Teekay Corp Ltd (TK) 2014 Q1 法說會逐字稿

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

Before Mr. Evensen begins, I'd like to direct all participants to our website at www.Teekay.com where you'll find a copy of the first-quarter 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 first-quarter 2014 earnings release and earnings presentation available on our website.

I'll 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 2014 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 we will be taking you through the first-quarter 2014 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 first quarter of 2014, Teekay Corporation generated $265 million of total consolidated cash flow from vessel operations, or CFVO, an increase of 37% from the same period of the prior year.

Teekay Corporation reported consolidated adjusted net income of $3.5 million, or $0.05 per share, for the first quarter, compared to a consolidated adjusted net loss of $11.7 million, or $0.17 per share, in the same period of the prior year. The increase in our adjusted net income is mainly attributable to stronger spot tanker rates, interest income recorded on our investment in three term loans, contributions from acquisitions and organic growth projects that delivered during the past year, and savings resulting from the re-delivery of six chartered and conventional tankers since the start of 2013, which was partially offset by lower revenues from our FPSO fleet due to operational issues and idle time between contracts.

During the quarter, we continued to execute on our strategic objective of having our ships and offshore units owned at the daughter company level. In late February, Teekay Parent co-created and invested in Oslow Lifted Tanker Investments Limited, or TIL, to which we sold our last four directly owned Suezmax conventional tankers.

In addition, Teekay Parent agreed to sell a 50% ownership interest in its conventional tanker commercial and technical management operation to Teekay Tankers for $15.6 million. As consideration for this sale, Teekay has agreed to take back additional Class B multi-voting shares in Teekay Tankers.

As a result of these transactions, Teekay Parent has further reduced its direct exposure to the volatility of the conventional tanker market, and is another step closer to its goal of owning vessels directly at the daughter company level, while still maintaining upside exposure to an expected tanker market recovery.

In April 2014, we completed required operational testing on the Voyager Spirit FPSO. And the unit received its certificate of final acceptance from the charterer effective as of February 22.

Receiving final acceptance marks the end of Teekay Parent's indemnification obligation related to the sale of the Voyager Spirit to Teekay Offshore. After taking into account the total indemnification payments of $38.4 million made to Teekay Offshore, Teekay Parent sales price to Teekay Offshore was still approximately $37 million higher than the costs incurred to acquire and upgrade the units.

Turning to slide number 4. I will review some recent highlights from our three publicly traded daughter companies.

Overall, our two publicly traded MLPs continued to execute on their respective business plans during the quarter. Teekay Tankers enjoyed a resurgence in spot tanker rates in the first quarter of 2014.

For the first quarter, Teekay LNG Partners declared a cash distribution of $0.6918 per unit. Based on our GP and LP ownership interest in TTP, the cash flows received by Teekay Parent totaled $25 million for the quarter.

In late March, Teekay LNG Partners, through a new 50/50 joint venture with a China-based LNG shipping company, signed a letter of intent to provide six internationally flagged ice breaker LNG carriers to the Yamal LNG project located in northern Russia. The project, which is being developed by Novatek, Total, and China National Petroleum, is currently scheduled for startup in late 2017, and is expected to produce 16.5 million metric tons of LNG per annum through three trains, once operating at full production.

LNG from the new liquefaction facilities will be transported primarily to Europe and Asia. The six vessels are expected to deliver between 2018 and 2020, at which point they will commence their respective 25- to 27-year time charter contract, plus extension options.

Teekay LNG Partners investment in these vessels is expected to total approximately $1 billion for its 50% ownership interest. In early April, Teekay LNG Partners LPG joint venture with EXMAR took delivery of the first of 12 mid-sized LPG carrier newbuildings, marking a milestone in the LPG joint venture's growth strategy.

Looking at the results for our other MLP, for the first 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 $17.7 million for the quarter.

Just this week, Teekay Offshore Partners signed a letter of intent to acquire Logitel Offshore Holdings, an offshore floating accommodation company carved out of our 43% owned affiliate, Sevan Marine. Logitel currently owns two floating accommodation units which are based on the Sevan Marine cylindrical hull design, and are currently under construction at the COSCO shipyard in China. Logitel has options to order up to an additional six floating accommodation units from COSCO.

The first newbuilding accommodation unit has already secured a three-year charter contract plus extension options with Petrobras in Brazil. And we expect to secure a charter contract for the second newbuilding prior to its scheduled delivery. Both units are scheduled to deliver in 2015.

The floating accommodation market represents an exciting adjacent growth opportunity for Teekay offshore, with potential synergies in the Partnership's existing operations, opportunities to gain additional business from our existing customer base, and another application of Sevan's innovative cylindrical hull design technology. Based on the Logitel opportunity alone, Teekay Offshore Partners' investment in the floating accommodation market could be up to $1.5 billion if all the options are exercised.

In March, Teekay Offshore Partners completed its $261 million acquisition of ALP Maritime Services, a Netherlands-based provider of long-haul ocean towage and offshore installation services to the global offshore oil and gas industry. As part of the transaction, Teekay Offshore Partners and ALP entered into an agreement with Niigata Shipbuilding and Repair of Japan for the construction of four state-of-the-art Ulstein design long-distance towing and anchor handling newbuildings, which are scheduled to deliver in 2016.

Lastly, in May 2014, Teekay Offshore Partners secured a 10-year contract extension with Apache Energy for the 1987 build Dampier Spirit FSO, which will continue to operate on the stag oilfields in western Australia. The unit is expected to enter into drydock in the second quarter for upgrades of approximately $11 million. Under the contract extension, the unit is expected to contribute approximately $5.7 million in annual cash flow from vessel operations or CFVO.

This is another example of how Teekay Offshore Partners can invest a small amount of CapEx to extend the life of its existing older tonnage. Upon completion of the 10-year contract extension, this FSO unit will have been in operation for a combined 37 years, which includes 11 years as an Aframax tanker and 26 years as an FSO unit.

Finally, looking at Teekay Tankers, in the first 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 $600,000.

Teekay Tankers generated cash available for distribution, or CAD, of $0.36 per share in the first quarter of 2014, or 3 times the $0.12 per share the Company generated in the fourth quarter of 2013, mainly due to higher average realized spot tanker rates and interest income recognized on its investment in term loans. During the first quarter, crude tanker rates reached the highest level since the third quarter of 2008, mainly due to higher crude oil imports into China, an increase in long-haul crude oil movements from the Atlantic Basin to Asia, combined with seasonal factors.

In late March, Teekay Tankers assumed full ownership of two 2010 built VLCCs, which had previously secured its $115 million investment in two term loans that were in default. In early May, Teekay Tankers sold these vessels to TIL for an aggregate purchase price of $154 million, which resulted in Teekay Tankers earning a total return of 12% per annum on these investments since their inception in July 2010.

Slide 5 provides an updated overview of our portfolio of growth projects across the Teekay group. We continue to make progress on our existing portfolio of growth projects and have also added some new projects since we updated you last quarter. I won't cover all the projects on this slide. However, I would like to provide you with a brief update on a few of the projects shown.

At Teekay Parent, we're primarily focused on completing the construction of the Petrojarl Knarr FPSO newbuilding, and the repairs and re-installation of the Petrojarl Banff FPSO. These are progressing well, and I'll talk more about these projects in a moment.

At Teekay Offshore, the Remora high-load dynamic positioning unit is on location in Brazil, undergoing operational testing, which I'm pleased to report is progressing well. The unit remains on track to commence full operations under a 10-year time charter contract with Petrobras in the second quarter of 2014, following completion of these operational tests.

The Teekay Group also continues to add new projects. However, what's different from the past is that the new projects are being done directly at the daughter level rather than by Teekay Parent.

Turning to slide 6, I'll provide a brief update on Teekay Parent's current FPSO projects. The Knarr FPSO newbuilding, our largest FPSO project to date, remains on track for its scheduled sail away in late June 2014 from the Samsung shipyard in South Korea for the Knarr oil and gas field in the North Sea.

Following field installation and production testing, the unit is expected to commence its 10-year charter with BG in the latter part of the fourth quarter, at which point the unit will be eligible for sales to Teekay Offshore. As you can see from the picture at the top right of the slide, the Knarr had its naming ceremony at the Samsung shipyard on February 28.

The repairs and upgrades to the Banff FPSO were completed, and the unit was towed to the Banff field in the North Sea for reinstallation in the first quarter. The unit is currently finishing up its field installation, and is expected to recommence its charter contract with CNR in the latter part of the second quarter.

Under its current contract rates, the Banff FPSO will operate at near cash breakeven levels. However, starting in January 2015, there will be a rate step up, which will result in significantly improved cash flows, at which time the unit will become eligible for drop down to Teekay Offshore under the omnibus agreement with Teekay.

Turning to slide 7, I'll provide a brief update on the status of Teekay Parent's three remaining on the water FPSOs. In late February, production was halted on the Foinaven FPSO due to continued issues with the units only operating gas compressor, while the unit's second gas compressor was still under repair.

The shutdown resulted in lost production of 32 days in the first quarter, and an estimated 37 case in the second quarter. Repairs will be completed in the next week and the unit is expected to recommence operations using its one compressor at approximately two-thirds of targeted production.

In late June, we expect repairs on the second compressor to be completed, at which point the unit will be capable of producing at its targeted production levels. Although the shutdown is unfortunate, we're working closely with the charterer to minimize the planned shutdown period in Q3 to recoup as much lost production as possible.

In May 2014, the charter contract for the Hummingbird Spirit FPSO was extended to December 2015, and with extension options out to March 2017. We have an active dialogue with Centrica looking at future options for this oilfield, which includes the Hummingbird Spirit, and hope to report back to you on the longer-term outlook for this unit later this year.

Lastly the Petrojarl 1 FPSO, which completed its previous contract with Stout Oil in 2013 is now in layup. We continue to evaluate potential redeployment opportunities or a potential sale to a third party.

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 8, I will review our consolidated results for the quarter, comparing the adjusted income statement for the first quarter of 2014 against an adjusted income statement for the fourth quarter of 2013, which excludes the items listed in appendix A to our release. And later on I will also provide our outlook for the second quarter of 2014.

Starting at the top of the page, net revenues increased by $10 million, primarily due to the strong spot tanker rates in Q1, and a $12 million increase in interest income recognized on our three term loans upon assuming ownership of the three VLCCs in March, as vessel values had appreciated during Q1. These increases were partially offset by a decrease in revenues from our FPSO units, primarily due to incremental revenues from the Foinaven FPSO contract related to the annual trueup amount typically recognized in the fourth quarter of each year, net of a $7 million commercial settlement received in Q1 in relation to the Foinaven's 2013 production.

Vessel operating expenses decreased by $4 million, mainly due to the sale of six conventional tankers in the fourth and first quarters, and lower repairs and maintenance cost on our FPSO units. Time charter hire expenses decreased $8 million due to the redelivery in the fourth and first quarters of five in-charter vessels, partially offset by an increase in spot in-chartering costs in our shuttle tanker fleet.

Depreciation and amortization decreased $6 million due to the sale of four conventional tankers to TIL, and the impairment charges recognized in the fourth quarter 2013 which reduced the book values of two shuttle tankers. G&A expenses increased by $2 million partly due to the timing of recognition of long-term incentive compensation expenses, which are typically higher in the first quarter of each year.

Interest expense was consistent with the prior quarter. And interest income decreased $3 million primarily relating to the settlement of a joint venture loan in the forth quarter of 2013. Equity income decreased $3 million primarily due to lower income from Sevan and scheduled drydockings.

Income tax expense increased by $8 million mainly due to adjustments to certain of our freight tax accruals in the prior quarter. Non-controlling interest expense increased by $9 million, mainly as a result of higher adjusted earnings in Teekay Tankers compared to the fourth quarter.

And looking at the bottom line, adjusted net income was $0.05 per share in the first quarter, up from the previous quarter's adjusted net income of $0.02 per share. And, as noted above, interest income from our VLCC loans contributed approximately $0.12 per share in consolidated net income in Q1. And a $7 million Foinaven commercial settlement contributed about $0.10 per share in consolidated net income in Q1.

Now turning to slide 9, we have provided some guidance on our consolidated financial results for the second quarter of 2014. Revenues from the fixed rate fleet are expected to decrease as a result of the following.

A $15 million decrease due to interest income recorded on the VLCC term loans in the first quarter, $9 million of which was recognized in TNK, and the remaining 6 million in TK Parent. A net $8 million decrease from the shuttle tanker fleet due to lower COA activity and higher drydocking activity, partially offset by the commencement of the high-load unit charter affected from mid April. An $8 million decrease related to the Foinaven FPSO, primarily due to the commercial settlement received relating to prior years' production. A $5 million revenue decrease from the conventional tanker fleet due to higher drydocking activities in the second quarter and from recent tanker sales.

These decreases are partially offset by an expected $6 million increase from the remaining FPSO fleet primarily due to higher expected production and a $4 million increase from the LNG fleet from fewer expected drydocking days and repair days in the second quarter.

Spot revenue days are expected to remain consistent with Q1. So far in Q2, we have fixed approximately 55% of our spot Aframax and Suezmax revenue days at average TC rates of $15,800 per day and $17,200 per day, respectively. Although the spot rates have declined from the highs of Q1, spot rates so far in Q2 are relatively stronger than the second quarter of 2013, where Aframax and Suezmax rates averaged just over $12,000 per day in Q2 of 2013.

Overall, vessel operating expenses are expected to increase by $3 million in the second quarter due to higher repairs and maintenance on the FPSO fleet and the delivery of the high-load unit in mid April, partially offset by the recent sales of five conventional tankers. Time charter hire expense is expected to decrease by $6 million as a result of lower expected spot in-chartering activity and scheduled off-hire relating to our in-charter shuttle tanker fleet.

Depreciation and amortization is expected to increase by $2 million, related to depreciation on the high-load unit and the Shoshone Spirit VLCC, which Teekay Parent assumed full ownership of in March in settlement of its term loan investment. This vessel is currently trading in the spot tanker market and is a potential conversion candidate for an FPSO project which Teekay Offshore is bidding on.

We expect G&A to decrease by approximately $1 million in the second quarter due to certain equity compensation expenses that were recognized in the first quarter, which I referred to earlier, partially offset by shore-based annual salary increases which became effective on April 1. Net interest expense in Q2 is expected to remain consistent with Q1 as interest expense related to the high-load unit is offset by reduced indebtedness relating to the recent sale of five conventional tankers.

Equity income is expected to decrease by $2 million, mainly due to scheduled drydockings and certain incentive-related revenues received in Q1. Income tax expense is expected to be consistent with Q1. And non-controlling interest expense is expected between $42 million and $44 million in Q2, which is lower than Q1 primarily as a result of lower expected earnings in Teekay Tankers from the softening spot tanker rates and the term loan interest income TNK recognized in the first quarter.

Overall, we are expecting weaker results in the second quarter compared to the first quarter, mainly as a result of lower spot tanker rates in Q2 and the income from the VLCC loans recognized in Q1. However, looking ahead into the second half of 2014, we should expect our results to improve as the Banff FPSO returns to operation, the Foinaven FPSO increases its production, and with the scheduled startup of the Knarr FPSO towards the end of the year.

With that I'll turn the call back to Peter to conclude.

Thanks, Vince.

Turning to slide 10, I'm pleased to inform you about the Teekay Group's 2014 Investor Day which is scheduled for the morning of Tuesday, September 30, and will take place at the St. Regis Hotel in New York. At this event we will provide a detailed presentation for the Teekay Group of companies, covering our strategy, financial position, and the market outlook for Teekay Corporation and our three publicly-traded daughter companies.

The event will be webcast live for all interested investors. While this event is still several months away we encourage everyone to mark this date in their calendars. And we look forward to presenting and meeting with investors at that time.

So, to wrap up, lots of great activity going on all around Teekay and all around the world. Thank you for joining us on the call today. And, Operator, we're now ready to take questions.

(Operator Instructions)

Michael Webber of Wells Fargo.

Hi guys this is Sumit on for Michael. Our first question really is on the FPSOs at Teekay. Just wanted to get a sense, now that, in our perspective, we think the Knarr is potentially the next drop-down to TOO as it delivers closer to Q4, but given all the activity for all the other FPSOs, the Banff having a new contract and potentially the Hummingbird extending its contract with Intrica post March, how should we think about the order of drop-downs, post the Knarr to TOO?

We haven't changed our strategy which is when the FPSOs become eligible, and by eligible, we mean they have the right kind of contract, that's when we drop them down. So, as I said in my prepared remarks, the Banff will go back on its original charter. And what we're waiting for is a step up in the rates. That happens January 1, 2015. And then it becomes eligible in our minds for dropping down because it's an accretive transaction.

And the Hummingbird depends upon the outcome of our discussions that we have with Centrica, because we would prefer to have a longer term contract on that before it drops. And those are really the two. And the Petrojarl 1, if it gets a new contract, and as I said, we're in discussions with people in new contracts; then, when that gets put on to the new contract that also gets eligible to be dropped down.

So we don't have a particular exact date for it. As you heard, there are lots of ways for Teekay Offshore to grow. So, actually the drop-downs, with the exception of Knarr, can be done on a more opportunistic basis.

Got it. And regarding TOO's growth opportunities, the Logitel offshore deal, which was announced today, in terms of the value of the accommodation units, I believe the value mentioned was $1.5 billion, for eight floating accommodation units, two under contract with six options. So, just want to get a sense on how we should think about the potential returns associated with those assets in comparison to, say, floating production and storage units and floating storage units?

Yes, it's Ken here. The order will be for three units firm. And then we have a very long string of options that potentially could give us up to eight units. And in terms of the valuation there, if we look at the earnings potential and the current markets that we have, then the longer-term contracts that you're seeing out there and reported in the market at the moment, they're roughly trading at around 6 times cash flow.

Got it. And in terms of the potential accretion associated with those assets how should we think about that?

We're not for competitor reasons since we're bidding contracts, we're not giving out that information.

Got it, and six of those are options to potentially exercise. How should we think about the likelihood of exercising those options?

We will be bidding and we have a lot of flexibility on it, so we'll be reactive in this new space. And we will not be longer than what we are at present. So, it will be basically that we'll be, as we are fixing them, we'll be exercising options. It's entirely contract dependent as we go about the exercise. And, again, I want to stress that we have a lot of flexibility on the options so they are non-contingent options that we have for the next number of years here. So, it gives us great flexibility to pursue this market.

And what's common, as we have with our FPSOs and our shuttle tankers, is oil companies need certainty on their accommodation requirements as they plan out field developments. And so that gives us the chance to have greater forward visibility, which is what is required for us to declare the options. So we're quite excited about this. And I think the Sevan design is actually quite innovative to have it applied to the accommodation. And that's what we're hearing from customers, that they really like the design.

Got it. And on the topic of growth at the daughters, switching to the Yamal LNG project, based on your announcement from today, $1 billion for the 50/50 JV. That, in our perspective, comes out to about $330 million per vessel, which is quite expensive. So just want to get a sense on how you guys think about the risk associated with the vessels and the project. And is there a sovereign guarantee you guys have for the project? Or just how should we think about that?

Yes, I'll give a little bit more detail on the project tomorrow on the Teekay LNG Partners earnings call. But these are not conventional LNG vessels. They're ice-breaking vessels that are capable of breaking through ice of two meters. And therefore they cost more.

And so, you're absolutely right, $1 billion, 50% of six is about $330 million on a fully built up cost basis. But that represents the fact that these vessels are innovative and cost a little bit more. They will have the long-term contract and we expect them to be quite accretive when they get delivered.

Got it. That's all the questions I have for right now. I'll turn the call over.

Gregory Lewis of Credit Suisse.

Yes, thank you. Good morning, guys. Peter, when we think about them, and congratulations on the Logitel deal. I think this is pretty exciting. You guys must be really excited about it. When we think about the move into this business, does this signal a pivot away from the FPSO market? Or is there a slowdown in the FPSO market? I'm just trying to balance. Clearly, FAUs seem like a natural extension of your business but at the end of the day you only have so much, you only have so many bullets to fire at strategic growth. Could you just balance those two?

Sure. First of all, we are quite excited about the Logitel opportunity. But it all stems from actually listening to our customers because the same customers that need FPSOs are the same customers that need the accommodation units.

And so, in true Teekay fashion, we were out talking with them. And they were saying, here is a need that we have and if Teekay operates it and Teekay has a good design, then that's something we're interested in. I actually have different teams working on the FPSOs than is working on the accommodation side.

And so, then, if you back that down and look at it from Teekay Offshore Partners' point of view, Teekay Offshore Partners has to choose which project is the best one to develop. And I actually think we spent a lot of time both at Teekay LNG and at Teekay Offshore at having different business streams that all revolve around the same customers on the offshore side. So we can choose between a Remora high-load investment, a shuttle investment, an FPSO investment, or an accommodation unit.

Now, naturally, going into some of these new areas, it has to look better than the activities that we have both on a financial basis as well as on a customer basis. And we think that's what we will get off the accommodation side. We have a 6 times multiple on a cash-on-cash basis on the accommodation, which sets up well for these kind of units.

And, so, if you think about it from Teekay's offshore point of view we're diversifying our revenue stream, we get a bigger amount of portfolio. And then it's just a question of how much investment at any one time. But as we said on slide 5, what we really like about these, is that they fit in quite well in 2015 and looking out.

So you're right, we haven't won any FPSO projects for awhile, but that's because we are able to bid on just the projects that we want. But I assure you, that my FPSO team is bidding on projects both in the North Sea, as well as in Brazil. And we actually think that continues to have a really great opportunity. All that drilling that you've had in the next few years is causing the fields to be put into production.

Okay, great. And then just in thinking about the FPSO market, clearly, it seems like one of the issues has been, historically, these have been purpose-built field development assets. Now, costs in the offshore expense of, I think, one of the things that the market is starting to talk about is some standardization coming across the FPSO fleet. And there's always going to be a degree to which you can be standardized and a degree to which it's going to be purpose project built.

Are you seeing projects or bids, or is the team at Teekay thinking about trying to get more towards more of a standardized type FPSO that can maybe go from one field to another relatively easier? And the only reason I ask is, clearly, the Petrojarl 1 is an older FPSO, so that was obviously purpose-built. And it seems like they're having issues with the longer term viability of that and it's later in life. So I'm just trying to figure out if there's any way to standardize the FPSO design going forward that makes it more -- it's a more defensive asset because it can go from one field to another.

Yes, that actually is a great question. We spend a lot of time talking with suppliers about that, as well as with customers. And to use it in a metaphor, the question is, can you have FPSOs that are 737s, some are 777s, some are 787s. The reality is no.

Because of the different kinds of reservoirs that you have, the size, the amount of storage capacity, the API of it, how much gas there is, how much water, how much produced water it is, you really don't. It isn't possible to get a standardized unit. And the reality is people want to optimize the reservoirs that they have.

And, therefore, we're still in a situation where when we move from one field to another, we have to make modifications. We might have to add a heat exchanger, we might have to add some gas compression. And so I can't really see that that is going to happen.

What we're seeing though, is that there is some standardization, for example, in the pre-salt. Petrobras is trying to go with bigger units that are more or less sisters of them. But they can do that because it's the same field, basically and it's the same viscosity of the oil.

What we're seeing in the North Sea is an emphasis on a smaller field, heavier oil; and that actually sets up really well for Teekay because there are two kinds of, really, FPSOs or contracts.

There are the small contracts where you go and you're on a field for three to five years, then you have to move on to another field. And we have purpose-built our FPSOs so they can be modified quite easily. Whereas, if we had just built them for the cheapest cost for a certain field, we would hurt their rollover opportunity or residual value.

So, to answer your question, the Petrojarl 1, we're actively looking at projects all around the world. But the big question for us is should it be in a harsh weather environment like the North Sea? If it was, we would have to do greater modifications given its age. Or move it to a more benign water out in Southeast Asia or Brazil. And given the configuration, it's more better suited as an early well test ship, given that it has a limited amount of risers coming up.

So, that's a long explanation but the answer is that the standardization is a long way away. But people frequently look at the drilling market and say, we can do the same thing on the FPSO market. And the response has really been, from engineers, customers, suppliers, the answer is no.

Okay. Thank you, guys, very much for the timing and congratulations on a good quarter.

Taylor Mulherin from Deutsche Bank.

Good morning, guys. How are you? I wanted to just get a little bit more color on that VLCC you added to the Teekay Parent fleet in March. It sounds like, looking at options for FPSO conversion there. So, I just wanted to know if you could give any more color on how that thought process plays out. And just generally what the timeline for something like that would be. And then, the last one was, could this, in some way, be something that could be done directly at the daughter level, like you mentioned as a goal in the past?

I think this is pretty fortuitous. Teekay Tankers made a loan secured by two VLCCs. They didn't want them and could sell them profitably so they went ahead and sold them to TIL.

Teekay had a sister ship, also took over ownership. But in that case, we suddenly saw that we had a project that would require that VLCC, to convert it to an FPSO. So we're holding it and will bid it into that project. If we win that project, that project would be done down at Teekay Offshore, and then Teekay will sell that unit down to Teekay Offshore.

It's a real advantage when you're doing a conversion to have that unit in your operations because it gives us a much greater understanding of its requirements in order to convert it. Since it's in our operation we can take much more detailed measurements and surveys of it, and have a greater understanding, which helps us in the conversion process.

So, it's being bid actively into an existing tender. And hopefully, we win, in which case it will be sold down into TOO as part of an FPSO conversion project.

Makes sense. And then, this is something you alluded to earlier. But with the Hummingbird Spirit, it looks like the charter extended it out to year end 2015. And then with that option for those two additional years, does that leave it in limbo in terms of basically that contract duration being uncertain at this moment as far as the potential drop-down? Are you in negotiations to get that a little bit more certain?

Yes. As I said in my prepared remarks, I think the good news is we are talking with Centrica. And just as the Dampier Spirit got extended with Apache, the natural way is that this field will continue in operation, and therefore the Hummingbird Spirit is the natural unit in order to continue on this field.

Since, as with the Dampier Spirit, we got a net present value positive, we want that amount to be represented in the drop-down. So, I don't want to sell it now. When it gets a better contract then Teekay Parent can make more money by dropping it down because the fair market value will increase. So, as I like to tell everyone inside Teekay, a dollar is a dollar is a dollar. We want to maximize these contracts before they get dropped down.

Makes sense. And then one housekeeping item, on the Foinaven. I just wanted to make sure I understood the off hire stuff. Is it going to be completely down in Q2 for 37 days, and then after that be operating at two-thirds of production? Or is that 37 days of down time a netting out for that reduced utilization?

The 37 days is the estimated down time for all of Q2. And then for the remaining period of the second quarter, well actually from the remaining period starting from probably next week, we hope to start producing closer to the two-thirds of the targeted production.

Got it. Thanks for your time, guys.

Keith Mori of Barclays.

Good morning, gentlemen. Peter, I just want to come back to the FPSO market. We see today drilling rates coming down, utilization coming down across the board. How do you see that playing out on the FPSO market over the next two to three years with drilling activity maybe slowing here?

I see a short-term effect and a long-term effect. On the short-term effect we never got those huge high, highs that drilling rates had, where you could get drilling rig rates that could repay it in four or five years. When we're inside the logistics system, we have much more consistent non-volatile rates.

So they are coming back down a little bit to earth. But what has been drilled up over the last few years will continue to be put in place. It's much more a function of oil price for us rather than drilling rig rates.

I think the good news that you're hearing is that as drilling rig rates come down, you will see an increased level of activity; and that will lead to more development plans going forward. The big complaint was, as Greg was saying earlier, the high cost of developing oil fields. And that high cost was preventing some fields from being put into development, taking FID. So, with drilling rig rates coming down, which could be anywhere from 25% to 33% of a total field development, that will just actually mean that there will be more FPSOs. But that's a medium-term issue, not a short-term.

All right, thanks for that information. I'd like to shift over to the cash flow story. Peter, you have a lot of growth projects coming online over the next two to three years. And they're going to require a lot of capital commitments. Just curious how your thought process is on Teekay supporting some of those capital commitments, in terms of ownership percentages, and how we should think about that going forward.

As we indicated in the past and today's call, all the new projects are done directly at the daughter company level. We've been warehousing these projects and making acquisitions directly there, and financing it with existing liquidity as well as issuing equity along the way.

We don't intend to utilize the Teekay Parent balance sheet for those new growth opportunities. So, the only remaining CapEx of the Parent really is, as summarized on page 15 of our presentation, is the remaining $160 million of CapEx related to Knarr FPSO. Otherwise everything else is really down at the daughter company level.

Thanks. I think I should refine the question maybe a little bit. I know that you'll be raising equity over the next year or two. How do we think about Teekay maintaining its ownership percentage in the daughter companies as those equity provides are raised?

We look upon the LP side, or limited partner side, we look upon our investment in MLPs, as well as any daughter on an investable basis. So, if we think it makes sense, then we'll invest. But it actually hasn't been our plan to increase our investment on the LP side.

We have a better use, which is we will raise the return on invested capital at Teekay Parent by having the GP value be a greater amount. And if we do that and reduce investments in other things, then the return on invested capital at Teekay Parent naturally goes up. And that's the greatest way we can create value for our shareholders.

Thank you for the time.

Urs Dur of Clarkson Capital Markets.

Good morning. You guys did a great job talking about the FPSOs, so I don't really have anything else to ask. I do note that you beat your revenue line very significantly on the guidance. And it's not really to poke anything at. I think it's an excellent result. But what's your confidence level on the guidance for this coming quarter?

As we laid out, Urs, on guidance, is on slide 9, given the fixed rate nature of the bulk of our revenues we have very high confidence on the guidance we're giving for the second quarter. And, as I mentioned, I think the outlook is better for the second half of 2014.

Okay, very good. And thanks for all of the info on the FPSOs. Thanks, guys.

Matthias Detjen of Morgan Stanley.

Good morning, gentlemen. Thank you for the update. I just have one quick question regarding TIL and the wider group. I know the expansion at TIL has come from internal sales of tankers. And I was wondering if future expansion is going to continue like that or if it's going to be focused more on external acquisitions?

In TIL, we are almost entirely focused on external acquisitions. As you heard earlier, we have sold our last four Suezmaxes from Teekay now. And we have one VLCC that we are holding for a potential FPSO project. So, presently, we are looking at the external market. In TIL, 6 of the 13 vessels that we own there, you're correct, originated from Teekay but that's only 6 of the 13.

Okay. And from the wider group, as well? Because some of them came from TNK, so I was wondering if there was any thought there?

No, there are absolutely no plans of selling assets from TNK to TIL.

Okay, great. That was actually it for me. Thank you very much.

(Operator Instructions)

Sameer Panjwani of Raymond James.

Hi guys, good morning. Peter, just a little while ago you mentioned the Teekay Parent strategy of maximizing the GP value. And obviously, one of the ways you guys are going to do that is to become asset light at Teekay Parent. And to that point, I saw, compared to the fourth quarter, a presentation; and this quarter's presentation you have the KT Maritime towage newbuildings coming in at Teekay Parent. So could you maybe elaborate of where those assets are actually going to be housed? Are they going to be at Teekay Parent or are they going to be dropped down somewhere?

Yes, so, this is a relatively small investment compared to what we've been talking about today. It's about $50 million. It was created by our Teekay Australia unit. We're really proud of them, that they have. But we actually have only 50% of that $50 million investment so it's net $25 million.

Ultimately, it will not be a Teekay Corporation. We just haven't figured out exactly where it is. It's a towage operation so it looks a little bit like offshore. But it relates to an LNG project, so that has aspects of Teekay LNG. But it's $25 million so we have time to figure out which daughter it belongs in.

Okay, I appreciate the color, thank you.

(Operator Instructions)

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

Great. Thank you all very much. It was an active quarter and I'm really proud of the whole Teekay team all around the world. We look forward to reporting back to you next quarter. Thank you.

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