Teekay Corp Ltd (TK) 2017 Q3 法說會逐字稿

Welcome to Teekay Corporation's Third Quarter 2017 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. Kenneth Hvid, Teekay's President and Chief Executive Officer. Please go ahead.

Before we begin, I'd like to direct all participants to our website at www.teekay.com, where you'll find a copy of the third quarter of 2017 earnings presentation. Kenneth and Vince 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 third quarter of 2017 earnings release and earnings presentation available on our website.

I'll now turn over the call over to Vince to begin.

Thanks, Ryan, and thank you all for joining us today for Teekay Corporation's Third Quarter 2017 Earnings Conference Call. Before Kenneth reports on the overview of the markets and our businesses, I would like to take a moment to discuss the financial results for the third quarter, including the impact of the Brookfield transaction on our financial statements.

Starting with Slide 3 of the presentation. In the third quarter, Teekay Corporation generated total consolidated cash flow from vessel operations, or CFVO, of approximately $238 million. We reported a consolidated adjusted net loss of approximately $36 million or $0.41 per share. The adjusted net loss excludes asset impairments of approximately $244 million recognized in the third quarter, most of which related to the Banff and Foinaven FPSO units, as discussed in our earnings release.

In connection with the Brookfield acquisition of their 49% interest in Teekay Offshore's general partner, Teekay and Brookfield entered into an agreement, whereby Brookfield obtained certain participatory rights in the management of TOO's general partner, which resulted in Teekay deconsolidating Teekay Offshore for accounting purposes on September 25.

Subsequent to the closing of the Brookfield transaction, Teekay retained significant influence over TOO and accounts for its continuing investments in TOO using the equity method.

As a result of that deconsolidation of TOO, Teekay recognized an accounting loss of $103 million in Q3 as detailed in our earnings release, which mainly reflected the difference between the book value and fair value of our investment in TOO on September 25. However, this loss on deconsolidation was more than offset by the recognition of a $350 million deferred gain relating to previous sales of assets from Teekay Parent to Teekay Offshore. This gain is shown as an adjustment to noncontrolling interest in our income statement.

Now turning to our daughter company results for the third quarter. Teekay LNG Partners generated distributable cash flow, or DCF, of $40 million resulting in DCF per limited partner unit of $0.50 and total CFVO of $107 million. The partnership continues to generate stable cash flows that were in line with our expectations and which we expect will grow as newbuildings deliver over the next couple of years.

Teekay Tankers reported an adjusted net loss of $14 million or $0.08 per share and total CFVO of $21 million. Seasonal weakness, combined with global inventory drawdowns, contributed to weak spot tanker rates in the third quarter. Since that time, crude tanker rates have improved, supported by refineries returning from seasonal maintenance and an increase in long-haul movements from the Atlantic to the Pacific.

Teekay Offshore Partners generated DCF of $13 million resulting in DCF per limited partner unit of $0.08 and total CFVO of $124 million. The partnership's results during the quarter were impacted by certain nonrecurring and timing differences, which we do not expect to see going forward.

Looking ahead to the fourth quarter, we expect better results with the delivery and start-up of TOO's growth projects, which Kenneth will touch on shortly.

Looking ahead to the fourth quarter, we expect stronger results in each of our businesses as detailed on Slide 11 in the appendix of this presentation. For comparative purposes, please note that the Q4 guidance information on Slide 11 is based upon the Q3 adjusted results assuming TOO was deconsolidated for the entire third quarter, which is reflected in the last column of Slide 10.

I will now turn the call over to Kenneth.

Thank you, Vince. Good morning, and good afternoon, everyone. For those of you that have been listening in on our daughter company calls this morning, you can sense it was a very active quarter following the Teekay companies.

Turning to Slide 4. I'll now provide a brief update on our recent transactions across the Teekay Group, transactions which we believe strengthens our reflective balance sheets and provide strategic flexibility of all businesses, each of which are operating in markets where we're beginning to see promising signs of a recovery.

In late September, Teekay and Teekay Offshore completed the previously announced strategic partnership with Brookfield, which strengthens both Teekay and Teekay Offshore's financial positions and eliminates various financial guarantees between the 2 entities.

In November, ISS and Glass, Lewis, 2 leading independent proxy advisory firms, both recommended to vote "FOR" the proposed charter amendment to permit Teekay Tankers' strategic merger with Tanker Investments Limited or TIL. In October and November, Teekay LNG secured a further $327 million of long-term financings to fund its FSU for the Bahrain regasification project and a MEGI LNG newbuilding for PPE while opportunistically raising $170 million preferred equity interest at a coupon of 8.5%.

Turning to Slide 5. Since reporting earnings in August, we've been very busy taking delivery of multiple growth projects across the Teekay Group, some of which have already commenced their respected -- respective charter contracts generating new additional cash flows. Teekay Offshore has taken delivery of an FSO to Shuttle Tankers and an ALP long-haul towage newbuilding. The Randgrid FSO has now commenced its charter contract with Statoil on the Gina Krog oil and gas field in the North Sea. And we expect the Libra FPSO to commence its charter contract with the consortium of international oil companies in late November on the Libra field in Brazil, while the 2 East Coast Canada shuttle tankers are expected to commence their respective charters in December and January.

In our gas business, Teekay LNG took delivery of 2 wholly owned MEGI LNG newbuildings and a 30%-owned TFP LNG newbuilding, each of which immediately commenced charter contracts with Shell, with charter durations ranging between 6 to 20 years.

Turning to Slide 6. We are at a tipping point as we are now starting to transition from execution to operations as our growth projects deliver. I'm pleased to report that our other growth projects are progressing well across the group, and we look forward to taking delivery in commencing operations under their respective charter contracts between now and 2020. As these projects continue to deliver into operations, they are expected to provide significant future cash flow growth.

Looking at Slide 7. Teekay Corporation's 3 directly owned FPSOs are poised to benefit from an oil price recovery because each of the contracts includes tariffs that contribute increasing cash flows at higher brand oil price levels. And for 2 of the FPSOs, we are anticipating high cash flows in the fourth quarter and into 2018, from higher production because of increased drilling by Centrica on the Chestnut Field where the Hummingbird operates, and for the

Foinaven FPSO as it returns to operations from scheduled maintenance.

Now looking at the chart at the bottom right of the slide. You can see that, collectively, these units have been hovering around cash flow break-even levels for the past year. However, we are expecting cash flow to increase to approximately $15 million for the fourth quarter of this year, $8 million of which is due to the annual production bonus on the Foinaven FPSO, which is recognized in the fourth quarter. If we then assume that production increases to fourth quarter run rate levels on the Hummingbird and we include a full quarter of operation of the Foinaven FPSO, normalized CFVO is expected to increase due simply to higher throughput and vessel availability. This has been illustrated in the bar to the far right of the chart. We have then layered in expected cash flows at various Brent oil prices. And as you can see, the contribution can be quite meaningful as oil prices increase.

Turning to Slide 7. Each of our businesses are now witnessing some green shoots on an energy market recovery. We have all seen the oil price increase over the past weeks and months, however, more important for us is energy-related activity and real structural changes that are necessary to support a sustained stronger energy industry.

In the Offshore space, oil prices are up. Project development costs are declining, FPSO contract awards is up to 7 this year compared with none last year, and Petrobras is currently out for tender for shuttle tankers to help move their increased production in a few years' time. The global gas trade was up 11% this year and is expected to continue growing for 2020. In fact, we expect LNG trade growth to exceed the supply of LNG carriers during this time as well. This is reflected by the strength that we are now seeing in the LNG spot market where rates are now above $60,000 per day.

And in our Tanker business, tanker rates and asset prices are up from the middle of this year, due in part to some of the highest scrapping rates we've seen in years, strong U.S. exports of crude are contributing to longer haul trade movements and, importantly, as all of these factors compound, we expect the tanker market will gradually enter a period of recovery.

In summary, we believe each of our businesses are in the early stages of a market recovery, and I'm glad that each of them is positioned to take advantage of this strengthening.

Before I turn the call over for questions, I'd like to thank the nearly 8,000 employees onshore and on both of our vessels during this busy time for our companies. I'm proud that we've been able to uphold our high operational standards and strong safety culture, particularly during a time when we are preparing to integrate so many new projects and vessels into our fleet.

Operator, we are now available to take questions.

(Operator Instructions) Our first question will come from Mike Webber from Wells Fargo.

Just a handful of questions from me, I've done a bunch of calls already, but obviously a lot going on. So I just wanted to zero in on Slide 7 for a second. I know this is really helpful in terms of laying out the kind of the baseline EBITDA from the parent's operating assets, particularly from the FPSO side. And so just to make sure I'm clear on this. When you look at the tariffs that are on all 3 assets now, the kind of the red kind of Where is Waldo bar in terms of the tariff revenue, it just reflects the Foinaven tariff revenue. Do you have a sense on, one, is that correct? And two, give a sense on, I guess, the magnitude of cash flow that can be thrown off from the other 2 in terms of how that could be augmented?

Mike, yes, first of all, Where's Waldo right is the -- that is the Foinaven annual incentive revenue that's recognized in the fourth quarter of each year. So this -- in this particular year, it's $8 million. So that is a once-a-year recognition. And then the rest of it, so which is around $7 million for the fourth quarter, that's reflecting our forecast for the fourth quarter. And as Kenneth said, we don't really have full run rate production in the fourth quarter, just given -- just due to the scheduled maintenance on the Foinaven as well as the Hummingbird, which we expect production to pick up sometime during this quarter, so you don't have a full quarter. So we just wanted to reflect what the run rate would look like in the last column there, which would bring you up a little bit higher or even at $55 Brent and what the sensitivity would be at higher Brent prices. So I think going forward -- yes, go ahead...

Right. No, I was just trying to -- and certainly it sounds like maybe on an annualized basis or if we could just look at '18 kind of the baseload EBITDA potential for the 3. And then if you were to aggregate the tariff upside for the 3 in the kind of a variable bonus column, how much aggregated tariff revenue do you think you could realistically look at based on the assumptions you made with the existing red and white bar?

I guess there's 2 parts to that question. I guess maybe you're asking what the Foinaven annual revenue could be, say, in 2018? That's a little hard to predict, obviously, because we don't yet know what the production will look like. We did have some downtime for maintenance on the Foinaven during 2017. We'll probably have some also in '18, but perhaps not as much so. So that $8 million could be, I would say, maybe more on a normalized basis in the 10 to 15 range, especially if Brent prices continue to or if production continues to increase. In terms of the run rate for the rest of the 3 units apart from that one-time fourth quarter number, I think what we portrayed here in the last column is a pretty good run rate number and depending on what Brent price you want to assume, I think the production for these fields, at least for the next few quarters, is pretty representative of what you see in that last column.

Okay, all right. Yes, that's helpful. I appreciate it. Kenneth, around the -- if I could just run through the parent level operating assets, you got the 2 chartered LNG carriers that market's obviously firming. I guess, one, what kind of rate are those on now? And if they're on maybe a legacy contracts, when would they find renewed market exposure to maybe take advantage of a firmer environment? And then, two, do you have the scale to really trade there on a spot basis or would you at some point thinking about either joining a pool or finding another way to kind of aggregate spot capacity? Sorry, there were a lot of questions.

So as a reminder, the Artic and the Polar, are in charter to Teekay Parent from TGP, and they're scheduled to be delivered to TGP in April next year. At present, they're on new contracts, and I would say it's largely a wash between the in charter and the charter out rate. So that's an improvement to what we saw in earlier part of the year. It's encouraging, but we are seeing the spot market responding as it's done, especially over the past quarter. And we have, I would say pretty good interest for these vessels as well. So we're already in talks about extensions beyond the April charters, which is actually back to back with the Teekay charter from TGP. So obviously, we're discussing that with Mark Kremin in terms of how do we best position these vessels. In terms of pool cooperation, I think we feel we have a pretty good look and performed pretty well against the pools that are out there. So at present, there are no plans to join any of them. We, as you know, have a bit of spot exposure. And as Mark reported on earlier this morning, we've also seen our vessels trading well, particularly because the TCEs are actually trending up here, and we're getting much higher utilization on these vessels, which is a big positive for the entire segment.

Got you. Okay. Just one more for me now, and I'll turn it over. For Vince, kind of putting those 2 -- the first 2 questions together, I guess. When you look at the cash flow that will be coming off of your operational FPSOs at the parent level, it seems like it should trend higher in '18 absent some unforeseen event and at a minimum, it's not like -- it looks like the burn -- one, those charters are all off, but the burn associated with the carriers is lightening up and could even become a bit positive towards the end of the charter. For me, parent cash, operational cash flow perspective, is that enough of a material difference year-on-year that it changes the way you think about handling the service on the parent level debt load? And maybe can you kind of walk through how you think about handling that and kind of the looming refinancing work you've got to do there?

Sure. Well, first of all, the Brookfield transaction was a big step in the right direction, which allowed the parent to delever by $140 million as well as removing a lot of the debt guarantees and swap guarantees in Teekay Offshore. So that was a big milestone. Going forward, you're right. We're -- our focus is pretty much on increasing the free cash flow of the parent and there are several sources of that. So we've talked a lot about the FPSOs, especially in the strong oil price environment that sort of kicks in, in the fourth quarter. We have the LNG burn that basically is gone, now that we fixed both the Arctic and Polar, and those charters expire -- those in charters expire in April of 2018. We barely terminated the 2 conventional tankers, so that burn is also gone. And of course, there's a lot of discussion about TGP distribution. So that's another source. And I think when we're looking at the refinancing and debt, I think we would like to continue to delever the balance sheet as we approach 2020. So we're taking a multifaceted approach here in terms of both increasing free cash flow as well as chipping away that maturity before 2020. I think especially with the strong macro environment, I think, we should be in a good position to look at various alternatives to refinancing that.

And I think as you alluded to, Mike, I mean, a big focus for us this year has really been to remove some of the overhang, which I think is fair to call it, that we entered into the year with. And as Vince was saying, as we are cleaning up some of the structures, and we're facing what we think are market recovery is pretty much across the board in all of the segments we're in here, not knowing exactly which one is going to come first. I think we feel pretty good that we have a toolbox of alternatives here that we obviously are very focused on which ones to pull first.

It appears there are no further questions at this time. I'd like to turn the conference back to Mr. Kenneth Hvid for an additional or closing remarks.

Well, thank you for participating in our call this quarter. We look forward to reporting back to you next year.

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