Teekay Corp Ltd (TK) 2009 Q2 法說會逐字稿

Welcome to Teekay Corporation's second quarter 2009 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, Chief Financial Officer.

Before Mr. Moller begins I would like to direct all participants to our website at www.Teekay.com where you will find a copy of the second quarter 2009 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 results 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 the second quarter 2009 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Moller to begin.

Thank you, Kent, and good morning everyone. Thank you for joining us on this morning's call. We are reporting our second-quarter results a few weeks behind our normal second-quarter reporting time frame, but we expect to be fully back to our normal schedule with our third quarter 2009 earnings in November.

I'm joined today by our CFO, Vince Lok, and for the Q&A session we also have Peter Evensen in New York, Teekay Corporation's Chief Strategy Officer, and also the CEO of Teekay LNG and Teekay Offshore, and we also have our Corporate Controller, [Brian Fortier] here.

We are reporting today on Teekay Corporation's second quarter 2009 results. While we are reporting a net loss for the quarter, against the backdrop of the weakest tanker market since 1992, we believe that Teekay is delivering on all of the key priorities outlined by management at our investor day in New York in June of this year. This morning I am pleased to provide you with an update on the considerable progress we have made.

Turning to slide three of the presentation, which is posted on our website, I will briefly review some of our recent highlights. For the quarter Teekay reported an adjusted net loss attributable to stockholders of Teekay of $21.8 million or $0.30 per share. These results are a reflection of the weak spot tanker market during the quarter which I will discuss in a few moments.

Even in the face of low spot rates, the Company generated consolidated cash flow from vessel operations, or CFVO, of $130 million in the quarter, highlighting the value of our fixed rate businesses. We reduced the size of our fleet trading in the spot market in the quarter and this will continue into the second half of 2009. Our strong focus on reducing operating costs and overhead expenses is achieving encouraging results with our costs continuing to trend meaningfully lower. We are progressing along the path of reducing debt at Teekay Parent. Teekay Parent represents the conventional tanker and FPSO businesses of Teekay and excludes the assets and liabilities of our three daughter companies, Teekay LNG, Teekay Offshore and Teekay Tankers. Over the past year we have reduced Teekay Parent's net debt significantly, and thereby improved the Company's balance sheet strength and financial flexibility.

We also continue to take advantage of the access to capital provided by our daughter company structure completing follow-on equity offerings at Teekay Tankers and Teekay Offshore. In July 2009 we paid out our regular quarterly dividend of $0.31625 per share for Q2 supported by the distributions we received from our ownership in our daughter companies. As of June 30, 2009 our consolidated liquidity remained at a healthy level, standing at over $2 billion, which is in addition to approximately $750 million of prearranged financing for our committed new buildings.

Finally we continued to enhance the contribution of our fixed rate businesses through a combination of contract extensions on various existing fixed-rate vessels and on a selective basis investment in new projects, and I will describe a few recent examples later in my presentation.

As the earnings reporting season for Q2 is nearly over now, other tanker companies will have already provided tanker market commentary on their earnings calls. I will, however, briefly review two slides to discuss our perspective on the tanker market.

Turning to slide four, we show in the shaded area the utilization of the world tanker fleet over the past 18 months as well as the resulting Aframax spot rates. As you can see, the world fleet has lost an estimated 10 percentage points in utilization during this period from above full utilization at 92% last summer to some 82% at the end of Q2 this year, and rates have followed suit. With rates having dropped even further into Q3 to date, utilization is probably closer to 80% right now. The biggest single contributing factor to this picture is the loss of 3 million barrels per day of relatively long-haul seaborne oil that OPEC has pulled off the market compared with their production cuts last summer. Using the usual rule of thumb to convert this 3 million barrels of reduced oil supply into the corresponding reduction in tanker demand, we estimate OPEC cuts have reduced tanker ton mile demand by between 8% and 10%. This figure may even be higher, actually, since Saudi Arabia, Iraq and other key OPEC countries have especially focused on temporarily reducing their supplies to the US in order to assist in bringing down price guiding oil inventories in the US. This has a significant effect on a ton mile demand basis because the Middle East to US is among the most tanker ton mile intensive trade routes.

Tanker supply, on the other hand, has so far played a smaller role because an 8% growth in physical supply in the last 12 months has only translated into a 3% growth in the effective supply. This is due to the fact that an estimated 18 million to 20 million tons of tanker capacity is being used for temporary floating storage, driven by oil price contango. We see this phenomenon firsthand since currently 13 of Teekay's owned or managed tankers are being used for floating storage. One vessel has been employed for storage since February of this year.

What this chart also makes clear is that the spot market in Q3 has gone from bad to worse, and this is reflected in our quarter to date TCEs of $15,000 per day for Suezmax and only $8000 a day for Aframaxes, both figures based on us having booked 80% of the days in the third quarter. However we do expect the usual seasonal increases in demand to help tanker rates somewhat in the fourth quarter of this year.

Perhaps the key take away from this slide as we look ahead is that we don't actually need tanker supply demand balance to revert all the way back to where it was last summer in order to get a significant improvement in rates. In fact, nobody realistically expects a return to full fleet utilization for quite some time. It would probably only require half of OPEC's cuts to come back on the market in order for fleet utilization to rise by something like 5 percentage points. And add to this the ton mile effect of a return to normalized allocation of OPEC oil to the US. And looking at the chart it would seem that it would only take a move back to the mid-80%'s utilization levels in order to support Aframax rates in the $20,000 to $25,000 a day range, which is substantially above Teekay Parent's breakeven level, as I will show later.

On slide five, we look ahead to the prospect of a recovery getting underway in 2010. We would expect the recovery to be demand-driven and there are some encouraging signs. Six out of the world's top 10 economies recorded positive year-on-year growth in Q2 with the second half of 2009 looking even more positive. And as shown in the graph on the right, China imported record quantities of crude oil in July. Looking at the graph on the left, the blue line shows the IEA's forecast of oil demand responding to an economic recovery in 2010 with growth of 1.6%. This figure may be subject to upward revision based on yesterday's news that preliminary August 2009 oil data indicates a swing into year-on-year oil demand growth for the first time since last summer, and that oil demand exceeded supply for the third consecutive month. With Middle East OPEC countries being the sole source of meaningful spare capacity and therefore by default the swing producer, most of future increases in oil demand will need to be supplied by long-haul OPEC oil. Due to OPEC's focus on bringing down global oil inventories, we can expect a lag between the time demand rises and the time OPEC responds with increased production. But eventually the demand fundamentals will translate into tanker demand.

We also expect the single hull tanker phaseout to gain momentum in 2010 and this will be necessary to address tanker supply due to the scheduled order book next year. So summing up the tanker market discussion, recovery in oil demand and acceleration in single hull scrapping will be key components required to see a meaningful increase in tanker rates starting at some point in 2010. From my experience I can tell you this is something that can happen very quickly.

Turning to slide six, we are maintaining our strategic focus on realizing value for Teekay's shareholders through the key [powers] outlined at our June investor meeting, namely actively managing our conventional tanker asset portfolio during this period of weak rates, improving our profitability through cost reduction and improved rates on new or renewed fixed-rate charter contracts and further delevering the balance sheet of Teekay Parent through drop-downs for our daughter companies, and asset sales to third parties.

On slide seven we discuss the reductions we are making to Teekay's spot tanker market exposure. We have updated two charts, which you may have seen at our investor day, showing the quarterly changes in our fleet employment in 2009. I was not intending to walk through the detailed charts, but merely use them to make the point that we continue to actively reduce the size of our spot fleet in the Aframax segment as well as in the medium-size product tanker segment, which is not shown on this slide. In the process our average in charter rates have fallen, as has our quarterly time charter hire expense. Between Q1 and Q2 our time charter hire expense was reduced by approximately $20 million. With additional Aframax in charters running off through the balance of the year we anticipate further time charter hire expense reductions which will reduce our cash flow breakeven rate. This is important as this is the sector making the largest contribution to our loss this quarter.

Our Suezmax fleet is somewhat smaller and we have fewer in charters trading spot. Our Suezmax spot exposure is set to grow in the second half of the year through expected delivery of two additional Suezmax new buildings in the fourth quarter plus the expiry of hedges known as synthetic time charter contracts, which will have the effect of increasing our spot exposure by 3.5 vessel equivalents by the end of Q3 this year.

Turning to slide eight, a key strength in our business model is our portfolio of business that is not linked to the volatile tanker cycle, coupled with our global reach which allows us to pursue business globally. In recent months we have remained active by renewing expiring below market contracts as well as selectively pursuing easily digestible new business opportunities. Some recent highlights shown on this slide provide good examples of our project management capabilities in action. We secured a 10 year fixed-rate charter with one of our key customers, Caltex Australia, to replace a 20-year-old vessel which we currently have on charter to them. In connection with this charter we acquired a modern product tanker which will be modified to meet the service requirements under this contract. This involves Australian coastal cabotage trade and the vessel will be supported from Teekay's Sydney office.

We signed a contract with Occidental Petroleum to provide a floating storage unit for a project in Qatar for a minimum period of 7.5 years. The ship, a 23-year-old charter tanker which was about to be phased out of our fleet, is currently being converted for storage and will begin its new charter late this year. Teekay's reputation at the FSO market was one of the factors in our securing this contract.

We recently extended a shuttle tanker charter to Petrobras for an additional three years at an increased time charter rate, reaffirming Teekay's leading position in Brazil. And lastly we have signed a fixed-rate charter for our specialized LNG carrier, the Arctic Spirit, to serve in the new intra-regional trade in Asia. This employment is expected to last initially until the end of this year, but with the potential to lead to further employment. Our project team was able to develop this charter by working with the customer to utilize some of the unique features of this vessel, thereby securing employment for the vessel during a time of excess supply of spot LNG vessels.

Turning to slide nine, another focus area we told you about at our recent investor day is to improve profitability. Since peaking in Q2 2008, our G&A expenses have been significantly reduced with our go-forward run rate down by approximately 20% from one year ago. The reductions to date have been achieved primarily through a 15% reduction in headcount, the rationalization of four offices, and a wide ranging cost efficiency drive. We will continue to work on managing our G&A and will guide you roughly to $55 million as the go forward run rate.

Turning to slide 10 we are pleased to report the 7% reduction in OpEx this quarter compared to one year ago, adjusted for the impact of fleet growth during the year and (inaudible) foreign currency effects. The biggest savings have come from our FPSO operations, from repairs and maintenance and from crewing cost. Combined, quarterly savings in these areas amounted to $10 million in Q2 compared with one year ago. And it goes without saying that these cost savings have been undertaken so as to not impact our fleet operations or our commitment to safety.

To summarize the effect of the initiatives I've just described on our cash flow breakeven levels, I'd ask you to turn to slide 11 where we show the cash flow breakeven of Teekay Parent from 2009 projected out to 2011. By actively managing our fleet and increasing profitability we have reduced the TCE rate needed for our spot fleet in order for Teekay Parent to achieve cash flow breakeven. This figure is falling on an Aframax basis from over $15,000 a day for the first half of '09 to approximately $10,000 a day in 2010 and all the way down to $7000 by 2011. Our operating leverage at Teekay Parent remains $19 million per $1000 day change in Aframax spot rates.

I will now hand it over to Vince to discuss the significant progress we've made towards delevering Teekay Parent and to review our financials.

Thanks, Bjorn, and good morning everyone. Turning to slide 12, I would like to provide greater detail on the third area of focus Bjorn highlighted, which is reducing debt at Teekay Parent.

As we stated at our June investor day, we have two primary ways of deleveraging Teekay Parent -- dropping down assets and transferring the associated debt on a non-recourse basis to our daughter companies, and selling assets to third parties. So far in 2009 we have completed two drop-downs to our daughter companies and four vessel sales to third parties. In August we completed the sale of our 70% equity interest in the 2 Tangguh LNG carriers to TGP for $70 million. And in June we sold a Suezmax tanker, the Ashkini Spirit, to Teekay Tankers for $57 million.

In terms of third-party vessel sales, in May we sold two product tankers for $115 million, and earlier in the year we sold two ships, one of them with a fixed-rate charter back for a total of $84 million. Combined these transactions reduced Teekay Parent's net debt by a total of $326 million.

Turning to slide 13, I want to take a moment to discuss a significant drop-down transaction that we are currently working on. Today, we announced the formal offer of the Petrojarl Varg FPSO to Teekay Offshore. As a reminder, the Varg is currently serving under a new minimum four-year contract with Talisman Energy in the North Sea. This contract is the first of a number of out-of-the-money FPSO contracts we inherited as part of the Petro acquisition to be renewed. So the Varg contract was renewed at a higher rate than previous. I am unable to provide details of the offer, as it is currently being reviewed by Teekay Offshore's conflicts committee. However in August, Teekay Offshore raised $104 million in equity, which can be used to acquire the Varg, together with a new debt facility that is currently in syndication. If approved by the conflicts committee and the board of Teekay Offshore, we expect the drop-down to be completed within 30 days.

And importantly, from Teekay Parent's point of view, this drop-down will have a significant deleveraging effect as illustrated on the following slide. Turning to slide 14, over the past year Teekay Parent's net debt as seen in the gray bars, has decreased by over $300 million from about $1.4 billion at June 30, 2008 to just under $1.1 billion at June 30, 2009, representing a net debt to capitalization of 32% at the Teekay Parent level. If we pro forma the net debt at June 30 for the Tangguh LNG drop-down to TGP, which occurred in August, and the pending Varg FPSO drop-down to TOO, net debt at the Teekay Parent level will reduce significantly further, resulting in a pro forma net debt to capitalization in the low to mid-20% range and over 80% of the consolidated net debt would then be held in nonrecourse subsidiaries.

In addition, the red bars which represent Teekay Parent's remaining new building commitments are also rapidly decreasing as progress payments are made and new building vessels delivered. It should be noted that a large portion of the remaining new buildings are earmarked for future drop-down to the daughter companies, such as the new build shuttle tankers and the Angola LNG carriers. So in summary, we have already significantly reduced debt at Teekay Parent, and we will continue to focus on this key area going forward.

On slide 15 we would like to discuss and illustrate Teekay's financial strength going forward. On a consolidated basis, Teekay has over $2 billion of liquidity at the end of Q2. Virtually all of our new building commitments are fully financed, and thus will not require the use of existing liquidity. We have no debt covenant concerns and no significant balloon payments until 2011. Furthermore, a portion of the $661 million in balloon payments in 2011 will be extended upon the completion of the Varg FPSO debt facility. Of course all this is in addition to the substantial stable cash flows generated from our fixed-rate businesses.

Turning to slide 16, in order to compare the offering results on an apples-to-apples basis, we have shown an adjusted Q2 income statement against an adjusted Q1 income statement, which excludes the items listed in Appendix A of our earnings release and reallocates realized gains and losses from derivatives to the respective income statement line items. Net revenues declined by $50 million in Q2, mainly due to lower spot tanker rates and fewer ship days, partially offset by $7 million in profit share recognized in the second quarter relating to two of our Suezmax tankers. The profit share for these vessels relates to the 12-month period ended May 31 but is not recognized until the amounts are determined in the second quarter. Vessel operating expenses decreased by about $3 million from the previous quarter, primarily due to a change in crew nationality and crew levels on some of our vessels and lower repairs and maintenance costs, partially offset by the impact of new building deliveries. We expect operating expenses in Q3 to increase from Q2 as a result of the full quarter impact of the new buildings and the timing of seasonal maintenance relating to our shuttle tankers and FPSOs. Time charter hire expense decreased by over $20 million compared to Q1, mainly due to the redelivery of eight in-charter vessels during Q2. We expect time charter hire expense to decline further by $20 million in Q3 due to the redelivery of another seven in-charter vessels.

Depreciation and amortization increased by about $1.6 million, mainly as a result of the deliveries of four new buildings partially offset by the sale of two large product tankers during Q2. G&A expenses decreased slightly from the prior quarter and is tracking below our previous guidance of $55 million to $57 million per quarter. Net interest expense increased over the prior year by about $3 million mainly due to the delivery of new buildings and lower interest income earned on our cash balances.

Equity income in Q2 mainly reflects the equity income from our 40% interest in the four RasGas III LNG carriers. The decline from Q1 relates to our 50% owned lettering joint-venture SPT. Income tax recovery increased from the prior quarter by $3 million mainly as a result of higher deferred tax recoveries in Norway and Australia.

Looking at the bottom line, adjusted net loss per share was $0.30 in Q2 compared to an adjusted net income per share of $0.15 in Q1. On a GAAP basis net income attributable to shareholders at Teekay for Q2 was $159 million or $2.19 per share, which includes a realized gain on the sale of vessels of $30 million or $0.41 per share in addition to a number of non-cash items.

So despite reporting an adjusted net loss for the second quarter, overall the results were better than expected as revenues came in higher and costs came in lower than expected.

With that I'll now turn the call back to Bjorn to conclude.

On slide 17 we summarize the value of the assets residing at the Teekay Parent level. The value of the conventional tanker assets has decreased slightly since we showed you this table at our investor day due to falling conventional vessel values. This has been substantially offset by an increase in the aggregate market value of our daughter company equity ownership. The value of the assets sitting in Teekay Parent plus the daughter company equity without ascribing any franchise value or growth premium to Teekay add up to a net asset value of $39.95 per share. At $17.68 per share, which was our closing price yesterday, we are trading at more than a 50% discount to our net asset value. But, we believe that by executing on our strategy we will illuminate the value of Teekay and meaningfully bridge the valuation gap. We remain focused on executing on our strategy of active asset management, focus on profitability, strengthening our balance sheet and preserving a high level of liquidity. Our aim is to ensure Teekay can withstand whatever the future may hold, and when the time comes, stand ready to take advantage of this severe downturn.

Operator, I am now available to take questions.

(Operator Instructions). Doug Mavrinac, Jefferies & Co.

Thank you. Good morning. My first question is more from a macro perspective. And more focusing on the ship's supply side of the equation, since Bjorn, you went through kind of your demand observations and expectations. As it relates to ship supply, what is the latest you're hearing as it relates to the implementation of next year's IMO phaseout, with regard to compliance? Are there any holdout areas or regions that are creating cause for concern that the phaseout may not be implemented as intended?

Nothing concrete, I would say. There's obviously a lot of scuttlebutt. I guess a couple of data points I would say is the best I can offer you. We've finally seen some emergence of scrapping in the last few weeks, after sort of a stunning absence of scrapping for most of the year, which was really surprising. But I think a lot of ships were hanging on for the rebound, the volatility, the option value of being around if something unexpected happens. I think people are going to probably wait until they actually face a deadline or some sort of a survey. So that's why I think we haven't seen more scrapping this year. But we (multiple speakers) see it start.

As far as next year is concerned, I'm not personally a subscriber of the view that every single hull vessel will be gone in 2010. I think that's optimistic. They will be kind of loitering around in some marginal trade routes here and there. But I think there will be significant momentum next year in phaseout. Don't forget, it's not January 1, 2010 that the phaseout occurs, it occurs on the anniversary date of any ship, whatever year it was delivered. If it was delivered in April, then its anniversary -- its phaseout date is in April. If it was delivered in November, then it's in November. So it will be interesting to see, but I think it is going to be important that we see some serious scrapping. If we don't, then supply is going to be an issue.

Thank you. And then as it relates to ship supply that's currently on the shelf, so to speak, and unfolding storage contracts, you mentioned earlier that Teekay has 13 such tankers operating on floating storage contracts. Can you share with us an approximate average duration of how long these contracts or the duration of these contracts, and when they may come back into the trade?

A guest I can tell you -- I'll give you an idea that we've had ships on storage for more than six months in some instances, and we've had many ships sitting on storage for three or four months. But we are -- even as we speak we are in the process of chartering another vessel, another new building coming out of the yard, which is looking to be chartered for a storage cargo. So it's ongoing, it's building. And I was looking at the contango curves yesterday. If you look at -- of course the further forward you sell the oil, the steeper the contango is. So it's sort of an equation that the traders go through. If they were to assume a six-month forward sale, then you could afford to pay storage for a vessel for five or six months. So the equation works. And it's really a matter of once you have it in the ship and there's some cost, if there is still contango you can still store it. It's sort of a rolling ball. I think it's -- and it's self-fulfilling. The overhang creates a low price, which in turn creates a contango. (multiple speakers) last for quite a long time, and it could grow.

And I wasn't going to ask this, but since you brought it up in your answer, as it relates to demand, clearly we are finally seeing demand beginning to improve. And you guys do amongst the best macro work of anyone out there when looking at these types of factors. Is there something specific that you guys say and see and say look, this is it, tanker demand is going to improve, we are out of the woods? Clearly oil demand improving is a good thing. But is it a certain inventory level to where we say, okay, well now OPEC has to do something? Is it the forward curve flattening out, and then maybe flipping the backwardation dis-encouraging inventory building? Is there something specific that you guys are going to look and say, all right, we are out of the woods now?

Well, that's a deep question. I would say the big issue is -- it's not that complex in the sense that (inaudible) you look at the economy. Unfortunately oil inventories are very high, so if you get economic recovery, I think oil demand will precede OPEC reintroduction of oil by some months. We were debating I guess the other day internally whether, is the global economy going to -- is oil demand going to be a leading indicator or a lagging indicator? I guess in terms of stimulus in China and places like that, you could argue that demand for oil is a leading indicator at the industrial level. But on the consumer level it's a lagging indicator because, for example, US miles driven is still a depressed number. So the green shoots which I guess -- I hate to use the phrase, but you'll see oil demand at the front end and you'll see oil demand at the tail end. I think it's going to be just about working our way through the next six to 12 months, but I think it's inevitable, oil demand will come back.

Great. Thank you very much.

Jon Chappell, JPMorgan.

Good morning everyone. Bjorn or Vince, the OpEx came in much lower than our expectations; that was pretty much the main contributor to the upside. And you gave us some good insight on G&A as well as the time charter expense going forward. Can you talk a little bit about what was temporary and what was sustainable to the OpEx cuts in the second quarter? You mentioned maintenance repairs; I know those tend to be lumpy throughout the course of the year. What type of run rate should we be looking at for the back half of the year, something closer to the second-quarter numbers or maybe something closer to the first-half -- or, I'm sorry, the first quarter?

I can speak to maybe some of the components, and then Vince, you can give guidance if you would like to talk about what -- [to go forward] on. I want to stress -- we're not saying, let's not maintain our ships. What we are saying is, let's be aggressive and negotiate in the supply chain, and use our buying power even more. And -- as we all experience, there's slack appearing in the value chain, so the opportunity we've reorganized our purchasing activity, so we are looking to pick low-hanging fruit and even higher-hanging fruit. And it's in our view, a lot of this is sustainable as opposed to deferral. Vince, do you want to add anything?

Yes. There's definitely what you saw in the second quarter, a lot of that is sustainable. However, as I pointed out, we are expecting, as you would typically see in the summer months, a little bit more seasonal maintenance, especially as it relates to our offshore business, the shuttle tankers and FPSOs. So in the third quarter we'll probably see a bit of a jump from the 150 that we saw in Q2 to probably something in the range of 155 towards, maybe, 160. But then, I would expect that seasonal maintenance to drop off when we get to the fourth quarter, and come down. But of course that number could change of course because of fleet changes.

And you mentioned in the TNK press release that there's going to be a heavy dry docking schedule in the third quarter. How many off-hire days are we looking at, and is that going into that higher OpEx number for the third quarter as well?

Yes, the impact on TNK is mainly the off-hire days, because it is extremely heavy drydock period in Q3 for TNK. But then in the fourth quarter, we don't have any dry docks. So we've guided in our release in TNK that that has about a $0.10 impact in Q3. So that's a bit of a temporary reduction in Q3.

Do you have the days offhand, Vince for the third quarter?

It's in the neighborhood of -- I think it's about 75 days, or roughly. We can give you some specific numbers later perhaps.

Two more quick ones. Bjorn, you mentioned in your prepared remarks that you personally have 13 -- Teekay has 13 vessels on storage. Just as that relates to the third quarter bookings that you've given, I assume those are shorter-term so you don't include those in your long-term time charter business. Are the rates that you're getting on those vessels in storage included in those numbers that you gave for the 80% of third quarter to date bookings, or is it a potential that the storage figures are a little bit higher, so those won't be the pure numbers that show up in the third quarter?

I'll try and guide you. Out of 13 vessels, five are Teekay-owned or in chartered, so in other words on our books. [They're] LR2s, and those are not included in the $8000-a-day Aframax rate, because we report our LR2 product fleet separate from our Aframax in our earnings releases. And the storage rate is probably in the mid-teens, $15,000 to $17,000 a day. But the other vessels we have -- so we have five of our owned LR2s, we have four commercially managed LR2s, which has no impact on our bottom line. And then we have four Suezmaxes engaged, and the Suezmax number is embedded in the $14,000 or $15,000 a day I gave you.

And then finally, just the product tanker you announced that you acquired, it seems like that was a deal-specific acquisition. Is that what the case was, or is this maybe a sign that you think that asset values may have bottomed and you may be able to put that $2 billion of liquidity to work to buy assets for the right projects?

Well, this was I think a specific situation. We acquired a product tanker for a project, so that doesn't signify any general buying behavior. But I think what it does show is the ability to kind of piece together projects and create a value package for customers. So I think we are proud of the project, but it doesn't signify that we are taking a new stance. It was project-specific.

Thanks, Bjorn; thanks, guys.

Urs Dur, Lazard Capital Markets.

Good morning. Vince, you mentioned something quite specific in regards to the charter hire expense going forward for 3Q and the number of ships coming up. Can you remind me what you said over the call here?

Yes. The Q2 time charter hire expense was about $116 million. And we expect that to come down by another $20 million in Q3. And so that's due to the redelivery of another seven ships in Q3.

Can you specify which seven, or --?

Most of those are, as indicated in our slide presentation, most of those are in the in-charter Aframax fleet.

Okay, thank you very much. It's an impressive liquidity situation, and you guys have been able to bring down net debt to the [cork] level, and it's something you don't necessarily discuss at this point in time. But maybe, Bjorn, can you give us some color going forward on the liquidity position vis-a-vis distributions going forward?

I guess you're referring to dividends?

Yes, sorry.

Yes, well, I guess that's a discussion we have with our board every quarter. I guess. So I guess we -- we announce them every quarter, and we have done so routinely.

Fair enough, thank you very much for your time.

Justine Fisher, Goldman Sachs.

So the first question that I have is just on the 2011 maturities. I know -- I think Vince mentioned that you expect to extend some of those maturities. And of the $600 million or so, I know $235 million or so is the Company's bonds. Can you talk about how much of the total maturities you expect to be able to extend? And then, of the remaining amount, of the $661 million total, what that is comprised of?

Sure. Our outstanding bonds right now are about $195 million of the $661 million. And there's also about $200 million relating to the Madrid Spirit, which is in TGP. And we expect to be able to roll that, given that it's on a long-term fixed-rate charter. And there is about $211 million relating to Teekay Petrojarl, and that is the piece that will be taken out upon refinancing the Varg FPSO. So those are the major components of the $661 million.

And then, as far as the liquidity goes, I guess -- if I should go back and look at the presentation from the investor day to see exactly what facility that's made up of, I can go and do that. But how many facilities are in that $2 billion?

There's several. Of course, at various company levels, and so about half of that is at the Teekay Parent level and the other half is in the daughter companies in terms of total liquidity.

As far as taking out the bonds, the maturity of the bonds, is the plan to try and refinance those or to draw on the revolver to take those out? Are you guys -- what sort of strategies are you thinking about at this point?

I think we have a lot of options available to us. We are delevering at the Teekay Parent with all these drop-downs, and we have a lot of existing liquidity already. So we have a lot of options in terms of retaining that, either early or upon maturity or refinancing it if market conditions improve. So I think we have a lot of options available to us.

And what's the endgame for the Teekay Parent drop-down? I know that with the dropping down of the assets you're able to repay debt, but there's also assets going away from the Parent. If you guys were to think about maybe a year or two years from now, what sort of assets do you want to see at Teekay Parent, and what's a target leverage level for Teekay Parent? When you're sort of done with this deleveraging strategy, what would you say that is?

Peter Evensen, why don't you try and take that?

I think our view is that we are trying to move Teekay Parent up and increase its return on invested capital. So we are trying to move toward being net debt free at the Teekay Parent level. That means we'll have cash so we can make various investments. But we'll also carry some debt up there, but we are trying to move toward being net debt free. And as part of that, we are trying to give enough liquidity to the daughter companies so that they can grow by themselves and they aren't as reliant upon Teekay Corporation. And that makes Teekay more asset-light, increases its return on invested capital and also puts it in a much stronger position to be an asset manager and take on new projects, which we are certain we will see as we all come out of this global downturn.

So In terms of giving the daughter companies the ability to generate liquidity by themselves, obviously you guys have done some follow-on equity offerings. But if we look at the debt level, I know in your investor presentation you had some debt to cap level there. They're reasonably high levels, so is it still an equity-focused liquidity strategy at the daughter company?

No, it is -- we aren't repaying debt. I want to emphasize, we are repaying debt up at the Teekay Parent level, but we are not repaying debt down at the daughter company level. The daughter companies retain their mandate to grow, either by buying assets from Teekay Corporation or by buying assets from third parties. And while the current financial environment means we will use more equity and less debt than we would of, say, two years ago, and that's a little bit because the debt costs more -- that we would continue to see that the debt levels would move up.

And I also want to emphasize that Teekay Offshore and Teekay LNG, they can carry higher debt levels because they have five-, 10-, and in the case of Teekay LNG, 20- and 25-year contracts. So they are comfortable to have amortizing debt that goes out. So we are building a portfolio there, and they have more stable EBITDA so they can carry higher debt.

And in terms of Teekay Tankers, we have done a follow-on offering in which we purchased an asset, but we also used that opportunity to increase its liquidity up above $100 million. So it would be in a position to grow. But we also felt that it was more prudent to carry a little bit more equity and a little less debt. As Bjorn has indicated, with the weakness in conventional values we wanted to have Teekay Tankers be more of an equity instrument, and in doing that we would safeguard the distributions. And in Teekay Tankers, we have reset the distribution policy so that we take out whatever debt that we have to amortize in any given time. But as you will have noticed, the big revolving credit that is the bulk of the debt at Teekay Tankers doesn't amortize until 2015 now. So that's our strategy.

Okay, thanks a lot.

Omar Nokta, Dahlman Rose.

Thank you. Good morning guys. I just have -- my question is actually related to the FPSO segment. I noticed that the revenues have been steadily climbing higher. They're roughly around $99 million in the second quarter. Just wanted to get a sense now with the Varg getting the new contract effective -- I guess it was early July, what can we expect the run rate to be per quarter for the whole FPSO segment?

The Varg did start a new contract in July 1, and we're also looking at the renewal of a number of FPSO contracts. We did give some guidance in the investor day in terms of EBITDA for the FPSO fleet. And I think it was for 2009, we are expecting that number to be close to about $100 million in EBITDA. I think those projections still hold.

Okay, so those are unchanged. And then, would it be the Petrojarl I and -- was there another one besides that one that needs a new contract for the near-term?

I guess we are discussing both new projects, and also amendment to existing contracts for some fields, so we will announce these as they become formalized. We won't pre-announce them.

And do you feel in general with the way the FPSO market has been over the past -- I guess over the past six months, have you noticed an improvement there? Are there new tenders available, or has it become a more busier market?

I would say it's been a lull in new FPSO projects which was linked I think to the big decline in oil price. But recently, the first new FPSO contract I think actually of this year was awarded. But we know that there is a significant amount of new project work being undertaken and my colleagues in Norway just attended a meeting offshore conference in Norway this week, and there's a lot of -- I mean, there's like a long string of oil companies all talking about how many opportunities they see in the North Sea, for example, which is our niche, the harsh weather FPSO. So I would say we are very optimistic about that franchise in general.

Thanks for the color.

(Operator Instructions). Mr. Moller, there are no further questions at this time.

Great. I would like to thank you very much for attending this morning, and we look forward to reporting to you in November. Have a great day.

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