Teekay Corp Ltd (TK) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Teekay Corporation's 2nd Quarter 2007 Earning Release Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. At that time, if you have questions, participants will be asked to press *1 to register. For operator assistance during the call, please press *0 on your touchtone phone. As a reminder, this call is being recorded.

Now, for opening remarks and introduction, I would like to turn the call over to Mr. Bjorn Moller, Teekay's President and Chief Executive Officer. 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'll find a copy of the 2nd Quarter 2007 Earnings Release Presentation. Mr. Moller and Mr. Lok will review this presentation during today's conference call.

I will now read the forward-looking statement.

Please allow me to remind you that various remarks we will make about future expectations, plans and prospects for the Company and the shipping industry constitute forward-looking statements for the purposes 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 the result of various important factors -- including those discussed in our most recent Annual Report on Form 20F, 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. Thanks so much for joining us on today's call.

As usual, I'm joined this morning by our Chief Financial Officer, Vince Lok -- and for the q-and-a session, we also have our Chief Strategy Officer, Peter Evensen, with us here today.

I'm pleased to report to you on our 2nd quarter results -- beginning with the highlights shown on Slide Number 3. It was another good quarter in each of our business segments, resulting in net income on an operating basis of 67.6 million, or $0.90 per share.

We generated strong cash flow from vessel operations of 165.2 million, with more than 2/3 coming from our fixed-rate businesses.

A consortium in which we hold a 1/3 stake recently signed a letter-of-intent to build and charter 4 LNG carriers to Angola for 20 years. We ordered 2 additional Aframax Shuttle Tanker new buildings, and we completed the acquisition of 50% of OMI Corporation for $1.1 billion. With our recent growth, our fleet -- including $3.4 billion worth of new buildings that are currently on order -- increased from 160 vessels on March 31st to 182 vessels on July 31st.

Reviewing our business segments next, on Slide Number 4, we show the key developments in our offshore segment. The big story remains the huge growth taking place in the offshore industry, driven by record oil prices, and increasing energy nationalism in key oil-producing nations. And this continues to create strong demand for FPSO, FSO and shuttle tanker services.

In response to these market dynamics, we emphasize in the [money options] to build an additional pair of Aframax shuttle tankers, at a total cost of $245 million. The ships are scheduled for delivery in 2011, and bring our shuttle tanker order book to 4 vessels.

As usual, Q2 marked the beginning of the North Sea Oilfield maintenance season -- which traditionally leads to reduced shuttle tanker demand. This year we were able to maintain relatively high shuttle utilization in Q2, while temporarily employing tonnage in the Eastern Canada Shuttle trade, and by concentrating periodic dry-dockings during this period.

In April and July, respectively, we completed the conversion of 2 remaining shuttle tankers for Brazil. In Q2, our latest converted floating storage vessel or FSO commenced its 3-year fixed-rate charter in the North Sea, at a daily rate of $70,000. We recorded a $12 million gain from the sale of an older shuttle tanker, and Peter Lytzen took up his position as Teekay Petrojarl's new CEO on August 1st. And with over 20 years' of offshore experience, Peter will further strengthen our FPSO team.

Turning to Slide Number 5 and our Liquefied Gas Segment. For the past year, the pace of new long-term LNG shipping contracts has been slow, due to delayed developments of key LNG projects. This hiatus appears to have now ended, with new projects being awarded in recent months.

I am pleased to report that last month, Teekay in partnership with NYK and Mitsui & Company signed letter of intent covering all 160,000 cubic meter LNG carriers for 20-year charters, to the Angola LNG project. A joint venture between subsidiaries of Chevron, [Sun Angol], BP and Total.

This project represents Teekay's first entry into West African LNG, which is expected to be a key growth market. Final project award is subject to a number of conditions by September. And Teekay's share of this project will be offered to Teekay LNG Partners. We believe that the outlook for future demand for LNG shipping remains strong.

Turning to the developments in our conventional tanker segment on Slide 6, we completed the OMI acquisition in June, and the integration is progressing as planned, with key OMI personnel having been signed up.

The combination of OMI's 13 Suezmax tankers, and the 7 third-party ships in the Gemini Pool -- with Teekay's existing spots [thru Suezmax] vessels, our 10-ship order book, creates the industry's premiere Suezmax franchise. The 8 medium-sized OMI product tankers add further tonnage to our growing product business.

On Slide Number 7, spot rates for medium-sized crude tankers remained firm in the 2nd quarter. Teekay's Aframax fleet averaged $32,000 a day. On a pure spot basis -- that is, excluding the effect of hedges -- our Suezmax fleet earned a strong $50,000 per day.

Q3 to date -- tanker rates have been weaker than Q2, due to seasonal oilfield maintenance, as well as Nigerian production losses. To date, we have booked 45% of our Q3 spot (inaudible) space, at an Aframax equivalent average rate of $27,000 a day.

Besides the OMI fleet, other changes to our spot crew fleet included our sale and leaseback of 2 first-generation double-hull Aframax tankers in Q2, and a similar transaction of 2 more ships in early Q3.

It was a very strong quarter for product tankers. Our large- and medium-sized product carrier fleet averaged $30,000 a day, mainly due to higher US imports. Rates are lower so far in Q3, but the product tankers' fundamentals remain positive.

There were a couple of upsetting changes in our product tanker fleet in the quarter, shown in this slide.

Following the OMI transaction, key case conventional tanker business segment -- including ships owned, in charter and on order -- reached a new high of 111 ships, of which 19 are in our fixed-rate segment, and 92 ships in our spot segment. In addition, our commercial management of 3rd-party owned spot tankers grew to 15 vessels.

Turning next to the tanker market outlook, starting on Slide Number 8. As is so often the case, it is OPEC oil production that holds the key to the market. As you can see from the red bars on this chart, during the seasonal low period in Q2, OPEC normally keeps production running at between 1.5 and 2 million barrels per day above demand. This allows inventories to build during the summer months. However, this year OPEC has kept production unusually low -- barely above Q2 lows -- and well below Q3 forecast demand.

Yesterday's report of a large counter seasonal draw in US crude oil inventories suggests that contrary to OPEC's official position, the current crude oil supply is running well below current demand -- let alone the significantly higher demand expected later in the year.

On the chart on Slide 9, the red dotted line show that this year, demand for OPEC oil in Q4 is expected to be 2.8 million barrels per day above today's production level -- a far greater increase than usual. The call on OPEC is compounded by a strong Q4 year-on-year oil demand growth, and lower-than-expected non-OPEC production. We calculate that the increased call on OPEC oil will cerate incremental tanker demand of 7% in Q4.

Rounding out the tanker market fundamentals of Slide 10. As we know from the strong tanker rates seen in the 1st half of this year, fundamentals are finally balanced. Tanker supply growth is being dampened significantly by the growing number of vessel sales for conversion to offshore and dry-bulk use plus scrapping.

The expectation of increased OPEC production in the fall -- plus the additional tanker demand generated when North Sea shuttle maintenance is completed -- sets us up for a strong winter market again, this year. For 2008, the [I.E.] is forecasting exceptionally higher oil demand growth of 2.5%. The second-fastest growth rate since the 1970s, with only 2004 showing higher growth.

In addition, we expect to see continued lengthening of the average [voice] distance due to shifting trading patterns, both in crude oil and product movement. We are projecting that demand growth and ongoing tanker removals should offset new tanker supply in 2008, resulting in a tightly balanced market next year.

Slide Number 11 shows the tanker values continue to rise with prices of modern tonnage rising about 15% in recent months. Even at these high values, there is very little tonnage available for sale. In parallel, tanker new building prices continue to rise, and lead times are getting longer, due to insatiable demand for dry bulk and large container vessels absorbing most of the world's new building growth.

These recent developments make us feel really good about the OMI deal.

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

Thanks, Bjorn.

Overall, we had a strong 2nd quarter. Excluding the items in the (inaudible) of our earnings release, net income for the second quarter increased to 67.6 million -- or $0.90 per share. Up 36% from the comparable figure of $0.66 per share in the same quarter last year.

Looking at our operating results on Slide 13. We generated 165 million in cash flow from vessel operations, or CFVO, during the 2nd quarter -- which is also up 36% from the 120 million of CFVO generated in the 2nd quarter of last year.

This increase was primarily the result of higher spot tanker rates, the delivery of 3 new building LNG carriers, and the acquisition of Teekay Petrojahl. In the 2nd quarter, approximately 69% of our CFVO came from our fixed-rate businesses, compared to 66% in the same quarter last year.

Moving into our segmented results and comparing them to the 2nd quarter of 2006, the results for the offshore segment came in better than expected -- generating CFVO of 64 million -- up approximately 23 million from the same quarter last year.

This increase mainly reflects the acquisition of Teekay Petrojahl in the 4th quarter of 2006, and the consolidation of 5 of 50% owned shuttle tankers effective December 1st 2006. Also contributing to this increase was the addition of 1 shuttle tanker, which commenced a 13-year fixed-rate charter in April, and 1 FSO which commenced a 3-year fixed-rate charter in May, partially offset by higher dry-docking activity.

Five shuttle tankers completed dry-dockings in the 2nd quarter, and 4 vessels are scheduled for in the 3rd quarter. For the 3rd quarter, we expect the offshore segment CFVO to be similar to the 2nd quarter.

There were no significant changes to the fixed-rate tanker segment during the quarter compared to the same quarter last year. For the 3rd quarter, we expect the CFVO from this segment to be roughly in line with the 2nd quarter.

The CFVO from the liquefied gas segment increased by 11 million from the same quarter last year, as the result of a delivery of the 3 RasGas -- 2 LNG carriers -- partially offset by 75 days of net [off-hire] incurred on the LNG carriers in the (inaudible) during the 2nd quarter. This also resumed normal operations in early July.

Looking ahead, we expect CFVO for this segment to be approximately 30 million for the 3rd quarter, and approximately 32 million in the 4th quarter, as one of our LNG carriers is scheduled to be dry-docked during the 3rd quarter.

Excluding the 4 LNG vessels relating to the Angola LNG project, we currently have another 6 LNG and 3 LPG new buildings under construction -- which are scheduled to deliver during 2008 and 2009. The CFVO contribution from our spot tanker segment increased by 10 million over the same quarter last year, as a result of higher spot tanker rates, and an increase in the size of our spot tanker fleet. Partially offset by an increase in time charter hire rates.

The increase in time charter hire rates is primarily the result of the sale leaseback of 2 Aframax tankers in April 2007, and higher average in charter rates. We sold a leaseback an additional 2 Aframax tankers in the 3rd quarter 2007. Our spot Aframax fleet earned an average TCE of $32,000 per day in the second quarter -- which is up from 29,200 per day earlier in the 2nd quarter of 2006.

Turning next to Slide 14, and reviewing the remaining income figures in comparison to the same quarter last year.

G&A expenses were 58.4 million compared to 41.5 million in the same quarter last year. This increase was primarily due to the acquisition of Teekay Petrojahl -- an increase in shortening of headcount, and the depreciation of the US Dollar.

In addition to the previously mentioned Aframax tanker sale leasebacks, we sold one of our older shuttle tankers -- the Nordic Trim -- and certain offshore equipment in the 2nd quarter. These sales resulted in a gain of 11.6 million in the 2nd quarter.

Net interest expense increased to 40.8 million in the 2nd quarter -- up from 23.1 million in the same quarter last year -- mainly due to the additional interest incurred on a debt used to finance our acquisition of Teekay Petrojahl, as well as the deliveries of the 3 RasGas, 2 LNG carriers.

There was no significant impact on our net interest expense from our investment in OMI in the 2nd quarter. As we equity-accounted for our joint venture in OMI on June 1st, the interest expense we incurred on the financing for the investment was substantially offset by the interest income we earned from our subsequent loans for the joint venture.

As a result, the impact on net interest expense from our investment in OMI is included in the line item, "Equity Income From Joint Ventures."

We anticipate that most of our 50% share of the OMI assets will be distributed us in early August. As a result, we will consolidate the results of those assets from that date forward.

We recognize an income tax expense of $300,000 this quarter. Excluding the effect of foreign exchange gains, we had a net income tax recovery of 3.6 million in the 2nd quarter. And we are estimating a similar tax recovery in the 3rd quarter.

Equity income from joint ventures was a loss of 2.1 million this quarter, compared to 900,000 in the same quarter last year. This decrease was primarily the result of an equity loss of 1.4 million from our 50% share of the results of OMI for the month of June.

Also contributing to this decrease in equity income was the consolidation of 5 50%-owned shuttle tankers in December 2006, which previously our equity had accounted for. And partially offset by a reduction in the equity loss from our (inaudible) PetroTrend joint venture.

Minority interest expense in the 2nd quarter was 6.3 million, and relates primarily to the minority interest expense and the result of Teekay Offshore Partners, Teekay Petrojahl, and Teekay LNG Partners.

Excluding the foreign exchange impact, minority interest expense in the 2nd quarter was an expense of 7.6 million. We expect the minority interest expense to continue to be roughly 7 to 8 million next quarter -- excluding the effect of any foreign exchange.

Other items -- net of 9 million -- is mainly comprised of income from our VOC assets, and gains on sales of marketable securities.

Turning next to Slide 15 -- we have presented our June 30th balance sheet, and compared it to the Marcy 31st balance sheet. During the 2nd quarter, we refined certain components of our Teekay Petrojahl purchase price allocation, which resulted in changes in certain balance sheet items. These adjustments resulted in a decrease in net income of 4.2 million in the 2nd quarter -- but this has no impact on cash flows.

Net debt including the current portions increased by 718 million -- primarily due to the debts incurred to acquire a 50% interest in OMI. As of June 30th, our OMI bridge facility had an outstanding balance of 700 million -- which is temporarily included in the current portion of long-term debt. We expect to refinance this facility with a long-term facility during the 3rd quarter.

Minority interest increased by 120 million -- primarily due to Teekay LNG following an offering in May 2007, and revisions to the purchase-price allocation related to Teekay Petrojahl.

Our consolidated liquidity as of June 30th was 1.9 billion. Net of restricted cash or net debt to full capitalization was 54.5% at June 30th. An increase from 51.5% at March 31st -- reflecting the increase in net debt as explained earlier.

Slide 16 shows our quarterly EPS rule-of-thumb. So far in the 3rd quarter of 2007, we have booked approximately 45% of our spot (inaudible) days at an average Aframax TCU rate of $27,000 per day.

The OMI assets are not expected to have a material impact to our 3rd quarter net income, and since most of the OMI (inaudible) are in fixed-rate charters, our rule of thumb ETS guidance remains unchanged from the previous quarter, which is a quarterly ETS of $0.06 per share for every $1,000 in Aframax [TC] above our net income breakeven of $16,000 per day.

I'll now turn it over to Bjorn to conclude.

Thank you, Vince.

I'd like to conclude this morning's presentation with Slide 17, where we've put the highlights for the quarter into the context of Teekay as the asset manager focused on the marine midstream.

In Q2, we changed our name from Teekay Shipping to Teekay Corporation, to reflect that we have grown to be so much more than a shipping company. At the Teekay Corporation level, as shown at the top of the slide, we continue to grow our role as a successful developer of marine mid-stream projects through a combination of acquisitions and organic growth transactions.

In the 2nd quarter, between our shuttle tanker new buildings, our Angola LNG deal and our acquisition of OMI, we have secured further projects of both of our MLPs and for the planned new spot tanker company -- Teekay Tankers. These new transactions add to the pipeline of existing projects currently under development for future dropdown to our subsidiaries.

In return, Teekay Corporation benefits from increased distributions on its limited partner units, and from growing incentive distribution rights or IDRs flowing to our 2 general partners, with TOO now approaching the 15% IDR split level, and TGP approaching the 25% IDR level.

The planned launch of Teekay Tankers later this year is expected to allow us to grow faster in the conventional tanker business in the same way our 2 MLPs have done for those businesses.

Our unique corporate structure is creating a great deal of momentum for Teekay, and we believe that this will further be enhanced by the expected listing of Teekay Tankers. We are excited about the tremendous value we see this structure creating for our shareholders, going forward.

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

Thank you, sir.

Ladies and gentlemen, if you would like to ask a question, please press the *1 on your touchtone phone. But remember, if you're using a speakerphone, you will need to lift your handset and then press the * key. And to withdraw your question, please press the # sign. Please press *1 now if you do have a question.

And our first question will now come from Jonathan Chappell of JP Morgan. Please go ahead.

Thank you. Good morning, guys.

Hey, Jon.

On your last slide with the Teekay LNG and TOO approaching higher IDR splits, how's that going to translate into cash flow directly to the Teekay shareholders? What I mean by that is, can we expect to see more frequent dividend increases or more aggressive share buybacks at Teekay Corp as the cash flow from the 2 MLPs start to accelerate?

Hi, Jon. This is Vince. As you've seen in the past 4 years, we've increased our dividends each year, and with the double-digits per year. So that's something that we will be looking at again, of course.

In terms of our share buyback program, we do have $97 million remaining under the existing authorization. We did mention last quarter, since we've acquired Petrojahl and OMI, that we were -- according to the buyback program -- on hold, temporarily. But we do intend to send it to 97 million at some point.

A question for Peter, really quickly on the LNG side. Is this West African tender the beginning, in your opinion, of finally catching up with the tenders that were expected in 2006 and earlier this year?

Yes. Hi, Jon. There was a delay in these projects, owing to the need to build out. As well as a shortage of supplies and workers. And now they're starting to all get decided.

As Bjorn was saying, some of these berths had to be freed up. And so now when they recontract, you're seeing projects into 2010 and 2011. We have a number of other projects that we're bidding on, so we're very much encouraged by this award, which we're spending time on trying to finish and get it fully contracted by the end of September.

Okay. Are there more awards excepted by the end of this year? Or that building is going now into 2008?

No. We have some outstanding tenders going on. I can't tell you exactly when they will be awarded. But we're hopeful.

Then finally, maybe this one's for Bjorn. Can you talk a little bit about the thought process behind the sale and leaseback of the Aframaxes? I did catch that you said they were first-generation. So I assumed they were a little bit older -- relative to the rest of your fleet.

But if you are still pretty optimistic about the market through the back half of '07 and '08, why the decision to sell some what are still considered modern assets?

Yes. Well, the ships were between 13 and 15 years old. And we have been chartered back for about 4 years. So that brings them close to 20 years of age.

We got a price for them. And the relationship between the price and the charter back indicates that there's a significant transfer -- which is a risk -- to the buyer. But to make sure that we control all those ships, we do have purchase options at the end of the charter.

Okay. Actually, if I can just ask one more quick one. Status on the people situation with OMI. Obviously their chartering desk had always produced or frequently produced above-average results for the Suezmaxes. Have you kept those Suezmax chartering guys? And how do you plan to incorporate them into the rest of your crew fleet?

Peter, why don't you answer that? You've been spending time in the Stanford office, filling in as our coordinator, there.

Yes, Jon, I'm pleased to say that we have put the chartering guys and the key other personnel under contract. So they have decided to join Teekay. And Teekay has decided to put its Suezmax operations located in Stanford. So when you put together Teekay's Suezmax operations with OMI's existing operations, and the Gemini Pool -- which has 3rd-party owners -- we think we have the premier leading franchise in Suezmaxes, which goes very well with our Aframax franchise.

Okay. That's great. Thanks, Bjorn, Vince and Peter.

Thank you. And our next question will come from Urs Dur of Lazard Capital. Please go ahead.

Hi, guys.

Hi, Urs.

Hey -- solid quarter. Congrats! Actually, Jon asked all the questions I wanted to ask. I had a specific question on the depreciation line, which I guess I'll go to Vince. But maybe you guys can discuss further your feelings on OPEC, and why you think they will simply increase production vis--vis demand. Do you really think they're going to open up the taps? And more thinking behind that?

I think the math just speaks for itself. Look at how much sum in inventory builds you've had the last several years. If our inventories continue to fall for the next few weeks, you're going to get prices north of 85 per barrel. I just feel that the math is compelling.

In a way, the longer they wait the more powerful it'll be for lifting the winter market. Because you're going to have a run on the bank of everybody trying to get bankers at the same time. So in a strange way, we actually don't mind the soft spell that we're having right now. Because it's setting us up for a stronger peak in the winter.

And I also think that OPEC was saying that the problem wasn't them -- the problem was the refinery utilization. And the refiner utilization is starting to increase now, so you're seeing a lot more (inaudible) on refineries. So that'll give an increased demand for crude.

Yes. The US data seems to be moving in the direction that we'd like to see, as well. So I see what you're saying, there.

How about this quarter? You mentioned it. It's been relatively weak, so far, this quarter. On what you have exposed -- what's not on contract this quarter -- how much of this quarter is left? I think we can all estimate that. But if you have any color on that, and where we are in the cycle of chartering.

Yes. We mentioned that 45% of the days have been locked in on average rates. $27,000 a day for Aframax. Which actually is a pretty good number, in my view. I mean not only historically, but I mean if you look at the sum of that actual parts of the numbers in the 3rd quarter, I think 27,000 a day is a real solid number.

I think current new voyages are probably a bit weaker than that, but we also know how quickly rates rebound in the Atlantic when the North Sea maintenance kind of flows down. So we think this is certainly a respectable summer market, and we are optimistic for the winter.

Finally, I guess we'd mentioned it before and you'd talked about it. But Teekay Tankers. Any particular more color you can give on timing on that? October?

Hi, Urs. It's Peter. We're not saying exactly what date it is. But one thing that I would tell everyone is that as a foreign filer, we file confidentially with the SEC. So when we do come out, you'll only see it about 1 week before we start the road show.

So don't think the fact is you're not seeing a public filing means we're not working very hard on it.

Oh, no. That's a very good point. It's just exciting. I was wondering if we could get some color there.

And finally, thank you very much. Solid quarter. Thanks.

Thank you. And our next question will now come from Tom Rinaldi of Brencourt. Please go ahead.

Good morning.

I was at the Marine Money Conference when you presented, and I think you were very articulate about how assets get valued in MLPs vis--vis what investors appreciate and pay for, in terms of yield.

I was just wondering how much, and maybe this is related to Chappell's question, but -- when you present your sum-of-the-parts on the trading values of the MLPs, have you considered that you might have to pass through the dividend to get the same valuation inside (inaudible) parent? Because for as long as you retain that cash, you're not actually capitalizing on the investor appetite?

Yes. We actually have looked at the whole structure. Teekay is going through this transformation, as Bjorn said. We launched the LNG in 2005. We launched Offshore in 2006. And now it's Teekay Tankers in 2007. And we also have a few billion dollars of assets that would have a greater valuation when they are eventually bought by the various subsidiary companies.

So you actually have to go through the transformation in order to get the cash flow yield up. But then as it would be natural to revisit the cash flow generation of the Teekay parent, because the Teekay parent will look materially different.

I mean if we look ahead. What would be ideal? A big fixed dividend from Teekay, structured around higher cash flows for more mature MLPs?

I think it depends also on the kind of business momentum. If we keep growing the snowball that we're rolling here, then you're going to need a growing amount of capital at the parent level. So a virtuous circle.

But ultimately, you're right, Tom. The cash is going to flow and it's going to increase flowing. So I think that it's a high-class problem, but we think we're finding great investment opportunities at the moment -- on top of which we are contemplating our stock buyback. And we're talking about reviewing the dividend -- which admittedly is an annual incremental basis.

But in terms of rethinking it, that's something we will continue to do.

But if you look at the last 4 years, a critical piece was the buyback of almost 25% of the share capital through the share buyback program, at very good share price. Both reflecting absolutely and compared to the sum-of-the-parts.

Through that buyback, we increased the value by $5.

What will happen steadily is, as Vince was pointing out -- the net debt to cap is over 50%. But what will happen at the senior parent company is that we will start to become debt free. Then the situation or scenario that you're talking about -- which is that you're getting cash generating up at Teekay parent -- becomes a high-class problem. But obviously, keeping cash up at Teekay Corporation above what we need for investment is not a good use of cash.

Well, yes. There are 2 ways to go. Right? The buyback or the virtuous cycle of MLPs -- which is everything you want to buy, you issue equity. Part equity, part debt. And you're issuing equity at a much higher level, rather than retaining the cash flow from the MLPs for acquisitions.

That's right. And the only new thing is that sometimes we have a long lead time before those assets generate cash. That's when it isn't just enough to create an MLP. You also need a very financially strong parent that can warehouse those projects -- as well as develop those projects.

One thing to look at the last slide is, we get a lot of synergies by having one company that can develop both LNG projects, offshore projects and tankers. Because those have common customers, but they also have a lot of common-end engineerings and of course everything is built in a shipyard or converted there.

Okay. All right. Great. Thanks.

Thanks, Tom.

Thank you. And our next question will now come from Justine Fisher of Goldman Sachs. Please go ahead.

Good morning.

Hey, Justine.

The first question that I have is about the dead weight tonnage that could be taken out of the tanker market for conversion to FPSOs and dry bulk. I know it's tough to put a number around this, but do you guys have estimates of how many deadweight tons you estimate will be taken out either for FPSOs and for dry bulk or just for both?

Well, if you look at the ships that have left the fleet this year and have been sold for conversion purposes, we're talking about 9 million tons. And we have about 2.3 million tons of scrapping.

So we're seeing more than 3% of the fleet deleted year-to-date. Although some of those conversions are going to take place later. But the commitments have been made.

And we're seeing announcements now coming that are suggestive of (inaudible) some of these conversions is growing. And (inaudible) made a shipyard and so on.

So as long as you're seeing the kind of rates you are for dry bulk, there's really no limit. I mean the limit is really the conversion capacity. And so as a matter of fact, that could grow bigger. So it's hard to say how far it could go.

And that 9 million tons is for both offshore and dry bulk?

That's right.

And then my second question is just about the outlook for the fourth quarter, again. I mean obviously if the demand estimates are correct, then it would seem that OPEC production is significantly below where it needs to be. But what would you guys say is the handicap for demand estimates for the second half of the year, in light of some of the economic data that is coming out recently?

I think we have to consider that last year's winter market was extremely poor because of a mild winter. We can start by assuming that if we have a normal winter, you're going to get 3% year-on-year (inaudible) demand growth in both quarters -- which is a pretty good number.

Other than that, you're seeing not just the volume, but you're also seeing the transportation routes. And suddenly, we have no question but that the oil will flow. And prices are not going to be allowed to -- I think -- skyrocket forever.

But there must be a limit to how much more OPEC can produce in the 2nd half, anyway. Right? I mean even if they're -- I know -- producing now, there's a limit to that capacity. And so maybe -- what's the potential for supply to limit tanker demand, anyway?

Yes. I think that they've been spending a lot of time adding capacity in the Middle East in the last couple years. And we haven't really seen them use it, because of the (inaudible) environment. As far as the demand environment.

But I think we certainly expect there's like 4 to 5 million barrels of spare capacity in the Middle East. And the numbers we're talking about here of 2.8 million barrels a day that they can [take out and call] on OPEC -- that is only the call on OPEC -- which their (inaudible) demand for oil from 2nd quarter to 4th quarter is actually 3.6 million barrels a day. And the remaining -- the difference -- is going to be made up of non-OPEC oil coming back on stream. For example, at the end of the North Sea maintenance season.

So you're going to get lots of new oil on the market, if they're going to meet demand. If they're not going to allow some sort of dangerous drawdown in inventories -- which I think would be unexpected.

Okay. And then my last question is one about liquidity. And it's related to the access that shipping companies have to liquidity in order to finance fleet expansion.

I think you guys are a pretty good company to ask this question to, because do you access the secure capital markets consistently in order to finance growth? And I suspect the answer is "no." But I'm checking because of what's going on in the credit markets right now.

But we've seen access to liquidity for large projects and for large financial projects shrink significantly over the last couple of weeks, just because -- again -- of what's going on in credit.

But it seems to me that for a shipping company, not only is a lot of your debt secured debt, but it also is financed on a relative basis more largely from European banks versus just US banks. So I'm wondering if you guys are seeing any diminished access to liquidity because of what's going on in credit (inaudible) or if you're seeing rates for that type of financing increase. And that's particularly in light of what you're planning to do to refinance the OMI facility.

Are you guys seeing access to liquidity shrink at all? Or not so much? Again, I suspect the answer is no, but I have to check.

Hi, Justine. We're not seeing that. And as you know, we're in the process of refinancing the OMI debt. We're getting a lot of interest from banks, so we're not seeing that.

And then even if not for Teekay in particular -- and maybe it's difficult to comment -- some of the easier bank financing that's been available to shipping companies more broadly over the last year that's allowed them to expand their fleets and to make acquisitions. Do you guys suspect that some of the smaller shipping companies, or ones that aren't as well-established as Teekay, would see less easy access to that liquidity?

Because that's certainly something that's happening in the rest of the credit markets. That less established companies are seeing poorer access to liquidity. Do you guys suspect that's the case in shipping?

I don't think we have. I mean we don't have any special insight on what other companies are doing. But certainly -- as Vince says -- we haven't seen it.

Okay. Thanks.

Thank you. And our next question will now come from Scott Burke of Bear Sterns. Please go ahead.

Hi. Good morning, guys.

Hi, Scott.

Now that you've got the premiere Suezmax franchise, I'm just wondering what your appetite is for additional Suezmax acquisitions -- especially at the current asset prices?

Are you guys out looking for more vessels?

We are not. We're not actively in the market at the moment, but we're certainly following opportunities. We have an order book of 10 ships, which of course is feeling nice and fuzzy, now -- being in the money by about 250 million. So we have the growth built in.

We're watching it, I think. I think new building prices are probably going to go up further from where they are. They haven't yet reacted completely to the latest asset transactions. So I can't really give you too much guidance. But we certainly are investing in our business. So we'll do that where we can.

Interesting. Kind of going back to the points you made on OPEC probably increasing production in the 4th quarter -- you know, the FFA marker right now does show their rates increasing pretty significantly for the next 6 months, and even into next year.

Just wondering how much credence do you guys put on the levels you can see in the FFA market, and then if that translates into any FFA activity for Teekay in terms of hedging.

Right. The FFA markets unfortunately still are relatively illiquid. But they are, I think, becoming a more reliable particular. And I think it's important to note that the major oil companies use the derivatives market probably as much as anybody. They have, I think, the insight into what's going to happen on the oil front more than -- I think -- the ship owners.

So that, I think -- that curve you're talking about, I think -- should certainly support what we're saying. And I think that's good.

We are more active in the derivatives market these days than we've been in the past. So we are hoping to contribute to that liquidity. So we are active in that market.

When you say you're active, does that show up anywhere in your financial statements at this point, or is that kind of too small of an impact?

It's too small, right now.

Okay. Well, thanks.

Thank you.

Thank you. And our next question will now come from [Craig Lewis] of Credit Suisse. Please go ahead.

Good morning. First, I want to expand on what Justin was talking about, regarding asset prices. And when you look at Slide 11, you see when OMI put itself up for sale. That was kind of the beginning, when asset prices really took off.

It was a lot of -- I mean obviously -- some private equity firms started looking at this space. It looks like those 4 sale lease-backed transactions you entered into were with a private equity firm.

Due to what's happening in the credit markets with private equity financing, do you think that this is the peak, and that second-hand asset prices are probably going to start coming down, being as a lot of these non-traditional investors will now start to leave the space?

That's a deep question. We don't think this is the peak in values. We think that -- I guess -- the values -- you look at what drives values, and certainly from [model] tonnage, you have a big influence in what happens in the new building market.

And there's no sign of any slowdown in the new building ordering for dry-bulk vessels and large container vessels. And in fact, it's quite difficult to find tanker berth even in the early part of 2011.

So, I guess this is a simpler way to ask the question. With those 4 sale lease-back transactions, has your phone still been ringing about private equity investors looking at these similar-type deals?

Well, I would say that not those in particular. Those are more financing deals. But what you have found is that the shipping sector has been steadily re-rated as people have gotten used to the idea that this cycle is going to last a lot longer.

And so what happened post OMI is people suddenly understood that there's going to be a re-rating of the sector. But what the slide shows is that the asset price market reacts much quicker to the shipping fundamentals. And we believe there is a lag effect with the stock investors, because they're not as familiar with it as the players. So it takes them a while to get used to it.

But just as we've seen, for example, in the dry bulk side, where there was a tremendous increase in values. But it took a while for the stock prices to catch onto that. And that's the same thing that we've seen in the tanker market. A steady re-rating.

So sometimes the analysts say, "Oh, 2004 was the high. And year-on-year, it has dropped." But they missed the point -- which is that we have stayed up at this high plateau.

And so there's a steady re-rating, as people understand that this thing's going to last a lot longer -- as we've been saying. And that's what people are looking at.

Now the private equity, which we noticed were competing with us on OMI -- they quickly saw that the enterprise value to EBITDA here makes it a financeable type of acquisition. So it's quit easy to finance.

But the way we look at it is, we are buying a business, rather than we are doing a quick financing the way somebody would buy a building.

Okay. Great. And then a lot easier question to answer. What sort of maintenance in the North Sea should we expect to spill over into Q3?

I think this is about a kind of year where you have about an even activity. But you typically have a peak in August. So I think maybe on the whole, we will have probably about 40% in the 1st and the 2nd quarter and 60% in the 3rd quarter.

Okay. Great. Thank you.

Thank you.

Thank you. And our next question will now come from [John Trasilis] of Citigroup. Please go ahead.

Hi. Good morning.

Vin, can you talk a little bit about depreciation for the 2nd quarter? I guess this question was asked before, but you didn't answer it.

It seems it was quite lower than that last few quarters. Was there something special there?

Yes. That was related to the changes to the purchase price allocation for Teekay Petrojahl that I mentioned earlier. So that -- which resulted in a reduction in the (inaudible), and therefore depreciation. So that's the majority of the reduction in depreciation this quarter.

Is that the one-off item?

Well, there is in that figure for the 2nd quarter, a catch-up going back to the 4th quarter of 2006. So approximately 1/3 of that impact would be part of this, going forward.

And also given that -- obviously the financials are going to change here -- are you going to provide some guidance in terms of your expenses for the rest of the year?

We've given guidance, I guess, on the cash flows overall for each segment. Expanses -- I guess both on the line-by-line items -- will increase in terms of all items, as we consolidate the OMI assets. So that we reflected in the 3rd quarter, going forward.

Okay. And finally, Bjorn. You said that you ordered 2 Aframaxes at 245 million, combined. That's significantly higher where prices are. Can you talk a little bit about that? What's the difference there? Why so high?

Yes. These are shuttle tankers. These are [BP2] -- just very sophisticated shuttle tankers with winterization and so on. So the price for a new-building Aframax is probably 70-75 million, right now. So a spread of 35-40 million for some of the most sophisticated [tele]tankers ever constructed is -- in light of the high price of equipment these days -- that's a natural price differential.

And that's in Japan?

This is in Korea.

In Korea. Okay. Thank you very much.

Thanks, John.

Thank you. And our next question will now come from Daniel Burke of Johnson & Rice.

Good morning, all.

Hey, Dan.

Question on the shuttle tankers used offshore Canada. How many were you operating over there? How does that market typically function, Bjorn? And are you opening up a new market for yourself as you look forward?

We are currently. We have 1 modern Suezmax tanker operating there for a 6-month period. It's a niche market that involves (inaudible) share of some vessels by major oil companies, and I'm not sure, but there are a couple other vessels by independent owners on long-term [chartered] oil companies.

So that is a niche, as I said. We think there can be some rationalization done there by going into the contractor of [affreightment] process or setup that we have in the North Sea. Teekay would be well-positioned to offer support there.

This is our first activity in Eastern Canada for a long time, and so I think it reinstitutes us as the Teekay name. Teekay Navion name. So we will explore what else can be done, there. It's not a huge growth market, but it is a growth market in the long-term, and very quality-conscious -- similar to weather characteristics to the North Sea. I think that plays to our strength.

Okay. Great. And then a question. Obviously, you feel pretty comfortable with the new Anglo LNG deal. It's still technically an LLI. What contingencies are there other than I guess financing contingencies, at this point?

They have their various formalities. We would view them as formalities. We think there's a final investment decision. But there's a lot of ground work having already been done here, and this is of course a very important project for Angola.

So in our conversations with the parties involved, we certainly get encouraged when this is a very high probability.

And there aren't any financing contingencies, on our side.

Okay. Thanks for that clarification, and thanks for the answers.

Thank you.

Thank you. Our next question will come from [Martin Rahr] of MSR Capital Management. Please go ahead.

Thank you. I read, Bjorn, in the speech you gave at the annual meeting, of the continued work that your joint venture's doing on the new way to transport compressed natural gas. Do you think that has the potential to be commercialized? And if so, what timeframe?

Hi, Marty. I think that the CNG -- Compressed Natural Gas -- transportation business is a little bit like the fresh water transportation business. It's something that everybody can see making sense. But the commercialization of it has been elusive.

We are optimistic that in the foreseeable future -- maybe the next couple of years -- that you're going to see projects that are actually undertaken in the CNG sector. We are involved in 2 projects. 1 is a joint venture with the Coselle technology in Marubeni -- which we believe is probably in the strongest position. It's the first to have full [clarification] approval. And we know that there are a number of discussions underway.

Plus again, there are a lot of moving parts. You've got to have the buyer, you've got to have the supplier of the gas, you've got to organize the term of facilities. So this will take time.

But I'd say I'd be very surprised if in 3 to 5 years, we're not seeing real projects underway, though.

Thanks very much. And thanks again for the very informative conference call.

Well thank you, Marty.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the *1 on your touchtone phone. And remember to lift your handsets first if you're using a speakerphone. If there are any additional questions, please press *1.

And our next question will now come from [Steven] Williams of Simmons. Please go ahead.

Yes. Hi. Just to check something. I think you actually stated earlier that certain assets are effectively worth more within the MLPs than within the Teekay parent.

That's right.

Okay. So as a result, could you --

The cash flow is valued differently.

Yes. Okay. So as a result, I can assume that some more of the Teekay directly-owned offshore business is going to end up within COO, for example.

Yes. We have given directional guidance that we have a variety of assets. While the intention is to grow the distributions of Teekay Offshore by 10 to 15% annually, of course, that means bringing in new business. And there's a lot of offshore business still held at the Teekay corporate level. Both to [OSCO] and the new shuttle tanker projects. Our FPSO business. So there really are quite a few opportunities for that.

Okay. So when that transaction takes place -- effectively -- say from Teekay into Teekay Offshore -- would I expect that to be priced at the value that the assets are worth to the MLP or the value that the assets are worth to the Teekay parent?

That's governed by an omnibus agreement that generally any assets that Teekay purchases have to be sold at-cost to the MLPs.

Okay. I'm thinking more about like the interest in the OPCO business.

But the OPCO business is up to Teekay to offer. And Teekay, of course, has an incentive to make sure it's an accretive transaction. And the MLP also has a fiduciary responsibility to make sure that if they bought it, they would do it in an accretive way.

So effectively somewhere in-between the two values, I guess.

Yes. I guess you would say that. But it's in Teekay's interest to have it as an accretive transaction.

But if I were valuing your offshore business in a kind of similar (inaudible) they used to present -- it's then not really right to use the kind of COO-traded price as a kind of indication of what the offshore business is worth to Teekay?

No.

If you'd effectively have to sell it a little bit cheaper?

No. I'm not sure that's right. Because if you look at the financial effect to Teekay of putting parts of OPCO or increasing the ownership of [TOO]'s ownership of OPCO, the general partner becomes worth a lot more. Which would make up for any discount that it would sell. That was put in.

Okay.

So there's a balancing. And in fact, it may be work better for Teekay in terms of its general partner being worth more.

As well as the limited partner interest that we have.

Right. So every time Teekay sells something, its existing LP units go up in value, and the general partner goes up in value.

Okay. Understood. Thank you.

Thank you very much.

Thank you. And at this time, sir, we have no other questions. So I'd like to turn the meeting back over to you.

Thank you very much for interrupting your summer vacations. And we look forward to talking to you next quarter. Have a great day!

Thank you. Ladies and gentlemen, this does conclude the conference call for today. Once again, thank you for participating. And at this time, we ask that you please disconnect your lines.