Teekay Corporation (TK) Q1 2017 Earnings Report, Transcript and Summary

Welcome to Teekay Corporation’s First Quarter 2017 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session [Operator Instructions]. As a remainder, this call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr. Kenneth Hvid, Teekay's President and Chief Executive Officer. Please go ahead, sir.

Before Mr. Hvid begins, I would like to direct all participants to our Web site at www.teekay.com where you will find a copy of the first quarter of 2017 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 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 first quarter 2017 earnings release and earnings presentation available on our Web site. 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 first quarter 2017 investor conference call. I am joined this morning by our CFO, Vince Lok. During our call today, we'll be taking you through the earnings presentation, which can be found on our Web site. Turning to slide three of the presentation, I'll briefly review some recent highlights for Teekay Corporation. During the first quarter, we generated consolidated cash flow from vessel operations or CFVO of approximately $275 million. Although, our consolidated results declined from fourth quarter of 2016, Teekay's offshore and tanker business performed slightly better than our expectations in the first quarter of 2017, prticularly driven by higher cash flow generated by our shuttle tanker and conventional tanker fleets. Teekay Corporation reported a consolidated adjusted net loss of $35.7 million or $0.41 per share in the first quarter. Since reporting earnings in February, we've made good progress in our efforts to re-contract the remaining offshore and LNG assets that are still directly owned or in charter by Teekay Parent. I'm pleased to report that we have recently secured new contracts for the Hummingbird Spirit FPSO and Polar Spirit LNG carrier. In April, we finalized a previously announced contract amendment to extend the term period of the Hummingbird Spirit FPSO charter for three year period out to the end of September 2020. I'll come back to this contract in a moment. Also, in April, we secured a new one year charter contract for the Polar Spirit LNG carrier at a strong market rate. As a reminder, the Arctic and Polar Spirit have unique characteristics that enable our customers to use them in certain traits where conventional LNG carriers would be restricted, for instance in China and South America. Both of these contracts will result in a direct increase to Teekay Parents’ CFVO. On slide four, I'll review some recent highlights from our three publicly traded broader institutes. For the first quarter, Teekay LNG partners generated distributable cash flow or DCF of approximately $43 million resulting in DCF for limited partner units of $0.54 and strong distribution coverage of 3.8 times. The Partnership’s results for the quarter were in line with our expectations, which included a one month contribution from the delivery of our third MEGI LNG carrier newbuilding, the Torben Spirit, which commenced its charter contract with a major energy company in early March. We're encouraged by the strong progress made by Teekay LNG, both towards the project execution and the related financing plan for all the Partnership’s committed growth projects. This includes $640 million in new long-term financings completing or nearing completion during the past quarter and the remaining financings remain on track to be completed by the end of 2017. For the first quarter, Teekay Tankers reported adjusted net income of approximately $7 million or $0.04 per share and free cash flow of approximately $34 million. While spot tanker rates in the first quarter were largely in line with those of fourth quarter of 2016, near term fundamentals are pointing to change the market weakness over the next few quarters. Teekay Tankers have taken proactive steps to maintain fixed charter coverage and strengthened its balance sheet, including a recent sale lease back transaction and sale three older vessels so that it is well positioned for the next market up cycle. We believe we are nearing the bottom of the current asset cycle with more positive fleet fundamentals ahead, which we expect will help drive a tanker market recovery in 2018. Finally, for the first quarter, Teekay Offshore Partners generated DCF of approximately $31 million, resulting in DCF for limited partner unit of $0.20 and declared a cash distribution of $0.11 per unit. Teekay Offshore’s first quarter results reflect the stronger cash flows from its shuttle tanker and FPSO fleets. This quarter’s results highlight strong cash flow that these businesses are currently generating and which is expected to grow and Teekay Offshore take delivery of its existing growth projects. Once delivered, these projects are expected to add approximately $200 million of annualized CFVO. We’re pleased to report that the Teekay Offshore’s 50% owned Libra FPSOs arrive into Brazilian borders yesterday, about 10 days ahead of schedule. Following final commissioning and testing on the field, we expect that the units will commence its 12 year contract in late June or early July. In addition, the shuttle tanker business continues to perform well and we have recently secured two new contracts of affreightment at higher rates. However Teekay Offshore is working through a few challenges as discussed on its earnings call yesterday, this relates to cost overruns on two of its projects as well as the recent termination notification received on the Arendal Charter contract, and the potential impact of these on Teekay Offshore’s balance sheet. Given the market reaction yesterday, I wanted to assure you that our Teekay Group Resources are fully focused on taking these challenges and we’re making good progress on many fronts. We believe these setbacks are within our means to overcome as we have done in the past. Turning to slide five, as demonstrated by recent contract announcements by Teekay Offshore, we’re beginning to see increasing evidence of green-shoots in our core offshore markets. As captured in the recent headlines on this slide, positive progress is being made in brining offshore field development cost down, which may enable further new field developments to proceed toward final investment decision in the coming months. We are still in the early days, but already the headlines are translating into positive results for Teekay Offshore’s business in the form of new shuttle tanker contracts, existing charter extension, and potential new offshore production contracts. Turning to slide six, example, of our customers again focusing on maximizing their existing fleet for Spirit FPSO where we recently extended our contracts to the end of September 2020 with Centrica on the Chestnut Field in the North Sea. Last year, Centrica was spaced with shutting in production and consequently, we were faced with potentially having to lay up the FPSO units if they elected to redeliver the unit in October 2017. Instead, we agreed on a three year contract extension, which will take effect in October this year on terms where we have all operating costs fully covered, but we participate to the upside based on the fields' production levels and oil price. Centrica's announcement this week on $45 million drilling campaign, which is expected to add 10,000 barrel per day of production to the existing 4,000 barrels per day is of course exactly what we were playing for. For illustrative purposes and assuming production of 14,000 barrels per day, we will generate between $10 million to $40 million of cash flow per annum at an oil price range of $50 to $70 per barrels compared to the current breakeven CFVO. To wrap up, we continue to focus on delivering on our existing growth projects, optimizing our asset portfolio across the group, and strengthening our balance sheets to better position the Teekay Group to take advantages of future opportunities. For Teekay LNG Partners, this means continuing to execute on our current newbuilding financing plan for Teekay Tankers. This means positioning the business for the next up cycle. And for Teekay Offshore, this means continuing to make progress towards delivering on the existing growth projects and strengthening the balance sheet. Thank you for joining us on the call today. Operator, we are now ready to take questions.

Thank you [Operator Instruction]. And we will take our first question from Michael Webber with Wells Fargo. Go ahead.

So I know you guys addressed the Arendal Spirit and the Petrojral I yesterday on TOO’s call. But I was curious on what's that you can take at the panel level to maybe you help address those issues?

First of all, as Kenneth said, we are fully focused on TOOs liquidity situation. And I think there is many reasons why we are confident that TOO will be able to address these challenges. First of all, TOO is focused on the oil production side of the business, and it continues to generate a lot cash flow, which is backed by strong counterparties. So this gives TOOs multiple alternatives to raise additional liquidity, ranging from partial or full monetization of certain assets through joint venture partners to new financings or refinancings of the existing assets, to help bridge the completion of TOOs projects. And then secondly, we’ve actually been working on a number of these initiatives over the past several months and we are making good progress on many of these spreads. And we hope to update the market on some of these quite soon. And the last point I think is TOOs cash flows will increase as these projects deliver, they’ll add another $200 million of annualized EBITDA and this will allow TOO to naturally de-lever overtime once these projects begin to cash flow. So we’re very confident that we’ll be able to address these. And the parent obviously is supporting TOO, we’re dedicating a lot of our corporate resources to resolving and raising this liquidity. And the parent is there to support the daughters what we have in the past if necessary.

And then just one quick question on the charter and LNG carriers. Do you have any color on the employment level for that?

Yes, the Polar Spirit secured a one year charter with the major energy company that commenced in April. So we see the benefit of that in the second quarter. We provided some guidance in the appendix of the presentation, which indicates improve the Parent's free cash flow by $4 million in the second quarter and going forward that is a one year charter. We do have the Arctic Spirit, which is in a similar situation where we even chartered it from TGP. We are actually actively looking at chartering that vessel out as well under similar terms. We hope to secure something sometime in the third or fourth quarter for that vessel. And as a reminder, these in-charters in TGP they do expire in April 2018, so that won't be affecting the Parents going forward starting in the second quarter of 2018.

And maybe I should just add, I mean, what's unique about these vessels is that they're actually a different size form some of the other vessels that are out there in the spot market right now. So they actually cater to more, a bit more in this trade into certain terminals where you have some drop restrictions. So these are slightly smaller vessels at 9,000 cubic meters where the vessels that we're competing against are in the say 145,000 to 174,000 rates and with a deeper drop. So some of the charters can really use this to partially load these vessels and use them into some of the smaller terminals. So that's why they're commanding some pretty good rates there.

Our next question comes from Fotis Giannakoulis with Morgan Stanley.

I just wanted to ask about the Hummingbird Spirit, you mentioned that the current production is around 4 million barrels per day -- 4,000 barrels per day. What is realistic number for 2017 and early 2018 given where the current oil prices are?

As we know, we're not reservoir, especially this year. So we lean on the same information that's been shared by our customers to the market. And since we did put an announcement earlier this week where they announced this drilling campaign that they're doing and where they're expecting the well that they're drilling to flow about 10,000 barrels per day, they are doing that drilling campaign in the third quarter of '17. So it looks like that's going to coincide roughly with when we go on the new extension charter of the Hummingbird, which will last for now we think for years.

I want to ask about your different credit facilities. Can you update us what is the level of the TPO facility, the outstanding right now? And refiner -- the equity margin revolver that you have. Did you draw down any debt this quarter?

The TPO facility, which is secured by the three FPSOs at the Parent, the outstanding balance at March 31st was about $123 million, and that amortizes down to $30 million at the end of 2018. So that's the status of that one. In terms of the equity margin revolver, we did complete an amendment in early April where we upsized the total availability from $150 million to $200 million. So that was partially drawn at March 31st. I think the amount that was drawn at was about $76 million of that at March 31st.

Do ithis facility serve that you have up, the Parent level I mean links with TOO when cross default relationship with a TOO debt?

Yes, there are a few legacy loans, mainly related to the shuttle tankers of TOO. And of course, the shuttle tanker segment is one of our best performing segments. But a lot of those guarantees would expire overtime. So overtime those guarantees will start to disappear. So some of these are legacy loans where the parent guarantees that remained to enable us to keep the favorable terms to those loans.

But they are not specific links between the Teekay Parent credit facilities and the TOO loans, it's simply the guarantees that the parent has provided to the loans of TOO. Is that correct?

That’s correct.

And we will take our next question from Wayne Cooperman with Cobalt Capital.

Given the market reaction yesterday to the numbers, which you could say people didn’t understand it. But it just seems that the people are more concerned about your ability to even maintain your current payouts versus raise. And we know as the parent a lot of the value is based on the broader companies getting into the higher spread. So I wonder and if you could comment on when you might see dividends going up at the daughters? And two, if you could comment on any thoughts about restructuring the parent daughter relationship, because it doesn’t look like you’re going to get into the high splits or IDRs anytime in the next couple of years.

So as we I think we started at the end of the year and when we reported in the first quarter here, we knew that we have one to two years ahead of us here with a lot of blocking and tackling project execution and financing on our all projects. So we went through it of course in quite detail as you heard probably on the LNG call yesterday where we’re making great progress on the financings. We need to house in place, but I would say we’re largely tracking along the flame that we put out end of last year. So as we enter into next year, I think that’s where we will start to really have that discussion. So your read on that is correct. On the offshore side, it's much the same story except that we have, I would say, more focus also on the project execution. And of course, there Arendal wrinkle that we had is obviously added to it, but we’re fully focused on that now. And it's about putting these projects in. fortunately, our markets are intact, they are up against good counterparties and slightly strengthening market here. These are some good projects. So we’re focused on getting them to cash flow and then getting our balance sheet restore. And that means that as we get into next year that’s when we can hopefully have some meaningful discussions about this again. But right now we’re fully focused on the execution.

So to follow up just any view to contemplate having issue any equity or equity type securities to get through the build out; and secondly, I think even though you addressed, whether you would contemplate changing the parent-daughter relationship, and that’s not something that you’re planning on doing?

I guess your first question is I presume is relating to the existing growth projects in TGP and TOO. In TGP, as Mark and Brody talked about on the call yesterday, when we complete all the remaining financings of the newbuildings, we’ve already funded the equity portion of those. So there isn’t a need to issue equity in TGP to fund the remaining CapEx. As it relates to TOO, as we mentioned on the call yesterday, one of the sources of liquidity there is to look for joint venture partners given that we have a lot of attractive assets that are generating lot of receivable cash flows in TOO. And we can partially monetize some of those to fund those in a more cost efficient manner. What was the second question that you had?

If you guys have thought about changing the relationship between parent and daughter, what doing something with the GP and the IDRs, or are you kind of leave it alone for now?

Nothing in the near term, I would say. We are noticing there’s lot of the GPs and MLPs looking at the IDRs and IDR resets. I think it's something that’d be prudent for us to evaluate at some point in time, but nothing in the near term.

It appears there are no further questions at this time. Mr. Hvid, I would like to turn the conference back to you for any additional or closing remarks.

Thank you everyone for joining us today. We look forward to reporting back to you next quarter.

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