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Edited Transcript of TK earnings conference call or presentation 24-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Teekay Corp Earnings Call

Hamilton Feb 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Teekay Corp earnings conference call or presentation Friday, February 24, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ryan Hamilton

Teekay Corporation - Manager, Finance and IR

* Kenneth Hvid

Teekay Corporation - President and CEO

* Vincent/Vince Lok

Teekay Corporation - EVP and CFO

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Conference Call Participants

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* Michael Webber

Wells Fargo Securities - Analyst

* Fotis Giannakoulis

Morgan Stanley - Analyst

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Presentation

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Operator [1]

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Welcome to Teekay Corporation's fourth quarter and FY16 earnings results conference call. During the call all participants will be in a listen-only mode. Afterwards you'll be invited to participate in a question and answer session.

(operator instructions)

As a reminder this call is being recorded. Now for opening remarks and introductions I would like to turn the call over to Mr. Kenneth Hvid, Teekay's President and Chief Executive Officer. Please go ahead.

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Ryan Hamilton, Teekay Corporation - Manager, Finance and IR [2]

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Before Mr. Hvid 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 of 2016 earnings presentation.

Mr. Hvid will review this presentation during today's conference call. Please allow me to remind you that our discussion today divides 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 fourth quarter 2016 earnings release and earnings presentation available on our website.

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

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Kenneth Hvid, Teekay Corporation - President and CEO [3]

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Thank you, Ryan. Hello, everyone, and thank you for joining us for TeeKay Corporation's fourth quarter 2016 investor conference call. I'm joined this morning on what will be my first TeeKay quarterly conference call by our CFO Vince Lok. During our call today, we will be taking you through the earnings presentation which can be found on our website.

Turning to slide 3 of the presentation, I will briefly review some recent highlights for TeeKay Corporation. During the fourth quarter we generated consolidated cash flow from vessel operations or CFVO of approximately $290 million.

TeeKay's gas and tanker businesses performed in line with our expectations in the fourth quarter of 2016. However, the results from our offshore business were affected by certain events which included an operational incident in November 2016 relating to TeeKay Offshore's Arendal Spirit UMS and related suspension of the charter higher revenue since that time. As annual sales are highlighted on yesterday's TeeKay offshore earnings call, we have maintained an ongoing dialogue with Petrojarl and our main priority is to address their concerns and return the unit to operation as soon as possible.

While Q4 2016 was a challenging quarter on the offshore front, we have made good progress on cost-saving initiatives throughout the year. For instance, daily operating expenses for FPSO Fleet have declined approximately 18% and our consolidated G&A expenses decreased by approximately 16% in 2016 compared to the prior year.

TeeKay Corporation reported a consolidated adjusted net loss of approximately $19 million or $0.22 per share in the fourth quarter of 2016, and we declared a cash dividend of $0.055 per share consistent with the previous quarter's dividend.

Since reporting earnings in November 2016 we have seen the oil price stabilize in the mid-$50 range which has had a positive impact on the sentiment of the industry and I'm pleased to report that we signed heads of terms to extend the firm contract periods on the Banff and Hummingbird Spirit FPSO units until the third quarter of 2018 and September 2020 respectively.

As you may recall, in mid-2016 when oil prices were in the low $40 range, we agreed with Centrica, who is the charter of the Hummingbird Spirit, to reduce the fix charter rate, which for all intents and purposes was a rate holiday, to avoid a production shut in and to incentivize the charter to reinvest in the field.

Now with oil prices in the mid-$50 range we have agreed on heads of terms with Centrica to extend the firm contract period out to September 2020 at a slightly higher fixed charter rate plus further upsides through an enhanced oil price and production tariff. The new terms will take effect from October 2017 and will give TeeKay Production an oil price upside while it's covering our OPEC plus a minimum agreed CapEx rate throughout the charter period.

The Banff FPSO has been operating on the Banff field since its delivery nearly 20 years ago under a charter contract with CNR in the UK sector where CNR could terminate the contract at any time with six months notice.

In order to upgrade a certainty and to better align both parties we enter into a heads of terms to ensure the unit will stay on the current field at least until the third quarter of 2018 by revising the charter rate structure to include a variable component through an oil price and oil production tariff in addition to a minimum fixed charter rate. At current oil price and production levels the future CFVO under the new contract is not expected to be materially different from the current CFVO before this latest amendment.

On slide 4 I'll review some of recent highlights from our three public traded [daughter instances]. For the fourth quarter TeeKay LNG Partners generated distributable cash flow or DCF of $50 million resulting in DCF per limited partner unit of $0.63. The partnership continued to generate stable cash flow during the quarter including a full quarter contribution from the delivery of our second MEGI LNG carrier new building, the Oak Spirit, which commenced its five-year charter contract with Cheniere Energy in early August.

For the fourth quarter, TeeKay LNG declared a cash distribution of $0.14 per unit, resulting in a strong distribution coverage ratio of 4.4 times. TeeKay LNG continues to make significant progress on securing long-term financing for its growth projects that deliver through early 2020 and bolstering its liquidity position.

During the fourth quarter the partnership completed approximately $1.7 billion in debt and equity financings including approximately $1 billion in long-term financings relating to its committed growth projects, with the remainder of the financings on track to be completed in the second half of 2017.

Lastly, we held the naming ceremony for our third MEGI LNG carrier last week, the Torben Spirit, named after the TeeKay's late founder, Torben Karlshoej. This vessel is expected to deliver from the SME in South Korea at the end of February and immediately begin its 10-month charter plus an extension option to a major energy company.

For the fourth quarter, TeeKay Offshore Partners generated DCF of approximately $22 million resulting in DCF per limited partner unit of $0.15. For the fourth quarter TeeKay Offshore declared a cash distribution of $0.11 per unit.

Although we had anticipated better results in Q4 from -- some key factors negatively impacted our results including a temporary suspension of operations for the Arendal Spirit UMS as the charter performs an operational review and higher operating costs in the shuttle fleet mainly due to further upgrade of the Navion Anglia for trade in the North Sea after returning from her charter in Brazil in mid-2016.

While Q4 was a challenging quarter for Teekay Offshore, the partnership made good progress on initiatives to further reduce cost from its operations. In early January TeeKay Offshore completed the sale of a 1995-built shuttle tanker, the Navion Europa, for net proceeds of approximately $14 million and recorded a gain of approximately $7 million.

I'm pleased to report that after having secured at three year charter -- three-year CoA contract for the Glen Lyon project in September 2016, TeeKay Offshore is now close to finalizing a new five-year plus expansion options shuttle tanker contract of affreightment in the North Sea. We are encouraged by the continued strong fundamentals in our shuttle tanker business where we are the market leader.

TeeKay Tankers reported adjusted net income of approximately $5 million or $0.03 per share and free cash flow of approximately $34 million.

The fourth quarter results were positively impacted by seasonal strength the tanker market and increased oil exports out of Nigeria, Libya, and the Baltic Sea. Tanker rates continued to be seasonally strong early in the first quarter of 2017. However, rates have recently begun to soften due to several factors, including regional refinery maintenance, an increasing number of new building tanker deliveries, and the effect of OPEC supply cutbacks on overall tanker demand especially in this Arabian Gulf.

Yesterday, TeeKay Tankers declared a cash dividend of $0.03 per share, representing the minimum quarterly dividend according to the Company's policy.

Lastly, given our view on the softer 2017 tanker market, TeeKay Tankers three upcharters for firm periods of 12 months at an average rate of $20,800. These charters increase our fixed-rate cover to approximately 40% over the next 12 months.

The fourth quarter was an active one across all businesses and companies, and I expect this to be -- to continue. On slide 5, we have laid out the TeeKay Group's top business priorities of the rest of 2017 and into 2018. At the TeeKay Corporation level we need to renew charters for remaining directly owned and in charter assets. And, as I mentioned earlier, we have made good progress with two of TeeKay's directly owned FPSO, which are expected to provide us with greater cash flow certainty in the form of a cash flow floor with upside exposure to future increases in the oil price.

Secondly, given the challenges we've had with some of our offshore projects, we believe that it will be important for us to further strengthen our project management and execution capabilities to ensure all projects deliver on time and on budget.

TeeKay LNG has made great headway towards completing its financings, however there's more to be done before taking delivery of its 19 new buildings.

TeeKay Offshore is focused on taking delivery of its various projects and securing charter expansions for its FPSO contracts that are coming up for renewal in 2018 and 2019. And, as Ingvild mentioned on the Teekay Offshore call yesterday, we also are in the process of optimizing our asset portfolio which may include certain asset sales and/or seeking joint venture partners which will help further strengthen COO's balance sheet and liquidity position.

In the face of a challenging offshore market, we remain focused on strengthening TeeKay offshore's financial position so that it can take advantage of opportunities as the offshore market recovers.

The tanker market is expected to be challenging in 2017 and we are focused on ensuring TeeKay Tankers is positioned to not only weather potential market weakness but also position TNK to benefit from an expected market recovery starting in 2018. Part of that includes expanding TNK's service offering to customers through its commercial pools and importantly, as US exports are increasing rapidly, expanding its ship-to-ship lightering services which earns a premium to current spot market rate.

Turning to slide 6, as you heard on the TeeKay LGN and TeeKay Offshore calls yesterday, across the organization today we are working hard on executing on our committed growth which involves taking delivery of 33 new building or conversion projects in our gas and offshore businesses. The majority of these projects are being managed by TeeKay involving hundreds of people on our project teams and thousands of people at the yards where we're building in China, Korea, Japan, the Philippines, Holland, and Singapore.

Once all of the projects have delivered, our assets base will grow by $3.5 billion by 2020 and they're expected to contribute an additional $450 million of cash flow from metal operations. On the projects we'll go on long term charters and provide cash flows for them as the are starting up oil production or gas liquefaction plants.

As we take our new assets into service for our customers, we will have an unwavering commitment to safe, reliable and efficient operation. In short, operational excellence. That has been our foundation from when we started this Company over 40 years ago, and that will continue to be our focus going forward.

Turning to slide 7, our footprint and customer relevancy has grown tremendously over the past two decades and, of course, everything starts with the customer. We service nearly all of the major oil and gas companies in one way or the other. Our customer base is truly global diversified and it continues to evolve.

Although it is difficult to predict the future of the energy markets, we are quite certain that global transportation of energy will be required for many years to come. We have strong positions in all three of the primary businesses that we are in, and we intend to navigate carefully to ensure that we are growing at the right pace and in the right areas going forward.

In closing, one of our key competitive advantages at TeeKay is our people and it is truly a privilege for me to now be leading this global team. Thank you for joining us on the call today. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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Thank you.

(Operator Instructions)

We'll take our first question from Michael Webber with Wells Fargo.

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Michael Webber, Wells Fargo Securities - Analyst [2]

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Hey, good morning, guys. How are you?

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Kenneth Hvid, Teekay Corporation - President and CEO [3]

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Good. How are you, Mike?

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Michael Webber, Wells Fargo Securities - Analyst [4]

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Good. A fair amount to get to. I wanted to start with the FPSO amendments and extensions, probably the biggest piece of news in the suite of releases yesterday. Can you give a bit of color, I guess, maybe starting with the Hummingbird? It seemed a great upside, which is certainly surprising I guess, given the context. I know you're able to add a pair of -- but can you maybe talk about the basis for that rate upside?

I believe there were some short term extensions layered on there, so what I want to understand how much upside we'd be talking about. And then maybe just an EBITDA level contribution at the parent for both that asset and the Banff, which I'll ask about next.

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Kenneth Hvid, Teekay Corporation - President and CEO [5]

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Sure Mike. I'll let Vince speak a little bit to the numbers, but I think what we're seeing and we've been talking about that on our calls during the year. And as you recall exactly a year ago we were sitting looking at $30 and everybody was talking about go down to $20 or we go to $40. And we've been talking about improving psychology in the markets throughout here.

And the conversations we're having with our customers have just continued to become better and better and I think the outlook is becoming more positive. And that's obviously what we need for all of the discussions on our FPSOs. So we have started at one end, we have a number of active dialogues and we are progressing them. And Hummingbird and Banff are the first ones where we think we have a better structure now that reflects a new oil environment that hopefully will continue to improve.

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Vincent/Vince Lok, Teekay Corporation - EVP and CFO [6]

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So Mike, these as you know are (technical difficulties) heads of terms on these contracts, so we're just in the process of finalizing them. So, we can probably share a little bit of information once we finalize everything.

But at a high level, I think the key thing, if you look at the Hummingbird, is it was due to come off the field in September of this year. And the key thing here was to make sure that asset case stayed on the field for a longer period, in this case another three years, which would avoid a lot of layup costs, et cetera and gives us that optionality.

So, it does give us, I would say, a slight increase to the minimum rate in that kicks in in October of 2017, and there's a tariff. And I'll talk about the tariff maybe a bit more on a combined basis for the two assets just given the commercial sensitivities. On the Banff, as we indicated there was -- again, make sure we get the duration and the asset stays in the field. And the overall CFVO for that asset will roughly be around the same at current oil prices. We made a little bit more upside obviously with the tariff.

So in terms of sensitivity for the two combined assets, as a rough rule of thumb for every $10 increase in the oil price going forward, it translates into an additional $15 million of CFVO for the two assets, just give you a rule of thumb there.

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Michael Webber, Wells Fargo Securities - Analyst [7]

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That's helpful. Just with the Banff, if memory serves, that was on until 2019, but there was a 60-day walk away clause in the contract, sliding it up to 18. Was that just a bit of horse trading to firm up the firm employment period? And did the talk of the conversations around what the actual use of life of that field, did that change at all? Is that still expected to run until 2019, and you'd be looking at re-letting it again for a year after that firm period ends?

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Kenneth Hvid, Teekay Corporation - President and CEO [8]

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Yes, as you know, when you come to the tail end of some of these large deals that have been producing for long time, it's obviously getting harder and harder to say exactly how long the tail is at the end of it.

So what this gives us is essentially instead of having the evergreen uncertainty, it gives us a fixed date that we can start planning around. And we will of course continue to have the ongoing dialogue with the customer here in terms of their planning as we move forward. But at least we have a firm date where we can also go out and market this vessel and would have the option to take it away now. And that just gives us an ability to better plan for the asset. So that's really the motivation for us going into this.

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Michael Webber, Wells Fargo Securities - Analyst [9]

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Okay. Fair enough. Two more quick ones, and I will turn it over. The in-charter LNG carriers, I believe one is still on a short-term contract, one's still laid up, right? So obviously improved off the bottom of the past six months. What's the plan for that last asset? Would you throw that in a pool? Would you look for long-term storage play with that? What should we expect in terms of employment for the asset for the balance of 2017?

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Kenneth Hvid, Teekay Corporation - President and CEO [10]

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Yes, as we've talked about on previous calls, these are little bit of a niche assets that have been good on some of the shallow draft trace that we've seen, especially occurring in China.

We are in dialogue now. Certainly, the slightly better spot market also helped here although I'd say all the time these units have been a little bit separated from the rest of the pack, because what they are good for is really transporting parcels into terminals where the larger LNG carriers cannot go in, but they still carry 80,000 cubic meters. So they are good size niche vessels that have been able to command good rates. As you recall, we had them on to South America.

The interest that we are seeing for the charters now are for some of the new terminals in China, and those discussions are open.

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Michael Webber, Wells Fargo Securities - Analyst [11]

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Fair enough. And then last one. Actually a kind of -- after your results were announced this morning, one of your investments, Sevan Marine, entered into a long term framework agreement with Exxon, with the idea being it's providing FLNG technology and licensing. What does this mean for your investment in Sevan? How does that impact you guys? And then is there any kind of timeline you can share or framework you can share to help us conceptualize how this changes your view on that investment? It seems like a pretty big deal.

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Kenneth Hvid, Teekay Corporation - President and CEO [12]

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Yes, I think it's a great deal for Sevan in terms of further expanding the use of the technology there. Teekay has never had any special agreements around the FLNG technologies, so that's something that Sevan has pursued for the past couple of years. And we have of course followed it and we are encouraged by it.

But other than that, we are really just an investor in Sevan, especially as it comes to the FLNG there. They are developing it and, as you know, Teekay is not active in the FLNG market today, and we don't have and plans to become an active player. You never know if it changes down the road, but at present that is not segment that we are focused on.

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Michael Webber, Wells Fargo Securities - Analyst [13]

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Got it. Okay I'll turn it over. Thanks for the time, guys.

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Kenneth Hvid, Teekay Corporation - President and CEO [14]

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Thanks Mike.

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Operator [15]

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(Operator Instructions)

We will take our next question from Fotis Giannakoulis with Morgan Stanley.

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Fotis Giannakoulis, Morgan Stanley - Analyst [16]

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Yes. Hello guys, and thank you. I would like to go on the financing over the parent level. Can you tell us, did you repay any debt during this quarter on the parent level?

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Vincent/Vince Lok, Teekay Corporation - EVP and CFO [17]

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Hi, Fotis. The main debt amortization at the parent is the debt facility related to the three FPSOs, so the quarterly amortization is about $13 million. So that's the run rate.

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Fotis Giannakoulis, Morgan Stanley - Analyst [18]

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Okay, thank you. And, what is the plan of the repayment of this debt, especially I'm talking about the 2020 loan? The debt market is getting a little bit better right now. How do you envision repaying this loan?

And the second question I want to ask is at this point, the cash flow of the parent is negative by $8 million, it was this quarter, which is partially supported by the dividend payments from the daughters. I was wondering, what is the purpose of the parent entity paying a dividend right now?

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Vincent/Vince Lok, Teekay Corporation - EVP and CFO [19]

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Well, I guess maybe just to step back a bit, obviously, it is a major focus of ours to continue to de-lever the parent's balance sheet. That's always been our stated goal, to become close to net debt free.

I think when you look at the free cash flow, it was lower than what we expected for the fourth quarter for sure. But I think when you look at free cash flow going forward and sources of cash flow to delever the parent's balance sheet, there's kind of three main sources or catalysts.

The first one is increasing distributions from daughters, as you said, including some intercompany loans from TOO. That's number one.

The second is the Polar and Arctic Spirit LNG carriers that Mike Webber just referred to earlier. That has a current drag on our CFVO about $36 million a year. And we're targeting to get charters for those assets in the second half of this year. Those in-charters, as a reminder, do disappear in April 2018. They go back to TGP.

The third, I would say, are the three FPSOs that we just talked a little bit about. We were to get extensions on two of the three with upside to oil prices. We still have the Foinaven, which is actually a drag on our cash flow right now. We are in discussions on redoing that contract and extending that out, and ultimately to really sell those assets to continue to delever the balance sheet.

So those are really the three, I would say the three key sources of cash flow and catalyst to the parent's de-levering plan.

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Fotis Giannakoulis, Morgan Stanley - Analyst [20]

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So, the asset sale that you mentioned for Teekay Offshore or finding potential liquidity investors, that those apply for the FPSOs at the parent level?

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Vincent/Vince Lok, Teekay Corporation - EVP and CFO [21]

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Yes. Absolutely.

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Fotis Giannakoulis, Morgan Stanley - Analyst [22]

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Okay, thank you very much, Vince. Thank you guys.

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Vincent/Vince Lok, Teekay Corporation - EVP and CFO [23]

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Thanks.

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Operator [24]

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That concludes today's question and answer session. Mr. Hvid, at this time I'd like to turn the conference back to you for any additional or closing remarks.

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Kenneth Hvid, Teekay Corporation - President and CEO [25]

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Thank you very much for your questions. We look forward to reporting back to you next quarter.

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Operator [26]

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This concludes today's call. Thank you for your participation. You may now disconnect.