Teekay Corporation Says Tanker and LNG Segments Performed In Line With Expectations

Teekay Corporation Says Tanker and LNG Segments Performed In Line With Expectations

Teekay Corporation reported the Company’s results for the fourth quarter and fiscal year 2016. These results include the Company’s three publicly-listed subsidiaries (Teekay Offshore Partners L.P. (Teekay Offshore) (TOO), Teekay LNG Partners L.P. (Teekay LNG) (TGP), and Teekay Tankers Ltd. (Teekay Tankers) (TNK)) (collectively, the Daughter Entities), all of which are consolidated in the Company’s financial statements, and all remaining subsidiaries of the Company. The Company, together with its subsidiaries other than the Daughter Entities, is referred to in this release as Teekay Parent. Please refer to the fourth quarter and fiscal year 2016 earnings releases of Teekay Offshore, Teekay LNG and Teekay Tankers, which are available on the Company’s website at www.teekay.com, for additional information on their respective results.

CEO Commentary

“On a consolidated basis, Teekay’s gas and tanker businesses performed in-line with expectations in the fourth quarter of 2016. However, the results from our offshore business were affected by certain events, which included an operational incident in November 2016 relating to the Arendal Spirit UMS and related suspension of the charter hire revenue since that time,” commented Kenneth Hvid, President and CEO of Teekay Corporation. “On the efficiency front, we are pleased to see that our various cost savings initiatives implemented during the past year are resulting in lower run-rate operating and general and administrative expenses.”

Mr. Hvid continued, “Looking ahead, we continue to focus on executing on our growth projects at Teekay LNG and Teekay Offshore. Teekay LNG’s projects remain on schedule and on budget and we have now completed approximately $1.2 billion(1) of long-term financings for its growth projects, with the remainder of the financings on track to be completed in the second half of 2017. The majority of Teekay Offshore’s projects generally are progressing well, including its largest project, the Libra FPSO conversion, which is on time and on budget. However, as mentioned during our third quarter earnings in November 2016, we have experienced delays and additional costs on the Petrojarl I FPSO upgrade, which is now scheduled to commence operations in the fourth quarter of 2017, and we are still in negotiations with the charterer, shipyard and our lenders.”

“Since reporting earnings in November 2016, we have seen the oil price stabilize in the mid-$50 range, which is positive to the industry sentiment. I am pleased to report that we have continued the momentum from last quarter by securing key commercial contracts, which are expected to contribute to the Teekay Group’s consolidated portfolio of fixed-rate contracts,” Mr. Hvid continued. “Teekay Parent entered into a contract amendment and heads of terms to extend the firm contract periods on the Banff and Hummingbird Spirit FPSO units until the third quarter of 2018 and September 2020, respectively; Teekay Offshore is in the final stages of securing an additional shuttle tanker contract of affreightment in the North Sea; and Teekay Tankers secured three, fixed-rate time charter-out contracts at attractive rates.”

Mr. Hvid added, “In addition to delivering on our existing growth projects, as we have highlighted previously, we continue to focus on optimizing our asset portfolio across the Teekay Group, with the goal of strengthening our balance sheets to better position the Teekay Group to take advantage of future opportunities.”

Summary of Results

Teekay Corporation Consolidated

The Company’s consolidated results decreased during the quarter ended December 31, 2016, compared to the same period of the prior year, primarily due to lower revenues from Teekay Parent related to lower utilization on the Polar Spirit and Arctic Spirit liquefied natural gas (LNG) carriers, a new contract in place for the Hummingbird Spirit floating production, storage and offloading (FPSO) unit at a lower fixed charter rate that took effect on July 1, 2016; lower income and cash flows in Teekay LNG mainly as a result of the sales of two conventional tankers in April and May 2016 and lower income from Teekay LNG’s Exmar liquefied petroleum gas (LPG) joint venture; lower income and cash flows in Teekay Offshore due to the redelivery of the Varg FPSO in July 2016, lower revenue from the Arendal Spirit unit for maintenance and safety (UMS) due to the charterer suspending charter hire payments since early-November 2016, lower FPSO revenues related to lower bonuses earned during the fourth quarter of 2016, lower results relating to the shuttle tanker fleet primarily due to the repositioning of a shuttle tanker from Brazil to the North Sea, higher depreciation expense, and lower towage fleet charter rates and utilization; and lower income and cash flows in Teekay Tankers due to lower spot tanker rates. Please refer to footnote (2) of the summary consolidated statements of income included in this release for further details.

These decreases in the Company’s consolidated results were partially offset by higher income and cash flows from Teekay LNG as a result of the deliveries of the Creole Spirit and Oak Spirit MEGI LNG carrier newbuildings, which commenced their five-year charter contracts with Cheniere Energy in late-February 2016 and early-August 2016, respectively.

Teekay Parent

Teekay Parent GPCO Cash Flow, which includes distributions and dividends paid to Teekay Parent from Teekay’s publicly-listed subsidiaries in the following quarter, less Teekay Parent’s corporate general and administrative expenses, was $3.8 million for the quarter ended December 31, 2016, compared to $8.9 million for the same period of the prior year. The distributions and dividends received from Teekay’s publicly-listed subsidiaries for the quarter ended December 31, 2016 decreased to $10.5 million, compared to $13.0 million for the same period of the prior year, primarily due to the reductions in quarterly cash dividends received from Teekay Tankers as a result of lower spot tanker rates.

Teekay Parent OPCO Cash Flow, which includes cash flow attributable to assets directly-owned by, or chartered-in to, Teekay Parent, net of interest expense and dry-dock expenditures, decreased to negative $8.0 million for the quarter ended December 31, 2016, from approximately breakeven for the same period of the prior year. The decrease was primarily due to lower utilization on the Polar Spirit and Arctic Spirit LNG carriers, the new contract in place for the Hummingbird Spirit FPSO as of July 1, 2016 at a lower fixed charter rate and lower average spot tanker rates.

Total Teekay Parent Free Cash Flow, which is the total of GPCO and OPCO Cash Flows, was negative $4.3 million during the fourth quarter of 2016, compared to positive $8.9 million for the same period of the prior year. Please refer to Appendix D of this release for additional information about Teekay Parent Free Cash Flow.

Summary Results of Daughter Entities

Teekay LNG Partners

Teekay LNG’s results decreased during the quarter ended December 31, 2016, compared to the same period of the prior year, primarily due to lower revenues from two vessels in Teekay LNG’s 52 percent-owned LNG joint venture with Marubeni Corporation as the charterer temporarily closed its LNG operations in Yemen in 2015, lower revenues from Teekay LNG’s 50 percent-owned joint venture with Exmar due to a reduction in mid-sized LPG carrier spot rates and fleet changes, charter rate deferrals for six LPG carriers on charter to I.M. Skaugen S.E., the sales of two conventional tankers in April and May 2016, and lower profit share revenue on a conventional tanker as a result of lower spot rates in 2016. These decreases were partially offset by, among other things, the deliveries of the Creole Spirit and Oak Spirit MEGI LNG carrier newbuildings, which commenced their five-year charter contracts with Cheniere Energy in late-February 2016 and early-August 2016, respectively. Please refer to Teekay LNG’s fourth quarter 2016 earnings release for additional information on the financial results for this entity.

Teekay Offshore Partners

Teekay Offshore’s results decreased during the quarter ended December 31, 2016, compared to the same period of the prior year, primarily due to the redelivery of the Varg FPSO at the end of July 2016, lower FPSO revenues related to lower operational bonuses earned during the quarter, the repositioning of a shuttle tanker from from Brazil to Teekay Offshore’s North Sea contract of affreightment (CoA) fleet, higher time-charter hire expenses due to the in-chartering of a shuttle tanker during the fourth quarter of 2016 to provide additional vessel capacity required to service new CoA contracts commencing in 2017, the redelivery of the Navion Saga floating storage and offtake (FSO) in October 2016 upon completion of its time-charter out contract, a reduction in revenues from the Arendal Spirit UMS due to the charterer suspending charter hire payments since early-November 2016 (see Summary of Recent Events Teekay Offshore), lower towage fleet charter rates and utilization, and the sale of two conventional tankers and sale-leaseback transactions on two conventional tankers in 2015 and 2016. These decreases were partially offset by, among other things, the delivery of a towage newbuilding, the ALP Striker, in September 2016 and lower operating expenses for the Knarr and Piranema Spirit FPSO units. Please refer to Teekay Offshore’s fourth quarter 2016 earnings release for additional information on the financial results for this entity.

Teekay Tankers

Teekay Tankers’ results decreased during the quarter ended December 31, 2016, compared to the same period of the prior year, primarily due to lower average spot tanker rates in the fourth quarter of 2016 compared to the same period of the prior year and the redelivery of nine chartered-in vessels during 2016. Compared to the third quarter of 2016, the spot tanker market strengthened during the fourth quarter of 2016 due to expected seasonal factors, and reached a seasonal high in December 2016, as global refinery throughput, increased exports out of Nigeria, Libya, and Baltic / Black Sea ports, and winter weather delays provided support for tanker rates. Mid-sized crude tanker rates, in particular, found support from weather delays through the Turkish Straits along with increasing exports out of the U.S. Gulf. Record high Middle East OPEC crude production, averaging 25.6 million barrels per day (mb/d) in the fourth quarter of 2016, also provided a boost for crude tanker tonne-mile demand. However, crude spot tanker rates have recently started to soften due to a number of factors. Please refer to Teekay Tankers’ fourth quarter 2016 earnings release for additional information on the financial results for this entity.

Summary of Recent Events

Teekay Parent

The Banff FPSO has been operating on the Banff field since its delivery nearly 20 years ago under a charter contract with Canadian Natural Resources (CNR) that permitted CNR to terminate the contact at any time with six months’ notice. In January 2017, Teekay Parent entered into a contract amendment with CNR to ensure the unit will stay on the current field at least until the third quarter of 2018 and to revise the charter rate structure to include a variable component (through an oil price and oil production tariff) in addition to a fixed charter rate. The future CFVO under the contract is not expected to be materially different from the CFVO before this latest contract amendment.

Since July 1, 2016, the Hummingbird Spirit FPSO has been operating under a contract amendment with Centrica Energy (Centrica) with a firm period out to September 2017. In February 2017, Teekay Parent entered into a new heads of terms with Centrica to extend the firm period out to September 30, 2020 at a higher fixed charter rate plus further upside through an oil price and production tariff. The heads of terms is expected to take effect in October 2017.

Teekay LNG

Teekay LNG owns a 52 percent interest in two LNG carriers, the Marib Spirit and Arwa Spirit, through its joint venture with Marubeni Corporation, which vessels currently are on long-term charters expiring in 2029 to the Yemen LNG project (YLNG), a consortium led by Total SA. Due to the political situation in Yemen, YLNG decided to temporarily close down the LNG plant in 2015. As a result of a possible extended plant closure, Teekay LNG’s joint venture agreed to a temporary deferral of a significant portion of the charter payments for the two LNG carriers during 2016. At the end of 2016, the Yemen LNG plant remained closed and as a result, in January 2017, Teekay LNG’s joint venture agreed to a further temporary deferral during 2017. During this temporary deferral period, Teekay LNG’s joint venture with Marubeni Corporation is entitled to trade the Marib Spirit and Awra Spirit for its own account.

In November 2016, the charterer of the 2004-built Suezmax tanker, the Asian Spirit, decided not to declare its extension option, allowing the charter to expire in January 2017. As a result, Teekay LNG agreed to sell the vessel to a third party for net proceeds of $20.6 million which resulted in a write-down of $11.5 million recognized in the fourth quarter of 2016. The Asian Spirit is expected to be delivered to its new owner in mid-March 2017.

Teekay Offshore

In January 2017, Teekay Offshore received a letter of award for a new five-year shuttle tanker CoA, plus extension options, with a consortium of oil companies to service a development located in the UK Central North Sea. Subject to the finalization of the terms of the CoA, the CoA is expected to commence during the first quarter of 2018 and will be serviced by Teekay Offshore’s existing CoA shuttle tanker fleet.

In November 2016, the Arendal Spirit UMS experienced an operational incident relating to its dynamic-positioning system. As a result of this operational incident, and a gangway incident that occurred in April 2016, the charterer, Petrobras, initiated an operational review. The operational review is currently ongoing and thus, Petrobras has suspended its charter hire payments since November 2016. Teekay Offshore has completed an investigation to identify the cause of the incidents and has implemented corrective measures. Teekay Offshore is in the process of working with Petrobras to address its concerns with the focus of returning the unit to operations.

Teekay Tankers

Teekay Tankers completed the sale of a Medium-Range (MR) product tanker and an older Suezmax tanker in November 2016 and January 2017, respectively, with one older Suezmax tanker sale scheduled to be completed in late-February 2017.

Since October 2016, Teekay Tankers entered into, and extended, time charter-out contracts for two Suezmax tankers and one Aframax tanker. These contracts have an average rate of approximately $20,800 per day and firm periods of 12 months each. The contracts commenced in December 2016 and February 2017.

Liquidity

As at December 31, 2016, Teekay Parent had total liquidity of $279.5 million (consisting of $146.4 million of cash and cash equivalents and $133.1 million of undrawn revolving credit facilities) and, on a consolidated basis, Teekay Corporation had total liquidity of approximately $1.0 billion (consisting of 568.0 million of cash and cash equivalents and $444.4 million of undrawn revolving credit facilities). Giving pro-forma effect to Teekay LNG’s distribution from its RasGas 3 joint venture in February 2017 relating to its vessel refinancing in December 2016 and Teekay LNG’s NOK 300 million bond issuance completed in January 2017, Teekay Corporation’s consolidated liquidity at December 31, 2016 would have been approximately $1.1 billion.

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