continue to be very busy, so you're not going to see a significant erosion, we believe, in the price of new ships. But even if you were to see that, that's of course for delivery three years hence. So people who want to acquire assets for more prompt delivery, you're going to pay into the current strong market. So I see it as quite firm asset values going forward.

Okay. And then just a technical question. In terms of the joint ventures that are relating to the LNG ships for Tengu and RasGas 3, are those currently held as part of TeeKay Shipping or part of TeeKay LNG?

Those are held as part of TeeKay Shipping. TeeKay LNG, they will be offered to TeeKay LNG to purchase.

And if they accept, then the effectiveness will occur when the ships complete their construction and are delivered, ready to enter into their contracts in 2007 and 8.

So I guess that would be a similar transaction to what we're seeing right now on the Suezmax. Are the Suezmaxes going to TeeKay LNG?

That's correct.

Okay. So it would be probably another source of some cash in the door for you guys?

Yes.

I guess with those kinds of opportunities out there and with the liquidity that you have right now, is it an attractive time to consolidate more market share than you have in your different asset classes or are you looking at other asset classes to get into? And how do you think about that going forward?

I guess the discipline is about trying to avoid paying at the top of the cycle for cyclical assets. Buying assets that are employed on long-term fixed-rate contracts, theoretically you can buy them at any point during the cycle if you can link up price of the vessel with the value of the contract.

Of course, there's a bit of variation on that front as well, but it's less sensitive. It's more on the spot side assets, where I guess we have held back, acquiring what we think are historically high-priced spot assets in the last 12 months. And we see those asset prices being still quite high, but we will continue to monitor that, relative to our view of the market and asset prices.

Are you comfortable with your competitive position in those spot areas where you compete?

We -- thanks to our flexible in-charter strategy, we've been able to keep our fleet numbers up. They have fallen, as you've seen, but I guess we certainly are very active whenever a window opens for us to take exposure in the in-charter market, where we can afford to be a bit more aggressive than if -- than when it comes to buying assets.

So through our in-charter strategy, we will expect to continue our fleet to be a significant size in the spot market. And certainly we have a significant customer base to service, and we will make sure we keep doing that.

Thank you very much.

We'll go next to John Kartsonas with Citigroup.

Good morning. A couple of questions. First of all on your guidance, on your rule of thumb. I guess it's very similar to the second quarter guidance. And if you apply it to this quarter, your breakeven levels look like closer to 18,000. Where is the discrepancy there? What am I missing?

Well, we see it closer to 15,000 when we're looking at it. What's happened is that we've time-chartered in more ships, so that's raised the breakeven. And we sold some old -- other vessels. But on the other hand, we've repurchased shares.

The issue, if you're moving to 18,000, was that the fixed-rate segment was abnormally low this quarter, which is why we had, if you look at it on a quarterly basis, a higher breakeven this third quarter.

Fair enough. Also on the sale of the three Suezmaxs. Obviously these vessels, if you put them in the market, they can get a higher price. How did you set up the $180m sale price?

Well, the -- obviously, if these ships were on a charter-free basis, they would be worth more. But these vessels are subject to 10-year charters at a lower charter rate, and that actually is holding down the value of them because they -- well, that gets a defined cash flow. So on this kind of cash flow basis, you would see that this is what the vessels are worth.

Okay, but -- so for the remaining vessels that you have there, conventional tankers, you would take the same approach to value these assets?

If we were looking at them on a [indiscernible] level, yes. But that isn't necessarily -- when we look at our fixed-rate segment, we value it on a multiple of cash flow, as you see in the sum of the parts. And that takes into account all the charter contracts, yes.

I see. And finally, your cash flow statement. On your cash flow for investments and your financing, you have a negative $93m from investing activities and a positive $61m from financing activities. What exactly is in these numbers, especially on the investment activities?

That's the amount that we have put into our -- in terms of investing, that's the amount that we put into our LNG newbuilding installment. For example, on RG 3 and Tengu, that we look at that. That's the amount.

Okay, so it's like regular CapEx?

Yes.

Okay. Thank you very much.

Thank you.

[Charles Cornbluth] with Spencer Capital has our next question.

Hi, good morning, gentlemen.

Good morning.

Quick question on the three Suezmaxs. What is the locked-in free cash flow per year for those ships that you sold for $180m?

I would refer you to the SEC document, or the S-1 that's been filed with the SEC. We're somewhat constrained with how we can talk about that transaction. So I would refer you to the S-1 document, which is on www.sec.gov.

Okay. Is the number in the SEC docs?

Yes.

Okay. One of the questions I wanted to ask was what cash flow multiple those were sold for. If you could touch on that and if it was different from what you are valuing the fixed-rate business at 10-times that, explain how you think about that.

And also, are there any other opportunities to sell more of your fixed-rate Suezmaxs to TeeKay LNG?

Yes. Well, when you look at the S-1, I think you will find that there's a continuity and a consistency in how we're looking at the valuation of those. And there are other opportunities, but TeeKay LNG Partners is called TeeKay LNG because it's going to expand in the LNG field. And as Bjorn mentioned, there are a number of projects coming in in 2007, 2008, 2009, so TeeKay LNG has its plate full with LNG projects.

Yes, I agree. I was actually surprised to see this transaction. Why did you sell these three ships, then, if the plate is full in terms of LNG opportunities?

Well, I think that the Board felt that when they looked at it, for the same reason that there are five Suezmax tankers already in TeeKay LNG, which is that that provides a source of stable cash flow, the same long-term cash flows which TeeKay LNG has. And that provides us cash flow which will help TeeKay LNG take on more projects of -- more LNG projects. So that's what the five LNG -- excuse me, five Suezmax tankers are presently doing in TeeKay LNG, and being supplemented with three more that will provide more fire power.

Okay, thanks. And then, referring to the sum of the parts valuation, are there any other balance sheet assets? You referred to investing in the LNG new builds that would be reflected on the TeeKay balance sheet. Is that reflected in the other assets?

Sorry, could you repeat the question?

Sure. The investment in the LNG new builds that TeeKay is currently doing, that are on the balance sheet, is that reflected in your sum of the parts valuation under "Other Assets" or is it not reflected in the sum of the parts valuation?

That is not reflected when we looked at it. It would be in the net debt, but it's not reflected. When you look at the increase, for example, some of our newbuildings are worth more than what we have invested in them, due to the general rise in tanker values. We haven't put that in the sum of the parts.

Okay, great. Thank you.

Our next question will come from Steve Araco with Locust Wood Capital.

Hi. Thank you very much. The gentlemen before me asked several of the questions I was going to ask. But I did read the S-1 and I get an idea of the incremental cash flow from the Suezmaxs that will go to the Tee -- the LNG partnership. By my calculation, and what no one seems to talk about and you guys as well in your sum of your parts, is the value of your general partnership interest. And if I do my math correctly, doesn't this deal get you guys pretty close to the first incentive breakpoint allocation for your general partnership interest in TeeKay LNG?

Well, that's your opinion. I'm not at liberty to discuss that, due to the pending public offering of shares.

Okay. My second question is everyone on this call seems to a lot focus on the spot business. But as you say, the fixed rate business could be worth as much as $28 a share, but the market's clearly not valuing it at that level. What's to keep you from putting more of your fixed rate assets either into TeeKay LNG Partners or perhaps setting up another MLP-like structure, like double-hull tankers, which just came public, to get the 10 multiple that you guys are talking about?

Because -- also on the flip side is because you own this GP interest you get a double benefit. Not only do we get to revalue those assets at a higher level, but we actually get to keep a significant portion of those cash flows through our general partnership interest. And I wanted to get your thoughts on that.

Well, I think you bring up a good point that in our sum of the parts valuation we haven't put any valuation for the general partner interest going forward. To go to your biggest point, we have elected right now, as Bjorn said, as part of our strategy to close this gap, to repurchase shares. You have the sale of these three vessels, speaking from TeeKay's point of view.

So there isn't anything that would prevent us from closing this gap, if investors don't close it for us by having recognized the values that we pointed out and seeing that we are aggressively repurchasing our shares. Which is a vote that the Board is saying that they're not happy with this gap.

Is there -- if the market did not close that gap for you - this is a hypothetical - would the title of TeeKay LNG, being that it's got LNG in the title, keep you from putting other non-LNG fixed-rate business in there to where it could become a much larger percentage or would you feel obligated to perhaps create a new structure?

And then a follow-up question, which relates to -- I just assume you're having a hard time finding better investments than your own stock right now on the spot market, because in effect you're buying a spot business for free. And I just -- I think I know the answer to that, but I just want to hear you acknowledge that because I sense a tone that you might be more interested in buying assets, and that's a tone I haven't heard in previous calls.

Well, I think, to answer your first question, I guess you're suggesting something that is speculative at this point, what we might do if we don't manage to close that gap. So why don't we deal with that if we get to that bridge? I think we're demonstrating a significant focus on shareholder value creation, and I think that's the main message from this call and from our actions.

And certainly, we do believe TeeKay is very compelling value and we think it's a great deal, and we're excited that we're buying the stock back.

Thank you.

Our next question will come from Josh Donfeld with Canyon Capital.

Hey, guys. Following up on this same -- on the same train of thought as the rest of -- the last couple of calls. If -- let's say hypothetically you're buying this -- if you're buying these companies at nine times EBITDA, you'd be adding $20m of EBITDA to the MLP and about $0.44 per share of distributable cash.

And if you capitalize that at the 5.5 to 6% cap rate that the MLPs have been trading at, you can make an argument that the MLP shares are worth $37 or $38 and TeeKay owns 77% of those. Any comment on that? I guess you can't really talk about that though, based upon your answers to the last few questions.

Well, thanks for your analysis, Josh, but as you point out, I cannot comment upon that, due to the offering.

Great. And then the other question I would ask is if you look at this Conoco -- these Conoco charters are below -- obviously below market because you're selling the ships for below a charter-free price. If -- what opportunities might there be for you to put out your Aframaxs at rates that charters would view as attractive?

And due to the low cost of equity at MLP, give a charter an attractive rate for a long period of time, and then dump it into the MLP for an opportunity to take advantage of the cost of equity arbitrage. And are you looking at deals like that right now?

Well, we look at that kind of deal all the time. If we have invested $4b in fixed-rate business and whether you take an existing -- I think the beauty of our business model is we haven't actually taken our spot assets and put them in long-term charters. We've built our fixed-rate business in addition to a significant spot business. We intend to be in the spot tanker market and we intend to build on our fixed-rate portfolio.

Great.

So it's not an either or.

Right. So you're saying you have the flexibility both to charter in or charter out your spot or your existing fixed vessels, and there's really nothing preventing you from doing either more of these deals other than finding the optimal ones?

Exactly. We have the fixed-rate business, which has a growth momentum. We have our spot tanker business, which is a leading franchise, and also we are an established in-charter of tonnage, unlike most of our competitors. So I think we have a lot more elements to our strategy, a much more textured way to work in the cycle.

Should we expect to see the pace of these kinds of deals accelerating, where you really leverage the attractive cost of equity? Could you speak to accelerated value illumination?

Well, I think the -- as Bjorn said, the listing of TeeKay LNG Partners has really highlighted this difference of valuation and TeeKay is always searching for where we can get the lowest cost of capital, because we have this commercial management organization which turns up a lot of long-term projects. So absolutely, we are looking for where we can find the lowest cost of debt, the lowest cost of equity.

I would say, to go to your point on the fixed-rate tanker segment, that some -- when you're doing some of these long-term deals, you find that the rates are lower than where the present spot market is. But it's up to TeeKay to decide, do we want to take greater rollover risk. And if -- and since some of our fixed-rate tanker segments are below the market, you can expect that when they have contract rollovers, we can pick up higher cash flows than what we presently have on those.

Right. And then you could put them in at a more optimal time to [indiscernible] cost of equity structure?

Potentially.

Great. Yes, and I'd like to reiterate my view that it looks like that this deal gets you past the 15% splits, which in my view is really great and congratulations.

Thank you.

Thanks for your analysis.

Talk to you guys soon.

Thank you.

We'll hear next from Jordan Alliger, with Deutsche Bank.

Good morning. This is actually Sal Vitali for Jordan Alliger. I have two quick questions. One, was the number of dry-dock days in your Aframax spot rate fleet, was that higher than what you expected for the third quarter?

No, it was there or thereabouts. As I said, we dry docked a few more than what we had actually planned on.

Okay. And what would be your expectation for the number of dry-dock days on the spot fleet for, say, fourth quarter and into '06? Do you have any sense for that at this point?

I think we're dry docking one, so it'll be quite low.

One vessel in fourth quarter?

Yes.

Okay. And do you have any sense for what the first and second quarter of '06 would be at this point?

If you can hold on one second.

Sure.

It will be about two.

Okay. Two per quarter, correct?

No.

Okay, that's fine.

Two in total because we have a relatively new fleet now.

Okay. And I may have missed this earlier, sorry if you already gave this information, but you said what percentage of the days for fourth quarter are booked at, was that -- to get the rate that you indicated?

50% at $37,000 a day.

50% at $37,000 per day.

But I also added that the present market --

Is that 50 to 80 you said, right?

Yes, 50 to 80.

50 to 80, okay. And just a big picture question regarding oil demand growth for 2006. You indicated 2.1% for '06. Is there a level of oil demand growth that starts to concern you regarding pressure on tanker rates for next year?

Which direction?

Well, downward pressure on tanker rates. Do you think that, say, 1.5% growth rather than 2.1% growth would -- what kind of repercussions do you think that would have for, say, Aframax spot rates?

I think what you are seeing is that there's an overlay of volatility that makes that kind of movement, that subtle movement, in our demand growth that may not necessarily get to influence the market that accurately. You have the distance factor that's changing around and you have a lot of events.

So we think that there's a fairly solid set of fundamentals for next year and with a bias to the upside, as we see it.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]. And we'll go next to Walter Lovato with Passport Capital.

Morning. First of all, I just wanted to congratulate you on following through and being methodical and aggressive on the share repurchase program, adding to the good analysis presented by some of the previous callers. I think that if you can buy back your own spot vessels at $20m a vessel, that's probably the best consolidation opportunity you have out there. And that doesn't preclude you from doing all the other operations which could take advantage of the lower cost of capital.

Thanks for that [indiscernible].

I think it's awesome. One very different question. How much or how significant is the switching out of vessels into FPSOs? How big is that and how real, and do you think that will continue?

It's been fairly meaningful. It's certainly at a pace that I don't recall seeing in the past. We've seen 4.2m tons of ships being [delivered] and I think more than half of those have gone to offshore projects. So I guess Clarkson is reporting it in a little bit of a bumpy fashion, because there's an issue of classification when the ship was sold to the project versus when it actually left the active trading fleet, sometimes there's a lead time.

But this is a non-insignificant amount of ships. We're talking 20-plus ships this year.

And you expect that this pace could continue, because of fundamental demand on the offshore --?

Yes, it's a combination of the amount of offshore and the distance from shore that the -- the depth of water in which they are operating, and the high price making the exploration of marginal fields more profitable. Which, of course, the more marginal, the less it makes sense to put in place pipeline infrastructure. It really lends itself to floating production and storage.

Great, thank you very much.

We will go next to Brandi Shaw with Beekman Capital.

Hi, guys. Great quarter. Most of my questions have been answered, but I have a follow-up on -- to see if you can comment on or give a little more clarity on the out of the money long-term charter that caused the drag down, and what kind of expectations we should or shouldn't have for those events going forward.

Yes, it's a charter we've talked briefly about on past calls. It is a fixed-rate COA, Contract of Affreightment, which we entered into at the same time as we entered into in-charter for tonnage. So the contract was and is profitable. It's just that the average rate that's been yielded by that contract is well below the current market.

Because our fleet is quite small in the Suezmax segment, it's having a noticeable impact. So it's something like 1.5 ships per year equivalent. So it simply is a paired or matched trade bringing revenues in and employing ships at profit, but when you average it into our overall fleet, it drags down results when the charter market is where it is.

Okay. Thank you.

And gentlemen, there are no further questions at this time.

Great. Thanks so much, and thanks for joining us. And we will talk to you early in the new year. Enjoy your 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.