Teekay Corp Ltd (TK) 2006 Q1 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] As a reminder, this conference is being recorded.

And 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 statements, I would like to direct all participants to our website at www.teekay.com where you will find a copy of the first quarter of 2006 earnings presentation. Mr. Moller and Mr. Evenson 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 31st, 2005, on file with the SEC.

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

Thank you, Scott, and good morning, ladies and gentlemen. Thank you for joining us. I'm pleased to report to you on another positive quarter for Teekay Shipping and I will begin with the highlights on slide number three.

We generated net income of $101.7 million or $1.35 per share and cash flow from vessel operations or CFVO of $193 million in the quarter. Approximately $90 million of our CFVO came from fixed-rate businesses.

Rates in our spot fleet remain strong with our Aframax fleet achieving an average of more than $44,000 per day. While this was down by 8% from last quarter, it was 12% higher than the same quarter last year.

We continued the long-term investment in our spot fleet, exercising in-the-money options for two Suezmax tankers, bringing our Suezmax order book to six ships and we repurchased a further 700,000 shares for total cost of $27.5 million during the second half of the quarter.

Let me put these last two points into a broader context on slide four. We have stated in the past that the order of priority in the use of our cash is, first, profitable growth, thereafter debt repayment and then return of surplus capital to shareholders. As you can see on this slide, over the past 12 to 18 months we have, in fact, done all three.

Over the past year we have committed significant capital to growing our three business segments, securing $1.3 billion in profitable new projects. We have strengthened our financial flexibility by reducing net debt to total capital from 42% to 37% and by maintaining liquidity of almost $1 billion and we have aggressively returned capital to our shareholders, repurchasing 22% of our outstanding shares and increasing our regular dividend payments for the third consecutive year. As we maintain our focus on growing the business and rewarding shareholders, our allocation of cash to these elements will vary over time, as dictated by the industry landscape.

On slide five, we show an updated sum-of-the-parts valuation for Teekay. As shown in the box in the middle of the slide, our ownership of 68% of the units in Teekay LNG Partners is worth $9.89 per Teekay share, based on Teekay LNG's implied EV to EBITDA multiple of 13.5 times. On the left we calculate the value of our fixed-rate tanker segment to be $24.61 per share, based on an EBITDA multiple of 10 times. On the right we show the value of our spot tanker segment to be $20.16 per share, based on the current fair market value or breakup value of our owned spot fleet.

Adding $3.51 per share for the value of our joint ventures and V.O.C. assets, the sum-of-the-parts valuation of Teekay adds up to $58.17 of equity value per share, without taking into account the value of Teekay's spot tanker franchise. Put differently, at our current share price of around $38, our spot tanker segment, consisting of more than $1.6 billion worth of almost debt-free assets, is valued at zero.

I should add that our share repurchases have increased our sum-of-the-parts value by approximately $3.25 and I can assure you that both the management and our board are committed to bridge the valuation gap.

Next I'll review the main developments in our business segments, beginning with our fixed-rate tanker segment on slide six. CFVO was $73 million in the quarter, an increase of 3% from one year ago. Shuttle tanker utilization was high due to seasonally strong winter demand, but Q2 and, to some extent, Q3 shuttle tanker CFVO is expected to fall more than normal due to above-average oilfield maintenance being planned in the North Sea this year. In Teekay shuttle tanker contracts, day rates are fixed, but we are exposed to volume variations, giving rise to seasonality in the shuttle CFVO.

Brazil continues to provide strong support for our shuttle segment. In addition to three long-term shuttle deals we reported to you a couple of months ago, we have extended the charter periods for two Aframax shuttle tankers already serving in Brazil at rates well above the current contract rate. On average, these extensions last through 2008, with the customer having options to further extend the term of the charters.

We continue to develop our Teekay-Petrojarl offshore joint venture, which will pursue the growing market for floating production solutions and the marketing of the joint venture is underway. We believe that the growth prospects are very attractive for our integrated offshore marine platform, which comprises floating production, floating storage and shuttle. You only have to look at the record level of deepwater drilling activity to get a sense of what's going to happen a couple of years down the road in terms of increased offshore oil production. So we're very excited about the opportunity.

Turning to slide seven and looking at the development in our fixed-rate LNG segment, we generated CFVO of $16.6 million, unchanged from the previous quarter. Teekay LNG Partners recently increased its annual cash distributions by 12% to $1.85 per unit, raising the amount of annual distributions that Teekay will receive to $44 million. This amount is expected to continue to rise further as LNG vessels currently under construction are delivered and commence their long-term charters.

Our LNG new building construction program, which consists of nine ships, is progressing according to plan. The first of these ships was due for delivery around the middle of Q4 this year.

The growth outlook for new LNG projects remains strong. Our internal estimates, based on LNG projects that we are aware of, indicate an need for an additional 125 LNG ships to be delivered by 2011, over and above those already on order.

Turning next to the developments in our spot tanker segment on slide number eight, our spot tanker fleet enjoyed a strong quarter, both in absolute and relative terms. As shown on the left side of the table, our Aframax fleet earned TCE of $44,300 per day and our Suezmax fleet $54,100 per day, as reported in our earnings release. These figures include the effect of our freight-hedging activities.

Our pure spot TC results, shown in the middle column, were $45,100 and $64,500 a day, respectively, outperforming the Clarkson benchmark, shown on the right.

Our product tanker fleet also enjoyed a very good quarter. Our fleet of eight large-to-medium-size and 10 smaller product tankers produced their highest quarterly average TCE. We extended our position in the large range product tanker market, declaring an option to upgrade another Aframax new building to LR2 specifications and bringing our LR2 order book to four ships.

We extended our series of Suezmax new buildings by exercising in-the-money options for a further two ships and we hold options for further vessels. This brings our Suezmax order book to six ships for delivery in 2008 and 2009.

These new vessels provide us with greater exposure to the market upside later this decade, leading up to the 2010 IMO deadline, beyond which most countries are expected to ban single-hull tankers. These ships will also be a source of conversion candidates for use in our shuttle and offshore business.

We are taking advantage of a dip in new building prices that took place in the second half of last year and we discuss this in more detail on the next slide. On slide number nine, the yellow line shows that in U.S. dollar terms, Suezmax new building prices dipped by about 8% between the second and fourth quarter last year but are now on the rise again.

Because new building contracts are priced in U.S. dollars, the recent strengthening of the Korean won to an eight-year high against the U.S. dollar means that shipyards in Korea, the world's leading shipbuilding nation, are getting fewer won per dollar in new contracts. This is placing their future profits under a lot of pressure. We expect this to provide support for new building prices and ship values in general, going forward, especially given the very full order book being enjoyed by shipyards. In turn, this should support the current net asset value of tanker companies and it certainly highlights the deep value that Teekay shares represent.

Looking at the key tanker market dynamics on the next few slides, on slide number 10, we highlight some of the key factors that caused the strong market in the first quarter, namely record oil production, growing oil demand -- albeit it a slightly slower pace -- resurgent import growth in China and growing Japanese demand, increased ton-mile demand as more oil is moved a long distance from the Atlantic basin to meet this growing Asian demand, the lingering of last year's hurricanes on U.S. oil production and refining, including an about-normal refinery spring maintenance this year and, finally, geopolitical factors in Nigeria, Venezuela and Iran.

On slide number 11, you can see from the light blue line that Aframax tanker rates are following a normal pattern, dropping significantly during March or April as we head into the weaker tanker demand season.

In terms of the outlook for Teekay's second quarter results, we can advise you that we fixed approximately 55% of our Q2 spot Aframax days at an average TCE of $30,000 a day. However, our most recent bookings have been averaging closer to $20,000 a day, in line with Clarkson.

Turning to slide 12, we are projecting that 2006 should see no major change from last year in the balance between tanker supply and demand and we expect rates to remain highly volatile.

Positive factors influencing tanker demand include an estimated 4.9% growth in the world economy and the IEA estimating that this will lead to oil demand growth of 1.8% this year, continued high OPEC production, coupled with growing non-OPEC production, continuing adjustments to global crude and product trading patterns driven by regional refining imbalances.

On the negative side, we can expect net growth in the oil tanker fleet of around 6% this year due to the large number of new buildings delivering. We could end up with smaller fleet growth if we see a higher-than-expected amount of scrapping or further acceleration in the demand for tonnage for use in the offshore conversion sector.

As we approach the tipping point in the ratio between double-hull and non-double-hull tankers in the world fleet -- currently about 75% of the existing Aframax world fleet is double hull -- the discrimination against older tonnage will become ever more pronounced.

On slide number 13 we highlight the IEA's latest forecast that oil demand growth will accelerate considerably in the second half of the year, reaching 2.8% in the fourth quarter. Of course, tanker demand may not feel the full impact until-- of this until oil production is increased in response to this oil demand. Fundamentally, however, this level of oil demand growth should eventually translate into tanker demand growth of around 6%.

In conclusion, even though we can expect seasonally weaker results over the next two quarters, we remain of the view that overall 2006 will turn out to be a good year for TK.

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

Thank you. As Bjorn indicated, we had a strong first quarter with net income of $101.7 million or $1.35 per share. This included a number of items that on a net basis had the effect of decreasing net income by $17.3 million or $0.23 per share. Without these items, which primarily relate to non-cash items resulting from the decline in the value of the U.S. dollar, net income would have been $119 million or $1.58 per share for the quarter.

Looking at the operating results for each of our segments on slide 14 of the presentation, overall CFVO for the first quarter decreased to $192.6 million compared to $222.2 million in the first quarter of 2005. Our fixed-rate segment generated $73.2 million in CFVO during the quarter, compared to $70.8 million in the first quarter of 2005. This increase was primarily due to the commencement in April 2005 of a three-year fixed rate charter out of the company's only chartered-in VLCT.

Since the new Brazil shuttle tankers announced last quarter will be coming online starting in the second half of 2006 and through to the first quarter of 2007, coupled with the fact that our shuttle tanker business has some seasonality, the cash flow from vessel operations will vary somewhat from quarter to quarter in this segment, as you've seen in the past.

We are expecting that oilfield maintenance in the North Sea will commence earlier this year and be at a higher level than normal. Accordingly, we're scheduled-- scheduling to complete a larger portion of our planned dry-dockings and maintenance work for 2006 during this seasonally low period. As a result, the CFVO in the second quarter for the fixed-rate segment is expected to be lower than the first quarter by approximately $15 million.

Again, as Bjorn indicated, longer term 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 $16.6 million in CFVO during the first quarter, which is virtually unchanged from the first quarter of 2005. We currently have nine LNG new buildings scheduled to deliver between the fourth quarter of this year and earlier 2009, all of which will commence service under long-term fixed-rate contracts upon delivery.

The contribution from our spot tanker segment decreased to $102.8 million compared to $134.4 million in the first quarter of 2005. This decrease was due primarily to a decline in revenue days resulting from the sale of a number of our significantly depreciated older vessels during the past 12 months, partially offset by delivery of new buildings and an increase in spot tanker rates. Our spot Aframax fleet earned an average TCE rate of $44,300 per day in the first quarter of 2006, up from $39,600 per day earned in the same period last year.

Turning next to slide 15 and reviewing the remaining income statement figures in comparison to the first quarter of 2005, general and administrative expenses were $40.3 million compared to $33.7 million in the first quarter of 2005. This increase was primarily the result of the adoption of FASB-123R, which requires the expensing of stock options commencing in the first quarter of 2006, the depreciation of the U.S. dollar and additional costs associated with TK LNG Partners. We currently expect G&A expenses to run in the low $40 million range per quarter for the next few quarters of 2006, which includes an estimated stock option expense of approximately $2 million per quarter, as discussed.

During the first quarter of 2006, we incurred $1.9 million of restructuring costs, primarily relating to the relocation of certain operational functions, which we discussed last quarter. During the remainder of 2006, we expect to incur approximately $5 million of further restructuring charges as we complete this reorganization.

Net interest expense decreased to $24.6 million in the quarter from $29.5 million a year ago, primarily due to the reduction in interest expense from the repayment and refinancing of debt over the past 12 months, the repurchase of $89 million of our 8-7/8% bonds and the conversion of our 7.25% mandatory exchangeable preferred units to equity in February 2006, partially offset by the expiry of certain of our more-favorable interest rate swaps. We are protected from higher interest rate swaps in general as a result of the swaps we entered into at lower interest rate levels.

We recognized an income tax expense of $3.8 million this quarter, of which $3.6 million was related to unrealized foreign exchange gains.

Foreign exchange losses of $8.9 million, net of the minority interest share of these losses, primarily results from the unrealized foreign exchange translation losses related to the company's euro-denominated debt.

Other items, net, included $3.1 million from the expiry of options to construct an LNG carrier, minority interest expense of $1.3 million and miscellaneous income of $2.6 million.

Turning to slide 16, we presented our March 31st balance sheet, compared it with the December 31st, 2005, balance sheet. You will notice restricted cash increased by $412 million, primarily due to the sale and leases-back through a UK tax-lease structure of three LNG new building contracts for the RasGas II project. The proceeds from this sale have been placed on deposit and will effectively be used to pay our obligations under these lease arrangements. Advances on new building contracts has decreased $249 million from $473 million at December 31st, primarily due to the previously mentioned LNG carrier sale/lease-back, partially offset by further advances made on our new buildings.

Our total liquidity at March 31st was about $1 billion, unchanged from December 31st.

Net of restricted cash, net debt to capitalization was 37% at the end of the quarter, a decrease from 40% at the end of the prior quarter. This decrease was primarily due to the cash generating from operations during the quarter and sale and lease-back of the RasGas II new building contracts, partially offset by payment of new building installments and our share repurchases.

As a reminder, please note that the interest expense associated with the debt related to our advances on new buildings contracts, which was $224 million at March 31st, is capitalized and not expensed in the income statement. In addition, on February 16th, our 7.25% mandatory exchangeable preferred units were converted to equity. This conversion resulted in the issuance of 6.5 million common shares, a reduction in debt of $144 million, which has reduced our interest expense accordingly.

Turning to slide 17, since our last update on February 22nd, we've repurchased approximately 700,000 shares for a total cost of roughly $27.5 million. If the remaining share repurchase authorization of approximately $36 million is completed at an average price of $38, we will have repurchased over 18.8 million shares or 23% of our outstanding shares since November 2004 when our first share repurchase was announced.

Looking at the second quarter results, we fixed approximately 55% of our spot voyage days at an average Aframax TCE of $30,000 per day and current Aframax rates are averaging around 20,000 per day.

On slide 18, I would note our rule of thumb EPS guidance is $0.055 per quarter for every $1000 change in TCE above $15,000. This is down from the $0.06 we indicated last quarter due to the redelivery of some of our in-chartered vessels during 2006.

We'd like to note the net income break-even may be a bit higher than the $15,000 over the next couple of quarters due to the high level of oilfield maintenance expected in the North Sea, as discussed earlier. However, you will notice that our quarter-to-date TCE rate of $30,000 is significantly higher than the Clarkson TCE rates for the same period.

I'll now turn the mike over to Bjorn to conclude.

Thanks, Peter. Finally, I would note that the conference call for our publicly listed subsidiary, Teekay LNG Partners, will be held on Friday, May 5th, which is the partnership's one-year anniversary as a publicly traded partnership. And to commemorate this occasion, TK LNG will be ringing the closing bell tomorrow at the New York Stock Exchange.

The partnership is off to an excellent start, with the units-- units trading around 40% above the IPO price and it's executing on our plan to increase the partnership's distributable cash flow, both through acquisitions and building LNG carriers against long-term contracts.

Thank you for listening and we are happy to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll go first to Jon Chappell with JP Morgan.

Thank you. Good morning. Bjorn, given your exposure to the Caribbean with your core Aframax fleet and also your lightering operations, as we approach the next hurricane season and the severity of last one still fresh in people's minds, are you seeing customers locking up tonnage, whether it be to store product or just to make sure they have the available capacity to meet demand, given potential disruptions down there?

I haven't noticed anything. There could be something going on below the radar screen, but it's not been a prevalent trend that I've noticed. I think-- I guess you can-- you can have, probably, as many ships as you want, but the issue is, getting rid of the cargo into shore facilities if ports are closed or electricity is out or storage terminals are down or refineries are down.

So I think-- actually, I think, the problem is less the shipping side and more the rest. And so, of course, disruptions occurred last time when ships were coming in with cargo and had to be diverted and, in a few instances, they were held off with cargo. In most instances, the oil was sold elsewhere. And so I believe that spot chartering gives you that flexibility, but it's something we should keep an eye on. I haven't seen it happen yet.

Okay. And then just regarding your fleet expansion going forward, you mentioned the lower Suezmax prices and taking advantage of that. Have you seen any dip, related dip in the second-hand market? You've kind of been holding out on acquisitions of second-hand tonnage given expectations, I guess, that prices may come down eventually. Have you looked at getting back into the second-hand market? Does chartering-in look more attractive, less attractive now, given current charter-in rates?

I'm going to offer a couple comments on that. Firstly, I would say we are seeing that single-hull vessels and older vessels are beginning to show a decline in price, which is exactly what we expected would happen and why we sold our single-hull fleet at very firm prices in the last two years.

So I think that's the tipping point I was referring to. Because the proportion of the global fleet is increasingly-- the proportion of double hull in the world fleet is growing, we are now beginning to see the marginalization of the single-hull ships and any weakness in the market will accentuate that.

As far as buying second-hand modern ships, I think we're seeing some continued heat in the prices. The price of five to six-year-old ships is the same as the price of new ships and while the current market is volatile and you can get good earnings, the market is not as strong as it was a year or two ago.

So we believe that right at the moment the best bet is to try and be opportunistic about new buildings, although if the-- some of the quotes we're seeing just this week for ships, I mean, it's indicating that they are heating up in the price of new buildings, again. So then we would step back. So this option series we've obtained has become quite valuable and so we're pleased with that.

As far as in-chartering is concerned, again, I think the option value that owners see in the volatility in the market means that we're not really seeing any softening in the in-charter rates for time charter ships, even though the spot market has had weaker periods. So that is something we're doing. We did in-charter a vessel recently for three years at a price that I would say five years ago I would have swallowed pretty hard to do. But given the outlook and the volatility of the market, we think it's worth keeping our toe in the water there.

Okay. I appreciate it. Thank you, Bjorn.

And we'll go next to Scott Burk with Bear Stearns.

Good morning. I wanted to ask a couple questions about your cash flow from vessel sales. Was that just the assets that were sold during the quarter or is that just the LNG vessels that you mentioned or were there additional vessels sold?

We didn't sell any LNGs. Those are just the ones settled in the quarter.

The sale/lease-back that you mentioned from the--

Oh, okay. We did do the sale/lease-back, yes.

Okay and that what accounts for the cash from asset sales?

Yes.

Okay. Do you have any additional planned sales and lease-backs going forward for the next couple quarters?

Well, I think we were one of the last people who completed UK tax relief arrangements under the old legislation and the new legislation hasn't been finalized. So we're always looking for opportunities to be able to lower our financing cost through various structures and I think I'll leave it that way.

Okay. Can you go through your decision process to not order the two LNG vessels that you had an option for? Is that driven because Qatari's looking to build some ships on their-- on their own, or is that more of a return-based decision?

I think we basically take a kind of holistic view of where we see the opportunity to line up projects against delivery dates. I think Qatari's activity is basically known. They've ordered or reserved a large number of slots in Korean yards and the various projects are, basically, then sort of chopping off another chunk of ships against their reserved berths.

So whether those ships are ordered by the Qatari's and then subsequently passed on to others or kept by themselves, that doesn't influence the balance of ships needed against new projects, as we see it. So I guess it's a judgment call. We keep looking at these things and the decision, based on this particular delivery window, was to pass.

Okay. And then one kind of outlook question. Is there any impact at all on your operations from the Bolivian decision to nationalize their-- nationalize their oil reserves or is most of that used internally?

We are not directly involved. It will have an effect on, I guess, on the margin on LNG projects, potentially, but it's-- I think as long as it doesn't become a trend, I don't think it's a big factor.

Okay. Thank you very much.

Thanks.

And our next question will come from Justin Yagerman with Wachovia Securities.

I'm sorry, asked and answered.

Okay, thanks.

We'll move on to Doug Mavrinac with Jefferies & Company.

Great, thank you. We just had, I guess, a couple questions on your product tanker fleet and noticing historically that you prefer to charter-in product tankers, but can't help but also notice that you've converted another Aframax new building to an LR2 product tanker. Can you share your thoughts with us on that decision, the strategic-- whether it was a strategic decision to increase your presence in the long-haul product tanker market over the Aframax crude oil market? Or if it was more of an opportunistic decision in nature?

The-- I guess the strategy we adopt when it comes to our various spot tanker segments is a combination of ownership and in-chartering and so I guess the product market, especially the smaller product market or medium size, is a-- quite a diverse ownership group and there are lot of very homogeneous vessels. So that's a segment where there is a lot more in-chartering activity in the marketplace than there is, for example, in the crude oil sector.

So that lends itself more to being able to take a trader mentality for companies like Teekay. So that's something we continue to hone, those skills, and that will be part of our strategy going forward.

The long-haul large product tanker market is much more oligopolistic, so in order to gain access to that market I think you have less option to charter and ownership is more logical and-- but also, of course, the interchangeability of those ships between our Aframax crude fleet and the product market means that this is much more adjacent to Teekay and it gives us some optionality and it gives us a strong position in a fairly niche market in the LR2.

Great. And then just one other question as it relates to your chartered-in product tankers. I noticed that one of the biggest changes from your fleet profile last quarter to this quarter was a handful of chartered-in product tankers-- the contracts weren't renewed on them. From a trading perspective, is there anything to, I guess, to take in-- or take out of that decision to-- to not renew some of those time charters as it relates to, maybe, what the outlook is for-- in the near term for product tanker rates?

No, you shouldn't conclude anything on that. I guess the ships that are coming off now, we have other ships due to join our fleet. The typical term of smaller to medium product tankers is 12 to-- 12 to 24 months, so there's a lot of rollover and I guess we had a very strong product tanker market in the last six to nine months, so that influenced some ship owners' ideas for their ships. So we'll step back whenever we see the rates being overheated and we'll step back in when we think the window opens. So that would be a trading-- a trading activity.

Great. Okay, great. And then just one final question as it relates to what you're seeing from charters and their appetite to secure tonnage, not just for the next few months, but have you seen an increase in demand from some of your customers to-- to secure vessels, both on the crude and product side, over the next couple of years?

We're seeing some activity, I guess, but, I guess, it a bit depends on which oil company you're talking about. Some oil companies have a more shipping-intensive control strategy and others have a very spot-oriented strategy. There's no sea change in the way they look at it. I think that it's ongoing activity. If the window opens up now to a weaker rate environment, I think we could see more activity on that, because I think they will probably want to cover more of the volatility that they've been experiencing in the spot market recently.

Okay, great. Thank you very much.

And next we'll go to Jordan Alliger with Deutsche Bank.

Yes, hi. With the rates on the Aframax that you generated in the first quarter somewhat above Clarksons and certainly, at this point given what we've seen at Clarksons, your $30,000 a day, as you noted, is above the levels that we've seen in the market thus far. Are you starting to get back some of your old premium in some sort of way?

Well, Jordan, we do have a great chartering team, so I think that would not be-- not be unrealistic. We have the ability to trade both the Pacific and the Atlantic and especially when you have a volatile trading environment, the voyages in the Pacific are longer than they are in the Atlantic, on average, and so our guys are very good at dialing in what the market's doing and it allows them to either aggressively pursue long-haul voyages or avoid them by steering towards more short haul if they can see-- if any, what movement they see in the market.

So I think they do a great job.

So have you seen-- make sure I understand. Are you seeing some shift in terms of the split of your vessels? Have you moved more into the Pacific? Is that the takeaway?

We haven't done any real changes, we just-- I think when you have big volatility as we have-- I mean, we had a very precipitous fall in rates--

Right.

--between end March through April and so the benefit of having locked in longer voyages becomes much greater. And so this year was an exceptional-- exceptionally steep decline in rates. It's since rebounded quite a bit, but I think it's-- maybe one quarter is difficult to draw a trend from, but I think we're very happy with our numbers.

Okay. And then, obviously, some, I guess, noise with the dry-dock days on the fixed fleet this quarter and the redelivery of some of the in-charters. Is the leverage rate or leverage factor of $0.055, is that a one or two quarter phenomenon, then you think maybe it goes back up to $0.06, or just stay in this range for the time being?

Well, it ranges between $0.055 and $0.06. As Bjorn said, it's mostly depending upon whether we take in more ships on the spot side of things. You could just as well take the $15,000 and just subtract the $15 million of revenues in the second quarter, but we're more comfortable with the $0.055 right now, given the redeliveries on the in-charters. If that changes materially, we will update you on that.

But, as Bjorn said, it depends upon our trading activity.

Okay, thank you.

Thanks.

And next we'll go to Philippe Lanier with Bank of America.

Yes, good morning. One quick question, following up on your chartered-in fleet. I noticed this a while ago, that a number of those product vessels had come off. Do you guys have any guidance as to how that's going to affect your chartered-in expenses in the next quarter?

No.

Okay. Pardon me?

No, just flat.

Okay. And then just a second question, regarding kind of your sensitivity to the Asian market. Given the flows that you're seeing, do you have a sense as to how full or not full [non-OSCD] inventories in Asia are relative to what we see is a very full inventory situation in the Western Hemisphere?

What is I understand to be the case, although the data isn't always great from that region, is that they had declined quite a bit but there's a bit of a rebuilding going on at the moment. I don't have a very good handle on that.

Okay. Thank you very much.

Let me just go back and say that-- to answer your question on the time charter expense, it should be down approximately $8 to $10 million.

Okay, great. Thank you.

And our next question will come from [Omar Nachta] with [Dahman Rhodes].

Hi, good morning. You guys have made some significant expansions within the shuttle tanker business and are starting to expand into offshore services, with respect to the crude tanker sector, you made some significant investments within Suezmax new building. Do you see yourselves growing that business and having a fleet comparable in size to your Aframax fleet?

The Suezmax segment is a much smaller number of ships than the Aframax market by a factor of two or three. So I guess the issue is, to us, building a meaningful platform that we can use to effectively triangulate and cross-trade our vessels. So we see, really, Aframax and Suezmax very adjacent to each other. Many of our customers may interchange in the use of some of those vessels, so in a way it's part of a medium-size crude oil play. So we will probably look to build both of those fleets over time.

Okay. And I just have a question about your FPSO joint venture. Do you have an update on that or is it still too early with respect to finding suitable vessels for conversion?

I think it's too early. I think, unlike the spot market, I think we're going to have a lot of quarters where we update you that things are progressing but we may be a while before we have projects announced.

However, we are actively marketing the joint venture and I believe that, if anything, what we saw as the growth potential when we set out has only grown stronger in the last three to six months.

All right. All right. Thanks a lot.

And we'll take our next question from John Kartsonas with Citigroup.

Hi, good morning. Actually I have more than one question related to your fixed-rate segment and in your presentation you apply a pretty high multiple on these cash flows and I assume that you are relatively comfortable with the length of the contracts and the certainty of these cash flows. How do you think about this segment, given that you have declining production in the North Sea and your fleet is relatively old, I mean, 10-12 years old at this point? How do you think about replacing the fleet or what's happening in the North Seas in terms of production?

Well, the North Sea is-- has been known for a long time to be a province that will see declining oil production. The question is, at what-- at what pace? Nothing we have ever based ourselves on has suggested that that would not be an underlying factor.

However, there are a lot of-- I think we demonstrated, taking the shuttle tanker business from one continent in 2001 to five continents earlier-- a couple quarters ago, that we can use our international reach to develop that business. The Brazil business has been a huge win. I think we've-- I think 15% of the world's shuttle tankers are now in Brazil and they're all Teekay's. So I think that shows you that growth potential.

We also would expect the Arctic to offer some very interesting opportunities for shuttle traffic and with our position in the shuttle business, with our location in Norway, I think we have a good shot at that.

So, I mean, we believe that our fixed-rate segment and our offshore segment, in particular, is a very powerful story. So we-- and as far as the average fleet age is concerned, new ships we are building, the Brazil deals we're doing, I think you'll find that that fleet is, if anything, modernizing right now.

Do you think that the nature of the contracts that you have are much different from like the regular time charter contracts? I mean, where is the difference there?

Absolutely because most of these are life-of-field contracts so that what you have to realize is as the oil price has gone up to $60-$70, the duration of these contracts, the effective life of field, for most of these oil fields has been extended because it isn't like they have a physical life. They have an economic life and that's been extended at a higher oil price.

So we don't have exact data on it, but we certainly are hearing from people that these oil fields are going to last much longer than what we had originally envisioned when they were being brought in at $15-$18 break-even prices. And so the nature of our contracts is that we will continue lifting as long as they have oil. So we're going to see the duration of oil production in the North Sea, as we've seen over time, has-- it hasn't peaked out. Everyone talks about when the peak is, but it's been extended. And that's even without enhancements that they may make to the reservoirs in order to keep up production.

So when it comes to pricing of these contracts, how are you renegotiate these contracts if it's for the life of the field?

Well, I guess the life-of-field contracts are priced. Some contracts are for term and many are for life of field. So those that come up for term are negotiated and those that are life of field, the price is already set.

But on the new contracts, we're getting much higher prices, which reflects higher fixed asset prices in general and the bullishness people have for the shuttle tankers. And, for example, if you look at-- in-- in Brazil, on our three contracts, even including shuttles, the shuttle tankers -- I'm talking about the old-- the three new projects that we announced last quarter, you can see an increase of $20 million in EBITDA, even taking account for bringing in a joint venture partner. And that's net, because we're moving one vessel out of the North Sea.

And, as Bjorn said, as we-- as we move outside of the North Sea, the older vessels, which may not qualify in the North Sea are perfect for areas like West Africa or Australia where you don't have as much harsh conditions as you do in the North Sea.

Okay, thank you very much.

And we'll go next to Stephen Errico with Locust Wood Capital.

Good morning. Thank you very much. My question is, when I look at your company, what I see, it's not often in my life I can buy $1.6 billion worth of ships for free and it's been about a year since you guys have put out the sum-of-the-parts valuation tables and, Bjorn, you mentioned at the beginning of the call that the management and the board were committed to bridging that valuation gap.

I was wondering if you're prepared to talk about-- I mean, there's been some speculation that you might put the shuttle business down into an MLP. At what type of transactions-- or what type of things you're considering and doing to bring that valuation out, which, by the way, I would say is even understated, because I think one of your most valuable assets in the next couple of years could be the general partnership interest you have in any-- in the current MLP and any future MLPs. Thank you.

Well, thank you, that's a very good question and I can assure you that we are looking continually for specific ways to illuminate the value in our business segments and to close the valuation gap as I said earlier. And I-- the comment I made about TK LNG having had its-- having its one-year anniversary as a publicly listed company tomorrow, I think, is very apropos because it's demonstrated the viability and success of a strategy of illuminating value through floating parts of our business.

However, I guess if we want to list a company, for example, as you outlined about floating parts of our business, we would want to do so at a time when we want to gain a valuable currency and where there's momentum in the business. I would say that it's reasonable to say that some of those factors are coming into play around our offshore activity. And we're not prepared to speculate what the company is considering doing, but I think there are a number of options available to us. We're considering all of them and we will do what we think is right.

To follow up on that, some of the-- could you give me an idea of what your pipeline is looking like in terms of some of those offshore projects? I mean, I know you have the Brazilian contracts and then you're doing this joint venture with Petro Geo. Is the pipeline fuller than you thought it was three or four months ago or about the same?

Yes, I would say that rather than having described that business as being mature, which we did 18-24 months ago, we now see it as a growth business, given that we moved-- we had-- last year we had a shuttle tanker on five continents. So we see it moving just as much out of the North Sea and then we see the North Sea moving into the Arctic region as Russian production comes on. So we now see that as a growth sector.

And then my one last question, will the Petro-- I guess Petro Geo is spinning off their FPSO business sometime this June. What impact will that have on your joint venture? And, given the valuation that people are talking about that as getting, how does that relate to how you're looking at your business?

Well, that's a great question. I mean, if you look at the sum of the parts, we're basing it just on what we have in the house on asset values, whereas when you look at the FPSO space, we notice that several of those companies, which don't have any assets, have positive value and so people are paying up for the FPSO franchise.

We have half a franchise, if you want to call it that, because any new project, half will go to Petrojarl, which is being spun off by PGS and half will come to Teekay. So hopefully-- we aren't-- we aren't asking people to value that growth premium the way that they are giving it to FPSO companies right now, but certainly we expect when we start to announce momentum in that-- in that space that people will, hopefully, give us some sort of growth premium for that.

Well, thanks for your time and best of luck.

Thank you.

Thank you.

And we'll go next to Terese Fabian with Sidoti & Company.

Hello, good morning. I have just one remaining question; most have been answered. But to get back to some clarification on the rate differential that you reported between what you've booked on your Aframax's so far and what the Clarkson averages are on the Caribbean and the Eastern Route, to get a handle on modeling for the rest of the quarter, it's a pretty steep difference. Clarkson shows about $20,000 averaging so far and you're at $30,000. Are you trading on different routes or is there something that we can fit into the rule of thumb model that you provided last time around?

I would stick with the rule of thumb, but I guess what I said earlier is we're very proud of our chartering guys for having read the market exactly right and having locked in a lot of long voyages at very high rates. So I think we are experiencing kind of a delay-- a delay in getting to the same reality that others have been facing for about a month. So I would say if you-- if you, going forward, assume that we'll follow the rule of thumb, then you won't be too far off.

Okay. And those locked-in rates that you have on the long voyages, are they going to be extending through the third quarter? Do you know?

No. That's-- that's included in the 55% of days booked for the second quarter.

Okay, thank you.

And our next question will come from [Adam Duarte] with [Cobalt Capital].

Good morning.

Good morning.

One quick question on liquidity. Given your capital commitments over the next two years, can you discuss how you plan to fund the remaining portion of your share buy-back? And then, as a second part to that, given that your stock price is at $38 now, relative to the average share repurchase price of $41.70 in the past, does your stock seem like a much better buy now than it was before? And would you consider accelerating or implementing a new share buy-back program? And how would that be funded?

Let me-- let me start with the last piece of your question and hand over to Peter to cover the rest. I think what I indicated was that we will use all three strategies around the use of our cash, which is investing, repaying debt and returning capital. So we'll use a mixture of those strategies.

So what we exactly do on the share repurchase front will depend what opportunities we see. We still have an outstanding authority and we'll see what happens with that. So it's not-- we may still see that our share value is low, but we may find projects that we consider to be more attractive than doing the repurchases, but we may do a mixture going forward.

And, Adam, we have $36 million left, so compared to our $1 billion of liquidity, that isn't-- that isn't very much. And in our press release we talk about the fact that we basically finance most of our outstanding CapEx going forward when we're looking at it.

And if you look back at what our pattern has been, we've announced share repurchases four times. We've done that because we had excess cash from ship sales as well as from the cash flow from operations and our general modus operandi is to announce a sale-- announce a share buy-back and then implement it rather than to put in one big one that will last for several years.

So when we finish this one, then we'll make an appraisal, as Bjorn said, about how we're going to use our cash, but the company continues to generate good cash at these levels.

Okay, thanks. One quick followup. Just to follow up on the comment about your general partnership interest in TGP. Can you help us understand sort of what a run-- once every-- once all the LNG tankers get delivered, what would sort of be the run rate, GP cash flow, related to that interest for you guys and what type of multiple do you think that should trade at?

Well, we have noticed that general partner multiple are selling up at 30 times, but we're not giving guidance out on where the general partner's cash flow will be when all of the present nine new buildings are delivered. We're giving guidance out on TGP two years on a rolling basis so you can see that. So I guess you have to do a little work yourself.

Darn. And, sorry, lastly, on the timing of, as you guys put it, closing this gap, can we expect a certain timeframe for other actions, potentially, to be taken?

I guess you should just keep watching what goes on and we'll announce whatever we have to announce when we're ready.

Okay, thanks. Good luck.

Thank you.

And next we'll hear from Ruairidh Stewart with Simmons & Company.

Yes, most of my questions have been answered. But I just wondered, you mentioned that production maintenances in the North Sea might be more severe than normal. I just wondered if you'd care to put kind-- some kind of delta on that for the shuttle tanker business over the next couple of quarters?

Yes, I guess we've given guidance that the EBITDA will be down by $15 million from the first quarter, so I think it probably gets into a little too much technicality to try and assess the exact percentages and so on, but I think, in particular, there's an element of front-loading from the first quarter into the second quarter, which is why we expect higher shortfall in revenue. But, I mean, I don't have all-- all-- very specific details I can give you here.

Okay just in conjunction, I guess, with one of the earlier questions and with PGS spinning off their FPSO business -- and I guess you kind of maybe talked to why you wouldn't do this with the valuations -- but I was just wondering if you are happy with the JV as it stood or would be interested in taking some kind of stake in the split-off FPSO business?

Well, we would certainly not want to discuss what we might be considering on that kind of front, but I think the benefit we have is that we are providing value in the joint venture and they are providing value with respect to skill sets, so we've acquired access to that skill set, we think, in a very low-risk and low-cost manner.

Investments in offshore assets, we think they are correctly valued, generally. They are valued a lot better than Teekay, so the fact that we're getting more into offshore, I think, should suggest that Teekay should be valued in a very different way.

Okay. That's fine for me. Thanks.

And we'll take our next question from [Martin Rohr] with [MSR Capital Management].

Thank you. I have a longer-term question regarding your financial leverage targets. You pointed out the decline from 42% to 37% in the last 12 months in spite of the big asset expansion and the almost $750 million of share repurchase. If large new projects and/or acquisition opportunities were to develop, how much would you be willing to take the leverage up and particularly given that as I look back on the history of the company, the leverage ratio is toward the low end of what the targets used to be before you built up such a large fixed-rate cash flow?

Yes. Well, that's a great question. As the company has gotten into more fixed-rate business and, I know fixed-rate is the fashion this quarter, but our fixed-rate business, as you point out, is fundamentally different, meaning that we aren't taking spot assets and converting them to fixed-rate. These businesses like the shuttle tankers and our LNGs start out and end as fixed-rate businesses. So we're able to carry a higher debt-to-cap ratio because of the changing business mix. That is to say, higher fixed-rate, less spot. You've seen when we've taken acquisitions we can move that debt cap comfortably up to 60% and then we try to repay it down.

The other issue that comes in is the fact that we consolidate TK LNG Partners. And so, although we consolidate it, we don't guarantee that debt, so that debt comes on to our balance sheet and with the expansion of TK LNG, both as a warehouser and with the consolidation of the statements, we-- we are-- we are more comfortable carrying a higher level of debt to capitalization than we would have in the-- in, you can call it, a few years ago, because of these two factors.

That's helpful. Thank you for the answer and for the great presentation.

Thanks, Martin.

[OPERATOR INSTRUCTIONS] And we'll go next to Daniel Burke with Johnson Rice.

Good morning, guys. Asked and answered, actually. I'll follow up offline, thanks.

We'll go next to Justine Fisher with Goldman Sachs.

Good morning. Most of mine asked and answered, too. I apologize, I also had to jump on some of the other calls, but, Peter, did you mention whether-- whether or not you guys bought back any of your bonds this quarter?

Yes, I did. We bought back about $87 million.

Apologies for the repetition. Thanks.

Oh, sorry, that's for the year.

Okay. For the year-to-date in '06?

Yes, the last 12 months, that is.

The last 12 months? Okay. Okay, thanks.

And we have no further questions at this time. I'll turn things back over to our speakers for any additional or closing remarks.

Thank you very much for your active participation. That was a very stimulating process today. Have a great day.