Teekay Corp Ltd (TK) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Teekay Shipping Corporation fiscal 2005 year end earnings release conference call. [OPERATOR INSTRUCTIONS] Now for opening remarks and introductions, I would like to turn the conference over to Mr. Bjorn Moller, President and CEO of Teekay Shipping Corporation. Please go ahead sir.

Before Mr. 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 fourth 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 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 the Private Securities Litigation and Reform Act of 1195. 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 24, 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. I'm very pleased to report to you on our results for the fourth quarter. Let me begin with the highlights on slide number three. We ended the year on a strong note with net income of $145 million or $1.85 per share. Rates in our Aframax fleet almost doubled from the third quarter to $48,000 a day due to strong tanker demand. We have seen the strong spot rate carry on into the first quarter of 2006 and we are currently ahead of where we were this time last year.

Yesterday, we announced that we have been awarded a long-term contract in Brazil for three additional shuttle tankers. Earlier this week, we announced that we have formed a strategic joint venture with PGS of Norway to jointly pursue opportunities in the growing FPSO sector. And we continued our aggressive share repurchase program, which to date has seen us buy back more than 21% of our shares since late 2004.

2005, as a whole, was a great year for Teekay. The key highlights for the year are shown on slide number four. We recorded our second highest net income in Company history with $571 million or $6.83 per share, and we produced nearly $700 million in cash flow from vessel operations or CFVO.

We completed the transformation of our spot fleet to 100% double-hull configuration and further reduced the average age from eight years to only six years. The size of our deep sea product tanker fleet doubled from six to 12 ships and we have further ships on order in this area. Teekay became the fastest growing independent LNG shipping Company with nine LNG carriers on order at this time. We conducted a highly successful IPO as well a subsequent follow-on offering of Teekay LNG Partners to help fuel our continued growth in the LNG sector.

Our shuttle tanker franchise extended its international reach, growing its activities to five continents. And we increased our regular dividend payments, this year by 51%, reflecting the significant amount of stable cash flows we are generating in our large, fixed rate business segments. And over the past three years, we have now raised our dividend by a total of 93%.

This morning, I will review the key developments in each of our business segments and briefly discuss tanker market dynamics. Peter Evensen will discuss our financial results before we open it up to questions. Looking at the development in our fixed rate segment on slide number five. CFVO was $76 million in the quarter, roughly unchanged from one year ago, but ahead of the $60 million in the third quarter.

As anticipated, shuttle tanker utilization and revenues returned to normal following a couple of quarters with production problems on some North Sea oil fields. High oil prices are continuing to drive increased activity in the offshore oil exploration and this is keeping us very busy in our offshore and marine project business. Teekay's marine midstream business platform provides our customers with the broadest range of marine services in our industry, helping them link their upstream oil production activities with their downstream refining. This past quarter, our midstream platform produced a number of profitable contracts linked to the strong offshore oil market. We were awarded our biggest contract ever in Brazil, one of the world’s fastest growing offshore oil frontiers. The contract is for 13 year, fixed rate charters of one Aframax size and two Suezmax size shuttle tankers. We will be investing $170 million in the acquisition and conversion of two tankers, plus we will utilize an existing Teekay shuttle tanker, like the one shown on this slide. And the ships will commence service between mid-2006 and earlier 2007.

The expected total CFVO will be $440 million over 13 years. But since we'll be utilizing one of our existing vessels and one vessel will be 50% owned by Teekay, the incremental CFVO for Teekay is expected to be approximately $225 million. This latest contract highlights the value of our shuttle tanker franchise as an economical solution for our customers at a time of rising offshore oil, exploration and production. The second offshore related project this quarter involves an eight year contract extension, which we secured on a floating storage unit, which has been serving in northwest Australia since 1998. Due to high oil prices, our customer has extended the life of this field through to 2014, and the projected cumulative CFVO from this extension is $40 million. In the quarter, we sold another surplus 1981 built Panamax shuttle tanker for use in an offshore project. And the delivery to the new owner is expected in June.

Next on slide number six, I'll comment on the Teekay Petrojarl offshore joint venture with PGS. The goal of the Teekay Petrojarl offshore venture is to become a leading worldwide supplier in the growing market of floating production, storage, and uptake solutions or FPSO's. The combination of two companies who are leaders in their respective fields creates a strong platform to pursue this market. PGS is the largest operator of sophisticated FPSO's in the North Sea, the offshore region with the world's harshest weather and strictest regulatory environment.

PGS brings tremendous offshore engineering expertise and a proven track record as a quality operator. Teekay brings to the joint venture its global marine operations, its wide range in customer network, its shipyard relationships and its vessel conversion experience. For Teekay, this venture is an attractive way to enter the FPSO sector because we will be investing in new projects, rather than first having to invest to order to get into the business.

We'll be partnering with an established leader and we will be growing the business organically with gradual investments on a project by project basis. This venture is a further example of how we are using our marine midstream platform to move up the value chain and away from the commodity side of our business. It is a logical extension of our floating storage and shuttle tanker businesses and we are following our customers as they invest in offshore oil.

By way of background, on slide number seven, where you see a nice picture of one of PGS's FPSO's, an FPSO is a vessel deployed to produce, process, store and offload hydrocarbons from offshore oil fields. The FPSO may be connected to wells on the sea floor through risers or through a platform. FPSO's are suitable for a wide range of field sizes and water depths. They are often reusable, allowing their cost to be spread over a number of field developments.

As you can see in slide number eight, our new joint venture allows us to build on our existing relationship with PGS, to whom we have three shuttle tankers and one FSO on longer term charger. The photo here shows a Teekay shuttle tanker offloading oil from the Teekay floating storage unit, Nordic Apollo, which is serving on PGS's Banff Field in the North Sea. You can see another PGS FPSO in the background. I believe this photo succinctly sums up the opportunities that exist in the offshore sector to bundle various combinations of FPSO's, FSO's and shuttle tankers into customized customer solutions.

On slide number nine, we show the developments in our fixed rate LNG segment. CFVO was $18 million in the quarter, unchanged from the previous quarter. Teekay currently receives $10 million in quarterly distributions from Teekay LNG. And as you may have seen from Teekay LNG's earnings release yesterday, it expects to increase distribution steadily over the next couple of years, such that by mid-2007 Teekay should be receiving some $12.5 million per quarter. During the fourth quarter, Teekay LNG completed its first follow-on offering, raising $125 million. The LNG market is still at an almost frenetic pace in terms of new long term projects being tendered. And the recent volatility in natural gas prices appears to have had no dampening effect on the project flow.

Turning next to the developments in our spot tanker segment, I'll first talk about our crude oil fleet on slide number 10. Our spot Aframax fleet recorded its second highest quarterly earnings, averaging more than $48,000 a day, a doubling of rates from the third quarter and with particularly the Interpacific market showing strength. Rate increases were initially kick-started in the Interpacific, due to the large number of Aframax size vessels that were chartered to handle large movements of refined petroleum products to the Atlantic in the aftermath of the U.S. hurricanes. Underlying strong global tanker demands, driven by record oil production and seasonal factors, added to the upward pressure on Aframax rates and eventually this spread to the larger ship sizes as well.

On a pure spot basis, our Suezmax fleet earned $54,100 a day. However, the affects of our hedging activities reduced the realized rate on this relatively small segment to $38,100 per day. As I mentioned earlier, the strong winter market has continued into the first quarter, where 75% of our spot revenue days have already been booked at an average rate of $47,000 a day. The remaining days are likely to be booked at rates below this figure given the current Aframax average market of around $30,000 a day.

Looking at fleet changes in the quarter, we took delivery of an ice class 1A Aframax tanker, designed to operate in the heavy ice conditions typically experienced during winter in the Baltic, which is an area seeing growing volumes of Russian crude oil exports. We delivered our remaining single-hull Aframax tanker to new owners and we redelivered three in-chartered crude oil ships. We placed orders for four Suezmax newbuildings, at a total price of $285 million. Two of these ships will be built in China, our first new buildings in that country. And two will be built in Korea. All for delivery in the second half of 2008. This brings our order book in our spot tanker segment to eight ships.

On slide number 11, our growing product tanker fleet benefited from a strong market. In the quarter, our large and medium-sized product tankers earned an average of $31,800 a day up from 27,400 in the previous quarter. We are continuing to build exposure to the product market. And we added a further two in-chartered MR product tankers to our fleet in Q4. Our small product tanker fleet enjoyed very good results, mainly due to strong demand and market dislocations associated with U.S. hurricanes. Over the next 12 months, we expect to take delivery of a further three LR2 product tanker newbuildings.

On the next few slides, I'll provide a commentary on the tanker market. On slide number 12, we've highlighted the factors which we believe drove the strong market in the fourth quarter. Despite the temporary lull in year on year oil demand growth in the fourth quarter and a lower than normal seasonal rise in oil demand in Q4 of 1.3 million barrels a day, we experienced much higher tanker rates for a couple of reasons.

Fundamental tanker demand remained very high, as OPEC and non-OPEC combined to produce near record levels of oil. Ever growing customer discrimination against older ships continued to drive up rates for modern ships. And a good example of this was BP's announcement earlier this year that it will no longer charger non-double-hull ships, adding to the list of oil majors that have adopted such a policy. And finally, a series of temporary factors provide additional strength, such as the lingering hurricane-related dislocation of ships, increases in U.S. product imports, seasonal transit delays and fuel switching from natural gas to oil in several markets.

Slide number 13 reminds us that there is a fairly predictable seasonal pattern in tanker rates each year. The graph shows that rates typically head into a normal seasonal downturn over the middle two quarters of the year, driven by such factors as refinery turnaround, summer oil field maintenance and benign weather. But at the end of the summer season, rates see a seasonal upturn going into the winter. As shown on the graph, rates in early 2006 to date are tracking ahead of rates seen in early 2005.

Looking forward to some of the factors likely to influence tanker demand in 2006 on slide number 14, the outlook is positive, we believe, for two reasons. Firstly, the global economy remains strong and is expected to drive high oil demand growth this year. As you can see from the graph on this slide, since the steep hurricane-related dip last October, demand growth has staged a strong recovery. The IEA is forecasting oil demand growth in 2006 of 2.1%. And we're already ahead of that figure with January demand growing at 2.3%.

Secondly, in addition to strong oil demand growth, we believe that the conversion factor used to translate oil demand growth into tanker demand growth may turn out to have a larger positive effect this year than normal for a number of reasons, such as; lingering U.S. offshore production outages that will require additional crude oil imports, refinery bottlenecks in key consuming regions, which will result in more long haul product trade, an expected abnormally large refinery maintenance seasons, which will cause volatility. And OPEC, again, may have to make up for the production shortfalls, for which some non-OPEC countries are notorious.

On slide number 15, we have highlighted an additional dynamic this year. Not only are overall tanker deliveries scheduled to decline compared with last year, if you focus solely on crude oil tanker oil deliveries, shown here by the blue bars, these are expected to fall to only 5.6%. And remember, this is gross, not net of the existing crude oil tanker fleet this year. This means that the rate of delivery will be down by one-third compared to recent years’ average.

Finally, let's look at the overall tonnage supply and demand picture for 2006 on slide number 16. This is a little bit of a busy slide, but let me talk you through it. In the top left-hand box, we have shown changes in tanker supply for the last three years and our forecast for 2006. The tanker fleet increased by net 7.5% in 2005, but as shown here by the red figure, we expect 2006 net tanker supply growth to slow to 5.5%.

In the top right-hand box, we've shown recent developments in tanker demand. As you can see in the 2005 column, oil demand grew last year by 1.3%. Underneath this figure, is the observed growth in tanker demand in 2005 of 8.8 million tons, as reported by Clarkson, which equals 3% of the existing tanker fleet. 3% tanker demand growth over 1.3% oil demand growth translates into a conversion factor or multiplier, if you will, of 2.3 times. You can also see that this multiplier tends to vary from year to year, driven by changes in the average ton mile intensity of global oil shipments. What this means is that when there is an increase in the average voyage length, the multiplier goes up.

So next, we have projected demand figures for 2006 based on the IEA's forecasted oil demand growth of 2.1% shown in the column on the right. We use this to derive likely 2006 tanker demand growth by multiplying this figure by a factor of between 2 and 2.5 times. And as you can see, this result in projected tanker demand growth of between 4.2% and 5.2% growth this year, again, shown in red.

We actually believe that we could well see a multiplier higher than 2.5 this year, due to the multitude of potential demand factors I listed in my earlier slides. Which I might add, did not even take into account the potential impact of political upheaval in places like Venezuela and Nigeria, which would almost certainly lead to a higher multiplier. So, we believe that we could see higher tanker demand growth than these figures show. Finally, in the box on the bottom, we have shown the resulting changes in the balance between supply and demand. You can see that despite a 4.5% difference, or weakening if you will in the market balance in 2005, average tanker rates remained very strong at $41,600 per day for Aframax tankers. For 2006, our parameters point to a change in the market balance of only between 0.3% and 1.3%. And this would suggest little change in rates this year compared with the strong market in 2005.

In conclusion, we believe that 2006 should be another very good year for Teekay. Based on a set of finely balanced market fundamentals, we expect spot rates to be volatile but overall relatively strong. And we are already off to a great start to the year. And we believe our product businesses, which are enjoying a great deal of positive momentum, should produce another year of profitable growth in 2006. I'll now hand it over to Peter to discuss our financials.

Thank you. As Bjorn indicated, we had a solid fourth quarter with net income of 140.6 million or $1.85 per share. This included a number of items that on a net basis had the effect of increasing net income by 12 million or $0.15 per share. Excluding these items, net income would have been 132.6 million or $1.70 per share for the quarter. For calendar year 2005, we reported our second highest ever annual net income of $571 million or $6.83 per share, which included $167 million, or $1.99 per share of items described in Appendix C of our earnings release.

Looking at the operating results for each of our segments on slide 17 of the presentation. Overall, cash flow from vessel operations for the fourth quarter decreased to 204 million, compared to 329 million in the fourth quarter of 2004. The contribution from our spot tanker segment decreased to 111.5 million, compared to 240.5 million in the fourth quarter of 2004. This decrease was due primarily to a 19% net decline in revenue base, resulting from the sale of a number of significantly depreciated older vessels during the past 12 months, partially offset by delivery of newbuildings and a decline in Aframax and Suezmax spot tanker rates.

Our spot Aframax fleet earned average TCE rate of $48,000 per day in the fourth quarter of 2005, down from the 57,500 per day earned in the same period last year. Our fixed rate tanker segment generated 75.8 million in cash flow from vessel operations during the fourth quarter. This was consistent with the same quarter last year. Although there was seasonality in this segment in 2005, overall, the results are indicative of expectations.

Since the new Brazil shuttle tankers will be coming online starting in the second half of 2006, through to the first quarter of 2007; and the fact that our shuttle tanker business has some seasonality that is stronger in the winter months and weaker in the summer months, the cash flow from vessel operations will vary somewhat from quarter to quarter, as you have seen in the past. As Bjorn indicated, we see strong growth prospects in the offshore oil sector, which should bode well for our shuttle tanker and FSO business, as well as our recently announced FPSO joint venture with PGS. Our fixed rate LNG segment generated 16.8 million in cash flow from vessel operations during the fourth quarter, compared to 13.3 million in the fourth quarter of 2004. This increase was mainly due to the inclusion of an LNG newbuilding for a full quarter in 2005, which delivered in late December 2004.

Turning next to slide 18 and reviewing the remaining income statement figures in comparison to the fourth quarter of 2004. General and administrative expenses were 45.4 million, compared to 48.3 million in the fourth quarter of 2004. This decrease is primarily the result of lower accruals for performance-based bonuses, partially offset by the appreciation of non-U.S. dollar currencies and the additional costs associated with Teekay LNG Partners.

Effective January 1, 2006, we will be adopting FASB 123R, which requires the expensing of employee stock options. We expect to recognize between 2 and 2.5 million per quarter of stock compensation expense share in 2006, which will be included in general and administrative expenses. We currently expect G&A expenses to run at an approximately 43 to 45 million per quarter in the next couple of years and this includes stock option expenses just discussed. The fourth quarter of 2005 included a gain of 14.9 million from the sale of an older Aframax tanker and an older shuttle tanker.

During the fourth quarter of 2005, we incurred 2.9 million of restructuring costs, primarily related to the relocation of certain operational functions, and the closure of our Sandefjord, Norway office. During the first three quarters of 2006, we expect to incur approximately $7 million of further restructuring charges, as we complete a relocation of our operational functions. We are relocating roughly 55 shore-based positions from our Vancouver office to locations closer to where our customers are located, and to where our ships operate.

We're also bringing in-house and consolidating the ship management of our shuttle fleet in Norway, which was previously managed by third parties. While we expect savings from these changes over time, this organization is primarily by the need for our marine operations to be closer to our customers and our commercial functions, particularly given the global nature of our operations. Net interest expense decreased to 22.8 million in the quarter from 27.6 million a year ago, primarily due to the reduction in interest expense from the repayment and refinancing of debt over the past 12 months, and the settlement of interest rate swaps in connection with the IPO of Teekay LNG.

We recognized an income tax expense of 9.5 million this quarter, compared to 18.7 million in the fourth quarter of 2004. This change is due primarily to the corporate reorganization of some of our shuttle tanker operations earlier this year, and the lower tax expense related to unrealized foreign exchange gains. This was partially offset by a one-time tax expense in Norway, resulting from a tax change restricting the deductibility of partnership losses against other income of the Norway Group. Excluding the impact of future changes and foreign exchange rates on deferred tax balances, we expect income tax expense to be approximately $2 to $3 million per quarter during 2006.

Other items this quarter included foreign exchange gains of 7.9 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. In addition, we recorded minority interest expense of 4.2 million, miscellaneous income of 3.5 million, and we incurred a loss of 3.1 million from the repurchase of 20.6 million of our 8.875% bonds. During all of 2005, we repurchased 86 million of the 350 million of the bonds that were outstanding at the beginning of 2005.

Turning to slide 19, we have presented our December 31, 2005 balance sheet and compared it with the September 30, 2005 balance sheet. Restricted cash decreased by $87 million, primarily due to the drawing down of these funds to make scheduled repayments of capital lease obligations on two of our LNG carriers. Advances on newbuilding contracts has increased 136 million to 337 million at September 30, due -- primarily due to further advances made on newbuildings. Partially offset by a reduction due to the delivery of one Aframax newbuilding during the fourth quarter.

Minority interest has increased 63 million to 282 at December 31 from 219 million at September 30. The increase is primarily the result of the net proceeds received from the follow-on public offering of 4.6 million units in Teekay LNG Partners in November 2005. Our total liquidity, at December 31 was $1 billion but this excludes a new revolving credit facility that was entered into in January for 138 million. Treating the mandatory exchangeable preferred issue as equity and net of restricted cash, net debt to capitalization was 40% at the end of the quarter, an increase from 38% 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 the interest expense associated with the debt related to our advances on newbuilding contracts, which was 473 million as of December 31, is capitalized and not expensed in the income statement. In addition, on February 16, 2006, our 7.25% mandatory exchangeable preferred units were converted to equity. This conversion resulted in the issuance of 6.5 million common shares and a reduction of 144 million, which will reduce interest expense accordingly.

Turning to slide 20. Since our last update on December 6, 2005, we have repurchased approximately 4.2 million shares for a total cost of roughly $165 million. If the remaining share repurchase authorization of approximately 64 million is completed at an average price of $39.50, we will have repurchased over 18.8 million shares or 23% of our outstanding shares since November 2004, when our first share repurchase program was announced. Considering the impact of the conversion of our PEPS unit and assuming the completion of our share buyback program during the first quarter of 2006, our fully diluted weighted average number of shares outstanding for the first quarter is estimated to be approximately 75 million shares.

Turning to slide 21. I wanted to take this opportunity to revisit our rule of thumb earnings guidance for the analysts and investor community. We do not forecast time charter rates. However, with this tool, you have the ability to estimate our earnings per share using Clarkson. We've chosen to use two of the routes tracked by Clarkson, because we believe they best approximate where our spot vessels trade; the Gulf - East trade route and the Carib - U.S. Gulf trade route. These routes are chosen as they basically track voyages where we specialize, within the Pacific and within the Atlantic.

Each region is given a 50/50 weighting. Because of the timing difference between when our voyages are booked and when the full effects of the revenues are recorded, we time lag each route by the average length of spot charter in the region. That is, three weeks for the Gulf - East trade and two weeks for the shorter Carib - U.S. Gulf trade. For the fourth quarter of 2005, the average rates in each region, with the time lag effect, were $51,000 and $45,503 in the Gulf - East and Carib - U.S. Gulf, respectively. After giving each a 50/50 weighting, the blended rate, in this case 48,255 per day, is multiplied by a utilization factor of 90%. The reason for using this utilization factor is that Clarkson's does not allow for waiting times, dry docking, weather-related delays, or commissions in their rate calculations. This rate is then used to calculate Teekay's earnings per share using the rule of thumb guidance provided on each earnings conference call.

As noted on slide 22, the resulting EPS from this calculation from the fourth quarter is $1.71 per share. That is to say $0.01 off from our actually earnings per share. And if we look at the first quarter of 2006, the time charter rates continue to be strong, as Bjorn has mentioned. And we have fixed approximately 75% of our spot voyage days in an average Aframax TCE of 47,000 per day. I'll now turn the mike over to Bjorn to conclude.

I basically just want to thank you for listening. And we'd be happy to try to answer your questions now.

[OPERATOR INSTRUCTIONS] Our first question comes from Jonathan Chappelle with J.P. Morgan.

Good morning, guys. A question on the chartered-in vessels, that seems to be one of the hardest things to forecast as we go quarter to quarter, as the chartered-in tonnage, whether it's Aframax's or the larger or smaller product tankers expire. Is there any way to give us a sense as to the remaining contract length on a lot of the chartered-in vessels?

It's a bit, we'd have to -- it's a fairly accurate in-charting strategy. I think that's one of our strengths is that we have a very sizable and accurate in-charter operation. Normally you wouldn't expect it to vary very significantly over time, we just happen to be in an environment where the prices are a little bit inflated. The sort of typical tenure is two years of in-charter. And so, I would use that as a rule.

Are there any large changes over the course of this year that have occurred so far in the first quarter that we should be aware of as we look at 2006?

No, no significant changes.

All right. I noticed in your press release announcing the three long term shuttle tanker contracts that you're taking a charted-in ship and converting it to a shuttle tanker after sizing an option to buy. Out of the 33 ships that you have chartered-in right now on your spot tanker segment, can you give us a sense of how many of those have options to purchase and at those option prices, how they compare to the current secondhand market?

That's not a very common feature, so that's not prevalent in our industry, so it's a somewhat unusual situation. But this was a vessel that was specifically suited for conversion, so that was the thinking behind chartering that ship originally and for very long term as well.

And then one last thing tying the two companies, Teekay and TGP together. The length of this Brazil shuttle tanker contract is 13 years. It seems to be along the lines of the length of some of the TGP contracts, is that something you'd look at passing off to TGP?

Not at this time. We are focusing on LNG and Teekay LNG Partners, although we did do a secondary with some Suezmax tankers, that was really because it was sort of a link to some Suezmax tankers already there and it allowed us to do some prefunding of equity. So -- but the focus in Teekay LNG Partners will be on LNG going forward.

Okay. Thanks.

Our next question comes from Jordan Alliger with Deutsche Bank.

Good morning. Sort of just a big picture question. I appreciate the thoughts on the multiplier and what have you. And I'm just curious, what is the biggest swing factor there? I know it's the length of haul. If, let's say at some point, there was some concern from OPEC about inventory builds or oil prices, whatever the reason may be so that they took the opportunity to come back or pull in production a bit, are the other lengths of haul out there in the world enough to offset that? Or does OPEC, it were to do that, push that multiplier down?

Well, OPEC is a big factor. That's why tanker rates are very highly correlated with OPEC production. However, with high oil prices, even if oil prices were to make a relatively significant correction, that is still a great incentive for them to produce at high numbers. And I think more at the moment the concern is places like Venezuela might decide to shift their oil away from the U.S. That would really accelerate ton mile demand. The short term situation we're seeing in Nigeria is causing a little bit of weakness in the West Africa Suezmax market. But should that prevail, that would draw replacement oil from longer -- like from the Middle East. So, if anything, the tendancy will be for the Middle East to be providing more of their oil and therefore I think we're looking at a bias towards longer haul, in general.

And then just a follow up question. I understand the break even analysis, but, I just -- what I just want to understand, was there something in the fourth quarter that adversely impacted the break even? And I only ask that because your realized rates for 45,000 a day in your financial statements, which I presume -- I would imagine that would go against the 15,000 straight up in the $0.06. So I'm trying to understand, was there some sort of leverage differential in the fourth quarter, timing of sale of ships, revenue days that might have impacted the rule of thumb?

No. Teekay is used to usually beating the Clarkson index or at least maxing the Clarkson index. What we wanted to do was to straighten out some misconceptions. A lot of people had our earnings a little higher than what they should have been this quarter. And the fact that we match or beat Clarkson, we have already computed that into our guidance. So when we take in that 90%, we're just trying to show you how to get down to the factor. And though we benchmark it by 90%, that's still into the $0.06 per share leverage we have.

That's fine. We can talk about it offline. But I'm just saying, if you realized 48,000 a day against a 15,000 break even, and a $0.06 leverage, I would imagine that would compute to a higher number than $1.70.

Yes, but if we didn't have the utilization factor at 90%, we'd have to readjust the $0.06 per share to account that.

So, that's where the adjustment would be?

Yes, it's more important for us to get the slope right.

Okay.

And so absolutely this quarter the 48,000 would have equaled that but that isn't true everywhere along the curve. This is our best guess to be able to tell you, with the huge volatility of rates, where to focus in on our earnings.

Okay. Thank you very much.

We will now take a question from [Roy Stewart] with Simon and Company.

Good morning. I had a question regarding the FPSO joint venture. I was just wondering what your kind of strategy is going to be with regard to identifying projects? Are you going to convert a vessel on spec to provide a fairly short term, quick solution to any projects? Or are you only going to do that on the back of a firm contract? And regionally, where you would like to focus? Obviously PGS has a position, primarily in the North Seas, is that going to be the focus to link in with the shuttle tanker business, or is it broader than that? And also the kind of CapEx range of projects? And FPSO's can vary quite a large degree from some very large units that are maybe $5, $600 million all-in contract to some of the lower end smaller units. And I was just wondering where you saw yourself pitching in?

Sure. Well thanks, that's a good question. Firstly, we're already marketing -- the joint venture is already out marketing and is pursuing several opportunities. So I think the process will be to do a build-to-suit strategy as opposed to a speculative strategy. But should we find an opportunity to do some sort of incremental work on some ships that might help in this market process or position ourselves timing-wise, then that would be considered. But that isn't the initial strategy. The growth markets we see are mainly Brazil, West Africa, and Southeast Asia. And those will be the markets, I think, where the marketing will be focused. And in terms of the CapEx size, you're right, there's a very wide range of costs. Of course, PGS operates four very sophisticated FPSO's in the North Sea. So, the capability of the joint venture would certainly be to span all the way up to a sophisticated FPSO range. I'd say at low end FPSO is probably about $100 million. And a sophisticated FPSO, as you say, could be 5 or 600 million, or in some cases even more. But the very big projects tend to be owned by the oil companies themselves. So, the guidance will be probably between 2 to 300 million is probably about the sweet spot.

Okay, would you be looking for a kind of lease type transaction, or just a sale primarily? I'm presuming lease.

It will be a lease, yes.

Okay, thank you.

Our next question comes from Walter Lavato with Passport Capital.

Good morning. Two quick questions. The first one is on, we're seeing more and more news about ship owners building in China. Can you talk about the status of shipyards in China, their ability to compete with the Koreans and the quality of work and how much capacity can ultimately come out of China?

China is coming on very quickly. They have some productivity issues that are quite significant compared to say Korean yards, which are the world's most efficient. But China has stated that by 2015, they expect to be the world's biggest ship building nation and there's no reason to doubt that forecast. So, we're seeing increasing Chinese capabilities, it stands to reason that they will increasingly -- they will be trying to take away tanker and dry bulk type construction from Korea and Japan, allowing those other countries to focus more on the high end ships like LNG container ships and offshore projects. So, there will be probably be a division of labor. We are seeing a number of new shipyards. As I mentioned, Teekay has placed it's first order in China. It's going -- we're confident that we can get very good quality, but it will probably require probably a little bit extra supervision, but that's something we're ready to do.

And are the costs comparable? Are the prices that are being offered comparable or are they --?

Well, the prices obviously are -- at least in our case, we look at what we view as being the delivered cost and the usefulness of the vessels. And so they are good quality builders and as long as you utilize the ships, you can get good ships probably a little bit cheaper in China right now than Korea.

Just a quick second question, on the Panamax tanker that you sold, which is going to go into the FPSO business, why did you sell that? Why didn't you convert it into an FPSO yourselves?

Well, I don't think that the FPSO venture with PGS is predicated on using Teekay hulls. The availability of ship hulls is not the concern. The issue is securing projects and making them work. So, if you take a project of 300 million in the FPSO business, a $10 million hull isn't going to make a big difference, whether it's 8 million or 10 million. So, this happened to be a ship that became surplus in the system and somebody had a project for it and we didn't have a project for it.

Great, thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] We will go to [Adam Duran] with Cobalt Capital.

Good morning. I have two questions. One is, given the strength of current Aframax rates so far in Q1, it looks like you guys are going to have another very strong quarter in terms of free cash flow generation. What are your thoughts on your uses for that cash and are you going to continue to buy back stock?

Well, we still have an outstanding stock buyback authorization, so it likely will be completed. But we have quite a lot of CapEx and we've been lucky enough to secure a large number of profitable projects in the last year. So we think that will allow us to put that capital to work very comfortably, as we have a little bit of room to delever as well. But there will also be opportunistic acquisitions. We've, as you seen, entered the newbuilding market again, so I think we have a nice blended use of the capital. We, certainly -- it's not burning a hole in our pockets.

But we have a policy of announcing share buybacks as we intend to complete them, rather than to have one big program that's outstanding for one or two years.

Okay. My second question is related to the rule of thumb and trying to compare Q1 of last year to Q1 of this year. What were the rates that were applicable in last year's Q1? If you go back in the documents, it looks like a $39,000 Aframax rate was the right number. And this year I think it's going to be -- who knows what it's going to be for the next couple of weeks, but it looks like it will probably be in the low 40's. Is it -- I'm afraid I might be missing something, because if you take that $3,000 to $4,000 difference in those rates and then apply the $0.06 per share average to that, you should end up, sort of, $0.15 to $0.25 ahead of Q1 of last year based on what current rates are in the Aframax market. And I wanted to make sure I was doing the math right.

Well, as I said on an earlier question, the Clarkson rate is the Aframax -- or is what the blended rate of what the Aframaxes are making. And so from our side, we're trying to put our whole fleet together and give you one way in order to take the whole fleet down and get it on, I would call it an Aframax EE equivalent type of rate. The difference between the first quarter of last year and the first quarter of this year, which is reflected in the leverage per share, is the fact that we have less revenue days that are coming in, because of the sale of the older single-hull vessels. But you can estimate what you want for the first quarter of 2006, run it through the utilization factor and then you'll get approximately what our earnings per share will be for the quarter.

Got it, thanks.

Thanks.

Our next question comes from Scott Burk with Bear Stearns.

A couple questions. First, in terms of timing of the joint venture to build the FPSO's, what kind of timing would you expect to actually have some into your fleet? And how big do you think that opportunity could be?

The lead time is probably a couple of years on these projects. It could be a little longer. It depends on the sophistication of the project.

Okay.

So, let's assume it's going to be a two to three year lead time. And as far as the size of the opportunity, that's something we're quite excited about but I think that the project volumes in the FPSO business, maybe the current expected slate of new projects might be 40 to 50 projects in the next three to four years. Of which, some will be redeployment of existing FPSO's, so maybe you'll see 20 to 30 new FPSO's in that period. And there are approximately ten companies in the industry that we think sort of constitute the competitive landscape. So, I think it would maybe a reasonable assumption that the venture could land a couple of projects in the first year or two. And that would be a good start. The interesting thing is, of course, the link to the shuttle tanker business where we also see the opportunity being that we can sell packaged solutions, rather than just FPSO's. So, that's something we're very excited about too.

Okay, a question about your fleet, your spot Aframax fleet declined from 26 vessels to 22 vessels at the end of January. And I just wondered what happened to the four vessels? It looks like they may have been transferred to the shuttle tanker business. I just wanted to get some color on what happened there.

We have -- we redelivered a couple, we transferred one to the fixed rate tanker segment, and there was one product -- one vessel went into the product trade. So, one ship went on long-term charter, which is reclassified to a fixed rate and two redelivered.

Okay. And one final question. In terms of your share count, could you just describe the impact of the PEP settlement on your diluted share count versus your basic share count? In other words is that difference going to -- that difference should decline lower than expected.

Yes, the difference should decline. But we were already taking into account with the Treasury stock method the fact that the PEPS was going to convert, so the net affect is about 3 million shares when you look at it.

Okay, thanks.

[OPERATOR INSTRUCTIONS] We will go to Daniel Burke with Johnson Rice.

Good morning all, forgive me for joining just a moment late. So, if I'm asking something already answered, again, forgive me. One question on the large medium-sized product tanker group. Again, rates did improve sequentially, but frankly I was looking for a little bit more of a sequential gain there. I was wondering if you could catch me up on any potential mix issues. I know there is sometimes vessels moving in and out, as you referenced earlier? Or perhaps an update on exactly where the bulk of this fleet is trading?

The majority of our [clean] product fleet is trading in the Atlantic basin. And we have a mixture of spot trading and certain contracts with affreightment that are with long-standing customers. And it's an important growing part of our business, one we're very positive about and we are following our customers who are obviously looking to increase their product movement. So, we think we are achieving pretty good results, maybe held back a little bit by some contracts with affreightment that are a little bit out of the money in the short-term, but we think over their term will be very attractive.

Understand. And then one last question on the FPSO joint venture, for PGS, the North Sea has been their region. Obviously, Teekay's relationship will allow a more global look. I would be curious if you could prioritize any potential geographies that you'll focus on in terms of FPSO deployment? And also curious for any potential comments you might have on the prospects for FPSO or FSO deployment in the Gulf of Mexico? Thanks.

Sure. I guess you missed the question earlier where we indicated the growth markets are Brazil, West Africa, and Southeast Asia for FPSO. You're right, the Gulf of Mexico is another area, which I should have mentioned, so I would say this will also be on the radar screen. So, we will -- the whole point, I think of combining forces, include the fact that the Company will have a global reach as opposed to a North Sea flavor.

Great. Thank you.

Our next question comes from Terese Fabian with Sidoti & Company.

Good morning. Just to follow up on the last question, do you have any shuttle tanker operations currently in the Gulf of Mexico?

We do not at this very moment. We did however, in the last two months after the hurricanes had the first ever dynamically positioned shuttle tanker in service in the Gulf of Mexico, operating under a Jones Act waiver. And that was an order to help out a customer who was able to put his oil production back on stream more quickly. And that was an important demonstration in that region where there's been a lot of talk for shuttle tankers, but never any action because of the strong pipeline lobby. And this was a successful experiment, in fact, the customer was very, very happy. So, we think this bodes well for this important frontier.

Great. Okay. Another question, a small question on the equity income from joint venture line on your income statement. Is there any way of sort of knowing where it could end up, because it seems to bounce around a bit between the quarters?

It does bounce around a fair amount but it isn't a big change running back and forth. But it does bounce around a fair amount. That actually comes up because we have a small Company Seagulls and they reported a little bit extra revenues. If you wanted to look at it, I would go for a run rate more along the lines of about $3 million, if you wanted to run an estimate on a per quarter basis.

Great, thank you. And then I have another -- a last question, please. What is your current thinking about a public listing for the shuttle tanker operations, particularly in light of the good results you've had with the LNG listing?

We have no decision in that regard. It's something that people bring up and something we think about as one of many ideas for the Company but at this point, there's been no decision to do that.

Okay. Thank you.

Our next question comes from John Kartsonas with Citigroup.

Good morning. A couple of quick questions. First of all on the two put options you have on the Suezmax market that come up in '06, is that cash -- a net cash outflow or is it already in restricted cash?

Which ships?

The Suezmaxes you have on capital leases.

Sorry, I didn't understand the question.

You have the put option to buy them.

Yes, they will -- we don't have a put option, those are financings and we already have financings in place, so as they expire, the debt financing will transfer into our books.

So, that's not a cash adjustment then?

Yes, there's no cash adjustment for that.

Okay, and also on the FFA's, isn't there a rate you can share, which you connect with the market rate to get what is the actual Suezmax rate for the quarter? Every quarter this is different. You can try to calculate it but it comes a different number every time.

The issue is we have two factors affecting our Suezmax returns. Namely, one out of the money, contract over freight and that's at a fixed rate, which we actually took tonnage in on charter again. So, the fact that it's holding down our results is slightly misleading, because it's still a profitable deal. But of course, it still affect it still affects the pure spot number downward. And then there is some traffic on FFA, which is lesser part of that change. We have in essence -- we have 32 ship days, at the moment, in Suezmax, so these will have a big headline effect, even though the actual dollars are not that big. So, it's hard to give you guidance because it depends on how many liftings we might have done in a quarter, cutoff at quarter ends in this particular seaway and so on. It's hard to guide.

I think as Bjorn said, on our spot operations we gave -- we highlighted the fact that we made about 54,000. But the headline rate is knocked down to 38,000. But that is misleading because we actually have a very beneficial charter-in that we have on that. And so, that's varied within the charter-in number.

So if you take out the whole charter-in, charter-out, it's going to be closer to 54 then right?

That's right.

Okay. That's all, thank you very much.

Thanks John.

Our next question comes from [Jerry Ebolan] with Impala Asset Management.

Hi, guys, how are you?

Good, thanks.

Bjorn, if I could just ask you, just listening to your comments and tell me if this is fair. You seem more upbeat about the spot core Aframax business than you have in a while. Is that -- did I read that correctly?

I think what's interesting is the fact that we keep seeing the market surprise to the upside. You're still going to have seasonality. But I think what -- there is a very positive and sort of bullish undertone on the part of the ship owners. And it looks as if there are plenty of opportunities to trigger the kind of volatility that seems to drag up the average. Because when you get spikes rates will probably -- they start running, they'll run.

Right.

I think the fact that we have such a tight global transportation, we have no slack in the system, they're just between technical mishaps, weather and political upheaval, I think there are just very many catalysts to help create that volatility. So -- but not only that, as you see from our presentation today, we also think the fundamentals actually looking pretty good. Based on the strong oil demand this year, they're surprising maybe to some degree of the economy was withstanding higher energy prices. So, we think the fundamentals are positive and the events are going to drive volatility on top of that. So, we are pretty positive.

Just the follow on, and this might be for you or Peter or both, I'm not sure. Given the uninspiring evaluation that you unfortunately get in the public margins and all you have done with your capital structure, how can you find -- well, let me ask it differently. It must be getting harder and harder to find projects to do that are more attractively valued than your own stock in a big way. Could you talk to that for a minute?

Well, I guess we have certainly voted for what represents a good investment as far as Teekay is concerned with our stock buybacks. So we are coming -- we soldier and we continue to try to illuminate value and create value and that's our job. So, we are going to be very disciplined in what we're going to do going forward. Of course, we want to build a business but we can't ignore Teekay's valuation as well, so that's why we are aggressively buying back our stock. So, appreciate the comment and we're hopeful that as we begin to illustrate and illuminate our ability to pursue the offshore sector, which of course has a very different valuation, that is going to be positive to Teekay.

Okay, thanks.

[OPERATOR INSTRUCTIONS] We will go to [Sandy Goldman] with Heartline Investment Corps.

Bjorn, you've been very, very conservative over the year in not wanting to pay for vessels when rates are going way up and you're now going back into the new build market. What's triggering that? It's obviously a long -- is it a long-term judgment, or is it a specific contractual judgment?

It's a combination. I think we accept that having the size of fleet that we have, while we'd love to pick the absolute troughs of every cycle, we've gotten so big we can't manage our business through what is sometimes in a liquid market at the extremes in the market. The ships we've ordered were at values sort of 10% to 15% below the peak. And we're taking the view that these shipyards focus are filling out very quickly out there. We decided to put our finger in the ground and take a few ships. And we'll want to average in through -- if there is in fact a potential decline in vessel values out there, then we will average down. But I think the reality is, there's a surprisingly strong momentum in newbuilding ordering for early '08, '09. So, it's not certain that values will in fact go down. And that's what somewhat unusual, we haven't seen this kind of situation. Just this kind of length of strong cycles. So, we feel we have to make sure we stay in the fray and we have a pretty good order book now, and we might add to that.

We're also seeing that having available modern tonnage is important for our project management work as well. So, having ships that we can quickly convert into, whether they are going to be shuttle tankers or FPSO's or other types of vessels is important in that work. And that's a key competitive advantage for us.

So, really your size and mix of Company is dictating the different way of doing business?

That's correct. We are being more industrial.

The other question I have is, with China's entry in ship building, could they build a capacity fast enough so you could get a flooding of the market? In other words, they have to price so aggressively that people will just go out and build vessels, even though it's marginally economic?

That is the half empty glass, if you talk some of service. That would have been our base assumption. But what we're seeing, first of all, Japan; the ship building industry in Japan is very mature and I think will be very vulnerable to both succession planning and generation change there. And any pressure from China will potentially squeeze out Japan, so I think that that's going to underpin the market, partially. But I also think we're seeing such a significant demand and there's going to be a big phaseout of single-hull ships at some point towards the end of the decade. So I would say eventually, is this going to be -- is ship building going to be cyclical future? Absolutely. But I think it will be well into the next decade before we see any -- where we believe we'll see any significant excess capacity, if any.

Thank you.

And there are no further questions. I would now like to turn the conference back over to our presenters for any additional or closing remarks.

We just want to thank you very much for your support and look forward to talking to you next quarter. Thank you very much.

This concludes today's presentation. Thank you for your participation and have a wonderful day.