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Teekay Corp. (NYSE:TK)

Q3 2011 Earnings Call

November 10, 2011 01:00 pm ET

Executives

Peter Evensen – President & Chief Executive Officer

Vince Lok – Executive Vice President & Chief Financial Officer

Kenneth Hvid – Executive Vice President & Chief Strategy Officer

Brian Fortier – Group Controller

Kent Alekson – Investor Contact

Analysts

Michael Webber – Wells Fargo

Josh Casavant – Deutsche Bank

Michael Pack – Clarkson Capital Markets

[Fotis Stianakulous] – Morgan Stanley

Name - Company

Name - Company

Operator

Welcome to the Teekay Corporation’s Q3 2011 Earnings Results Conference Call. (Operator instructions.) As a reminder, this call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to Mr. Peter Evensen, Teekay’s President and Chief Executive Officer. Please go ahead.

Kent Alekson

Before Mr. Evensen begins, I’d like to direct all participants to our website at www.teekay.com where you will find a copy of the Q3 2011 earnings presentation. Mr. Evensen and Mr. Lok will review this presentation during today’s conference call.

Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the Q3 2011 earnings release and earnings presentation available on our website.

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

Peter Evensen

Thank you, Kent. Good morning from Vancouver, everyone, and thank you for joining us today for Teekay Corporation’s Q3 earnings call. I’m joined this morning by our CFO Vince Lok, and for the Q&A session we also have our Chief Strategy Officer Kenneth Hvid, and our Group Controller Brian Fortier.

If we begin on Slide 3 of the presentation, I will briefly review some recent highlights for Teekay Corporation and our three daughter companies. For Q3 2011, Teekay Corporation generated a consolidated $157 million of cash flow from vessel operations, or CFVO, an increase of 18% from Q3 2010. We reported a consolidated adjusted net loss of $40.6 million, or $0.58 per share in Q3 on a consolidated basis. This was a disappointment. The profits from our fixed-rate businesses were not enough to make up for the losses from our spot tanker operations, including in-chartering of tonnage which took place in previous years.

While the third quarter of the year is usually the weakest quarter on a seasonal basis it was particularly weak this quarter. In addition we also looked at our tanker franchise including the booked value of our tanker assets and, after analysis, recorded some non-cash write downs to the goodwill and the booked value of some of our MR product tankers and older crude tankers.

Despite the weak spot tanker markets, our fixed-rate businesses continue to grow and in the past month we have announced significant acquisitions in both our offshore and L&G businesses. Starting with offshore, Teekay and Teekay Offshore have agreed to acquire three existing FPSO units from Sevan Marine for approximately $790 million, and Teekay will also invest $25 million to acquire a 40% ownership interest in a new net debt-free Sevan. This transaction positions Teekay as one of the top global operators of leased FPSOs.

Also in October, our daughter company Teekay LNG Partners announced that it would form a joint venture with Marubeni Corporation to acquire the Maersk LNG fleet, which is comprised of interests in eight modern LNG carriers for a total purchase price of approximately $1.4 billion. I’ll talk more about both these transactions in a moment.

Since we reported last during our Q2 earnings release on August 10th, we’ve repurchased approximately 770,000 Teekay Corporation shares at a total cost of approximately $18.5 million, which brings the total amount repurchased to date under our current share repurchase authorization to 5.2 million shares at a total cost of $162 million. Since our current authorization began in November, 2010, we’ve bought back approximately 7% of Teekay Corporation’s outstanding shares. For the time being, we have suspended further share buybacks as a result of the need to finance and complete these pending acquisitions.

Our three daughter companies have also been active in Q3 and Q4 to date. Related to its joint venture acquisition of the Maersk LNG fleet with Marubeni, this week Teekay LNG Partners completed a follow-on public equity offering raising net proceeds of approximately $180 million. Teekay LNG Partners Q3 distribution of $0.63 per unit is payable on November 14, and based on the expected cash flow accretion from the Maersk LNG transaction and the delivery of LNG and LPG new buildings in the last four months of this year, Teekay LNG management announced it intends to recommend a 7% increase to the Teekay LNG distribution effective for Q1 2010, which will be payable in May.

Just this morning, Teekay Offshore Partners announced its intention to acquire the [Paranima] FPSO from Sevan Marine directly for a purchase price of $165 million and concurrently signed an equity private placement agreement, raising net proceeds of approximately $170 million which will be used to partially finance the purchase. In October, Teekay Offshore Partners acquired the Scotts Spirit new building shuttle tanker from Teekay parent for approximately $116 million, not including an earn-out under which Teekay parent may receive an additional $12 million. And for Q3, Teekay Offshore declared a distribution of $0.50 per unit in line with the previous quarter.

Finally our tactical management of Teekay Tankers Fleet continues to provide value along with Teekay sponsorship through our commercial and technical management agreements. Based on Teekay Tankers’ high percentage of fixed contract cover, the company was able to declare a relatively healthy dividend of $0.15 per share for the quarter in one of the worst spot tanker markets in twenty years. And due to two new, recently-entered time charter-out contracts, Teekay Tankers’ fixed rate coverage will increase to 60% for Q4 2011 and to almost 50% for 2012, which will enable it to continue paying an attractive dividend while remaining exposed to the spot market. For a more in-depth view of the tanker markets please listen to the Teekay Tankers’ conference call later at 1:00 PM Eastern Standard Time.

The benefits of our daughter companies’ structure to be able to facilitate profitable growth in a difficult macro environment were apparent this quarter, and the benefits of our Maersk LNG and Sevan acquisitions will be seen in Teekay in 2012. Our daughter companies are able to grow through the purchase of new building projects, the purchase of existing and on-the-water vessels from Teekay parent, as well as through the direct acquisition of third-party assets. And as our daughter companies grow, the receipt of daughter company dividend and general partnership cash flows are becoming an increasingly important source of cash flow for Teekay parent. In addition to our usual discussion on the results for the recent quarter, today’s presentation will largely focus on our significant transactions with Sevan and Maersk LNG.

Turning to Slide 4 of the presentation, I’ll provide an overview of our pending transaction with Sevan Marine. As we first announced in early October, we’ve agreed to purchase three existing FPSO units from Sevan Marine – the 2007-built Sevan [Paranima], the 2008-built Sevan Hummingbird, and the 2009-built Sevan Voyager.

The [Paranima] FPSO, which is operating under a long-term time charter contract with Petrobras in offshore Brazil will be acquired by Teekay Offshore Partners for a purchase price of $165 million. The contract with Petrobras, which has a firm period ending in March, 2018, includes eleven one-year extension options and it is expected to generate between $22 million and $27 million of CFVO annually on a run rate basis.

The Hummingbird FPSO is currently operating under a shorter-term time charter contract with [Centriqua] in the North Sea until at least September, 2012 and will be acquired by Teekay parent for a purchase price of $179 million. Under its current contract, this FPSO unit will generate run rate CFVO of approximately $25 million to $33 million and includes extension options for up to five and a half years.

Finally, the Voyager FPSO is currently undergoing upgrades to prepare the unit for a new five-year time charter plus extension options with [Eon]. Teekay parent has agreed to add technical resources to support the upgrade and finance the completion of Voyager’s upgrade for an estimated remaining cost of between $110 million and $130 million, and will then acquire the Voyager for an additional $324 million once it commences operation in the North Sea under its new contract, which is expected to occur in Q3 2012. Once operating under its new contract, the Voyager FPSO is expected to generate run rate CFVO of approximately $75 million annually.

Under the omnibus agreement between Teekay parent and Teekay Offshore, both the Hummingbird and the Voyager will become eligible for sale to Teekay Offshore once they’re operating under a long-term contract with an initial term of greater than three years. This means we must offer the Voyager to Teekay offshore within one year of it commencing its longer-term contract in Q3 next year, and the Hummingbird will become eligible for sale to Teekay Offshore once we secure it on a new long-term contract.

In addition to the FPSO acquisitions I’ve just described, Teekay parent will also be investing $25 million equal to a 40% ownership position in the new recapitalized Sevan, and Teekay will also enter into a cooperation agreement which would obligate Sevan to offer future offshore projects to Teekay Offshore at fair market value.

Turning to Slide 5, we highlight a number of key benefits of the Sevan transaction. First, the combination of the three Sevan FPSOs and Teekay’s existing offshore businesses places Teekay and Teekay Offshore among the top four operators of leased FPSO solutions globally, and further strengthens our key market positions in the North Sea and offshore Brazil. This provides us with an increased profile in these markets and will enhance our ability to win further new business.

Second, we are acquiring a fleet of modern FPSOs at an attractive price. All of the FPSOs have been completed in the last three years, and with plenty of useful life ahead. While we paid a fair value for these assets as-is, the opportunity exists for Teekay to add value to the fleet we are acquiring. In particular, our FPSO Project Group is assisting Sevan’s technical group to complete the upgrade of the Voyager on time and with a revised budget, and our Commercial Team needs to find new longer-term employment for the Hummingbird.

Third, this accretive acquisition will add strong fixed-rate cash flows to our business mix, further enhancing our profitability and providing additional insulation from the volatile spot tanker market.

Fourth, this transaction is a win-win for both Teekay and Sevan in that both Teekay and Sevan benefit from Sevan remaining as a going-concern business. The sale of FPSOs to Teekay allows Sevan to recapitalize and become an asset-light offshore engineering services and project development business, which when combined with Teekay’s offshore operational expertise and balance sheet strength, creates a powerful offshore-focused partnership that will benefit both companies.

Finally, the cooperation agreement with Sevan enhances the pipeline of the future offshore growth opportunities which would benefit Teekay Offshore directly and also Teekay parent through future general partner cash flow growth.

Turning to Slide 6, let me review the other important transaction we recently announced in our LNG business. In October, our daughter company Teekay LNG Partners announced it had agreed to acquire AP Miller-Maersk’s fleet of modern LNG carriers through a newly-formed joint venture with Marubeni Corporation for a total purchase price of $1.4 billion. The transaction includes 100% ownership in six LNG carriers and a 26% ownership interest in two additional LNG carriers.

A significant portion of the fleet comes with long-term fixed-rate charters that fit nicely into our existing fleet employment profile. Five of the eight vessels are currently operating under long-term contracts with average remaining durations of seventeen years, and all of these have at least ten years of extension options. The remaining three LNG carriers are currently operating under short-term time charters; however, one has an option to extend for another eighteen years which we expect to be exercised.

Given the strong rate environment in the spot LNG market at the moment, which is now in excess of $120,000 per day, we’re comfortable with additional risks on the shorter-term time charters. However, our medium-term goal will be to secure new long-term contracts for these LNG carriers and this is more in line with the risk profile of Teekay LNG’s business model.

While Teekay LNG and Marubeni will own 52% and 48% of the joint venture on an economic basis, control will be shared equitably. As a result, Teekay LNG will account for its share of the joint venture using the equity method and the joint venture will not be consolidated on Teekay LNG’s nor Teekay Corporation’s financial statements. After a transition period of approximately six to nine months, Teekay Corporation expects to take over technical management of the vessels.

Based on the incremental cash flows from Maersk LNG and the LNG and LPG new buildings that have delivered to Teekay LNG in 2011 to date, management expects to recommend a 7% increase to the partnership’s quarterly distribution, commencing with the Q1 2012 distribution. This increase would move Teekay LNG Partners into the 50% split threshold, and that would mean that 50% of any future distribution increases over a level of $0.65 per unit will flow to Teekay parent as the general partner. As a result, we expect the quarterly GP cash flow to Teekay parent to increase by approximately $10 million per annum beginning in Q1 2012. At this time we’re not in a position to provide guidance on the expected GP accretion from the Sevan transactions.

Turning to Slide 7, the Sevan and Maersk LNG transactions will further enhance Teekay’s already-strong portfolio of forward fixed-rate revenues. These two transactions are expected to provide approximately $1.8 billion of incremental, forward fixed-rate revenues which will bring the total consolidated to $16 billion with an average contract length of almost nine years. We believe this level of fixed-rate contract coverage is unparalleled in our industry and has a quality level that sets Teekay apart from other more spot-oriented shipping companies.

With that I’ll turn the call over to Vince to discuss the company’s financial results for the quarter.

Vince Lok

Thanks, Peter, and good morning everyone. Starting with Slide 8 I will review our consolidated 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. Later on I will also provide our outlook for Q4.

Net revenues decreased by approximately $5 million mainly due to lower spot tanker rates and fewer vessel days from in-charter vessel deliveries during the quarter, which reduced time charter hire expense by a great amount which I will discuss later. These decreases were partially offset by higher project revenues from our shuttle tanker fleet and delivery of new building shuttle tankers and gas carriers during the past two quarters, and lower dry docking activity for our LNG fleet in Q3.

As a reminder, a portion of the revenue we earn on the [Foinhaven] FPSO is dependent on various annual operational performance measures, oil production levels, and average oil price for the year. As a result, for accounting purposes, this portion of revenues is typically recognized in Q4 of each year. Based on the results and performance of the [Foinhaven] FPSO for the first nine months of the year, $4 million of such revenue was recognized in Q3 leaving approximately $25 million of unrecognized revenue at the end of Q3 to be recognized in Q4 2011, provided our operational performance and the average oil price for the year is similar to the performance in the first nine months of the year.

Vessel operating expenses decreased by $3 million primarily due to the timing of expenditures and lower maintenance costs relating to our FPSO fleet. Time charter hire expense decreased by $6 million to the redelivery of vessels in Q2 and Q3, and an overall decrease in spot in-chartering of shuttle tankers. Depreciation and amortization increased by $3 million due to the delivery of the Scotts Spirit and a full quarter amortization of the [Perry Spirit] and the Norgast Unicom. G&A expenses were $49 million, slightly below our normalized run rate of about $50 million per quarter.

While not included in the adjusted income statement column, we recorded non-cash impairment charges of approximately $150 million in Q3 mainly related to certain of our smaller product tankers, our older conventional tankers, our equity investment in [Skowgan Petrotrends] and goodwill related to our conventional tanker business segment. The impairment largely reflects the continued weakness in spot tanker rates and the decline in asset values in the spot conventional tanker segment as seen in the last several quarters. It is important to note that these non-cash charges do not affect our operations, our cash flows, liquidity, or any of our loan covenants but they do reflect the fact that current asset tanker values have fallen as I will discuss when we come to the “Sum of the Parts” slide.

Continuing down the income statement, net interest expense increased slightly mainly due to the recent delivery of new buildings. Equity income decreased by $1 million due to decreased earnings from our [Skowgan Petrotrends] joint venture. Income tax expense was consistent with the prior quarter at about $1 million. Non-controlling interest expense increased to $37 million as a result of higher adjusted earnings in our daughter entities Teekay LNG and Teekay Offshore. Looking at the bottom line, adjusted net loss per share was $0.58 in Q3 compared to $0.51 in Q2. Again, most of the net loss is attributed to the weak spot tanker rates.

Now turning to Slide 9, we have provided some guidance on our consolidated financial results for Q4 2011. Net revenues from our fixed-rate fleet in Q4 are expected to increase. We estimate approximately $30 million of additional revenue from the [Foinhaven] FPSO unit meeting various annual operational performance measures, oil production levels and the average oil price for the year. In addition, the expected acquisition of two Sevan FPSO units assumed here to occur at the end of November, a full-quarter impact of the delivery of the Norgast Camilla, and the delivery of the multi-gast SO, the Norgast Vision in mid-October, are expected to increase revenues by approximately $12 million in total. These increases are partially offset by the reduction in shuttle tanker project and COA revenues and fixed-rate conventional tankers on the expiration of their time charter contracts.

Net revenues from our spot fleet are expected to decrease despite an increase in the number of revenue days due to the continued weak spot tanker rates expected in Q4. So far in Q4, we have fixed approximately 45% of our spot [Afermax] revenue days at an average rate of $5000 per day, and 33% of our spot Suez revenue days at an average TCE rate of $12,000 per day. With the recent rate volatility combined with various one-off fleet repositioning days, we expect the full Q4 average [Afermax] rate to be higher than what we have booked to date for the quarter. As a rough rule of thumb, for each $1000 per day change in spot tanker TCE rates it results in a $2.5 million change in our consolidated revenue per quarter.

Overall, vessel operating expenses in Q4 are estimated to increase by about $9 million to $11 million compared to Q3 as a result of the expected acquisition of the two Sevan FPSO units in late November and increased repairs and maintenance in our FPSO and gas fleets. Time-charter hire expense is expected to decrease in Q4 by approximately $2 million to $3 million reflecting the redelivery of in-charter vessels during Q3 and Q4, and less spot-in chartering activity in our shuttle tanker fleet.

Depreciation and amortization is expected to increase by $1 million due to the Sevan FPSO units and recent new buildings deliveries, partially offset by the impact of vessel write downs incurred in Q3 as previously mentioned. We expect G&A to be in the range of $51 million to $53 million which includes incremental overhead related to the Sevan FPSOs. Net interest expense is expected to increase by $2 million to $3 million due to the recent new building activities and the Sevan FPSO units. Income tax expense run rate is expected to be approximately $1 million. Non-controlling interest expense is expected to be approximately $30 million to $32 million in Q4 reflecting lower expected adjusted earnings in TOO and TNK, partially offset by the Q4 equity offerings inflated in TGP and TOO recently.

So overall we are expecting a stronger Q4 compared to Q3. Note that we are not expecting the Maersk LNG transaction to close until early 2012 and thus we expect equity income to increase starting in Q1 2012. We will provide further guidance on this next quarter. On Slide 10, we have provided a breakdown of Teekay’s consolidated investment capital by reporting segment as of September 30 to highlight that over 85% of our consolidated investment capital is now related to our fixed-rate businesses with only 13% of our invested capital with exposure to the current weak spot tanker market. Upon completion of the Sevan and Maersk LNG transactions, our capital base will shift even further towards offshore and LNG assets which generate additional fixed rate cash flows and higher returns.

Turning to Slide 11, Teekay parent and all the Teekay daughter entities are financially well positioned with substantial liquidity and a strong balance sheet at each. Over the past few years, Teekay’s daughter companies structure has been a central part of positioning the company for profitable growth by enabling us to de-lever our balance sheet and build liquidity so that we can take advantage of attractive investment opportunities both at Teekay parent and daughter entity level, such as the Sevan and Maersk LNG transactions.

As of September 30, Teekay Corporation had $1.8 billion of total liquidity on a consolidated basis, and approximately $700 million at Teekay parent. Subsequent to September 30 and not yet reflected in these figures, we recently raised a further $350 million of equity in Teekay LNG and Teekay Offshore in advance of the Maersk and Sevan transactions. At our daughter entities, we target a leverage appropriate for the length and stability of the contract portfolio at each entity. It’s also important to note that at Teekay parent, $435 million or just under half of the $894 million net debt at September 30, is related to warehouse new building installments which is temporary in nature, as this debt will typically transfer with the asset when it is sold to the respective daughter entity.

Turning to Slide 12, I will provide some additional details related to our financing plans for the Sevan FPSOs and Maersk LNG fleet. I’ll focus on the Sevan transaction first.

First of all, the [Paramina] FPSO will be acquired directly by Teekay Offshore and therefore the headline purchase price of $788 million is effectively reduced for Teekay parent by $165 million. I’ll cover the [Paramina] FPSO financing in Teekay Offshore in a moment. The next main consideration from the Teekay parent perspective is that the acquisition of the remaining two FPSOs is phased in over a period of time.

Due to the Voyager upgrade, Teekay parent will not be purchasing this FPSO unit from Sevan until it commences its charter from [Eon] in Q3 2012. In addition, $230 million of the Voyager purchase price is expected to be financed through the assumption of an existing debt facility which leaves only $94 million to be financed from Teekay’s existing liquidity. For the remaining upgrade work for the Voyager FPSO, which we estimate to be $110 million to $130 million, the cost will be phased in over a period of three calendar quarters and we expect to finance approximately $100 million of this amount with a new debt facility which leaves only about $10 million to $30 million to be drawn from existing liquidity.

Finally, upon closing, which we expect to be in Q4 2011, Teekay parent will be acquiring the Hummingbird FPSO for $179 million. We are currently in the process of securing a new debt facility to finance approximately $100 million of the Hummingbird purchase price, leaving $79 million to finance from existing Teekay parent liquidity. To summarize, of the approximately $623 million total purchase price for the Hummingbird and Voyager including upgrade costs for the Voyager, we expect to have approximately $430 million of new or assumed debt facilities in place leaving $193 million to be drawn from Teekay parent’s liquidity between the current quarter and Q3 2012. One the Voyager commences its long-term contract with [Eon] and is eligible for sale to Teekay Offshore, proceeds from the sale would rebuild Teekay parent’s liquidity.

To finance Teekay Offshore’s purchase of the [Paramina] FPSO, we are currently in the process of attaining a new debt facility which will cover about $130 million of the $165 million purchase price. We will then finance the remaining $35 million using a portion of the proceeds from a $170 million equity private placement that Teekay Offshore announced earlier today which will close concurrently with the acquisition of the [Paramina] FPSO. The remaining $135 million of net proceeds from the equity placement will be available for allocation to other Teekay Offshore acquisitions, including the Scotts Spirit shuttle tanker which was purchased from Teekay parent in October and the BG shuttle tanker new buildings which are scheduled to lever in mid- to late-2013.

For the $1.4 billion purchase price for the Maersk LNG carriers, the Teekay LNG/Marubeni joint venture already has a new debt facility commitment of approximately $1.12 billion. Of the $280 million of equity required, Teekay LNG’s portion, based on its 52% economic ownership, is $146 million. This amount will be financed using a portion of the net proceeds from the $180 million public equity offering Teekay LNG completed earlier this week. Similar to the Teekay Offshore financing, the remaining net proceeds from the offering, which total approximately $34 million, will be additive to Teekay LNG’s available liquidity which can be used for future acquisitions including the final Angola LNG carrier scheduled for delivery in January, 2012.

On Slide 13 we have provided an update to our “sum of the parts” calculation which indicated Teekay’s current underlying value of just under $40 per share. Our sum of the parts value has decreased from the $43 per share we reported in August primarily as a result of lower asset values in our conventional tanker fleet and depreciation of our fleet of three on-the-water FPSOs, partially offset by an overall increase in the value of our daughter company equity interests which mostly relates to Teekay LNG and Teekay Offshore.

Compared to the current Teekay share price of under $27, which has increased by 20% since our Q2 earnings release on August 10, our sum of the parts discount has narrowed to approximately 32% from almost 50% in August. It’s important to note, however, the sum of the parts presented here does not reflect the net present value of the Sevan transaction nor the expected future increase in Teekay parent GP cash flows which will result from both the Sevan and Maersk LNG transactions. For instance, Teekay LNG is expected to increase its quarterly distributions by approximately 7% as a result of the Maersk LNG transaction in Q1, which will move the Teekay LNG incentive distribution rights into the highest tier which is 50%.

Accordingly, upon completion of the two transactions, we expect the sum of the parts value to increase which highlights the compelling value of Teekay shares at current price levels. Although we continue to believe that Teekay share price is negatively affected by the current sentiment in the marketplace towards the conventional tanker sector, the strong growth outlook for our offshore and LNG business and the beneficial effect on Teekay parent’s cash flows from its GP and LP interests in Teekay Offshore and Teekay LNG will become increasingly difficult to ignore.

With that, I’ll turn the call back to Peter to conclude.

Peter Evensen

Thank you, Vince. To conclude, we’re not satisfied that we reported a net loss for the quarter due mainly to the seasonal lows in an already-weak spot tanker market which masks our growing fixed-rate business and corporate structure that are sources of strength, value accretion and profitability. Over the past few years Teekay’s daughter company structure has been an important part of positioning the company for profitable growth that we’ve talked about this quarter, and enabling us to de-lever our balance sheet and build liquidity.

In the coming quarters, our main focus is going to be on completing the Sevan and Maersk LNG transactions, executing on our existing offshore, new building and conversion projects and above all, improving the profitability of our existing business operations.

Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions.) Your first question comes from Michael Webber from Wells Fargo. Please go ahead.

Michael Webber – Wells Fargo

Hi, good morning guys. Obviously a lot going on here so I’ll try to keep it brief, maybe just starting with Sevan. Peter, can you just walk us through the timeline for closure here? You’ve got till the 30th and you’ve got the lockup on the bond vote through that period, and I believe the equity vote is on the 14th. I guess can you walk us through that timeline and then how the closure of the private placement for TOO impacts that and whether or not you would need to get an extension on that November 30th date.

Peter Evensen

Sure. So of the three FPSOs, the Sevan [Paranima] is going to be acquired directly by TOO, and we expect that to occur at the end of this month. The really governing feature of that is to get the charterer, which is Petrobras, to give their consent. All the money has been raised, and a key part about the private placement is that it’ll be funded when we get the acquisition of the [Paranima] FPSO. So what we like about the private placement idea is that we don’t have to use that money until we get the [Paranima].

But from the Sevan side, they have their bondholder meeting today and they have the shareholder meeting next Monday, and so we like the fact that that’s going to go directly to Teekay Offshore Partners. The Hummingbird is going to be bought by the end of the month. We expect things to go to the end of the month. They could move around a little bit but that’s the timing, and with the cash in place and the seller, Sevan, is putting all the requisite corporate approvals in place to make that happen.

Michael Webber – Wells Fargo

Gotcha, okay. So you guys are still pretty comfortable with the 30th then. There’s still a little bit of leeway but you’re pretty comfortable with that date.

Peter Evensen

That’s right. And the Voyager, as Vince explained we’re not actually buying it yet but we are funding it and we have already started funding it. And that’s really critically important because what happened was that that unit was delayed and so now we see first oil coming in Q3 2012. We’ve had discussions with [Eon], which is the operator on that field and so to the extent that we can give our technical assistance and money we now see that those modules are being completed on time and on budget. And when you back up an upgrade project you really have to put in place all the requisite parts. So there’s a lot of people spending a lot of time on that upgrade.

Michael Webber – Wells Fargo

Gotcha, yeah, that makes sense. I guess I was thinking about the FPSOs in general. The [Paranima] is kind of cutting in line a little bit – you still have the [Foinhaven] there to drop down. How should we think about that timing? Obviously it would seem dependent on putting some debt on the [Paranima] whenever you finalize that $130 million facility. And then I guess more broadly, you guys have talked in the past about doing one to two dropdowns per year. Any change in that thought process at all and I guess how the Sevan FPSOs kind of fit into that? Obviously it’s securing longer-term deployment and getting the upgrades done kind of dictate when they’ll be available, but can you maybe just talk a little bit about that pipeline; and specifically the [Foinhaven] and when we should expect that.

Peter Evensen

Yeah, well actually what’s happened is the eligible assets just increased and so we actually think that’s a good thing. Obviously you have to finance them but you’re right that the [Foinhaven] is eligible and so the [Paranima] cut in line. But that’s okay. So we’re still looking at good growth in Teekay Offshore in 2012 and as you point out, the [Foinhaven] FPSO is one of the first assets that will probably be considered.

Michael Webber – Wells Fargo

Gotcha, okay, that’s helpful. I guess moving to tankers, and obviously the spot [Afermax] is acting as a drag on earnings and valuation at this point. Can you talk a little bit about how you potentially think about dropping those down eventually? You’ve got about $290 million of liquidity sitting at TNK and you’ve talked in the past about TNK being a buyer here but you guys might not necessarily be sellers considering how asset values are. Can you just give us an update on what your thought process is there right now?

Peter Evensen

Sure. Well, actually I think that’s changed a little. As Vince said, we had de-levered the balance sheet so if we sold anything we didn’t have to build liquidities. So I think that speaking for Teekay Corporation, now that we have some new assets that we put on the books and the GP cash flows that we know are coming in 2012, I expect we would be more of a motivated seller at this time.

Because of the sum of the parts we actually marked them to market, and as Vince said we lost about $3. So from our point of view, we’re transparent in marking them to market which we think people should do, so if we decide to sell them the good news is we have a pipeline where we can fill them up with more fixed-rate assets.

Michael Webber – Wells Fargo

Right, right. That’s very helpful and encouraging. I guess just staying on the tankers here, it looks like you’ve got I guess eight third-party charter-ins that roll off at some point over the next twelve months. Can you give us an update on the timing of those and when they should hit by quarter?

Peter Evensen

We don’t have exactly when they’re rolling off but Vince, you can give some more detail on it.

Vince Lok

Yeah, I think we’ve provided some of those details, Mike, in the appendix to our presentation.

Michael Webber – Wells Fargo

Okay, I can run through them then later.

Vince Lok

I mean we’ve got a pretty good run rate of about a couple vessels per quarter over the next several quarters.

Michael Webber – Wells Fargo

Gotcha.

Peter Evensen

We are positive on the tanker market turning around, and so the key question will be do we want to charter out and how do we want to change the mix as it relates to conditioning ourselves for a rebound.

Michael Webber – Wells Fargo

Gotcha, gotcha. Alright, that makes sense. And I guess one more and then I’ll get back in line, but on Maersk LNG, obviously a pretty big win for you guys and then certainly it adds pretty considerably to your GP cash flows. By our numbers it seems like you actually have some more room there on the distribution. Can you talk a little bit about I guess what you guys are looking for to maybe unlock more? I mean obviously you did just move it up by 7%, but if I look at the three LNG assets that are there that are rolling over the next probably couple quarters, is securing long-term employment on those really what kind of would drive the kind of more recognition of that potential cash flow?

Peter Evensen

Well that’s right – when we’ve looked at it we’ve looked at what we call the long-term sustainable cash flows that you can get on those units. Obviously we have a kind of backward-dated forward curve on LNGs. In other words, if you were to trade it in a short-term market you’d get $120,000 whereas if you were going to put it longer-term you’d get I would say closer to $80,000 or $90,000 depending on the duration. So we have to take the short-term duration and play it up against the longer-term. The good news is we have a lot of people that want to charter that and we have to choose the proper duration. So you’re right that if you put in $120,000 versus $80,000 you get to a higher accretion number, but we wanted to give what we thought was the minimum accretion that we’ll get from the project.

Michael Webber – Wells Fargo

Gotcha, sounds good. And t hen I guess just finally can you talk a little bit about that interest that you’ve seen in signing those three LNG vessels that roll off over the next several quarters? And maybe just an idea about I guess the volume of interest you’re seeing already on those?

Peter Evensen

Yeah, well first of all we actually think it’ll only end up being two vessels that’ll be spot because we think the [Max Meridian], because that extension option is below where the current market is we expect them to extend it although we don’t have a definitive declaration by the charterer. So we have one vessel that’s coming due in March, 2012 – that’s the Maersk Methane – and we have a second one, Maersk Magellan, that comes due in Q3 2013. So we already see interest by charterers to lock in the 2013 spot vessel so that tells you the current strength of the market. I mean there’s a clear shortage of LNG vessels but the question that I ask my commercial people is how long will that shortage last, and that’ll fit into our model.

Just as we do with Teekay tankers where we don’t go all spot, on Teekay LNG our bias is to put in long-term fixed-rate cash flows. I think that’s consistent with what our investors want, which is stable cash flow, but obviously Teekay LNG is getting to the point where it can afford to have a certain amount of vessels spot, especially when you see how high the short-term charter rates are.

Michael Webber – Wells Fargo

Gotcha. Any idea how far forward you guys look to fix those assets or is it a little bit too early?

Peter Evensen

It’s too early.

Michael Webber – Wells Fargo

Gotcha. Okay, that’s all I’ve got. Thanks a lot, guys.

Operator

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

Josh Casavant – Deutsche Bank

Good morning, this is Josh Casavant for Justin. I just wanted to start off with maybe what you’re seeing in the bank market. You’re clearly out there raising capital for different asset classes, and just wondering maybe what you’re seeing with regard to just who’s out there, what types of lenders. Are these credit agencies or your traditional bank lenders? Maybe if you can talk on margins and amortization profiles.

Vince Lok

Sure. We have over forty banks in our bank group and so we have a large group of banks to work with, and of course there are some banks on that list that are not quite open at this point in time. But there’s still a lot of banks that are open for business, and lending to their core clients such as Teekay – the larger clients; and in particular I think they are more willing to lend to Offshore and LNG where you have long-term stable cash flows against those assets relative to spot assets. So we’re making very good progress on our financings, and of course you are seeing the margins higher than they used to be; however, partially offsetting that you do have lower LIBOR rates and swap rates so your all-in debt cost is not impacted as much overall. So overall we’re making good progress on our financings.

Josh Casavant – Deutsche Bank

And with regard to amortizations, is that required to be done usually over the contract life for some of these assets or how are lenders thinking about that?

Vince Lok

Yeah, I think in FPSOs the amortization tends to be a little bit quicker just given the nature of the asset and the contracts. Given that our intention here is to, for example, to fix it out on a longer-term contract we will look to get a longer-term loan to match against that. So it really depends on the length of the contract. Of course in the LNG business with the Maersk LNG assets, they’re very long-term contracts so that we’ll get longer-duration loans against those assets.

Josh Casavant – Deutsche Bank

And with regard to the Hummingbird, I guess its current fixed portion of its contract expires in Q3 2012. At what point are they required to exercise or declare an option, and have you started discussions on whether those options will be declared or whether you might be seeking maybe longer-term new contracts?

Peter Evensen

The short answer is yes, we have started discussions with [Centriqua]. It has much more to do with the actual field that it’s operating on – how long they expect to be producing oil on that field. And so we anticipate that it will come off, that they won’t renew all the options which is why you hear us talking about arranging new employment. I think with Teekay’s operating excellence that we have through our [Petrial] unit, that makes the amount of people that want to charter the Hummingbird much larger than it was when Sevan owned it and people weren’t quite sure what the staying power was of Sevan to either operate it or to upgrade it. So a big part of these FPSOs is your operational excellence.

Josh Casavant – Deutsche Bank

Does that mean that this could be a potential dropdown candidate in 2012 or likely 2013?

Peter Evensen

It all depends on when [Centriqua] wants to release it. They recently renewed it from March 2012 until September and so we’re in commercial discussions. I think pending those commercial discussions then we’ll have a better timeframe for when it’ll be eligible to be dropped down, but if you want to look at what 2012 will look like, clearly the Voyager will be finished in Q3 2012. It’ll be on a minimum five-year contract and then that would be clearly eligible. So we’re not sure which comes first.

Josh Casavant – Deutsche Bank

Thanks for that color. Maybe just switching topics, with regards to the GP interest, I guess the new guidance is that TGP will surpass that 50% profit share split, and TOO is not far away – I guess it’s getting close to that $0.525 split. Have you thought about maybe monetizing the GP units in any way? I guess you’ve gotten away from it in the past, but now that you’re getting to these higher hurdles have you thought about maybe a spinoff?

Peter Evensen

No we haven’t. From our point of view we think the GP is a clear value driver up at Teekay. We are not going to be affected by any changes in the GP law and so because we’re incorporated in the Marshall Islands. And so for us we think owning the GPs or having the GPs from two different MLPs, both of which have good growth profiles is really important. I think when you look at the MLP universe, a lot of people have been doing in-market consolidations whereas obviously we’ve been doing some in-market consolidations. But the real story about both Teekay LNG and Teekay Offshore is that they’re pointed toward strong international energy growth. And so we expect that to continue, and therefore we expect the GPs to continue to increase value. And there isn’t anyone who would ever in my opinion look to monetize the GP when you’re just up at the 50% split. This is when it gets interesting.

Josh Casavant – Deutsche Bank

Thanks for your time.

Operator

Your next question comes from Michael Pack from Clarkson Capital Markets. Please go ahead.

Michael Pack – Clarkson Capital Markets

Yes, hi everyone. I just had a question on the write downs of the conventional tankers. Can you talk about the test that is required on that and do you expect a test for your year-end results in Q4?

Vince Lok

Yeah, hi Michael. Under US GAAP, it’s undiscounted cash flow analysis which is the first part of the test, so you have to forecast your projected cash flow for the assets. And if the undiscounted cash flows are below the carrying value then you go to step two, which is marking it to fair market value. So you’re correct – we typically would do these reviews in the year-end accounts. However, we started the work a little bit earlier just given the condition of the spot tanker markets and what we’ve seen over the last several quarters. And it became apparent to us that there was some impairment in some of these, especially the older tankers just given that they have a limited remaining life in those assets. So this is essentially in our way our sort of year-end review of our carrying values.

Michael Pack – Clarkson Capital Markets

Okay, great. So we would not expect any further write downs at year end, I assume.

Vince Lok

Based on the information that we have now and our intended use of the assets, I’m not expecting any further write downs in Q4.

Michael Pack – Clarkson Capital Markets

Okay, great. That’s all I had. Good luck the rest of the year, guys.

Operator

Your next question comes from [Fotis Stianakulous from Morgan Stanley. Please go ahead.

[Fotis Stianakulous] – Morgan Stanley

Yes, hi guys. Mike just gave me a pass and I want to follow-up a little bit on this question and ask you what kind of flexibility do you have in order to postpone write downs? I’m not asking so much about Teekay; I’m asking for other companies that they might be forced to take write downs in the future.

Vince Lok

Well, it is based on management’s forecast of earnings for the asset so I guess it may differ from company to company, from management to management and relative to what the book value of the assets are. So there’s obviously some subjectivity but it should be obviously consistent with the reviews of the market.

[Fotis Stianakulous] – Morgan Stanley

Thank you on that. I want to ask about the tanker market. We have seen over the last few days the market tightening. Rates are moving a little bit higher. Inventories, according to refining analysts are extremely low in Europe and Asia. Do you think that we can have a rally these winter months? And if yes, what will drive it and which routes do you think we’re going to see higher movement, and how long can it last?

Peter Evensen

That’s asking me to get out my crystal ball but let me give you a better view about where we think it is. We’ve been consistent that Q3 was seasonally weak but it was hit by a lot of strong headwinds if you talk about Libya, if you talk about the strategic petroleum reserve. And really what happened in our view is that the ton mile demand reduced and so while everyone talks about how much oil you would have, the fact of the matter was that because oil prices were in backwardation you had this drawdown on stocks. And the weather also now is going to be a more positive view so all the headwinds are switching around to being, I would call them not strong tailwinds but good ones.

For example, we see that Libya is coming back and therefore you should see more West Africa oil flowing to the east, whereas what was happening was the West African oil was flowing up to take away the Libyan volumes. And so that led to shorter routes and so the Chinese were taking more from the Agee. So if things get back a little bit more to normal, Libya comes in and feeds the Med, then we’re going to get back to that situation we were in which was that we had surplus oil in the Atlantic which had to flow to the Pacific and that gave us those longer ton mile demand.

If you want to get excited you should look and see what happened on the LNG side. On the LNG side, you suddenly had a lot more ton mile demand when all those LNG volumes were starting to flow out to the Pacific, and therefore you saw the big jump that can occur. I’m not in the business of saying how long it’s going to last but we do believe that Q4 and Q1 will be better than Q3. To the extent that it gets sustained, I think you have to look and see where sentiment is.

When I sit on our commercial desks I see a lot of owners who are willing to do private deals or do deals below what the last world scale fixture is, but that weakness or those weak hands can change. And I think they just have to get all the normal things that come in the winter, which is the various delays in the [Bosperous]. If we get some ice that’s important. But everyone forgets that it takes longer to cross the Atlantic in the winter than it does in the summer, so we see all these seasonal factors helping us. And so if you ask me “Will things regress back to the mean?” yes, I think they will.

And I think Q3 was weak but the idea that it’s just about supply of ships versus demand for ships isn’t completely relevant. It’s how the mix changes in terms of the oil cargos. So if we get more light suite moving from West Africa out to China, for me that’s the number one driver.

[Fotis Stianakulous] – Morgan Stanley

I understand though that you also talk from the safety that your fleet is mainly [Afermax’s] vis a vis the larger vessels where the order book is much bigger. Do you share the same view for [VLCCs] and Swiss [Maxis] that the market is relatively balanced in 2012; even after this winter period it will be a balanced market? Or is this view only limited to [Afermax] where we have a very significantly lower order book?

Peter Evensen

Yeah, I think that you’re absolutely right.

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