Teekay Corp Ltd (TK) 2007 Q1 法說會逐字稿

Welcome to Teekay Shipping Corporation's first quarter 2007 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.

Now, for opening remarks and introductions, I would like to turn the call over to Mr. Bjorn Moller, Teekay's President and CEO and Mr. Vince Lok, Teekay's CFO. Please go ahead.

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 2007 earnings presentation. Mr. Moller and Mr. Lok 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 the purpose of the Safe Harbor provision under the 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, 2006 on file with the SEC.

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

Thank you Dave and good morning, ladies and gentlemen. Thank you for joining us on today's call. As the Operator mentioned, I am joined this morning by our Chief Financial Officer, Vince Lok; and also by our Chief Strategy Officer, Peter Evensen.

It's only been a couple of months since we reported to you on your year-end results and I realize that most of you have been through a lot of earnings calls these past few weeks, so we'll keep today's formal presentation relatively brief, so we can move on to the Q&A session.

Beginning with slide number 3, there were three major highlights in the first quarter; good performance across all of our business segments resulted in net income on an operating basis of $83.8 million or $1.12 per share and produced strong cash flow from vessel operations or CVFO of $180.5 million, two-thirds of which came from our fixed-rate businesses.

In April we announced a planned acquisition of 50% of OMI Corporation for $1.1 billion. This will add one of the world's premier Suezmax franchises to our fleet, as well as increase our presence in the medium-sized product tanker market. And we announced plans to create a new publicly-listed entity, Teekay Tankers, for our conventional spot tanker business. We expect to launch Teekay Tankers during the second half of 2007.

We're excited about the OMI and Teekay Tanker transactions. They will allow us to immediately strengthen our conventional tanker business through the addition of physical capacity and software; and they create a foundation for long-term growth, similar to what Teekay LNG and Teekay Offshore have done for our other business segments.

Turning to slide number 4, we show the key developments in our offshore segment which comprises our shuttle, FPSO and FSO fleets. CFVO in this segment was $67 million in the quarter, up significantly from one year ago due to the addition of Teekay Petrojarl and higher than in previous quarter due to the consolidation of five 50%-owned shuttle tankers.

At the end of the quarter, we had two tankers undergoing conversion to shuttle trade and the previously announced long-term contracts in Brazil. One of these vessels subsequently commenced its charter in April and the other vessel is expected to deliver by late June.

We had one FSO being upgraded and this vessel is expected back in service this month, commencing a new 7-year storage contract in Australia. These three vessels will all be offered to TOO, Teekay Offshore Partners, within a year of delivery.

Our involvement with Teekay Petrojarl continues on a positive path. The FPSO fleet is operating satisfactorily. The conversion of the Siri FPSO is progressing according to schedule and we are pleased that Teekay Petrojarl was able to announce the hiring of Peter Lytzen as its new CEO. Peter comes from AP Moller-Maersk, is a leader in the FPSO business with over 20 years of offshore experience and I'm sure he'll be a great addition to our team.

Turning to slide number 5 and looking at our liquefied gas segment; CFVO increased to $25.8 million due to the delivery of two RasGas II LNG carriers. These two vessels, the second and third in the series; commenced their 20-year fixed-rate charters. The delivery of these vessels marks the successful end to the construction phase of this major project; Teekay's first organically grown LNG project, with the ships all delivered ahead of schedule and on budget.

Late in the quarter, an LNG carrier in our fleet experienced an operational problem with its engine boiler. The vessel was taken out of service for repairs which are ongoing, and the vessel is expected to be off-hire for approximately two months. Because of existing insurance agreements between Teekay and Teekay LNG, the financial impact on Teekay's results is expected to be approximately $5 million, while the impact on Teekay LNG's results is expected to be less than $1 million.

Turning to the developments in our conventional tanker segment on slide 6; there were no notable developments in our fixed-rate tanker segment which performed in line with expectations in the quarter, generating CFVO of $24 million.

CFVO in our spot tanker segment rose from the prior quarter to $63.7 million due to a strong tanker market with Suezmax and Aframax tankers benefiting from rising non-OPEC oil production. Aframax rates strengthened further from the previous quarter with our Aframax fleet averaging $36,900 a day. This year we saw a relatively weaker start to the year in the Indo-Pacific market, with our Aframaxes earning only $31,800 per day in this region, compared to earnings of $41,200 per day in our Atlantic Aframax fleet.

On a pure spot basis, excluding the effect of hedges mentioned in the footnote on the table on page 4 of our earnings release, our Suezmax fleet earned $45,800 a day; good results but not as good as our future colleagues at OMI.

The second quarter is off to a very good start with rates well ahead of where they were this time last year. To date, we've booked 50% of our Q2 spot Aframax voyage days at an average rate of $35,000 a day.

The key changes to our spot fleet in the quarter were the delivery of two LR 2 product tanker new buildings in Q1, and the subsequent delivery of the fourth and final ship of this series earlier this week. The combination of the ships we own, in-charter and manage for third parties has elevated us to the second-largest operator in the LR 2 product tanker market.

It is worth noting that LR 2s can readily be switched into Aframax crude oil trades whenever rate differentials make it worthwhile to do so.

During the second quarter, we completed the sale and leaseback of two of our 1993/1994 build double hull Aframax tankers. This sale allows us to [layer] residual risk, while continuing to control the vessels commercially and technically for a number of years into the future.

On slide 7, we briefly recap the OMI transaction. Teekay and TORM have agreed to buy OMI for $2.2 billion, to be split roughly 50-50. The tender offer for OMI shares is expected to close May 25th. The addition of OMI's 20 Suezmaxes consolidates our position as the market leader in the medium-sized crude oil tanker space. It also adds 8 vessels to our growing product tanker fleet. The acquisition is expected to produce substantial synergies with our existing business, and should provide 10% accretion to our earnings from 2008.

Charter rates for the majority of the fleet we are acquiring are locked in on average of two years, through a combination of physical contracts and derivatives transactions. However, the OMI fleet offers additional upside potential through profit sharing on some of the [out] charters, spot exposure on three vessels, as well as in-the-money purchase options on some in-charter tonnage. And OMI's fleet supports the launch of Teekay Tankers.

On the OMI acquisition conference call last month, we mentioned the strong fundamentals in the Suezmax market. On slide number 8, we provide you with a little more color on what's driving demand and supply in this dynamic market; illustrating some of the changing trade routes.

Overall, Suezmax demand is growing due to a combination of increasing cargo volumes, the emergence of new trades, and longer transportation distances. Growing export volumes from key producers in West Africa, the former Soviet Union and North Africa and growing import volumes in key countries like the US, India and China; are resulting in Suezmaxes being used on new long-haul routes. Suezmaxes are also complimenting Aframaxes on certain trade routes, for example on transatlantic trades.

A good example of the effect of longer transportation distances is the growing imports of West African crudes by major Asian economies; in particular, China. For each 1 million barrel-per-day of imports sourced from West Africa, which is a 30-day haul; instead of the Middle East, a 19-day haul; the demand for Suezmaxes increases by 11 full-time vessels.

Looking at the Suezmax tanker supply numbers at the bottom of the slide, with 126 ships on order through 2010, the world Suezmax fleet is expected to grow; but we believe the growth rate will be in line with the increased demand. Year to date, we have already seen nearly 4% or 11 vessels in the Suezmax fleet being sold for other uses. If you assume that only the 61 non-double hull Suezmaxes will be leaving the fleet by 2010, through either scrapping or conversion for other uses; then the 126 ship ordered through 2010 would only result in annual net growth of just over 5%. In comparison, Suezmax tanker demand has been growing at an average of 7% over the past three years, according to MSI.

These positive fundamentals have allowed Suezmax charter rates to outperform other vessel sizes in the last few years. We expect the picture to remain positive going forward, which is also why we have 10 new buildings on order in this segment.

I'll now hand it over to you Vince, to discuss the financials.

Thanks, Bjorn. Overall, we had another strong quarter with slightly better than expected financial results. Excluding the unrealized foreign exchange-related items in Appendix A of our earnings release, net income for the first quarter was $83.7 million or $1.12 per share; up from $1.06 per share in the previous quarter.

Looking at our operating results on slide 10, we generated $180 million of cash flow from vessel operations or CFVO, during the first quarter. This is up 12% from the $161 million generated in the previous quarter, as spot tanker rates strengthened further and we took delivery of two new building product tankers and two new building LNG carriers during the quarter.

In the first quarter, approximately 65% of our CFVO came from our fixed-rate businesses; compared to 60% in the previous quarter.

Moving into our segments and results and comparing them to the previous quarter; the offshore segment generated CFVO of $67 million, up about $6 million from the last quarter. This increase primarily reflects the consolidation of five 50%-owned shuttle tankers for a full quarter in Q1, which were equity accounted for prior to December 1st 2006.

As you have seen in the past, a portion of our shuttle tanker business has some seasonality, which is mainly due to oil-field maintenance activity in the North Sea. This usually results in higher shuttle utilization in the winter months and lower utilization in the spring and summer months. As a result, we have scheduled most of our planned shuttle tanker fleet dry dockings to be completed during the next couple of quarters; with six vessels in the second quarter and three vessels scheduled in the third quarter.

However, this will be partially offset with the addition of one shuttle tanker which commenced a 13-year fixed-rate charter in April, one FSO which commenced a 3-year fixed-rate charter in May, and another FSO which returns to service in May after completing a scheduled upgrade. As a result, we expect our offshore segment CFVO to be in the $57 to $60 million range in the second quarter.

There were no significant changes to the fixed-rate tanker segment during the quarter. The CFVO for this segment declined slightly from the prior quarter, due to few calendar days in the first quarter and one small one-time adjustment that increased the fourth quarter revenues. In the second quarter, we expect to see CFVO from this segment to be roughly in line with the first quarter.

The CFVO from the liquefied gas segment; which includes our LNG and LPG carriers, increased by $6 million from the previous quarter, primarily due to the delivery of the 2 remaining RasGas II LNG carriers during the first quarter. We will begin to see the full benefit of the three RasGas II vessels starting in the second quarter; however, this will be partially offset by the roughly 50 to 60 days of expected off-hire on the LNG carrier the Madrid Spirit.

The net effect of this is that we expect to see CVFO from this segment to be approximately $26 million in the second quarter and $30 to $31 million in the third quarter, when the Madrid Spirit is expected to return to [solid] service.

As a reminder, the Madrid Spirit offer has only a limited financial impact to Teekay LNG partners, since Teekay provides Teekay LNG with off-hire insurance coverage. As a result, the net exposure to Teekay LNG is only 7 days of off-hire, of which 3 days were incurred in the first quarter; and four days will be incurred in the second quarter. We currently have another 6 LNG and 3LPG new buildings under construction; which are scheduled to deliver during 2008 and 2009.

The CFVO contribution from our spot tanker segment, increased by $9 million over the previous quarter primarily due to the increase in spot tanker rates. Our spot Aframax fleet earned an average TCE rate of $36,900 per day in the first quarter; which is up from the $34,800 per day earned in the fourth quarter of 2006.

Turning next to slide 11 and reviewing the remaining income statement figures in comparison to the previous quarter; G&A expenses were $58.8 million, compared to $56.4 million in the fourth quarter of 2006. This increase was primarily due to an increase in expense associated with our restricted stock units as a result of the increase in our share price during the first quarter, and the costs associated with Teekay Offshore Partners. We currently expect our G&A expenses to be in the high $50 million range in the second quarter.

We did not have any vessel sales during the first quarter; however, one of our older shuttle tankers, the Nordic Trim, will be sold in the second quarter; which will result in a gain of approximately $10 million.

Net interest expense increased to $44.2 million in the first quarter, up from $41.3 million in last quarter, primarily due to new building deliveries.

We recognized an income tax recovery of $4 million this quarter. Excluding the effect of foreign exchange gains, the net income tax recovered was $7 million in the first quarter, and we are estimating a tax recovery of about $5 million in the second quarter.

Equity income from joint ventures was a loss of $1.6 million in this quarter, compared to an income of $3.7 million in the fourth quarter. This decrease was primarily the result of the consolidations of five 50%-owned shuttle tankers that I mentioned earlier, which were previously accounted for under the equity method.

Minority interest expense in the first quarter $5.6 million and related primarily to the minority interest in the results of Teekay Offshore Partners, Petrojarl, and Teekay LNG Partners. Excluding the foreign exchange impact, minority interest expense in the first quarter was $7.1 million. We expect the minority interest expense will continue to be roughly in the $6 to $7 million range next quarter, excluding the effect of any foreign exchange.

The largest component in other items net of $4.2 million is income from our VOC assets.

Turning next to slide 12, we have presented the March 31st balance sheet and compared it to the December 31st balance sheet. Restricted cash increased by $87 million from the previous quarter which was primarily due to the funding of the restricted cash deposits that would be used to pay the lease payments on the two RasGas II vessels delivered in the first quarter.

Other assets increased by $226 million from the previous quarter, which is primarily due to our purchase of small interest in OMI in the quarter, the advances towards the 40% interest in the RasGas III vessels which are currently under construction, and an increase in vessels held for sale.

In the second quarter, we sold and leased back for a period of five years, two of our older Aframax tankers. The $25 million gain from this sale will be amortized over the 5-year lease period.

Vessels and equipment increased by $380 million, primarily due to the delivery of two new building LNG carriers and two new building product tankers, during the first quarter.

Net debt, including the current portion; increased by $432 million, primarily due to the delivery of two new building LNG carriers and capital leases and the draw down of debt facility used to finance new building construction payments and additional restricted cash deposits.

Included in other long-term liabilities is approximately $388 million of in-process revenue contracts. This represents our 65% share of the negative value in we have currently assigned Petrojarl's existing charter contracts, which are presently out of the money.

Our consolidated liquidity as of March 31st was $2 billion; of which $1.1 billion is at the Teekay parent level, and the remainder is in the two MLPs and Petrojarl. In addition, we have secured a new $700 million debt facility to fund the acquisition of OMI. So our liquidity position will remain strong, even after the acquisition.

Net of restricted cash or net debt to capitalization, was 51.5% at March 31st; an increase from 47.5% as of December 31st; reflecting the increase in net debt, as explained earlier.

We currently have $98 million remaining under our current share repurchase authorization. As a result of the pending OMI acquisition, and the capital requirements of other attractive growth opportunities, we do not expect to be repurchasing any of our shares in the near term.

Looking forward to the results in the second quarter of 2007, we have booked approximately 50% of our spot voyage days at an average Aframax TCE rate of $35,000 per day. On slide 13, our rule of thumb EPS guidance is a quarterly EPS of $0.06 for every $1,000 per day in Aframax TCE above our net income break even of about $16,000 per day.

However, for the second quarter, our net income breakeven may be slightly higher than the $16,000 per day, given the large number of dry dockings scheduled for the shuttle tanker fleet in the quarter.

Since the OMI acquisition is likely to close near the end of the second quarter, it will have a very minimal impact on our second quarter results. As we indicated earlier, we expect the OMI acquisition to be accretive to our earnings by approximately 10% in 2008, based on a Suezmax TCE rate of $45,000 per day.

I will now turn it over to Bjorn to conclude.

Thank you, Vince. I'd like to conclude with slide number 14, and provide our perspective on the tanker market and give you the context for the OMI transaction and the planned carve out of Teekay Tankers.

In late 2006, we heard quite a few comments and concerns about the outlook for the market. We thought it would be interesting to compare these pre-2007 concerns with the actual or now likely outcomes, as we see them today. And I'll quickly run through each of the sections on the slide starting with oil demand.

The global economy was expected to moderate this year, but this has been upgraded due to higher growth in key economies. Also, higher oil prices were expected to depress demand, but here the weakening dollar has offset increases in energy prices for most of the world. The IEA is therefore still expecting strong oil demand growth of 1.8% this year.

Tanker demand was predicted to experience lower ton mile intensity, due to high non-OPEC oil growth and a decline in call on OPEC oil. Now, delayed non-OPEC start up and large stock draws in the first quarter, have set the stage for an increased call on OPEC oil to drive tanker demand up by some 5% in the coming winter from where it is today.

Tanker supply was expected to grow by a net of 6 to 7%. However, we've seen a surprisingly large numbers of tankers leaving the active trading fleet in scrapping or conversion projects. And four months into the year, the size of the world fleet is only up by 1%. As a result, not only have we not seen a deterioration in freight rates; tight fundamentals have caused Aframax rates year-to-date to increase by 22% from last year. And today, there is essentially no spare capacity in the world fleet to deal with any of the trading disruptions that almost inevitably come along; be they hurricanes, strikes or political upheaval.

Looking to the medium term, increased ship-building capacity was expected to lead to decline in asset values a few years down the road. In fact, the opposite is now happening. Ordering of tankers, offshore vessels and large container ships is continuing. But the big story is the huge number of orders being placed for drybulk ships in response to record-high freight rates.

New building prices for king-sized bulk carriers are up by 25% this year. And with more than 125 of these large ships ordered year to date, this activity is now absorbing slots in 2010 and beyond, that were originally allocated to tanker construction. Add to this, the weak US dollar and rising steal prices; and we see continued upward pressure on ship values.

We are also seeing a number of positive demand factors in the tanker market. Overall, we believe that higher tanker rates and high asset values are likely to continue over the medium term.

Thank you for listening this morning and Vince, Peter and I are now ready to take your questions.

Thank you. [Operator Instructions]. Your first question comes from the Jonathan Chappell, JPMorgan. Please go ahead.

Thank you. Good morning. Bjorn, a couple of questions on the Suezmax fleet; the first thing-- I know you can't talk a lot about what's going on with OMI, but has there been any development with the people aspect of OMI? You mentioned how their Suezmaxes have historically done better than the market. And we figure that if you brought over the OMI chartering desk, it may help bring your Suezmax rates up longer term.

Well, we certainly hope that will be the case. We are in the active stages of planning what's going to happen after we close the sender offer and take over the company, together with TORM. So we don't have any concrete news we want to share; but certainly we bought a business, not ships. So I think that's really the message I can give you.

Okay. And then the footnote that you typically have in your table on the Suezmaxes; the actual rate is always higher than the reported rate. And I think some of that has to do with the FFAs. Are you looking at revisiting maybe your FFA strategy? Does it really provide any market intelligence that's offsetting kind of the financial impact it seems to be having?

This particular issue that we keep reporting on every quarter is really linked to one very specific transaction that was entered into in 2003. And the market was lower at the time. Our customer wanted to enter into a contract with us at a fixed rate. So we in-chartered tonnage and we also sold that freight to the customer and covered it up in the FFA market. So we actually are making a profit on the transaction; but of course the nominal number that the ships are earning is well below the market. And that's why we always clarify that. So really, what we give you is-- when we adjust it is to give you the pure spot performance on the Suezmax fleet.

So that's historical. As far as the FFA strategy, FFA is going to be of increasing importance and increasing interest, I think, in the tanker industry and we certainly plan to be active along the way. And we-- I think OMI has a very successful strategy in that as well. So that is likely to be a more active feature along the way for us.

When does that contract with the customer expire?

I think it ends in 2008-- the old contract?

Yes, the one for 2003.

2008, if I'm not mistaken.

Okay, and then just one last quick one for Peter; the RasGas II vessels were delivered early which has helped Teekay LNG's results. Any update on the RasGas III vessels? Are the shipyards able to push those out a little bit earlier than expected or are they still on plan?

No. They're still on plan and they're being built at Samsung and we don't have any issues with those.

Okay. Thanks, Bjorn and Peter.

Thank you. Your next question comes from Urs Dur, Lazard Capital Markets. Please go ahead.

Hi guys. Congratulations; good quarter and better than I expected so it's tremendous what's happening with the Aframaxes being sustained this well. But on the product tankers, sort of a broad question; you see the high crude inventories in the United States and the trouble with gas inventories. How is this affecting product tanker demand into the United States? Is the bearing further growth in ton-mile demand for product tankers?

Absolutely. That's a big feature of the product tanker market. We're seeing the product tanker market is expected to grow by 6-7% annually and that's obviously quite a bit stronger than the crude oil growth. We do have a lot of traffic; transatlantic now, because of the-- so it's a combination of growing demand, bottlenecking in refineries in the US, as well as some of the inefficiencies of different grades and so on. So this is really a growth story for the product tanker business.

Would you say-- and you may not have a view on this, but would you say it's reasonable to assume that given the gas inventory situation in the United States, that generally strong rates that the product tankers are achieving today should be maintained through the summer?

Well, I think the windows will open and close as inventory adjustments-- but the fact that inventories are this low, coming into the driving season; it should bode quite well I would say, for the summer market.

Yes. It's something we've never seen, right?

That's interesting to watch, yes.

Yes. I heard-- I don't know if I heard this correctly, Vince-- maybe you can walk me through on the share repurchase program; did you say you don't plan to repurchase any in the near future? And what's the-- any further comments on the repurchase program?

No. As you know, we have $98 million left under the current authorization. And because of the OMI acquisition and the fact that we still see a lot of attractive growth opportunities, I'd say for the next few quarters we won't likely be buying back any further shares.

Okay.

With the planned IPO of Teekay Tankers and any future drop downs of assets in MLPs; that would provide us additional capital to continue with that program.

Okay, very good. I just wanted to make sure I heard that correctly. So it changes some assumptions and that's great. Thank you. One other question for you; you mentioned other income, I know this is a bit small piece here; but how do we look at that going forward? What assets are generating that line item?

These are the [DOC] assets on our shuttle tankers that are generating roughly $3 million a quarter of cash flow.

Okay. So we should sort of look at that number and assume that there's going to be something there going forward? It's not a one-time item?

That's correct. It's an ongoing--

Okay, that's cool. Very good, thanks and that's it for me. Thank you very much. Congratulations and very good results.

Thank you, Urs.

Thank you. Your next question comes from Daniel Burke, Johnson Rice. Please go ahead.

Good morning, all. Bjorn, you offered some more positive commentary on the tanker market. One thing that I noticed looking at your Aframax average spot rates is that they've actually been pretty consistent for the last four quarters or so and actually into Q2 '07. Do you think that is actually happenstance or is demand becoming more ratable on a yearly basis?

I think it's a bit early to conclude that there is a conference rate on the Aframax, but I think it's very encouraging that there seems to be a [floor] of $35,000. I mean, who would have thought that a few years ago? So I think that we're seeing the ability of the market to spike up to sort of $60-$80,000 a day almost overnight. So I think it illustrates really that we are dealing with effectively a very tight market and so all the factors around single-hull discrimination and subtle changes in trading routes; these factors are obviously supporting the rates. And it's difficult to document and to calculate exactly. But we are experiencing it in the market.

So I think it's an interesting observation you make, but I think the positive is that that sort of appears to be a floor at the moment.

Great, thanks. And then just one other; most of the contracts on the shuttle side and on the LNG side have been with the larger oil companies and the NOCs. The Skaugen deal announced a couple of quarters back is a bit of a departure from that model, being struck with another ship owner; maybe there are limits to what you can say, but could you address your interest in the prospects for additional transactions along the lines of the Skaugen deal as well as how you view the risk when the counterparty is a ship owner instead of an NOC?

I think that's a good question. We actually look and see what is the profitability of all of our customers and we risk adjust it based on the credit side. But I think what we're finding is that-- especially as we look at some of our floating production projects and as we move our shuttle franchise around the world, we're going to have a greater customer mix going forward. But the advantage that Teekay has; whether it's in the MLPs or as an operating unit, is that if we ever did get into trouble, we could quickly reemploy those ships because we have a system.

So I think we like that part of it. But we're always keying to see what the credit quality is of our customers. But we're very happy with the franchise as it relates to Skaugen. Skaugen is the leader in the ethylene trade and we like the ethylene market going forward. So it isn't just a question of who the counterparty is; it's also knowing what the prospects are for that particular industry.

I see, thanks for the comments.

Thank you. [Operator Instructions]. Your next question comes from Justine Fisher, Goldman Sachs. Please go ahead.

Good morning.

Good morning.

The first question that I have is just one about logistics. I know that you can't answer, but it's with respect to the decision about what is going to happen to OMI's bonds-- I'm not asking what's going to happen, but I'm asking when we can expect to find out. Is that going to be the same day that the tender offer closes or what would the timing be on that for us to look out for?

No. That'll be after the tender offer closes and the consummation. The purchase by Teekay and TORM of OMI doesn't automatically trigger the repayment of the bond. So as I said on the last call, this is a decision that'll be taken after we formally purchase the company.

So it could take weeks or months to kind of make that decision as far as the bond?

Yes. It'll happen after the purchase.

Okay. And then the only other question that I had is about the comments that Bjorn made about higher scrapping conversion. And I think a lot of people in the market were saying -- well, there's going to be increased scrapping and increased conversion as we get closer to the 2010 IMO phase-out deadline. But it's interesting that it's happening a lot earlier. I think people thought it would start happening in maybe late '08 or 2009; but the fact that it's starting to happen earlier in 2007 at least to me, is interesting. And I was wondering if you guys could comment as to why you think we're seeing it happen so much earlier than the actual phase-out date.

If you look down the list of ships that have been involved in various phase outs this year, it's a significant number. I think it's around 30 vessels. And a number of those; Frontline for example, took out a bunch of Suezmax tankers, I think five ships that had about 8 to 9 years remaining trading life tankers and converted them to heavy-lift vessels. Apart from those, the typical amount of remaining regulatory life of the ships leaving the fleet is about sort of 1 to 5 years. So that indicates that people are pulling ships out significantly before the deadline. And that's driven by the fact that offshore companies will pay relatively high prices; significantly above scrap prices which are also high, in order to get hold of these hulls.

So obviously it's supply and demand at work.

Yes, but we also see that tankers have an alternative use and so when we talk about deletions from the fleet, we aren't talking about scrapping. We're talking about tankers having found a higher value in an alternative use. And as Bjorn said, it has the effect of scrapping; but actually it's enhancing the asset values of the fleet because people realize they have a greater alternative use.

Alright. So I guess it seems to be that previously I guess before the increase in conversion from tankers to offshore; everyone was saying-- well, it depends on where scrap steel prices are and then it's just a matter of can you make more money operating your ship as a tanker versus scrapping it. And now it's not only that decision calculus which still comes into play; but it's also can I make more money converting it to offshore. So it's the strength in offshore that's helping to drive that?

And let me add that a handful of VLCCs are either already being converted or committed for conversion to drybulk because of the strong tanker market. So I think that's a pretty interesting development, as well.

So would you guys still expect the rate of scrapping to increase from '07 to '09 or would you expect it to be more of a stable curve because of the amount that offshore may take out of the fleet before '09?

I think some of the ships that are being deleted now are probably within a year or two of their scrapping; so you are going to eat in a little bit to the scrapping, but we don't really mind why the ships are leaving; it's all a matter of them leaving. And I think the net effect is that most ships will be leaving than are mandated to be leaving. So we are seeing --the net growth is much less of an issue than maybe people thought.

Great. Thanks very much.

Thank you. Your next question comes from Omar Nokta of Dahlman Rose. Please go ahead.

Hi, good morning guys. I just have a question regarding the Petrojarl assets and the possibility of them going into Teekay Offshore. Is there anything currently that holds you back from being able to do that, considering you only have about a 64-65% stake?

Yes. Right now they could be sold. But if Teekay Offshore buys them it's just like a third party buying them. But if we purchase 100% of Teekay Petrojarl, then the qualifying contracts would mean that those ships have to be, or production assets have to be offered to Teekay Offshore, if they have a contract that's more than 3 years.

But we fully plan that any new assets that qualify that come out of the Teekay Petrojarl system will definitely be offered to Teekay Offshore. And I think that's the more exciting part.

Right. Have you at all been in discussions with [Prosace] about their position, or are they still-- are they still pretty quiet about it?

I don't think we wish to comment on any of those discussions.

Understood. Thank you very much.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Moller for closing remarks.

Thank you very much. I think we managed to do it a little faster than in other quarters; especially when this time we had a Q&A session. So thank you very much for participating and we look forward to talking to you next quarter. Have a good day.

Ladies and gentlemen, this concludes the conference call for today. You may now disconnect your line and have a great day.