Teekay Rating Raised

Thursday, March 22, 2001
Standard & Poor's revised its outlook on Teekay Shipping Corp. to positive from stable. The outlook revision reflects Teekay's consistent, solid performance, which has resulted in a gradually improving financial profile, and expectations for more predictable cash flow generation due to the purchase of contract-based shuttle tanker operator Ugland Nordic Shipping ASA. Teekay's rating reflects a favorable business position as the leading midsize ("Aframax") crude oil tanker operator in the Indo-Pacific Basin, expanded presences in the AtlanticAframax tanker market and the North Sea Shuttle tanker market, and fairly conservative financial policies. These factors are offset by significant, but carefully managed exposure to the volatile tanker spot markets. In 2001 Teekay purchased 56% of Ugland Nordic Shipping for $123 million and is expected to acquire the remaining ownership for around $100 million during 2001. Ugland has about $440 million of debt and newbuilding payments of around $150 million due during the next few years. Ugland operates 14 shuttle tankers (with four newbuildings on order), transporting crude oil from offshore production platforms to refineries, mostly under long-term contracts(average term around 4.5 years).

In 1999, Teekay acquired Bona Shipholding Ltd. for $450 million in Teekay stock, cash, and assumed debt of $314 million. Standard & Poor's views both these acquisitions as strategic positives. Bona was a large operator (about 26 vessels) of oil tankers, most of which were of a similar size and modestly younger than those in Teekay's fleet (6.8 years versus eight years). The purchase significantly increased the size of Teekay's fleet and especially expanded the company's presence in the Atlantic. Ugland Nordic controls a fleet of shuttle tankers (average age 7.5 years) under long-term contracts and the purchase of Ugland will add a significant fixed contractual component to Teekay's cash flow.

Teekay's fleet of 75 vessels (70 Aframaxes) is roughly three times that of the next comparable competitor, and around 11% of the fragmented world Aframax fleet. Aframax vessels are medium-sized tankers that transport both crude and refined products with rates that are generally less volatile than larger vessels. Through aggressive management of its modern fleet, using aback-haul strategy, the firm minimizes ballast (empty) legs, achieving higher capacity utilization rates than the industry average. As a result, Teekay enjoys a market share of approximately 25% in the Indo-Pacific Basin for this size vessel. Teekay has a solid, but more modest, share of the Atlantic basin (intra-Caribbean, North Sea, and trans-Atlantic) tanker market and through Ugland, a significant presence in the North Sea shuttle tanker market.

While weak tanker rates in 1999 resulted in a net loss of $18 million, a sharp rise in Aframax rates during 2000 resulted in net income of $270 million. Prior to the Ugland purchase, total debt to capitalization had declined to under 45% due to strong cash flow generation during 2000 from around 57% at the end of 1999. A profitable Aframax tanker market, Teekay's proven operating strategies, and its careful financial policies should enable the company to continue to improve its credit profile during 2001, despite the cash purchase of Ugland. A continued solid tanker market, combined with the company's steady focus on de-levering, could over time lead to a modest upgrade, Standard & Poor's said. - (Reuters)

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