Teekay Corp Ltd (TK) 2007 Q3 法說會逐字稿

Welcome to Teekay Corporation Third Quarter 2007 Earnings Release Conference Call. (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 Chief Executive Officer, and Mr. Vincent Lok, Teekay's Chief Financial Officer. Please go ahead, sir.

Before Mr. Moller begins I would like to direct all participants to our website at www.tk.com, where you will find a copy of the third quarter 2007 earnings presentation. Mr. Moller and Mr. Lok will review this presentation during today's conference call.

Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from those projected by those forward-looking statements as a result of various important factors. Additional information concerning those factors is contained in our earnings release and the earnings release presentation available on our website. I will now turn it over to Mr. Moller to begin.

Thank you, Dave, and good morning ladies and gentlemen. Thanks for joining us on today's Q3 earnings call. I am joined here in Vancouver by our CFO, Vince Lok, and for the Q and A session we also have our Chief Strategy Officer, Peter Evensen, on the line from London.

I'll begin with the highlights for the quarter, which are shown on slide number three. We generated net income on an operating basis of 22.9 million or $0.31 per share, reflecting a weaker tanker spot market in the quarter. Despite lower spot rates, we still generated good cash flow from vessel operations of 135.5 million thanks to our large fixed rate business contributing 112 million of CFVO.

Since we last reported on August 1st we repurchased almost 1 million of our shares at an average price of just below $55 a share. This still leaves $44 million remaining under our existing authorization. And we announced our fifth consecutive annual dividend increase, this time by 16%. This brings our annualized dividend payment to $1.05 per share, more than twice the level five years ago. And with the continued growth in our fixed rate long-term businesses and the increasing distributions that Teekay receives from its MLPs as a result, we expect to continue to regularly review our dividend policy.

Given that fixed rate CFVO accounted for a record 83% of our total CFVO in the quarter, I'll take this opportunity to highlight on slide four just how strong the underlying growth trend is in our long-term fixed rate businesses. Of course, given the drop in our spot CFVO this quarter, the relative percentage of fixed rate CFVO was always going to be higher this time but our fixed rate CFVO is growing not only in relative terms, it's growing rapidly in absolute terms as well and is headed for another new record this year. The nine-month annualized figure points to us generating an all time high of $450 million in fixed rate CFVO this year, an increase of 24% from 2006 and a quadrupling since 2002.

Looking ahead at our order book, we already have a backlog of 16 vessels, additional vessels, scheduled to join our fixed rate fleet in the next three years. Our levels of fixed rate CFVO are unique in the tanker industry. If you turn to slide five you will see two other factors that make our fixed rate business unique, namely the length and the size of our contracts. As shown at the bottom of the table, the average remaining firm contract period is over 13 years and our locked in forward revenues have now reached $10 billion.

Looking at the amount of coverage in each of our segments, it's also important to note that 85% of our forward fixed rate revenues come from segments other than the conventional tanker business. What that says is that our fixed rate revenues are being generated in additional to our spot tanker business, not at the expense of our spot tanker business.

Next, I will briefly review each of our business segments. On slide number six we show the key developments in our off shore segment. Higher oil prices continue to fuel the off shore industry and there's a high level of activity in oil field development with approximately 20 new FPSO projects expected to be awarded in 2008. We also anticipate associated new demand for FSOs and shuttle tankers stemming from the high off shore activity. So we expect our off shore businesses will be very busy going forward.

Brazil continues to be one of our key growth markets. In the quarter we delivered the final of 3 shuttle tankers on a long-term charter to Petrobras, the Siri FPSO conversion is on track and is expected to deliver in Brazil in Q1 and we secured two time charters on two of our smaller first generation shuttle tankers at firm rates averaging over $38,000 a day. One of these charters is an extension of a shuttle tanker already serving in Brazil, while the other vessel is being moved from the North Sea to Brazil.

Turning to slide seven, our gas segment reported record revenues and CFVO in the third quarter. On the LNG project in Angola I mentioned on our last call, we now expect the final investment decision to be taken by the end of December of this year. Our existing LNG projects remain on track with 4 large [two flex] ships due to deliver to RasGas 3 in the second quarter of 2008 and the first Tangguh vessel and the first Skaugen LPG vessel to deliver during the second half of 2008.

Turning to the developments in our spot tanker segment on slide number eight, charter rates for medium sized crew tankers softened from the previous quarter, mainly due to a seasonal reduction in tanker demand. Teekay's Aframax fleet earned an average of $21,500 a day, while our Suezmaxes earned $27,100 a day. As is generally the case during periods of market weakness, rates for medium sized tankers fared relatively better than VLCCs during the quarter because the smaller ships are better able to secure a combination and triangulation trades. Since the middle of October Aframax and Suezmax rates in the Atlantic have rebounded strongly, while rates in the Pacific have begun moving up as well. In his comments Vince will provide our usual guidance on how the fourth quarter is shaping up so far.

Our product tankers out performed the market. Our LO2s earned a firm $30,100 under contracts of a freightment. Our MR product carriers earned $23,300 a day, benefiting from high utilization on combination trades. MR rates have started the fourth quarter a bit weaker but the Europe to U.S. gasoline arbitrage window has recently opened driving increased movement of cargo trans Atlantic. The size of Teekay's conventional tanker fleet increased considerable to 116 vessels this quarter, up from 90 vessels at the end of Q2. The [XOMI] fleet accounted for 21 of these ships but we also in chartered 4 additional Aframaxes and 1 additional MR product tanker in order to increase our exposure to the upcoming winter market. The 50/50 OMI fleets split with Torm took effect on August 1st and the integration of the XOMI ships and personnel are almost complete.

On slide number nine there were a couple of changes in our fixed rate tanker segment. Two of the XOMI Suezmaxes, which came with time charters until 2012 were included in our fixed rate fleet as was an Aframax tanker that commenced a new three-year time charter. We also concluded three year time charters on two Aframaxes to a major oil company and they're due to commence in Q4.

Slide number ten, turning to the tanker market outlook, slide number ten provides an updated chart of the seasonal picture for spot Aframax tanker rates. As you can see from the red line, despite a slightly later than normal start, Aframax rates have again started to follow a normal seasonal pattern of strengthening as we head into winter.

Slide number eleven highlights some key fundamentals driving the market. On the demand side the IEA is estimating oil demand growth next years of 2.4%, which would be the second highest figure since the 1970s, second only to 2004. OPEC had already announced a production increase from today, November 1st, and it remains under pressure to add further supply due to the high oil prices and recent large inventory draw downs. We are seeing normal seasonal factors come into play such as North Sea oil production ramping up after the end of the summer maintenance period. Also, weather related port and transit delays are becoming a factor across the Northern Hemisphere.

On the supply side we've seen a 50% drop in new tanker ordering year-to-date compared to last year, as ship yards focus on the red hot drybulk sector. It's almost impossible to find unsold tanker berths in 2010 or earlier and 2011 is already tightening up considerably, particularly in Korea. A growing number of tankers, both existing and on order, have been sold to conversion to drybulk thereby dampening tanker supply growth.

And the table on slide twelve provides more information about these drybulk conversions. Tankers sold for scrap year-to-date have remained at a low level of 2.7 million tons. An additional 2.1 million tons of tankers have left the fleet for conversion to either off shore or dry cargo. However, in recent months sales of existing tankers for conversion to drybulk ships have shot up by an additional 11.5 million tons or more than 3% of the world tanker fleet. Due to the six month lead time for shipyard conversion space, these ships have not yet been removed from the tanker fleet but are scheduled to do so over the next six months. Recently we have also seen reports of approximately 15 new berthing tanker orders having been switched to dry cargo.

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

Thanks Bjorn and good morning everyone. Net income for the third quarter was $22.9 million or $0.31 per share when excluding the net loss of $5.9 million of other items listed in the appendix A of our earnings release. These Appendix A items mainly relate to unrealized losses from foreign exchange translation and interest rate swaps, partially offset by 15 million of realized gains from the sale of assets. Our third quarter results were negatively impacted by the seasonal decline in spot tanker rates. However, as Bjorn mentioned, spot tanker rates increased in October and are currently averaging above third quarter levels.

Before I discuss the operating results, please note that our third quarter results reflect the consolidation of most of the OMI vessels effective August 1st, which is when the majority of the OMI assets are equally divided between Teekay and Torm. We continue to own two MR product tankers and two new building Handysize product tankers jointly with Torm. These vessels will continue to be equity accounted for until we divide them up in due course.

Looking at our consolidated operating results on slide fourteen, we generated $136 million in cash flow from vessel operations, or CFVO, during the third quarter, which is down 8% from the $148 million in the third quarter of last year. This decrease was primarily the result of lower spot tanker rates, partially offset by the growth of our fixed rate off shore and LNG businesses. The total CFVO from all of our long-term fixed rate businesses increased by 28% to $112 million in the third quarter of 2007 compared to the $87 million in the same quarter last year. The off shore segment generated CFVO of 58 million, up 15 million from the third quarter of last year. This increase mainly reflects the acquisition of Teekay Petrojarl in the fourth quarter of 2006 and the consolidation of five 50% owned shuttle tankers effective December 1st, 2006.

Also contributing to this increase was the addition of two Brazil shuttle tankers and the FSO Navion saga. We took advantage of the seasonal maintenance of the North Sea oilfields during the summer months to complete a total of 8 planned dry dockings in our shuttle tanker fleet during the second and third quarters of this year. For the fourth quarter we only have one planned dry docking in our shuttle tanker fleet, which will allow us to benefit more from the upcoming winter market.

Our fixed rate tanker segment generated CFVO of $24 million, down from $27 million from the same quarter last year. This decrease was primarily due to the low revenues earned from two vessels, which earn a profit share component when spot tanker rates exceed certain threshold levels. This decrease was partially offset by the addition of two OMI Suezmax vessels, which were on fixed rate charters through to 2012 and one of our in chartered Aframax tankers from the spot segment, which commenced a three-year fixed rate charter during the third quarter.

So CFVO from the liquefied gas segment generated was about $12 million-- was up about $12 million from the same quarter last year. As a result of the delivery of the three RasGas II LNG carriers. This increase was partially offset by the scheduled drydocking of one of our LNG carriers during the third quarter of 2007. The CFVO contribution from our spot tanker segment decreased by $36 million over the same quarter last year, primarily due to the reduction in spot tanker rates, an increase in time charter hire expense and an increase in vessel crewing costs, partially offset by an increase in the size of the spot tanker fleet from the OMI acquisition.

Our spot Aframax fleet earned an average TCE rate of $21,500 per day in the third quarter, which is down from the $34,800 per day earned in the third quarter of 2006. So far in the fourth quarter booked approximately 45% of our spot Aframax days at an average TCE rate of $23,000 per day. However, current spot Aframax rates are averaging higher than this level.

Turning next to slide fifteen and reviewing the remaining income statement figures in comparison to the same quarter last year, G&A expenses were $60.9 million compared to $39.8 million in the same quarter last year. This increase was primarily due to the acquisitions of Teekay Petrojarl and OMI, an increase in business development related costs, expenses related to Teekay offshore partners and the depreciation of the U.S. dollar. Net interest expense increased to $57.9 million in the third quarter, up from $26.3 million in the same quarter last year, mainly due to the acquisitions of Teekay Petrojarl and OMI, as well as the deliveries of the RasGas II LNG carriers.

Excluding the effect of foreign exchange items, we would have recorded a net income tax recovery of $2 million in the third quarter instead of an income tax expense of $10 million. Minority interest income in the third quarter was $3.6 million and relates primarily to the minority interest expense, minority interest in the results of Teekay offshore partners, Teekay Petrojarl and Teekay LNG partners. Excluding the foreign exchange items minority interest in the third quarter would have been an expense of $4.6 million. Other items net of $12.4 million is mainly comprised of a $7 million gain in the sale of COAS, a computer based marine training company and income from our VOC assets.

Turning next to slide sixteen, we have presented our September 30th balance sheet and compared it to our June 30th balance sheet. As previously mentioned, we consolidated the assets we acquired from OMI effective August 1st. This had the effect among other things, of increasing current assets, vessels and equipment, intangible assets and goodwill and current liabilities. In addition, we finalized our Teekay Petrojarl purchase price allocation, which resulted in the reclassification of certain balance sheet items, including other assets, goodwill and minority interests. These changes had no impact on net income or cash flows.

Turning next to slide seventeen, we are pleased to report that we have recently arranged through a syndicate of banks and for an $800 million 10 year revolving credit facility to refinance most of the OMI vessels we acquired and 7 other of our Aframax tankers at very attractive terms. Through the strong support of our banks this financing demonstrates Teekay's ability to continue to access competitively priced capital even during difficult financial market conditions. In addition we have prearranged financings in place for all of our new buildings on order and this is in addition to the $1.9 billion in total liquidity that we currently have in place.

Finally, our innovative corporate structure not only provides us with a greater access to capital but also a lower cost of capital. Overall we are well positioned in terms of our current and future financing requirements.

I will now turn it over to Bjorn to conclude.

Thank you, Vince. I think we are going to just open it up to questions from the people on the lines so please go ahead.

(Operator Instructions) Your first question comes from Jonathan Chappell with JPMorgan.

Bjorn or maybe Peter, can you talk a little bit about opportunities in the offshore sector? You mentioned a couple projects and the Siri one we've known about for a while but do you see any new major projects under way or ramping up and have you had any customers come to you whether they're traditional FSO customers or maybe people you're more familiar with in your other segments looking for opportunities for you to new build specialized assets for their projects?

Well, maybe I can start off answer that question and Peter join in if you have anything to add. Now certainly there's no question there's a lot of projects out there. Petrojarl has-- was a company that had not really been in the thick of business development for a number of years when we acquired two-thirds stake in them. The Siri project, as you know, is the first new FSO project for a number of years and it's going very well. I had the opportunity to visit the project in Poland a few weeks ago and I think the issue right now given the pressures in the offshore industry it's important to stick to your knitting and I think Petrojarl being at the high end of the market in terms of sophistication could probably pursue pretty much any project from a skill standpoint but I think it's about picking where can you bring your competitive strengths to bear the best and they have been bidding on some projects but I think we-- it's a matter of really selecting which ones to go for rather than whether there are any projects out there. Certainly on the shuttle side we're seeing additional inquiries and on the FSO as well so it's really about making sure we build out the capability in Petrojarl so that we can be very credible when we go after these projects.

On your chartering in strategy I saw over the summer you locked in a couple and it was pretty much at the depths of the market but the charter in rates are still pretty robust. When you look at chartering in and you mentioned Bjorn your comments for the winter up cycle, I mean can you get 4 to 6 months charter in opportunities or do you have to go at least a year? And as you look out further to the expected phase out of 2010 have you started even longer term charter ins or three years or plus?

Well, I think very few in charter opportunities below one year. You might get the odd one but it really is a minimum twelve months, so that's sort of the minimum term we're pursuing because otherwise you pay up for the short term. As far as looking towards 2010, I mean we, as you know, we have a significant new building program that we have about 25%, 30% building growth in our new building fleet in terms of value and we already have a variety of ships in charter for multi-year periods. So I think we will continue to play a portfolio game of owned vessels, in charter vessels and new building so 2010 is certainly a lot closer than it was but it's not-- there's not a lot of chartering activity for 2010 I would say right now.

Okay and then one last one for Vince, on the OMI consolidation on August 1st when we look at a line item such as D&A, do we assume that OMI had only been in there for two months rather than three so when we look for a run rate 4Q going forward it's going to be even a little bit higher?

That's right. We have two month's of OMI's results consolidated in the third quarter so you'll need to sort of multiply that by three over two in a way.

And where was the one month of minority interest? Did that fall into minority interest income?

That's correct.

All right so we'll just take it out of there going forward.

Well, actually for the month of July it was equity accounted for.

On joint ventures?

That's correct.

Doug Mavrinac, Jefferies & Company.

I just had a few questions for you guys with the first couple being on your tanker side of the business. Bjorn, are you guys a little bit surprised that OPEC isn't doing more right now given the price of oil and what inventories are looking like globally? I mean have you seen an increased activity level for maybe November, December loadings and maybe kind of following on to that and maybe more importantly, what sort of expectations do you have for 2008 as it relates to OPEC production capacity increasing as well as non OPEC production capacity increasing?

Those are $64 questions, Doug. I guess let me start by saying you know it's previously announced we expect to file publicly with the S.E.C. during the fourth quarter of 2007 our registration statement for the IPO of Teekay Tankers and as a result of this we're not able to answer questions that either relate to this process and also restricted from expressing opinions about the outlook for the tanker market so I can't speak to 2008 OPEC but I can say, of course, around what's going on currently is that there's been significant discipline in OPEC and no wonder, given what's going on. They obviously have great resolve in maintaining the momentum but I think that I can only-- there are many people following the oil market. We're just one of them and I think it's incredible what's happening with oil prices and I think that you obviously have to get rid of the backwardation in oil prices to really begin to see refiners build inventories but if inventories keep falling the way they are then clearly there is going to be more oil needed.

Okay great and looking at the third quarter results here LR2 spot fleet did very well during the quarter. Is there anything in particular that you can attribute that strength to?

We have a very strong position in the Atlantic basin for LR2s. The LR2 Atlantic market is smaller than the inter Pacific market where most of the ships trade from the Middle East to Asia and that's a large market and a competitive market but we have quite some attractive contracts on these trades in the Atlantic where we are the biggest operator so that's really primarily the reason.

And then finally on your off shore segment, looking at the Gulf of Mexico shuttle tanker business what sort of opportunities do you see within that market for Teekay going forward?

It's going to be a small niche market. I suppose OSG were awarded a contract recently for Petrobras and I think the question is even though there might be more oil fields coming, the distances are very small in that area so it's going to be a very small niche. Obviously we'll continue to look at opportunities there but I don't think it's going to grow to be a very large tonnage pool.

So there may be more other areas that would be better suited for Teekay?

Well, I think clearly the North Sea where we have a very, very strong franchise I think the biggest growth opportunities come from the fact that a lot of new oil is expected in the northern part of the North Sea where there's little infrastructure and if you look at incremental oil in those areas, the ton mile effect is tremendous and brazil, of course, is the other big area that's growing very rapidly where we've gone from zero to I think 11 shuttle tankers in the last five years.

Got you. Okay perfect. Great. Thank you very much, Bjorn.

Scott Burk, Bear, Stearns & Co.

A couple questions, first of all on the LNG front there's been some news about some LNGs coming out of the new building yards that are having to be laid up because the projects aren't ready yet. I don't think that's the case of any of your LNG vessels but if that were the case would it have any impact on your-- on the day rate that you receive or the days that you operate?

I have seen the reports and I think what's happening is that, particularly in [Cuttar], there's some delays in developing some of the liquefaction facilities and the ships were always built on such a schedule so as to be a little bit ahead of the liquefaction plant because you didn't want the liquefaction to be ready and not have the ship. It's better off to have it the other way around so there was already a bit of slack build into the construction schedule and if these delays materialize in liquefaction it's possible that some ships may get laid off temporarily. Should that occur there has been no decision on that cert6ainly involving our ships but should that occur we would be careful and that would be contractually covered.

Okay so your contracts will still be safe.

That's right.

Then on the Aframax side, right now the Aframax routes coming out of the Arabian Gulf really haven't seen the upside that some of the ones in the Atlantic basin have seen and I just wanted to get a split or how your fleet currently is split between kind of the AG basin, AG areas and then the Atlantic.

The rule of thumb that we offer is 50/50 split between AG east and Carib south coast so, of course, the numbers move around a little bit and clearly our Suezmax fleet is predominantly operating in the Atlantic and a lot of our product tankers are operating in the Atlantic, so over time that's probably going to shifting a little bit more towards the Atlantic but on the pure Aframax side we still provide that rule of thumb. I should mention that in the last couple of weeks the rates in the east have picked up as well, although not yet to the level we have seen at the Atlantic, so that-- it's not uncommon for that to be a little bit out of kilter and move around to slightly different timing.

And then at the rates you mentioned earlier in terms of $22,000 a day so far in the quarter, that includes kind of that 50/50 split.

That's correct. That's a blended average.

Okay and then one other question about the MLP market, you know the MLP stocks in general have been or MLP units I should say have been weak over the last I'd say three or four months including TGPTOO. Two questions regarding that, first of all what's the impact on your sum of the parts calculations and then second of all what valuation maybe in terms of dividend yield would make the MLP market unattractive to continue to drop vessel into it?

Peter, would you like to take that?

Yes well I think there has been a repricng of the MLP market but we are still happy with how Teekay LNG is trading and Teekay off shore is trading. We have continued to deliver upon our plan of increasing the distributions by a double-digit rate. We announced TOO has moved up its distribution by 10% and we announced a more than 10% just to increase in Teekay LNG, so we're delivering on our plan. There isn't much we can do about where the general market is but at the present rates with the very competitive dividends that we have, they are still trading as growth MLPs or at a premium to the market so we would still continue to have an incentive to drop down assets and that's moreover because Teekay is selling at a discount to it's sum of the parts. Now for the reasons Bjorn mentioned with Teekay tankers, we're not going to come out with numbers on where our sum of the parts are. We'll have to wait until the flotation of Teekay tankers but suffice it to say we continue to sell at a discount, so it's still absolutely in our interest to continue upon the plan that we've articulated for growing the distributions of the MLPs, which is to put more assets into them.

Okay thanks a bunch and one final question in terms of rules on guidance for fourth quarter in 2008, can we still kind of assume the same-- I think it was $16,000 a day base for that guidance forecast?

Yes, Scott, it's because our mix of vessels has changed, has expanded beyond Aframax because it is difficult to have an accurate rule of thumb from quarter-to-quarter but if you wanted to use a rough rule of thumb the old one probably is a good approximation still.

Justine Fisher of Goldman Sachs.

The first question that I have is regarding OPEC production. I know you can't make forward-looking statements about it but I was wondering what your opinion was on what we've seen to date. Do you guys think that we've seen the physical evidence of the 500,000 barrel per day increase that OPEC announced because one of your competitors this morning said they don't believe that's materialized.

Well, we are seeing it partly. We're partly seeing it. It's certainly not shown through in its entirety but we are beginning to see there's a sort of the underlying volume increase, so I am not sure whether it's-- it's pretty close up data so I mean I guess whether you see it or not it's a little bit subjective but we view that it's beginning to show its hand.

And if we were looking forward, I know you can't tell us what you think but what do you think is the most important tanker demand indicator we can look at going forward? Is it going to be OPEC production or do you think it's other factors like North Sea productions?

Well, I think you have to-- it depends what horizon you're looking at the market with. If you're looking at it--

Let's say fourth quarter.

Yes I think you have to just look at the seasonality that exists in the market and it's been pretty tried and tested that there is more out on the market in the fourth quarter and you have more court delays and you have-- so in other words the demand tends to go up and supply tends to get a little constricted, so the chart we showed of our Aframax rates is-- shows a very clear seasonal pattern and I guess that's the best guide to go by I think.

And then also I know that you guys usually only give a percentage of the Aframax days that you have booked for the current quarter but now that you have a lot more Suezmax tankers, can you give us color as to what you booked those at?

Yes, as you know, a lot of the OMI Suezmaxes are on a short-term charter. Those are in the mid thirties and OMI added to us about three spot Suezmaxes. So far we fixed about 50, 60% of those spot days sort of in the $25,000 range or so.

And then any targets for repaying the OMI related debt?

As you're referring to the old OMI debt?

Or no, just the debt that you have now taken on in order to acquire OMI, are there any targets that you guys have internally as far as repaying the debt associated with that acquisition?

Well, we have just completed an $800 million facility, as I mentioned, which refinances the majority of the OMI assets that we acquired along with 7 other Aframaxes so that's a ten-year facility. That's a revolving credit facility.

But you said you-- my impression is that you've drawn on that in order to repay the OMI related debt, right?

Yes that facility is in documentation phase so we're expecting to close that in the next month or so.

Okay so you can't comment on repaying or amortization or anything like that?

That so we'll use those proceeds to pay down the short-term facility that we had in place.

Craig Lewis, Credit Suisse.

Yes I had a follow-up question on the off shore business. You know through the acquisition of Petrojarl it looks like Teekay controls about 4% to 5% of the FPSO fleet. There's no doubt about it that there's going to be a significant growth in the FPSO market over the next say three, five years. Is it-- could we kind of look at like growth potentially doubling in the number of FPSOs in the fleet? I mean is that a reasonable assumption?

Well, the forecasts that are being used is that there will be a near doubling of the market in the next four to five years and of course I think the view is really that constraint will be on how many the industry can provide rather than how many will be needed and of course with-- from Petrojarl's standpoint I think if we-- I think we've expressed that if we could land one new project a year that would be the early ambition and then if we can ramp up from there that would be a great step. So we think there's a lot of people queuing and there a lot of customers queuing and outside of the FPSO companies and we will very deliberately pursue the projects where we have the greatest I think skill and strength, which is in harsh weather very regulated environment and high quality operation and we think there will be quite a lot of projects actually in that area.

Okay and being as most of the FPSOs are built in Japanese, Korean yards, I mean with the order of those shipyards pretty much at capacity I mean what sort of turnaround time would there be for an FPSO? I mean is it similar? Would it be a three year turnaround?

Well, there are two factors to consider there. Firstly, the shipyards assign-- they have different parts of their shipyard and you can't switch the entire yard from Aframax tankers to FPSO so some slots even though the bulk ship slots have been sold out, that doesn't automatically follow that the offshore slots are entirely sold out but the lead time for new FPSOs is probably three plus years but a lot of FPSO projects, of course, are not customized or custom built new vessels. They're conversions of existing tanker hulls that are brought in and you place equipment on the deck and convert the vessel for service. So but even that, of course, that also has a finite number of repair and conversion facilities in the world and those facilities are very, very busy. One of the key factors determining the lead time is the availability of major equipment components where the supply chain is very stretched and so that's obviously being taken into account by oil companies looking to develop their oil fields. They are aware of this but it is a key factor, so I'd say on the conversion side you're looking at a couple years lead time and on the new building side, three to four year lead time.

Okay great. Moving on to China, there has been some talk that the smaller refineries in China have kind of not been operating at the highest utilizations they could have. Do you think the announcement by the Chinese government that they're going to increase fuel prices-- do you think that sort of increases these small refiners demand for oil?

I think that's they've kind of hit right in the sweet spot because they've raised prices and the Chinese government subsidizes or limits the price of oil that's in the refined sector so people are buying subsidized oil, artificially low price oil. Of course, that's managing-- that's leading to demand growth at a high level but the refiners are prevented from selling their product. They're buying crude very expensively and selling their products cheap so now that the government has announced that they are raising prices by 10% it's clearly going to help refiners who were struggling and who were running low cost utilization so in that sense that's going to stimulate crude import to China we believe and it's not a big enough price increase that it's going to crimp demand so we think that that's probably an elegant move on their part.

Okay great and just lastly, I think in a press release there's about $44 million left on the buyback. Given the filing, the quiet period, will that limit or prevent the buyback from occurring in Q4?

No that's-- there's no restriction to do the IPO.

(Operator Instructions) Urs Dur, Lazard Capital Markets.

Most of my questions are answered but, Bjorn, in the past I think I recall that you guys actually put a fairly round figure on growth in actual tanker demand crude and product. I don't see it in here this time. Do you have an outlook for say a CAGR over the next three years on the increase in demand for sea born transport of crude and product?

Urs, I wish I could comment on that but we resolve the law. We're not able to answer questions.

You said that. I apologize for asking that. I heard that. All right, sorry. I guess one question, it's sort of a hot topic these days and there is some debate out there in terms of conversions. In fact, some say that it's quite difficult to just call up your shipyard and say, "Wow that tanker I really would like it to be a dry bulk ship." I mean, in fact Oishi said it yesterday that it was difficult. How easy is it and what kind of cost might be involved? Have you investigated that not that you want to go dry bulk but have you investigated that and what's your conclusion?

Right, well two factors on that on the existing vessels a Chinese company or Taiwanese company TNT stepped out and purchased I think 10 vessels in the last couple of weeks and they have gone and booked the shipyard out for two years and they are clearly taking a very aggressive approach. The cost of converting an existing VLCC is about $30 million, an existing Suezmax is about $20 million, $25 million, so it's clearly a major project and the good news is once these ships leave they don't come back. But on the new building side to convert new building berths I think the issue would be the availability of such long lead items as hatch covers and other equipment and, of course, the shipyards being as busy as they are they are like straining to just absolutely optimize their production line so anybody coming in saying can we change something very radically their first answer is not, "Sure, what can I do for you?" But, of course, if you can incentivize them by sharing in the profit and if you can give them enough lead time, it can be done but I would agree though it isn't easy.

It's obviously a very hot topic and you emphasize it and thank you for that and then I guess on the FPSO side, and you may have touched on upon this and I may not have heard it but what kind of speculative ordering are you seeing in the FPSO off shore project market and do you feel that there's enough projects out there to warrant the speculation, if any, that you see?

There is-- there are a couple of operators with new concepts, mainly that have ordered speculative FPSO. I think you would probably see about 10 speculative FPSOs or off shore structures of various types out there, not all of which have delivered but are on order but that's out of a total universe of maybe 120, so a relatively small percentage. It's not unlike the LNG business really.

All right. All right. Well, that's very helpful. Thank you very much.

Martin Rahr, MSR Capital Management.

In the unusual items this past quarter both Vince and the Press Release highlighted the Seagull AS and I am not even aware of what that vessel own something like that. Can you tell us a little bit more about what that was?

Teekay acquired a Norwegian computer based training company. Actually we acquired a small Canadian computer based training company and then we acquired the industry leader Seagull out of Norway about 4 years ago and we had I think some success with that but in the end decided that it was not a core business even though there was some opportunity to cross fertilize, if you will, between Teekay's business and our training needs versus this company. Very successful company and clearly has a great business but it was too small and it was not close enough to our core to warrant the distraction that it represented.

Are there any other small or non core assets that maybe be disposed of in the future?

I don't know. It's not-- we don't have a lot of those kinds of investments but it was an opportunistic investment, which actually works seen from a small compens standpoint but as the Company has been growing larger and more complex and busy we decided to focus on our management time on more core related activities.

Thank you very much and good luck.

[Owen Flore] of Morgan Stanley.

This I pulled up on your comment that you're starting to see oil coming out of the Middle East. It looks like we're coming into a very tight North well Atlantic inventory picture here going over the next few weeks. What exactly are you seeing? Could you elaborate a bit because the (inaudible) are going to be out where I know 600,000 barrels in November for maintenance and the Saudis are saying they're going to increase by 0.5 million. At least they're saying they are so net net there shouldn't really be any change out of the Middle East even if the Saudis indeed did come forward with crude, so would you highlight what-- a little bit more details on what you're seeing?

Basically I guess there will be some UAE maintenance in November of '07 but I guess we are looking at IEA numbers among other things. I am sure everybody else is and if we're just detecting-- I mean on some of it's sort of anecdotal stuff from our chartering desks. It would be difficult to go into a very kind of definitive discussion of you know you have your finger on the pulse in the market and you kind of hear a lot of rumblings and fixtures and talk so it isn't I would agree with (inaudible). It isn't clear cut but we're certainly seeing activity.

Yes because looking at the latest oil movements they said it looks as if they are the chartering activities sort of. I can't really see any change in the pattern. I mean I read the same REA data as you do but that's notoriously unreliable.

Yes so it's not definitive and I mean I think the issue is we have no reason to think that OPEC is not going to deliver on the extra oil and--

Why do you say that?

Well, I think that I think just generally they have shown a lot of discipline. They have shown discipline in withdrawing the oil and I think they're playing the market with a lot of discipline.

So you think it's discipline rather than ability.

Yes I mean I think you can certainly have opinions about that. I mean there's allegedly more spare capacity in the Middle East now than there has been for several years.

Okay. Well, from the oil field services side I don't really see that but I hope you're right.

Well, I guess I think time will show.

There are no further questions at this time. I'd like to turn the conference call back to you, Mr. Moller.

I'd like to thank you all for your participation today and wish you a great day. Thanks for joining us.

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