Teekay Corp Ltd (TK) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Teekay Corporation first-quarter 2008 earnings release conference call.

During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded.

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

Before Mr. Moller begins, I would like to direct all participants to our Web site at www.Teekay.com., where you will find a copy of the first-quarter 2008 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. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in our earnings release and the earnings release presentation available on our Web site.

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

Thank you, Dave. Good morning, ladies and gentlemen. Thanks for joining us for our first-quarter earnings call. As usual I'm joined by our CFO, Vince Lok. For the Q&A session, we also have our Chief Strategy Officer, Peter Evensen available.

Starting with the highlights for the quarter on Slide number 3, we earned net income on an operating basis of $60.8 million or $0.83 per share. Cash flow from vessel operations or CFEO was $184.8 million with approximately one-third coming from our spot business and the remainder from our fixed-rate businesses.

We repurchased close to 500,000 of our shares for $20.5 million or around $41 per share. Q1 average tanker rates were higher than the previous quarter, and this improving trend has continued into Q2, where we are currently enjoying very high tanker rates due to strong fundamentals. As I will be describing this morning, we are actively executing on our 2008 strategy which we presented to your last quarter.

Slide number 4 provide you with a quick reminder of that 2008 value creation strategy, which is to grow each of our subsidiaries accretively through drop-downs of existing and future assets from Teekay Corporation and from third-party acquisitions. The benefits to Teekay are twofold -- to increase the performance fees we receive from our daughter companies, thereby increasing free cash flow and return on invested capital at Teekay; and to increase the share price of our daughter companies in order to raise the sum of the part's value.

On Slide number 5, we highlight our recent progress in executing on this strategy. I will spend a few minutes talking you through these developments.

It was another active quarter for Teekay LNG partners, shown in the box on the bottom left of the slide. We dropped down to two Kenai LNG carriers, which [auto back] to Teekay for ten years plus options. This month, we also dropped down the first of four RasGas III LNG carriers. TGP management plans to recommend distribution increases in connection with these drop-downs.

TGP completed a $200 million follow-on equity offering of which Teekay participated for $50 million. The general partner, owned 100% by Teekay, will soon move up to the 25% tier in the incentive distribution rights.

The box above TGP marked "gas" shows new business developed by Teekay for drop-down to TGP at a future date. As you will have seen from our earnings release, Teekay announced it will be taking over from IM Skaugen the new building contracts for two multi-gas vessels to be constructed in China. On delivery in 2010, these ships will be dropped down to TGP, who will charter them to Skaugen for 15 years.

Looking next at Teekay Tankers in the middle column, TNK declared its first full-quarter dividend of $0.70 per share, representing an annualized yield of approximately 12%. Teekay dropped down two Suezmax tankers to TNK early in the second quarter. This early fleet growth, coupled with the rise in Q2 tanker rates, points to a very attractive dividend payment for TNK for the current quarter. Teekay is entitled to an incentive fee of 20% of dividends paid above $3.20 per share.

At the corporate level, Teekay sold four Handymax product tankers for $175 million. These ships, which were acquired as part of the OMI transaction last year, were not considered core to Teekay.

Finally, turning to Teekay Offshore Partners on the right, Teekay announced it has offered TOO a drop-down of 25% of OPCO. If agreed, this transaction should provide accretive growth to TOO and move the GP up the IDR splits from its current level of 2%. At the Teekay level in the offshore sector, the Siri FPSO went on hire in Brazil where it is now pioneering the offshore production of heavy oil with an API of below 12.

We continue to see a lot of opportunities in the offshore production, storage and transportation area. Teekay Petrojarl is actively biding on new FPSOs projects, but we are continuing our disciplined approach in an environment where many of our competitors are experiencing cost overruns and project delays. We are confident that we can compete in this space as illustrated in Petrojarl's recent bid for the [Toopy] project in Brazil. Although that contract was awarded to another contractor who had one of the few existing idle FPSO units, we know, from the subsequent publication by Petrobras of all bids, that Petrojarl submitted the most competitive bid among those offering a conversion solution.

It is worth mentioning that we've recently established a Teekay office in Brazil to increase our marketing in this important offshore oil and gas growth market. Petrojarl is also actively negotiating contract extensions on some of its existing FPSO units as it seeks to reprice current rates in line with today's stronger market.

Finally, let me say to those of you who have been asking for better financial information on Teekay to illuminate the effect of our drop-down strategy, we heard you. In Appendix B to the earnings release, we have shown desegregated financial statements for Teekay and its publicly listed subsidiaries for the first time. Vince will walk you through this new reporting format during his comments. We look forward to your feedback.

On Slide number 6, we show our updated sum of the parts value which currently stands at $63.44 per Teekay share. As you saw in the previous slide, we are working hard to raise the sum of the parts. We also believe that, as we continue to execute on our value-creating strategy, we will narrow the current 25% gap between the sum of the parts value and Teekay's share price.

Turning to Slide number 7, I would like to discuss the spot tanker market which is phenomenally strong at the moment. In fact, based on rates so far this quarter, this is shaping up to be the strongest Q2 spot tanker market on record. We have booked 65% of our Q2 Aframax spot base at an average TCE of $38,000 a day, and we have booked 60% of our Q2 Suezmax spot base at an average TCE of $62,000 a day. Current market rates for both of these segments are well above these levels.

In light of this strong market, we are pleased to be able to reflect on having executed a number of fleet growth initiatives. Our acquisition of OMI, which is now approaching its one-year anniversary, and our more recent acquisition of ConocoPhillips' six-year Aframax fleet were well-timed. Also, the six new Suezmax buildings we've scheduled for delivery in the next 12 months were ordered at favorable prices that should translate into a low net income breakeven of $23,000 a day. This means that, in a $60,000 day spot market, each of these ships would add approximately $0.18 of EPS annually to Teekay Corporation's results.

When we look at what's driving tanker rates, it's comforting to realize that the market appears less driven by short-term events and more by solid fundamentals. On the following few slides, I will review the three reasons we see for the current strong market.

Turning to Slide 8, reason number one is strong tanker demand growth driven by both higher oil volumes and growing average transportation distances. While oil demand is flat to slightly negative in the U.S. and Europe, demand is powering ahead in non-OECD countries. China and developing Asia currently account for 70% of global oil demand growth. In Q1, China oil imports were up by 15% year-on-year.

Newly published statistics by China highlight that a full 35% of its imports are now being sourced from the Atlantic Basin, three times the volumes of five years ago. This highlights the fact that, in broad terms, the marginal barrel of oil is being produced in the Atlantic and is being consumed in the Pacific.

There is a related trend of new or growing long-haul trade routes such as Venezuela to China and India, Brazil to California, Angola to China, and so on. In other words, it takes more tankers to move the same amount of oil that it used to.

Reason number two for the strong market on Slide number 9 is that the required additional tankers to move that oil may not actually become available due to limited supply growth. In Q1, the world tanker fleet grew b y only 0.6% from the end of 2007. Deliveries were almost entirely offset by ships being converted to offshore or dry-bulk use and also scrapping activity reemerged due to record high prices for scrap steel.

Many observers have predicted net fleet growth this year based on the published order book. The table on this slide takes a closer look at 2008 fleet numbers. The number of new building deliveries projected by Clarkson's is shown in the column marked "2008 deliveries as per CRS". Based on our first-hand experience of a six-month delay on our own Suezmax new buildings in China, which are being built at a relatively well-established shipyard, we've adjusted Clarkson's expected 2008 deliveries in the next column on the basis that half of scheduled 2008 Chinese new buildings will be delayed by six months. This would, for example, reduce Suezmax deliveries from 21 per Clarkson to 17 per our calculation.

The deletion figures in the sold-for-conversion and scrap column are a Teekay estimate. They include ships which have already left the fleet this year, plus ships mandated out in 2008 by the IMO, plus tankers sold in 2007 for conversion but which have not yet converted, plus 50% of ships reported sold in 2008 year-to-date for conversion. We have conservatively assumed no further conversion sales nor any voluntary scrapping for the remainder of 2008. Based on these, in our opinion, realistic assumptions, overall Aframax, Suezmax, and VLCC fleet growth could be as little as 1% this year, as shown in the right-hand column.

Reason number three for the strong market on Slide 10 is what we have termed "operational constraints." This is a list of factors which, in aggregate, meaningfully reduce the effective utilization of the world fleet. Single-hull discrimination continues to grow. Korea, which has been a leading user of single-hull tonnage, has set aggressive reduction targets for single-hull use. The 20% of the world's tankers that make up the single-hull fleet is feeling the net tighten around it.

A growing number of ship days are big lost due to a variety of infrastructure bottlenecks such as ships waiting to unload due to lack of short-tank capacity, ships serving as floating storage as we're currently seeing in Iran, where 1.5% of the world tanker fleet is tied up, or ships being used as hidden storage by [alterators] stretched repair yards lengthening the average drydocking stay for ships. As always, there are a number of temporary factors influencing the fleet as well.

Finally -- and this is probably a factor which tends to be overlooked by many observers -- is the effect of high bunker prices. The optimal economical speed of a ship is a function of the price of fuel and the prevailing freight market. More than a year ago when bunker prices were well below today's levels, the major container lines began slow-steaming their ships due to pressures on operating margins. The result was a significant contraction in shipping capacity.

Based on today's bunker prices of close to $600 per ton, a modern Suezmax tanker needs to generate a TCE of more than $50,000 a day to justify maintaining full speed of 15 knots. Below this TCE level, it is more economical to reduce speed to 14 knots. Doing so, however, would mean taking approximately 6% more days to complete a given voyage. At a macrolevel, this equation represents a major self-regulating factor in tanker supply that should put a floor on the spot rates at a high TCE level.

It is interesting to note that, in 2004, the previous peak year for tanker rates, bunker prices were less than one-third of today's levels and therefore did not provide anywhere near the same underpinning to market rates as is the case now.

On Slide 11, we reintroduce a graph from the past showing the close correlation between global fleet utilization and spot tanker rates. It is generally accepted that 90% represents full utilization of the world tanker fleet and above this level, spot rates tend to spike dramatically. According to [Plotu], world tanker fleet utilization is now back above 90%, explaining the market strength we're currently enjoying. While it is still too early to rule out the prospect of seasonal weakness later this summer, fundamentals point to a very tight tanker market overall for 2008.

I will now hand it over to Vince for the financials. Vince?

Thanks, Bjorn, and good morning, everyone. Net income for the first quarter was $60.8 million or $0.83 per share when excluding the items listed in Appendix A of our earnings release, which relate mainly to unrealized losses from foreign exchange translation and interest rate swaps.

Looking at our operating segments on Slide 13, we generated $185 million in cash flow from vessel operations or CSEO during the first quarter, compared to $138 million in the previous quarter. The Offshore segment CSEO declined by $2 million from the fourth quarter of 2007, mainly reflecting an increase in the number of off-hire days in our shuttle tanker and FPSO fleets due to unexpected repairs, partially offset by a decrease in vessel operating expenses. In the first quarter, two of our shuttle tankers incurred a total of 102 days of unscheduled off-hire which resulted in a $3.8 million reduction in revenues.

Our new Siri FPSO commenced its charter in Brazil on February 1. However, the CFEO this unit was not material in the first quarter due to start-up costs and that full production did not commence until early in the second quarter. We estimate that the second quarter's CFEO for the Offshore segment will be slightly higher than the first quarter because the full impact from the Siri CFEO and lower expected off-hire days will mostly be offset by higher maintenance costs for the Offshore fleet as we begin to move into the usual summer maintenance season in the North Sea.

CFEO from the fixed-rate tanker segment increased by $1 million, primarily due to the net increase in the fleet size. For the second quarter, we expect CFEO from the fixed-rate tanker segment to increase to approximately $26 million as a result of the addition of two [MR] product tankers which recently commenced five-year charters to ConocoPhillips.

We had another strong quarter in our liquefied gas segment, generating record high CFEO of $39 million, up $4 million for the prior quarter. The increase was the result of the acquisition of the two Kenai LNG carriers in December of 2007, partially offset by the impact of five off-hire days on the Catalunya Spirit in the first quarter. We expect the gas segment CFEO to decrease to approximately $37 million in the second quarter, due to the scheduled drydocking of two LNG carriers and one LPG carrier.

The first RasGas III LNG carrier delivered in May. However, as these vessels are equity accounted for since we own a 40% interest in these vessels, the results will not be reflected in our reported CFEO going forward.

The CFEO contribution from our spot tanker segment increased by $43 million compared to the prior quarter, primarily due to the increase in spot tanker rates and an increase in the size of the spot tanker fleet resulting from the acquisition of the ConocoPhillips vessels.

In order to improve the comparability of our TCE results to market indices, in our earnings release, we have split out the TCEs and revenue days within our spot tanker segments between charters that are less than one year, which we refer to here as spot, and charters one to three years in initial length, which is referred to as time charter. Our spot Aframax and Suezmax fleet earned an average TCE of 36,200 and 46,700 per day, respectively, in the first quarter. As Bjorn mentioned earlier, the spot rates so far in the second quarter are above the first-quarter levels.

Turning next to Slide 14 and reviewing the remaining income statement figures in comparison to the prior quarter, G&A expenses were $67.7 million compared to $60.1 million in the prior quarter. This increase was primarily due to higher business development costs, particularly in our Offshore segment, the timing of certain expenditures, and the continuing depreciation of the U.S. dollar. As noted at the bottom of the income statement in our earnings release, we had certain foreign exchange hedges in place which did not get hedge accounting treatment. Had we been able to get hedge accounting treatment, the reported G&A costs would've been roughly $2 million lower in the first quarter. We expect G&A expenses in the second quarter to be slightly lower than in the first quarter.

We incurred $1.5 million in restructuring charges during the first quarter. These costs related to the recurring of a tanker from Australian crew to international crew. An equivalent amount was paid to us by the customer, which is included in our revenues. The increase to net interest expense was mainly related to unrealized losses from interest rate swaps which have not been designated as hedges, as well as the acquisition of the Kenai LNG carriers in December of 2007. The total amount of these unrealized losses from interest swaps was $11.5 million in the first quarter compared to $5.8 million in the prior quarter.

The income tax expense in the first quarter of 2008 was in line with expectations when excluding the effect of foreign exchange rates. Excluding the effect of these foreign exchange rates, we expect our tax to recover in the second quarter to be approximately $10 million, which includes a $5 million one-time cash tax recovery.

Foreign exchange loss in the first quarter of 2008 was $29 million, which was mainly due to unrealized translation losses. Excluding the minority interest portion of the items in Appendix A, minority interest expense in the first quarter would've been roughly $12.6 million, which has increased from $7.1 million in the previous quarter due to the impact of the Teekay Tankers IPO for a full quarter. Going forward, minority interest expense will of course vary depending on the results of Teekay Tankers.

In keeping with our asset manager focus, for the first time, we've also presented our balance sheet and income statement on a desegregated basis, separately showing the results of each for publicly listed subsidiaries and of the parent company on a stand-alone basis. We hope that this supplemental information will be useful, particularly in illuminating the free cash flow generated by the parent company and to illustrate the strength of Teekay's balance sheet on a stand-alone basis.

As you can see on Slide 15, most of Teekay's consolidated debt resides in its various subsidiaries and is nonrecourse to Teekay Corporation. As at March 31, Teekay stand-alone net debt was just under $1.4 billion. However, this amount is declining rapidly.

For instance, in early April, Teekay Corp. sold two Kenai LNG carriers to TGP for $230 million and two Suezmax tankers to Teekay Tankers for about $190 million. Pro forma for these two transactions, Teekay stand-alone net debt was below $1 billion. As we continue to execute on our plan to drop down more assets into our daughter companies, Teekay stand-alone's balance sheet should quickly delever, which will provide us with further financial strength and flexibility going forward.

Slide 16 shows the desegregated income statement and cash flow for vessel operations. For simplicity, we have included Teekay stand-alone's 74% direct interest in OPCO's results under the Teekay Offshore column.

Teekay stand-alone generates a significant amount of cash flow, which was $49 million in the first quarter. Further, when Teekay Petrojarl's current FPSOs contracts reset to current market rates, there is significant upside to its cash flow from vessel operations.

Slide 17 illustrates the amount of cash flow generated during the first quarter from Teekay stand-alone's perspective. The distributions received from TGP, TNK, TOO and OPCO totaled $51 million in the first quarter. These cash flows are expected to increase as we grow the distributions in each of our daughter companies.

It is also important to note that we're still at the early levels of the GP incentive distributions, which can grow exponentially as we start to move into the higher splits and as we grow the absolute size of each of our daughter companies.

Together with the $34 million in net cash flow from the stand-alone assets, the total cash flow generated by the parent company in the first quarter was $85 million or $1.16 per share, which is an attractive free cash flow yield, especially when you consider the upside potential of our FPSOs and our GPs.

Slide 18 shows the number of new buildings scheduled to deliver into our fleet during the remainder of 2008. All of these vessels are fully financed and are either committed or suitable to be dropped down into our daughter companies. Our new building delivery pipeline provides us with significant built-in growth in 2008 to further help increase our cash flows.

I will now turn it over to Bjorn to conclude.

Thank you, Vince. I just want to say that we are very excited about the progress we're making on our strategic approach with news to report in each of our daughter companies, and we're very excited about the momentum of the tanker market and Teekay's recent growth in that sector as well.

So with that, we'd like to open it up to questions from the analysts and investors.

Thank you. (OPERATOR INSTRUCTIONS). Jonathan Chappell, JPMorgan.

Thank you. Good morning, guys. Bjorn, can you remind us, on the Petrojarl contract renewals, when do they officially expire? How early before those expirations are you attempting to get the kind of mark-to-market rates? Really, what's your alternative if you can't get the current contracts renewed at market rates? Are there other potential opportunities for those assets?

Yes, I guess there's some disclosure in the Teekay Petrojarl annual report, but essentially the Siri FPSO which is now producing in Brazil is on a two-option one-year contract that's been widely publicized, and discussions in the early stages on ongoing production opportunity for that vessel, but that's not suppressing but we're confident that shop will probably spend all or most of its technical and operational life in Brazil.

We have currently two contracts in the North Sea that are likely to end in 2010. One of them is under active negotiation and the other one I guess is under consideration.

So I would hope that we would have something in the next couple of quarters to report. On the renewal side, hopefully we will have some new projects that we can also secure.

Okay. Sticking with the Offshore segment, the refinery shutdowns and disruptions earlier in the second quarter in the North Sea -- did that have any significant impact on your shuttle tanker business or any of your business out in that area?

I think what happened in the North Sea was of course the freight market was strengthening and that caused our customers to try and use the shuttle tankers for slightly longer voyages. They have I guess, under the time charter provision, the right to go to different destinations. They pay the same day rate which is like in the mid '50s today, and so if it's a weak spot market, they will typically shuttle the crew to nearby storage gathering facilities and ship it out on [VL's] Suezmax (inaudible) trans-Atlantic. But if the spot market is very hot, they actually can choose to directly deliver crude oil and shuttle tankers into the Mediterranean, the U.S. Typically, if you have a disruptive market, especially in a firm freight market, then they tend to use up more shuttle days. So, we certainly would not have suffered any idle time from that.

Okay. Then finally, there were large discrepancies in the different Aframax markets over the last several weeks and months. I kind of grew up on Teekay, understanding that half of your business was done in the Pacific Basin and half in the Caribs. Are you more flexible now? Are you getting more exposure to potentially the North Sea and the Med markets which had been hotter of late recently?

Yes, we are. We are still using the same rule of thumb, but I guess we have a more varied underlying trading pattern (inaudible) sorry, the vessel days sold in the second quarter reflect the fact that the first month of the second quarter, April, was quite a bit weaker in the Pacific than it was in the Atlantic, but that has since caught up so that current dayrates in the inter-Pacific are $40,000 to $45,000, and that's similar to the Caribbean market. So we are certainly doing more in the Mediterranean and of course, with our Suezmax business, we're generally doing a lot more in the Atlantic than we are in the Pacific.

So we have moved a few ships from the Pacific into the Mediterranean these last few months in response to the strong rates. We've also traded a couple of LR2 product carriers from clean into dirty to take advantage of that big differential. So, we are quite flexible.

Okay, very helpful. Thanks, Bjorn.

Urs Dur, Lazard Capital Markets.

Good morning, guys. I saw you on CNBC this morning. I guess you were up early.

You've got that right.

Yes! I was wondering if you could discuss, because I appreciate your position, on the order book and I tend to have a general agreement -- how many conversions are you seeing on the Aframax side, or is that specified in the presentation? I didn't quite see that.

Well, I think the number we used in our presentation was -- was it 45 (multiple speakers) Aframax. So of course we are only assuming that half of the vessels sold for scrap this year would go and all of the ships sold -- sorry, let me repeat that. Half of the ships sold for conversion in '08 so far are for those assumed to actually go ahead this year, whereas all of the ships that were sold for conversion last year we assume will get done by the time the year is over. So, we think that's a pretty conservative assumption.

Do you see, next year, in your assumptions going forward next year, a similar tightness? Do you see issues in regards to scrapping going forward, considering the phase-out? There's going to be an awful lot of tonnage that will be legislatively redundant in the vast majority of the trading world?. Do you seeing bottlenecks with scrapping and do you see a similar tightness next year with the fleet growth?

Well, we definitely have more inflow of new tonnage next year; that's understood. But again, we think China will have a bigger share next year, and they will have the same kind of domino effect of delays, so that's one thing that will possibly mitigate the incoming tonnage, but it's still going to be a big number.

So the question is how can that be absorbed? On that front, I would say clearly I don't think anybody is talking about 2015 phase-out of single hull. The question is, is it 2010 or are people going to start phasing the vessels out even sooner? Of course, that depends on the market. It would be a bit of a self-fulfilling support of the market if the market were to weaken. I think you would very quickly get people scrapping their ships at $700, $800 a ton light ship scrap price. And you will also of course, with the dry market being at a record level, there's strong demand for offshore, there's really no reason single-hull tankers would not (inaudible) so that's even before we get to what the demand side is.

So I would say that there are so many wild cards I think that are going to disrupt the ability of the order book to overpower the market. I mean, this slow speed thing that I described is a very significant factor. You know, if Suezmax rates were to drop below $50,000 a day, with people being rational, essentially you would see 6% of the supplier side disappear overnight (multiple speakers) significant.

Yes. That would be, so we will see. You're right, a lot of wild cards.

Finally, you mentioned and one sees that, if one looks at consensus across the board in tankers, that people sort of expect seasonal slowdowns in third quarter or in the summer. I was wondering if you -- you mentioned it just very briefly -- but if you have any insight as to what the potential causes of that could be and what the potential offsets to that could be. Do you have any insight that you can provide there?

Well, I think a lot is going to be depending on stocking patterns this year, which relate to [Contango] versus backwardation. So I think, if you're going to see continued backwardation, then you're probably not going to see any stock building over -- or limited stock building on the summer. Then you might get a weaker summer, whereas if you get more of a contango, then I think you could see a run to replenish stocks in some of the markets where stocks are a little bit on the low side.

Excellent. Thank you very much.

Greg Lewis, Credit Suisse.

Good morning, gentlemen. I guess a follow-up on Urs' last question -- I mean, given what's happening in China with the strong demand and questions surrounding the order book, it almost sounds like we're looking at potentially '09 being better than it was previously expected, say, three months ago. Are you sort of comfortable with that sort of --?

Yes, I think that there's generally a firming undertone. I mean, the fact that we're looking at the strongest Q2 on record now at a time when we should have been seeing the usual seasonal weakness is mind-boggling. The fact that it's based on fundamentals rather than sort of disruption events speaks volumes I think. So I mean, you look at how difficult it is to get drydocking space, how long -- time ships are taking repairing, how much it's costing the value of scrap steel -- you know, if you have a ship that is due to be phased out in 2010 or is being discriminated out, why stick around? So, I think you could actually see a lot of front-loading of the single-hull phaseout.

So then, given like the strong environment, I mean, clearly that we're in now and potentially that we will be in, is it more -- becoming more of a challenge for you to sort of charter in tonnage at what you would consider to be attractive rates?

Well, the market is firmer now that it was. I still think you can -- I mean, what has so far been different between the tanker business and drydock business is the drydock time charter rates have really gone up very significantly. You can do five-year charters at very high rates if you have a vessel.

In the tanker side, it is difficult to cover a ship long-term at high rates. Conversely, it's relatively easy to charter in a vessel for a three to five-year period. So the issue is are you getting the right quality of ships, the right quality of owners? Of course, in our case, we have the luxury of our new building program, which is going to add operating leverage to us at a very good time.

So we will be opportunistic. I think there will see some seasonality and people have amazingly short memories. The ship owners will adjust their rates based on a relatively shallow dip in the market sometimes. So we will play with it.

Okay, great. Then I just have a few quick questions. One was on Slide 7 when you referred to that spot guidance. Is that just for the -- I know that's for the spot segment, but is that just for the spot vessels in the spot segment or is that the aggregate of the spot fleet, which includes the longer-term fixed time charters?

Yes, that guidance is just for the spot portion of the (inaudible) so it's less than one year component.

Okay, great. Then my other question was -- and Vince, you sort of mentioned, with the typical seasonal slow-down in the shallow tanker business in Q2 -- you know, clearly, we're in the middle of Q2 at this point. Is that going to be primarily in Q2 or should we sort of expect that dip to sort straddle into Q3 as well?

Yes, typically, it's higher in the second quarter and (multiple speakers) declines as we head into the fall, so it will continue into the early part of the third quarter but then likely activity levels pick up near the end of the third quarter.

Okay, but it will primarily be in Q2?

That's usually the peak seasonal maintenance period.

Okay, sure. And then actually, you know, just one last quick thing -- you mentioned that you converted a couple of your LR tankers into crude tankers.

(multiple speakers)

Yes, for the trading. Roughly, that's sort of clean those tanks to get them back in the product fleet. Like what's sort of the timing and the cost of that?

It depends what the [last] cargoes are and so on. In our case, we have a number of contracts to carry condensate in the Atlantic Basin, some of which are not that [collar] sensitive, so you can actually use those cargoes as cleanup cargoes, which allows you to make the cleanup and return process a lot easier. So it's not a major factor.

Okay, great. Thank you.

Justine Fisher, Goldman Sachs.

I think that bondholders are probably excited to see the unit offerings from the [MLPs] going to pay down debt. I was wondering if there's any -- I mean I know you can't comment on how imminent they might be, but it I mean how many -- how often do you maybe plan to do that, or how much more of those can expect? Are those going to be on a regular basis or --?

We have a defined plan for the dropdowns. Of course, it is market-sensitive, but it also depends upon going through the -- where we have a dropdown, it depends on going through the conflicts committee process. As we announced today, we are going through that process on Teekay Offshore in order to have another 25% of OPCO move into Teekay Offshore.

The other ones are on more of an opportunistic basis, but we are committed toward that schedule of trying to move more assets down into the daughters which have a lower cost of capital.

Can you remind us which assets are left at the top?

We have of course all of the -- our shareholder in Petrojarl is up at the top, and we have about 30 tankers up there that are eligible to go down into Teekay Tankers, and then we have a few more fixed rate tankers that don't automatically belong up there, as well as of course 75% which we hope soon to be 50% of the OPCO or the offshore franchise.

So as far as the physical assets are concerned, there's only 30 tankers and then a few fixed-rate tankers as well?

That's correct.

Is the goal to get all of those out of OPCO?

The goal isn't to get them out of OPCO. The goal was to sell the rest of OPCO down into Teekay Offshore. But ultimately, as it relates to those 30 tankers, yes, we would like to have them inside of Teekay Tankers.

Yes, the 30 tankers are distinct from OPCO. Those are small tankers.

Yes.

So the process would work whereby Teekay just continually drops assets down until Teekay Corp. I guess as a holding company followed the [MLPs] and that is it?

Well, Teekay also is generating new transactions, right, on top of that. So we can reemploy the funds as well into new projects, which as we have said is part of our asset manager. We're always looking at developing new projects, and then there is a warehousing component going on as well.

So if we can't reemploy the money in good projects going forward, then of course we will have to look at returning it to the shareholders. But right now, we have great opportunities in our offshore franchise. Then of course, we also have the trading of the conventional tankers that we do up at Teekay where we in-charter in ships and then we charter them out and play the spot market.

Right, but there's still -- I mean those still aren't owned assets, and so ultimately it seems like there may be few -- there may be no real owned physical assets at Teekay Corp. and while Teekay Corp. may be a conduit for additional growth projects, eventually those will be dropped down, too. Right?

Yes, but all of this takes a certain amount of time and with our FPSOs we have a -- so yes, you're right in principle that could happen. But that assumes that all the people we have dedicated toward business development can't find some great projects in the offshore realm, and/or the shipping realm.

I think the ConocoPhillips transactions, for example, in December, which moves us closer into one of what we would call a strategic customer is the right kind of thing that you are going to see Teekay moving toward -- because more customers want to use us for their outsourcing needs. So we actually see a wealth of opportunities up at Teekay. Having said that, we are also cognizant of trying to close the sum of the parts.

Okay. Then I have a question on the LNG market. I know that Teekay's LNG vessels are on very long-term charters and so it doesn't what affect you. But just qualitatively have you guys -- given the fact that you were probably the first of the public tanker companies in the U.S. to get into LNG years ago, have you been disappointed by the way that market has unfolded?

I think we are realistic about the market, which is that so much money is going into gas right now that it can't fulfill all of the projects, so the projects have been delayed. This isn't anything new. We saw this in early '80s when people were going to build a lot of refineries. Those refineries ended up been delayed or sometimes not being built as the case was in the Mid East. But there is a resource issue as I'm sure you'll hear from other companies that are trying to build the liquefaction.

So we have noticed that, and of course, we had to change our model. Our model involved going out and then buying more LNGs that were on the water with long-term contracts, where you see Kenai, you just saw us look at the Skaugen transaction. We think there's a lot of great opportunities there in order to consolidate what's a fragmented market.

So for us, the big question is changing the model. But definitely, the amount of tenders have moved on, moving into more value-added strategies. If it's hard to get a liquefaction plant built on land -- we are looking, for example, at floating LNG, because you can build those cheaper in shipyards and other offshore fabrication yards and then you can float them into other places. So that's all part of our strategy.

That's certainly what you're seeing worldwide, this huge build-out as people try to tap into the resources.

Okay, thanks. Then just one last question -- how many of the senior notes were outstanding at the end of the quarter?

Roughly about $250 million.

Okay, thanks.

Tim Mullen, Virginia National Bank.

Good morning. As a follow-up on that, on your Slide 15 with the disaggregated balance sheet, what is the make-up of the long-term debt and capital leases? Particularly, I'm wondering what part of that is made up of leases -- at the parent company only number?

The parent company number -- very little. Most of that is sitting in Teekay LNG, where we have leases on the Suezmaxes and on a few of the LNG vessels. So most of that in Teekay parent is long-term -- is in the form of debt and bonds.

Very good. Also, thank you for adding that disaggregated stuff. That's very hopeful.

(OPERATOR INSTRUCTIONS). Daniel Burke, Johnson Rice.

Good morning. I was curious on the sale of the former OMI product carriers. Do you still have the other four I think? Why are they noncore? Are you changing at all your outlook on the product sector?

Okay. The four Handymaxes and MRs, even though they are relatively close in terms of deadweight size, they actually are relatively distinct markets. So having four of each doesn't actually give you eight vessels in a particular pond. So we determined that, on the basis of other priorities around offshore and gas and spot tanker crude assets, it wasn't very likely that we would devote enough capital to build up a meaningful position in those two segments.

So, we had the opportunity to unload the Handymax tankers. We still have the small MR tankers. Two of those were placed on five-year charters to ConocoPhillips at attractive rates. The other two are trading -- well, actually they are I think either just coming off some time charters that we inherited but they are not on long-term charter at this time.

Okay, so no real change in how --?

So just to add, sorry, I mean, it's a market with a lot of units. There are a number of fairly sizable constellations that have formed by A.P.Moller and others where they are running like 50, 70 ships. So to have four ships or two ships, it is not a factor, so that isn't a game Teekay plays in.

A.P.Moller Okay, and then just one other one, Bjorn -- a lot of scrutiny around the situations in Chinese shipyards. You mentioned that you are personally seeing six-month delays. Maybe more color on -- is it component to issues, just general slowdown? Any more color you can give on, in your experience, specifically what's creating that delay?

There are a number of factors. One is quality. We have pretty high standards, so our sizable supervision team will drive the Chinese shipyards (inaudible) until we are happy with the welding. So we will reject blocks and have them represented and so on. So, that's one factor.

The other factor is just supply chain and the fact that the yards are not as productive as I think they expected to be. So it's a combination of factors.

A.P.Moller Okay, great. Thanks for that.

[Rupesh Savhu], (inaudible) Capital.

Yes, with regards to the OPCO dropdown to TOO, do you have any initial thoughts on how TOO will finance that, either via debt for equity or a combination? Then also, how do you -- how will you value OPCO? You know, what's the preliminary plan on valuing the dropdown?

As it relates to the first part of the question, how will you finance it, that has to be done through equity. That isn't an asset that you can necessarily leverage.

As it goes to the second one, Teekay has made an offer to Teekay Offshore, and Teekay Offshore conflicts committee is evaluating that and is in active discussions in order to arrive at a price that is beneficial to Teekay Offshore.

So would Teekay then accept TOO equity or is -- would TOO do a secondary offering to third-party investors?

I don't think I want to be drawn on exactly what the financial plan is going to be at this point.

Okay. Would it be fair to say that the drop-down price that you offered TOO is less than the indicated price that TOO is trading, if you understand me?

Yes, I think that is a fair assumption that, unless you do that, the deal is not going to be accretive and there's no point in Teekay Offshore buying any asset unless it's an accretive asset.

Right. You wouldn't care to give us some sort of a discount, would

I would now want to be drawn on what that value is right now.

Okay. Also, I guess the last question is TOO's assets, if I understand, are predominantly -- I mean like 85% or more of their asset value relates to OPCO. Is that plus or minus correct?

Yes.

There are no further questions at this time. Please continue.

Okay, we would like to thank you very much for attending. This is an exciting time in the tanker market, and we look forward to reporting to you next quarter. Have a great day. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference call for today. You may now disconnect your lines and have a great afternoon.