Teekay Corporation (TK) Q4 2014 Earnings Report, Transcript and Summary

Welcome to Teekay Corporation's Fourth Quarter and Fiscal 2014 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.

Before Mr. Evensen begins, I would like to direct all participants to our website at www.teekay.com, where you will find a copy of the fourth quarter and fiscal year 2014 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 fourth quarter and fiscal year 2014 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Evensen to begin.

Thank you, Scott. Good morning, everyone, and thank you for joining us today for Teekay Corporation's fourth quarter and annual 2014 earnings call. I'm joined this morning by our CFO, Vince Lok; and for the Q&A session, we also have our Group Controller, Brian Fortier. During our call today, we will be taking you through the earnings presentation, which can be found on our website. Beginning on Slide 3 of the presentation, I will briefly review some recent highlights for Teekay Corporation. For the fourth quarter of 2014, Teekay Corporation generated $308 million of total consolidated cash flow from vessel operations or CFVO, an increase of 25% over the same period of the prior year. For fiscal year 2014, our consolidated CFVO has now grown to over $1 billion. Teekay Corporation reported consolidated adjusted net income of $30.7 million or $0.42 per share for the fourth quarter of 2014 compared to $1.1 million or $0.02 per share in the same period of the prior year. While I am pleased with the improvement, which is mainly due to profitable growth projects and stronger spot tanker rates, it would've been significantly higher if we had, had higher utilization on the 100% owned Foinaven FPSO throughout the year, as well as a higher oil tariff revenue on the Hummingbird Spirit FPSO. On a full year basis, Teekay Corporation generated adjusted net income of $1.5 million or $0.02 per share compared to a consolidated net loss of $79.9 million or $1.12 per share for fiscal 2013. This is our first full year profit since 2008, and with Teekay at an inflection point in its operational performance, I look forward to building on this result in future years as a result of more growth projects starting up and higher utilization on our FPSOs, including having the Banff FPSO back and operating for full year. Since reporting our third quarter results in November, we've continued to make steady progress on Teekay Parent's strategic transformation into a pure-play general partner. In December, after successfully recontracting our oldest FPSO, the 1986 build Petrojarl I, the unit was sold to Teekay Offshore Partners for $57 million. Teekay Offshore will upgrade the unit, which will then commence a 5-year contract in Brazil in the first half of 2016. In December, Teekay Offshore Partners agreed to acquire the Petrojarl Knarr FPSO from Teekay Parent for a fully built-up cost of approximately $1.2 billion. We expect to complete the sale of the Knarr FPSO to Teekay Offshore by the end of the first quarter following the achievement of First Oil and commencement of the unit's charter contract with BG. We remain committed to the new Teekay Parent dividend policy that we announced in late September, which we anticipate will take effect in the second quarter of 2015, following the completion of the sale of the Knarr FPSO to Teekay Offshore. Based on the dividend cash flows Teekay Parent receives from its starter entities, we intend to increase Teekay's annualized cash dividend to between $2.20 and $2.30 per share, which represents an increase of approximately 75% to 80%. In addition, with our existing project backlog of approximately $7 billion of known growth projects at our 2 MLPs, Teekay Corporation's dividend should continue to grow from the new higher base as our MLPs increase their distributions as those projects deliver over the next few years. Turning to Slide 4. I will review some recent highlights from our 3 publicly traded daughter entities. For the fourth quarter, Teekay LNG Partners declared a cash distribution of $0.70 per unit, an increase of 1.2% from the previous quarter. Based on our GP and LP ownership interest in TGP, the cash flows received by Teekay Parent totaled $26.3 million for the quarter. In early December, Teekay LNG secured time-charter contracts with a wholly-owned subsidiary of Royal Dutch Shell for 5 new build MEGI LNG carriers. The vessels will operate as part of Shell's global LNG fleet under time-charters ranging in duration from 6 to 8 years plus extension options. Delivery of the vessels will commence in the second half of 2017 and continue into 2018. In order to fulfill our commitment to Shell, Teekay LNG exercised its remaining options with DSME shipyard for the construction of 3 additional MEGI LNG carrier newbuildings. In February, a new contract was signed with DSME for 1 additional MEGI LNG carrier, and this order included options for 4 additional LNG newbuildings. This contract was entered into because Teekay LNG continues to seek customer requirements for MEGI LNG vessels and need ships to bid on these requirements. Teekay LNG's total investment for the 4 newbuildings ordered in December and February is approximately $850 million. In November, Teekay LNG Partners agreed to acquire a 2003 built LPG carrier, the Norgas Napa, from IM Skaugen along with a 5-year charter back to Skaugen at a fixed rate plus potential upside through a profit sharing component. In January, Teekay LNG Partners LPG joint venture with Exmar took delivery of the fourth of its 12 midsized LPG carrier newbuildings as part of that joint venture's fleet renewal and growth strategy. Looking at the results for our other MLP for the fourth quarter. Teekay Offshore Partners declared a cash distribution of $0.5384 per unit. Based on our GP and LP ownership interest in TOO, the cash flows received by Teekay Parent totaled $18.1 million for the quarter. During the quarter, Teekay Offshore continued to secure growth in both its offshore production and offshore logistics businesses. As I noted a moment ago, in December, Teekay Offshore acquired the Petrojarl I FPSO unit from Teekay Parent. The unit is currently undergoing upgrades at the Damen Shipyard in the Netherlands for a total cost of $235 million, including the $57 million cost to acquire the unit. The upgraded Petrojarl I FPSO will be used as an early production system on the Atlanta field in the Santos Basin offshore Brazil for a consortium led by QGEP commencing in the first half of 2016. In January, Teekay Offshore, through its 50-50 joint venture with Odebrecht Oil and Gas finalized a contract with Petrobras and its international partners to provide an early well test FPSO unit for the Libra pre-salt oil field in the Santos Basin. The FPSO will be converted from an existing Teekay Offshore shuttle tanker for a fully built-up cost of approximately $1 billion on a 100% basis. The unit is expected to commence operations under a 12-year fixed fee based contract in early 2017. This will be the second FPSO project for Teekay Offshore Partners joint venture with Odebrecht. Finally, in November, Teekay Offshore's wholly-owned subsidiary, ALP Maritime, agreed to acquire 6 long distance towing and anchor handling vessels for an en bloc price of approximately $220 million. This acquisition, combined with ALP's 4 existing newbuildings, is strategically important as it positions ALP as the clear leader in the long distance dynamically positioned towage segment with a fleet of 10 vessels. The acquisition provides ALP with greater scale to bid on a broad range of projects and a larger presence in the growing global Ocean Towage and offshore installation market. Moving onto Teekay Tankers. In the fourth quarter, the company declared a fixed dividend of $0.03 per share. Based on its total ownership of Class A and Class B shares, Teekay Parent received a cash dividend of approximately $900,000. Teekay Tankers generated free cash flow of $0.35 per share in the fourth quarter of 2014, a 192% increase from the same period of the prior year, mainly due to an expanded in-charter fleet and higher average realized spot tanker rates. In December, Teekay Tankers agreed to acquire 4 LR2 product tankers and 1 Aframax tanker from third parties for an aggregate price of approximately $230 million. The acquired vessels, 2 of which have already delivered and 3 of which will deliver by the end of the first quarter, further increases Teekay Tankers' operating leverage to the strengthening tanker market while the LR2 vessels also provide the flexibility to trade in crude or product tanker markets. Teekay Tankers also continued to be commercially active during the fourth quarter, securing 3 additional in-charter Aframax tanker contracts, which brings Teekay Tankers' chartered in-fleet to a total of 11 vessels. The 11 charter in contracts have a low average daily rate of 16,700 and initial firm contracts of between 6 and 33 months with extension options. During the quarter, crude tanker rates reached the highest level in 6 years supported by a combination of seasonal factors and increased tanker demand as a result of low oil prices. Rates have remained firm in the first quarter of 2015 as these positive demand drivers remain in place, augmented by the emergence of floating storage with more than 30 VLCCs booked on time-charter with storage options since the beginning of the year. Turning to Slide 5, I will take a moment to update you on the status of the remaining FPSO assets at Teekay Parent. I noted that we had completed the dropdown sale of the Petrojarl I FPSO. This transaction highlights a shift in how FPSO projects are being managed within the Teekay group. Whereas in the past, we would have warehoused this project at Teekay Corporation and dropped down just as the unit was starting under its contract, Teekay Offshore now has sufficient size and balance sheet to warehouse this type of project on its own. We are also within a few weeks of completing the dropdown of the Knarr FPSO, our largest FPSO project to date for a fully built-up cost of approximately $1.2 billion. The Knarr FPSO is in the final stages of its field installation and its dropdown sale to Teekay Offshore will be completed following completion of the unit's 72-hour interim production test, which is expected to be completed in March. Following the Knarr dropdown, we will have 3 remaining legacy FPSOs, which we're targeting to drop down by 2017. The Petrojarl Banff FPSO returned from off hire in July 2014 and following repairs from storm damage incurred in late 2011. In January, the Banff commenced a charter rate uplift under its existing multiyear contract, which makes this unit now eligible for dropdown under our omnibus agreement with Teekay Offshore. We expect to offer the Banff for dropdown sometime during 2015 after the Knarr FPSO dropdown has been completed. The Hummingbird Spirit FPSO is currently operating under a firm contract with Centrica until March of 2016, with options under the current contract which runs through March of 2017. The existing charter is too short to qualify for dropdown eligibility under the Omnibus Agreement, however, we're currently reviewing new contract opportunities for the Hummingbird Spirit following the expiry of the current charter. Once we found a new long-term contract, the Hummingbird will become eligible for dropdown. And finally, we have the Petrojarl Foinaven FPSO, which is currently operating under an evergreen contract with BP, however, subsea issues on the field are currently requiring the Foinaven to produce below maximum capacity. We are currently working with BP to stabilize and increase production on the field and obtain approval to transfer ownership to Teekay Offshore. Once this has been achieved, the Foinaven FPSO will also become eligible for dropdown. With Teekay Corporation's new dividend policy linked to future growth of its daughter entities, the dropdown of the remaining Teekay Parent legacy FPSO assets will be an important driver of future dividend growth. And with that, I'll turn the call over to Vince to discuss the company's financial results.

Thanks, Peter, and good morning, everyone. Starting with Slide 6. This provides an overview of our consolidated results for the quarter comparing the adjusted income statements for the fourth quarter of 2014 and the third quarter of 2014, both of which exclude the items listed in Appendix A to our earnings release. A full reconciliation of adjusted net income to GAAP net income can be found in both Appendix A of our earnings release and the appendix to this presentation. Looking at the bottom line. We had a better than expected fourth quarter reporting a consolidated adjusted net income of $30.7 million or $0.42 per share compared to Q3's adjusted net loss of $12.6 million or $0.17 per share. The fourth quarter income more than offset the losses we had in the first 3 quarters of the year, resulting in a positive adjusted net income of $1.5 million for fiscal year 2014. The main factors contributing to the fourth quarter results include the incremental revenues from our Foinaven FPSO contract related to annual recognition of operational and oil price tariff revenue, typically recognized in the fourth quarter of each year. Higher average spot tanker rates earned by our conventional tanker fleet, lower repairs and maintenance costs for our FPSO fleet and income tax recoveries recognized in Q4. Now turning to Slide 7. We have provided some guidance on our consolidated financial results for the first quarter of 2015. Revenues from the fixed-rate fleet are expected to increase from the following: A $20 million increase from the Knarr FPSO, assuming finalization of the commissioning process by March 1; a $4 million increase from the rate reset on the Banff FPSO effective January 1, 2015; and a $2 million increase from the delivery of 3 Ocean Towage vessels assuming March 1 deliveries. These increases are offset by a $20 million decrease from the annual revenue true-up for the Foinaven FPSO recognized in the fourth quarter, which I mentioned earlier; a $14 million decrease from the expiration of time-charter out contracts for 1 shuttle tanker and 5 conventional tankers. The conventional tankers have been redeployed to the spot market at higher rates, which I will discuss shortly; an $8 million decrease from the remaining FPSOs due to incentive-based revenues recognized in Q4; a $4 million decrease from COA days in the shuttle tanker fleet; and a $2 million decrease from lower time-charter outrates on the Polar Spirit and Arctic Spirit LNG carriers. Spot revenue days are expected to increase by 540 days due to additional in-charters in TNK and time-charter contract expiration that I mentioned earlier. So far in Q1, we have fixed approximately 60% of our spot Aframax and Suezmax revenue days at average TCE rates of $30,000 a day and $39,000 per day, respectively, which are materially higher than the Q4 comparative amounts. Overall, vessel operating expenses are expected to increase by approximately $7 million due to the Knarr FPSO and the Ocean Towage vessels commencing operations and higher expected repairs and maintenance for our remaining FPSOs. Time-charter hire expense is expected to increase slightly by about $1 million in Q1, reflecting the additional in-charter conventional tankers in TNK. Depreciation and amortization is expected to increase by $5 million related to the Knarr FPSO, the Ocean Towage vessels and TNK's vessel acquisitions, partially offset by lower depreciation on the Petrojarl I FPSO. We expect G&A to increase by $4 million to $5 million in the first quarter due to certain stock compensation expense that is recognized annually in the first quarter of each year. Net interest expense for Q1 is expected to remain consistent with Q4 as increases related to the Knarr FPSO and Ocean Towage vessels are partially offset by lower interest costs as a result of the fourth quarter refinancing of the RasGas 2 LNG carriers in TGP. Equity income is expected to remain consistent with Q4. Income tax expense is expected to be approximately $2 million in Q1. Noncontrolling interest expense is expected to be between $71 million and $73 million in Q1, primarily as a result of Q4 equity issuances in TNK and TOO, higher expected earnings in TNK from stronger spot tanker rates, partially offset by lower expected earnings in TOO. Turning to Slide 8. We have provided a comparative summary of Teekay Parent's Q4 and Q3 free cash flow. Our total free cash flow is separated into the OPCO cash flows of Teekay Parent's legacy operating assets and the GPCO cash flows comprised of the dividend payments from our daughter entities, which provide the basis for future dividend increases under our new dividend policy. In Q4, OPCO cash flow improved by over $28 million compared to Q3, primarily due to the incremental fourth quarter revenues from our Foinaven FPSO contract mentioned earlier and improved spot tanker rates. GPCO cash flow increased due to higher GP distributions following share issuances by TOO and TGP in Q4, higher dividends from TNK as a result of Teekay Parent acquiring 4.2 million shares as part of TNK's equity offering in Q4 and lower corporate G&A. Our corporate G&A is currently running below the annual run rate guidance of approximately $20 million per year. As a result of the above, total Teekay Parent free cash flow per share increased from $0.21 per share in Q3 to $0.62 per share in Q4, which is well above our current quarterly dividend of about $0.32 per share. Looking ahead into 2015. We expect our GPCO cash flows to increase shortly after the dropdown of the Knarr FPSO into TOO. The Knarr dropdown will also significantly delever Teekay Parent's balance sheet. As a result, we remain committed to our new dividend policy that we announced last September. We are still targeting an initial dividend amount of $2.20 to $2.30 per share in the quarter following the Knarr dropdown with future increases linked to increases in distributions received from our daughter entities. With that, I'll turn the call back to Peter to conclude.

Thank you, Vince. Turning to Slide 9. With the recent decline in the oil price creating concern for investors, I wanted to take a moment to highlight Teekay's strong and diversified portfolio of fee-based contract revenues focused on the production side of the energy supply chain. With an unrivaled backlog of over $20 billion of forward fee-based revenues, our Offshore and Gas business continues to generate stable and predictable cash flows from a wide cross-section of blue chip customers. Each of our major business lines has an average remaining contract tenure, which will provide downside cash flow protection and stability for many years. Turning to Slide 10. We've provided an update of our visible growth pipeline, which is now comprised of approximately $7.2 billion of accretive projects, including approximately $2 billion of new projects secured during the fourth quarter of 2014 across our 2 MLPs and Teekay Tankers. With both of our GPs in the 50% incentive distribution rights stage, this growth will be a key driver of future distribution increases at Teekay Corporation once our new dividend policy is implemented. While we have locked in growth for the next few years, we will likely see our organic project growth be lower in 2019 and beyond because of the oil price decline as our customers take a wait-and-see approach on many projects. At this stage, we believe most of the new projects that we are discussing with our customers and on our internal radar screen for 2019 and beyond will go ahead but be delayed as customers wait for clarity on oil prices and work with suppliers to lower costs. It should also be remembered that much of the cost for finding the oil offshore has already been incurred on these projects. So on these projects, we are working on known reservoirs. The oil price decline may be a V shape or a U shape but the depletion rate on existing production will continue while oil demand increases. So we believe any interruption in oil production growth will mean that the oil prices will ultimately be higher than today. As far as our strategy is concerned, should the oil price decline turn out to be protracted and result in fewer new organic project opportunities, we will probably supplement our growth with the acquisition of on-the-water assets with contracts as Teekay has done in the past, but that is well in the future. And for now we will concentrate on operating efficiently and executing on our $7 billion project pipeline that will support growth in both the distributions at our MLPs and in turn, drive additional dividend growth for Teekay Corporation for the next few years. Thank you for joining us on the call today. And operator, we are now ready to take questions.

[Operator Instructions] The first question is from Michael Webber from Wells Fargo.

I just wanted to start off with -- to make sure I'm clear around the dividends and the guidance. I know you guys have mentioned and you've been mentioning since the Investor Day that the bump in the dividend is tied to acceptance testing and completion of the Knarr. And you're talking to the following or subsequent quarter having that dividend increase. The right way to read that would be if the acceptance testing is completed in the back half of Q1 that we'd be looking at a Q2 table increase in the Teekay Parent distribution?

Yes. I guess if we're looking at a March dropdown into TOO of the Knarr, then effectively, most of the cash flows are really kicking into -- in the second quarter, which will allow TOO to increase its second quarter distribution, which is paid, I guess, in August. So that's the effective timing. That flows up to the parent, of course, with the same timing.

So the flow-through to the parent distribution bump would then be in August?

That's correct. Well, I guess, parent is usually paid in July.

Okay, okay. I guess move to the guidance. And Peter, your remarks at the end were pretty helpful in terms of the way you think about the out years in terms of growth and the new oil environment and being able to augment organic growth consolidation. I guess just for simplicity sake, the guidance you guys gave in the Q3 Investor Day, 20% CAGR for a 3-year period and then kind of needing to fill up the bucket beyond that, that's still in place at this point within the current environment. Correct?

That's right. And let me just add on to that. That's because we have this forward look with all the $7 billion of projects. So just to reiterate what I said, we're really thinking about what are the projects that are going to come in 2019 and beyond. And that's what we're sitting there looking at. And that's the effect on Teekay of the oil price decline.

Got you, okay. And along those lines, you get the Libra that you just finalized in one of your primary markets in Brazilian and, obviously, Petrobras, a major counterparty and they've been in the news quite a bit with the bribery scandal, FSO Odebrecht who's involved with -- in your JV. One, I'm just curious what readthrough, if any, if there's been any risk actually working its way up to that JV with Odebrecht? And then two, which I would imagine is a longer answer, whether or not what's happening now in that Brazilian market leads you to look at other markets maybe Asian market as a bigger center of forward growth?

Sure. So we have a joint venture with Odebrecht Oil and Gas. Odebrecht Oil and Gas is a division of Odebrecht and it's a separate division from Odebrecht that has been implicated in the Petrobras carwash scandal. So we have checked in our joint venture. We can continue to bid, but Teekay would front the bid, if you will. So we've checked that with Petrobras, and we are able to bid on those -- on new projects. We're not locked out as some of our competitors are. In terms of Brazil, overall, we think that they have an active pace. We -- they are some of the customers we have forward look on what kind of projects are coming. What I like about our position in Brazil is we're not bidding on the really big pre-salt fields. We're bidding on a lot of the smaller fields, where they know the reservoirs are there and the breakeven price of putting those fields into production is far less than what you have on the pre-salt. So we think a lot of those projects will go ahead but not in the same timeframe that Petrobras had going forward. So we anticipate bidding on Petrobras projects but there won't be as many of those projects. But I think the way we like it with smaller Aframax and Suezmax conversions of projects which set up well like the Libra, we think that there will still be projects there. As far as moving to other places, that isn't on our radar screen right now. We have a good market in the North Sea. We have a good market in Brazil. And what I'm watching in the North Sea is our customers figuring out how can we do things cheaper. And that actually sets up quite well for some of our existing FPSO units like the Hummingbird coming off contract because those are the kinds of projects where they can use a cheaper unit rather than a newbuild. So there is some light here in -- at the end of this oil price decline tunnel.

Okay. That's helpful. Just one more for me and I'll turn it over. I'll save high load [ph] for the [indiscernible] call tomorrow. But -- all right, you mentioned actually just now and in your prepared remarks around opportunities and consolidation playing potentially a bigger role and kind of turning that 3-year CAGR into a 5- or 6-year CAGR. I'm just curious, when you look at around the offshore space, you mentioned some of your competitors getting locked out of bids now or in the LNG space either with larger scale FSRU or LNG carrier businesses. Where do you see the most opportunity from a consolidation standpoint? And then do you think that's more of a 2015 event? Or are we going to see more of an opportunity a bit later on for all around 2016, 2017 when the balance sheet aspects are to shake up?

The latter. I see the good opportunities coming in 2016, 2017 and that sets up quite well with our project pipeline. I think everything has happened so fast in the last, call it, 4, 5 months. So I think there really isn't the opportunity to do what I would call good M&A from our point of view. So we're going just execute on our existing pipeline, and I don't expect you'll see much M&A. We get asked on a lot of projects, but I think the consolidation, which will happen, will take longer than everyone envisions.

And the next question is from Gregory Lewis of Crédit Suisse. Gregory Lewis - Crédit Suisse AG, Research Division: Peter, you touched on the issues in Brazil. I guess just more of a bigger picture question as it pertains across all of the assets that are on fixed rate fee business. Have you -- have customers started -- approach you about potential price concessions or discounts in the near- or medium-term for some of these long and dated contracts? And then on the flip side of that, as you're building out some of this equipment, have you then in turn gone to any of your equipment providers and started to look for discounts from them?

Sure. I think there's going to be continued pressure on the supply chain going forward. What I like about Teekay is that we're in the production side of things. So Teekay has always had long-term contracts. We never had the huge upswings that came on the drilling side and now of course, the huge downswings. We're more of a steady Eddie. So we are always in conversations with our customers and they are going around to all their suppliers and saying, what can you do to lower our costs? So we're working with our customers to try to work together to lower their costs and then be able to pass that on. But we're not in active discussions, as you've seen on the drilling side, to just cut by 20%. That isn't how oil companies work with people who are inside their logistics chain, especially on the production end. And the kind of cash flow we put together, they need our assets in order to be able to produce oil and get cash flow. So that puts us in a different position than, say, a drilling rig contractor. Gregory Lewis - Crédit Suisse AG, Research Division: Okay, great. And then just -- and thinking about the dropdowns from Teekay to TOO. What types of financing should we be thinking about to get these done? Just -- I mean as we look at TOO right now the yield is a little bit high, arguably too high at 10%. But what types of alternatives does Teekay have to execute these dropdowns in 2015 in the event that TOO's yield stays in the 10% range?

AS you know with the Petrojarl Knarr, Teekay Corp. has agreed to provide vendor financing given that, that outfit is fully financed. We have the flexibility to offer that to TOO. So we don't need to issue any equity in the near term for the Knarr. Of course, we'll monitor the markets over the course of the year. Teekay Corp. has also agreed to take back up of $200 million of TOO units as part of that dropdown, so that certainly facilitates that dropdown. In terms of the other assets, the Banff, I guess, is sort of next on the lineup. That's a relatively small asset, so we don't see that as a big financing requirement. It has dedicated debt facilities as well that would go with the dropdown. So you're looking at a relatively small equity slug for that. So I think... Gregory Lewis - Crédit Suisse AG, Research Division: And that sounds like something where push comes to shove, Teekay could just provide that capital?

We can provide that capital or we could also take some units back as well similar to the Knarr dropdown. But I guess if you look more longer term out, we really believe that TOO units will normalize at some point given where it's trading and as well as the fact that the distribution increases will be coming shortly after the Knarr dropdown.

And the next question is from Amit Mehrotra from Deutsche Bank.

Just had a question on the longer-term outlook. You mentioned your contracts, much of the upfront costs had already been incurred and basically effectively sunk. And that makes sense given the longer lead times. But can you just help us with respect to what percentage of future products have -- projects have already incurred significant costs where by the cash on cash return analysis sort of still makes sense in the current oil price environment? And just help us better understand sort of the sustainability of the cash flow streams beyond the existing contract duration.

Do you mean on existing contracts? Or do you mean on new projects?

On new projects.

Yes. I wish I could give you a marker on it but the reality is that each oil field is different. And so what we're seeing is that the -- well, let's take the Petrojarl I FPSO. So that was a project where our unit was the best unit that could come online. They could -- the -- QGEP could have used a newbuild, and we were completing up against newbuilds. But the Petrojarl I could come in at a much lower breakeven price. Maybe closer to like $30. And so therefore it was a very easy decision as far as we saw it because that was a chance for them to get cash flow much faster, and it would ultimately enhance the value of that oil field. So these early well test ships, I think, sets us up quite well for the replacement value of our existing assets. And so -- but I would stress that beyond all of the new projects, irregardless of whether they have low breakeven, people are looking for how they can become more efficient. And I think that's where -- what we as suppliers have to do in order to get more projects and enhance assets. Obviously, the easiest way is that we have cheaper assets that we can reemploy and use the whole production. On our existing contracts, they have low breakeven especially on a marginal cost basis. So we don't see them terminating early on a lot of those fields because as you pointed out, a lot of money has been spent upfront and then they have lower marginal costs. So what we see playing out is actually an opportunity for Teekay especially with our existing assets. But if we with our, for example, Sevan unit on the newbuilding side can deliver cheaper capital costs, then I think we'll get an advantage in new projects going forward. And that's why we're exploiting some of the intellectual property we have like this Sevan design.

Okay. That's really helpful. If I can just sort of follow up on that. If we were to fast forward, say 4, 5, 6 years, maybe if the oil price whether it's a U or V, but let's assume it's a U for now. You might see sort of that come into the cash flows of the business, 4, 5, 6 years from now and then you might be able to backfill with acquisitions like you said earlier. I mean is that sort of the thinking where you think beyond the existing contract duration, you'd still, given the balance sheet, given the existing duration of the contracts, you'd still be able to maintain the distribution even beyond sort of the existing duration?

Well, okay, so now you're asking for a crystal ball going forward 5 or 6 years. I think that's a pretty hard stretch. Here's what I think will happen. Teekay will be able to adapt to the environment that we have and we have shown that. And so we're not reliant exclusively on FPSOs. We're not -- we have moved ourselves into various places of the offshore chain. There are still going to be billions of dollars spent. So those billions are going to go to the suppliers who have the best service offering, and that's what we're stressing on a longer-term time frame. So that has to do with our units, that has to do with our operations and that's why we're not looking -- we are looking to become much more efficient as we have going forward. I think oil demand -- everyone always forgets that oil demand is going to continue to increase. This is -- this point just seems to be lost on people and even the new BP outlook that came out this week points that out. And so as I was trying to say in my prepared remarks, we have to replace a lot of the oil that's going to deplete going forward. And that is basically involved in being able to produce oil at a competitive price. Our FPSOs on a per barrel basis are the solution that can make that happen. And obviously, the rest of the supplier network will also look to how it can become more efficient.

Got it. Okay I think that's great color. Just one last sort of housekeeping question with respect to the deleveraging of Teekay Parent following the Knarr dropdown. Just trying to get a little bit more clear on the magnitude of the deleveraging because I guess the $850 million facility will drop down with it. And so you're left with $400 million to $354 million. I mean is -- I would say the majority of the sales price of $1.2 billion would be reflected in the deleveraging. Is that safe to say?

That's correct except for the portion that the parent takes back in TOO units which is about $200 million and the rest would be delevering the parent balance sheet.

I would just add that I think it's great that Teekay as a sponsor can help TOO with its dropdown financing.

And the next question is from Darren Horowitz from Raymond James. Darren Horowitz - Raymond James & Associates, Inc., Research Division: Peter, a couple of quick questions. The first one actually dovetails with what we were just talking about with regard to financing structure. I want to make sure I'm thinking about this the right way. I think at the Analyst Day, you had laid out that from an annual investment capacity, the daughter MLP, TGP and TOO, respectively, could have anywhere around 60% or 65% debt capacity and let's just say we assume per Vince's comments that the $400 million of short-term vendor financing reflects a 6% or 6.5% yield. That's -- it's meaningfully inside of the existing equity yields, and I'm wondering going forward beyond the Banff, has there been a shift from a financing structure perspective where you think maybe vendor financing, if you will, corporate vendor driven financing becomes more of an integral part of the overall financing mix so that, that way on a lever basis, you achieve the types of returns that you need in order to get that Teekay dividend growth on a multiyear period?

I would say that the vendor financing is a short-term fix. Ultimately, we will do better if TOO issues units. Obviously, as Vince was saying in the Q&A, we think the TOO price will normalize as it's yielding, call it around 10% now, and we're going to increase the distribution as it relates to the Knarr. But from Teekay's point of view, we think Teekay Offshore is a good investment. So that's something that we take into account when we're looking at it. But I think that we will find our way through this in the same way that it was in '09. I always like to tell the story how I saw our 2 MLPs go from the low 30s down to 10 or 11 in the financial crisis, and our EBITDA didn't change by $1.00. Ultimately, they recovered as people saw the stability of our fixed rates cash flows and I think the same thing will happen here albeit that we don't have a financial crisis but we do have the energy industry, which is going into recession. So I think the ability of the sponsor to be able to do the right thing as it relates to the long-term capital structure of our 2 MLPs is a real competitive advantage. Darren Horowitz - Raymond James & Associates, Inc., Research Division: In order for you guys to hit that 20% compound growth rate through 2017 and the Teekay Corp. dividend, has there been any shift to the associated coverage that you want to run at Teekay? I think when you had laid out the guidance, it was a 1175 type coverage plus or minus and you had run through an upside case where you could minimize that coverage in order to achieve greater dividend growth. But obviously in today's market based on where your cost of capital is and financing mix, it's a little bit different. So I'm just wondering is that still the target in terms of coverage? Might you run a little bit lower on the coverage side since you have visibility on those associated FPSO cash flows? Any additional color there will be helpful.

Yes, Darren. I think as of now we're still targeting that range of 115 to 120. I think if you look out over the near term and the medium term that certainly is our target. I think when you look at the fact that our cash flows are going to continue to grow based on the committed projects we have over the next few years, that gives us good visibility. The only thing would be perhaps with the low oil price. Obviously the Foinaven cash flows are lower because of the oil price tariff in the near term. But of course, as the oil price recovers, we expect that to normalize over time as well. Darren Horowitz - Raymond James & Associates, Inc., Research Division: Okay. And then last question for me. Just from a growth perspective. When we start thinking about floating regas and incremental demand for FSRU projects and also point-to-point long-haul ethane exports out of the Gulf Coast, obviously, again the commodity mortgage changed. I think with regard to FSRUs, you had speculated that they were somewhere around $3 billion to $5 billion of projects over the next 5 years. Number one, I'm wondering if that's still the case or how that market has changed with regard to supply/demand dynamics? Second, from an ethane export perspective, if we're in a period of lower crude oil prices for longer, and the heavier ends of the NGL barrel get more competitive from a margin per ethylene production perspective or even naphtha and gas, oil get more competitive, how does that change the market for VLECs or midsize carriers over the next few years to move ethane?

So a lot of questions there. Let me look at -- talk about LNG before I talk about the submarket. I've actually been really happily surprised that the LNG market has stayed so strong. And when we look at -- and that's based on what our customers need for existing LNG liquefaction projects out through 2019. And that's what got us excited about ordering 1 more LNG carrier and needing more -- 4 more for the point-to-point traffic because we're going to need those ships for the tenders that are coming up. We can see at least 20 -- the requirement for at least 20 ships in 2018-2019 time frame. So the Shell deal basically got us sold out. And we needed some more inventory in order to be able to bid on projects. I think it's been a key advantage that we had existing vessels that we could show people especially, obviously, the MEGI technology, which is really kind of becoming the de facto standard. As it relates to the ethane markets, which we're working on in our LPG joint venture with Exmar, I think that has slowed down. The amount of requirements that we see there is quite clearly that people are reevaluating what the feedstock prices are. Obviously, that would help us in our tanker side if we had more naphtha moving rather than ethane. But I can immediately see that with the lower prices going down, people aren't immediately going to ethane. They're looking at LNG, which is more oil price linked. They're looking at staying with fuel oil but there are certainly pockets that we see particularly in Asia in places like China, India, Indonesia where they are quickly moving over to being more gas-centric for their electricity generation. And that's where a lot of the different opportunities that we see on regas are going to be coming in. So the -- if you will, the pricing power has moved over to the buyers of LNG and other gas projects rather than the sellers. So everyone sits and talks about, well, will this liquefaction project go up. But ultimately, we are seeing in terms of our customers, a lot of need for regas projects because suddenly, if you're in a foreign country, you can afford LNG. Whereas before, it was a little problematic whether you could afford it. So I'm much more optimistic about our ability on the LPG and the LNG to find good long-term projects.

And the next question is from Fotis Giannakoulis from Morgan Stanley.

I want to ask you about your dividend forecast and what are the risks on this dividend forecast on your target of -- the growth target that you set up back in September given the difference in prices of the MLPs. How much is dependent on the ability of the MLPs to raise the equity at a certain price and how much can be funded? And if you can give us an estimate of what is the capital that these MLPs they need to raise in order to allow you to do -- increase your dividend after your target level?

Fotis, I guess you're referring back to our Investor Day materials, which was an illustrative case that we provided. If you look at -- again, if you look at the projects that we have that are already committed on Slide 10 of our presentation, those, of course, are built -- that's built-in growth for us. In terms of the unit prices, of course, having a lower unit price in TOO right now hurts the accretion of some of those projects for TOO. It's not so much for TGP at this point. And that's part of the reason why we're -- we've been holding off issuing equity in TOO and financing the Knarr with vendor financing until things normalize a bit. I guess when you look at from -- the parent perspective, if you look at the Knarr, for example, even though the accretion may be a little bit lower for the parent, it's partially offset by the fact that we're taking back units, perhaps at a lower unit price than we would have. So we're getting actually more LP units and more GP units which offsets that accretion. So from the Parent's perspective, there is a mitigant there. Again, we think that the unit price for TOO will normalize over time and especially given the accretive nature of these projects, they will add to the distributable cash flow of TOO over the next few years.

And may I follow up on that and let's assume that the price of TOO stays the same. Is there a possibility or sort of potentially some of the projects that they are destined for TOO to be funded directly by Teekay? And would a scenario like that allow the dividend to grow to $0.20 to $0.30 per share?

No, that is not our plan. These projects are done directly at the daughter company level. So there's no plans for the parent to do any of the warehousing. A lot of these projects, especially during the construction phase, we have very tail-heavy payments with the shipyards. We had a lot of time to finance the construction payments. There's a good portion of those that are financed actually with debt facilities and with low interest rates and debt margins coming down that's also an offset to the higher equity costs. So we layer in the equity cost over time and so it's sort of an averaging in. So I think in the grand scheme of things, it doesn't have a huge impact in the long term.

I actually think that's a great point, Vince, that the cost of our debt financing has actually been dropping. And that has made up for, if you will, the higher cost of the equity side. So when you balance that out, actually, our cost of capital has been dropping. We just went around with our bankers and I would say our bankers really like our fixed rate contract cash flow, and so we're quite optimistic about that.

That's very helpful. And one last question about the TIL. Are there any different thoughts about the future of this investment and the strategic role of TIL and I'm talking about potential floating to the U.S. or merger with TNK?

Well, I think you have to really ask the management of TIL. We're just shareholder in TIL. So I'm going to defer that question. You can call up Will Hung and Scott Gayton and ask that. We're just a shareholder.

[Operator Instructions] And the next question is from TJ Schultz from RBC Capital.

Most everything I had was answered. Just I guess one thing. If you can just give or do you have a rationale to keep that close to 1x, 2x coverage at the GP? Or is it fair to assume that this comes down over time? And then if this is a function of getting the rest of the FPSOs into the MLP, I noticed you pushed the kind of FPSO dropdown window into 2017, which really deals with the Foinaven and Hummingbird, I assume. So if you could just give any more color on those discussions to get those into the MLP?

I'll take the first -- or I'll take the second part and then I'll give it over to Vince. I think we wanted to give people -- or we wanted to give ourselves a little bit more runway room in order to make sure we get the best contract on the Hummingbird, and that's why we moved it more to 2017. But I mean the good news from Investor Day is that we got a contract from the Petrojarl I. So that one dropped down earlier than what people said. I intend to recommend to the board that we drop down these units as quickly as possible, and I think the faster we can become a pure-play GP, the better it'll be for our investors going forward. And of course, when we drop it down, we get the accretion which helps the dividend going forward. So it was just really trying to give ourselves a little bit more runway. I don't think we've actually changed our plans. It just gives people -- well, it just gives us more runway. And then I'll give it over to Vince.

In terms of the coverage ratio, just as a reminder, the coverage ratio that we apply, which 1.15 to 1.2 is on the GP cash flows. And so that is intended to act as a buffer against any variability in the OPCO cash flows. And so I guess the coverage ratio is meant to cover things like variability on the Foinaven oil price revenues. So that's something we'll have to monitor over the next several quarters. The good thing there is that that's partially offset by the higher spot tanker rates that we're experiencing given that we still do have some spot assets of the parent company. That's acting as an offset. But over time, you're right, as we drop down the remaining assets of the parent, as Peter laid out, that will allow us to lower that target coverage ratio over time as we reduce the OPCO assets.

There are no further questions at this time. Please continue.

All right. Thank you, all, very much. We look forward to reporting back to you next quarter on our progress.