Teekay Corporation Q4 Earnings Call Transcript

123jump.com Staff
15 Mar, 2010
New York City

Teekay Corporation fourth quarter net revenue declined 26.6% to $448.9 million. Net loss for the quarter was $33.3 million or $0.45 per share as against net profit of $53.2 million or $0.73 per share in the same quarter in the prior year.

Teekay Corporation ((TK))
Q4 2009 Earnings Call Transcript
March, 4, 2010, 11:00 AM ET

Executives

Kent Alekson – Investor Relations Officer
Bjorn Moller - President and Chief Executive Officer
Vincent Lok – Executive VP and Chief Financial Officer
Peter Evensen - Chief Strategy Officer

Analysts

Michael Lever – Credit Suisse
Jonathan Chappell – JP Morgan
Gregory Lewis - Credit Suisse
Justine Fisher - Goldman Sachs
Urs Dur - Lazard Capital
Daniel Burke - Johnson & Rice
Scott Burk – Oppenheimer & Co

Presentation

Operator

Welcome to Teekay Corporation’s fourth quarter and fiscal 2009 earnings conference call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. (Operator Instructions) At that time if you have a question participants will be asked to press “*1” to register for their question. For assistance during the call please press “*0” on your touchtone phone. As a reminder this call is being recorded.

And 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.

Kent Alekson - Investor Relations Officer

Before Mr. Moller begins, I would like to direct all participants to our website at www.teekay.com where you will find a copy of the fourth quarter and fiscal 2009 earnings presentation. Mr. Moller 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 our fourth quarter and fiscal 2009 earnings release and earnings presentation available on our website.

I will now turn the call over to Mr. Moller to begin.

Bjorn Moller - President and Chief Executive Officer

Thank you, Kent and good morning everyone. Thank you very much for joining us. As usual I am joined today by our CFO, Vince Lok. For the Q&A session we also have Peter Evenson Teekay’s Chief Strategy Officer and also the CEO of Teekay LNG and Teekay Offshore as well as our corporate Controller Brian Fortier.

We would like to turn to slide 3 of our presentation. We recorded a net loss in the fourth quarter of 2009 primarily due to a continued weakness for tanker market for most of the quarter although we ended the year with the market on a firmer note. For the quarter Teekay reported an adjusted net loss of $33.3 million or $0.45 a share, a slight improvement from the $0.60 share loss in Q3. Due to our profitable fixed rate businesses we still generated significant positive cash flow from vessel operations or CFVO of $129 million, an increase of 16% from the prior quarter. We declared our regular quarterly dividend of 31.625 cents per share. This dividend is entirely funded by the stable distributions we receive from our ownership in our two NOP daughter companies. For fiscal year 2009 adjusted net loss was $87.5 million or $1.20 per share and CFVO was $526 million.

Reviewing recent highlights on slide 4 there have been a number of positive developments on the commercial side. We took delivery of vessels in each of our offshore gas and conventional tanker segments. Our annualized fixed rate CFVO reached to more than $550 million. We expect to continue to grow that fixed rate CFVO as we are currently seeing increased customer entry of fixed rate contracts mainly on the offshore side. In the meantime spur tanker rates are off their Q3 lows due to improving demand even though they have fallen from the recent spike we experienced at the turn of the year.

Another highlight has been the significant progress we continue to make on our financial priorities both building liquidity and reducing debt at the Teekay current level. Of particular note is the highly successful $450 million bond offering completed in January. Also earlier this week we agreed to sell to our daughter company Teekay LNG Partners three tankers with long-term fixed rate charters for $160 million. Vince will address our financial highlights on this later on the call.

Looking briefly now to each of our business segments I will begin with the offshore market on slide 5 where we have seen a recent up-tick in project activity. Global E&P spending is expected to grow by 11% this year linked to a firm oil price outlook and this will drive demand for FPSO, FSO and shuttle tankers. The graph on the top left shows the lull in new FPSO projects during the first half of 2009 following the collapse in oil prices and a subsequent rebound in new projects awards in the latter half of the year once oil prices had stabilized. Ten FPSO contracts were awarded during this period. That still continues to be at the forefront of the new offshore activity and we are also seeing new projects in the North Sea and these are Teekay’s Q4 offshore markets. As I mentioned earlier, we are seeing increased customer entries for fixed rate business much of it in FPSO and shuttle tankers.

Slide 6 covers the recent highlights in Teekay’s offshore activities. In December we completed the conversion of a floating storage unit Falcon Spirit and the vessel commenced its 7.5 year contract in Qatar. The incremental CFVO would be approximately $8 million per year. In our most recent shuttle tanker contract extensions, we have secured rate increases of 10% and over the past several months we have achieved cost reductions through re-flagging of certain shuttle tankers.

We are positive about the outlook for this part of our business. In 2010 our focus would be on completing contract renewal negotiations currently under way with two of our existing FPSO units and we expect more news in the next couple of months. We have a number of choices available to us for the deployment of our Amundsen class shuttle new buildings which start delivering in Q3 this year. We will turn our attention to this in the coming months and we intend to selectively pursue new FPSO and FSO projects that play to our strength in the harsh weather operationally intensive end of the market.

Turning to our gas business on slide 7, the market for new business is unusually quiet due to the delay in customers taking final investment decisions on new gas field developments. In Q4 Teekay LNG Partners took delivery of a second Skaugen LPG new building. Our four ship Angola LNG project commenced construction. We are a 33% partner in the project which will commence 20 year contract upon delivery in 2011, and 2012. We discontinued the Kitimat FLNG project. While the technical concept was viable the commercial economics of this specific project proved insufficient to proceed. In terms of new projects we continue to investigate various niche opportunities in the absence of new point-to-point projects.

Looking at the spot market on slide 8, we have updated a chart we first showed you last November which looks at 2010 oil tanker fleet utilization scenarios. As it is a busy slide I will walk you through it. The blue bar on the left shows that the estimated global tanker fleet utilization of 2009 was 84%, which as we have seen first hand yielded a weak tanker market overall for the year. The second bar on the left indicates our base case of 2010 fleet utilization. Back in November of that base case which we call as old base case net tanker demand growth of 5% being offset by 5% supply growth. In the column marked new base case we have updated assumptions based on recent developments. For example on the demand side, the IMF has raised its forecast of GDP growth from 3.1% to 3.9%. Also Opec has increased its market share of world oil supply. On the supply side we have reduced the expected number of tanker new building cancellations in the base case from 5 million tons to 2.5 million tons because following a flurry of cancellations one year ago we have seen few recent tanker cancellations. On the other hand we have maintained our assumption for single hull tanker renewals of 23 million tons because year-to-date renewals are in fact on track to achieve this figure. The net effect of these changes in the new base case is the utilization of 85% suggesting a slight improved rate environment in 2010 from the low base.

What we have illustrated in the recovery case is the anatomy of a market recovery. The green bars show the impact on utilization based on the outcomes in the right hand column in our table. The figures generally speak for themselves but I’ll just point out that we have added a new green and red bar on the right hand side relating to floating storage. Currently approximately 4% of the world tanker fleet is being used for floating storage driven by oil prices from tankers. The red bar shows the effect if floating storage were reduced to 2% of the world fleet and conversely the green bar shows the effect of storage growing to 6% of the world fleet. Current oil tanker pricing points to a likely drop in floating storage, so, in the near term we are more likely to see a downward move into the red area and an upward move into the green area.

If all other factors in the recovery case comes to bear we could see 2010 fleet utilization rise from the base case figure of 85% to somewhere in the vicinity of 90% and effectively creating full fleet utilization and a tight tanker market. While it is improbable that all of these factors will materialize it is more than likely that some of them will. For example, yesterday an update from the Energy Intelligence Group reported estimated year-on-year oil demand growth of 2.5% in February, a growth figure at the upper end of our recovery case assumption.

In slide 9, we provide an update on Teekay’s conventional tanker business. Given the range of outcomes on fleet utilization that I have just described we expect rates in 2010 to be volatile. Against this backdrop, we continue to carefully manage our spot market exposure. And during Q4 we redelivered four further in-chartered vessels and we laid off additional risk by fixing up full spot Suezmax equivalent for 2010, three of which were down to forward trade agreements yielding a TCE of approximately $24000 a day with the fourth ship being fixed on a regular tank charter with the minimum rate of profit share arrangement.

We took delivery of our fourth and final Suezmax tanker from Bohai. This leaves Teekay with no conventional tanker new buildings on order for the first time since shortly after the millennium. On this slide we have also provided our usual Q1 rate guidance. Some 40% of Teekay parent’s conventional tanker revenue days are under fixed rate charters earning an average of $27,000 a day. Of the remaining days which are exposed to spot markets, to-date this quarter we have booked 70% of our spot days at an average rate of $19,000 for Aframax and $26,500 for Suezmax respectively. The spot Suezmax figures include the three FFA contracts mentioned earlier since these are classified under spot fee. Our focus in 2010 would be to continue to actively manage our spot market exposure as we see the market unfold. In the near term we expect to be on the sidelines with respect to new conventional tanker investment. Instead we aim to expand our market share through Teekay tonnage pool and commercial management.

I’ll now hand it over to Vince to give you the financial results and discuss the significant progress we have made on our financial objectives. Vince?

Vince Lok – Chief Financial Officer

Thanks Bjorn and good morning everyone. Turning to slide 10 I’ll review our operating results for the quarter. In order to compare the results on a comparative basis we have shown the adjusted Q4 income statement against an adjusted Q3 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. Even though we operated fewer vessels in the fourth quarter net revenues increased by $17 million mainly due to higher spot tanker rates and fewer dry dock dates in the fourth quarter compared to the previous quarter. That’s how our operating expenses increased by $12.5 million from the previous quarter primarily as result of the timing of repairs and maintenance activity particularly relating to our FPSO fleet. Overall we expect vessel operating expenses to be about $5 million to $7 million lower in Q1. Time charter hire expense decreased from the previous quarter by approximately $14 million mainly due to the redelivery of four in-charter conventional tankers and one in-charter shuttle tanker during Q4.

As the result of the Q4 redeliveries and an additional redelivery during Q1, we expect time charter hire expense to decline by a further $8 million in Q1. Depreciation and amortization increased by about $4 million mainly as a result of a fourth quarter depreciation for vessels that were delivered in Q3 as well as an increase in the number of vessels that were dry docked in prior quarter. We expect depreciation expense to be similar in Q1. G&A expenses remained consistent with prior quarter as we have been able to sustain the 20% reduction in the peak level in Q2 of 2008. Net interest expense increased over the prior quarter by $1.7 million mainly due to the delivery of new vessels during the second half of 2009. As a result of recent less vessel deliveries and the $450 million bond offering completed in January net interest expense is expected to increase by approximately $6 million in Q1.

Equity income in Q4 mainly reflects the results from our 40% interest in the Ras Gas 3 LNG carriers and our 50% owned laterite (ph) joint venture SPC. Equity income increased compared to the prior quarter primarily due to higher income from SPC. The income tax recovery of $8.7 million in Q4 was unusually high due to timing differences. The tax recovery in Q1 is expected to be closer to the Q3 amount of about $4 million. Joint controlling interest expense increased compared to the prior quarter due to the drop down of the Petrojarl Varg FPSO in Teekay offshore in September, the Teekay LNG equity offering in November and the higher net income in Teekay Tankers.

Non-controlling interest expense in Q1 is expected to be in line with Q4. Looking at the bottom line adjusted net loss per share was $0.45 in the fourth quarter compared to an adjusted net loss per share of $0.60 in the third quarter. Based on how spot tanker rates have tracked so far this quarter, the expected reduction in costs Q1 is shaping to be an improvement over Q4.

Turning to slide 11, looking back over the past year we have made significant progress towards our financial objectives. Mainly through asset sales to our daughter companies and third parties we have reduced Teekay’s current net debt and made the new billings by over $6 million during 2009. Through our cost reduction initiatives we have achieved significant savings in both G&A and vessel operating expenses. The reduction in the in-charter fleet has reduced our quarterly time charter hire expense by over $85 million compared to the fourth quarter of 2008. A smaller in-charter fleet not only reduces our spot market exposures but also our cash flow break even levels.

Our recent $450 million unsecured bond offering together with other financings completed during 2009 has allowed us to term out our debt such that Teekay currently has no balloon debt payments due until 2014. In addition we have arranged debt financing for 100% of our remaining new building program giving us a total consolidated liquidity of $2.8 billion. This places us in a very strong position going forward in terms of liquidity and financial flexibility.

Looking at 2010, one of our key focus areas is to increase the possibility of our existing assets by controlling our costs while also increasing our revenues through contract renewals and potentially an improvement in spot tanker rates. We intend to continue with our plan of reducing debt at Teekay current level mainly through selective drop downs advances through our daughter companies and accretive acquisitions. The recently announced sale of three conventional tankers to Teekay LNG for $160 million is a good example of that. This transaction will reduce Teekay’s current net debt while also increasing the value of our limited partner and general partner interests in Teekay LNG.

Given our priorities to delever and improve our profitability we have been and will continue to be very selective with any new capital investments and will only pursue projects with higher return goals. With that I’ll now turn the call back to Bjorn to conclude.

Bjorn Moller

Thank you, Vince. Summing up on slide 12 as you just heard Vince describe we have made excellent progress in building our financial strength and flexibility. The key focus area going forward will be to enhance our profitability through re-contracting and fixing assets and we are making progress on this front. Even with spot tanker rates having come of their 2009 bottom we see 2010 as another year of volatility so we are managing our spot exposure in a relatively conservative way. We have unraveled forward fixed rate coverage to $11.5 billion of forward revenues. We have generated more than $550 million in annualized fixed rate CFVO. Our platforms in the offshore gas and conventional tanker businesses provide a great optionality and would give us access to attractive investment opportunities in the future.

However as Vince indicated, with our focus on continuing delevering at Teekay apparent we will be patient and be selecting in making future investments by targeting higher ROI. In closing we are confident that Teekay is well positioned to create long-term shareholder value. Thank you for listening in and we are now open to your questions.

Question-and-answer session

Operator

Thank you. Ladies and gentlemen if you’d like to ask a question please press “*1” now. To remove your question, please press the pound sign. We’ll stand by a moment to assemble the queue. Our first question on the line comes from Michael Lever. Please go ahead.

Michael Lever - Credit Suisse

Good morning guys. How are you?

Bjorn Moller

Good morning.

Michael Lever - Credit Suisse

A handful of quick questions I guess macro questions first. On the supply side, can you give a little bit of color on where you think single-hull utilization rates are right now? We''re two months into the year; have you started to see some vessels actually come out yet, or are they still actively bidding for business?

Bjorn Moller

We have seen significant scrapping and iterations as compared to last year and so the pace of scrapping has increased and that has been on top of all vessels primarily as some use the single hull vessels for storage in some locations. And so that has obviously that tends to become storage fleet being taken out of the active supply. It has some efficiency as storage vessel. But generally my sense is although we are not directly involved as we don’t have single hull vessels my total sense is they are very marginal and very low in contract but they are being used for storage and they are trading in certain countries in Asia.

Michael Lever - Credit Suisse

On slide 8, you guys give a 45% compliance rate through your industrial base case and a 65% compliance rate in your recovery case. That''s, I guess, a little bit lower than we''ve seen from estimates from some competitors, and I guess it''s general market estimates. What''s behind that 45% compliance number, and what do you think would allow the remainder of that fleet to continue trading this year?

Bjorn Moller

Well I just want to point out we are not really giving guidance there. We are just trying to show the mechanics of what if. It is an arbitrary number but it is also a pragmatic number knowing that this is not steel box that they are putting people in it, the net with escape routes here and there. So, I mean it is really a commercial hammer that’s going to drive these ships to the scrap yard. The regulatory aspect has enough loopholes that you are not going to see every ship leave in 2010. I think it is going to be driven by survey base and so we think this will be effectively phased out, whether they leave the fleet or whether they just reduce the efficiency curve over time.

Michael Lever - Credit Suisse

Thanks. On slide four you mentioned you''ve seen increasing inquiry for fixed-rate business. Can you give a little color on I guess the duration of that business and whether or not that is kind of spread evenly across your asset base? Or, is that more concentrated within a specific asset class?

Bjorn Moller

Most of the enquiries is in the offshore sector and the typical interest is sort of in the three to seven years I’d say. In case of shuttle tankers it tends to 15 years. There is a little bit more activity on time charter in the conventional space but it is mainly gone to two years so that’s not really what I’d characterize as a change but it is more of the fact that the offshore market has become reactive again and of course our involvement is sort of part of the chain that follows the drilling and so there is a lot of activity that’s taking place in the last several years on the drilling sector and this is now kind of assembly lining down to production and storage in the shuttling sector. So, we see a nice cluster of activity coming up.

Michael Lever - Credit Suisse

Thanks and actually we have been that actually leads into my next question. It was in the offshore segment. Has there been any thought or is it a realistic possibility to potentially move into other asset classes within the offshore segment, potentially upstream to more drilling or potentially UDW rigs?

Bjorn Moller

That hasn’t been considered. The drilling business is very different from the production business. It is much more cyclical and very different. So, we haven’t looked at that.

Michael Lever - Credit Suisse

Okay. I will go ahead. Thanks for the time.

Bjorn Moller

Thank you.

Operator

Thank you. The next question on the line comes from John Chappell, JP. Morgan. Please go ahead.

Jon Chappell - JP Morgan

Thanks good morning guys. One follow-up on the offshore business, I know you probably don''t want to give away too much information on the pricing environment, given you''re in the process of renewing those contracts. But can you just give us a wide range of how things may have changed now versus when you were able to recharter the Varg? We''ve heard a lot about rig prices, deepwater rig prices, coming down on the contracts. Are you seeing the same with the FPSO environment?

Bjorn Moller

No. I mean the big potential value in it was two things, the operating platform but then there were also the off the money charter. So, I guess we see significant re-pricing potential because by virtue of the ships being out of the money in the first place. So, I’d say prices are pretty stable in the FPSO business. There have been on the front side more activity and I’d say we certainly are not seeing the trend we are seeing on the drilling side.

Jon Chappell - JP Morgan

Okay. So the magnitude of the out-of-the-money contracts hasn''t changed at all over the last 12 months or so?

Vince Lok

Yeah and I’d add John that on the drilling side you’ve seen a number of owners ordering speculative units with the idea that they would get charters whereas the nature of the FPSO business is that there aren’t that many speculative unit and there isn’t one size fits all. So, the idea that on the tenders you have to supply a FPSO on a bill to suit basis we haven’t seen the shipyards reducing their prices by that much. So, I think it is a question more of scarcity value. As Bjorn said the demand for FPSO is starting to move up as the oil companies are now more confident about the oil price and so that’s what giving the x rated demand in giving us the chance to bid on maintain any more contracts in both FPSO, FSO and shuttle tankers.

Jon Chappell - JP Morgan

Got it. It makes sense. Okay. On the selective growth opportunities for this year, I understand, obviously the net debt-free Teekay is something that you aspire to. But this may be the time or it may be the trough of the market, and there may be opportunities out there. I won''t hold you to anything, but which areas of your pretty diverse business today have the most attractive -- kind of those return hurdle rates that you were talking about?

Bjorn Moller

Well I’d say that we are most excited in the near term about the offshore market and so shuttle and FPSO, that’s a place where we think we have a niche and modest growing and there is not a lot of space to ply. The gas business as I indicated is very quiet and I don’t see there being a lot of investment opportunities. At some point there maybe a consolidation play in that sector. But we haven’t seen that yet. And on the conventional side well I agree that prices have come down significantly and may appear as found the bottom or a slight up-tick even, I’d argue that with the backlog of new ship that’s delivering and the fact that world is not yet out of the woods economically, we think we are going to forced to wait and watch the situation. We think in 1999, and 2002, in those dips there was a danger in acting too late. I think this time around there maybe a danger in acting too early. So, we don’t think the market would get away from us. Obviously if we see it turning that may change our thinking. At this time we feel comfortable with the opportunities that will come the road. We will be as good as or better than what we see now.

Jon Chappell - JP Morgan

Okay, so you don''t necessarily view it as bouncing along the bottom; you think there''s a very solid potential -- once again, not holding you to it, but very solid potential that there is more downside in the conventional tanker assets?

Bjorn Moller

We certainly don’t discount it but we also have identified in our model for the anatomy of the recovery as you call it. There is a possibility that you can get a stable but slightly firming market. We don’t lose that out. But I think there is volatility ahead.

Jon Chappell - JP Morgan

Okay. And then finally on your charter-in strategy, obviously you have been focusing a lot on unwinding some of the charter-ins. I did notice from your fleet list that you have chartered in a VLCC. I won''t ask for the economics of that, but are you starting to be a little bit more flexible on taking some back in on charter-ins? And has the time horizon changed on those? Are you looking for much shorter-term charter-ins to meet seasonal spikes in the environment?

Bjorn Moller

I think the VLCC is maybe an aberration in the reporting. We have one VLCC on in-charter. We have had it for five or six years. It has annual extension options on the vessel as subsequently been reled by acts on oil companies. So, what will show up is we have exercised one of the annual options and this vessel continued on its charter to an oil company through us. But there is no dabbling in VLCC end of charters this time. In-charters is something we have had the benefit of filing up and down and of course our tonnage pool gives us a very nice footprint in the market even if the P&L for the fleet and Teekay are down. So, we have a lot of flexibility on that and this time we have not been chartering vessels but we are looking at it and we can move quickly should we decide that the risk reward ratio moves into the green territory.

Jon Chappell - JP Morgan

Okay great. Thanks Bjorn. Thanks Peter.

Operator

Thank you. The next question on the phone comes from Gregory Lewis with Credit Suisse. Please go ahead.

Gregory Lewis - Credit Suisse

Thank you. Good morning. Bjorn you mentioned some issues facing the gas market and that it was fairly quiet. Could you go into some detail on the reason that the FLNG project simply became less attractive? Does that sort of give you concern for the longer-term outlook of these types of projects?

Bjorn Moller

The project that we were investigating in Kitimat was a specialized niche project that had a different design concept than the typical projects you are seeing in the market and in fact it was kind of a low tech, low complexity project and the thing that made it not work was simply the size of the production and the cargos relative to the distances relative to the price of gas. And I guess long-term contracting of gas in Asia in particular is a dynamic that can be tricky. So, if you look at FLNG more generally there certainly are still rumblings out there but these are very large complicated projects. There is a range of projects where the high end is very large and complex and expensive. I think a price of $5 billion was mentioned around the Shell FLNG project Australia which I am not sure whether would go ahead. But it is being talked about that they ordered a unit in Samsung and then there are other lesser projects. It is something we are following and we have all the capabilities through processing experience, our LNG containment, transshipment, conversion, top sites, we have all the skill sets. It is just a matter of making the…I don’t think we necessarily want to be first to be first on that industry.

Gregory Lewis - Credit Suisse

Okay and following up on that, given the huge capital outlays for those types of projects, do you have joint venture agreements in place, or would those be something that would be sort of set up as projects became available?

Bjorn Moller

I think we would typically design a case-by-case basis. I know that some of the players in the industry have recently teamed up but that I think was more a fact or function of trying to combine the skill set, the missing skill set than it was a necessarily a risk spreading but I think we clearly would not plunge into like a huge project like that without the careful consideration of the capital.

Gregory Lewis - Credit Suisse

Okay guys, my last question is regarding the announcement of the drop-down of those three assets into TGP, I guess my first question regarding that is, were those three vessels with those long-term contracts -- were those contracts already on those ships before those assets were targeted for the drop-down?

Peter Evensen

Yes this Pete Evensen. Those assets were ordered with those contracts or converted with those orders in place. So, those were existing assets of Teekay which Teekay LNG chose to buy because it fits our model of buying vessels with long-term contracts. As gas market wasn’t yielding us enough assets to have a fee to transaction we thought that was our best opportunity to continue to grow our distribution down at Teekay LNG. And as it relates to the gas projects in general, there is a short-term hiatus but what we have been focusing in is these niche opportunities. Kitimat was the export of gas from Western Canada was an interesting project because it was a quick to market project. And whereas most of these liquefied fraction plants are very large and take years to build, we could supply smaller unit but much quicker and while the economics didn’t work out there are these opportunities that we look at and one opportunity we continue to pursue is a floating storage regas unit in Israel for example, which is on a joint venture basis and so there is all these nice opportunities that we look at but it isn’t part of our commodity trend. It is just as the different requirements come up for both export as well as import.

Gregory Lewis - Credit Suisse

Okay great and then when I''m looking at potential future drop-downs, are there any existing vessels in Teekay parent, in the form of, I guess, more traditional tankers that sort of have longer-term contracts at this point, that that could be future drop-down candidates?

Peter Evensen

There are more assets up at Teekay that have longer term contracts. We have three daughters, one focused in on the gas, one focused in offshore and one focused in on short-term tankers. So, there isn’t a natural place for tankers with long term contracts. However Teekay LNG will continue to focus in on the gas side and the offshore side and then for the short-term tankers that’s just vessels that are on zero to three year contracts.

Gregory Lewis - Credit Suisse

Okay great, thank you very much.

Peter Evensen

Thank you.

Operator

Thank you. The next question comes from Urs Dur with Lazard Capital Markets. Please go ahead.

Urs Dur - Lazard Capital Markets

Good morning and thank you for your time. A question is sort of follow on to Greg''s initially, on the drop-down of the three ships, what''s the gain on sale to the parent? I didn''t see it listed anywhere. Or is that revealed?

Vince Lok

Urs given that this is inter company sale from the parent to Teekay LNG there won’t be any gain or loss reported.

Urs Dur - Lazard Capital Markets

Okay, perfect, makes sense. On OpEx, it''s a little bit higher than I expected. And you did mention that you did a lot of maintenance in the fourth quarter, which is fair enough. And you gave very nice guidance on many other items or ideas. What''s the outlook for OpEx? In 1Q, what should we be looking at?

Vince Lok

As I mentioned I think again the Q4 number is higher than normal due to timing differences. So, Q1 we are expecting to be about $5 million to $7 million lower on a consolidated basis.

Urs Dur - Lazard Capital Markets



$5 million to $7 million lower; okay, thanks, I missed that, very good. And, Vince, can you tell us also, what''s the net debt to cap at the parent now?

Vince Lok

Net debt to cap is about 56% I believe around that.

Urs Dur - Lazard Capital Markets

On recourse, sorry, recourse not net debt to cap.

Vince Lok

When you look at the parent company only it has got 28%.

Urs Dur - Lazard Capital Markets

It''s 28%, yes, okay very good, thank you, that''s extremely helpful, and thanks a lot for your time, guys.

Operator

Thank you. The next question on the line comes from Justine Fisher with Goldman Sachs. Please go ahead.

Justine Fisher - Goldman Sachs

Good morning. Just to clarify on the question on the drop-downs, so you guys -- so the reason why you dropped those down to Teekay LNG as opposed to the others is that Teekay Tankers is focused on short-term. But for Teekay offshore, the tankers in Teekay offshore are on long-term charters as well, aren''t they?

Peter Evensen

Yes. There are chartered back to Teekay and that was part of the tax planning that we put in place on Teekay Offshore at the beginning but there are plenty of assets particularly offshore to acquire in the offshore segment. So, it is not interested in purchasing more tankers.

Justine Fisher - Goldman Sachs

So really, then, essentially, the only daughter company that''s appropriate for those time-chartered-out tankers is LNG?

Peter Evensen

I would say yes, that’s true.

Justine Fisher - Goldman Sachs

Okay and then I know that you guys are not looking at yields at the moment, in the tanker segment. And I think it makes a lot of sense as far as holding back if you think the market is going to become more troubled as far as asset values goes. But we''ve seen other shipping companies that seem to be getting deals not that are too good to resist but deals where they will get a serious discount on vessels if they pay more cash up front, etc. And so if you guys were presented with opportunities like that as opposed to a vanilla acquisition from a yard, would you take that opportunity?

Peter Evensen

I think the environment for investing in the tanker market as Bjorn said is going to be better later on than sooner and the real reason we think that is because the last Bohai we took delivery of was ordered about two and a half years ago when rates were and order prices were reasonable. So, the vessels we have taken delivery of now are in the money are still worth their net asset value. The ships that are going to be delivered later in 2010, and into 2011, were ordered at as much as 50% more than what they are worth today. And that sets up an interesting dynamic. So, to buy now when you have some really interesting dynamics that are going to unfold over the next 6 to 18 months seems to us to be not the best way to use our shareholder funds. So, we are waiting to see those opportunities. We get to see a lot of opportunities coming our way but we believe it will be better later rather than sooner.

Justine Fisher - Goldman Sachs

So, as far as that dynamic, how does that dynamic unfold? Like if we''ve got these vessels coming at very high prices versus what they would be priced at today, is the dynamic that you would take advantage of because those owners may not be able to pay the rest of the price to the yards; they will be selling them at distressed levels? Or, is it that the owners would turn around and flip them? How exactly does it create opportunities just because they were vessels ordered at --

Peter Evensen

Well, I think there are three stakeholders here. There are the owners. There are the banks that are financing the owners and there are the shipyards. And so, depending upon the financial profile of the owner he may or may not have the money to complete that order. And his banks may or may not allow him to complete that even if he wants to. So, there has to be a negotiation between the owner, between the shipyard and the bank will of course be involved. So, we think there is an opportunity and we can go in through the debt or we can go in through the equity or if they abrogate their contract we can come and help the yard. And so we are focused in on working with all the different parties and mostly one off transaction and that’s where we think the opportunities will come but it is a slow moving dance. Everyone is focused a lot in on distress but as Bjorn said these things take time in order to work themselves out. And I think that’s what the market is finishing but where we are more conservative about the tanker market is, we think ultimately these vessels will come out in the market. The question is in what form and at what cost price? And Teekay is good at harvesting these kinds of opportunities.

Justine Fisher - Goldman Sachs

Right okay and then just one more question to make sure that we''ve got the vessel numbers going forward right -- so did you guys go over the time charters that you have expiring, if any, in 2010? And then when are these shuttle tankers and LNG carriers that are the new builds on order being delivered?

Bjorn Moller

Shuttle tankers I can answer that one, one vessel in Q3, one vessel in Q4 of this year and then two more vessels in the second half of 2011. Do you have the number on time chartered Vince?

Vince Lok

In terms of in-charter vessels we have one coming off in Q1, and then there are three coming off in Q2 and another two in Q3. We do give some real conventional space on slide 17 as well of our presentation.

Justine Fisher - Goldman Sachs

Right, but I just didn''t know if those included vessels that -- that''s the Teekay parent fleet. So I didn''t know if those included vessels that you are dropping down, but that aren''t necessarily leaving the corporate fleet. So -- all right; I''ll put those numbers in. That''s fine. Thank you.

Operator

Thank you. The next question comes from Daniel Burke. Please go ahead.

Daniel Burke - Johnson Rice & Company

Good morning guys. A question; I did want to return to the shuttle tankers still on order. You have a decent amount of capital invested there. Can you expand any on the outlook for the Amundsen Class? I guess we presume that, given the way they were outfitted, they would be headed to the North Sea. Is that a reasonable presumption? How do you see the market accepting those assets here as they get closer to delivery?

Bjorn Moller

Well they are certainly a fleet to have some of the most sophisticated shuttle tankers ever built and they definitely have features that make them very useful in the North Sea. I should know that Brazil was also upping its technical requirements significantly if they have a tender offer at the moment where they actually are looking for huge amount of foster capacity and so they are upping the ante as well. So, I think having sophisticated new buildings on order in the market where there is little spare capacity and growing demand is very exciting. So, I’d say it could be the North Sea but it may not necessarily be.

Daniel Burke - Johnson Rice & Company

Sticking with the offshore, just one other question, on the FPSO side, I would assume, then, looking at sort of the harsher environments, you would similarly there be focused pretty specifically on North Sea and Brazil opportunities? Is that a fair way of looking at it?

Bjorn Moller

I think it is about those are the issues where Teekay has specialized skills, operation sensitive markets, harsh weather and not necessarily ultra deep water but we can definitely operate in those niches. There are a few places around the world where I’d see harsh weather as an issue. So, I think we have the number of places we can go. We certainly have more options than people who are focused on the benign weather end of the market.

Daniel Burke - Johnson Rice & Company

Okay, and then one last question, coming around to the conventional tanker market, you pointed out in the recovery case the role that utilization of first-gen double hulls could play in terms of potentially tightening the market, Bjorn. Have you seen -- maybe not recently, but last year when the market was slower -- discrimination creeping into that first-gen double hull market? Or, how do you see that unfolding over the next couple of years?

Bjorn Moller

It is definitely there. It is a reality and I’d say we thought ourselves on both the technical standard and also the cosmetic appearance of our vessels. I’d say our vessels are of the highest standards. Yes if you have a 17, 18 year old ship and there is one with efficiency they flip the switch on being automatic approval way faster than they ever used to be in the past. So, I’d say the oil companies when they have a choice and there is lots of supply of modern tonnage they are being extremely selective and so it is a reality and you are going to see that not that it will be a buffering like the single hulls were buffering there in the early transition to double hull the same will happen with ships with over 15 years of age. In my view they will be the last to get employed in those markets, especially with lots of new buildings coming in. So, I think there you will see clarification in the fleet and that helps I think dampen the any surplus supply.

Daniel Burke - Johnson Rice & Company

Thanks for your comments.

Operator

Thank you. The next question comes from Scott Burk with Oppenheimer. Please go ahead.

Scott Burk – Oppenheimer & Co

Hi guys a couple of follow up questions here. You talk about the recovery case in your presentation, and kind of a median point would be, say, 88% utilization, but then you also talk about reducing -- folks introducing your spot exposure. So does this imply that you think the risks are higher to the downside near-term? And also, how actively will you be looking to charter out vessels on any kind of rates spikes?

Bjorn Moller

I believe we are being prudent and conservative but we are certainly not running. However we have spot exposures and we have significant offering leverage at this time. We are hedging our bets a little bit but with an uncertain outlook. I mean you can look at the economy, keep on talking about the economic recovery but also talking about slaughtering economy right? So, I don’t think we are out of the woods. Basically we are playing right down the middle. As far as chartering in or out on spikes I think we have chosen to play it by ear. We did cover some tonnage in the spike over the New Year. That’s the four vessels that I referred to, Suezmax contract that we took.

Scott Burk – Oppenheimer & Co

Okay.

Bjorn Moller

In the meantime it is not like we don’t have other projects to pursue. That’s the beauty of the Teekay platform. We have good opportunities in the offshore sector that we are interested.

Scott Burk – Oppenheimer & Co

Okay. All right thanks and then just one follow up for Vince, I also missed the DD&A number guidance that you gave for first quarter.

Vince Lok

We don’t expect that will change too much from Q4 or might be up a little bit with the new building in December.

Scott Burk – Oppenheimer & Co

Okay and then when you''re looking out for the rest of 2010 and into 2011, is that first-quarter indications -- is that kind of good run rate going forward, or what kind of changes could we expect throughout the rest of the year?

Vince Lok

Well we have some new buildings scheduled to deliver in the second half. So, for example we have the two shuttles in Q3. So, that will increase the DD&A and we have got another Skaugen vessel delivering in Q3. So, the number will tick up as the vessel deliveries take place.

Scott Burk – Oppenheimer & Co

And I guess, same for the operating expenses, same idea?

Vince Lok

That’s right. That’s right except the Skaugen ship is on bare loads. There is no OpEx amount.

Scott Burk – Oppenheimer & Co

Okay and any upward pressure on the G&A this year?

Vince Lok

No we are still maintaining the 20% saving from the peak from Q2 ’08 and we expect to be able to hold that during 2010.

Scott Burk – Oppenheimer & Co

All right thanks

Operator

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

Bjorn Moller

All right well thank you very much for listening in this morning and it is just learning from the Olympics in Vancouver but a very positive event. We look forward talking to you at next quarter. Thank you. Have a great day.

Operator

Thank you ladies and gentlemen. This does conclude the conference call for today and we thank you for your participation. You may now disconnect your line and have a great rest of the day.