Teekay Corporation (TK) Q4 2016 Earnings Report, Transcript and Summary

Welcome to Teekay Corporation Fourth Quarter and Fiscal 2016 Earnings Results Conference Call. [Operator Instructions]. Now for opening remarks and introductions I would like to turn the call over to Mr. Kenneth Hvid, Teekay's President and Chief Executive Officer. Please go ahead .

Before Mr. Hvid begins I would like to direct all participants to our website at www.teekay.com where you will find a copy of the fourth quarter of 2016 earnings presentation. Mr. Hvid will review this presentation during today's conference call. Please allow me to remind you that our discussion today contains forward-looking statements. Actual result may differ materially from results projected by these forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the fourth quarter 2016 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Hvid to begin.

Thank you, Ryan. Hello everyone and thank you for joining us today for Teekay Corporation's fourth quarter 2016 investor conference call. I'm joined this morning on what will be my first Teekay quarterly conference call by our CFO, Vince Lok. During our call today we will taking you through the earnings presentation which can be found on our website. Turning to slide three of the presentation, I would briefly review some recent highlights for Teekay Corporation. During the first quarter we generated consolidated cash flow from vessel operations or CFVO of approximately $290 million. Teekay's gas and tanker businesses performed in-line with our expectations in the fourth of 2016. However, the results from our offshore business were affected by certain events which included an operational incident in November 2016 relating to Teekay's offshore's [indiscernible] spirit UMS and related suspension of the Charter higher revenue since that time. As [indiscernible] highlighted on yesterday's Teekay offshore earnings call we have maintained an ongoing dialogue Petrobar and our main priority is to address their concerns and return the unit to operation as soon as possible. While Q4 2016 was a challenging quarter on the offshore front we have made good progress on cost saving initiatives throughout the year. For instance daily operating expenses for FPSO fleet have declined approximately 18% and our consolidated G&A expenses decreased by approximately 16% in 2016 compared to the prior year. Teekay Corporation reported a consolidated adjusted net loss of approximately $19 million or $0.22 per share in the first quarter of 2016 and we declared a cash dividend of $0.0550 [ph] per share consistent with the previous quarter's dividend. Since reporting earnings in November 2016 we have seen the oil price stabilized in the mid-$50 range which has had a positive impact on the sentiment of the industry and I'm pleased to report that was signed terms to extend the firm contract periods on the Banff and Hummingbird Spirit FPSO units until the third quarter of 2018 and September 2020 respectively. As you may recall, in mid-2016 when oil prices were in the low $40 range we agreed with Centrica with the charter of the Hummingbird Spirit to reduce the fixed charter rate which for all intents and purposes was a rate holiday to avoid a production shut-in and to incentivize the charter to reinvest in the field. Now with oil prices in the mid-$50 range we have agreed a heads-off terms with Centrica to extend the firm contract period out to September 2020 at a slightly higher fixed charter rate plus further off-sides through an enhanced oil price and production tariff. The terms will take effect from October 2017 and will give Teekay production an oil price upside while covering our OpEx plus a minimum agreed CapEx rate throughout the charter period. The Banff FPSO has been operating on the Banff field since its delivery nearly 20 years ago under a charter child contract with CNR in the UK sector where CNR could terminate the contract at any time with six months' notice. In order to upgrade a certainty and to better align both parties we entered into headsoff terms to ensure the unit will stay on the current field at least until the third quarter of 2018 by revising the charter rate structure to include a variable component through oil price and oil production tariff in addition to a minimum fixed charter rate. At current oil price and production levels the future CFVO under the new contract is not expected to be materially different from the current CFVO before this latest amendment. On slide four, our reviews on recent highlights for our three public traded border instances, for the fourth quarter Teekay LNG Partners generated distributable cash flow or DCF of $50 million resulting in DCF limited partner unit of $0.63. The partnership continued to generate stable cash flow during the quarter including a full quarter contribution from the delivery of our second MEGI LNG carrier new building, the Oak spirit which commenced as five year charter contract with Cheniere Senior in early August. By the fourth quarter Teekay LNG declared a cash distribution of $0.14 per unit resulting in a strong distribution coverage ratio of 4.4 times. Teekay LNG continued to make significant progress on securing long term financing for its growth projects that deliver through early 2020 and bolstering its liquidity position. During the first quarter the partnership completed approximately $1.7 billion in debt and equity financings including approximately $1 billion in long-term financings relating to its committed growth projects. With the remainder of the financings on track to be completed in the second half of 2017. Lastly, we helped the name ceremony for our third MEGI fall LNG carrier last week, the Torben Spirit named after Teekay's late Founder, Torben Karlshoej, this vessel is expected to deliver from the BSME in South Korea at the end of February and immediately begin its 10-month charter plus extension option to a major energy company. For the fourth quarter of Teekay Offshore Partners generated DCF of approximately $22 million resulting in BCF for limited partner unit of $0.15. For the fourth quarter, Teekay Offshore declared a cash distribution of $.11 per unit. Although we had anticipated better results in Q4 from some key factors negatively impacted our results including a temporary suspension of operations for the Arendal spirit UMS as the charter performs an operational review and higher operating costs in the shuttle feed mainly due to further operate on the Navion Anglia for the trade in the North Sea after returning from third [ph] charter in Brazil in mid-2016. While Q4 was a challenging quarter for Teekay Offshore the partnership made good progress on initiatives to further reduce costs from its operations. In early January, Teekay offshore completed the sale of a 1995 built shuttle tanker, the Navion Europa for net proceeds of approximately $14 million and reported a gain of approximately $7 million. I'm pleased to report that after having secured a three your charter, three year seaway contract for the Glen Lyon project in 2016 Teekay Offshore is now closed to finalizing a new five-year plus expansion options shuttle tanker contract of freight in the North Sea. We are encouraged by the continued strong fundamentals in our shuttle tanker business where we are the market leader. Teekay tankers reported adjusted net income of approximately $5 million or $0.03 per share and free cash flow of approximately $34 million. The fourth quarter results were positively impacted by seasonal strength in the tanker market and increased oil exports out of Nigeria, Libya and the Baltic Sea. Tanker rates continued to be seasonally strong early in the first quarter of 2017 however, rates have recently gone softened due to several factors including regional refinery maintenance and increasing number of new building tanker deliveries and the effect of OPEC supply cutbacks an overall tanker demand especially in this Arabian Gulf. Yesterday, Teekay tankers declared a cash dividend of $0.03 per share representing the minimum quarterly dividend according to the company's policy. Lastly given our view on the softer 2017 tanker market Teekay tanker secured three up out charters for firm periods of 12 months at an average rate of $20,800. These charters increased our fixed-rate cover to approximately 40% over the next 12 months. The fourth quarter was an active one across our businesses and companies and I expect this to continue. On slide 5, we have laid out the Teekay groups' top business priorities for the rest of 2017 and into 2018. At the Teekay Corporation level we need to renew charters for remaining directly owned and in charter assets and as I mentioned earlier, we have made good progress with two of Teekay's directly owned FPSOs which are expected to provide us with greater cash flow certainty in the form of our cash flow floor with offside exposure to future increases in the oil price. Secondly, given the challenges we've had with some of our offshore projects we believe that it will be important for us to further strengthen our project management and execution capabilities to ensure all projects deliver on time and on budget. Teekay LNG has made great headway towards completing its financings however there's more to be done for taking delivery of its 19 new buildings. Teekay Offshore is focused on delivery of its various projects and securing charter expansions for its FPSOs contracts that are coming up for renewal in 2018 and 2019 and as [indiscernible] mentioned on the Teekay Offshore call yesterday, we also are in the process of optimizing our asset portfolio which may include certain asset sales and/or seeking joint venture partners which will help further strengthen COO's balance sheet and liquidity position. In the face of a challenging offshore market, we remain focused on strengthening Teekay Offshore's financials position so that it can take advantage of opportunities as the offshore market recovers. The tanker market is expected to be challenging in 2017 and we are focused on ensuring Teekay's tankers position to not only weather potential market weakness but also position TNK to benefit from an expected market recovery starting in 2018. Part of that includes expanding TNK's service offering to customers through its commercial pools and importantly as U.S. exports are increasing rapidly expanding its ships ship lightering services which earns a premium to current spot market rates. Turning to slide 6, as you heard on the Teekay LNG and Teekay Offshore calls yesterday across the organization today we are working hard on executing on our committed growth which involves taking delivery of 33 new buildings or conversion projects in our gas and offshore businesses. The majority of these projects are being managed by Teekay involving hundreds of people on our project teams and thousands of people at the yachts where we're building in China, Korea, Japan, the Philippines, Holland, and Singapore. Once all of the projects have delivered our assets base will grow by $3.5 billion by 2020 and they're expected to contribute an additional $450 million of cash flow from vessel operations. On the projects we will go on long term charters including [Technical Difficulty] and provide cash flows for them as they are starting up oil production or gas leak protection plans. As we take our new assets into service for our customers we will have an unwavering commitment to safe, reliable and efficient operations, in short operational excellence. That has been our foundation for when we started this company over 40 years ago and that will continue to be our focus going forward. Turning to slide 7, our footprint and customer relevancy has grown tremendously over the past two decades and of course everything starts with a customer. We service nearly all of the major oil and gas companies in one way or the other. Our customer base is truly global, diversified and it continues to evolve. Although it is difficult to predict the future of the energy markets we are quite certain that global transportation of energy will be required for many years to come. We have strong precisions in all three of the primary businesses that we're in and we intend to navigate carefully to ensure that we are growing at the right pace and in the right areas going forward. In closing one of our key competitive advantages at Teekay is our people and it is truly a privilege for me to now believe in this global team. Thank you for joining us on the call today . Operator we are now ready to take questions.

[Operator Instructions]. We will take our first question from Michael Webber with Wells Fargo

I wanted to start with the FPSO, amendments and extensions probably the biggest piece of news from the suite of releases yesterday, can you give a bit of color I guess maybe starting with the Hummingbird, it seemed like rate upside which is certainly surprising I guess given the context I know you're able to add a tariff but can you maybe talk about the basis for that rate upside and I believe there were some short term extensions laid out there, so I want to kind of understand how much upside we would be talking about and maybe just EBITDA level contribution at the parent for both of that asset and the [indiscernible].

Sure Mike. I'll let Vince speak a little bit to the numbers but I think what we're seeing what we've been talking on our calls during the year as you recall exactly a year ago we were sitting looking at $1 million and everybody was talking about go down to 20 or could we go to 40 and we've been talking about improving psychology in the markets that’s throughout here and the conversations we're having with our customers have just continued to become better and better and I think the outlook is becoming more positive and that's obviously what we need for all of the discussions on our FPSO. So we have started at one end, we have a number of active dialogues and we are progressing in Hummingbird and Banff are the first ones where we think we have a better structure now that reflects a new oil environment that hopefully will continue to improve.

So Mike, these as you know are on headsoff of terms on these contracts so we're just in the process of finalizing them. So, we can probably share a little bit of information once we finalize everything but at a high level I think the key thing if you look at the Hummingbird as you know it was due to come off the field in September of this year and the key thing here was to make sure that asset stayed on the field for a longer period in this case another three years which would avoid a lot of layout cost and gives us the optionality. So, it does give us, I would say a slight increase to a minimum rate that kicks in October of 2017 and there is a tariff and I'll talk about the tariff maybe more in a combined basis for the two assets just given the commercial sensitivities. On the Banff, as we indicated there was again make sure we get the duration and asset stays in the field and the overall CFVO for that asset is roughly around the same—will roughly be around the same at current oil prices. We have made a little bit more upside obviously with the tariff. So just in terms of sensitivity for the two combined assets, as a rough rule of thumb for every $10 increase in the oil price going forward it translates into an additional $15 million of CFVO for the two assets just to give you a rule of thumb there.

That’s helpful, just with the Banff, let me make sure that was on till 2019 but there is a 60 day kind of walk away clause in the contract so with that sliding it upto 18 was that just bit of horse trading that kind of firm up the, as the firm employment period and did the talk and the conversations around what the actual use of life for that field, did that change at all? Is there still expected to run until '19 and if you're [indiscernible] again for a year after that firm period ends?

Yes, as you know when you come to the tailend of some of these large fields and that are producing for long time it's obviously getting harder and harder to say exactly how long the tail is at the end of it. So well this gives us is essentially instead of having the evergreen uncertainty it gives us a fixed date that we can start planning around and we will of course continue to have the ongoing dialogue with the customer here in terms of their planning as we move forward but at least we have a firm date where we can also go out and market this vessels and would have the option to take it away now and that just gives us an ability to better plan for the asset. So that's really the motivation for us going into this.

Two more quick ones and then I will turn it over. The [indiscernible] LNG I believe one is selling a short-term contract, one is still laid up, rates obviously improves off the bottom of the past six months. What's the plan for that last asset? Would you through that in a pool? Would you look for a long-term storage play with that, what should we expect in terms of employment for that asset for the balance of '17?

Yes, as we have talked about on previous calls, these are little bit of a niche assets that have been good on some of the shallow draft trace that we've seen especially occurring in China. So we are in dialogue now certainly the slightly better spot market ad has also helped here. Although I would say all the time these units have actually been a little bit separated from the rest of the pack because what they are good for is really transporting parcels into terminals where the larger LNG carriers cannot go in but they still carry 80,000 cubic meters. So they are good size needs vessels that have been able to command good rates as you recall we had them on to South America, the interest that we're seeing for the charters now are for some of the new terminals in China and those discussions are open.

And then last one, actually kind of after your results were announced this morning, one of your investment [indiscernible] entered into a long framework with Exxon with the idea of being providing FLNG technology and licensing, what does this mean for your investment in Savon [ph], how does that impact you guys and then is there any kind of timeline you can share or framework you can share to help us conceptualize how this change your view on that investment, it seems like a pretty big deal.

Yes, I think it's a great deal for Savon in terms of further expanding the use of the technologies there. Teekay has never had any special agreements around the FLNG technology so that something that Savon has pursued for the past couple of years and we have followed it and we are encouraged by it but other than that we are really just an investor in Savon and especially as it comes to the FLNG they are developing it as you know, Teekay is not active in the FLNG market today and we don't have any plans to become an active player you never know if it changes down the road but at present that’s not a segment that we are focused on.

[Operator Instructions]. We will take our next question from Fotis Giannakoulis from Morgan Stanley.

I would like to go on announcing the parent level, can you tell us did you repay any debt during this quarter at the parent level?

Yes the main debt amortization we have at the parent is the debt facility related to the three FPSOs and so the quarterly amortization is about 13 million so that's the run rate.

And, what is the plan of the repayment of this debt especially I'm talking about the 2020 loan the debt market is getting a little bit better right now, how do you envision repaying this loan and the second question I want to ask is at this point, cash flow of the parent is negative by $8 million it was this quarter which is partially supported digital payments for the daughters. I was wondering what is the purpose of the parent entity paying a dividend right now.

Well, I guess maybe just a step back a bit obviously it is a major focus of ours to continue to delever the parents balance sheet that's always been our stated goal to become close to net debt free. I think when you look at the free cash flow it was lower than what we expected for the fourth quarter for sure. But I think when you look at free cash flow going forward and sources of to delever the parents balance sheet there's kind of three main sources or catalyst. The first one is increasing distributions from daughters as you said including some inter-company loans from TOL, that's number one. The second is, the [indiscernible] LNG carriers that Mike Webber just referred to earlier that has a current drag on our field about $36 million a year and we're targeting to get charters for those assets in the second half of this year. Those in charters as a reminder due to [indiscernible] in April 2018 they go back to TGP, the third I would say, the three FPSOs that we just talked a little bit, we want to get extensions on two of the three with upside to oil prices. We still have the [indiscernible] which is actually a drag on our cash flow right now. We are in discussions on redoing that that contract and extending that out and ultimately to really sell those assets to continue to delever the balance sheet. So those are really the three, I would say the three key sources of cash flow and catalyst to the parents delivering plan.

So, the asset sale that you mentioned for Teekay Offshore for finding potential equity investors that also applies for the FPSOs at the parent level?

Yes. Absolutely.

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

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