Teekay Corp

NYSE:TK

Earnings Call Transcript 2017-Q4

[Operator]

Welcome to Teekay Corporation Fourth Quarter and Fiscal 2017 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. [Operator Instructions] As a 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, sir.

[Unidentified Company Representative]

Before we begin, I would like to direct all participants to our website at www.teekay.com, where you will find a copy of the fourth 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 fourth quarter of 2017 earnings release and earnings presentation available on our website.

I will now turn the call over to Kenneth to begin.

[Kenneth Hvid, President and Chief Executive Officer]

Thank you, Lee. And thank you all for joining us today for Teekay Corporation's fourth quarter of 2017 earnings conference call. I'm joined this morning by our CFO, Vince Lok.

Starting with Slide 3 of the presentation In the fourth quarter, Teekay Corporation generated total consolidated Cash Flow from Vessel Operations or CFVO of approximately $184 million, and a consolidated adjusted net loss of approximately $10 million or $0.11 per share, which has significantly improved from last quarter's loss of $0.41 per share on the back of stronger results across the Teekay Group, including our three directly-owned FPSOs, which have fixed-rate flows with upside exposure to production and oil prices.

As a reminder, since we deconsolidated Teekay Offshore on September 25, our consolidated CFVO in the fourth quarter only includes 14% of Teekay Offshore's CFVO, whereas in the third quarter it included 100% of Teekay Offshore's CFVO up to September 25. Had we continued to consolidate Teekay Offshore, our reported CFVO would have been over $300 million in the fourth quarter of 2017.

In mid-January, Teekay completed two capital issuances, $97.5 million of common equity and $125 million of convertible bonds, for growth proceeds of $222.5 million. We and our board viewed this as a prudent time to further strengthen Teekay Parent's balance sheet and begin addressing our January 2020 bond maturity, providing us with flexibility and optionality to do so with total liquidity of almost $540 million pro forma for these two capital raises.

I won't spend a lot of time going through Teekay LNG's recent results and highlights on Slide 4, because I will assume most if you listened into their earnings call earlier today. Teekay LNG Partners generated Distributable Cash Flow or DCF, of approximately $52 million, resulting in the DCF per limited partner unit of $0.65 and total CFVO of approximately $127 million, up 19% from last quarter.

The partnership continues to generate stable cash flows that are in line with our expectations and which we expect will grow as newbuildings deliver over the next couple of years. Teekay LNG recently delivered 6 LNG carriers on to long-term contracts and we have a total of 11 LNG carriers delivering by the end of 2018 and 18 by the end of 2020.

We expect TGP's LNG carrier deliveries to generate approximately $250 million of CFVO to the partnership. The financings for TGP's LNG newbuilding program is now largely complete, and TGP has also made progress on the re-financings coming due for certain of its existing LNG carriers.

On Slide 4, we have summarized Teekay Offshore's recent results and highlights and the status of its growth projects. Teekay Offshore Partners generated DCF of approximately $34 million, resulting in DCF per limited partner unit of $0.08 and total CFVO of approximately $145 million, up 17% from last quarter. The Teekay Offshore team has been extremely busy, delivering projects onto contracts and is looking forward to the start-up of one of its more complex units, the Petrojarl I FPSO, which is scheduled to commence its charter this April.

Two FPSOs have secured contract extensions, and the partnership ordered two additional LNG fuel shuttle tanker newbuildings to serve as part of its North Sea CoA portfolio. As can be seen on the right hand side of this slide, TOO has now taken delivery of almost all of its near-term growth projects. And collectively, these are expected to generate approximately $200 million of cash flow up on the startup of the last couple of contracts, with a significant portion of this cash flow not fully recognized until the first and second quarters of 2018.

Looking at Slide 6, Teekay Tankers reported an adjusted net loss of approximately $6 million or $0.03 per share and total CFVO of approximately $32 million. Elevated levels of tanker deliveries and global oil inventory draw-downs contributed to weak spot tanker rates in the fourth quarter. And while we expect 2018 to be challenging for the tanker market, the supply and demand fundamentals indicate a tanker market recovery towards the end of this year and into 2019.

In November, TNK completed its strategic merger with Tanker Investments Ltd., or TIL, which creates the world's largest publically listed, midsized tanker company with a combined fleet of 58 tankers. We believe Teekay Tankers' stock represents compelling value. And therefore, during the fourth quarter, Teekay Corporation increased its ownership in TNK from 24% to 29%, which approximates our premerger ownership level.

A portion of the proceeds to fund the acquisition of these shares were reallocated from the divestment of our non-core investment in dry bulk carriers. Importantly, we see these purchases of TNK stock at a level that is below TNK's net asset value or NAV.

Looking to the right of this slide, we see significant value in TNK's equity, when the tanker market and asset prices recover even just to mid-cycle levels, which we define as the median of the past 15 years. From an asset point of view, we believe TNK's NAV will increase by over 140% or more when ship values revert to the long-term average level.

And as the chart at the bottom right of the slide depicts, if Aframax rates revert back to mid-cycle levels of just under $25,000 per day, we believe that TNK can generate approximately $1.05 per share in free cash flow, roughly equal to the current share price this morning. This is a business that we have been in for over 40 years, and we understand the power of a recovering market and what that can have on tanker equities.

I would like to finish the call today on Slide 7. We really see that Teekay is at an inflection point, financially, operationally, in terms of project deliveries and from a fundamental energy market point of view. We have taken great strides over the past couple of years, raising liquidity and executing on our financial and operational goals. And we are now well positioned to increase the value of our companies.

In particular, we see three key drivers that are aligned to increase the intrinsic value of our companies. First, the financial strength of our companies has improved refinancings of our projects and the completion of various strategic transactions in 2017. Second, we're enjoying tailwinds from an improving macroeconomic backdrop in each of our core segments. And third, we have embedded cash flow growth most of which has not yet been included in our results as the projects are just now beginning to come into operations.

Let's analyze how these three key drivers will increase the value of our companies. Teekay LNG has done a great job completing the financings for its newbuilding program, removing the financing uncertainty that has been surrounding TGP for the past couple of years. And while Teekay LNG's leverage is currently high mainly because it's warehousing its large newbuilding program, it will naturally delever as its newbuilds deliver and begin to cash flow.

Looking forward, the volume of LNG trade has increased remarkably, up 11% year-over-year, and predicted to grow an additional 24% by 2020 as the world transition away from coal-fired power plants to cleaner gas-powered plants to fuel increasing - to fuel increasing electrification needs. And lastly, Teekay LNG's newbuilds will continue to deliver over the next few years, adding approximately $250 million of cash flow.

In mid-2017, Teekay and Teekay Offshore entered into a strategic partnership with Brookfield, which significantly strengthened Teekay Offshore's balance sheet. And similar to Teekay LNG, Teekay Offshore's balance sheet will naturally delever as its project begin to cash flow. During the last seven or eight months oil prices have increased and with it, our primary customers comprised of the oil majors, are enjoying higher margins than they were at a $100 oil due to lower input costs. However, the majors have also under invested over the past few years.

And with global oil demand increasing, we are now witnessing increased activity in the offshore space, particularly in our core markets. And Teekay Offshore is well positioned to participate in this upturn. The majority of Teekay Offshore's projects have now delivered, and over the next few quarters, we associated $200 million in annualized cash flow will also be realized.

In November of last year, Teekay Tankers completed its merger with Tanker Investments. And in December, TNK completed the refinancing of two of its assumed financings, stretching out TNK's debt maturity profile during a time of expected market weakness. Both of these transactions increase the financial strength of Teekay Tankers and help to position it for the tanker market recovery that we see coming, which is based on favorable supply and demand fundamentals.

Growth in the tanker fleet is slowing just as scrapping is picking up, combined with continued strength in oil - global oil demand. And under a recovery scenario, Teekay Tankers is expected to generate strong free cash flow, which will increase the value of TNK and our investment in the business.

And looking to the far right hand column on this slide, Teekay will benefit alongside fundamental improvements across each of our companies. As I spoke about earlier in my remarks, the capital raised by Teekay in January of this year helped us build financial strength by providing us with optionality and flexibility, as we look to reduce our overall financial leverage. Each of our businesses will benefit from growing oil and gas demand and growing cash flows, which should ultimately translate into growing free cash flow for Teekay Corporation.

So summing up this slide, we believe that we are at an inflection point, and our key drivers are aligned. Each of our companies has and will continue to strengthen financially. The energy markets are providing tailwinds for our businesses, and our cash flows are growing, noting that the majority have not yet been reflected in our financial results. As these factors continue to strengthen in unison the intrinsic value of our companies, including Teekay, should increase.

Operator, we're now available to take questions.

[Operator]

Thank you. [Operator Instructions] And at this time, we'll take your first caller, will come from Michael Webber with Wells Fargo Securities.

[Michael Webber, Wells Fargo Securities LLC]

Hey, good morning, guys. How are you?

[Kenneth Hvid, President and Chief Executive Officer]

Good morning, Mike.

[Vincent Lok]

Hey, Mike.

[Michael Webber, Wells Fargo Securities LLC]

Hey. Kenneth, I wanted to kind of start off first with the recent capital raise and the idea that - I mean, it clearly seems that you guys are trying to kind of get ahead of the refinancing, the January 2020 bonds, seems like the biggest bogey out there. Can you talk a little bit about, one, how you would kind of attack that with, I guess, the recently raised capital as well as any eventual uptick in organic cash flow, and maybe just kind of help lay out the plan? You've got some time, obviously, but it does seem like you're trying to get ahead of it. So I feel like it's warranted to kind of run through it.

[Vincent Lok]

Hi, Mike. It's Vince here.

[Michael Webber, Wells Fargo Securities LLC]

Hey, Vince.

[Vincent Lok]

Yeah. With the capital raises in January, first of all, we felt it was a prudent thing to do. As you've seen, financial strength is across the Teekay Group, and in fact, is one of our strategic initiatives. This allows us to delever the current balance sheet and increase our liquidity, which is over $500 million now. And it does give us a lot of financial flexibility and a lot more options to address our liability management going forward, and as you mentioned the 2020 bonds.

And so this allows us to right size the balance, and ultimately refinance the smaller amount of the bond. So for example, if we were to be able to reduce our bond down to, say, $300 million, that would save annual interest expense of more than $25 million, which obviously increases our free cash flow, so for example.

So in terms of addressing the bond, this is something that we are discussing with our banks and our board on our liability management strategy over the course of this year. We do have some time though. But we're going to look at through a number of alternatives and choose the one that's going to be - that's just going to create the most value over the long-term.

But I think this gives us an opportunity to work from a position of strength. Our free cash flow is improving, as you noted, but our asset coverage is also improving, given that our Daughter companies have stable capital structures, their cash flows are increasing. Another potential source of capital, of course, is our three FPSOs. And if we're able to sell some of those over the next couple of years, that's another source of delevering.

[Michael Webber, Wells Fargo Securities LLC]

Yeah, that was actually my next question was around whether there's a bid for those. It seems like the - at least the tariffs are closer to being in the money, at least with the slits [ph] work. And whether they're - is there a realistic opportunity to sell those today, if you needed or wanted to? I guess, it's such a thin market. I'm just curious whether that's something you would explore today. Or would you wait for the market to firm?

[Kenneth Hvid, President and Chief Executive Officer]

Yeah, this is a theme that we've been talking about, I guess, for the past couple of years. So - and I think we've been pretty consistent in terms of saying that we're definitely not sellers when the oil price were low and those zero interest for assets like this and in a recovering market. And that was a reason why we also, I think, restructured some of our contracts here, so that we'd be more participating with our customers in the market downturn, but also in the upturn. And as you point out, we are now seeing that upside.

So with that, and not surprisingly, we are, of course, also seeing some inbound inquiry for some of the more marginal fields that are looking for to cheap development solutions. And so same as we're seeing on TOO, we do actually have inbound inquiries for - especially one of the assets that's coming up.

Both of them - I mean, if you take Hummingbird, we just put on a new contract, the new well is flowing. There is a well simulation vessel on there. It's not quite flowing at the rate that we expected, but the oil is there. So our customers are working on that right now, actually, with the well stimulation. And we're looking at other means so we can try and further stimulate that well.

So that looks pretty promising on the backing of the drilling campaign that our customer committed to there. On Banff, that continues to flow. There's a lot of gas coming in to that unit. But it's actually - even though it's a small unit. It's a fairly universal unit that is in good condition that can produce a number of different fields.

So people know that this is an asset that's coming up potentially for renewal. And we are receiving some interest in that unit. And Foinaven, of course will continue for longer.

[Michael Webber, Wells Fargo Securities LLC]

I guess, maybe if I take another run at that, maybe in a more straightforward way. Is it fair to say that in 2018, you're looking at kind of operational upside on those assets? And if you were to actually liquidate in that optimism, I guess, it would actually permeate into the SMP market for those. That would be more of a 2019 or 2020 event?

[Kenneth Hvid, President and Chief Executive Officer]

Not necessarily. I think we have always been on the stated path of not owning assets directly upstairs. And as we talked about it last quarter, we reduced our exposure to the conventional tanker markets and have no asset there. Our Polar and Arctic are redelivering over this quarter and next quarter, so that reduces that. And then, what we're left are the three FPSOs, as you pointed out.

So we are, of course, in also evaluating the strategic alternatives. And in concert with that, we are trying to maximize the cash flows on those assets now. So I think the straight answer to your question is that we're quite flexible in terms of what makes the most sense if there is an interested party in those assets.

[Michael Webber, Wells Fargo Securities LLC]

Right, with the inbound is in operational, you're not getting inbound from people looking to buy them?

[Kenneth Hvid, President and Chief Executive Officer]

Yes, we are.

[Michael Webber, Wells Fargo Securities LLC]

Okay, okay, good. All right, that's helpful. I'll turn it over. Thanks, guys.

[Kenneth Hvid, President and Chief Executive Officer]

Thanks, Mike.

[Operator]

We'll hear next from Randy Giveans from Jefferies.

[Randy Giveans, Jefferies]

Hey, thanks. I don't think there are enough questions on those FPSOs, so I have a few more. Is the only - or is the only buyer going to be TOO or are you kind of bookmarking them for dropdown candidates? Are you open to kind of third-party sales as well?

[Kenneth Hvid, President and Chief Executive Officer]

We obviously have, dating back to when we established TOO, Omnibus agreement, where these assets have been offered or can be offered to Teekay Offshore. But the parties that we are having discussions with also now are external parties. So we don't have a restriction. There is an opportunity for TOO to buy, of course, but there is also an opportunity for other people to invest in these assets.

[Randy Giveans, Jefferies]

Sure. And then, I guess, you looked at those as a source of cash. Let's say, you were to sell all three, give us kind of a ballpark for the range of expected proceeds. And then - or I guess, more pointedly, the debt against those that you'd have to pay off, so the kind of net cash benefit of sales?

[Kenneth Hvid, President and Chief Executive Officer]

Yeah, and back to, I guess, my answer to Mike before. It's quite clear that these assets are either worth what is meaningful. And that all depends on what is the next opportunity and can somebody use the assets right. And that's where, in the last downturn here that we saw, there wasn't a lot of inbound inquiry. And therefore, assets like this don't have a lot of value.

But if you can actually match it with an asset with the right field, then obviously, the conversation changes. So I don't think I really want to be drawn on what we have as a minimum sales price. But it's clear that the value from these assets comes from pairing them with the next opportunity. And that's, of course, a pretty exciting dialogue in a strengthening market.

[Vincent Lok]

In terms of the debts on these three assets, we had $83 million drawn on these three assets as of December 31. However, with the capital raises we did in January, that $83 million has been paid down in the revolvers. We have nothing drawn on those three assets.

[Randy Giveans, Jefferies]

So anything would be straight net cash?

[Vincent Lok]

From where we sit today, yes, that's right.

[Randy Giveans, Jefferies]

Perfect. All right, and then I guess one more question. Looking at the dividend, any chance of increasing that without distribution increases at the Daughter levels? Or is it kind of waiting on TGP to increase theirs before you increase your dividend?

[Vincent Lok]

Yeah, right now, we don't have any plans to change the dividend in the near term. I think as Kenneth mentioned in his prepared remarks, our focus is increasing the value of the entire group, first and foremost. But in terms of capital allocation decisions around dividends, it's something always is discussed with our Board.

[Randy Giveans, Jefferies]

Fair enough. I'm sure you all had a busy day. So I'll let you go. Thank you.

[Vincent Lok]

Thank you.

[Operator]

At this time, there are no additional callers on the queue. I'd like to turn the conference back over to Mr. Hvid for any additional or closing comments.

[Kenneth Hvid, President and Chief Executive Officer]

Well, thank you for your interest in all our calls today. And we look forward to reporting back to you next quarter on our progress. Thank you.

[Operator]

That does conclude today's teleconference. We thank you all for your participation.