Teekay Corp Ltd (TK) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to Teekay Corporation's first quarter 2010 earnings results 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. Please go ahead.

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 first quarter 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 first quarter earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Moller to begin.

Thanks, Kent, and good morning, everyone. Thank you for joining us on this morning's earnings call. I am joined today by our CFO, Vince Lok, and as usual for the Q&A session, we also have Teekay Corporation's Chief Strategy Officer and the CEO of Teekay LNG and Teekay Offshore, Peter Evensen, as well as our Corporate Controller, Brian Fortier. We are reporting today on Teekay Corporation's first quarter 2010 results which saw noticeable progress from the previous quarter. If you will turn to slide three of the presentation which is posted on our website, I'll briefly review some of our recent highlights.

For the first quarter, we recorded an adjusted net loss of $3.9 million, or $0.05 per share. This represents a significant improvement over the loss of $0.45 per share recorded in the fourth quarter of last year. Please note that our results exclude the $30 million, or $0.41 per share catch-up payment recognized in the quarter related to the Foinaven contract amendment which I'll discuss later. We generated cash flow from vessel operations, or CFVO, of $203.8 million for the quarter, a 57% increase over the fourth quarter results. And this was due to Teekay's stable foundation of fixed rate businesses, augmented by the $30 million Foinaven payment, stronger spot tanker rates, and lower costs.

Teekay remains financially strong with consolidated liquidity of $2.9 billion, including prearranged financing for 100% of our new building capital commitments. We continue to benefit from our unique corporate structure by selling assets to our publicly traded daughter companies and using the proceeds to delever the balance sheet at the Teekay Parent Company level. So far in 2010, such asset drop downs to our daughters have resulted in $340 million of net debt reduction at Teekay Parent, reducing the Parent's pro forma net debt to $567 million and its net debt to cap to only 15%. Distributions Teekay receives from both Teekay LNG Partners and Teekay Offshore Partners were increased by over 5% this quarter, and Teekay Tankers' dividend was also up substantially this quarter.

Turning to slide four, the graph shows that our quarterly earnings shown by the red line have improved in part due to recovering spot tanker rates which are shown by the blue line. The narrowing gap between these two lines in Q1, however, points to the fact that our earnings are growing faster than the rise in spot rates, highlighting the success of our focus over the past year on improving our profitability. The drivers of improved profitability cut across our businesses and include contract amendments and renewals on existing FPSO units, starting with the Petrojarl Varg last July, and more recently, the Petrojarl Foinaven. Our shuttle tanker fleet had a good first quarter due to high utilization and the effect of recent charter renewals at firm rates. Over the past year, we have redelivered over 25 [in-charter] vessels, eliminating some $65 million in quarterly time charter hire expense, and we saw reduction in our operating and overhead expenses compared to Q4 last year. Based on specific initiatives already underway, we expect to achieve further improvements in 2010.

Turning to slide five, we are excited about the prospects for our offshore business. When we enter the FPSO business some three years ago through the acquisition of Petrojarl, we factored into the price the assumption that its FPSO contracts had significant upside potential at their future renewal. As I just mentioned, over the past year, we have started to see our efforts to bring Petrojarl's contracts up to current market levels bear fruit. In March, we signed an amended contract for the Foinaven FPSO which is projected to provide an average of $30 million to $40 million of incremental annual CFVO going forward. To compensate us for operations in prior periods, we will also receive catch-up payments totaling $60 million, and I'll provide more background in a moment. In addition, we are engaged in discussions to renew or amend other existing FPSO contracts, as well as pursuing new FPSO contracts in what is an active project pipeline in the sector.

The outlook for the shuttle tanker fleet is also positive. Our Q1 shuttle tanker segment posted its best results in several quarters as fleet utilization improved, and cost management measures put in place starting in second quarter last year began taking effect. On the revenue side, the trend is also positive. Rates on shuttle tanker contract renewals are generally trending upward, reflecting a tight supply and demand balance, especially driven by Brazilian demand. In July and September this year, we are scheduled to take delivery of the first two of our state-of-the-art Aframax shuttle tanker new buildings, and there is considerable customer interest in these vessels. We are in active discussions regarding their employment which will lead to further top line growth. We are taking a disciplined approach with respect to investment hurdle rates in new offshore investments. We believe that by focusing on higher value lease projects that play into Teekay's strengths in harsh weather operations, for example, we will be able to meet those relatively high hurdles.

Turning to slide six, I would like to spend a few minutes on the Foinaven FPSO contract amendment which is an important milestone for our offshore franchise. It marks the second contract upgrade of the five FPSOs included in the purchase of Petrojarl and is the result of over two years of negotiations. This FPSO has operated on the Foinaven field in the UK sector of the North Sea for over twelve years, and it is the centerpiece of the investment program the Foinaven [co-venturers] are making in order to extend the field life and enhance production output. As a result, the field is anticipated to provide employment for the Foinaven FPSO until 2021 and beyond. To enable the unit to remain on the field throughout this period, the project will involve investment by both Teekay and its customer to complete life extension upgrades.

On slide seven, we outlined some of the key financial aspects of the Foinaven contract amendment. In return for us operating the FPSO for the past two years while the renegotiation was taking place, we will be paid two lump sum catch-up payments totaling $60 million, or $0.82 per share. Half of this amount has already been recognized in the first quarter, and the other half is expected to be included in the second quarter. The contract amendment introduces a revised revenue formula effective January 1, 2010 consisting of four main components. A daily base rate, which is paid for each day the unit is on hire, a daily operating efficiency rate which provides payments for meeting pre-specified operational uptime requirements, a per barrel tariff based on the volume of oil produced, and a supplemental per barrel oil price tariff which provides upside, and to a lesser extent, downside exposure based on the annual average branch crude oil price. Based on current production estimates and the current forward oil price curve, we project that the revised revenue formula will provide an incremental $30 million to $40 million of CFVO annually. However, significant upside exists for Teekay in the event of higher oil prices and-or increased production volumes.

I mentioned a moment ago that the unit will undergo refurbishment upgrades to increase its production. This will mean that for 2010, CFVO will be somewhat lower than in future years. It should also be noted that the timing of cash flows will be lumpy as a result of true-ups on annual performance and oil prices in the fourth quarter each year. As a result, we expect approximately 75% of incremental annual payments from the contract to be recognized in the fourth quarter with the remaining 25% spread evenly through the first three quarters of the year. Overall, the Foinaven contract represents significant new value to Teekay. Applying a ten times multiple to the $35 million midpoint of the illustrated annual operating cash flow amount and adding the $60 million lump sum payment, the amended contract has an estimated value of approximately $5.60 per Teekay share.

Slide eight quantifies how our recontracting efforts are significantly enhancing our FPSO cash flows. On the slide, the dark blue bar shows the guidance on future cash flows from our existing FPSO units which we first provided you at our Investor Day last June, and we are now providing updated guidance through 2011. In July 2009, the Petrojarl Varg contract, shown here in gray, was renewed, and subsequently, this FPSO was sold in September to our daughter company, Teekay Offshore. However, it is included here for comparison purposes. Starting in 2010, the improved cash flows from the Foinaven FPSO are included. The white bar represents the $60 million catch-up payment, and as you can see, the big step-up in recurring cash flows starts in 2011 and assumes that the Foinaven refurbishment is completed. As you can see, although the timing of our FPSO contract renewals has shifted slightly from what we projected last June, the key takeaway is that going forward, our existing FPSO fleet is projected to generate strong cash flows well above 2009 levels.

Turning to slide nine, we take a look at the growth opportunity in the FPSO market out to 2015. The chart shows that future FPSO demand, net of redeployments, looks promising even if oil prices should moderate considerably from where they are today. With the oil price averaging around $70 a barrel in the first four months of this year, we're certainly seeing a much higher volume of new inquiry for FPSOs compared to one year ago when oil prices dropped below $40 a barrel. It is important to note that due to the long timelines in oil field developments, most of this projected FPSO demand over the next five years is linked to fields on which exploration drilling has already been completed.

Turning to slide ten, we show highlights of our conventional tanker business in 2010, to date. The key story has been the general improvement in spot rates which are well off the bottom seen in the third quarter last year. In the first quarter, average Suezmax and Aframax spot rates were up by 50% from the previous quarter. So far in the second quarter, rates have remained relatively firm. With 50% of our spot days booked for the quarter, our Aframax spot rates have averaged $17,000 a day although rates are well above these levels as I speak. And our Suezmax spot bookings have averaged $29,000 a day.

During the past four months, we've completed the drop down of six conventional tankers to daughter companies for total net proceeds of approximately $300 million. In addition to the cash we received, which provides further delevering for the Teekay Parent balance sheet, we also benefit from the related increased distributions from our daughters. We redelivered one in-charter vessel and sold one old Aframax, yet we increased our commercial footprint due to the continued growth of our tonnage pools with six vessels joining our Gemini Suezmax pool in recent months, bringing the total number of vessels in that pool to 44.

On slide 11, you can see that spot tanker rates for crude tankers have been on a rising trend since last August, driven by strengthening market fundamentals. Encouragingly, rates in Q2 to date have been relatively firm during what is usually the seasonally weakest quarter of the year for oil consumption. On the larger crude oil tankers, the ton mile intensive movements to China, coupled with floating storage in the Atlantic and off Iran, have supported rates, although they are off their recent peak levels. This week's strong rally in Aframax rates in the Atlantic appears to be driven by rising cargo volumes in the North Sea and increased trans-Atlantic cargo movement due to higher US refinery utilization.

On slide 12, we discussed the oil market fundamentals underpinning the spot tanker market. Oil demand growth in 2010 is forecast by the IEA to be the strongest since 2004 on the back of the global economic recovery. Once again, this demand growth is expected to come from non-OECD led by China. China's crude imports are running 16% ahead of 2009 and are being sourced from ton mile-intensive OPEC and Atlantic Basin suppliers. It is also important to note that oil demand in the OECD has finally stabilized after two years of negative growth, and this removes a major drag on tanker demand.

OPEC quota compliance continues to slip. OPEC production in April was nearly one million barrels a day higher than in the same month last year, and this has been a major driver behind tanker demand growth. Looking at the second half of the year, the call on OPEC crude is expected to be higher as global oil demand increases seasonally.

Turning over to tanker supply on slide 13, the impact of the IMO-targeted single hull tanker scrapping is now evident as tanker removals have risen considerably compared to 2009 as shown in the top chart. The noose for single hulls is tightening further as Thailand, which is the second largest spot charter of single hull vessels, recently announced that it is considering a ban on single hull ships. Also, the recent events in the US Gulf may lead to the discontinuation of ship-to-ship [lightering] in US waters involving single hull tankers. It is perhaps telling that this past week, Vela, the shipping arm of Saudi Aramco has reportedly sold five of its single hull VLCCs for dry bulk conversion. As you can see in the bottom table, year-to-date net fleet growth has been limited to only 1.5% due to slippage in the schedule of new buildings and the high rate of removals.

On slide 14, we have updated our 2010 fleet utilization outlook slide. I won't review the details since not much has changed in the numbers from what we presented when we presented this slide last quarter. However, we have included it again, mainly as a reminder of the plausible path that could take us at least part of the distance from our base case fleet utilization of 86% which should result in a mid-cycle type tanker market to our recovery case would could ultimately see a return to full utilization and higher rates. As the various factors play out, we do expect volatility to remain a factor throughout 2010. I will now hand it over to Vince to discuss the Company's financial results. Vince?

Thanks, Bjorn, and good morning, everyone. Turning to slide 15, I will review our consolidated results for the quarter. In order to present the results on a comparative basis, we have shown an adjusted Q1 income statement against an adjusted Q4 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. Starting with net revenues, they increased by $11 million in the first quarter, primarily due to higher spot tanker rates and fewer dry dock days in the first quarter compared to the previous quarter. Note that the Q1 adjusted revenues excludes the $30 million catch-up payment relating to the Foinaven contract amendment which has been included in Appendix A as a nonrecurring item. However, we are expecting to recognize the second catch-up installment of $30 million in the second quarter.

Vessel operating expenses decreased by $16 million from the previous quarter, mainly due to the timing of repairs and maintenance activity in our FPSO and shuttle tanker fleets. As in the past, we typically schedule more of our dry docks and maintenance activities for our North Sea FPSO and shuttle tanker fleets during the spring and summer months. As a result, we expect vessel operating expenses to be about $10 million to $13 million higher in the second and third quarters compared to the first quarter. Time charter hire expense decreased from the previous quarter by approximately $10 million, mainly due to the redelivery of five in-charter vessels during Q4 and two in-charter vessels in Q1. As a result of the Q1 redeliveries, and additional redeliveries during Q2, we expect time charter hire expense to decline by a further $4 million in Q2.

Depreciation expense decreased by $3 million, mainly as a result of revised residual value estimates for our FPSO fleet and a reduction in amortization of intangible assets that were written off in Q4. We expect depreciation expense to be similar in Q2. G&A expenses decreased from the prior quarter, reflecting our continued focus on managing expenses. Conservatively, we expect a G&A run rate of approximately $50 million per quarter for the next few quarters. Please note that we have reclassified crude training costs from G&A expenses to vessel operating expenses which were $3 million in Q1 and $4.4 million in Q4. The Q4 G&A and OpEx figures have been reclassified to conform to this new presentation. Net interest expense increased over the prior quarter by $4.4 million, mainly due to the $450 million bond offering completed in January. Net interest expense is expected to increase slightly next quarter reflecting the full quarter impact of the new bond.

Income tax recovery of $4.1 million in Q1 was lower than in the previous quarter. However, Q1 is more representative of a normalized run rate. Noncontrolling interest expense increased due to higher earnings in all three of our daughter companies, as well as the recent equity offering in Teekay Offshore.

Looking at the bottom line, adjusted net loss per share was $0.05 in the first quarter, an improvement compared to an adjusted net loss of $0.45 in the fourth quarter. I would note again that the first quarter's adjusted net loss excludes the $30 million, or $0.41 per share, Foinaven catch-up payment and does not fully reflect the benefit of the amended Foinaven contract. Since as Bjorn mentioned, a large portion of the Foinaven revenues are recognized in the fourth quarter of each year.

Turning to slide 16, in an effort to provide greater transparency of the financial performance and cash flow generation at the Teekay Parent level, we have created two new appendices in our earnings release. Appendix C provides a detailed breakdown of the cash flows generated by the various asset classes directly owned and in-chartered by Teekay Parent, and Appendix D provides a detailed summary of the total operating free cash flow at the Teekay Parent level, including the cash distributions received by our equity holdings of our daughter companies. In addition, the appendices to this earnings presentation, we have provided detailed information on Teekay Parent's existing conventional tanker outcharters, its in-chartered fleet as well as its projected spot revenue days. We hope you will find this additional information useful.

Looking briefly at Appendix D on slide 16, Teekay Parent's vessels generated positive cash flow from vessel operations of $36 million in Q1, compared to a negative cash flow of $19 million in the prior quarter. The improvement in Q1 mainly reflects the strengthening in spot tanker rates as well as the $30 million catch-up payment relating to Foinaven. The cash distributions from the daughter companies are also on a positive trend as both Teekay LNG and Teekay Offshore increased their distributions by over 5% in the first quarter.

The general partner, or GP distributions, are also ramping up quickly, which is driven by two factors. Firstly, the GP distributions increased in absolute dollar terms after each equity offering in the MLPs. This is because the absolute size of the GP also increases as the size of the limited partnership increases. Secondly, when the distribution per unit increases for the limited partners, the GP distributions increase proportionately higher. This is because of the GP's incentive distribution rates. Both TGP and TOO are currently at the 25% tier of the incentive distribution rates. Meaning that the GP receives 25% of any incremental distribution increases compared to only 2% when the MLPs were initially launched. On an annualized basis, Teekay Parent is currently receiving over $200 million in distributions from its daughter companies, which is more than double the current Teekay Corporation annual dividend of $92 million.

Turning to slide 17. Over the past 15 months, we have significantly strengthened Teekay Parent's balance sheet, reducing our total net debt and new build commitments by over $900 million during this period. So far in 2010, we have completed asset drop downs to each of our three daughter companies, resulting in a reduction in Teekay Parent's net debt by $340 million. As you can see, Teekay Parent is well on its way toward becoming net debt-free.

On slide 18, we provide the composition of Teekay Parent's net debt, its liquidity and its remaining new building commitments. As of March 31st, the Teekay Parent's debt included $472 million of unsecured bonds, most of which is the new $450 million ten-year bond we issued earlier this year. The remaining debt is primarily amortizing term loans, including the net proceeds from the drop down of three vessels to Teekay tankers in April, Teekay Parent's net debt reduced to $567 million resulting in a net debt to capitalization ratio of only 15%. All of the parent Company's revolvers are now undrawn, which together with our cash balance of about $400 million results in current liquidity of over $1.2 billion. In addition to that, we have prearranged new building financing of $583 million, resulting in total liquidity of over $1.8 billion.

At the bottom of this slide, we have provided a breakdown of Teekay Parent's remaining new build commitments. As you can see, not only are these commitments pre-financed, but these assets are also destined to be dropped down to Teekay Offshore in the case of the new build shuttle tankers and Teekay LNG in the case of the Angola vessels. As a result, these CapEx payments won't remain on Teekay Parent's balance sheet. I should also note that the Angola vessels are equity accounted for given our one third equity ownership interest. So only the equity portion or roughly 20% of these amounts will be on balance sheet.

Although we are carrying more cash than we have in the past, which comes with a carrying cost, we believe that having a strong balance sheet, ample liquidity, and access to capital will provide Teekay with a competitive advantage going forward. We are optimistic that we will have the opportunity to deploy this capital profitably. Slide 19 provides an updated debt profile for Teekay Parent. With the completion of the $450 million, ten-year bond in January, we now have virtually no debt balloon payments due over the next several years, which gives us a significant amount of financial flexibility. I will now turn it over to Bjorn to conclude.

Thank you, Vince. Teekay Corporation's share price continues to trade at roughly half of its sum of the parts value. You will find an updated sum of the parts slide in the Appendix. We believe that increasing our profitability is a key to increasing our share price and narrowing the sum of the parts discount. This morning, we have emphasized our keen focus on profitability and the considerable progress we are making. We intend to maintain this focus and anticipate being able to record further improvements to you in the coming quarters. Thank you for listening in this morning, and we will now be happy to take your questions.

Thank you. (Operator Instructions) Our first question today comes from Justin Yagerman of Deutsche Bank. Please go ahead.

Good morning. This is Rob Salmon on for Justin.

Good morning.

I guess I'll start off with a few broader industry questions, and then follow up with a couple Company-specific. I was curious if you had seen any impact from the events which happened in the US Gulf to the underlying market? In particularly, the Aframax market?

Hello. Thanks for the question. I would say there hasn't been any concrete displacement of tonnage. We've seen stronger rates in the Atlantic Basin, but I believe that's driven by other fundamentals which I indicated -- which is high volume of cargo in the North Sea and higher US refinery utilizations. So we have not seen any significant or any noticeable impact on our fleet of that incident.

Got you. And then, when I'm thinking about the Aframax market in general, what do you think has caused that market to lag the VLCC and Suezmax markets? And what do you think we need to have to drive an improvement in the Aframax market in terms of rates?

Right. I guess if you look at the delivery schedule, there was -- when you look at the ramp up in the global order book a couple of years ago, and then the delivery schedule that followed. The -- both the product tanker market and the Aframax market were earlier to see the inflow of large numbers of new buildings, whereas the Suez and VLs were looking at that happening later. So in fact, 2009 was a significant growth year for Aframax. So we had the deteriorating supply-demand balance. That was more serious in that sector than in the larger vessels. I think that might reverse itself in the next year or 18 months. So I think it will even out, and I think we're seeing certainly -- currently the strength in Aframax rates indicates that there is not a lot of surplus. It doesn't take a lot to trigger a significant rate increase.

That was really helpful. If I'm shifting a little bit in terms of your philosophy regarding employing vessels in the spot or charter market. How are you thinking about that mix over the next six to 12 months right now?

Well, Teekay, due to its diversified business model, has a lot of stability of cash flow from both the daughter company distributions as well as the fixed rate business sitting up at the parent. So we are -- we have some built in hedges, if you will. And so we can view the conventional spot tanker segment in our fleet a little differently, but I think we take a tactical approach with a combination of short- to medium-term time charters and some spot exposure. We have fairly significant operating leverage still as indicated on one of the slides, and so I think we have certainly good exposure to the upside that's being provided by the recovery that we're seeing. We are seeing some strengthening fundamentals that are probably a little better than we had expected. We also have structured a number of our time charters out to include profit share components which gives us a flow and gives us an upside potential. So we expect this year to continue to be volatile, and so I think we have a good mix between time charter and spot.

Got you. That's really helpful. I guess when you're talking to your customers or potential customers, what sort of duration in time charters are they currently most interested in? And how long are you willing to sign vessels to charters currently given some of the improvement in the fundamentals that you had discussed a little bit earlier?

The typical time charter business is between one and three years. You don't often see contracts going extensively beyond that. Remember that Teekay, in the daughter companies have vehicles that focus on ten- to 25-year charters. And Teekay LNG partners, three- to ten-year in Teekay Offshore and have in the Teekay Tanker subsidiary, we have a zero to three-year charter policy. I think in the conventional tanker market, most charters are one to three years.

Okay. So we really haven't seen much of a shift in terms of how those have historically trended in terms of what customers are looking to try and find charters for right now then?

Not on any -- not in any significant trend, that would be pretty anecdotal.

Okay. And then I guess finally, on the -- what types of vessels are you looking at at potentially either acquiring or divesting in the S&P market right now?

We are -- we have a new building order book that's delivering in the next two years, that certainly will provide growth to Teekay. We are taking an opportunistic approach. We've sold some of our older vessels recently as you've noted, and we are basically comfortable. We don't think that there's any rush to move into acquisition of new tonnage right now. We have a pretty good exposure to the market, and we're looking mainly to invest in the offshore business which we think offers attractive long-term returns.

I appreciate the time, gentlemen. I'll shift it over to someone else.

Thank you.

Thank you. And our next question comes from Scott Burk from Oppenheimer. Please go ahead.

Good morning, Bjorn and Vince. You have the one chart in your presentation showing earnings growing fast for the last couple of quarters and the rebound in day rates. If day rates remain at near current levels, what other levels can you pull in terms of lower expenses to boost earnings over the next year?

I think a lot of the cost savings we expect to achieve have been achieved. I think we are mainly focusing on maintaining the gains we have made. I think the biggest opportunity for profitability is through the recontracting and renegotiation of existing assets, and we've achieved significant steps forward in the two FPSOs we've renegotiated. We've renewed a number of shuttle tanker contracts at higher rates, and we have discussions on various projects within our existing fleet where we think we can do a lot more. So that is the major move of the profitability. And that will not require any significant additional investment, if any at all. But of course, we are also looking at trying to improve profitability by securing new profitable projects. So it's a -- but, I think there's a lot of low-hanging fruit that we continue to be targeting.

And when you approach your clients with these FPSOs or the shuttle tankers, what kind of leverage do you have to be able to negotiate those higher rates? Is it just as things roll off? Or what's the leverage there?

It's mainly as things roll off, and -- but we also have -- we work with our customers to determine if we can figure ways to restructure contracts to a mutual benefit. So we've been successful in that regard as well. So it's really a cooperative approach, I would say.

Okay. And then I wanted to also ask you about the vessel drop downs to the daughter companies. Had several equity offerings at the daughter companies in the last quarter and a half and several drop downs. What -- talk about the decision process you go through as to when you're going to drop things down? Is it mostly just how receptive the equity market is? [Know] that the applied cost of capital is fairly low -- or cost of equity is fairly low? Or what is the driver to -- that actually leads you to pull the trigger on dropping down a vessel?

Why don't we ask Pete Evensen to respond to that.

Sure. Well, actually, we have a process that starts with the Omnibus agreement that Teekay LNG Partners and Teekay Offshore have with Teekay. And if a gas project is put together by Teekay Corporation, it must offer it at cost to Teekay LNG. And likewise, if a new offshore project is put together at Teekay Corporation, it must be offered at cost to Teekay Offshore.

Yes.

When it comes to existing assets -- when those get recontracted, they are offered at fair market value, and the independent directors at each subsidiary form a conflict committee. And they will make a determination of whether they wish to purchase that asset. At the same time, Teekay Corporation has been willing to sell assets because they want to become net debt-free. And, of course, they have an incentive distribution right so that it's a favorable transaction for them. But as it relates to the daughter companies, they're interested in buying assets that will allow them to increase the distribution. Luckily, we've been able to do that, but on the off -- on the subsidiary side, we don't just look at Teekay assets. We look across the broad spectrum -- try to buy assets that we want at the price that will enable us to increase the distributions per share.

I would also add, though, the model, as we saw it in 2009. When probably the equity market would have been closed for practically everyone else, the daughter companies were able to access the capital markets and raise equity. So I think it gives us a lot of flexibility that model. So I think that's an important feature.

Okay. And then, one follow-up. You talked about having quite a bit of cash on the balance sheet, and presumably some of that is -- could be traced back to being generated by the distributions at the daughter companies. What's the trigger point to start paying more of that out to Teekay Parent shareholders in terms of -- in the form of higher dividends? Is it when you get to the net debt-free point? Or is it just you got to wait for more of the general partner incentive distributions to kick in? Or what's going to trigger it to increase the dividend at the parent corporation?

That's a question that we discuss with the Teekay Board each quarter. We have three uses for cash in general -- is to repay debt. It's to invest in profitable projects, or it's to return it to shareholders. So we've had a combination of those three things. If we run out of debt to repay, then there's the other two choices. And so, that's a problem that we would like to have at some point, and then we will address it. So I would say, we -- that's why I referred in my presentation to the fact that we're focusing on a reasonable high level of hurdles in new investment because we realize that we have to compare favorably to the alternative use of our cash -- invest in new projects.

Right. Okay. Thank you.

Thanks.

Thank you. And our next question today comes from Urs Dur of Lazard Capital Markets. Please go ahead.

Good morning.

Hello, Urs.

It's not really -- I don't know what time it is. It's still morning. Good morning. Most asked and answered, and I think there -- Bjorn, you made a neat quote that in regards to profitability, you might be able to bridge the gap between where the share is trading and the sum of the parts valuation. And I'm not disputing the sum of the parts valuation calculation, it seems to make sense. But unfortunately, the Street right now at least hasn't been taking that. So is it just profitability? Is there any other way that story can be conveyed to get the valuation to the sum of the parts?

We keep telling it, and I guess we should be open to ideas how to tell it differently. But I think the story is extremely compelling. You look at the fixed assets sitting at Teekay. You look at the investment in the daughter companies, and you subtract the dwindling net debt. And you can very quickly come to the sum of the parts valuation. I think it's a fair valuation, and I believe that we will make progress. We really are making strides on the profitability. I think we have to show that. So that's our key driver.

Sure. Okay. And it's tough because -- I agree that the calculation makes quite a bit of sense. It doesn't seem the Street is taking, unfortunately. On the offshore side, really a macro question. Been probably way too early to even ask this, but, how do you view the current situation in the Gulf? Not from Aframax operations in the Houston ship channel, but more from an offshore development slash demand for your assets globally? And how you view offshore drilling and opportunities going forward? You obviously say it's very strong, but do you see any hurdles that could be created by this current situation?

It's certainly, as you point out, early in the proceedings to have a firm view of what the impact is, but I would say that this -- that the oil business is a global business. And we expect that globally, oil search and deep water exploration will continue -- will be a growth business because that really is the -- we need the oil and gas. And so, the industry performs a very valuable role. So there may be more regulation coming from this and, of course, it's very regrettable what's happened. But I think if you look at just in the next five years, as I indicated. Because of the lead times, the exploration wells that in five years will be new FPSO projects, those wells have already been drilled. So it's -- even if there's a delay or a slowdown in awarding new acreage in certain parts of the world, I think it will take five to seven years before it impacts the FPSO pipeline of projects. And, of course, the quality focus will only heighten as it has done in the tanker industry over the past years based on mishaps in that industry. So that actually helps companies that have good names.

Great. Thank you. Finally, again, macro and asset question here. Not that you have massive exposure, but the product tanker market has been specifically weak for quite some time. Is there any -- is there ever going to be a turn in that market? Or are we terminally oversupplied? Or is this -- or is there going to be more demand for long distance moves of products going forward? And what's your view on the product tanker market?

Well, our product view is that we believe primarily our business is linked in the large product tankers, LR2s.

Sure.

That's clearly going to be a prolific product trade as there already is. But, we just feel that the product tankers -- the smaller product tankers, medium-sized, fragmented market which is somewhat commoditized. We have focused on the LR2 as the -- because of the long-haul nature of new export refineries in Asia. And it's a good adjacency between LR2, which are Aframax tankers with coating -- Aframax franchise. So we have the ability to cross trade. So that makes a lot of sense for us. So I would say we are not likely to look at the smaller product tankers for some time.

And I would also say that I think you really have to find refinery utilization coming up before you find the smaller product tankers recovering.

Sure. Thanks, Peter and Bjorn. No, that's very helpful. Thank you.

Thank you.

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

Good morning.

Hello, Justine.

So in one of the later slides in your presentation, you were talking about how scrapping is on track for the base case scenario of 45% of single hulls this year? And I was wondering if you could comment on what you think the feasibility is for the remaining single hulls to be scratched? It seems to make sense from a regulatory perspective and an economic perspective that people may want to scrap lower earning, single hull vessels, but can the scrapyards actually take it? Is there anything that can happen to make it more feasible from the numbers?

I think the issue is not the ability of scrapping companies to handle the volume. I think it's simply driven by the shipowners deciding this is the right time. We're helped by the strengthening steel price. This, of course, is an economic calculation. But I think there's no bottleneck in terms of the capacity to scrap large numbers of ships. We've seen that in these industries can start up and shut down fairly quickly. So that is not the factor. And I think, we are, in fact, slightly ahead of what we call the base case with the -- where annualized running at like 27 million tons instead of 23 million. And I think if anything the momentum is growing month by month as we also showed on our chart. So I think this is why it's interesting to keep an eye on the recovery case. We also are seeing continued good dry bulk interest. So it's not purely a matter of the push by shipowners selling scrap. There's some pull effect from dry bulk wanting to acquire all the VLCCs.

To convert to VLLCs, you mean?

Yes, to large -- in fact, across all segments. It's Aframax, Suezmax, and VLCCs. A number of vessels are being sold for dry bulk conversion. And once they go there, they never come back.

How much does one of those conversions cost you? I know you're not doing them, so it's hard to say. But do you know how much it costs to convert a tanker to dry bulk?

I've seen numbers of $25 million to $50 million for large dry bulk [areas].

And then, another question is, I know that you mentioned your pretty strong cash balance. And if I look at the cash flow statement, it just seems as though CapEx is pretty low during the quarter. Can you just talk about the other drivers of that balance? It looks like you issued more debt than you repaid, and I know that that happens with just timing of percentage of completion payments. But can you talk about the key drivers of the higher cash balance 4Q to 1Q?

Well, a lot of that is driven by the drop downs that we've made to the daughter companies as well as the bond issuance in January. I think we've laid out the CapEx. There is very little in the first quarter. It was only about $35 million in new building installments, and the next set of new building installments are really related to the shuttle tanker new buildings in the third quarter and a little bit in the fourth quarter. So we don't have a lot of outflows. The changes in the debt that you see in the cash flow statement, a lot of that is a repayment on draws and revolvers.

Okay. So, right -- but it looks as though it was a net -- the net number was a higher debt number which seems to have been the biggest driver of the almost $200 million quarter over quarter cash increase?

Yes, I think that does include the issuance of the $450 million bond.

Right. Okay. And so only a portion of that was used to repay bank debt?

Yes. We have purchased about $170 million of that -- applied that to repurchase the old bonds. And we repaid -- used the rest pretty much to reduce term debt and revolvers.

Okay.

A lot of in and outs there.

Yes. And then just from the bond perspective, have you put out a number on Parent Company EBITDA if bondholders want to get an idea of the EBITDA generation from the vessels that are accounted for at the Parent? And then, if they want to -- it depends if people want to include GP interest in EBITDA. But is this a number that you have calculated? And if so, could you give it? If not, is this something that you would look to give out going forward for the purpose of bondholders?

Yes, absolutely. I think that was the intention of the Appendix C and Appendix D to the earnings release as we showed in slide 16 of the presentation. The direct EBITDA earned by the vessels owned and in charter by the parent is $36 million in the quarter, and the total distributions from the daughter companies is about $52 million. And then, you can deduct the interest expense in dry docking. So we get a total net cash flow of $64 million at the Parent. So that was the intention of Appendix D.

I'll look back at that. I must have missed it. That's in the presentation or the press release?

It's in both of them.

Okay. I'll look for it. Thanks.

Thank you.

Thank you. (Operator Instructions) Our next comes from John Chappell of JPMorgan. Please go ahead.

Thanks, good morning.

Good morning.

Bjorn, after the Foinaven and the success that that had as far as adding cash is concerned, what -- can you just give us an update on the schedule for the remaining three? When they'll be undergoing their negotiations? I know it's a moving target, but just your best guess right now. And then also, where do they stand relative to current market rates compared to where the Foinaven was? Looking at a big retroactive $60 million cash payment for these other three? $30 million to $40 million step up in EBITDA? How do those compare?

Well, the remaining three assets -- we have one unit which is likely to come up for renewal in the next few quarters, I would say. And that unit is burning reasonably good cash flow. We might be able to improve it slightly, but I think above all, we'll buy longevity -- maybe five to seven years. Then we have a unit that may be up for renewal somewhere in 2012, 2013. And we have another unit that's due for renewal in 2015. The 2012, 2013 unit is probably going to see improved cash flow. It's earning some reasonable cash flow now, but not very strong. But that will be hopefully improved when we renew the unit. Whereas the 2015 unit is not a very attractive contract that we are hoping to improve through some mutual benefits, negotiations with customers. But that will be -- so it will be staggered over the next five years. But of course, the new project pipeline is also very active. So we're hoping that we can squeeze in a new project or two along the way.

Yes. And if you drop one more FPSO down, whether it's the Foinaven or this next one in the a couple of quarters to TOO -- assuming the financing and the equity markets are available to that. You're going to be a lot closer to your net debt-free a lot sooner than what you had hoped for at the end of 2011. Follows on a little bit of an earlier question, but if you're getting twice as much dividend distribution from the daughters than you're paying out at Teekay, and if your stock's trading at half of what the sum of the parts is, talk about the acquisition opportunities right now. And how they compare to your hull rates? And then also I would just -- if you can add a little bit more commentary on profitability probably will help narrow that gap. But I think maybe the return of cash to shareholders ahead of maybe acquisitions or debt paydown might also narrow that gap a little bit.

Yes, that's a good point, John. And we certainly are looking very closely at that equation. We are intending -- we are turning down business that is not meeting the hurdles that we think would make the investment justified compared to the alternatives. So we're being very disciplined. We're not out buying in in the rally and conventional tankers. In fact, we are even looking to see if we can unload certain assets into that rally, and with the aim of creating the financial flexibility that will allow us to pursue profitable projects or do other uses for the cash. So basically, we'll return capital if it's excess.

Without giving any numbers, how close are you now to the hurdles based on the current time charter and asset price environment? Are we talking a couple percent, or is it still pretty far away?

[Mainly] in the offshore sector, so I guess I would say in the conventional business, I think the equation -- you'd have to be willing to look at the last ten years and say we can repeat the next ten years would look like the last ten years in order to justify investing in the spot tanker business right now. And that's why you're not seeing us being active there. We -- it could happen, but we're not convinced that this is the time to make that investment. I think in the offshore, if we could get unlevered IRRs in the low teens, then I think that would be potentially interesting. But we may have enough capital to do both, some growth and some returning.

Yes. Okay. Thanks, Bjorn.

Thank you.

Thank you. And our next question comes from Sandy Goldman of Front Barnett.

In reference to your building your war chest -- your balance sheet. Some of your competitors are doing the same thing. A lot of other competitors are going into the market to finance. What do you expect to happen whereby you can get bargains?

Well, we are not necessarily convinced there will be bargains. But we are saying that the value equation between what you can purchase conventional assets at today versus the potential outlook if you look at global ship building capacity going forward. We think there will be volatility, and there will be pockets of value. And if there are not, then we will invest in our other businesses. That's the beauty of the Teekay business model. We have several areas in the value chain -- offshore, shuttle, gas, and so on. And we see a lot of opportunity for investing outside of the more cyclical business, but we have made a lot of good money in the cyclical business historically. Some of our -- .

Well, you've done -- yes, you've been very, very aggressive at the right time historically.

So we are not ruling that out, but then we would be on the sidelines most of the time if we only had the conventional cyclical business. But that's why we build a different business model. One that we think will sustain us through the cycles.

So really, given your outlook, you think it will be those alternative investments that most probably will come to fruition because you would have a lot of competition in the basic cyclical business from all of the people that are raising money or cleaning up balance sheets?

Well, that's right. I think we can be patient, and we have -- we can look for the deep value play. If it doesn't show up, we'll invest in our stable growth businesses. So we are fortunate to have those choices.

Okay. But obviously to the degree you think your base businesses will move up, it has to be in an environment where value shouldn't collapse?

Well, you could have -- the offshore business is quite different in its cycles from the conventional tanker business.

Right.

They don't have any speculative capacity in the floating production business, for example. And you have very limited speculative capacity in the shuttle tanker market.

Right.

So I think that's about franchise, about know how, customer relationship, and niche skills. That's very different from the conventional business.

Yes. Thank you very much.

Great. Thank you.

Thank you. And our next question comes from, once again, Justine Fisher of Goldman Sachs. Please go ahead.

Hey, just a follow-up to the last discussion about your approach to the tanker market. So it seems if you are willing to offload vessels into this -- into the improved sentiment in the tanker market, are you looking to rotate away from activity in the tanker business over the next couple of years? It seems like a pretty trepidatious approach to the tanker market over the longer term. It may be that rates over the last few -- over the last ten years were -- won't be seen again for the next 30 years just because they happened to come at a time where shipyard capacity was severely restricted and Chinese demand increased significantly. So does -- if we are not going to see those rates for the next couple of -- the next decade, does that mean that Teekay continues to shrink more in the conventional tanker business?

No, that wouldn't be true. Maybe I should have been more clear. At the Teekay Corporation level, we have a strategy of being a project manager and a project developer. We have created Teekay tankers to be a play on the conventional tanker market and the cycle in particular with zero to three employment profile. Teekay Tankers has grown. It has done so in large part due to sales of assets by the parent. But that is by no means the only growth track for Teekay Tankers, and of course, Teekay Corporation is a major investment of Teekay Tankers. So we expect to continue to have exposure, but we are doing so in a pure play vehicle where that particular type of exposure is going to be valued more highly.

But you did talk about offloading vessels into the current market?

Well, opportunistically. We're not exiting. We're just saying we may sell some assets opportunistically.

Okay. Great, thanks.

Thank you.

Thank you. And at this time, there are no further questions in queue. Please continue.

Well, thank you, very much, for joining us this morning, and we look forward to reporting to you next quarter. Have a great day.

Thank you. Ladies and gentlemen, this now concludes your conference for today. We appreciate your participation. You may now disconnect your lines, and have a great rest of the day.