Teekay Corp Ltd (TK) 2014 Q4 法說會逐字稿

Welcome to Teekay Corporation's fourth quarter and FY14 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.

Before Mr. Evensen begins, I would like to direct all participants to our website at www.teekay.com, where you will find a copy of the fourth quarter and FY14 earnings presentation. Mr. Evensen and Mr. Lock will review this presentation during today's conference call.

Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the fourth quarter and FY14 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Evensen to begin.

Thank you Scott. Good morning everyone and thank you for joining us today for Teekay Corporation's fourth quarter and annual 2014 earnings call. I'm joined this morning by our CFO, Vince Lok, and for the Q&A session, we also have our Group Controller, Brian Fortier.

During our call today, we will be taking you through the earnings presentation which can be found on our website. Beginning on slide 3 of the presentation, I will briefly review some recent highlights for Teekay Corporation. For the fourth quarter of 2014, Teekay Corporation generated $308 million of total consolidated cash flow from vessel operations, or CFVO, an increase of 25% over the same period of the prior year.

For FY14, our consolidated CFVO has now grown to over $1 billion. Teekay Corporation reported consolidated adjusted net income of $30.7 million, or $0.42 per share for the fourth quarter of 2014, compared to $1.1 million, or $0.02 per share in the same period of the prior year. While I am pleased with the improvement, which is mainly due to profitable growth projects and stronger spot tanker rates, it would have been significantly higher if we had, had higher utilization on the 100% owned Foinaven FPSO throughout the year as well as a higher oil tariff revenue on the Hummingbird Spirit FPSO.

On a full-year basis, Teekay Corporation generated adjusted net income of $1.5 million, or $0.02 per share compared to a consolidated net loss of $79.9 million, or $1.12 per share for FY13. This is our first full year profit since 2008 and with Teekay at an inflection point in its operational performance, I look forward to building on these results in future years as a result of more growth projects starting up and higher utilization on our FPSOs, including having the Banff FPSO back and operating for a full year.

Since reporting our third quarter results in November, we continued to make steady progress on Teekay Parent's strategic transformation into a pure play general partner. In December, after successfully re-contracting our oldest FPSO, the 1986 build Petrojarl 1, the unit was sold to Teekay Offshore Partners for $57 million. Teekay Offshore will upgrade the unit, which will then commence a five-year contract in Brazil in the first half of 2016.

In December, Teekay Offshore Partners agreed to acquire the Petrojarl Knarr FPSO from Teekay Parent for fully built-up cost of approximately $1.2 billion. We expect to complete the sale of the Knarr FPSO to Teekay Offshore by the end of the first quarter, following the achievement of first oil and commencement of the unit's charter contract with BG.

We remain committed to the new Teekay Parent dividend policy that we announced in late September, which we anticipate will take effect in the second quarter of 2015, following the completion of the sale of the Knarr FPSO to Teekay Offshore. Based on the dividend cash flows Teekay Parent receives from its daughter entities, we intend to increase Teekay's annualized cash dividend to be between $2.20 and $2.30 per share, which represents an increase of approximately 75% to 80%.

In addition, with our existing project backlog of approximately $7 billion of known growth projects that are two MLPs, Teekay Corporation's dividend should continue to grow from the new hire base as our MLPs increase their distribution as those projects deliver over the next few years.

Turning to slide 4, I will review some recent highlights from our three publicly traded daughter entities. For the fourth quarter, Teekay LNG Partners declared a cash distribution of $0.70 per unit, an increase of 1.2% from the previous quarter. Based on our GP and LP ownership interest in TGP, the cash flows received by Teekay Parent totaled $26.3 million for the quarter.

In early December, Teekay LNG secured time charter contracts with a wholly-owned subsidiary of Royal Dutch Shell for five newbuild MEGI LNG carriers. The vessels will operate as part of Shell's Global LNG fleet under time charters ranging in duration from six years to eight years plus extension options.

Delivery of the vessels will commence in the second half of 2017 and continue into 2018. In order to fulfill our commitment to Shell, Teekay LNG exercised its remaining options with DSME Shipyard for the construction of three additional MEGI LNG carrier newbuildings.

In February a new contract was signed with DSME for one additional MEGI LNG carrier and this order included options for four additional LNG newbuildings. This contract was entered into because Teekay LNG continues to see customer requirements for MEGI LNG vessels and needs ships to bid on these requirements.

Teekay LNG's total investment for the four newbuildings ordered in December and February is approximately $850 million. In November, Teekay LNG Partners agreed to acquire a 2003 built LPG carrier, the Norgas Napa from I.M. Skaugen, along with a five-year charter back to Skaugen at a fixed rate plus potential upside through a profit-sharing component.

In January, Teekay LNG Partners LPG joint venture with Exmar took delivery of the fourth of its 12 mid-sized LPG carrier newbuildings as part of that joint venture's fleet renewal and growth strategy. Looking at the results for our other MLP for the fourth quarter, Teekay Offshore partners declared a cash distribution of $0.5384 per unit. Based on our GP and LP ownership interest in TOO, the cash flows received by Teekay Parent totaled $18.1 million for the quarter.

During the quarter Teekay Offshore continued to secure growth in both its offshore production and offshore logistics businesses. As I noted a moment ago, in December, Teekay Offshore acquired the Petrojarl 1 FPSO unit from Teekay Parent.

The unit is currently undergoing upgrades at the Schiedam shipyard in the Netherlands for a total cost of $235 million, including the $57 million cost to acquire the unit. The upgraded Petrojarl 1 FPSO will be used as an early production system on the Atlanta field in the Santos Basin offshore Brazil for a consortium led by QGEP, commencing in the first half of 2016.

In January, Teekay Offshore, through its 50/50 joint venture with Odebrecht Oil & Gas finalized a contract with Petrobras and its international partners, to provide an early well test FPSO unit for the Libra pre-salt oil field in the Santos Basin. The FPSO will be converted from an existing Teekay Offshore shuttle tanker for a fully built-up cost of approximately $1 billion on 100% basis.

The unit is expected to commence operations under a 12-year fixed fee-based contract in early 2017. This will be the second FPSO project for Teekay Offshore Partners' joint venture with Odebrecht. Finally, in November, Teekay Offshore's wholly-owned subsidiary, ALP Maritime, agreed to acquire six long-distance towing and anchor handling vessels for an on block price of approximately $220 million.

This acquisition, combined with ALP's four existing newbuildings, is strategically important, as it positions ALP as the clear leader in the long-distance dynamically positioned towage segment with a fleet of 10 vessels. The acquisition provides ALP with greater scale to bid on a broad range of projects and a larger presence in the growing global ocean towage and offshore installation market.

Moving on to Teekay Tankers. In the fourth quarter, the Company declared a fixed dividend of $0.03 per share. Based on its total ownership of Class A and Class B shares, Teekay Parent received a cash dividend of approximately $900,000. Teekay Tankers generated free cash flow of $0.35 per share in the fourth quarter of 2014, a 192% increase from the same period of the prior year, mainly due to an expanded in-charter fleet and higher average realized spot tanker rates.

In December, Teekay Tankers agreed to acquire four LR2 product tankers and one Aframax tanker from third parties for an aggregate price of approximately $230 million. The acquired vessels, two of which are already delivered and three of which will deliver by the end of the first quarter, further increases Teekay Tankers' operating leverage to the strengthening tanker market while the LR2 vessels also provide the flexibility to trade in crude or product tanker markets.

Teekay Tankers also continued to be commercially active during the fourth quarter, securing three additional in charter Aframax tanker contracts, which brings Teekay Tankers chartered-in fleet to a total of 11 vessels. The 11 charter-in contracts have a low average daily rate of $16,700 and initial firm contracts of between six and 33 months, with extension options.

During the quarter, crude tanker rates reached the highest level in six years, supported by a combination of seasonal factors and increased tanker demand as a result of low oil prices. Rates have remained firm in the first quarter of 2015 as these positive demand drivers remain in place. Augmented by the emergence of floating storage with more than 30 VLCCs booked on time charter, with storage options since the beginning of the year.

Turning to slide 5, I will take a moment to update you on the status of the remaining FPSO assets at Teekay Parent. I noted that we had completed the dropdown sale of the Petrojarl 1 FPSO. This transaction highlights a shift in how FPSO projects are being managed within the Teekay Group.

Whereas in the past -- excuse me, whereas in the past we would have warehoused this project at Teekay Corporation and dropdown just as the unit was starting under its contract, Teekay Offshore now has sufficient size and balance sheet to warehouse this type of project on its own.

We are also within a few weeks of completing the dropdown of the Knarr FPSO, our largest FPSO project to date for fully built-up cost of approximately $1.2 billion. The Knarr FPSO is in the final stages of its field installation and its dropdown sale to Teekay Offshore will be completed following completion of the unit 72 hour interim production test, which is expected to be completed in March.

Following the Knarr dropdown, we will have three remaining legacy FPSOs, which we are targeting to dropdown by 2017. The Petrojarl Banff FPSO returned from off-hire in July 2014 and following repairs from storm damage incurred in late 2011.

In January, the Banff commenced a charter rate uplift under its existing multi-year contract which makes this unit now eligible for dropdown under our omnibus agreement with Teekay Offshore. We expect to offer the Banff for dropdown sometime during 2015, after the Knarr FPSO dropdown has been completed.

The Hummingbird Spirit FPSO is currently operating under a firm contract with Centrica until March of 2016 with options under the current contract which run through March of 2017. The existing charter is too short to qualify for dropdown eligibility under the omnibus agreement; however, we are currently reviewing new contract opportunities for the Hummingbird Spirit following the expiry of the current charter. Once we found a new long-term contract, the Hummingbird will become eligible for dropdown.

Finally, we have the Petrojarl Foinaven FPSO which is currently operating under an evergreen contract with BP. However, subsidy issues on the field are currently requiring that Foinaven to produce the low maximum capacity. We are currently working with BP to stabilize and increase production on the field and obtain approval to transfer ownership to Teekay Offshore.

Once this has been achieved, the Foinaven FPSO will also become eligible for dropdown. With Teekay Corporation's new dividend policy linked to future growth of its daughter entities, the dropdown of the remaining Teekay Parent legacy FPSO assets will be an important driver of future dividend growth. With that, I'll turn the call over to Vince to discuss the Company's financial results.

Thanks, Peter, and good morning, everyone. Starting with slide 6, this provides an overview of our consolidated results for the quarter, comparing the adjusted income statements for the fourth quarter of 2014 and the third quarter of 2014, both of which exclude the items listed in Appendix A to our earnings release.

A full reconciliation of adjusted net income to GAAP net income can be found in both Appendix A of our earnings release and the Appendix to this presentation. Looking at the bottom line, we had a better-than-expected fourth quarter, reporting a consolidated adjusted net income of $30.7 million, or $0.42 per share, compared to Q3 adjusted net loss of $12.6 million, or $0.17 per share.

The fourth quarter income more than offset the losses we had in the first three quarters of the year, resulting in a positive adjusted net income of $1.5 million for FY14. The main factors contributing to the fourth quarter results include the incremental revenues from Knarr, Foinaven FPSO contract related to the annual recognition of operational and oil price tariff revenue, typically recognized in the fourth quarter of each year. Higher average spot tanker rates earned by our conventional tanker fleet, lowering the ship repairs and maintenance costs for our FPSO fleet, and income tax recoveries recognized in Q4.

Now turning to slide 7, we have provided some guidance on our consolidated financial results for the first quarter of 2015. Revenues from the fixed rate fleet are expected to increase from the following: a $20 million increase from the Knarr FPSO, assuming finalization of the commissioning process by March 1; $4 million increase from the rate resets on the Banff FPSO effective January 1, 2015; and, a $2 million increase from the delivery of three ocean towage vessels assuming March 1 deliveries.

These increases are offset by a $20 million decrease from the annual revenue true-up for the Foinaven FPSO recognized in the fourth quarter which I mentioned earlier; a $14 million decrease from the expiration of time charter out contracts for one shuttle tanker and five conventional tankers. The conventional tankers have been redeployed for the spot market at higher rates, which I will discuss shortly.

An $8 million decrease from the remaining FPSOs due to incentive-based revenues recognized in Q4, a $4 million decrease from CoA days in the shuttle tanker fleet; and a $2 million decrease from lower time charter out rates on the Polar Spirit and Arctic Spirit LNG carriers.

Spot revenue days are expected to increase by 540 days due to additional in-charters in TNK and time charter out contract expirations that I mentioned earlier. So far in Q1, we have fixed approximately 60% of our spot Aframax and Suezmax revenue days, at average TC rates of $30,000 a day and $39,000 per day, respectively, which are materially higher than the Q4 comparative amounts.

Overall, vessel operating expenses are expected to increase by approximately $7 million, due to the Knarr FPSO and ocean towage vessels commencing operations and higher expected repairs and maintenance for our remaining FPSOs. Time-charter hire expense is expected to increase slightly by about $1 million in Q1, reflecting the additional in-charter conventional tankers in TNK.

Depreciation and amortization is expected to increase by $5 million related to the Knarr FPSO, the ocean towage vessels and TNK vessel acquisitions, partially offset by lower depreciation on the Petrojarl 1 FPSO. We expect G&A to increase by $4 million to $5 million in the first quarter due to certain stock compensation expense that is recognized annually in the first quarter of each year.

Net interest expense for Q1 is expected to remain consistent with Q4, as increases related to the Knarr FPSO and ocean towage vessels are partially offset by lower interest costs as a result of the fourth quarter refinancing of the RasGas II LNG carriers in TGP.

Equity income is expected to remain consistent with Q4. Income tax expense is expected to be approximately $2 million in Q1. Non-controlling interest expense is expected to be between $71 million and $73 million in Q1, primarily as a result of Q4 equity issuances in TNK and TOO, higher expected earnings in TNK from stronger spot tanker rates, partially offset by lower expected earnings in TOO.

Turning to slide 8, we have provided a comparative summary of Teekay Parent's Q4 and Q3 free cash flow. Our total free cash flow is separated into the OPCO cash flows of Teekay Parent's legacy operating assets and the GPCO's cash flow is comprised of a dividend payments from our daughter entities, which provides a basis for future dividend increases under our new dividend policy.

In Q4, OPCO cash flow improved by over $28 million compared to Q3, primarily due to the incremental fourth quarter revenues from our Foinaven FPSO contract mentioned earlier, and improved spot tanker rates. GPCO cash flow increased due to higher GP distributions following share issuances by TOO and TGP in Q4, higher dividends from TNK as a result of Teekay Parent acquiring 4.2 million shares as part of TNK's equity offerings in Q4 and lower corporate G&A.

Our corporate G&A is currently running below the annual run rate guidance of approximately $20 million per year. As a result of the above, total parent, Teekay Parent free cash flow per share increased from $0.21 per share in Q3 to $0.62 per share in Q4, which is well above our current quarterly dividend of about $0.32 per share.

Looking ahead into 2015, we expect our GPCO cash flows to increase shortly after the dropdown of the Knarr FPSO to TOO. The Knarr dropdown will also significantly delever Teekay Parent's balance sheet. As a result, we remain committed to our new dividend policy that we announced last September.

We're still targeting an initial dividend amount of $2.20 to $2.30 per share in the quarter following the Knarr dropdown, with future increases linked to increases and distributions received from our daughter entities. With that, I'll turn the call back to Peter to conclude.

Thank you, Vince. Turning to slide 9, with the recent decline in the oil price creating concern for investors, I wanted to take a moment to highlight Teekay's strong and diversified portfolio of fee-based contract revenues focused on the production side of the energy supply chain.

With an unrivaled backlog of over $20 billion of forward fee-based revenues, our offshore and gas business continues to generate stable and predictable cash flows from a wide cross-section of blue-chip customers. Each of our major business lines has an average remaining contract tenure, which will provide downside cash flow protection and stability for many years.

Turning to slide 10, we provided an update of our visible growth pipeline, which is now comprised of approximately $7.2 billion of accretive projects, including approximately $2 billion of new projects secured during the fourth quarter of 2014, across our two MLPs and Teekay Tankers. With both of our GPs in the 50% incentive distribution rights stage, this growth will be a key driver of future distribution increases at Teekay Corporation once our new dividend policy is implemented.

While we have locked in growth for the next few years, we will likely see our organic project growth be lower in 2019 and beyond, because of the oil price decline, as our customers take a wait-and-see approach on many projects. At this stage, we believe most of the new projects that we're discussing with our customers and on our internal radar screen for 2019 and beyond will go ahead, but be delayed as customers wait for clarity on oil prices and work with suppliers to lower costs.

It should also be remembered that much of the cost for finding new oil offshore has already been incurred on these projects, so on these projects, we are working on known reservoirs. The oil price decline may be a V-shape or a U-shape but the depletion rate on existing production will continue while all demand increases.

So we believe any interruption in oil production growth will mean that the oil price will ultimately be higher than today. As far as our strategy is concerned, should the oil price decline turn out to be protracted and result in fewer new organic project opportunities, we will probably supplement our growth with the acquisition of on-the-water assets with contracts, as Teekay has done in the past.

But that is well in the future and for now, we will concentrate on operating efficiently and executing on our $7 billion project pipeline that will support growth in both the distributions at our MLPs and in turn, drive additional dividend growth for Teekay Corporation for the next few years. Thank you for joining us on the call today and operator, we are now ready to take questions.

Thank you.

(Operator Instructions)

We'll pause for just a moment to allow everyone an opportunity to signal for questions.

Michael Webber from Wells Fargo.

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

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

Okay. Got it.

That flows up to the parent, of course, so the same timing.

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

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

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

That's right.

Okay. Okay. That's helpful. A couple more.

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

Got you. Okay. Along those lines, you get that the Libra now that you just finalized. And in one of your primary markets in Brazil and obviously, Petrobras is a major counterparty and they've been in the news quite a bit with the bribery scandal as has Odebrecht, too, involved in your JV.

One, I'm just curious what read through, if any, there's been to any risk -- actually working its way up to that JV with Odebrecht? And then, two, which I would imagine is a longer answer -- whether or not what's happening now in that Brazilian market leads you to look at other markets, maybe the Asian market as a bigger center of forward growth?

Sure. We have a joint venture with Odebrecht Oil & Gas. Odebrecht Oil & Gas is a division of Odebrecht and it's a separate division from Odebrecht that has been implicated in the Petrobras Car Wash scandal. So, we have checked in our joint venture.

We can continue to bid, but Teekay would front the bid, if you will. We've checked that with Petrobras and we are able to bid on those -- on new projects. We are not locked out as some of our competitors are.

In terms of Brazil, overall, we think that they have an active pace. We -- they are some of the customers we have forward look on what kind of projects are coming. What I like about our position in Brazil is we're not bidding on the really big pre-salt fields. We are bidding on a lot of the smaller fields where they know the reservoirs are there and the breakeven price of putting those fields into production is far less than what you have on the pre-salt.

So, we think a lot of those projects will go ahead, but not in the same timeframe that Petrobras had going forward. So, we anticipate bidding on Petrobras projects, but there won't be as many of those projects. But, I think the way we like it with smaller Aframax and Suezmax conversions of projects, which set up well like the Libra, we think that with -- there will still be projects there.

As far as moving to other places, that isn't on our radar screen right now. We have a good market in the North Sea, we have a good market in Brazil and what I'm watching in the North Sea, is our customers figuring out how can we do things cheaper.

That actually sets up quite well for some of our existing FPSO units like the Hummingbird coming off contract because those are the kinds of projects where they can use a cheaper unit rather than a newbuild. So, there is some light here at the end of this oil price decline tunnel.

Okay. That's helpful. Just one more for me and I'll turn it over. I'll save high load for the [teve]. I'll call tomorrow. But you mentioned just now, it was in your prepared remarks around opportunities and consolidation playing potentially a bigger role and kind of turning that three-year CAGR into a five- or six-year CAGR. I'm just curious.

When you look at around the offshore space, you mentioned some of your competitors getting locked out of bid now, or in the LNG space, either with larger scale FSRU or LNG carrier businesses. Where do you see the most opportunity from a consolidation standpoint and then do you think that's more of a 2015 event or are we going to see more of an opportunity a bit later on if we're off around 2016, 2017 when the balance sheet aspects start to shake out?

The latter. I see the good opportunities coming in 2016, 2017, and that sets up quite well with our project pipeline. I think everything has happened so fast in the last, call it, four or five months.

So, I think there really isn't the opportunity to do what I would call good M&A from our point of view. So, we're going to just execute on our existing pipeline and I don't expect you'll see much M&A. We get asked on a lot of projects, but I think the consolidation, which will happen, will take longer than everyone envisions.

Got you. Great. I will stop there and turn it over. Thanks, guys.

Greg Lewis of Credit Suisse.

Peter, you touched on the issues in Brazil. I guess just more of a bigger picture question as it pertains across all of the assets that are on fixed rate fee business.

Have you -- have customers started to approach you about potential price concessions or discounts in the near or medium term, for some of these long and data contracts? And then on the flip side of that, as you're building out some of this equipment, have you, then, in turn, gone to any of your equipment providers and started to look for discounts from them?

Sure. I think there's going to be continued pressure on the supply chain going forward. What I like about Teekay is that we're in the production side of things. So Teekay has always had long-term contracts. We never had the huge upswings that came on the drilling side and now, of course, the huge downswings. We are more of a steady-eddie. So, we are always in conversations with our customers.

They are going around to all of their suppliers and saying, what can you do to lower our costs? So, we're working with our customers in -- to try to work together to lower their costs and then be able to pass that on. But, we're not in active discussions, as you've seen on the drilling side, to just cut by 20%.

That isn't how oil companies work with people who are inside their logistics chain, especially on the production end. And the kind of cash flow we've put together, they need our assets in order to be able to produce oil and get cash flow. So, that puts us in a different position than, say, a drilling rig contractor.

Okay. Great. And then just -- in thinking about the dropdowns from Teekay to TOO, what types of financing should we be thinking about to get these done? I mean, as we look at TOO right now, the yield is a little bit high, arguably too high at 10%. What types of alternatives does Teekay have to execute these dropdowns in 2015, in the event that TOO's yield stays in the 10% range?

Greg, as you know with the Petrojarl Knarr, Teekay Corp. has agreed to provide vendor financing, given that, that asset is fully financed. So we have the flexibility to offer that to TOO. So, we don't need to issue any equity in the near term for the Knarr. Of course, we'll monitor the markets over the course of the year.

Teekay Corp. has also agreed to take back up to $200 million of TOO units as part of that dropdown, so that certainly facilitates that dropdown. In terms of the other assets, the Banff, I guess, is sort of next on the line-up. That's a relatively small asset.

So, we don't see that as a big financing requirement. It has a dedicated debt facilities as well that would go with the dropdown. So, you're looking at a relatively small equity slug for that. So I think --

That sounds like something where push came to shove, Teekay could just provide that capital?

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

Perfect. Thank you very much for the time.

Amit Mehrotra from Deutsche Bank.

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

Do you mean on existing contracts, or do you mean on new projects?

New projects.

I wish I could give you a marker on it, but the reality is, each oilfield is different. So, what we're seeing, is that the -- well, let's take the Petrojarl 1 FPSO. That was a project where our unit was the best unit that could come online. They could -- the QGEP could have used a newbuild and we were competing up against newbuilds but the Petrojarl 1 could come in at a much slower breakeven price, maybe closer to like $30.

So therefore, it was a very easy decision as far as we saw it because that was a chance for them to get cash flow much faster and it would ultimately enhance the value of that oilfield. So these early well test shifts, I think sets us up quite well for the replacement value of our existing assets. I would stress that beyond all of the new projects, irregardless of whether they have low breakevens, people are looking for how they can become more efficient.

I think that's where -- what we, as suppliers, have to do in order to get more projects and enhance assets. Obviously, the easiest way is that we have cheaper assets that we can reemploy and use the whole production. On our existing contracts, they have low breakevens, especially on a marginal cost basis so we don't see them terminating early on a lot of those fields. Because as you pointed out, a lot of money has been spent upfront and then they have lower marginal costs.

So, what we see playing out is actually an opportunity for Teekay, especially with our existing assets. But, if we with our -- for example, with Sevan unit on the newbuilding side can deliver cheaper capital costs then I think we'll get an advantage in new projects going forward. That's why we're exploiting some of the intellectual property we have like the Sevan design.

Okay. That's really helpful. If I can just sort of follow up on that. If we were to fast forward, say, four, five, six years, maybe if the oil price, whether it's a U or V, but let's assume it's a U for now, you might see sort of that come into the cash flows in the business, four, five, six years from now and then you might be able to backfill with acquisitions, like you said earlier.

I mean, is that sort of the thinking, where you think beyond the existing contract duration, you'd still, given the balance sheet, given the existing duration of the contracts, you'd still be able to maintain the distribution even beyond the existing duration?

Well, okay, so now you're asking for a crystal ball going forward five or six years. I think that's a pretty hard stretch. Here's what I think will happen. Teekay will be able to adapt to the environment that we have. We have shown that.

So, we are not relying exclusively on FPSOs. We're not -- we have moved ourselves into various places of the offshore chain. There's still going to be billions of dollars spent. Those billions are going to go to the suppliers who have the best service offering and that's what we're stressing in a longer-term timeframe.

So, that has to do with our units, that has to do with our operations and that's why we're not looking -- we are looking to become much more efficient as we have going forward. I think oil demand -- everyone always forgets that oil demand is going to continue to increase. This is -- this point just seems to be lost on people. Even the new BP outlook that came out this week points that out.

So, as I was trying to say in my prepared remarks, we have to replace a lot of the oil that's going to deplete going forward. That is basically an involved in being able to produce oil at a competitive price. Our FPSOs on a per barrel basis are the solution that can make that happen. Obviously, the rest of the supplier network will also look to how it can become more efficient.

Got it. Okay. Thanks. That's great color. Just one last housekeeping question with respect to the deleveraging of Teekay Parent following the Knarr dropdown. Just trying to get a little bit more clear on the magnitude of the deleveraging.

Because I guess the $850 million facility will dropdown with it and so you're left with $400 million -- $300 million to $400 million, I mean, is -- I would say the majority of the sales price of $1.2 billion would be reflected in the deleveraging. Is that safe to say?

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

Great. Great. Thanks very much, guys.

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

Yes, agreed. Thank you.

Darren Horowitz from Raymond James.

Peter, a couple quick questions. The first one actually dovetails with what we were just talking about with regard to financing structure. I want to make sure I'm thinking about this the right way. I think at the Analyst Day, you had laid out that from an annual investment capacity, the daughter MLP, TGP and TOO, respectively, could have anywhere around 60% or 65% debt capacity and let's just say we assume, per Vince's comments, that the $400 million of short-term vendor financing reflects a 6% or 6.5% yield.

That's meaningfully inside of the existing equity yields and I'm wondering, going forward, beyond the Banff, has there been a shift from a financing structure perspective where you think maybe vendor financing, if you will, corporate vendor-driven financing becomes more of an integral part of the overall financing mix so that, that way on a levered basis, you achieve the types of returns that you need in order to get that Teekay dividend growth on a multi-year period?

I would say that the vendor financing is a short-term fix. Ultimately, we will do better if TOO issues units. Obviously, as the -- as Vince was saying in the Q&A, we think the TOO price will normalize as it's yielding, call it around 10% now, and we're going to increase the distribution as it relates to the Knarr.

But from Teekay's point of view, we think Teekay Offshore is a good investment. So, that's something that we take into account when we're looking at it. But, I think we will find our way through this in the same way that it was in 2009. I always like to tell the story how I saw our two MLPs go from the low 30s down to 10 or 11 in the financial crisis and our EBITDA didn't change by $1.

Ultimately, they recovered, as people saw the stability of our fixed rates cash flows and I think the same thing will happen here, albeit that we don't have a financial crisis, but we do have the energy industry, which is going into recession. So, I think the ability of the sponsor to be able to do the right thing as it relates to the long-term capital structure of our two MLPs is a real competitive advantage.

Okay. In order for you guys to hit that 20% compound growth rate through 2017 and the Teekay Corp. dividend, has there been any shift to the associated coverage that you want to run at Teekay? I think when you had laid out the guidance, it was a 1.175 type coverage plus or minus and you had run through an upside case where you could minimize that coverage in order to achieve greater dividend growth.

But obviously, in today's market, based on where your cost of capital is and financing mix, it's a little bit different. So, I'm just wondering. Is that still the target in terms of coverage? Might you run a little bit lower on the coverage side since you have visibility on those associated FPSO cash flows? Any additional color there would be helpful.

Darren, I think as of now, we're still targeting that range of 1.15 to 1.20. I think as you look out over the near term and the medium term, that certainly is our target. I think when you look at the fact that our cash flows are going to continue to grow based on the committed projects we have over the next few years, that gives us good visibility.

The only thing would be, perhaps, with the low oil price, obviously the Foinaven cash flows are lower because of the oil price tariffs in the near term, but of course, as the oil price recovers, we expect that to normalize over time as well.

Okay. I appreciate that. Last question for me. Just from a growth perspective, when we start thinking about floating regas and incremental demand for FSRU projects, and also point-to-point, long-haul ethane exports out of the Gulf Coast, obviously, again, the commodity market has changed.

I think with regard to FSRUs, you had speculated that they were somewhere around $3 billion to $5 billion of projects over the next five years. Number one, I'm wondering if that is still the case or how that market had changed with regard to supply/demand dynamics.

Second, from an ethane export perspective, if we're in a period of lower crude oil prices for longer, and the heavier ends of the NGL barrel get more competitive from a margin per ethylene production perspective or even naphtha and gas, oil get more competitive, how does that change the market for VLECs or mid-sized carriers over the next few years to move ethane?

So a lot of questions there. Let me look at -- talk about LNG before I talk about the submarkets. I've actually been really happily surprised that the LNG market has stayed so strong. When we look at -- and that's based on what our customers need for existing LNG liquefaction projects out through 2019.

That's what got us excited about ordering one more LNG carrier and needing more -- four more for the point-to-point traffic because we're going to need those ships for the tenders that are coming up. We can see at least 20 -- the requirement for at least 20 ships in a 2018, 2019 timeframe.

So, the Shell deal, basically got us sold out and we needed some more inventory in order to be able to bid on projects. I think it's been a key advantage that we had existing vessels that we could show people, especially, obviously, the MEGI technology which is really kind of becoming the de facto standard.

As it relates to the ethane markets, which we're working on in our LPG joint venture with Exmar, I think the -- I think that has slowed down. The amount of requirements that we see there is quite clearly that people are reevaluating what the feedstock prices are.

Obviously, that would help us in our tanker side if we had more naphtha moving rather than ethane, but I can immediately see that with the lower prices going down, people aren't immediately going to ethane, they're looking at LNG, which is more oil price linked. They're looking at staying with fuel oil.

But, there are certainly pockets that we see, particularly in Asia, in places like China, India, Indonesia, where they are quickly moving over to being more gas-centric for their look for electricity generation and that's where a lot of the different opportunities that we see on regas are going to be coming in. So, if you will, the pricing power has moved over to the buyers of LNG and other gas projects rather than the sellers.

So, everyone sits and talks about, well, will this liquefaction project go up. But ultimately, we are seeing in terms of our customers, a lot of need for regas projects because suddenly if you are in a foreign country, you can afford LNG, whereas before, it was a little problematic whether you could afford it. So, that -- so, I'm much more optimistic about our ability on the LPG and the LNG to find good long-term projects.

Thank you.

Fotis Giannakoulis, Morgan Stanley.

Hi, Peter. Thank you. I want to ask you about your dividend forecast and what are the risks on this dividend forecast on your target with -- the growth target that you set up back in September, given the difference in prices of the MLPs.

How much is dependent on the ability of the MLPs to raise the equity at a certain price and how much can be funded? If you can give us an estimate of what is the capital that these MLPs, they need to raise in order to allow you to do -- increase your dividend after your target level?

Hi, Fotis. I guess you're sort of referring back to our Investor Day materials, which was an illustrative case that we provided. If you look at, again, if you look at the chart, the projects that we have, that we're already committed on slide 10 of our presentation, those, of course, that's built in growth for us.

In terms of the unit prices, of course, to having a lower unit price in TOO right now, hurts the accretion of some of those projects for TOO. It's not so much for TGP at this point. That's part of the reason why we've been holding off issuing equity at TOO and financing the Knarr with vendor financing until things normalize a bit.

I guess when you look at from the parent perspective, if you look at the Knarr, for example, even though the accretion may be a little bit lower for the parent, it's partially offset by the fact that we were taking back units, perhaps, at a lower unit price than we would have. So, we're actually getting more LP units and more GP units which offsets that accretion.

So from a parent's perspective, there is a mitigant there. Again, we think that the enterprise for TOO will normalize over time and especially given the accretive nature of these projects, they will add to the distributable cash flow of the TOO over the next few years.

And may I follow up on that. Let's assume that the price of fuel stays the same. Is there a possibility or a thought of potentially some of the projects that they are investing for TOO to be funded directly by Teekay and would a scenario like that allow the dividend to grow 20% to 30%?

No. That is not our plan. These projects are done directly at the daughter company level so there is no plans for the parent to do any of the warehousing. A lot of these projects, especially during the construction phase, we have very tail heavy payments with the shipyards. We have a lot of time to finance the construction payments.

There is a good portion of those that are financed especially with debt facilities and with low interest rates and debt margins coming down. That's also an offset to the higher equity cost. So, we layer in the equity cost over time and it's sort of an averaging in. So I think in the grand scheme of things, it doesn't have a huge impact in the long term.

I actually think that's a great point, Vince. The cost of our debt financing has actually been dropping. That has made up for, if you will, the higher cost of the equity side.

When you balance it out, actually, our cost of capital has been dropping. We just went around with our bankers and I would say our bankers really like our fixed rate contract cash flow. So, we're quite optimistic about that.

Thank you. That's very helpful. One last question about the TIL. Are there any different thoughts about the future of this investment, and, the strategic role of the TIL, and I'm talking about potential floating to the US or merger with TNK?

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

Okay. Thank you very much.

Thank you.

(Operator Instructions)

T.J. Schultz from RBC Capital.

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

I'll take the first, or I'll take the second part and then I'll give it over to Vince. I think we wanted to give people -- or we wanted to give ourselves a little bit more runway room in order to make sure we get the best contract on the Hummingbird and that's why we moved it more to 2017. But, I mean, the good news from Investor Day is that we got a contract on the Petrojarl 1.

So, that one dropped down earlier than what people said. We -- I intend to recommend to the Board that we dropdown these units as quickly as possible. And, I think the faster we can become a pure-play GP, the better it will be for our investors going forward.

And, of course, when we drop it down, we get the accretion, which helps the dividend going forward. So, it was just really trying to give ourselves a little bit more runway. I don't think we've actually changed our plans. It just gives people -- well, it just gives us more runway. And then, I'll give it over to Vince.

In terms of the coverage ratio, just as a reminder, the coverage ratio that we apply which is 1.15 to 1.2 is on the GP cash flows. So that's intended to act as a buffer against any variability in the OPCO cash flows. So, I guess the coverage ratio is meant to cover things like variability on the Foinaven oil price revenues.

That's something we'll have to monitor over the next several quarters. The good thing there is that's partially offset by the higher spot tanker rates that we're experiencing, given that we still have do some spot assets at the parent company that's acting as an offset. But, over time, you are right. As we dropdown the remaining assets of the parent, as Peter laid out, that will allow us to lower that target coverage ratio over time, as we reduce the OPCO assets.

Okay. Thanks. Good luck.

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

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

Thank you, ladies and gentlemen. This concludes the conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.