Teekay Corp Ltd (TK) 2006 Q2 法說會逐字稿

Thank you for standing by, ladies and gentlemen, and welcome to the Teekay Shipping Corporation second-quarter 2006 earnings release conference call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded.

And now, for opening remarks and introductions, I would like to turn the conference over to Mr. Scott Gayton. Afterwards, you will hear from Mr. Bjorn Moller, President and Chief Executive Officer of Teekay Shipping Corporation, and Mr. Peter Evenson, Chief Financial Officer of Teekay Shipping Corporation. Please go ahead, sir.

Before I read the forward-looking statements, I would like to direct all participants to our website at www.teekay.com, where you'll find a copy of the second 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 provisions under Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent Annual Report on Form 20-F dated December 31, 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. Thanks for joining us. I am pleased to report to you on our second-quarter results. And I will begin with the highlights on slide number 3.

Excluding the items in Appendix A of our earnings release, our net income was $49.8 million or $0.66 per share. Cash flow from vessel operations, or CFVO, was 120.7 million, of which approximately 80 million came from our fixed-rate businesses.

We enjoyed a strong performance in our spot tanker segment on both an absolute and relative basis. We made a further commitment to the growth of our spot tanker business, declaring options for another two Suezmax tankers. This brings our Suezmax order book to eight ships and our total new building order book to 23 ships.

In June, we announced plans to create a Master Limited Partnership for our offshore business. In June, we also announced a further $150 million increase to our share repurchase program. And since our last report in mid-June, we repurchased a further 1.3 million shares for a total cost of $54.3 million.

Turning to slide number 4, I will review the main developments in our fixed-rate tanker segment. CFVO was $65.9 million in the quarter, down by approximately 7 million from the previous quarter. You may recall that last quarter we guided you that we expected Q2 to be down by $15 million from Q1 because we were anticipating this year's oilfield maintenance season in the North Sea to be very front-heavy and to fall largely into the second quarter.

As it turned out, the schedule was not quite as heavily front-loaded as we had projected, and therefore our CFVO came in above the guidance. Consequently, we now expect some field maintenance to be pushed into Q3.

Our guidance at this point is that Q3 CFVO from our fixed-rate tanker segment should be better than last year's Q3 by approximately $3 million due to a combination of the lower than usual remaining field maintenance and the recent rollover of several expiring shuttle charters at increased charter rates.

As shown on this slide, there were a number of notable developments in our offshore business. We concluded an eight-year contract extension on our floating storage unit, Dampier Spirit, which will continue to serve in the field, where it has been operating since 1998. We saw further growth in the shuttle tanker demand in Brazil, where we chartered an additional Aframax shuttle tanker through 2008. You will recall that just last quarter, we reported on the renewal of two other medium charters in Brazil at higher rates.

In July, after completing conversion work, we delivered the first of three Brazilian long-term shuttle tankers that we announced earlier this year, and we chartered a shuttle tanker for six months for Gulf of Mexico oil producer. After last year's Katrina-related outages to subsea oil pipelines, we scrambled to free up a shuttle tanker in order to help one of our customers restore disrupted oil flows as quickly as possible. This year, we've seen some of our customers chartering shuttle tankers ahead of time to be ready in case we see a repeat of last year's hurricanes disruptions.

We signed our FPSO joint venture agreement with Petrojarl in the quarter, and the venture is up and running, actively bidding on offshore contracts.

Finally, while we are limited in what we can say about the planned IPO of Teekay Offshore Partners, we can say that the process remains on track as per our June announcement, namely that we expect to file a registration statement with the SEC during the second half of 2006.

Turning next to slide number 5, our fixed-rate LNG segment generated CFVO of $13.9 million, down by $3.8 million from the same quarter one year ago. The decrease was due to the scheduled drydocking of one LNG carrier and the subsequent extension of that drydocking when unforeseen repairs to the cargo containment system in some of the ship's tanks had to be carried out. The ship has since returned to regular service.

The first of our newbuildings for the RasGas II project, shown in the photograph on this slide, is nearing completion and is scheduled to deliver later this year. We now expect all of the three RasGas II ships will be on charter by the end of the first quarter of 2007, ahead of the originally scheduled completion in the second quarter.

Turning to the developments in our spot tanker segment on slide number 6, our Aframax fleet earned $29,200 per day in the quarter, a high figure for this time of year by historical standards. Our Suezmax earnings were adversely affected by the timing of non-revenue-generating repositioning voyages and certain hedges described in the footnote to the table shown in the earnings release. Due to a relatively small number of Suezmax ship days, our average Suezmax earnings were reduced by -- to $26,000 per day as a result of these factors.

During the quarter, one Suezmax and three Aframaxes joined our fleet, while one Aframax left the fleet. All were in-chartered ships. Notably, Teekay's total spot crude tanker fleet days increased in the quarter for the first time since the third quarter of 2004.

As mentioned earlier, we declared in-the-money options for a further two Suezmax newbuildings. The specification of these latest ships incorporates shuttle tanker features that give us optionality around their future use. And with these orders, our Suezmax newbuilding program stands at eight ships, the largest in the world, and in combination with Teekay's large Aframax fleet, this consolidates our position as the premier operator of medium-size tankers.

The newbuildings are scheduled to deliver during 2008 and 2009 in the lead-up to the 2010 IMO deadline, beyond which many countries are expected are expected to ban single-hull tankers.

With ship prices continuing to rise and major shipyards already nearly sold out through 2009, we believe that our large newbuilding program puts Teekay in a favorable position.

Finally, in our spot tanker segment, our clean product tanker fleet also enjoyed a good quarter, with our large and medium-sized ships earning an average of $26,200, and our product fleet increased further through our active in-charter strategy.

On slide number 7, we have illustrated our profitable in-charter strategy in the context of Aframax spot rates. The first point to note is that the spot market, as shown in the black line, has consistently outperformed the time charter markets, shown by the red and blue lines. And this has made our in-charter strategy very profitable.

The second point I want to highlight is the timing of Teekay's in-charter activity, indicated by the white X's along the horizontal axis. As shown in the box on the chart, Teekay's large in-chartered Aframax fleet remains significantly in the money, with an average in-charter rate of $21,500 a day compared to the current spot market of around $40,000 per day. I would also point out that during the past quarter, we in-chartered a number of ships at close to $30,000 a day, reflecting our positive view of spot tanker rates going forward.

Looking on slide 8, we see a series of positive dynamics driving the tanker markets today, and these factors are expected to continue to have impact during the second half of the year. Fundamental factors include the continued above-average growth in the world economies predicted by the IMF; a pickup in the pace of year-on-year oil demand growth, plus the usual large seasonal rise in oil demand from Q2 to Q4; OPEC maintaining high levels of production of ton-mile-intensive long-haul oil; surging imports in major industrializing countries, with both China and India showing more than 15% year-on-year growth in oil imports during the first half of the year; and average distances lengthening on freight routes for both crude and products.

Specific events affecting the market include disruptions to both crude production and oil refining operations in Nigeria and Venezuela, as well as the potential effect on oil markets of the situation in Iran and other parts of the Middle East. A key point is that despite recent growth, the world tanker fleet still lacks capacity to absorb the effects of external shocks, making rates spike whenever disruptions occur. And finally, the ever-growing discrimination against single-hull tankers is providing underlying support for tanker rates.

On slide 9, we show just how surprisingly strong Aframax freight rates are at the moment. Consider that during the first six months of this year, the combination of below-average oil demand growth and the 3% net increase in the tanker fleet point to something that should technically have led to a decline in the utilization of the world tanker fleet. Yet tanker rates for Q3 today are well ahead of the levels seen during the very strong tanker markets in both 2004 and 2005.

As you can see on the chart, we booked 50% of our Q3 Aframax revenue days at an average rate of approximately $35,000 a day, and this compares to Q3 last year, where we averaged less than $25,000 a day for the quarter.

We believe that the combination of market dynamics I described from the previous slide is driving actual tanker demand growth higher than meets the eye, and that is dampening the effect of physical tanker supply growth. In other words, we believe that today's high rates are the result of the effective utilization in the world tanker fleet being higher than the theoretical figure you would normally arrive at by analyzing market fundamentals.

We see market dynamics pointing to strong tanker rates again this winter, and for 2007, we see the market continuing to be finely balanced with firm, albeit volatile, rates.

I will now hand it over to Peter Evenson to discuss our financial results in more detail. Peter?

Thank you. We had a relatively strong second quarter. The reported net income was 20.4 million or $0.27 per share. This included a number of items that, on a net basis, had the effect of decreasing net income by 29.4 million or $0.39 per share. Without these items, which largely relate to unrealized foreign exchange losses, net income would have been 49.8 million or $0.66 per share for the quarter.

Looking at the operating results for each of our segments on slide 10 of the presentation, overall CFVO for the second quarter decreased to 120.7 million compared to 165.9 million in the second quarter of 2005. Our fixed-rate tanker segment generated 65.9 million in CFVO during the second quarter compared to 74.6 in the second quarter of 2005. This decrease was primarily due to the lower utilization of the shuttle tanker fleet due to maintenance of offshore oil facilities occurring earlier in the year than in the past. As Bjorn mentioned, some of this field maintenance has been delayed into Q3, and as a result, the CFVO in the second quarter came in higher than expected.

We expect the CFVO in the third quarter from the fixed-rate tanker segment to be approximately $62 million, which would be roughly $3 million higher than in the third quarter of 2005.

Our fixed-rate LNG segment generated 13.9 million in CFVO during the second quarter compared to 17.7 million in the second quarter of 2005. This decrease in cash flow was primarily due to one LNG carrier being off-hire during a scheduled drydocking, which was extended to complete certain unexpected repairs that were found during the drydock.

Net voyage revenues declined by 2.7 million due to this LNG vessel being off-hire for a total of 33 days. And vessel operating expenses increased by $1 million, representing the insurance deductible for the repair costs. The vessel resumed regular operations at the beginning of July.

We currently have nine LNG newbuildings scheduled to deliver during the fourth quarter of this year and early 2009, and all of which will commence service under long-term fixed-rate contracts upon delivery.

The contribution from our spot tanker segment decreased to 40.9 million compared to 73.6 million in the second 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, a decrease in spot tanker rates, partially offset by the delivery of newbuilding. Our spot Aframax fleet earned an average TCE rate of 29,200 per day in the second quarter, down from 34,500 per day in the same period last year.

Turning next to slide 11 and reviewing the remaining income statement figures in comparison to the second quarter of 2005, general and administrative expenses were 41.5 million compared to 40.2 million in the second quarter of 2005. This $1.3 million increase is not directly comparable because 2006 includes a $2.3 million expense for stock options as per our adoption of FASB 123. Excluding the stock option expense, G&A expenses declined slightly from the previous year.

We currently expect G&A expenses to run in the low $40 million range per quarter for the next few quarters of 2006, i.e., be flat, which includes an estimated stock option expense of approximately 2 million per quarter, as discussed.

During the second quarter of 2006, we incurred 2.6 million of restructuring costs primarily relating to the relocation of certain operational functions, which we discussed earlier this year. During the remainder of 2006, we expect to incur an additional $2 million of restructuring charges as we complete this reorganization.

Net interest expense decreased to 23.1 million in the second quarter from 24.9 million a year ago, primarily due to the reduction in interest expense from the repayment and refinancing debt over the past 12 months, the repurchase of $32 million of our bonds and the conversion of our exchangeable preferred units to equity in February 2006. This was partially offset by the expiry of certain of our more favorable interest rate swaps. We are protected from higher interest rates as a result of the swaps we entered into at lower interest rate levels.

We recognized an income tax expense of 7 million in this quarter, of which 6.9 million was related to unrealized foreign exchange gains. Foreign exchange loss of 21.8 million primarily results from the unrealized foreign exchange translation losses relating to the Company's euro-denominated debt.

Other items net of 4.3 million primarily includes income from our lock assets and a minority interest recovery due to unrealized foreign exchange losses, partially offset by $3 million loss from the expiry of options we held to purchase LNG carriers.

Turning to slide 12, we've presented our June 30 balance sheet and compared it to our March 31 balance sheet. Other assets have increased by $83 million, which was due primarily to the increase in the value of our interest rate swaps, which hedge our floating rate debt. Advances on newbuilding contracts has increased by 63 million from 224 million at March 31, primarily due to further advances made on our newbuilding. Our total liquidity at June 30 was about $1 billion, unchanged from March 31. Net of restricted cash, net debt to capitalization was 37% at the end of the quarter, unchanged from March 31.

Turning to slide 13, on June 12, our Board authorized a $150 million increase to the existing share repurchase program. From June 12 to August 1, we have repurchased 1.3 million shares for a total cost of roughly $54 million or approximately $41.60 per share. If the remaining share repurchase authorization of approximately 132 million is completed at an average price of $43.35 per share, we will have repurchased over 22.2 million shares or 27% of our outstanding shares since November 2004, when our first share repurchase was announced.

Looking at the third-quarter results, we have fixed approximately 50% of our spot voyage days at an average Aframax TCE rate of $35,000 per day. And current Aframax rates are averaging around 40,000 per day. On slide 14, we at updating our rule-of-thumb EPS guidance as our average in-charter rate has increased and our share count is declining due to our share repurchase program. Our updated guidance is a quarterly EPS increase of $0.06 for every 1000 Aframax TCE above 15,500 per day.

On slide 15, we look at our in-charter portfolio. While our in-charter costs may have gone up recently, we have a highly profitable in-charter portfolio of over 35 vessels, with in-charter rates which compare favorably to current spot rates at a time when we expect continued strong rates in the coming months.

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

Thanks, Peter. In conclusion, I believe that Teekay is in a sweet spot. Each of our business segments -- oil tankers, LNG carriers and offshore -- are in hot sectors. With our large, modern fleet, our considerable newbuilding order book, our strong balance sheet and our [MLTs], Teekay is well-positioned to grow even faster in the future.

Thank you for listing in this morning, and we will open it up to your questions.

(OPERATOR INSTRUCTIONS). Scott Burk, Bear, Stearns.

Got a couple questions. The shuttle tanker that you got on lease in the Gulf of Mexico -- would that be accounted for in your spot business, because it -- or would it still be in your shuttle tanker business?

That will remain in our shuttle segment.

So it would just be kind of a higher utilization of that segment?

Yes, you can say that, and also the rates are indicative of today's time charter rates, which are higher than last year.

Are there any other bidders out there? Do you anticipate getting any more deals like this for the hurricane season?

Well, I guess one of the issues is there isn't really a lot of spare shuttle tanker capacity. So it is not without some contortion that we free up tonnage like that. That's attractive to know that there is growing shuttle demand. So I wouldn't expect maybe a lot more of that, but if more comes along, we will try and help customers out.

And then one more industry-type question -- are you guys seeing any negative effect on the Caribbean Aframax trades from increased VLCC loadings out of Venezuela?

No, we are seeing Aframax rates pretty good in the Caribbean. They are pretty stable at the moment. The movement of oil from Venezuela to China, for example, we estimate to be about 150,000 barrels a day. There is talk of that doubling. And that will take some time before that occurs.

On the whole, for the tanker business, that would be very positive. And we estimate that 300,000 barrels a day of Venezuelan oil to China compared to if that all went to the U.S., that could increase tanker demand between 1 and 2%. So that is a positive effect overall.

Omar Nokta, Dahlman Rose.

You have really ramped up your focus in the services and shuttle business sectors. You're also ordering Suezmaxes and building up your LNG business as well. What does this mean for your Aframax? Do you see yourself maintaining that fleet the way it is today and perhaps growing everything else around it?

There is no focus away from Aframax. The Aframax fleet is a very important part of our business. We are opportunistic. It is a little easier to in-charter Aframaxes than it is to in-charter Suezmaxes. So it gives us -- there is more flexibility how we maintain and eventually hope we grow our Aframax fleet, whereas in the Suezmax market, we felt it was easier to go in through the investment group.

On the other hand, if we get any dip in asset prices, we certainly would expect to be investing in our Aframax segment. So that will continue to be a major part of our business. Aframax and Suezmax, of course, is -- in a way, there's some overlap there. We characterize that as a medium-sized segment and so we are building on the medium-sized segment.

And the other thing I think you eloquently summed up, the strategy -- but I guess the project business we've been growing has not been at the expense of our Aframax business. It has been in addition.

Got you. So with respect to Suezmaxes, do you see them becoming another workhorse of the industry like the Aframaxes?

On some routes, they're interchangeable. On other routes, there's a migration to bigger ships, as there would always be a drive to try to get economies of scale. Similarly, we are seeing some Panamax trades migrating to Aframax trades. So there is evolution, but we intend to obviously be a force in both Aframax and Suezmax.

Doug Mavrinac, Jefferies & Co.

Congratulations on the fantastic quarter. Just a quick question -- as far as rates go currently, is there one thing that you can pinpoint to as why you believe rates are so strong, or is it a culmination of multiple events that are responsible for the current strength in rates?

Well, certainly, the fundamentals are important. There is no spare capacity in the tanker market. And here we are in the middle of the summer, and rates are 40,000 a day for Aframaxes. It just goes to talk to both the fundamentals, but also these intangible factors. In a way, maybe it's got some elements of similarity to the oil market, where you can do all the math on what the oil market should be, but it turns out that prices and realities are very different.

And certainly distance factors, I don't think, are captured by the rule of thumb of converting oil demand to tanker demand, because trading patterns are changing. For example, right now, I think Angola is the biggest supplier to China and has overtaken the Middle East. Saudi Arabia used to be their biggest supplier; now it is Angola. But that's the kind of subtle shift in ton-miles that we are experiencing.

And then also on the shuttle tanker that you fixed on a short-term contract in the Gulf of Mexico, if I recall, you guys did something similar after we had a lot of the disruptions after the hurricanes last fall. Do you see any longer-term opportunities within that particular region where you could utilize your experience in that particular sector and take advantage of opportunities in the Gulf?

We see the Gulf of Mexico as one of several growth frontiers for the shuttle tanker business. So I would expect as they go further offshore and go into deeper water, shuttle tankers would definitely be a growing solution there, as it is one of several potential growth markets.

Jonathan Chappell, JPMorgan.

Just a follow-up to Doug's question which I had not planned on asking, but your shuttle tankers -- are they capable of trading in the U.S. flag market? Do you need re-flag, or do you need some type of easing of the Jones Act to trade in the Gulf?

Last year, the customer we helped out had to use our vessel under a waiver of the Jones Act. So the current shuttle fleet would not be eligible to permanently trade in the Gulf of Mexico. So it would involve having to become involved with Jones Act [tonnage].

Okay, so you'd need other waivers. As far as your time charter-in strategy, thanks for providing the detail on the last page of the slide show. I assume that is as of last week, July 28? And if so, that's about six more ships chartered in than just at the end of the second quarter. Obviously, it shows a little bit of bullishness on your part. What is the charter-in strategy going forward vis-a-vis secondhand ships or newbuilds?

Sorry, what is the in-charter strategy on secondhand newbuildings?

No, what is the in-charter strategy versus looking at --

Well, I guess we are clearly experiencing very high asset prices at this time. And so we have opted for a combination of forward ordering of newbuildings combined with in-charters because there's a bit of backwardation in the evaluation, and we've been able to get some slots both in China and Korea that we felt were attractive during slight dips in newbuilding prices. But what is interesting is the way prices continue to power ahead. So we feel very good about our newbuilding orders.

I think if you look at the pattern of in-charters, we in-chartered in the summer of 2003. We in-chartered in the summer of 2004. We didn't in-charter in '05, because we thought the charter markets had got ahead of themselves, and we were feeling maybe a little bit concerned about the tanker market.

Now everybody is being surprised, including us, on the upside and the strength of the market. And now we are backchartering in, signifying our positive view of the market. So clearly, the fact that we are back in at these rates speaks to our confidence in the market. But we will obviously be more active if we see a dip. If rates stay as high as they are, we will go from deal to deal.

And can I just confirm that this chart in the presentation is as of last week, or something since June 30, and that you have added six charter-in vessels since the end of the second quarter?

Yes.

And then one last one for Peter, just on the G&A guidance that you gave in your prepared remarks. Last year, there was a pretty big spike in the fourth quarter. I assume that had to do with bonuses and annual compensation. Are you accruing for bonuses now throughout the course of the year so the G&A should be much smoother as we move into the second half?

Yes, we are.

So no big spike in the fourth.

We don't expect that.

Philippe Lanier, Banc of America Securities.

A technical question as it relates to the LNG tankers coming in the fourth quarter and the next year. Could you detail for us and make it a little bit more clear, now that we are nearing that date, how it is going to affect your balance sheet transfer of debt to TGP? What should we expect there?

Well, because we consolidate the Teekay LNG Partners, there isn't much of an effect upon Teekay Shipping. And we are not going to raise any equity at Teekay LNG Partners in order to purchase these assets. So when the assets are purchased, you won't see any affect at Teekay Shipping Corporation.

Will you see any reimbursement for any of the interest expense that you have carried in the process?

Absolutely. There will be a cash -- well, you won't see it on an accounting basis -- there will be a cash transfer -- all the equity and interest on the equity that has been sent by Teekay Shipping Corporation during the pre-delivery part. There will be a cash transfer to reimburse Teekay Shipping Corporation for having warehoused those assets.

Fantastic. And then another question, and I apologize if this is too granular and you might not be able to answer it, but as it relates to Venezuela, there's been a pretty large refinery incident there, the Amuay refinery, which in our calculations could release as much as 200,000 barrels a day of crude onto the market for potentially six months. It has been a month gone now, or close to it. Have you seen any new crude hit the market? Do you have any sensitivity to that?

I think it blends together. It is difficult to follow specific crude. So I couldn't say that we notice that, but we are aware of it.

And then just one last question for you, Peter, and I understand if you are not really willing to release this, but as it relates to your time charter higher expense line, you've moved a lot of things in and out in the quarter. I am approximating something closer to 100 million in the third quarter versus this 95 you had this quarter. Am I close to target there? Or have some more things moved that I'm not aware of?

No, that is a good figure to use.

Thank you very much, and a great quarter.

Jordan Alliger, Deutsche Bank.

I didn't quite catch -- I thought you had mentioned what you said your in-charter rates were in the new ships this past quarter. I didn't quite catch it.

We indicated it was close to 30,000 a day, and you can see on the chart, on the slide, where time charter rates are. We have indicated to on- and three-year in-charter rates. And so you can assume we paid around the market.

And the next question is just more of a big-picture question. There's been a lot of talk, just in general, about sort of the distance factors and the favorable impacts and the potential impacts from, for instance, you had mentioned Angola to China and then Venezuela possibilities. And I guess my question -- is that lessening the importance of the Gulf states as drivers to the tanker supply/demand equation? For instance -- well, I will leave it at that for now.

Well, I think that what is interesting about it, talking macro, clearly OPEC is pumping a lot of oil. And they are going to maintain high oil production at these price levels. It is interesting also that their spare capacity has increased, which bodes well, because you are inevitably going to have some of the non-OPEC oil that is being projected every year not come through. You see what is happening in Nigeria right now -- it's having a short-term negative effect on Suezmax tanker rates because cargoes are being [post majeured].

And so, these are short-term effects. But Middle East OPEC remains in the background with spare capacity. And so we believe that that oil will potentially move further afield if Middle East oil is being displaced out of China by West Africa. Then that oil may go further afield. Of course, China is also seeing growing imports, so it's not necessarily displacing Middle East oil. The Angola stuff is growth as opposed to displacement.

So I would say OPEC is, if anything, is growing their capacity, I think. There's a potential for more tanker demand.

India -- do you know offhanded the main supplier of crude to India? Is it the Arabian Gulf?

It is the Middle East.

Ruairidh Stewart, Simmons & Company.

I have a couple of questions. You've given a lot of good insight on the macro so far. I was just wondering if I could push that and see what you thought the part being played in the current tanker market from storage and people using tanker for storage in terms of using that for arbitrage opportunities and maybe other strategic reasons.

I think there are two comments I want to make to that. One is that the anecdotal use of storage tankers by Iran appears to be a story that is consistent. We are estimating from information we have from the oil markets that about 10 supertankers [real seas] were used. They have started unloading those. They were taken into use due to short-term oil sales dynamics as opposed to anything strategic, we believe.

And so obviously it had a marginal beneficial effect on tanker demand. But it wasn't material. Others are saying the Saudis are doing the same. It is difficult to know because they have a large fleet that they control themselves.

The second point is that if you look at the broader use of tankers for storage, of course, the growing offshore market is expected to draw out a significant, meaningful number of tankers in the next several years, both for floating storage units and floating production. So that is worth thinking about in the broader context of storage.

I'm sorry, was your comment there that the Iranians are kind of unwinding that storage position?

Right.

And the main question I had was just -- we've seen a wide variance, I guess, in asset prices being paid both in terms of perhaps the secondhand market and particularly on the newbuild side. I just wonder with your recent additions that it looks like $81 million a copy, whether there was anything specifically different with those vessels or how you saw the value versus risk with perhaps other orders, which seem closer to $70 million. But Chinese yards there are perhaps a little greener than the Koreans?

We have four ships on order at China at prices that are in the low 70s per vessel. And I guess you have to distinguish between reported prices and fully built up-costs, which include pre-delivery interest and supervision and spares and provisions. So I guess Teekay did order four ships in China at very attractive prices on the same basis.

The ships we have just reported have some differences. They include a number of shuttle features, and again, are fully built-up costs. So the number isn't necessarily directly comparable to other reported orders. But we are very happy with both the price and delivery windows.

(OPERATOR INSTRUCTIONS). Justine Fisher, Goldman Sachs.

Most of my questions have been answered. But I wanted to ask you about synthetic FFAs. I know that one of your competitors started entering into those contracts. And I guess it's a way to sort of use the paper market to eliminate the fluctuations in the stock market, if it works out. And I know that you guys have some FFAs for your Suezmaxes that have affected the rates that you report. But just more generally, would you guys be interested in those types of contracts?

We have hedged, if you will, by diversifying our business stream into a number of profitable fixed-rate businesses. So we actually are very happy with the spot exposure, and we are wanting the spot exposure. We have used some derivatives, as you have seen. And that is around -- in fact, the hedge that is dragging down our Suezmax numbers is a physical hedge to contracts that is out of the money but which was paired with the in-charter at very favorable rates -- physical vessels to cover the transportation. But of course, those ships are generating less TCEs. But they also have a very low breakeven.

We don't have a lot of synthetic hedges. We do occasionally use it on the margin. But we are looking in our spot segment to have a spot exposure, and in our other segments, we have fixed rates and therefore it will hedge our income.

Terese Fabian, Sidoti.

I don't know whether you can talk about it with your upcoming registration statement, but you reported that you had a couple of extensions and renewal on offshore contracts. Can you, in general, say what you are seeing in the offshore energy business these days, in terms of competitors and in terms of your own activity?

Again, as you did say yourself, I want to not probably go into too much detail here in light of our registration process. There's generally a very firm market in the offshore sector, driven by high demand and confined availability of resources, both vessels and people and equipment. And I guess the higher oil prices are certainly driving that. So we would say, we obviously are looking to have additional sourcing and funding for our growth in the offshore sector; hence, the MLT. So we feel positive about that opportunity.

On a macro level, maybe, more macro level that affects your particular business, are you seeing operations developing in parts of the world where you are not now located?

Well, we are pretty much located in every area of the tanker business -- the offshore business, we have operations at this time in Australia, Asia, Europe and South America. Certainly West Africa is a large growth market for offshore. But it is pretty much every region, I would say, is looking -- there's a lot of oil being sought and a lot of grilling going on. And hence, 12, 24 months down the road, there is going to be more production as well. Sorry I couldn't be more helpful.

(OPERATOR INSTRUCTIONS). At this time, we have no other questions standing by. I'd like to turn the conference back to Mr. Moller for any additional statements or closing comments.

Well, thank you very much for participating. And enjoy the rest of your summer. Thank you. Have a good day.

Thank you, everyone, for your participation on today's conference call. You may disconnect at this time.