Teekay Q3 Earnings Call Transcript

123jump.com Staff
09 Dec, 2010
New York City

The provider of international crude oil and petroleum product transportation services reported net quarterly revenues fell 5% to $408.4 million. Net quarterly loss widened 31% to $186.0 million or $2.55 per share, compared to a net loss of $142.2 million or $1.96 per share in the year-ago quarter.

Teekay Corporation ((TK))
Q3 2010 Earnings Call Transcript
November 5, 2010 11:00 a.m. ET

Executives

Kent Alekson – Investor Relations
Bjorn Moller – President and Chief Executive Officer
Vincent Lok – Executive Vice President and Chief Financial Officer
Peter Evensen – Executive Vice President; Chief Executive Officer, Elect and Chief Strategy Officer

Analysts

Michael Webber – Wells Fargo
Jonathan Chappell – J.P. Morgan
Fotis Giannakoulis – Morgan Stanley
Urs Dur – Lazard Capital Markets
Gregory Lewis – Credit Suisse
Scott Burk – Oppenheimer & Co.
Justine Fisher – Goldman Sachs
Joshua Katzeff – Deutsche Bank
Herman Hildan – RS Platou Markets
Salvatore Vitale – Sterne, Agee & Leach

Presentation

Operator

Welcome to Teekay Corporation''s Third 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. At that time, if you have a question, participants will asked to press star one to register for the question. For assistance during the call, please press star zero on your touchtone phone. 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.

Kent Alekson

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 third quarter earnings presentation. Mr. Moller and Mr. Lok will review this presentation today, during today''s 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 third quarter earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Moller to begin.

Bjorn Moller

Thank you, Kent and good morning, everyone. Thank you very much for joining us for this morning''s earnings call. Having provided an extensive update on our business at our Investor Day just two weeks ago, today''s presentation will be somewhat abbreviated from our regular quarterly call. If you haven''t already done so, I would invite you to visit our website, where you will be able to access the Investor Day presentations for Teekay Corporation and each of its daughter companies as well as the archived sound recording of the entire event.

I am joined today by our CFO, Vince Lok. For the Q&A session, we also have Teekay Corporation''s Chief Strategy Officer and CEO-elect, Peter Evensen, as well as our Corporate Controller, Brian Fortier.

Turning to slide three of the presentation which is posted on our website, I will briefly review some of Teekay Corporation''s recent highlights. For the third quarter, we reported an adjusted net loss of $53.3 million or $0.73 per share.

As per our guidance last quarter, our Q3 results were negatively impacted by the combined effect of a very weak spot tanker market and a higher-than-usual level of scheduled maintenance downtime in our offshore business which resulted in lower revenues and higher costs from this part of our business. I will talk more about each of these factors in a few moments.

Despite these adverse factors, we generated $134 million of cash flow from vessel operations or CFVO, in the third quarter, approximately 20% more than in the same quarter last year. Teekay is enjoying significant positive momentum in its offshore business development and this was exemplified when in October we signed a nine year contract with Petrobras to provide an FPSO for the Tiro and Sidon offshore oil fields in Brazil''s Santos Basin. The unit is scheduled to deliver in the second quarter of 2012.

Our unique daughter company structure continues to serve us well. Over the last few weeks, we have completed a total of $394 million of asset dropdowns to two of our daughter companies, Teekay Offshore and Teekay Tankers and in addition, Teekay LNG Partners just closed on an acquisition from a third party.

We are using the proceeds from these dropdowns to further deleverage the Teekay Parent balance sheet, pro forma for the recent dropdowns, Teekay Parent net debt has been further reduced to $247 million or approximately 11% of net debt to total capitalization. This is down from $555 million or 21% at the end of the second quarter.

With Teekay Parent capable of achieving its net debt-free target by 2011, our focus has shifted towards creating greater shareholder value by reallocating available capital towards a combination of higher-return growth investments and return of capital to shareholders. Reflecting our belief that the share price of Teekay Corporation represents compelling value, we recently announced our intention to commence repurchasing shares under our existing $200 million share-repurchase authorization.

Turning to slide four of the presentation, after a stronger than expected first half of 2010, spot tanker rates weakened significantly in the third quarter. Directionally, this was consistent with normal seasonality and demand but this year it was compounded by increased tanker supply, caused by the unwinding of floating storage contracts and newbuilding deliveries.

Teekay''s third-quarter spot Aframax pool rate averaged $13,800 per day and our spot Suezmax pool rate averaged $18,700 a day. For the fourth quarter so far, spot market weakness has persisted. Based on 30% of days booked for Q4, our spot Aframax pool bookings have averaged $10,000 per day and our spot Suezmax pool bookings approximately $13,000 per day.

However, as shown in the chart on the left side of the slide, bottom left, the winter market spikes in recent years have not occurred until late in the fourth quarter and this suggests that there still is time for a winter rally to occur this year. Over the past week, we have seen what might be the beginning of such a rally, initially censored on a rapidly strengthening of the VLCC market in the Middle East as a result of an increase in fixtures.

Teekay Parent has over 20 owned and in-charter tankers exposed to the spot market so an increasing spot tanker rates could still have a meaningful impact on our Q4 earnings. I remind you for every $1000 a day increase in average Q4 spot tanker rates, Teekay Parent would generate an additional $2.8 million of CFBO.

On slide five, I wanted to spend a moment discussing the higher than usual concentration of scheduled maintenance in our offshore business, which had a temporary but material impact on our third quarter results. At various times during the quarter, four of our five operating FPSOs were on period shutdown, the equivalent of a vessel dry dock for conventional tankers, except that the work takes place at the offshore sight.

This maintenance work is important to ensure that our fleet can continue to be operated safely and at optimal production levels but it results in temporarily lower revenues and higher operating expenses. As a result, FPSO revenues were down by approximately $10 million in Q3 compared to Q2 and shutdowns resulted in 48 days of unpaid off-hire during which time we were not earning our base time-charter rate and a further 22 days off-hire at a reduced base time-charter rate. And this compares to only eight days of unpaid shutdowns in Q3 2009.

In addition, we saw a reduction in oil production-related tariff revenue under certain of the FPSO contracts, in connection with these shutdowns. The Foinaven FPSO had a relatively lengthy shutdown, which in addition to routine maintenance, included elements of unscheduled subsea work by the customer, and life extension work related to the recent contract amendment for this unit.

As with vessel dry docks, FPSO shutdowns generally result in an increase in maintenance activities, as certain required maintenance can only be performed when the FPSO is not producing. This resulted in $5 million of additional FPSO OpEx in the third quarter, compared to the previous quarter.

As part of the general North Sea maintenance season, we typically experienced lower fleet utilization in our shuttle tankers during summer. As a result, revenues from our shuttle tanker business were down in Q3 by approximately $4 million from the prior quarter.

Maintenance related OpEx for shuttle fleet was up only slightly quarter on quarter. In Q4, production and utilization in our offshore fleet has returned to normal levels and it is worth noting that there are no shutdowns scheduled in our FPSO fleet in 2011.

On the next three slides, I will briefly recap the many positive developments that is have taken place in our three daughter companies over the past couple of months. Developments which will ultimately benefit Teekay Parent, through increased cash distributions.

Turning to slide six, Teekay Offshore has made considerable progress in signing new contracts and improving the profitability of existing contracts. In August, Teekay Offshore through its 51% owned subsidiary OPCO, signed a new master agreement with Statoil which converts an existing volume-based contract of a freight to time-charters for initially seven vessels including three of the four newbuildings shuttle tankers warehoused by Teekay Parent.

In October, Teekay Offshore required the Cidade de Rio das Ostras FPSO, previously known as the Syria PSO, and OPCO acquired the first of the three shuttle newbuildings for gross proceeds of $286 million to Teekay Parent. The partnership also agreed to acquire the second and third shuttle newbuildings when their time-charter contracts to Statoil commence in January and July 2011 respectively.

In August, Teekay Offshore also signed new time-charters with Petrobras for two shuttle tankers which were freed up as a result of the shuttle newbuildings entering the North Sea trade. In addition, the contracts for two other shuttle tankers remain servicing the Heidrun field in the North Sea were renewed at improved rates.

In addition, the previously mentioned Tiro-Sidon project in Brazil, which will be warehoused at Teekay Parent during the conversion phase at Jurong Shipyard, will be offered to Teekay Offshore in due course. Each of these transactions is expected to increase Teekay Offshore''s distributable cash flow.

Turning to slide seven, Teekay LNG Partners recently agreed to acquire a 50% interest in two modern LNG carriers, the Excalibur and the Excelsior, from Belgian company Exmar for an equity purchase price of $70 million and the assumption of approximately $100 million of pro rata debt. The 2005-build Excelsior is also equipped as a floating storage and regas unit and is currently serving in this specialized capacity in Argentina.

The vessels come with existing charters with 12 years and 15 years remaining, and in an update from what was reported in our earnings release, I am pleased to report that this transaction closed yesterday, November 4. Earlier today, Teekay LNG also completed the sale of one of its LPG carriers, the 2000-built Dania Spirit to a third-party buyer for proceeds of $21.5 million, resulting in a $4.3 million gain that will be recorded in the fourth quarter. These transactions will result in a net increase to Teekay LNG''s distributable cash flow.

Teekay Tankers has also been active. Turning to slide eight of the presentation. In October, Teekay Tankers agreed to acquire the 2003-build Suezmax tanker Iskmati Spirit and the 2004-build Aframax tanker, Esther Spirit, from Teekay Parent at a total cost of $107.5 million. This transaction is expected to close next week.

In October, Teekay Tankers entered into a 50-50 joint venture with Asian shipowner Wah Kwong to acquire a VLCC newbuilding scheduled to deliver in April 2013. Upon delivery, the vessel will be chartered to a major Chinese company for a period of five years.

This is Teekay Tankers'' first direct investment in VLCC tonnage. In July, Teekay Tankers used a portion of its liquidity to invest $115 million in first priority mortgage loans secured by two VLCC newbuildings. The investment provides an average annual yield of 10% over the three-year investment period.

In August, Teekay Tankers sold the oldest vessel in its fleet, the 1995-built to Aframax Tankers, Sotra Spirit for $17 million. Despite the weak spot tanker market in the third quarter, Teekay Tankers'' fixed rate coverage enabled the company to declare an attractive Q3 dividend of $0.31 per share, which is only slightly down from the last quarter, despite the significant drop in average Spot Tanker rates.

With the continued volatility in the spot tanker market, Teekay Tankers remains well covered with approximately 70% of days locked in under fixed-rate contracts for Q4 and approximately 50% for 2011. Having reviewed the positive momentum in our daughter companies, it is instructive to review and revisit the sum of the parts table on slide nine.

The accretive growth in the daughter companies'' benefits Teekay Parent not only through the increase in cash distributions it receives but also through the growing value of its equity ownership in the daughter companies. As shown on the bottom right, the value of our equity ownership has increased by $278 million or at $3.81 per share of additional underlying value just since the end of June. As shown in the top half of the table, there is still $1.75 billion of assets residing at the Parent.

As we continue to drop down shipping and offshore assets from Teekay Parent to our daughters, the equity value should continue to increase, further raising the sum of the parts'' value. The dropdowns also serve to illuminate the true value of Teekay Parent''s assets and should serve to narrow the gap between Teekay share price and the sum of its parts.

With Teekay shares still trading at a significant discount to the sum of the parts, we believe they represent compelling value. And for this reason, we recently announced our intention to commence repurchasing shares under our existing $200 million repurchase authorization. With that I will turn the call over to Vince to discuss our financial results.

Vincent Lok

Thanks, Bjorn and good morning to everyone. Turning to slide 10, 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 Q3 income statement against an adjusted Q2 income statement, which excludes the items listed in Appendix A of our earnings release and reallocates realized gains and losses from derivatives to their respective income statement line items. I will provide our outlook for the fourth quarter a little bit later on.

Net revenues decreased by $35 million primarily due to lower average spot tanker rates and a higher than usual level of scheduled maintenance in our offshore business in Q3. As Bjorn mentioned, revenues from our FPSO and shuttle tanker fleets declined by a total of $14 million from Q2 as a result of planned shutdowns to four out of our five FPSO units in Q3 and North Sea field maintenance during the summer months which affected our shuttle tanker fleet.

Overall, this decline was in line with our expectations, as indicated during our Q2 earnings call. Although, we normally experience lower revenues during the second and third quarters of each year due to seasonal maintenance in our offshore fleet, what we experienced during this third quarter was quite unusual, with such a high number of FPSO shutdowns in the same quarter let alone in the same year.

The good news is that our FPSO and shuttle tanker fleets are back up and running at a high level of utilization now, when oil production levels are generally the highest, which is during the fourth and first quarters of the year. Vessel operating expenses increased by $10 million in Q3, mainly due to the maintenance costs associated with the planned FPSO shutdowns as well as the timing of certain occurring and related travel costs.

The increase in the FPSO and shuttle tanker maintenance costs in Q3 was less than what we had originally anticipated, which was positive, although some of these expenditures have been deferred to 2011 and a little bit into Q4. Time-charter hire expense decreased from the previous quarter by about $11 million, mainly due to the redelivery of three in-charter conventional tankers in the third quarter and the full impact of two in-charter vessels that we redelivered in the second quarter as well as less spot in-chartering activity in the shuttle tanker fleet.

Depreciation and amortization is in line with the prior quarter as the addition of the shuttle tanker Amundsen Spirit was partially offset by the sale of two older conventional tankers during Q3. G&A expenses decreased by $2 million to $47 million due to the lower performance-based bonus accruals and the timing of certain expenses.

Our normalized G&A in the first nine months of 2010 is running about $11 million below the first nine months of 2009. So we have been able to achieve further cost savings in addition to what we realized in 2009.

Net interest expense decreased by $2 million compared to the prior quarter, primarily due to an increase in interest income from higher average cash balances during Q3. It should be noted that the interest income from Teekay Tankers'' $115 million investment in the VLCC term loans has been recorded in revenues.

Income tax recovery was $2.7 million in the third quarter, which is in line with expectations. Non-controlling interest expense decreased by $2.3 million due to lower third quarter adjusted earnings in Teekay Tankers and Teekay Offshore, partially offset by the Q3 equity offerings of Teekay offshore and Teekay LNG.

Looking at the bottom line, adjusted net loss per share was $0.73 in the third quarter compared to an adjusted net loss of $0.36 in the second quarter, with the majority of this difference coming from lower average spot TCE rates and higher than normal level of scheduled maintenance in our offshore fleet.

Now turning to slide 11, we have provided some guidance for some of the more significant changes happening in our fourth quarter, most of which points to a stronger quarter compared to the third quarter. With the completion of the FPSO shutdowns and North Sea and field maintenance, net revenues for our FPSO and shuttle tanker fleets are expected to increase by approximately $15 million to $17 million in Q4 compared to Q3.

In addition, we have fewer scheduled dry dockings in Q4, which we estimate will provide an additional $4 million in revenue compared to Q3. For your reference, we have provided our detailed dry docking schedule for 2010 and 2011 in the appendix to this presentation.

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 and since it is based on various annual operating performance measures, oil production levels and the average oil price for the year. As a result, based on the performance of the unit and the average oil price during the first nine months of the year, we estimate that an additional $15 million to $17 million will be recognized from this unit in Q4 and just to be clear, this is an amount that is in addition to the $15 million to $17 million increase mentioned above, relating to the return of the offshore fleet to normal production levels in Q4.

The new Rio das Ostras FPSO contract extension becomes effective in December or early 2011, at which time the charter rate will increase by about $20,000 per day. We should also expect higher revenues resulting from the new shuttle tanker contract amendments that took effect on September 1 as a result of the newbuilding -- as well as the newbuilding shuttle tanker that commenced its new time-charter with Statoil in early October.

The second newbuilding shuttle tanker is scheduled to commence its time charter in January 2011. Lastly, although our fourth quarter spot rates have averaged below the third quarter averages so far, there is still the potential for a winter market rally as Bjorn discussed earlier. On a consolidated basis, as a rule of thumb every $1000 per day increase in average Spot Tanker rates results in about $3.2 million in additional revenues.

Looking at vessel operating expenses, they''re expected to decrease by approximately $3 million to $5 million in Q4 as a result of the high level of FPSO maintenance activity we experienced in Q3, partially offset by changes to the fleet size. Time-charter hire expense is expected to decrease in Q4, by approximately $5 million, reflecting the full-quarter effect of the Q3 redeliveries as well as the redelivery of an in-charter shuttle tanker in Q4.

We have an additional six external in-charter vessels redelivering in 2011, which is expected to reduce our time-charter hire expense in 2011 by approximately $80 million compared to 2010, which includes the full-year effect of the 2010 redeliveries. Depreciation and amortization is expected to increase by about $3 million in Q4 due to the delivery of two newbuilding shuttle tankers during Q3 and Q4 2010, and the amortization of dry docking expenditures that were incurred in Q2 and Q3.

G&A expenses are expected to be about $50 million in Q4. Net interest expense is expected to decline in Q4 by about $2 million as a result of the reduction in net debt. Income tax recovery in Q4 is expected to be consistent with Q3.

Non-controlling interest expense is expected to increase to approximately $32 million to $34 million in Q4 as a result of the recent equity offerings in associated dropdowns completed in our daughter companies as well as higher expected operating earnings in Teekay Offshore in Q4 and the recently completed Exmar acquisition in Teekay LNG. On that note, equity income is also expected to increase slightly in Q4, as a result of Teekay LNG''s 50% interest in the two Exmar vessels during November and December. So overall, the fourth quarter results were expected to be stronger for the various reasons outlined above.

Turning to slide 12 of the presentation, this provides a summary of the progress we have made since the beginning of the year with respect to deleveraging the Teekay Parent balance sheet. While our Q3 earnings release shows Teekay Parent net debt of $624 million, this does not take into account the net debt reduction from our recent dropdowns to Teekay Offshore and Teekay Tankers.

Pro forma for these transactions, Teekay Parent''s net debt now stands at only $247 million, which represents a net debt to capitalization ratio of only 11%. Since the start of 2010, net debt has reduced by approximately $630 million and this includes the incremental CapEx related to progress payments on our existing newbuildings.

Our recent dropdowns have also had a positive impact on liquidity at Teekay Parent, which has increased from $1.3 billion to $1.4 billion on a pro forma basis, with an additional $900 million of liquidity in our three daughter companies. As you can see, we have built up a strong liquidity position and are capable of being net debt-free at Teekay Parent very soon.

In addition, as we discussed at our recent Investor Day, we expect to generate a significant amount of available cash flow over the next couple of years, as we continue to drop down assets to our daughter companies. This, combined with our existing financial strength, provides Teekay with the optionality to take advantage of attractive investment opportunities and/or return capital to shareholders. With that, I will turn the call back to Bjorn to conclude.

Bjorn Moller

Thank you, Vince. At our recent Investor Day, we highlighted that Teekay is financially strong and strategically well positioned as a world leader in each of its businesses. We also described that we have made significant progress on our strategic priorities over the past year.

We are focused on creating shareholder value going forward and in particular through our disciplined uses of the significant capital becoming available at Teekay Parent. Operator, we are now available for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you would like to ask a question, press star one on your touchtone phone. To withdraw your question, press the pound sign. If you are using a speakerphone, lift your handset before entering your request, please standby for your first question. Your first question comes from Michael Webber from Wells Fargo. Please go ahead.

Michael Webber – Wells Fargo

Good morning, guys. How are you?

Bjorn Moller

Good. Good. Thanks.

Michael Webber – Wells Fargo

Just a quick question, I guess, on dividends. The stock actually reacted very well post-Investor Day and buybacks and when you think about ways to expedite value recognition for Teekay shareholders, obviously the dividend increase is the next thing that comes to mind. Can you outlay out your framework as far as how you will think about approaching an eventual dividend increase and whether or not that is something you would maybe do concurrently with buybacks or potentially after? Can you just lay out your current thought process there?

Bjorn Moller

Right. I think the approach that the Teekay Board is adopting is that if we would like to make sure that we sustain Teekay Corporation dividend with stable cash flows that support it and so therefore I think you should be looking to the MLP distributions that are stable and growing as the underpinning of the Teekay Corporation dividend whereas I think you should view some of the ad hoc capital availability that comes about as a result of dropdowns or third party asset sales, as capital that might be available to use for share repurchase.

So I think the situation we have now is we have significant available capital coming up to Teekay, coming up at Teekay Parent and so the stock buyback I think is the most appropriate way to return capital to the shareholders. The dividend as we increase the distribution at the daughters, the dropdowns that are accretive will increase the distribution of the daughters and that will in turn allow the Teekay Board to consider whether dividends should be increased.

Michael Webber – Wells Fargo

Got you. That makes sense. That kind of leads me to my next question. The dividend right now is covered I think about 112% to 114% by those MLP distributions, and you mentioned that''s kind of the barometer for looking at dividends going forward. There is a fixed component I guess to the TNK distribution. Is there ever a scenario where those cash flows would factor into your dividend discussions or are they still too variable with one-to-two-year contracts?

Bjorn Moller

I would say it''s part of a bigger picture. They''re not covered more than the chartering strategy of Teekay Tankers is spot or a combination of spot and fixed rate one to three years in duration.

Michael Webber – Wells Fargo

Right.

Bjorn Moller

At the other end of that you have some stability and so it''s part of overall consideration. Of course there are other factors that weigh into that decision as well.

Michael Webber – Wells Fargo

Okay. Great. I guess there is one final question and I will turn it over. More of a macro question, but we had Q3 come and go and driving crude prices higher and the trade is getting I guess a little more crowded at this point but the inflationary implications down the road kind of pose an interesting scenario for floating storage, with future inflation potentially driving possibly some contango in the curve. In your conversation with the charters and within your FSO businesses is this an idea that''s really had any traction or yet to grab hold. And I guess what are your thoughts on I guess the 2011 floating storage trade in general considering what a big role it has played in tankers over the last 18 months?

Bjorn Moller

Yes. We follow that closely. I would say that we see good oil demand growth at the moment. We''re seeing -- although some inventories and some locations are relatively high, the absence of the reduction in floating storage means that there is no buffer and for that reason we might see firming of oil prices and that''s going to be I think the enemy of contango and floating storage. So as long as you have good oil demand and strong oil prices and a flat curve, then we''re not going to see a return to floating storage.

So you would have to see some like a glut of oil coming onto the market and the oil price being forced down in the early near months. So as that could happen because I think these oil prices OPEC may be interested in pumping more oil. So it is possible that that could reignite the contango. We watch that very closely.

Michael Webber – Wells Fargo

Thanks a lot for the time, guys. I appreciate it.

Operator

Thank you. Your next question comes from Jon Chappell of J.P. Morgan. Please go ahead.

Jonathan Chappell – J.P. Morgan

Thanks. Just a couple quick ones this morning. Vince, a couple questions on your slide 11. You gave us the impact of the Rio rate increase about $20,000 a day. Is there any way to quantify what we should be looking for the shuttle tankers with the contract amendment?

Vincent Lok

Yeah. We don''t -- because part of that includes the other two newbuildings that are delivering in 2011, probably won''t see the full impact of that in Q4 yet. It is more of a gradual increase as the newbuildings delivery. Roughly, I would say it is about $2.5 million for the fourth quarter.

Jonathan Chappell – J.P. Morgan

Okay. Helpful. And then also on the completion of the North Sea field maintenance and FPSO shutdowns as I think about where we attribute that in your model, is that mostly at the Teekay Parent level or some of that in the Teekay Offshore model as well, that $15 million to $17 million sequential increase?

Vincent Lok

A portion of that will be in Teekay Offshore relating to the Varg FPSO….

Jonathan Chappell – J.P. Morgan

Okay.

Vincent Lok

…. and not too much of it relating to the Siri. So I would say a portion would go to the Varg, probably in the neighborhood of about $3 million to $4 million of that amount.

Jonathan Chappell – J.P. Morgan

Okay. Great. And I guess I didn''t hear, Peter was there or not but I read an article earlier this week on a shortage of transportation capacity for LNG in the back half of this year, the fourth quarter of this year and the implication that it could have on seaborne trade of that commodity. First of all, is that true? I know that TGP has significant long-term fixed-rate contracts. I wouldn''t expect there to be any near-term benefit from the temporary shortage of transportation capacity, but is that -- is it just temporary or is there a longer-term trend there and is there some opportunities for Teekay LNG to benefit from that?

Peter Evensen

Hi, John. I think that calling it a shortage is a little too extreme. We''re going from an oversupply situation to a situation in which we''re getting better balance between the amount of vessels that are available versus the amount of cargoes. So we''re seeing a gradual improvement in the LNG market but we''re not back to the point where we were before where you can start to talk about a shortage of ships. But basically there is more gas coming out onto the market as more of these liquefaction plants ramp up and so steady improvement in the market but nothing that I would label a shortage.

Jonathan Chappell – J.P. Morgan

Okay. And then finally, if my memory serves me correctly, Teekay has been aggressive with share buybacks in its history. Most of them were program trading. Is there going to be more control I guess over the day-to-day activity and kind of the point of this question is what''s the sensitivity going to be around price? I am guessing that when the Board approved this new commencement the stock was maybe $5, $6 lower than where it is today. Are we going to see continued involvement in the market or is there going to be sensitivity to price as you complete that program?

Bjorn Moller

I think we''ll manage that in a tactical way. And I guess it will be as we progress through the use of the authorization we''ll also have data points of other projects and then other investment opportunities that come along. So I can''t give you a lot of guidance, but we will be managing tactically is the best thing I can say.

Jonathan Chappell – J.P. Morgan

Okay. Understood. Thanks, Bjorn. Thanks Vince and Peter.

Operator

Thank you. Your next question comes Fotis Giannakoulis from Morgan Stanley. Please go ahead.

Fotis Giannakoulis – Morgan Stanley

Good morning, guys. It seems like the market has really appreciated the strategy of focusing increasingly on the offshore sector but I wanted to ask you about your outlook for tankers. You mentioned in your press release about the lack of cargoes going east from the Atlantic Basin and the decline in ton miles demand. Do you see any evidence that the, this might be changing and the western trade is growing?

Bjorn Moller

I would say that I think there is a lot of opportunistic approach on the part of China in particular so they''re very astute. They obviously stepped in so the big SWAT of the VLCCs in the Middle East market when the rates were low and they kind of moved the market overnight. Similarly, depending on how OPEC is pricing its crude with its discounts, they will react to that.

I think fundamentally we do expect to see a growing trade from the Atlantic to the East. I think that''s supported by the investments that China is making in Brazil, for example, the strategic relations they''re building with Venezuela and their involvement in Africa in general.

So I would say first of all just to clarify, I don''t think there is a reduction in ton miles. I think there''s just a reduction in the growth rate in ton miles because of course any growth in imports in China will drive additional ton miles. The question is how much. So we believe that this was a kind of a shift that was ad hoc in nature rather than fundamental in the last quarter.

Fotis Giannakoulis – Morgan Stanley

And a little bit on the short-term, we seen the last couple of days the rates towards the Far East after the spike earlier during the week, we have lost about $10,000. Is there something going on here? Is there any turning point that you foresee? We know that now this is the big season and a lot of charters are fixing the December contracts in advance.

Bjorn Moller

I believe that''s the usual jockeying for position between owners and charters. I think the charters are obviously trying to dampen the enthusiasm that occurred and the owners are trying to keep it up. And so having had such a weak period of rates, I guess you can''t blame some owners for being willing to take a little bit less than $45,000 a day just to get coverage, but so it''s a bit of a seesaw battle right now. I don''t think it is easy to predict where it''s going to go. I believe, we''re certainly hopeful that we''ll see that the activity level which is quite good is going to ultimately reflect in the Atlantic Basin, also seeing some increases in rates so it is on a knife edge I would say right now.

Fotis Giannakoulis – Morgan Stanley

And in terms of your strategy, do you foresee that there might be opportunities for expanding again on the tanker sector next year because now I see that the fleet, the tanker fleet out of 115 vessels that are you controlling only 17 are tankers on the Parent level?

Bjorn Moller

Yes.

Fotis Giannakoulis – Morgan Stanley

Do you see that there might be an opportunity of expanding again during next year?

Bjorn Moller

I believe -- two comments. Firstly, I think there will be opportunities in the next one to two years for people who have strong balance sheets to be opportunistic in the market. Secondly, the Teekay Group''s intended strategy for involvement and growth in the conventional tanker sector is through Teekay Tankers, its subsidiary, TNK. And so TNK is growing and TNK has a strategy to continue to grow. So I guess Teekay will continue its involvement in the sector in various ways, including TNK.

Fotis Giannakoulis – Morgan Stanley

Thank you.

Bjorn Moller

Thank you.

Operator

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

Urs Dur – Lazard Capital Markets

Hi. Good morning.

Bjorn Moller

Hi, Urs.

Urs Dur – Lazard Capital Markets

Hi. Almost everything answered for me. The move in the oil price here hasn''t really steepened contango much, but still with the quantitative easing I guess more in a macro question the higher oil prices got to benefit the long-term investment and the offshore space and make it more viable. Are there any near-term impacts beyond the ones that are in your presentation of what you see maybe next quarter or next year for the development of your shuttle tanker and other offshore businesses that you might be able to identify and is that a target growth area?

Bjorn Moller

We see good momentum both in shuttle tankers and in floating production and floating storage for that matter. So I think it is a good time to be exposed to that sector and we feel that Teekay is extremely well positioned. So clearly the high oil price is going to be stimulative to two things, firstly, the exploration of new oil which may take five to seven to 10 years before it starts getting produced but also of course the life of fields that when production volumes reach and low levels at the end of the field life they''re going to continue longer the higher the oil price. So that''s very good for demand.

I think it is best to refer you maybe to some of the slides we used earlier today, where there is a fairly extensive discussion. But I certainly feel the benefit of the strong oil prices is coming -- playing to our position. I guess also the longer our existing FPSO stay on field the longer and the more tariff revenue we receive and we also on the Foinaven FPSO have a price-related oil tariff. So we are exposed to the upside in that sense as well.

Urs Dur – Lazard Capital Markets

Great.

Bjorn Moller

Positive for Teekay.

Urs Dur – Lazard Capital Markets

I had that presentation in front of me as well. I just wanted to take an opportunity to ask you again since so much has changed frankly since October 20 amazingly enough. Really that''s all I wanted to hear about. Thank you very much.

Bjorn Moller

Thank you.

Operator

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

Gregory Lewis – Credit Suisse

Yes. Thank you and good morning. I guess, my first question is related to, you made some moves in the LNG segment, I mean you picked those interests in the Exmar vessels, and you sold the Dania Spirit. In terms of thinking about the sale of the Dania Spirit was that more of like a vessel swap? Is that how we should be thinking about that?

Vincent Lok

I think you should look upon it that we had a vessel and we got a very good price from someone who approached us. And so we were able to record a substantial gain on it. It wasn''t that accretive to our distributable cash flow, so when we weighed up the future net present value versus selling it today, it just made a lot of sense to sell it today.

Gregory Lewis – Credit Suisse

So in other words, when I look at your existing LNG fleet and how should I say, your gas fleet, you have at this point now looks like you have two LPG vessels on the water. Should we think about these vessels also leaving the fleet over the next say few quarters?

Vincent Lok

No. Because the other LPG vessels that we have, they''re all on 15-year charters. So this one was on a shorter charter and the charter had some options to extend and so when we looked at it, we just felt that this was the right time to sell it in its life cycle which is the same thing that we''re doing at Teekay Tankers as it relates to some of our older ships. If we can get premium prices, we''d rather take the money and look for other investments where we can get a higher return.

Gregory Lewis – Credit Suisse

Okay. Sure. Just given the variability it doesn''t probably make sense to be in an MLP structure in the pricing. Okay. And then just my other question is, when you do a good job of laying out the cash flows of the daughter companies and the parent as well, in terms of when we look at the parent company and we see the negative cash flow or cash flow from operating vessels that the parent is generating, as I sort of go down the asset classes, are there a handful of assets that are just really dragging that cash flow negative?

Vincent Lok

If you look at the existing assets of the parent right now, we still do have two FPSOs that are have under-the-water contract, below-market contracts substantially, so that is dragging but we are working on improving those contracts.

Gregory Lewis – Credit Suisse

Sure.

Vincent Lok

They will be up for renewal in the next several years. The other part of it is the conventional business which we still have some in-charters both external charters as well as internal charters from Teekay Offshore. So they have based on current Spot Tanker rates they are a drag on EBITDA. So we would need a recovery in spot tanker rates to see an improvement there.

Gregory Lewis – Credit Suisse

So it is primarily the FPSO and the in-charter vessels that are driving that negative. So when we think about vessels being dropped down into the daughters, I am assuming if they''re negative cash flows those assets can''t be dropped into the daughters. Is that the right way to think about it or not really?

Vincent Lok

In terms of the two FPSOs, I would say that''s correct. But we still have other assets that are generating positive cash flows such as the Foinaven FPSO. We also have 49% of OPCO remaining that could be dropped down to Teekay Offshore and conventional tankers would be dropped down at fair market value like we did with the Esther and Iskmati Spirit.

Gregory Lewis – Credit Suisse

Okay. Perfect, Vince. Thank you very much. Thanks for the time, guys.

Operator

Thank you. Your next question comes from Scott Burk of Oppenheimer. Please go ahead.

Scott Burk – Oppenheimer & Co.

Hi. Good morning, guys. A little bit of a follow-up question to Greg''s about the FPSOs being dropped down to Teekay Offshore. Just wondered how many assets do you eventually want to keep at the Teekay Parent level and then how quickly can you drop down that remaining 49% of Teekay OPCO down to TOO?

Bjorn Moller

First, I''ll give a shot to answer that and then maybe Vincent and Peter can chime in. I guess the intention would be to continue to drop down assets that can provide value in daughter companies and internal, so be beneficial to the parent in the form of increased cash flow from the daughters and increased value in our ownership of the daughters.

The purpose of Teekay will then be to continue to secure new projects, to warehouse them and as we laid out at Investor Day, the warehousing is a temporary use of capital and then there are more strategic uses of capital. If large opportunities come along or new projects that fit the, outside the box of the daughter companies. So I guess essentially most of what you see upstairs at the parent will eventually be eligible for dropdown. That''s the plan.

Vincent Lok

I think that''s the key with what he''s saying is they''re eligible. It is with existing assets upstairs it is Teekay Corporation''s desire to sell and likewise down at the daughter companies, the daughter companies have their choice of either buying from Teekay at fair market value or we go outside and look at third-party acquisitions and whenever I am evaluating any acquisition, I always look and see, is there a third-party transaction. So there is a constant weighing up of what is the best transaction for the daughter companies as it relates to getting accretive growth.

Scott Burk – Oppenheimer & Co.

Okay. And I want to follow-up to that in terms of warehousing projects at the parent level. It seems like, that the VLCC that you''re doing the joint venture with in Teekay Tankers, seems like that might be a better or might be a warehouse-type project. In other words, you have newbuilding payments to complete there. How did you make the decision to put that into TNK as opposed to do that project at the Teekay level?

Vincent Lok

I think from our point of view we''re looking for the daughter companies to be able to warehouse more of their projects on their own. So for example, Teekay LNG Partners has over $500 million in liquidity and because Teekay Tankers has substantial liquidity itself and it could borrow under its lines and capitalize the interest. So it will have no negative effect on the partnerships'' dividends or excuse me, on Teekay Tankers dividends. So it just made sense to do it downstairs.

Scott Burk – Oppenheimer & Co.

Okay. All right. And then, Vince, one question for you on the guidance or I guess two questions. First of all, can you just clarify if the guidance you gave there, that''s for changes in revenue compared to third quarter just for Teekay Corporation? In other words, do we need to deduct from those changes like the $4 million or whatever that would be going to, more directly to Teekay Offshore?

Vincent Lok

This is on a consolidated basis.

Scott Burk – Oppenheimer & Co.

Yes.

Vincent Lok

So you have a portion of these in some cases would apply to the daughters. So the guidance is on a consolidated basis to be clear.

Scott Burk – Oppenheimer & Co.

Okay. All right. That''s what I thought. And then one more question about the cash flow vessel operations for every $1000 increase in spot tanker rates. Is that compared to third quarter day rates or should we -- I assume that''s compared to third-quarter day rates, not the day rates that you mentioned that you locked in for the 30% Aframax days so far?

Vincent Lok

It is not compared to any particular quarter. It is just the rule of thumb for every $1000 change it is about $3.2 million. So that''s just the sensitivity on a quarterly basis.

Scott Burk – Oppenheimer & Co.

Okay. Very good. Thank you.

Bjorn Moller

Thank you.

Operator

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

Justine Fisher – Goldman Sachs

Good morning.

Bjorn Moller

Hi, Justine.

Justine Fisher – Goldman Sachs

I have one follow-up question to Greg first. So just to clarify, it seems as though if you did drop additional conventional tankers from Teekay Parent to Teekay Tankers, it wouldn''t be the chartered-in tankers, it would only be owned tankers that you dropped down?

Bjorn Moller

That''s correct.

Justine Fisher – Goldman Sachs

And so in that case, it seems as though historically chartering in vessels afforded the company significant flexibility and I know this is a consistent point that you guys made, not necessarily in 2010 but in years before that, it allowed you to gain additional control in the market without having to go out and acquire vessels at prices that you thought were too high. It seems that at the moment the company is looking to wind down the chartered-in fleet, that their, obviously, loss making vessels.

But let''s say over the next one to three years, if Teekay as a group wants to retain exposure to the chartering market, is that going to happen via growth at the parent or would you consider chartering in vessels directly to Teekay Tankers or is chartering not something you''re going to be focused on?

Bjorn Moller

It is a good question and one we will discuss as that opportunity comes along. We have been in unloading-exposure mode in the last two or three years since TNK really gained traction. And so we now have reached a bottom in the market of some sort whether we bump along that market for bottom for a while and there will be some trading opportunities. I think the main thing is that the expertise resides inside the Teekay group to do that.

So far the mantra has been that Teekay Tankers was in the business of acquiring vessels, acquiring steel and maintaining a spot presence or chartering them out. However, the potential for trading in TNK is something that could be developed. We have the pools which, of course, provide us with lots of flexibility and the size of our fleet, and it is possible that you might do some trading inside the pools as well. So that number of options, just I don''t think we have fully baked that idea how we will work on that.

Justine Fisher – Goldman Sachs

Okay. And then just a question on CapEx and deliveries. I think you guys usually include a schedule of what the remaining payments are and I believe as of the Q2 SEC filings you had another $180 million payment to make in 2011. Can you just give us an update on the remaining newbuild-related payments that you have for the remainder of 2010 and then 2011 and 2012?

Vincent Lok

Hi, Justine. We''ve actually included a table in our earnings release.

Justine Fisher – Goldman Sachs

I missed it.

Vincent Lok

Just below the liquidity.

Justine Fisher – Goldman Sachs

Okay. I will go back and look.

Vincent Lok

It is, just for your reference, the 2010 fourth quarter about $182 million, 2011 is about $550 million, which includes the recent Tiro-Sidon FPSO project, so you can find the details in the earnings release.

Justine Fisher – Goldman Sachs

Okay, apologies for asking. I''ll go back. Just one other question going back to the issue of the vessels at parent versus the daughter companies. Obviously, the vessels at the daughter companies are not losing money on a grand scale now, but it does seem as though because of the different dividend structure at Teekay Corp. that the company is at least more comfortable keeping loss-making vessels at the parent rather than dropping them down to the daughters as you mentioned with the FPSOs that are still underwater. In the future, if there were vessels at the daughter companies that were loss-making on, let''s say a two-quarter basis. Would you consider ever selling them back up to the parent just because it wouldn''t have a significant effect on the dividend there?

Peter Evensen

Let me answer that. Justine that isn''t our policy. Our policy down at the MLPs is that we put these vessels on the long-term contracts, so any contract interruption is the responsibility of the MLPs. We aren''t doing trading between the companies. If the daughter companies wish to purchase assets, that''s a decision they make, that they want to do it because it''s a transaction that will create value.

You are not going to find us moving assets up and down based upon whatever their short-term prospects are. And so I want to reiterate that it is a two-sided decision. If Teekay wants to sell an existing asset, there is a meeting of the Board at the daughter company and they will consider whether that transaction is an accretive transaction for the daughter company. If they don''t consider it that way, then they won''t buy it.

Justine Fisher – Goldman Sachs

Okay. Great. Thanks very much.

Operator

Thank you. Your next question comes from Justin Yagerman of Deutsche Bank. Please go ahead.

Joshua Katzeff – Deutsche Bank

Hey, guys, this is Joshua Katzeff on for Justin. Just to, I guess, get the short, I just want to go back to potential offshore investments. You guys have repeatedly mentioned there were higher risk-adjusted returns in the offshore sector. Do you think these opportunities will be lasting long-term or is this something you need to act quickly on and deploy a lot of capital in the near-term?

Bjorn Moller

We see a strong demand growth and we see a limited number of suppliers. We see a consolidation of the supplier side and therefore we expect this will be a positive trend that will last multiple years.

Joshua Katzeff – Deutsche Bank

Great. Thanks. And just one more question. With regard to your goal of reaching or $0 in net debt or going below, would that prevent from you making large-scale acquisitions or pretty large investments or would you consider maybe delaying that goal?

Bjorn Moller

We have indicated a direction of wanting to be in a position to reach that goal. Now that we have it within our sights, it doesn''t necessarily mean that that is the optimal capital structure of Teekay. And so therefore we are looking at all alternatives, continuing to repay debt, investment or stock buyback. And I think we will find that the best use of our capital will probably be with some stock buyback and some new investment.

Joshua Katzeff – Deutsche Bank

Thank you.

Bjorn Moller

Thank you.

Operator

Thank you. Your next question comes from Herman Hildan of RS Platou Markets. Please go ahead.

Herman Hildan – RS Platou Markets

Hi. Good morning, guys. I just have a quick question on the FPSO side. Could you give us any comments on the market dynamics in terms of how many competitors you see on the project you are tendering for and what regions you''re targeting currently?

Bjorn Moller

We''re focused on niche markets in Brazil and the North Sea which are the areas that have the strength of Teekay Petrojarl, our FPSO subsidiary. And we see about 10 competitors in the market, of which there are probably three in what we characterize as the top tier size wise and then three more companies in the next size, including us.

Herman Hildan – RS Platou Markets

Can you also comment on how you see your pricing power compared to previous companies?

Bjorn Moller

I don''t think there is a pricing power but I think there''s a skill set that''s very desirable in our offshore organization. And I think the customers are willing to recognize that. It comes from the operational reputation, it comes from the technical knowhow and the strength of our balance sheet. So I think we are well-positioned competitively.

Herman Hildan – RS Platou Markets

And then lastly also do you see projects getting larger or do you still kind of target the mid-range FPSOs?

Bjorn Moller

Well, we''ve looked at some of the big, what I call commoditized projects in the $1.5 billion investment category. And I think we feel that''s probably not going to be our core business. Our core business will be in the niche projects, small-to-medium size projects, and that''s where we have also gained the most traction I find.

Herman Hildan – RS Platou Markets

Okay. Thank you very much.

Bjorn Moller

Thank you.

Operator

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

Salvatore Vitale – Sterne, Agee & Leach

Good morning. I just have a couple of quick questions on the LNG side. I see in the press release here that there was the Dania Spirit was sold. And it will be completed by the middle of November. What should we be looking at? What is the quarterly revenue contribution from that vessel just for modeling purposes?

Vincent Lok

Hi. I don''t have that figure in front of me but it is not material to the distributable cash flow.

Salvatore Vitale – Sterne, Agee & Leach

It’s okay.

Vincent Lok

It is one of the reasons that we sold it. So it doesn''t detract from our distributable cash flow after we looked at the net expenses.

Salvatore Vitale – Sterne, Agee & Leach

Okay. And then just on the overall conventional tanker side on the LNG and TPG, what should we look -- that was $23 million, I am sorry, $24.8 million in Q3. Is that a good run rate to use going forward?

Bjorn Moller

Vince, do you want to take that?

Vincent Lok

You''re referring to the…

Bjorn Moller

PGP.

Salvatore Vitale – Sterne, Agee & Leach

PGP conventional tanker side, the $24.8 million revenue.

Bjorn Moller

That''s a fairly stable fleet with fixed-rate contracts. So apart from chasing quarterly scheduled dry dockings, it is a pretty good run rate. We did have dry dockings in Q3, so Q4 should be a little bit better.

Salvatore Vitale – Sterne, Agee & Leach

Okay. What was just ballpark, what was the revenue impact of those dry dockings?

Bjorn Moller

It is about $1 million.

Salvatore Vitale – Sterne, Agee & Leach

Okay. $1 million and then just the last question on the (inaudible) newbuildings, that are deliverable in 2011 if I am reading this right. Have you provided what the rates are going to be on that, what the revenue contribution will be from that?

Vincent Lok

No, we haven''t.

Salvatore Vitale – Sterne, Agee & Leach

Okay. Thank you.

Operator

Thank you. There are no further questions at this time.

Bjorn Moller

Okay. Well, thanks for joining us this morning. Let''s hope for a good winter market and I wish you a very good weekend. Thanks for listening. Bye-bye.

Operator

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