Teekay Corp Ltd (TK) 2013 Q1 法說會逐字稿

Welcome to Teekay Corporation's first-quarter 2013 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 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, sir.

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 first-quarter 2013 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 first quarter of 2013 earnings presentation and earnings release available on our website. I will now turn the call over to Mr. Evensen to begin.

Thank you, Ryan. Good morning, everyone, and thank you for joining us today for Teekay Corporation's first quarter of 2013 earnings call. I'm joined this morning by our CFO, Vince Lok, and for the Q&A session, we also have our Chief Strategy Officer, Kenneth Hvid, and our Group Controller, Brian Fortier. During our call today, I'll be walking through the first quarter of 2013 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 and our three publicly traded daughter companies. For the first quarter of 2013, Teekay Corporation generated $193 million of total consolidated cash flow from vessel operations, or CFVO. Teekay Corporation reported a consolidated adjusted net loss of $12 million, or $0.17 per share for the first quarter of 2013. An improvement from the consolidated adjusted net loss of $0.30 per share that we reported in the first quarter of 2012.

The reduction in our adjusted net loss for the quarter reflects the contributions from the strategic acquisitions and organic projects that delivered over the past year, the redelivery of 12 chartered-in conventional tankers since the start of 2012, and the progress we've made on our cost reduction initiatives. These results still reflect the lost cash flow of approximately $9 million per quarter due to the Banff FPSO unit being off-hire while it undergoes repairs following damage from a December 2011 storm event.

In February, 2013, the Cidade de Itajai FPSO achieved first oil on location offshore Brazil and commenced its nine-year time-charter with Petrobras. As for our omnibus agreement, Teekay Parent has subsequently offered to sell its 50% interest in this FPSO unit to Teekay Offshore. Teekay Offshore increased its quarterly cash distribution by 2.5% to $0.5253 per unit, which moves our general partner incentive distribution rights, or IDRs, into the 50% high splits. This means that our GP interest for Teekay Offshore Partners and Teekay LNG Partners are both now in the 50% tier. Which means that Teekay Parent will receive 50% of future cash distribution increases from both of our MLPs going forward.

Our three publicly traded daughter entities have also been executing on their respective business plans during the quarter. In mid-February, Teekay LNG Partners completed its accretive acquisition of a 50% interest in Exmar LPG, a new joint venture with Belgium-based Exmar, which controls a fleet of 25 LPG carriers, including 8 newbuildings currently under construction. The new joint venture is a natural extension to Teekay LNG's already sizable gas shipping business, and the partnership with Exmar, whom we consider to be the leading player in the attractive midsize LPG sector, provides another channel for future distributable cash flow growth.

Teekay LNG declared a cash distribution of $0.675 per unit. Based on its GP and LP ownership interests in Teekay LNG. Teekay Parent will receive a cash distribution of $23 million when Teekay LNG's first-quarter distribution is paid on May 14. Teekay LNG is seeing increased new business development for both LNG transportation projects and floating storage and regasification, or FSRU projects, and is currently bidding on several projects that are expected to start up after 2015. When new liquefaction facilities are scheduled to come online. The opportunities Teekay LNG are looking at include securing contracts for the two fuel-efficient LNG carrier newbuildings ordered by Teekay LNG last December and its three newbuilding options.

Moving to our other master limited partnership, on May 2, Teekay Offshore Partners completed its accretive acquisition of the Voyageur Spirit FPSO from Teekay Parent for $540 million following first oil in the North Sea on April 13. Also in April, Teekay Offshore continued to diversify its sources of equity capital and completed 150 million Series A perpetual preferred units offering, which complemented a new $60 million common unit private placement to institutional investor that was also completed in April. With the completion of these offerings, the equity requirements for the Cidade de Itajai FPSO and the four BG shuttle tanker newbuildings are now covered.

As mentioned earlier, Teekay Offshore increased its declared cash distribution by 2.5% to $0.5253 per unit. Based on its GP and LP ownership interests in Teekay Offshore, Teekay Parent will receive a cash distribution of $15.4 million when Teekay Offshore's first quarter distribution is paid on May 14. Teekay Offshore has also seen an increase in new offshore project tenders during the past year. Teekay Offshore is currently bidding on several FPSO and FSO projects for expected field startup in 2016 and 2017.

Looking at Teekay Tankers, for the first quarter, Teekay Tankers generated cash available for distribution, or CAD, of $0.10 per share, down from $0.13 per share in the fourth quarter of 2012, mainly due to lower time-charter revenues. As previously announced, Teekay Tankers elected to move to a fixed quarterly dividend of $0.03 per share commencing in the first quarter of 2013. Based on its total ownership of Class A and Class B shares, Teekay Parent will receive a cash dividend of $600,000 when Teekay Tankers' first-quarter dividend is paid out on May 28.

In April, Teekay Tankers ordered four fuel-efficient LR2 product tanker newbuildings from STX offshore of South Korea at an attractive, fully built-up cost of $47 million each. Which are scheduled to deliver in late 2015 and early 2016 to coincide with an expected improvement in refined product and crude oil shipping rates. With new generation G-type engines and updated hull design, enhanced propeller design, and other design efficiencies, these newbuilding tankers are expected to be 20% to 30% more fuel-efficient and have lower emission levels than current vessels in the existing LR2 fleet. The STX order also includes a favorable [four plus four plus four] option string for additional LR2 newbuildings at a fixed price, and they are non-contingent and can be declared at 6-month intervals over the next 18 months.

Turning to Slide 4, I want to take a moment to highlight the achievement of three project milestones so far in 2013. Starting on the left of the slide, in February, the Cidade de Itajai FPSO achieved first oil on its field in the Santos Basin of offshore Brazil and commenced its nine-year time-charter contract, not including extension options, with Petrobras. As I mentioned on the previous slide. In April, Teekay Parent offered its 50% interest in the FPSO to Teekay Offshore at Teekay Parent's fully built-up cost. The Teekay Offshore conflicts committee is currently reviewing this offer, and if approved, we expect to complete this drop-down before the end of the second quarter.

In mid-April, the Voyageur Spirit FPSO commenced its five-year time-charter contract with extension options with E.ON, following first oil on the Huntington Field in the North Sea. Teekay Parent completed the sale of the Voyageur Spirit FPSO to Teekay Offshore for $540 million on May 2. Finally, this week, Teekay Offshore took delivery of the Samba Spirit shuttle tanker shown on the right side, which is the first of the four BG shuttle tanker newbuildings scheduled for delivery in 2013. Constructed by Samsung Heavy Industries in South Korea, the Samba Spirit is currently en route from South Korea to Brazil, where in June it is expected to commence its 10-year time-charter contract, not including extension options, with the BG Group.

Turning to Slide 5, this slide provides a time line overview of our growth projects delivering over the next few years. And, as you can see, the Teekay Group of Companies has several growth projects currently in execution across all of our business areas. With all the projects currently underway, efficient and focused project execution remains a top priority focus area. The ability to deliver these projects within our targeted timeframe and at expected cost levels is critical for achieving our targeted returns. The completion of these projects will contribute to growth in each of our core businesses, and the sale of assets currently being warehoused by Teekay Parent to our daughter companies will further improve Teekay Parent's financial strength and flexibility through increased liquidity and a deleveraged balance sheet.

I won't cover all the projects on this slide. However, I would like to provide you with brief updates on a few of the projects shown here, which I touched on during last quarter's earnings call. In May of 2013, Teekay Offshore finalized an agreement with Salamander Energy to provide an FSO unit under a 10-year time-charter contract, plus options to extend for an additional 5 years in offshore Thailand. Teekay Offshore intends to convert its 20-year-old shuttle tanker, the Navion Clipper, into an FSO unit for an estimated fully built-up cost of approximately $50 million. The unit is expected to commence its contract with Salamander in the third quarter of 2014 and will provide profitable employment for this tanker well beyond its useful trading life as a tanker.

During the fourth quarter of 2012, Teekay Offshore announced the acquisition of a 2010-built, HiLoad dynamic positioning offshore loading unit from Remora AS, and Teekay Parent announced it would acquire a 49.9% ownership interest in Remora. The acquisitions of both the HiLoad unit, which will operate under a 10-year time-charter contract with Petrobras in Brazil, and Teekay Parent's 49.9% acquisition of Remora are expected to be completed by June 30. After completion, certain modifications to the unit which are underway, the HiLoad DP unit is expected to commence operations at its full charter rate in early 2014 following delivery to Brazil and the completion of operational testing.

In April, the Petrojarl I FPSO completed its previous contract with Statoil and has since departed the Glitne Field. We're currently evaluating several potential redeployment opportunities for this unit, which has been redeployed on 10 different fields in the North Sea since 1986. The Teekay Group also continues to add new projects, which include Teekay Tanker's LR2 product tanker newbuilding order in April, which I touched upon earlier.

Importantly, all of these projects, whether completed directly at the daughter entities, or at Teekay Parent, being warehoused for drop-down at inception of contract, support the growth in distributable cash flows at Teekay Offshore and Teekay LNG, which will translate into increased general partnership and limited partnership cash flows to Teekay Parent. I'll now turn the call over to Vince to discuss the Company's financial results.

Thanks, Peter, and good morning, everyone. Starting with slide 6, I will review our consolidated results for the quarter. In order to present the results on a comparative basis, as we do each quarter, we have shown an adjusted income statement for the first quarter against an adjusted income statement for the fourth quarter, which exclude the items listed in Appendix A to our release. As we did in the fourth quarter, we have removed the pre-delivery activity of the Voyageur Spirit FPSO, which is treated as a variable interest entity for accounting purposes. Which is consolidated into our accounts, even though we did not acquire the unit until May 2. Later on, I will also provide our outlook for the second quarter.

First of all, commencing this quarter, we have included the cost of ship management activities and vessel operating expenses and revenues from providing ship management services to third parties have been included in revenues. We had previously included these items in general and administrative expenses. This new presentation is more consistent with the presentation utilized by many other shipping companies and peers. We have reclassified such costs and revenues in comparative periods to be consistent with this new presentation.

Starting at the top of the page, net revenues decreased by $59 million due primarily to a $24 million decrease in revenues from customer-funded front-end engineering and design, or FEED studies, relating to FPSO and FSO projects we are pursuing, and $15 million lower revenues from the Foinaven FPSO contract. The additional revenue relating to the Foinaven FPSO is recognized typically in the fourth quarter of each year, since it is based on various annual operational performance measures, oil production levels, and the average oil price for the year. In addition, revenues decreased in the first quarter due to lower revenue days in the shuttle tanker fleet, the expiration of certain time-charter contracts in the conventional tanker fleet, as well as from vessel sales and lay-ups.

Vessel operating expenses decreased by $35 million, due mainly to a reduction in costs for the FEED studies completed in Q1 compared to Q4 which I just mentioned. In addition, there were decreases in service costs and other operating expenses as a result of timing differences and from vessel sales and lay-ups during Q4 and Q1. As a reminder, the FEED studies I just mentioned relate to engineering work typically done in preparation for FSO or FPSO tenders for which the revenues and costs are both recognized for accounting purposes when the studies are completed. Time-charter hire expense was consistent with the prior quarter.

Depreciation and amortization decreased by $11 million, due mainly to the vessel impairment charges that were recognized in Q4. G&A expenses increased by approximately $3 million due to the timing of recognition of short-term and long-term incentive compensation expenses, which are typically higher in the first quarter of each year. Interest expense increased by approximately $700,000 in Q1 as a result of the issuance of the Norwegian bonds in January by Teekay Offshore. Equity income increased by approximately $4 million in Q1, due to income from the 50% owned LPG joint venture with Exmar, which was acquired in mid-February, and higher equity income from our Exmar LNG joint venture.

Income tax expense increased by approximately $4 million, primarily due to reductions in Q4 in certain freight tax accruals and tax recoveries from the restructuring of our Norwegian operations. Non-controlling interest expense decreased to $34 million, mainly as a result of lower adjusted earnings in Teekay Offshore. Looking at the bottom line, adjusted net loss was $0.17 per share in the first quarter, a decrease from the previous quarter's adjusted net income of $0.04, primarily due to the incremental revenues recognized from the Foinaven FPSO contract in Q4.

Turning to Slide 7, we have provided some guidance on our consolidated financial results for the second quarter of 2013. After normalizing for the $3 million of revenue recognized for FEED studies in the first quarter, revenues from the fixed rate [fleet] are expected to remain roughly flat in the second quarter, as the $18 million increase from two months of the Voyageur Spirit FSO is offset by an expected $10 million decrease from the Petrojarl I FPSO leaving the Glitne Field upon the completion of its contract in April. A reduction of $5 million from the Hummingbird Spirit and the Foinaven FPSOs due to reduced amortization of non-cash revenues and timing differences, and $4 million lower fixed rate conventional tanker revenues expected as a result of dry dockings and the expiration of time-charter out contracts.

Spot revenue days are expected to increase by 65 days in the second quarter due to vessels dry docking in the first quarter and vessels coming off time-charter out contracts, partially offset by spot vessel sales and one time-charter in redelivery. So far in Q2, we have fixed approximately 45% and 35% of our Aframax and Suezmax spot revenue days at average TC rates of $13,100 per day and $12,200 per day, respectively. Which is, on average, comparable to the first quarter levels. Vessel operating expenses are expected to increase by $6 million, as a result of the delivery of the Voyageur Spirit FPSO and the first two BG shuttle tankers during Q2. We are also expecting an increase in repairs and maintenance costs of approximately $10 million as we enter into the North Sea maintenance season for the FPSO and shuttle tanker fleets, partially offset by reduced FEED study costs of $2 million.

In the third quarter, we are expecting a reduction in the OpEx of the Petrojarl I, as the unit will be in lay-up awaiting redeployment. Time-charter higher expense is expected to decrease by approximately $1 million in Q2, reflecting lower spot in-chartering in the shuttle tanker fleet and a Q1 redelivery of one conventional tanker. Depreciation and amortization is expected to increase by $6 million, due primarily to the Voyageur Spirit and the shuttle tanker deliveries and the amortization of additional dry docking costs.

We expect G&A to decline to approximately $35 million in Q2. Net interest expense for Q2 is expected to increase by $3 million due to the Voyageur Spirit FPSO and the shuttle tanker deliveries. Equity income is expected to increase by 3 million, reflecting a full quarter earnings from the Exmar LPG joint venture and the Itajai FPSO. Income tax expense is expected to be approximately $2.5 million in Q2. Non-controlling expense -- non-controlling interest expense is expected to be between $30 million to $32 million in Q2, primarily as a result of lower expected earnings in Teekay Offshore, as well as the equity offerings completed by Teekay Offshore in April.

Turning to the next slide, with the drop-down of remaining projects and assets from Teekay Parent to the daughter entities, Teekay Parent will continue to delever its balance sheet and build liquidity, which will further improve its financial flexibility. Pro forma for the sale of the Voyageur Spirit FPSO from Teekay Parent to Teekay Offshore on May 2, Teekay Parent's March 31, 2013 net debt decreased by approximately $350 million to approximately $1 billion, and its liquidity increased by approximately $120 million.

Of the remaining net debt at Teekay Parent, just over 50% is attributed to the Knarr FPSO newbuilding, which is expected to be available for sale to Teekay Offshore commencing in the second quarter of 2014. And, the balance primarily relates to five existing FPSO units with four directly owned conventional tankers remaining at Teekay Parent. With the drop-down of further FPSO units, with the Knarr FPSO being the most significant in size, Teekay Parent is on track to becoming net debt-free. With that, I'll turn the call back to Peter to conclude.

Thank you, Vince. Turning to Slide 9, on today's call, we've highlighted Teekay's focus on project execution, which is increasingly taking place at the daughter entities, as they are now able to initiate their own projects rather than rely upon Teekay Parent to use its balance sheet to warehouse the units during construction. Growth of our daughters through both organic projects and acquisitions, especially Teekay LNG and Teekay Offshore, is beneficial for Teekay Parent in the form of increasing cash flows resulting from its LP and GP ownership.

In addition to the visible offshore and gas projects that we highlighted on slide 5, we're confident that the increase in tendering activity for new offshore and gas projects will lead to new growth opportunities for Teekay LNG and Teekay Offshore. With the IDRs of our two GPs now both in the 50% high splits, we expect the growth in cash flows from the two GPs to accelerate and become a proportionately greater and more important component of Teekay Parent's cash flows. Thank you for joining us on the call today. And, Operator, we're now ready to take questions.

(Operator Instructions)

The first question comes from Mike Webber of Wells Fargo. Please go ahead.

Good morning. How are you?

Fine.

Good morning.

I just wanted to start with the offshore side first. Last quarter, you gave a little color around the new FPSO and FSO projects you were looking at in the North Sea. I am curious as to if there's any update there in terms of, I think there were five projects spreading out along the FSO and FPSO space? Maybe where you stand there, and what sort of timeframe you're looking at before you would find out about those?

Well, we're continuing to do the front-end engineering studies on them, and we're putting in our bids and we haven't heard a result yet. So, we're still in the running for five of them.

Got you. That nominal value is still right around where it was last quarter?

What nominal amount?

I think, around $3 billion.

Yes.

Okay. And then, you have talked a bit about cleaning up liquidity and getting back toward a net cash position. Can you talk about, theoretically, how those new projects fit into that drive to get back to net neutrality from a liquidity perspective? And how you think about that in the context of isolating and amplifying your GP value?

What we're talking about about delevering is up at the Teekay Parent. Our plan is not to add new projects up at Teekay Parent. Rather it is to have the Teekay LNG and Teekay Offshore do the projects themselves. So, that's a departure from how we've done it in the past. We think they are big enough that they can do the warehousing themselves. Therefore, you -- we hopefully don't have to help our daughters with the warehousing. And therefore, what Vince was pointing out on his slide about Teekay Parent's net debt dropping means that we continue to be on our path to moving net debt-free, which will give us a lot of better free cash flow generation at the Teekay Parent.

Got you. That makes sense. It's good to hear. Just a couple more, and I'll turn it over. Around the Knarr, you have been talking for a while about either adding a JV partner or revenue insurance there. Just curious as to whether there's any progress around that. And then, from a return perspective, can you talk a bit about how the Knarr compares to some of the newer FPSO and FSO projects you're looking at? Maybe from an allocation of capital perspective?

Well, I was out last month looking at the Knarr. And, it's on time and it's on budget, and so that -- we're very pleased with that unit. We are -- we may evaluate selling part of the unit prior to delivery. But, I have to say I really liked the unit when I was out there, and whether it all ends up in Teekay Offshore or whether we sell part of it, it will be an accretive transaction.

Got you. That may be relative to some of the returns you're seeing on new FPSO and FSO projects. How does the Knarr compare?

I would say it's the same. The really good news that we have is that the knowledge that we've gained in building the Knarr FPSO can be replicated on some of these other projects. But, in general, the FPSOs with their more engineering value give us a higher return than our FSO conversions.

Got you. All right. That's helpful. I will turn it over. Thanks for the time.

Thank you.

Thank you. The next question comes from Greg Lewis of Credit Suisse. Please go ahead.

Yes, thank you, and good morning.

Good morning.

So Peter, when we think about Teekay three to five years from now, clearly by then it will be net debt negative. And, it doesn't sound like it's going to be used as a warehouse vehicle anymore. What is -- should we think over time that we're going to see increased buybacks and increased dividends at a certain point?

Well, I think that if Teekay Parent continues -- we have two main goals. They are to increase the net asset value per share, and we're able to do that through adding new projects, and therefore receiving more cash flows up from our GP and LP interests. And, the second is to close the sum of the parts gap. Therefore, if the share price doesn't sell at what we consider its net asset value, then we have to use our liquidity, not to buy more assets, but to close that gap.

Okay, and so to follow up on that. Because previously I thought Teekay was going to be beyond the warehousing assets as well. Has it been a function that TOO has been able to grow with, at such a nice pace, but now it has the ability to warehouse a $1 billion project?

Yes, the market caps of those companies are $2 billion to $3 billion, and therefore, they have warehouse capacity themselves. And, I think Vince and his finance group have been able to come up with ways to do the pre-delivery financing, which also gives us a view that Teekay Parent -- that we can change the way we've taken on projects rather than have Teekay Parent buy them and then drop them down. We want them to do that directly.

And then, you mentioned, I believe briefly, that you potentially could sell off a part or a portion of FPSO projects upon their delivery. Who would be the type of buyer for those types of -- I guess basically what you're talking about is creating additional joint ventures. Would those be more regional, based on where the project is located?

Well, that's right. You can have too few projects and you can also have too many projects. And so, when we think about what we have, we're always looking at how much human resources we have as well as financial resources. So, we have a plan for which projects work out for what we have, but we don't want to have too many projects that we're financially responsible for. We're lucky that as a project developer, we get various investor groups that approach us about wanting to be part of our projects. And so -- what we're saying to people is that if we do get -- have an abundance of projects, then we'll take in joint venture partners. I think Teekay has a system set up and a good corporate governance that we are a good joint venture partner. We can produce good corporate reporting. We have good corporate governance principles, and that's what lends investors who want to co-invest with Teekay to approach us.

Okay, and one final question for me on the LPG newbuilds. Just given the nature of the LPG market and as that evolves, should we expect those types of assets as you -- whether it's the existing LPG newbuilds or going forward. Should we -- what type of contract coverage should we expect to see on those vessels? And, is it a function of the Teekay LNG on its own is big enough that we can maybe have a little bit more volatility from those assets than the traditional LNG ultra-long-term contracts?

Well, that's a very good question because the LPG market has traditionally been contracts of affreighment. What we liked about EXMAR is they have a very strong position in the ammonia trades, as well as the LPG trades in the midsize LPG. What we've seen is that just as everyone is talking about all the shale gas, that's going to lead to increased gas exports. We're going to see new trade routes opening up. We actually think there will be more LPG exports, and more specifically, ethane exports, coming out of the US. And so, when we see various places that have associated gas, we should see an increased export. The LPG market has traditionally been looked at as an arbitrage market. Some of the various petrochemicals, as well as ammonia and the gases, we think you'll see an increased activity level. The newbuildings that we have here, we think are going to deliver into a better rate. The way EXMAR runs their business is less volatile. They can both time charter out as well as take their contracts on COAs, but it's not a spot trade. They have the ability with their customer base to move back and forth between time charters plus minimum/maximum type of charters. But, as you hear, we're positive on the LPG market.

Okay. Thank you very much for the time.

Thank you.

The next question comes from TJ Schultz of RBC Capital Markets. Please go ahead.

Hi, good morning. I think you just said you have a sense of the warehouse capacity at the MLPs. If you could provide a little more color here. I understand that at the Teekay level, you do not want to warehouse projects, but if you could provide any framework where at least since you do have the supportive sponsor relationship that you would sense Teekay still needs to be involved to help out the MLPs?

That's simply a question of size. When your market cap gets up to be a bigger amount, we can issue -- we've been able, for example, if you look at the BG shuttle tanker newbuildings. We ordered those directly at Teekay Offshore last year, and we were able to issue equity and capitalize up those projects down at the daughters. For -- and part of that is that we are able to negotiate with the shipyards on having most of the shipyard -- or most of the ship contract price be paid at delivery. And, therefore, there isn't as much of a warehousing component required as we have in the past. In the past, you've seen things like five times 20% spread over two years. Now, we're looking at more like 70% at delivery. We've been able to change around the cash flows that we're responsible for, which reduces the warehouse requirements at the same time that the daughters have become bigger, and have a better capacity to do that. I'm not saying that Teekay won't always -- won't lend a hand. That could be in its interest, but that isn't our plan A.

Okay, thanks. I guess secondly, I want to ask about the Teekay dividend. Certainly, when we look at other public MLP general partners, there's a pretty clear linkage, or at least an outlook for the linkage to the underlying MLP growth translating to dividend growth at the GP level. So, I understand you have a few transactions to get done first. But, when do you expect enough free cash flow visibility to discuss the potential for linking the dividend and distribution between Teekay and the MLPs?

Sure. I think that ultimately linking the dividend is an important part of closing the sum of the parts gap. But, also an important part has been to move enough of the assets that we have upstairs downstairs, and thereby become net debt-free. So, therefore, the costs that we have on debt upstairs isn't a drag, and so that's what we've been doing, steadily selling the assets down. It's taken us a little bit longer, but we're well on the path to doing that.

Okay, thanks.

Thank you. The next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Yes. Hi, Peter, and thank you. I want to ask about the Petrojarl I FPSO, and how shall we think of earning capacity of this asset? Also, how shall we think the useful life? Are there any specific regions that you think there are more chances to be deployed in? What do you think this will be able to earn?

Well, it all -- thanks, Fotis. The Petrojarl I has come off of its field in the Norwegian sector. It is Norwegian sector compliant. Therefore, it can operate in the Norwegian sector. So, we're -- we have opportunities both in the North Sea, as well as moving it to a more benign region, places like Brazil or Africa, where it can act like more of an early well test ship and bring fields into production sooner. So, we actually have an abundance of opportunities, and we're just gauging up which one is best. But we've decided that with the amount of opportunities that we have, we would -- we're taking our time. If we move it to a more benign place, it doesn't need as much of an upgrade, whereas if we moved it and re-employed it in the Norwegian sector, we would have to do more upgrading of it. That's something we're taking into account. Should we try to re-employ it earlier and not upgrade it, but in that case, it won't make as much money? Or, should we upgrade it, and have it live a longer life?

And, can you give us a sense of the numbers that this potential upgrade could be? And, what would be the difference in the EBITDA in each of these cases?

We were actually happy that it came off of the Glitne field because the Glitne field was producing 5,000 or 6,000 barrels of oil a day. We had an oil barrel tariff on that, and we weren't making any money. So, for us, the good news is while you have a short-term dip in cash flow, it gives us the chance to re-employ the vessel and earn higher returns. So, I can't be more specific on exactly what the EBITDA multiple would be, but I can tell you that we're having various conversations. We might also sell the vessel if we get a lot of these other new offshore tenders coming up. As I said earlier, I think a lot about how much human resources I have at Petrojarl, and if I -- if we needed to upgrade the unit, I might just go ahead and sell the unit and take those people that -- those good engineers that we have and put them on a new FPSO opportunity where we would make more money.

Can you also give us a little bit more of an overview of what are the opportunities in the FPSO sector? Are there any potential projects that you might be looking for next year that you are in discussions right now?

We are, as we said earlier, we're looking at five FPSO and FSO projects that we're doing front-end engineering studies. Those are paid studies that people pay us to see whether our unit will be acceptable on their fields, and there's a lot of engineering work being done on those. Those actually come in from 2015 onward. So, there isn't -- given the timeline that's involved in the development, there isn't anything near-term that we would add beyond what we already have, which is the Knarr, which is the single biggest investment that we have. So, that's going to power a lot of distributions in 2014. I think if you're asking me, would we acquire something? Our focus right now is on organic projects because we can make more money.

And, last on the FPSOs, you get a bigger portion of your profitability from FPSOs from the performance bonus at the end of the year. I know that it is still very early, but is there a way that you can give us some expected range for these performance bonuses on the existing FPSOs?

It's very difficult because it's based on volume, and it's based on what the oil price is going to be. So, I would -- so I'm not going to give you that figure. But I will tell you that we expect the volume that's produced on the field to be higher than what it was last year.

Okay. Thank you. And, my last question. Obviously, you mentioned that your goal is to be the owner of the GP and not to warehouse projects anymore. But are there any thoughts that potentially very large projects that the daughter companies still cannot warehouse and fund, might be warehoused by the parent entity? And, I want to ask more specifically, are there any thoughts of expanding into new areas of the offshore or LNG sector? Naming one, like FLNG projects that could be warehoused by the parent?

Yes. Of course, I will never say never. But, I'm quite clear, as I said in my prepared remarks, that our plan A is not to warehouse assets up at the parent. That's not our plan. So then, we would have to have an abundance of really great projects. And they would have to have a higher return than what we would normally associate. That's what I have agreed is the strategy, which is that for that -- for us to change off of plan A, it would really have to be a good project. For FLNG, I have to say we're in the conservative camp. As I said, I think the third mouse gets the cheese. I was out in Korea. I saw where they laid the keel on the Prelude FLNG project. These FLNG projects are just massive. They are beyond Teekay's financial capacity. You're talking about $6 billion of projects. So we actually think that that industry is changing a lot, and we're not convinced that the small projects will be as economically viable as the large projects.

I certainly see why you're seeing companies move to the FLNG market, given that its comparison is to land costs. And, the land costs we're seeing in places like Australia and other places, and particularly labor, is leading to these huge cost overruns, which means the projects aren't economic. But, the reality of LNG liquefaction is that people are building bigger plants in order to get economies of scale in order to get lower costs. The smaller FLNG units that we have seen don't bring that average cost down. So in the longer term, the benefit is that you will get faster to market. But, when these big projects like we have in BC with Kitimat come on, then as in most markets, he with the lowest cost is going to win. That's a long explanation to say that's not a focus area of ours.

That was very clear. Thank you, Peter. Just to end up, in other sectors, are you potentially open for new offshore sectors like OSBs or jack-ups -- other sectors that could complement with your offshore strategy?

We look at some new things, but we are not going to move into the drilling sector. There's a lot of good companies in there, so we're not going to move into the drilling sector. We're more into the production-type of sector. But, I have to reiterate that for us to get involved with something, we have to see that we have a competitive advantage. But, I just think the growth opportunities that we have in our existing offshore and our existing LNG, including FSRU opportunities, is so good that we shouldn't really stray from what we're doing.

Thank you very much, Peter.

Thank you.

Thank you. The next question comes from Justin Yagerman of Deutsche Bank. Please go ahead.

Good morning. It's Josh Katzeff in for Justin.

Hi, Josh.

I guess this is the first time in a couple of years where we're seeing newbuildings in growth across all three of your daughters and all of your major segments. Can you talk about how you rank the opportunities on a risk-adjusted basis across offshore, LNG, LPG, and tankers?

Sure. But, we have an investment committee which Vince chairs up, so every investment gets looked at by the same people, and we have a chance to look at it on a risk-adjusted return basis. But every -- but we have four companies. They have four pools of capital. They have different costs of capital, but I would have to say that the FPSOs generate -- and the FSOs, they will generate the highest returns that we have. Mostly because they are more engineering-focused, and they're not as commodity-type of driven. Then, we have the LNGs, and depending on how much risk you take, that will change your IRR. We have observed that the 20-year contracts are being reduced down to more 5 to 10. We have a portfolio that -- an approach that can handle that.

And then, the tankers, as Bruce will talk about in about an hour when he does the Teekay Tankers call, there you can make a lot of money or lose a lot of money. So that's a cyclical business, a commodity business. What was important for us is we hadn't ordered really, any newbuildings on the tankers side since 2006. We did a lot of work over the last two years, spoke with customers, spoke with shipyards, really worked on the design, and so we think that now is the chance to move in. We moved with the Aframax size, and as Bruce will say the Aframax size we think gives us optionality to trade clean as well as dirty, and we think that ultimately that will be a good size going forward. That fits in with our customer base, and it fits in with our size. And we also had a pretty good LR2 franchise that we run through our Taurus tankers pool. It took us a while, but that's the way Teekay operates. We test out designs with customers, and so it's -- I am pleased that we have good capital projects in all four of our verticals.

Got it. And then, with regard to regasification. I guess that's more engineering-heavy. So are those returns going to be similar to the FPSOs if you move into that space?

On the FSRUs, I think it depends on project by project. They are better than conventional LNG, but I'm pretty sure that market will get commoditized.

Got it.

The other thing is that that market has changed. When it was a question of conversions, then you were getting returns that were more split out. But now, everyone's really ordering the same kind of FSRU. So, it has gotten back to this game Teekay is good at. Operating, cost of capital, those are things that play to our strengths.

Kind of looking at your fleet, your FPSOs, the Cidade that was offered down at cost. Can you talk about rationale on pricing? If it was taken down at the fully built-out cost, then I guess you're not getting any spread for the risk you might have taken to -- on that project?

That's right. And, that's a key part of being the general partner. We have two -- we have one agreement with Teekay LNG and another agreement with Teekay Offshore, that any asset that we create up at Teekay Parent must be dropped down or offered to the daughter at our fully built-up costs. So, we don't take any spread on assets or projects that we create up at Teekay Parent in offshore and LNG. And, I think that's a good thing because that aligns us with the investors down at the daughters, and that makes it an accretive deal. And, we make our money back through our general partnership interest.

Just to add to that, our fully built-up cost does include our cost of capital so that we do get a return during the construction period.

Okay, great. Then, I guess the difference with the Spirit was you acquired that unit. So, you were able to charge a premium on the drop-down?

That's right.

I guess with the Petrojarl I, now that that's coming off hire, can you talk about expected operating expenses on that ship while it's not earning revenue? Are you able to reduce the crew and minimize some of the OpEx?

Yes, it takes us a while to move the crew to other units. The good news is we have new units coming on, like the Knarr. So, it takes us, what, about a quarter to reduce our expenses down on that.

That's right. We're reducing the crews gradually and redeploying some of the crews on other units. So, I think in the third quarter, we should expect some reduction in the OpEx for Petrojarl I.

Okay, but that may lag.

Yes, I would say that the second quarter we have to sort of incur those operating costs.

Right.

Which is what Vince said.

Then, one more before I turn it over. G&A, I guess looking at the breakout of G&A between Teekay Parent and the daughters. It's still really high to the Parent Company, and I guess the daughters have grown significantly. Is there any way to shift some of those costs more down to the daughter levels? Especially when they are project-based and asset bases increase?

Yes, the G&A of the Parent is gradually decreasing, as we drop down more assets, and there is quite a bit of operating G&A related to the FPSOs. So, as we drop down more FPSOs, more of that will go down to Teekay Offshore. There is a component of business development costs sitting at the Parent as well, and you'll notice that at certain times we also charge success fees to the daughter companies as we drop down assets or make acquisitions. So, some of that recovery is a little bit lumpy in terms of timing.

Got it. I appreciate the time. Thanks.

(Operator Instructions)

The next question comes from Urs Dur of Clarkson Capital Markets. Please go ahead.

Good morning, everybody.

Good morning.

Most has been answered towards the end here, but I was wondering if Vince can take us through -- I guess you've guided on equity income. But, if you can give us a little bit more color on the drivers of that line item -- what's expected more for later in the year?

Yes, we've -- as we indicated on slide 7, we are expecting equity income to increase in the second quarter. And that gives you the full effect of the EXMAR LPG joint venture, as well as the Itajai FPSO.

Great. I've noticed that in the guidance. I was wondering if there are any other drivers that we should consider going forward? Or, just take that guidance for the face value?

I think that's probably a good run rate for the time being. There are some newbuildings being delivered in 2014 onwards in the EXMAR LPG, so that will increase. So, unless we enter into additional joint ventures, that's probably a good run rate for the time being.

Okay. Thank you very much. Everything else has been answered. Thanks.

Thank you. There are no further questions at this time.

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

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line and have a great day.