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Teekay Shipping Corporation

Teekay Shipping Corporation

Bayside House
Bayside Executive Park
West Bay Street & Blake Road
PO Box AP-59212
Nassau, Bahamas
Telephone: (242) 502-8820
Fax: (242) 502-8840
Web site: http://www.teekay.com

Public Company
Incorporated:
1973 as the Teekay Shipping Group
Employees: 5,500
Sales: $1.96 billion (2005)
Stock Exchanges: New York
Ticker Symbol: TK
NAIC: 483111 Deep Sea Freight Transportation; 483211 Inland Water Freight Transportation

Teekay Shipping Corporation (TK), with the world's largest and most modern fleet of mid-sized oil tankers, is a leading transporter of crude oil and petroleum products. Ten percent of the world's oil passes through TK's ships at some point. TK expanded its reach in the late 1990s through a number of strategic acquisitions and entered the liquefied natural gas (LNG) business in 2004 through an affiliate that was soon spun off. As of December 2005, TK's fleet consisted of 145 vessels (including 17 newbuildings on order) with a total cargo capacity of approximately 13.6 million tons of oil and 2.2 million cubic meters of liquefied natural gas. These ships provide transportation services to major oil companies, oil traders, and government agencies. Incorporated in the Marshall Islands and headquartered in the Bahamas, Teekay has principal operating offices in Vancouver and a presence in 14 countries around the world. Two trusts hold about 40 percent of Teekay shares.

GETTING INTO THE SHIPPING BUSINESS

Jens Torben Karlshoej's lifelong passion for the sea and ships probably began with visits to the harbor when he was a child in Denmark. Although he came from a farming family, he left the land and went to work for a small Danish shipping company. Then, in his early 20s, Karlshoej emigrated to the United States. During the 1960s and early 1970s he held a progression of increasingly responsible jobs with shipping companies in New York and Los Angeles.

In 1973 Karlshoej struck off on his own, founding the Teekay Shipping Group in New York, incorporating it in Liberia, and using his initials to give the company its name. His strategy was for the company to manage and operate a range of tankers, but to charter the vessels from independent ship owners, not to own them.

Major oil companies, whether private or state-owned, as well as independent ship owners, transported crude oil and other petroleum products under two types of contract: short-term contracts, including "spot charters," which were for a single voyage, or long-term "time charters." New York was one of the shipping centers where tanker chartering occurred, with brokers (and sometimes ship owners and charterers) working around the clock to transact business.

When the oil market collapsed, however, Karlshoej closed up his New York operation and moved to the West Coast. In 1975 he established an affiliated company, Palm Shipping Inc., which concentrated on chartering medium-sized tankers for Pacific routes. Tankers came in various sizes, for certain types of trips and cargoes. A charterer usually wanted the largest possible vessel for the cargo that would meet port and canal dimension restrictions for the route. Karlshoej chartered medium-sized tankers (75,000-115,000 deadweight tonnage), referred to in the industry as "aframax." These vessels typically made medium- and short-haul trades of less than 1,500 miles and carried crude oil or petroleum products. They were smaller than the Suezmax size of approximately 115,000 to 200,000 dwt used for long-and medium-haul crude oil trades and bigger than the Panamax vessels used to transport petroleum products in short- to medium-haul trades.

The West Coast was a tough market to break into. California refiners favored smaller ships to import crude oil and were hesitant to go with an unknown company. However, Karlshoej persuaded them to consider a larger tanker, and within a year he had time-chartered his first ship, White Peony, an aframax owned by Takebayashi of Japan. The ship was chartered to Palm Shipping at $1.35 dwt per month, which came to $3,800 a day. By 1977 Karlshoej was operating two Norwegian vessels as well. That year, Captain James Hood, a Scotsman who left school to go to sea at age 16, joined Karlshoej to run the operational side of the business. Palm Shipping's all-chartered fleet quickly grew from 16 to 18 ships.

In 1979 Karlshoej founded another affiliated organization, Viking Star Shipping, Inc., to buy and own tankers to provide a reliable source of high-quality vessels to support Palm's chartering activities. His timing was poor, as the market began to slide in 1980, and Viking Star made no purchases.

FROM CHARTERER TO OWNER

In 1985 Palm Shipping signed a deal with Japanese ship owner Sanko Steamship to charter 12 of Sanko's afra-max vessels on a two-year timecharter. The transaction was a major coup for Karlshoej and happened because Sanko, which had been the most powerful aframax operator in the world, was shaky and Karlshoej was offering three months' hire up front. As Jim Hood remembered it in a 1996 Seatrade Review article, "It was not exactly a vibrant market. Taking those ships was at once an act of faith and the grasping of an opportunity." Because there was not enough business on the Pacific routes, Palm Shipping extended operations into the Atlantic. "You took what you could get and ran with it," Hood said. Later that year Karlshoej bought his first ship paying $3.9 million for the Golden Gate Sun, a ten-year-old aframax. The purchase made Viking Star Shipping a shipowner, finally. This time Karlshoej's timing was right, as the market began to turn.

The Sanko timecharter gave the Teekay Shipping Group controlled tonnage and credibility. In an improving market, it was suddenly a big player. Shell Oil saw Teekay's power as a threat and offered Sanko more money to charter ten of the tankers when Teekay's leases expired. Without even letting Karlshoej make a counter-bid, Sanko agreed to the Shell offer.

COMPANY PERSPECTIVES

Energy powers industries, fuels transportation systems and improves the quality of our lives. Our customers face the challenge of moving oil and gas from where it is produced to where it is consumed. At Teekay, it is our job to ship that oil and gas anywhere in the world. It is our promise to provide our customers with a safe and reliable service. Teekay Shipping is committed to being an essential marine link in the global energy supply chain, serving the world's leading oil and gas companies. We connect our customers' upstream oil and gas production with their downstream refining and distribution, positioning us as the marine midstream company.

Karlshoej was amazed, to say the least. After all, his financing flexibility had allowed Sanko to keep going some five months before it went bankrupt. Suddenly left out in the cold, Teekay could have gone under. Instead, Karlshoej vowed revenge and went on a building spree, ordering some 30 vessels over the next six years at a cost of $1.4 billion. "The newbuilding run was driven by Torben's conviction that massive aframax replacement would be needed and that newbuilding prices would not come down," Hood told Seatrade Review. Karlshoej bet the company on that vision, ordering ships first from Hyundai in South Korea and then from a variety of yards, including 3 Maj in Yugoslavia and Imabari and Onomichi in Japan. The Onomichi yard created a design to Karlshoej's specifications, the 100,000 dwt Onomax, which would become the backbone of Karlshoej's fleet. The first of these vessels, the Palm Star Orchid, was delivered in 1989. For the fiscal year that ended in April 1989, the Teekay group had net income of $54.7 million on revenue of $200.9 million.

ON THE BRINK OF DISASTER: 199092

Company revenues continued to climb at the beginning of the decade, first as a result of the run up after the Gulf War and then as more ships were delivered or purchased secondhand and put into service. In 1991 Karlshoej moved his operations from Long Beach, California to Vancouver, British Columbia, in part to protect it from potential liabilities under the new U.S. oil spill legislation, but primarily to take advantage of new tax laws in Canada, where headquarters of foreign companies were not taxed on their worldwide business operations. However, even as he made the move, the situation was worsening.

Overcapacity in the tanker market caused freight rates and newbuilding prices to sink. On top of that, the yen, in which the company had most of its contracts, strengthened. Although Viking Star's fleet had increased from an average of 18 vessels in 1989 to 46 in 1992, the Teekay group was heavily in debt, owing nearly $1 billion. During 1992 Karlshoej renegotiated the debt repayments and sold the company's 50 percent interest in Baltimar Overseas Limited. Then, in September 1992, one of Viking Star's tankers collided with a container ship, resulting in the deaths of 20 crew members. The ship, the Nagazaki Spirit, was declared a total loss. A month later, on October 3, Torben Karlshoej died in his sleep of an apparent heart attack, at age 51. In columns in trade papers and in letters to the editor, Karlshoej was honored for his integrity and vision.

Lloyd's Shipping Economist credited Karlshoej with leaving two legacies. "The first was a leading position in a competitive market, based upon a high standard of operations and modern vessels." The second was a towering debt.

Amid speculation about the future of the Teekay group, Jim Hood was named president and chief executive officer of Teekay Shipping Ltd., the parent company. Under a contingency plan Karlshoej set up shortly before his death, a four-member executive board took over the company's operations. The board included Karlshoej's elder brother, Axel; shipowner Thomas Hsu; shipbroker Shigeru Matsui; and Arthur Coady, Teekay's general counsel.

NEW LEADERSHIP

Hood replaced Karlshoej's flair with a more cautious, financially focused approach, but he faced severe challenges. In the fiscal year ending March 31, 1993, revenues dropped to $337.4 million from $416.1 million the year before. Even after Viking Star raised more than $37 million by selling vessels, the group had a loss of $47.5 million. The global recession finally had hit the tanker freight market, depressing rates, especially those for spot chartering, on which Teekay concentrated. A time charter equivalent rate of $19,270/day the year before dropped to $13,722/day. Added to this was the company's heavy dependence on yen-dominated debt, which resulted in a $77.9 million foreign exchange loss.

KEY DATES

1973:
Torben Karlshoej forms Teekay Shipping Group (TK) using chartered tankers.
1975:
Karlshoej forms Palm Shipping Inc. to charter mid-size tankers in the Pacific.
1977:
Captain James Hood heads operations as chartered fleet reaches 18 ships.
1979:
Karlshoej forms Viking Star Shipping, Inc., to buy tankers.
1985:
Palm Shipping charters a dozen tankers, expands to Atlantic; Karlshoej buys first ship, the Golden Gate Sun.
1989:
Palm Star Orchidis first of 30 vessels delivered in six-year buying spree; group revenues are $200 million.
1991:
Operational headquarters moved from California to Vancouver.
1992:
Nagazaki Spirit lost in fatal collision; Karlshoej passes away a month later.
1993:
New CEO James Hood restructures company in face of falling revenues, $1 billion debt.
1995:
TK goes public, raising $139 million.
1998:
Bjorn Moller becomes CEO after James Hood retires; Australian Tankerships acquired.
2001:
Ugland Nordic Shipping AS acquired.
2003:
Navion AS acquired.
2004:
LNG market entered through acquisition of Spain's Naviera F. Tapias SA. while total sales exceed $2 billion.
2005:
LNG business spun off in successful initial public offering.

The company's structure was in keeping with Karlshoej's passion for privacy. Teekay reported its activities through Viking Star Shipping, Inc., its holding company. Teekay operated and managed the Viking Star-owned fleet, while Palm Shipping Inc. handled chartering activities. Each vessel was owned by a separate Teekay subsidiary, as was common in the industry, which was built with commercial bank mortgages to one-ship companies. Teekay also owned 50 percent of Viking Consolidated Shipping Corp., which owned three ships on long-term charter to a big Japanese company.

Under Hood, Palm became a subsidiary of Viking Star, and the company restructured. Ultimate ownership rested in two trusts set up by Karlshoej before he died. Cirrus Trust owned 100 percent of Viking Star's common stock and JTK Trust held 100 percent of the redeemable preferred stock. The company's advisory board oversaw the trusts, the ultimate beneficiaries of which were charitable organizations.

In the year after Hood become president, Viking Star sold six ships, postponed building of two others, renegotiated some of its debt, refinanced 15 of its vessels, and, in a significant move for this very private company, privately placed $175 million in notes backed by its ships. These measures more than doubled the company's liquidity by early 1994, but it still faced long-term debt of more than $900 million.

To raise money, the Teekay group announced in March that it would take its ship owning company, Viking Star, public, issuing 13.5 million shares, about 27 percent of the company. Hoping to raise $250 million, the company planned to use the proceeds to build replacements for its older vessels and to repay some of its debt. Viking Star's prospectus eased speculation about the company's liquidity. The low-profile company reported net income of $4.3 million for the nine months ending January 31, 1994, on revenues of $264.2 million. Within a month, however, the company postponed the offering, when share prices dropped ten percent as interest rates started to rise.

A SINGLE, PUBLIC COMPANY IN 1995

By July 1995, the Teekay group was ready to go ahead with a public offering, though on different terms. To begin with, the shares were no longer for Viking Star Shipping, Inc. In March, Hood restructured the group, merging the ship owning and ship management companies into a single entity. Viking Star acquired Teekay Shipping Ltd. and then reverted to the group name, Teekay Shipping Corporation. In a July 1995 article, Lloyd's List speculated that the change was due to market criticism about the earlier plan to leave the management of the fleet in private hands. Teekay issued fewer shares (6.9 million) at a higher price of $21.50 a share and raised $138.7 million. The bulk of the proceeds was used to pay down debt from previous new-building and Hood's more recent purchases of secondhand vessels. The company also sold its older ships, including the Golden Gate Sun, the first ship Karshoej had bought.

Taking the company public appeared to mark the turning point for Teekay. Within a year a study by U.S. investment bank Lazard Freres reported that Teekay "was well positioned to benefit from better conditions projected for the aframax sector over the next three years." Those conditions included the strong growth in oil imports to Asia, the potential market in China, and the firming of the oil industry cycle.

According to Lloyd's Shipping Economist, the Teekay group had four operational strengths: fleet age, vessel uniformity, regional targeting, and in-house servicing. Because of its remarkable ship building program, the company had a youthful fleet, with an average age of under eight years during the last half of the decade. This compared with an average age of more than 13 years for the world oil tanker fleet and more than 12 years for the world aframax tanker fleet. Teekay believed that its modern fleet gave it a significant advantage, with higher fuel efficiency and lower operating costs, important considerations in an industry with increasingly stringent operating and safety standards. The large fleet also was fairly homogeneous in size, with many vessels being identical sister ships. That uniformity made it possible for Teekay to substitute vessels, giving it greater flexibility in accommodating changes on short notice.

The company had targeted the Indo-Pacific basin when it moved to the West Coast in 1975 and developed a significant presence and long-term relationships in an area that underwent explosive and sustained economic growth. That region, with the Red Sea on one border and the west coast of the United States on the other, encompassed the Arabian Gulf, Indonesia, and Australiathree major oil exporting regionsand the company derived approximately 90 percent of total revenues from its operations there.

That regional concentration contributed to the final operational plus, Teekay's ability to meet its needs in-house. Through its wholly owned subsidiaries, the company was able to operate independently, providing all of the operations, ship maintenance, crewing, technical support, shipyard supervision, insurance, and financial management services required to support its fleet.

For example, the company recruited staff through its offices in Glasgow, Manila, Sydney, and Mumbai and used two specially configured tankers to train the 24 to 29 crew members needed for each of its vessels. It also operated a cadet program to develop future senior officers and provided additional training for newly hired seamen and junior officers at its training facilities in the Philippines. The company budgeted about $1 million to educate crews to Teekay's standards, two to three times as much as the competition spent. "Cost is not the only thing to consider. We need quality people. You can't compromise on ship safety," the manager of technical training told LSM in a 1994 article.

ENTERING THE FPSO MARKET IN 1997

Aframax freight rates were historically high as the new year began, with owners averaging $25,226 per day, according to Fairplay. This resulted from the growing importance of short-haul crude, and Teekay's net income rose 46 percent to $42.6 million for the fiscal year. Teekay claimed its fleet utilization was almost 70 percent, due to the availability of back haul cargoes from the West Coast. Recognizing the high risk involved in its spot trades strategy, Teekay began exploring the possibility of converting some of its tankers for the floating production, storage, and off-loading (FPSO) market. Chief operating officer Bjorn Moller told the company's annual meeting, "During the past year we have stepped up our efforts to develop new projects where we can lever our strengths into related business opportunities, an example being offshore marine."

At the beginning of 1998, Teekay announced an eight-year contract to provide a FPSO vessel to Apache Energy Ltd. and the acquisition of Australian Tanker-ships Pty. Ltd., a shipping subsidiary of Australian Petroleum Pty. Ltd. which brought with it the servicing of Caltex Petroleum's oil transportation requirements. In March, Jim Hood retired as president and CEO, replaced by Bjorn Moller. Moller, who came to the company in 1985, had been chief operating officer since 1997. Shortly after that, the company announced plans to order at least two new aframax tankers and to sell seven million shares of common stock.

During the 1990s Teekay Shipping survived near disaster by its careful financial policies, reputation for safety, and quality customer service. It changed from a highly secretive, wholly private company to a popular public corporation, reorganizing from a group of affiliated companies into a single entity. Although economic problems in Asia and 94 aframax vessels under construction might cause concern in the next few years, Teekay appeared well positioned to withstand a period of reduced rates.

TK expanded its reach in the late 1990s through a number of strategic acquisitions. Bona Shipholding was acquired in 1999, bringing TK into the Norwegian market for the first time.

ENTERING THE SHUTTLE TANKER MARKET IN 2001

TK began offering shuttle tankers in 2001 when it acquired a 56 percent interest in Norway's Ugland Nordic Shipping AS. The company was also forming a ship management joint venture with BHP Billiton.

Revenues plunged to $783 million in 2002; net income of $53 million was but a sixth of that in 2001. The year 2003 was a watershed for the company. Buoyed by acquisitions and recovery in the energy industry, TK's revenues doubled in 2003 to $1.6 billion and net income of $177 million was more than three times the previous year's figure.

After a couple of quiet years TK had bolstered its shuttle presence with the April 2003 acquisition of Norway's Navion AS. Navion's shuttle fleet included 27 vessels, eight of them owned. These were later combined with UNS's fleet into the Teekay Navion Shuttle Tankers business unit.

TK entered the market for transporting liquefied natural gas (LNG) through the $1 billion April 2004 acquisition of Naviera F. Tapias S.A. This unit was renamed Teekay Shipping Spain S.L. The LNG market required specialized vessels and allowed for fees of up to three times that of conventional oil tankers. TK Spain was also one of the leading suppliers of petroleum shipping in the country.

At the same time, the oil industry was clearly in full swing. An insatiable appetite for oil in fast-burning economies such as China and India was increasing the demand for TK's services to unprecedented levels. Its rates were reaching record highs, more than $100,000 in some instances, Moller told Investor's Business Daily (average rates were closer to $50,000).

TK's fleet had tripled in a few years to nearly 160 ships. Most were the double-hulled variety. The older, single-hulled type was being phased out over concerns about spills. Investor's Business Daily noted this resulted in huge backlogs among shipbuilders, and made TK's available spot fleet all the more attractive.

TK stepped up its in-chartering of vessels from other tanker operators when the cost of new vessels began to rise around the end of 2004 due to the increase in tanker rates. Having ordered earlier than its competitors, it had plenty of new ships under construction$1 billion worth, Moller told the Wall Street Transcript in March 2005.

TK's liquefied natural gas business, Teekay LNG Partners L.P., was spun off in 2005. Its successful initial public offering raised $132 million. Federal tax law had been changed to allow mutual funds to invest Teekay LNG's type of corporate structure, which was a master limited partnerships.

Total sales slipped about 10 percent to just under $2 billion in 2005, and net income fell 25 percent dur-ing the year to $571 million. TK had more than 5,000 employees and was continuing to grow. In 2006, the company was planning a new joint venture with a unit of Petroleum Geo-Services ASA to expand its FPSO business.

While there appeared no slowdown in sight in the world's energy demands, TK was prepared in case of a market downturn, Moller told the Wall Street Transcript. Its contracts from its fixed business had grown to the extent that they could carry the company even if the spot market dried up.

                                    Ellen D. Wernick

                          Updated, Frederick C. Ingram

PRINCIPAL SUBSIDIARIES

Navion Offshore Loading AS (Norway); Navion Shipping Ltd. (Marshall Islands); Norsk Teekay AS (Norway); Norsk Teekay Holdings Ltd. (Marshall Islands); Single Ship Companies (Australia); Single Ship Companies (Spain); Single Ship Limited Liability Companies (Marshall Islands); Teekay Chartering Limited (Marshall Islands); Teekay Lightering Services LLC (Marshall Islands); Teekay LNG Partners LP (Marshall Islands; 68%); Teekay Marine Services AS (Norway); Teekay Navion Offshore Loading Pte Ltd. (Singapore); Teekay Nordic Holdings Inc. (Marshall Islands); Teekay Norway AS; Teekay Shipping (Canada) Ltd.; Teekay Shipping Ltd.; Teekay Shipping Spain SL; Ugland Nordic Shipping AS (Norway).

PRINCIPAL OPERATING UNITS

Teekay Tanker Services; Teekay Navion Shuttle Tankers; Teekay Gas & Offshore; Teekay Marine Services.

PRINCIPAL COMPETITORS

Aframax International Pool; General Maritime Corporation; Knutsen OAS Shipping AS; Malaysian International Shipping Corporation.

FURTHER READING

Bate, Alison, "The Newcomers," Westcoast Shipping, May 1997, p. 20.

Brady, Joe, "Analyst Ranks Teekay Shipping as a Good Buy," Tradewinds, April 26, 1996, p. 8.

Brewer, James, "Teekay Looking to Branch Out into New Areas," Lloyd's List, September 4, 1997.

"Company Interview: Bjorn Moller, Teekay Shipping Corporation," Wall Street Transcript, March 7, 2005.

"Down But Not Out," Lloyd's Shipping Economist, December 1994, p. 22.

Elliott, Alan R., "Teekay Shipping Co. Nassau, Bahamas; Demand for Fuel Gives Shipping Firm a Lift," Investor's Business Daily, October 26, 2004, p. A6.

Gray, Tony, "Teekay Orders Two Aframaxes," Lloyd's List, May 15, 1998.

, "Teekay President Hood Hands Over Reins," Lloyd's List, February 6, 1998, p. 2.

"Lazard Freres Study Lifts Teekay Spirits," Lloyd's List, April 30, 1996.

Lillestolen, Trond, "Teekay Faces Challenge After Founder's Death," Tradewinds, October 9, 1992, p. 6.

"Mutual Funds Laud LNG Shipping IPO," Investment Dealers' Digest, May 9, 2005.

"Profile: Modest Man of the Moment," Seatrade Review, October 1996, p. 13.

Shinkle, Kirk, "New America Spotlight: Owner of Oil Tankers Rides the High Tide," Investor's Business Daily, March 4, 2004, p. A7.

Smith, Leigh, "It's Business as Before at Teekay," Lloyd's List, October 19, 1992.

"Teekay Boss Fondly Recalls His Roots as an Ordinary Seafarer," Europe Intelligence Wire/Lloyd's List, March 15, 2005.

"Teekay Builds on Founder's Legacy," LSM, December 1994, p. 63.

"Teekay Prospers Again," Fairplay, February 6, 1997, p. 18.

"Teekay Puts Money Where Its Mouth Is," Tradewinds, March 4, 1994, p. 1.

"Teekay Sets Offer Price," Lloyd's List, July 21, 1995.

"Teekay Share Issue Capital Tagged for New Aframaxes," Tradewinds, March 31, 1994, p. 7.

"Teekay Shipping Acquires Australian Tanker Operation," Worldwide Energy, January 1998.

"Teekay Shipping Corp Outlook Revised to Positive by S&P," Business Wire, April 16, 1998.

"Written-Down Single Hull Tankers Are Not for Sale, Declares Teekay," Europe Intelligence Wire, December 12, 2003.

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Wernick, Ellen; Ingram, Frederick. "Teekay Shipping Corporation." International Directory of Company Histories. 2007. Encyclopedia.com. 25 Jun. 2016 <http://www.encyclopedia.com>.

Wernick, Ellen; Ingram, Frederick. "Teekay Shipping Corporation." International Directory of Company Histories. 2007. Encyclopedia.com. (June 25, 2016). http://www.encyclopedia.com/doc/1G2-3479800092.html

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Teekay Shipping Corporation

Teekay Shipping Corporation

Tradevvinds Building, 5th Floor
Bay Street
P.O. Box SS-6293
Nassau
Bahamas
(242) 332-8020
Web site: http://www.teekay.com

Public Company
Founded:
1973 as the Teekay Shipping Group
Employees: 1,596
Sales: $406 million (1998)
Stock Exchanges: New York
Ticker Symbol: TK
SICs: 4412 Deep Sea Foreign Transportation of Freight

Teekay Shipping Corporation, with the worlds largest and most modern fleet of midsized oil tankers, is a leading transporter of crude oil and petroleum products. As of March 1998, its fleet consisted of 46 vessels with a total cargo capacity of approximately 4.6 million tons. These ships provide transportation services to major oil companies, oil traders, and government agencies, primarily in the region from the Red Sea to the west coast of the United States, with its main operating routes in the Pacific. The company claims to hold 25 percent of the medium-sized tanker market in the Indian and Pacific oceans, with about 66 percent of its net revenue coming from spot voyages. Headquartered in the Bahamas, Teekay has chartering offices in Tokyo, London, Singapore, and Vancouver, which also is its principal operating office. Two trusts hold just more than half of Teekays common stock.

Getting into the Shipping Business: 197379

Jens Torben Karlshoejs lifelong passion for the sea and ships probably began with visits to the harbor when he was a child in Denmark. Although he came from a farming family, he left the land and went to work for a small Danish shipping company. Then, in his early 20s, Karlshoej emigrated to the United States. During the 1960s and early 1970s he held a progression of increasingly responsible jobs with shipping companies in New York and Los Angeles.

In 1973 Karlshoej struck off on his own, founding the Teekay Shipping Group in New York, incorporating it in Liberia, and using his initials to give the company its name. His strategy was for the company to manage and operate a range of tankers, but to charter the vessels from independent ship owners, not to own them.

Major oil companies, whether private or state-owned, as well as independent ship owners, transported crude oil and other petroleum products under two types of contract: short-term contracts, including spot charters, which were for a single voyage, or long-term time charters. New York was one of the shipping centers where tanker chartering occurred, with brokers (and sometimes ship owners and charterers) working around the clock to transact business.

But when the oil market collapsed, Karlshoej closed up his New York operation and moved to the West Coast. In 1975 he established an affiliated company, Palm Shipping Inc., which concentrated on chartering medium-sized tankers for Pacific routes. Tankers came in various sizes, for certain types of trips and cargoes. A charterer usually wanted the largest possible vessel for the cargo that would meet port and canal dimension restrictions for the route. Karlshoej chartered medium-sized tankers (75,000-115,000 deadweight tonnage), referred to in the industry as aframax. These vessels typically made medium- and short-haul trades of less than 1,500 miles and carried crude oil or petroleum products. They were smaller than the Suezmax size of approximately 115,000 to 200,000 dwt used for long- and medium-haul crude oil trades and bigger than the Panamax vessels used to transport petroleum products in short-to medium-haul trades.

The West Coast was a tough market to break into. California refiners favored smaller ships to import crude oil and were hesitant to go with an unknown company. But Karlshoej persuaded them to consider a larger tanker, and within a year he had time-chartered his first ship, White Peony, an aframax owned by Takebayashi of Japan. The ship was chartered to Palm Shipping at $1.35 dwt/month, which came to $3,800 a day. By 1977 Karlshoej was operating two Norwegian vessels as well. That year, Captain James Hood, a Scotsman who left school to go to sea at age 16, joined Karlshoej to run the operational side of the business. Palm Shippings all-chartered fleet quickly grew from 16 to 18 ships.

In 1979 Karlshoej founded another affiliated organization, Viking Star Shipping, Inc., to buy and own tankers to provide a reliable source of high-quality vessels to support Palms chartering activities. His timing was poor, as the market began to slide in 1980, and Viking Star made no purchases.

From Charterer to Owner: The 1980s

In 1985 Palm Shipping signed a deal with Japanese ship owner Sanko Steamship to charter 12 of Sankos aframax vessels on a two-year timecharter. The transaction was a major coup for Karlshoej and happened because Sanko, which had been the most powerful aframax operator in the world, was shaky and Karlshoej was offering three months hire up front. As Jim Hood remembered it in a 1996 Seatrade Review article, It was not exactly a vibrant market. Taking those ships was at once an act of faith and the grasping of an opportunity. Because there was not enough business on the Pacific routes, Palm Shipping extended operations into the Atlantic. You took what you could get and ran with it, Hood said. Later that year Karlshoej bought his first ship, paying $3.9 million for the Golden Gate Sun, a ten-year-old aframax. The purchase made Viking Star Shipping a shipowner, finally. This time Karlshoejs timing was right, as the market began to turn.

The Sanko timecharter gave the Teekay Shipping Group controlled tonnage and credibility. In an improving market, it was suddenly a big player. Shell Oil saw Teekays power as a threat and offered Sanko more money to charter ten of the tankers when Teekays leases expired. Without even letting Karlshoej make a counterbid, Sanko agreed to the Shell offer.

Karlshoej was amazed, to say the least. After all, his financing flexibility had allowed Sanko to keep going some five months before it went bankrupt. Suddenly left out in the cold, Teekay could have gone under. Instead, Karlshoej vowed revenge and went on a building spree, ordering some 30 vessels over the next six years at a cost of $1.4 billion. The newbuilding run was driven by Torbens conviction that massive aframax replacement would be needed and that newbuilding prices would not come down, Hood told Seatrade Review. Karlshoej bet the company on that vision, ordering ships first from Hyundai in South Korea and then from a variety of yards, including 3 Maj in Yugoslavia and Imabari and Onomichi in Japan. The Onomichi yard created a design to Karlshoejs specifications, the 100,000 dwt Onomax, which would become the backbone of Karlshoejs fleet. The first of these vessels, the Palm Star Orchid, was delivered in 1989. For the fiscal year that ended in April 1989, the Teekay group had net income of $54.7 million on revenue of $200.9 million.

On the Brink of Disaster: 199092

Company revenues continued to climb at the beginning of the decade, first as a result of the run up after the Gulf War and then as more ships were delivered or purchased secondhand and put into service. In 1991 Karlshoej moved his operations from Long Beach, California to Vancouver, British Columbia, in part to protect it from potential liabilities under the new U.S. oil spill legislation, but primarily to take advantage of new tax laws in Canada, where headquarters of foreign companies were not taxed on their worldwide business operations. But even as he made the move, the situation was worsening.

Overcapacity in the tanker market caused freight rates and newbuilding prices to sink. On top of that, the yen, in which the company had most of its contracts, strengthened. Although Viking Stars fleet had increased from an average of 18 vessels in 1989 to 46 in 1992, it and the Teekay group was heavily in debt, owing nearly $1 billion. During 1992 Karlshoej renegotiated the debt repayments and sold the companys 50 percent interest in Baltimar Overseas Limited. Then, in September 1992, one of Viking Stars tankers collided with a container ship, resulting in the deaths of 20 crew members. The ship, the Nagazaki Spirit, was declared a total loss. A month later, on October 3, Torben Karlshoej died in his sleep of an apparent heart attack, at age 51. In columns in trade papers and in letters to the editor, Karlshoej was honored for his integrity and vision.

Lloyds Shipping Economist credited Karlshoej with leaving two towering legacies. The first was a leading position in a competitive market, based upon a high standard of operations and modern vessels. The second was a towering debt.

Admid speculation about the future of the Teekay group, Jim Hood was named president and chief executive officer of Teekay Shipping Ltd., the parent company. Under a contingency plan Karlshoej set up shortly before his death, a four-member executive board took over the companys operations. The board included Karlshoejs elder brother, Axel; shipowner Thomas Hsu; shipbroker Shigeru Matsui; and Arthur Coady, Teekays general counsel.

Company Perspectives:

We are committed to the following business principles: honest, ethical conduct; training, teamwork and communication; safety and environmental protection; loss prevention (physical and economic); customer service; efficiency and economy; action. Our challenge is to live by these principles, anticipate the future, and develop our strengths in order to maintain our vitality and competitive edge.

New Leadership: 199394

Hood replaced Karlshoejs flair with a more cautious, financially focused approach, but he faced severe challenges. In the fiscal year ending March 31 1993, revenues dropped to $337.4 million from $416.1 million the year before. Even after Viking Star raised more than $37 million by selling vessels, the group had a loss of $47.5 million. The global recession finally had hit the tanker freight market, depressing rates, especially those for spot chartering, on which Teekay concentrated. A timecharter equivalent rate of $19,270/day the year before dropped to $13,722/day. Added to this was the companys heavy dependence on yen-dominated debt, which resulted in a $77.9 million foreign exchange loss.

The companys structure was in keeping with Karlshoejs passion for privacy. Teekay reported its activities through Viking Star Shipping, Inc., its holding company. Teekay operated and managed the Viking Star-owned fleet, while Palm Shipping Inc. handled chartering activities. As was common in the industry, each vessel was owned by a Teekay subsidiary, having been built with commercial bank mortgages to one-ship companies. Teekay also owned 50 percent of Viking Consolidated Shipping Corp, which owned three ships on long-term charter to a big Japanese company.

Under Hood, Palm became a subsidiary of Viking Star, and the company restructured. Ultimate ownership now rested in two trusts set up by Karlshoej before he died. Cirrus Trust owned 100 percent of Viking Star[/idx]s common stock and JTK Trust held 100 percent of the redeemable preferred stock. The companys advisory board oversaw the trusts, the ultimate beneficiaries of which were charitable organizations.

In the year after Hood become president, Viking Star sold six ships, postponed building of two others, renegotiated some of its debt, refinanced 15 of its vessels, and, in a significant move for this very private company, privately placed $175 million in notes backed by its ships. These measures more than doubled the companys liquidity by early 1994, but it still faced long-term debt of more than $900 million.

To raise money, the Teekay group announced in March that it would take its ship owning company, Viking Star, public, issuing 13.5 million shares, about 27 percent of the company. Hoping to raise $250 million, the company planned to use the proceeds to build replacements for its older vessels and to repay some of its debt. Viking Stars prospectus eased speculation about the companys liquidity. The low-profile company reported net income of $4.3 million for the nine months ending January 31, 1994, on revenues of $264.2 million. But within a month the company postponed the offering, when share prices dropped ten percent as interest rates started to rise.

A Single, Public Company: 199596

By July in 1995, the Teekay group was ready to go ahead with a public offering, though on different terms. To begin with, the shares were no longer for Viking Star Shipping, Inc. In March, Hood restructured the group, merging the ship owning and ship management companies into a single entity. Viking Star acquired Teekay Shipping Ltd. and then reverted to the group name, Teekay Shipping Corporation. In a July 1995 article, Lloyds List speculated that the change was due to market criticism about the earlier plan to leave the management of the fleet in private hands. Teekay issued fewer shares (6.9 million) at a higher price of $21.50 a share and raised $138.7 million. The bulk of the proceeds was used to pay down debt from previous newbuilding and Hoods more recent purchases of secondhand vessels. The company also sold its older ships, including the Golden Gate Sun, the first ship Karshoej bought.

Taking the company public appeared to mark the turning point for Teekay. Within a year a study by U.S. investment bank Lazard Freres reported that Teekay was well positioned to benefit from better conditions projected for the aframax sector over the next three years. Those conditions included the strong growth in oil imports to Asia, the potential market in China, and the firming of the oil industry cycle.

According to Lloyds Shipping Economist, the Teekay group had four operational strengths: fleet age, vessel uniformity, regional targeting, and in-house servicing. Because of its remarkable ship building program, the company had a youthful fleet, with an average age of under eight years during the last half of the decade. This compared with an average age of more than 13 years for the world oil tanker fleet and more than 12 years for the world aframax tanker fleet. Teekay believed that its modern fleet gave it a significant advantage, with higher fuel efficiency and lower operating costs, important considerations in an industry with increasingly stringent operating and safety standards. The large fleet also was fairly homogeneous in size, with many vessels being indentical sister ships. That uniformity made it possible for Teekay to substitute vessels, giving it greater flexibility in accommodating changes on short notice.

The company targeted the Indo-Pacific basin when it moved to the West Coast in 1975 and developed a significant presence and long-term relationships in an area that underwent explosive and sustained economic growth. That region, with the Red Sea on one border and the west coast of the United States on the other, encompassed the Arabian Gulf, Indonesia, and Australia, three major oil exporting regions, and the company derived approximately 90 percent of total revenues from its operations there.

That regional concentration contributed to the final operational plus, Teekays ability to meet its needs in-house. Through its wholly owned subsidiaries, the company was able to operate independently, providing all of the operations, ship maintenance, crewing, technical support, shipyard supervision, insurance, and financial management services required to support its fleet.

For example, the company recruited staff through its offices in Glasgow, Manila, Sydney, and Mumbai and used two specially configured tankers to train the 24-29 crew members needed for each of its vessels. It also operated a cadet program to develop future senior officers and provided additional training for newly hired seamen and junior officers at its training facilities in the Philippines. The company budgeted about $1 million to educate crews to Teekays standards, two to three times as much as the competition spent. Cost is not the only thing to consider. We need quality people. You cant compromise on ship safety, the manager of technical training told LSM in a 1994 article.

1997 to the Present

Aframax freight rates were historically high as the new year began, with owners averaging $25,226 per day, according to Fairplay. This resulted from the growing importance of short-haul crude, and Teekays net income rose 46 percent to $42.6 million for the fiscal year. Teekay claimed its fleet utilization was almost 70 percent, due to the availability of back haul cargoes from the West Coast. But recognizing the high risk involved in its spot trades strategy, Teekay began exploring the possibility of converting some of its tankers for the floating production, storage, and off-loading (fpso) market. Chief operating officer Bjorn Moller told the companys annual meeting, During the past year we have stepped up our efforts to develop new projects where we can lever our strengths into related business opportunities, an example being offshore marine.

At the beginning of 1998, Teekay announced an eight-year contract to provide a fpso vessel to Apache Energy Ltd. and the acquisition of Australian Tankerships Pty. Ltd., a shipping subsidiary of Australian Petroleum Pty. Ltd., which brought with it the servicing of Caltex Petroleums oil transportation requirements. In March, Jim Hood retired as president and CEO, replaced by Bjorn Moller. Moller, who came to the company in 1985, had been chief operating officer since 1997. Shortly after that, the company announced plans to order at least two new aframax tankers and to sell seven million shares of common stock.

During the 1990s Teekay Shipping survived near disaster by its careful financial policies, reputation for safety, and quality customer service. It changed from a highly secretive, wholly private company to a popular public corporation, reorganizing from a group of affiliated companies into a single entity. Although economic problems in Asia and 94 aframax vessels under construction might cause concern in the next few years, Teekay appeared well positioned to withstand a period of reduced rates.

Principal Subsidiaries

Palm Shipping, Inc.; Teekay Shipping (Vancouver) Ltd.; Teekay Shipping (UK) Ltd.; Teekay Norbulk Ltd. (Scotland); Teekay Shipping (Singapore) Pte. Ltd.; Mayon Marine Management, Inc. (Philippines); Teekay Shipping (Japan) Ltd.; Teekay Shipping (Australia) Pty. Ltd.

Further Reading

Bate, Alison, The Newcomers, Westcoast Shipping, May 1997, p. 20.

Brady, Joe, Analyst Ranks Teekay Shipping as a Good Buy, Trade-winds, April 26, 1996, p. 8.

Brewer, James, Teekay Looking To Branch Out into New Areas, Lloyds List, September 4, 1997.

Down But Not Out, Lloyds Shipping Economist, December 1994, p. 22.

Gray, Tony, Teekay Orders Two Aframaxes, Lloyds List, May 15, 1998.

, Teekay President Hood Hands Over Reins, Lloyds List, February 6, 1998, p. 2.

Lazard Freres Study Lifts Teekay Spirits, Lloyds List, April 30, 1996.

Lillestolen, Trond, Teekay Faces Challenge After Founders Death, Tradewinds, October 9, 1992, p. 6

Profile: Modest Man of the Moment, Seatrade Review, October 1996, p. 13.

Smith, Leigh, Its Business as Before at Teekay, Lloyds List, October 19, 1992.

Teekay Builds on Founders Legacy, LSM, December 1994, p. 63.

Teekay Prospers Again, Fairplay, February 6, 1997, p. 18.

Teekay Puts Money Where Its Mouth Is, Tradewinds, March 4, 1994, p. 1.

Teekay Sets Offer Price, Lloyds List, July 21, 1995.

Teekay Share Issue Capital Tagged for New Aframaxes, Trade-winds, March 31, 1994, p. 7.

Teekay Shipping Acquires Australian Tanker Operation, Worldwide Energy, January 1998.

Teekay Shipping Corp Outlook Revised to Positive by S&P, Business Wire, April 16, 1998.

Teekay Shipping Corporation, Form 20-F, Washington, DC: Securities and Exchange Commission, March 31, 1998.

Teekay Shipping Corporation, Prospectus, Teekay Shipping Corporation, June 9, 1998.

Ellen D. Wernick

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