Teekay Corp Ltd (TK) 2010 Q2 法說會逐字稿

Welcome to Teekay Corporation's second quarter 2010 earnings results conference call. (Operator Instructions). As a reminder, this call is being recorded.

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

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 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 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. As usual, I'm joined today by our CFO, Vince Lok. And for the Q-and-A session, we also have Teekay Corporation's Chief Strategy Officer, Peter Evensen, who's also the CEO of Teekay LNG and Teekay Offshore, and we also have our Corporate Comptroller, Brian [Forte].

If you care to turn to slide three of the presentation, I will briefly review some of the Corporation's second quarter highlights. We generated a strong $195 million of cash flow from vessel operations, or CFVO, in the quarter, virtually unchanged from the first quarter, but significantly a 50% increase over the same quarter last year. The spot tanker market generally held up from the first quarter, and we were able to realize average spot rates in Q2 of $18,200 and $30,900 per day for our Aframax and Suezmax tankers, respectively. Nevertheless, we reported an adjusted net loss of $26.1 million, or $0.36 per share, which was caused primarily by lower revenues due to a heavy dry docking schedule and an increase in net interest expense, mainly due to the full quarter impact of the $450 million of bonds we issued in January. In his presentation, Vince will provide more detail.

Please note that our adjusted result excludes the benefit of the second and final catch-up payment of $29 million, or $0.40 per share, related to our amended Foinaven FPSO contract. We are enjoying significant positive momentum in our offshore business and I'll address some of the significant developments in our FPSO and shuttle fleets in a few moments.

Finally, we continued to build Teekay's financial strength and flexibility during the quarter. As at June 30, Teekay's total consolidated liquidity, including pre-arranged financing for our remaining new building program, stood at $2.8 billion, $1.8 billion of which was at Teekay parent. We reduced net debt at the parent company level to $555 million, bringing its net debt to capitalization to 21%.

Turning to slide four of the presentation, I am pleased to be able to show that our daughter company model is thriving. Over the last 12 months, the share price of each of our daughters has increased considerably, on average rising by more than 50% and resulting in an increase in the value of Teekay parents' equity ownership by nearly $1 billion, or over $13 per Teekay share. Briefly reviewing the highlights in each daughter, Teekay LNG Partners, or TGP, has seen a strong unit price appreciation, which has reduced its yield to approximately 7%, which compares favorably to other midstream MLP's. In July, TGP completed a direct equity placement to a large institutional shareholder, raising approximately $51 million of proceeds intended to finance future fleet growth. The Angola LNG project is progressing on schedule, and the project reached another important milestone in July with the keel laying of the first of the four LNG carriers. Teekay parent's one-third interest in this project is expected to be offered to TGP in accordance with the omnibus agreement. During the second quarter, TGP announced a 5.3% increase in its quarterly distribution.

Teekay Offshore Partners, or TOO, had significant opportunities for accretive fleet growth, which is reflected in its unit price increasing by more than 60% over the past year. TOO posted another strong financial performance in the second quarter, generating $28 million of distributable cash flow. The partnership's core offshore markets in the North Sea and Brazil are seeing significant project activity for FPSO's and shuttle tankers. You may also be interested to know that during the second quarter, TOO chartered one of its specialized tankers from the North Sea to the US Gulf of Mexico as a backup vessel to provide storage services in the (Macando) oil recovery efforts. TOO increased its quarterly distribution by 5.6% in Q2, reflecting its recent accretive acquisitions.

Teekay Tankers or TNK, our conventional tanker daughter company, has also shown a good share price performance. Teekay Tankers has had an active second quarter and third quarter to date. A few weeks ago, TNK utilized some of its undrawn low-cost revolver capacity to invest $115 million in a three-year, first priority mortgage loan secured by two new building VLCC's. The investment is expected to provide an annual yield of 10% and illustrates the innovative ways our daughters are increasing returns to shareholders. In April, TNK completed a follow-on equity offering, raising proceeds of $103 million, which was used to acquire three conventional tankers from Teekay parent. Together, these transactions were over 30% accretive to TNK's cash dividend per share. And TNK declared a dividend of $0.34 per share, which represents an annualized yield of approximately 10%.

Turning to slide five, you can see in the graph that our strong daughter performance has had a favorable impact on Teekay's share price. Teekay Corporation's share price has outperformed that of the pure play tanker companies, supported by the underlying increase in the value of our daughters, and this suggests that Teekay's share price is linked less to spot tanker rates and more to our growing fixed rate cash flow. As I mentioned earlier, we are enjoying positive momentum in our offshore business, and this is reflected in the significant progress being made in our FPSO and shuttle tanker businesses.

Turning first to the FPSO business on slide six, during the second quarter we received the second and final catch-up payment of $29 million under the amended Foinaven FPSO contract. We extended the Siri FPSO contract on the Aruana field in Brazil for seven and a half years, and as a result, starting in mid-November 2010, we expect the average annual cash flow from this FPSO to increase by over 20% compared to its annualized cash flow in 2010 to date. Teekay was also recently selected as the preferred bidder for a new project in Brazil, the Tiro Sidon FPSO project. And we're currently in negotiations with Petrobras to finalize this contract. A key success factor in Teekay's bid was our preferential access to a partly converted ship hull, which enabled to us table a competitive bid and still achieve our target hurdle rates. The expected start-up date is first half 2012. In addition, we continue to bid selectively on further FPSO projects that fit Teekay's main niche, namely Sophisticated Solutions in Brazil and the North Sea. We're seeing signs of an upward trend in project returns in these areas, due to strong customer demand.

Looking at the shuttle tanker business on slide seven, in Q2 shuttle rate increases and higher fleet utilization resulted in a 55% year-over-year increase in the shuttle tanker CFBO from $32 million in Q2 last year to $49 million in Q2 this year. We are maintaining the OpEx reductions that we received -- we achieved in prior periods, largely as a result of lower crewing costs. During the quarter we increased our shuttle presence in Brazil to a new fixed rate contract for two additional vessels, bringing our total Brazilian shuttle fleet to 13 vessels, and we're currently negotiating the employment of our sophisticated Amundsen class shuttle new buildings in the North Sea. We hope to report further progress in the coming months, as these vessels begin to deliver into the fleet.

Turning to slide eight, the high level of new offshore business we're seeing at Teekay is part of a larger up trend in activity in the offshore market, which is gaining momentum following a period of inactivity in 2009, when a combination of the global financial crisis and lower oil prices led to relatively few new contract awards. Fourteen new floating production unit contracts have been awarded since the start of the year, and even if we subtract the eight FPSOs which Petrobras has ordered for the Tupi field, the industry is still above the long-term average of five contract awards per quarter. The recent oil spill in the US Gulf may potentially lead to more stringent regulations with regards to offshore exploratory drilling in the longer term, but it is not expected to have a major impact on the demand for FPSO and shuttle tanker projects over the next several years, since the US Gulf is not a major FPSO shuttle region and since many field development projects are already well beyond the exploration drilling stage. In fact, as shown on the chart on the bottom left of the slide, there are around 160 FPSO projects currently being studied worldwide, with many of these in the North Sea and Brazil. For comparison, two years ago the number of visible FPSO projects worldwide was only half this total. The global deepwater rig count is set to rise, setting the stage for more deepwater projects, many of which will also require a shuttle tanker solution.

Looking more closely at Teekay's core markets in the North Sea and Brazilian FPSO markets on slide nine, these markets together account for around 45% of all visible FPSO projects in the next few years. The North Sea is a mature area for oil production, yet it remains an active FPSO market due to its harsh weather and its proliferation of marginal oil fields, typically developed by smaller independent field operators who prefer these solutions. Brazil, the world's busiest offshore frontier, has seen orders for 11 FPSO's to date and with Petrobras' most recent investment plan containing a capital budget of $118 billion, there will be many more projects in the years ahead, with a further 41 projects already in the tendering or planning phase. Petrobras recently announced another mega discovery, with the 4.5 billion barrel Franco field.

Turning to slide ten, we provide an update on our conventional tanker business. After holding up quite well in Q2, spot tanker rates in Q3 are off to a weak start. Based on 50% of days booked for Q3, our spot Aframax bookings have averaged $13,500 a day and our spot Suezmax bookings $19,000 per day. Interestingly, time charter rates and vessel values have remained firm, indicating that the third quarter rate drop is viewed by the market to be part of normal seasonality.

We have made further progress in managing our exposure to the volatile spot market. In the first half of 2010, we redelivered three in-chartered vessels which had an average daily cost of approximately $29,000 per vessel. In Q3, we expect to deliver another three expensive in-charters. In addition, we have added to our fixed rate cover with a five-year out charter of an MR product tanker to Caltex Australia. We have sold a 1995-built Teekay Tanker's owned Aframax for proceeds of $17 million. And we added another nine vessels to the Teekay managed Gemini Suezmax pool, which brings the total number of vessels in the pool to 48.

Turning to slide 11, we highlight the contract improving tanker demand fundamentals. Global oil demand continues to grow in tandem with the economic recovery, led by China. In fact, yesterday the IEA raised its 2010 demand forecast to a new all-time high level. Crude oil imports into China in the first half of the year increased by 30% over the same period last year. With Chinese tonne-mile demand, it is growing even faster, as China continues to source its crude from further afield in the Atlantic basin. Angola remains the number one supplier of crude oil to China, and imports from South America have also increased substantially year-on-year. US oil demand staged a recovery, up 2% year-on-year in the first half. And while there remains some question about the strength of the global economic recovery, looking ahead to the winter the forecast on the chart on the top left highlights the firm outlook with winter demand at its highest level in three years. In the short term though, floating storage of oil, shown on the bottom chart, has declined due to the erosion of the [Contango] oil price play, as well as the unwinding of the Iranian storage program. With storage vessels returning to spot trading, we have seen a one-time increase in tonnage supply, which has hurt tanker rates in the short term.

With that, I will hand it over to Vince to discuss the Company's financial results.

Thanks, Bjorn, and good morning, everyone.

Turning to slide 12, I will review our consolidated operating results for the quarter. In order to present the results on a comparative 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. I will provide our outlook for the second half of 2010 a little bit later on.

Net revenues decreased by $13 million, primarily due to the slight -- the slightly lower average spot tanker rates compared to Q1 and an increase in scheduled dry dock days in Q2. In the second quarter, we had 403 dry dock days compared to only 71 in the first quarter. In general, we try to complete the majority of our dry dockings and FPSO maintenance during the seasonally lower -- slower second and third quarters of the year, which enables us to have as many revenue operating days as possible during the seasonally stronger winter months. Note that the Q2 adjusted revenues exclude the $29 million catch-up payment relating to the Foinaven contract amendment, which has been included in Appendix A as a non-recurring item. Vessel operating expenses decreased by $2 million, mainly due to timing differences. Time charter hire expense decreased from the previous quarter by about $3 million, mainly due to the redelivery of two in-charter conventional tankers during Q2.

Depreciation and amortization is in line with the prior quarter, given that there were no significant changes to our own fleet during the second quarter. G&A expenses were $50 million,and were in line with our expectations. Our normalized G&A, in the first half of 2010, is running at about $4 million below the first half of 2009. So we've been successful in maintaining the G&A cost savings we've achieved last year. Net interest expense increased over the prior quarter by $3.6 million, mainly due to the full quarter impact of the $450 million bond offering completed in January. Income tax recovered decreased by $3.1 million, due to the increased deferred tax expenses on accounting income in our taxable and Norwegian entities in Q2 compared to Q1. Non-controlling interest expense increased by $1.8 million compared to the prior quarter, due to higher earnings in Teekay LNG and Teekay Tankers a result of recent drop-down transactions, and the full quarter impact of the March equity offering in Teekay Offshore. Looking at the bottom line, adjusted net loss per share was $0.36 in the second quarter, compared to an adjusted net loss of $0.05 per share in the first quarter, with the majority of this difference coming from increased dry docking activity, lower income tax recovery and higher interest expense.

Turning to slide 13, we have provided some guidance on the expected impact of our financial results from the significant changes happening in our third and fourth quarters. Due primarily to seasonal maintenance, net revenues in Q3 are expected to decrease in both our shuttle tanker and FPSO fleets by approximately $6 million to $8 million each, compared to Q2. This decrease is due to lower shuttle tanker utilization as a result of seasonal maintenance in the North Sea fields, and planned shutdowns on four out of the five FPSO units for a portion of the quarter for annual maintenance. We are also expecting lower revenues from our spot tanker fleet in Q3, based on what we have averaged so far in the quarter, which partially reflects seasonal factors. And, as I've mentioned, we are also -- we have also a very heavy dry dock schedule in Q3, similar to Q2. For your reference, we have provided our detailed dry dock schedule for 2010 in the appendix to this presentation. Net revenues, however, are expected to increase in Q4 as our shuttle tanker and FPSO fleets resume back into full service after completing their dry docks and maintenance work, and the North Sea fields return to full production in the winter months.

As a reminder, a large portion of the incremental cash flow relating to the Foinaven FPSO contract amendment is recognized in the fourth quarter of each year, since it is based on various annual operational performance measures, oil production levels, and average oil price for the year. As a result, based on the performance of the unit and the average oil price during the first half of the year, we roughly estimate that an additional $18 million will be recognized from this unit in Q4. Other expected revenue increases in Q4 include the new Siri FPSO contract extension, commencing in mid-November, the expected completion of the amendments to certain shuttle tanker contracts, the deployment of the new shuttle tanker new building delivered in the third quarter, and the potential winter market rallies for spot tankers, as Bjorn discussed earlier.

Looking at vessel operating expenses, they are expected to increase by $15 million to $20 million in Q3, in conjunction with the scheduled dry dockings and FPSO shutdowns, which coincide with the maintenance period of the North Sea fields. However, OpEx is expected to return back to more normal levels in Q4, after the completion of the North Sea maintenance programs in Q3. Time charter hire expense is expected to decrease in Q3 by approximately $10 million, as a result of the redelivery of three in-chartered vessels and feeder spot in-charters in the shuttle tanker fleet as well. We expect a further reduction in Q4 of approximately $3 million, reflecting the full quarter effect of the Q3 redeliveries. Net interest expense is expected to reduce by approximately $2 million, primarily as a result of the net interest income from Teekay Tankers' $115 million investment in the VLCC secured loans. Income tax recovery run rate is expected to be approximately $2 million a quarter, down from $4 million previously, as we anticipate higher accounting income in the taxable Norwegian entities.

Non-controlling interest is expected to reduce by approximately 26 -- to reduce to approximately $26 million to $28 million in Q3, as a result of lower expected earnings in Teekay Offshore in that quarter. However, we anticipate non-controlling expense to rise back to the $30 million level by Q4 subject ,of course, to any additional drop-downs and/or equity offerings that may occur during the second half of the year. In addition to what is shown on this slide, depreciation amortization is expected to increase slightly, with the delivery of two shuttle new buildings during the second half of 2010, and the amortization of dry docking expenditures that will be incurred in Q2 and Q3. We expect that G&A run rate will remain consistent, at about $50 million per quarter. So in summary, the third quarter results are expected to be lower ,mainly due to a much heavier than normal maintenance schedule for our offshore fleet. However, as you can see, Q4 is expected to be significantly stronger for the reasons outlined above.

Turning now to slide 14, we have updated the slide that we provided last quarter which summarizes the composition of Teekay parent's net debt, its liquidity and remaining new building commitments. As at June 30, Teekay parent's debt included $463 million of unsecured bonds, most of which is the $450 million ten-year bond we issued earlier this year. The remaining debt is primarily amortizing term loans. As at June 30, Teekay parent's net debt stands at only $555 million, resulting in a net debt to capitalization ratio of only 21%. Our net debt balance has declined by almost $150 million, when compared to the end of the first quarter net debt balance of $703 million. This decrease is primarily due to vessel drop-downs to our daughter companies, partially offset slightly by new building installments. Based on the repayment of our revolvers, following the April sale of three vessels to Teekay Tankers, all of Teekay's parents company revolvers are now undrawn. Together with our June 30, 2010 cash balance of approximately $460 million, current liquidity is approximately $1.3 billion. Including our pre-arranged new bidding financing of $589 million, Teekay parent total liquidity now stands at over $1.8 billion. In addition to this, another 1 billion of liquidity resides in our three publicly listed daughter companies.

At the bottom of our slide we have updated the breakdown of Teekay parent's remaining new build commitments. These assets are ultimately 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 LNG vessels. And as a result, these CapEx payments won't remain on Teekay parent's balance sheet for very long. Over the past two years, we have significantly strengthened our balance sheet and bolstered our liquidity position. Although this is resulting in higher carrying costs in the near-term, we believe that having this financial strength and flexibility is a competitive advantage for Teekay, and we are confident that we will be able to deploy this capital profitably.

I will now over -- turn the call back over to Bjorn to conclude.

Thank you, Vince.

And so turning to slide 15 of the presentation, it is a graph that we're very proud of, our portfolio of fixed rate cash flows continue to grow, with our 2010 CFBO expected to reach a new high of $660 million. This figure is an approximation, as it is based on the first half of 2010 annualized, and in order to reflect only recurring cash flows, we've backed out the $59 million before any of the catch-up payments that we recognized during the first half of the year. Our fixed rate business provides considerable cash flow stability and, as Vince said, provides Teekay with a competitive advantage, especially during periods of tanker market volatility. And to recap the presentation on slide 16, as we've stated this morning, there is more fixed rate CFBO growth to come, which is not yet reflected in our year-to-date figures.

Commencing in Q4, we have the improved cash flows under the Siri FPSO contract extension. Subject to performance for the remainder of 2010 and Q4, we expect to receive a payment under the annual revenue true-up in Foinaven. Over the next few quarters we'll see the full benefit of recent profitability improvements in our shuttle tanker fleet, due to higher contract renewals. We also project additional CFBO as a result of contracts currently in negotiation, including the new building shuttle tankers and the Tira Sidon FPSO project. And finally, Teekay Tankers' first priority mortgage loans will add additional returns.

So over the past 24 months, we've transformed Teekay parent's balance sheet, and today Teekay is operating from a strong and flexible financial platform. As we approach becoming net debt free at Teekay parent, our main focus areas are enhancing the profitability of our existing asset portfolio, taking a disciplined approach to new investments, by which I mean setting higher, unlevered IRR hurdle rates, and lastly, at Teekay parent, comparing the investment of capital in its new projects versus returning it to our shareholders. Before we open the call up to questions, I would like to turn your attention to slide 17 which provides some preliminary details on our 2010 Investor Day to be held Wednesday, October 20 at the Waldorf-Astoria in New York. At this event, we will provide detailed presentations on the Teekay group of companies, covering the financial position and market outlook for each of Teekay Corporation, Teekay LNG Partners, Teekay Offshore Partners, and Teekay Tankers. The event will be webcast live for all interested current or prospective investors. While this is still a couple months off, we encourage everyone to mark their calendars, and we look forward to presenting and meeting with investors.

Operator, I am now available to take questions.

(Operator instructions) .

Your first question comes from Justin Yagerman of Deutsche Bank. Please go

Hello, good morning, gentlemen, how are you?

Hello, Justin.

I wanted to get a sense of where your guys' heads are at. I mean, when I look at the transactions that you guys have made in this first half of this year, there has been a lot of shifting assets around, but you've had some of your public competition out there actively buying tonnage and I was curious what you guys think you're seeing differently, or if you're planning on deploying some of the liquidity that you have into assets, as this could be, you know, an interesting long-term entry point given where the market is right now.

Yes. That is certainly a topic of ongoing discussion at Teekay management meetings every week. We, I think, have been on record as saying that we expected this to be a volatile year, even when rates were pretty strong in the second quarter. And so that's proven itself out. We do expect a better winter market. But I still think we are looking at some choppiness. We had a rally in new building prices and secondhand values a few months ago, which I would characterize as driven by IPO purchasing and a little bit of a bubble there. And I think we might see vessel prices move sideways or even down slightly in the next few months.

So, what we are trying to do is look for investments where we think we have a good chance of earning above our cost of capital. And I think those projects are typically now in the offshore sector where we can see fixed rate, long-term investments at attractive returns, and I think there's a lot of investors that would like us to return capital before we plow a lot of money into speculative, spot business. And so we -- we're monitoring it and we will be opportunistic, but we will be disciplined.

That -- that's definitely fair.

When I think about the one transaction that you did make outside of the family of companies in the crude space, you went into the debt side of things. You know, right now is -- I guess is that a statement that debt is more attractive than equity and, you know, is there more debt out there, I guess, that you could purchase, a la what you did at Teekay Tankers?

Peter, why don't you take that?

Okay.

Well, Justin, I think that that was a relative -- that was a unique investment. There are probably some more out there, but we anticipated the volatility and the weakness that we saw in the third quarter. We thought that the spot rates in June were a little bit overdone and things returned back to normal. As you heard Bjorn say, we think things will improve a little bit in the fourth quarter. But with our focus on profitability at Teekay Corporation, we think that our investors are better served if we take out some of that volatility going forward. So we're trying to allocate our capital up at Teekay towards more fixed rate projects that will give much less volatile cash flow, which we think will result in a higher share price.

But down at Teekay Tankers, we are actively looking and so we did complete two transactions of purchasing vessels, as well as purchasing the debt. But so far I think it's proven itself better on the VL side, in order to purchase the debt. But you will see Teekay Tankers continue to grow in the future, both from third party, as well as from hopefully being able to take some assets from the parent.

Fair enough.

One more if I can, before I turn it over. Just -- you know, you kind of answered this in your previous remarks but, you know, we've seen a little bit of a move off the bottom here when it comes to VL rates. Admittedly, off of a very low bottom. Do you think this uptick in demand, do you think that this is an uptick in demand or is this more capacity driven and then, you know, when you look at kind of the dashboard over the next six months or so, you know, what are you guys seeing in the market right now that gives you the conviction in your views?

Well, two things I would say.

Firstly, I mean fleet growth is sort of targeted around 5% on a net fleet growth this year, if we kind of project deliveries, the slippage, granularize the scrapping figure year-to-date, which I think is reasonable. And then you have IEA upgrading oil demand and you are seeing, you know, basically the best winter market or the strongest demand for tankers in over three years. I think we're going to see, clearly, some activity and it is going to drive people's psychology and (inaudible) as well off the bottom. Whether we'll get a real spike, that's a little bit about winter weather and dislocation of tonnage. We might get the return of storage business later over the winter as well. That definitely hurt in the near term, all of this unwinding of storage. Last year -- or at the peak, we had 5% of the world fleet doing storage, now we have 2% and that has added another 3% of net fleet supply. So I think it will be choppy, but I do think we'll get a winter market.

Got it. Thanks for your time.

Thanks.

Thank you.

Your next question comes from Jon Chappell of JP Morgan. Please go ahead.

Thank you. Good morning, guys.

My first question is for Peter. I notice in the TOO press release that the date that Teekay needs to drop the Foinaven, or needs to offer the Foinaven to Teekay Offshore, is moved back to July 2012 from July 2010. Just wanted to know what the thought process was behind that. Is there kind of an interest to drop down maybe the shuttle tankers or some other FPSO projects first? Concerns about financing? Why the pushback by two years?

Hi, John. That's a great question.

We reached agreement at TOO with Teekay Corporation to amend that option because the Foinaven has a new contract, but as part of the new contract it is going to go through some life extension work. So it is going to have a greater variability of cash flow, which will give it some downtime. And so we thought it better to maybe take over the -- or have the -- have the ability to take over the unit later rather than earlier, when the variability of the cash flow goes out. And there is a wealth of other assets that we can acquire. So it isn't like we're missing out on an opportunity.

Right. Okay. Makes sense.

Bjorn, I want to ask the same question I asked three months ago regarding your liquidity. You dropped the net debt again pretty significantly. You talked about, I think, asset prices are going to come down, and so you would probably stay on the sidelines there, you even mentioned that investors probably want to see return of cash flow. Your dividends at the daughters have all gone up. You've been successful with equity issuances at the daughters and your dropdowns. The only thing from the story that hasn't kind of played out from, you know, 2006, 2007, when you started talking about it, was this ramped up dividend to Teekay shareholders or share buybacks. And you didn't put your sum of the parts in there, but I imagine you are trading below that as well. How close are we to pulling trigger -- or, how close are you to pulling the trigger on, you know, share buybacks or increased dividends to the Teekay parent shareholders?

Well, we're certainly closer than we were three months ago. But I would say, obviously, it is matter we're discussing with the Board. We are due to meet our Board next month. And it's typically been on the on the agenda for the fall meeting where we look at capital allocation. And so I would say we think the case is building, but against that you have to weigh the fact that we are suddenly seeing low- to mid-teens unlevered IRR's on offshore projects, which is a positive development, and ideally we would like to grow our business profitably. That is our first priority. But if we can't grow it sufficiently profitably, then we will return capital and I think that my expectation, subject to our Board's agreement, is that we'll do some of each.

Okay.

And then finally, kind of the bigger picture tanker industry question, there's been a lot of talk lately about the Bosporus Straits and trying to build pipelines to bypass that because of environmental concerns. You know, I know it is still in the very early stages, but as a major operator of mid-size tonnage that frequently transits the Bosporus, have you given any thought on what impact that may have on your business going forward?

Well, there's nothing in the near term, that we know of. I realize that there are a number of that kind of de-bottlenecking projects going on around the world. China is talking about doing one that gets around the Straits of Malaga via Thailand, is it, or Malaysia, and the BTC pipeline is another area where you hear headlines or discussion about intended plans. But nothing in the near term. I wouldn't say it is high on our radar screen right now, Jon.

Okay. That's fair.

Thanks, Bjorn. Thanks, Peter.

Thank you.

Your next question comes from Gregory Lewis of Credit Suisse. Please go ahead.

Thank you and good morning.

Bjorn, could you provide us with some more color on the FPSO project with Petrobras in terms of the size of this asset, maybe in terms of costs and potential IRR's that you are thinking about. It sounds like you mentioned that it might be somewhere in the mid-teens.

I can't give you a lot of detail, due to confidentiality. We are still negotiating the contract with Petrobras. We were the preferred bidder after the tender round. But we still have some work to do. But I would say the guidance was probably low- to mid-teens.

Okay. Is this going to be a joint venture, or is this going to be just solely Teekay?

Well, that's also something we are keeping an open mind on. We have a number of our FPSO projects we're looking at where -- where the potential for partnerships exists, and there is some merit in doing maybe twice as many projects with half the investment in each, as part of a risk spreading and there's a -- and a smoothing of -- of volatility and -- and, you know, contracts ending and getting redeployed and so on. So we're exploring the opportunity on several projects to do joint ventures as opposed to 100% owned.

Okay, sure.

We have the financial capability to do the projects we're looking at on a 100% owned basis.

Okay.

And then just given the -- you know, the size of that field, where the asset's going to be, can you sort of give guidance on the potential size of this FPSO or --

This is going to be an Aframax-sized FPSO, and I think that production will be in the 25,000 to 35,000 barrels a day. It is about a nine-year contract we're negotiating.

Okay. Great.

And then you mentioned the heavy maintenance schedule for the offshore shuttle tankers in Q3, relative to -- could you give some guidance on -- on what Q3 is going to look like versus what it looked like in Q2, because I kind of think that it's my understanding is that it -- you know, both quarters have a significant amount of downtime in terms of the shuttle fleet.

Yes. In Q3, actually, the more significant downtime is related to the FPSO fleet, where we have four planned shutdowns on the units. So it's a heavier than usual type of schedule. So most of the increase OpEx that you see here on slide 13 is relating to the FPSO fleet as opposed to shuttle tankers.

Yes. Okay. Great.

And then just lastly, Bjorn, you mentioned on the call that it looks like, you know, the fleet is going to grow, net fleet growth of around 5%. And -- and I -- you know, when you look -- when you sort of match up new building deliveries versus fleet removals and/or scrappings. Net's one thing, but given the fact that older vessels tend to be underutilized, do you think the numbers actually may be a couple percentage points higher?

I think there's probably some element of that. Utilization will be higher for new tonnage. So that's -- it's around the margin. But, you know, it's probably true, what you are saying. So I would say -- but on the other hand, tonne miles are developing in a positive direction and so every barrel, on average, seems to be traveling further now. And I think that that's a subtlety that's difficult to pick up, and so I would say that probably offsets it.

Okay, perfect. Okay, guys, thanks for the time.

Thanks.

Thank you.

Your next question comes from Urs Dur of Lazard Capital Markets. Please go ahead.

Good morning, guys.

Hello, Urs.

Hello.

John Chappell asked my question on the dividends and buybacks, and that's nice color, and I thank you for that. And everything else has been asked about conventional tankers. Just a little bit of an angle on offshore. You mentioned that Gulf of Mexico is not a big FPSO area. But do you see increased regulations - while US regulations are lower than many other locations in the world -- do you see increased regulations impacting your competition negatively globally in any way? We do know that you have very modern assets. I was wondering if you could talk about possible increased regulation going forward.

Are you talking about the conventional fleet or an offshore --

No, no, excuse me, on the offshore fleet.

I believe that each different government will continue to regulate its own business domestically. I -- I question whether there will be an international convention that will be applied by governments to the offshore industries. I think what -- if there are increased regulations, I think it plays to the strength of Teekay Petrojarl, which has focused on the toughest regulatory environment in the world, which is the UK and Norwegian continental shelves. And Brazil actually ten years ago was a very different story, today is one of the highest regulation and scrutiny areas. So that's why we're focusing on those areas, because there is a higher barrier to entry, a higher barrier to success.

Right. That -- that's very good.

You also mentioned, just taking a look again at slide 13, on the conventional tanker side, you know, potential winter rally and spot tanker market. You may have done some color on that. And maybe I didn't get all the notes. But could you go over again the drivers? I know we're seeing better EIA numbers, you noted. Can you see the drives there? And are there particular ship types, including your own, but are there particular ship types that you think on the conventional side will have a very strong fourth quarter and first quarter?

I think all of the crude oil carriers are going to move in -- in concert. We believe that just the combination of the winter weather and the -- the increased -- I mean we see more and more OPEC oil coming on the market, which of course is very accretive to tonne miles. I believe we're going to get some sort of broad-based improvement across all crude sectors. The product market is much more arbitrage driven. I would say that's difficult to predict, based on fundamentals. So we're cautiously optimistic for a good winter market ,but I don't think it will be too different, Real, Suez, Afra will all do better.

Okay.

Time charter hire expense, you gave us some guidance. Can you -- some ideas, I guess is a better way to term it on -- again, on slide 13. I would expect that the rates are weak now. Is there any taking advantage of chartering and tonnage over the next three to six months? I mean, are we going to see a higher run rate for next year but obviously that being accretive to the bottom line? What's your expectation for time charter hire expense for next year?

Well, I mean in terms of --

If any --

Vince can talk to the numbers, as they look now. But in terms of our planned activity, we have been on the sidelines in terms of the ordering. So I guess it will be a matter of whether a window opens and if we go through that window, then that will be a variable that is hard to predict.

Okay. Very helpful.

Thank you for your time, sir.

Thank you, Urs.

Thank you.

Your next question comes from Todd Lee of Ahtena Asset Management. Please go ahead.

Thanks for taking the call. I've got two questions.

The first one, in regards to the large discount that Teekay trades to its NAV<and I was wondering what are the steps that you guys are willing to take over the short term to reduce that discount or -- in the valuation gap?

Well, we're actually taking a lot of steps.

The first thing is that we weren't happy with the return on invested capital of our existing assets, which had dropped down. A lot of that was because we had in-chartered ships at too high a rate and we were losing money on our trading position. So we cut our trading position radically over the last 18 months and that started to hemorrhage out what we had in -- in losses there. Then we worked onto the operating side in terms of cutting costs, and then as you heard Bjorn talk about today, we're in sort of the late innings in terms of recontracting some of our fixed rate projects, but some of the good news is still to -- to come. So the first thing we're doing is to raise the inherent profitability of the Company. And so some of that has taken us some time in order to do that.

The second thing was we bolstered our financial strength. That actually came at some cost to the invested capital because we raised up, as you heard Vince say, $450 million, which we haven't put to work yet. But as Bjorn said he is confident that he will find mostly offshore projects that will give us money in the low- to mid-teens on an unlevered IRR basis. So that -- that will give us a positive spread and, as we grow, that will raise the whole return on uninvested capital. Then --

I'm not sure where you think your NAV is today, but according to my calculations you are trading at, you know, at least a 50% discount to your net asset value. I don't see how you could find projects that could get you that kind of return.

Yes. So let me just finish.

And so as we've started to show in -- in our appendix statements, we're -- we're starting to generate real free cash flow now, whereas by cutting -- and we actually cut down on the amount of investments that we had. In previous years we were investing up to $1 billion. So we radically cut down the amount of investments, which is starting to generate up free cash flow. And so now we're starting to look at, which was the first question, how we can return capital.

In the past, in 2004, 2005, 2006 you watched Teekay buy back 25% of its' outstanding shares and so it's -- it's been a process and we're -- and we're now moving into the point where we're generating real free cash flow and, as Bjorn said, we can both invest on a selective basis, but not at the same level that we had done going forward, and look at returning capital to the shareholders. So I think the biggest way as a -- as an asset manager for us to enhance the value per share, which -- which really comes to the stock price, is -- is if we looked at it as -- as Bjorn said, that if you could move to a positive financial position, you could buy back stock which will enhance the value per share and that would --

Absolutely. The stock purchase would definitely do that.

Have you considered distributing the daughter company shares to the shareholders so that, you know, you could kind of reduce the complexity of the valuation process?

That's something that we could look at, or we -- but right now, we see that the daughter companies have a -- have a real value and they are continuing to -- to grow as you saw on one of the slides. So we think the best is yet to come for the daughter companies.

Well, absolutely but does it really matter if you guys are controlling the shares or if the shareholders -- your current Teekay shareholders are controlling the shares, right?

Yes. But what you have seen is that the distributions that we get up from Teekay Offshore and from Teekay LNG are a little bit more than what we pay out as the Teekay dividend. So, as you heard Bjorn say, we're -- we're actively looking at how we can return capital to shareholders, and that's either in increasing the dividend or in -- or in putting back shares --

Putting back shares.

-- putting back -- or in share buybacks. But the one point that we have made is that there isn't been -- there hasn't been a huge point in buying, say, conventional vessels up at Teekay because that has not resulted in an increase in value per share.

Right.

My second question is regarding the poison pill and I was wondering why you guys decided or you felt the need to install the poison pill, and the second part of the question is, how does that really enhance shareholder value?

That's simply a matter of, I think, good housekeeping. I think we have a very large, supportive, long-term shareholder. So it's really a formality. We believe that we're very focused on maximizing shareholder value and, as Peter outlined, it is foremost on our mind. And so I would not put any particular focus on -- on the -- on the pill. It simply was renewing the pill that expired.

Okay. Thank you.

Thank you.

Thank you.

Your next question comes from Sal Vitale of Sterne Agee. Please go ahead.

Good morning, gentlemen. Thank you for taking my question.

I'm not sure whether you addressed this earlier, but there's plenty of detail in the presentation -- but did you talk about what your spot exposure is in the -- in the fourth quarter? I only ask because, you know, you sounded in your -- in your remark, you sounded pretty confident about the return on the tanker market in the fourth quarter and into 1Q. So I was just wondering if you provided any details on that?

Yes. We do provide a breakdown of our fleet in the earnings release, so you can see which vessels are -- are trading in the spot fleet. So for example in the -- currently at the Teekay parent level, we have nine owned vessels and 13 in-chartered vessels, so all of the details are listed in the earnings release.

Okay.

But you didn't provide a percentage of days on spot as opposed to fixed, correct?

We do have the -- all the details listed in the appendix to the earnings presentation.

Okay. Very good. I'll take a look at that.

And then, if I could just go back to some of the remarks about maintenance in the third quarter on the FPSO side, was there some of that that occurred in the third quarter -- in the second quarter, as well? And was there any other -- you know, was there any other revenue impact on the -- on the FPSO side?

In the second quarter we did not have nearly as much, no. The OpEx for the FPSO fleet in the second quarter was up about $3 million over the first quarter, whereas the third quarter there is a significant ramp-up as I mentioned because of the planned shutdowns. I guess normally we would try to smooth it out between the second quarter and the third quarter, but it just so happens that this year it is all lumped into the third quarter, and so it is really a timing difference.

But on the revenue side -- on the FPSO revenue side for the second quarter, is there an amount that you can articulate as to what the impact might have been or is it --

We actually had a fairly strong second quarter for the FPSO fleet, and so it was more or less similar to what we had in the first quarter. So the dip that you see really of the $6 million to $8 million is in the third quarter.

Okay. Very good.

And then just on the FPSO side, have any other -- do you have any sense for when, you know there will be some repricing that occurs in the -- the-- in the other two FPSO's at the parent level, besides the Siri and the Foinaven.

We are in discussion about that. I think it probably will be a matter of 24 months.

24 months.

Okay. Thank you very much.

Thank you. (Operator Instructions).

There are no further questions at this time.

Okay. Well, thank you very much for spending your summer day listening to us this morning. And I hope you can join us at our Investor Day in October. In the meantime, we look forward to reporting back to you next quarter. Have a great day. Bye-bye.

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