Stable LNG Cash Flows To Boost Teekay Corporation’s Q2 Results

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Teekay Corporation reported results for the first quarter ended March 31, 2020.

These results include the Company’s two publicly-listed consolidated subsidiaries, Teekay LNG Partners L.P. (Teekay LNG) (NYSE:TGP) and Teekay Tankers Ltd. (Teekay Tankers) (NYSE:TNK) (collectively, the Daughter Entities), and all remaining subsidiaries and equity-accounted investments. Teekay, together with its subsidiaries other than the Daughter Entities, is referred to in this release as Teekay Parent. Please refer to the first quarter 2020 earnings releases of Teekay LNG and Teekay Tankers.

CEO Commentary

“The first quarter of 2020 marked the second consecutive quarterly adjusted profit for Teekay, as we recorded consolidated adjusted net income of $25.3 million, or $0.25 per share, and saw our total adjusted EBITDA increase by approximately $128 million, or 59 percent, from the same period of the prior year(1)” commented Kenneth Hvid, Teekay’s President and CEO. “Looking ahead to the second quarter of 2020, we are expecting another strong quarter supported by our stable LNG cash flows and the firm tanker rates we have already secured in the second quarter of 2020.”

Mr. Hvid continued, “Our strong results for the first quarter of 2020 can be attributed to higher earnings in each of our businesses. Teekay Tankers experienced significantly stronger spot tanker rates, reaching its highest level in more than 10 years, which continued into the second quarter, while Teekay LNG had robust earnings from a complete quarter contribution from its fully delivered LNG fleet, which is now 100 percent fixed through 2020, and our directly-owned FPSO units performed better, primarily due to a new bareboat contract structure for the Foinaven FPSO secured in March 2020.”

“While COVID-19 is having an unprecedented impact on the world and is clearly a major focus for us throughout the Teekay Group, we are fortunate to be in a position where our operating results have increased to-date in 2020 and we have had minimal impacts on our operations due to the pandemic,” commented Mr. Hvid. “We are truly proud of how our seafarers and onshore colleagues have responded to COVID-19, implementing new standards which focus on the health and well-being of everyone involved in our organization, especially our colleagues at sea, while maintaining consistently safe and efficient operations of our assets for our customers.”

“Moving forward, we continue to execute on our strategic priorities across the Teekay Group,” commented Mr. Hvid. “At Teekay Parent, we delevered our balance sheet with the $67 million in proceeds received in April 2020 as part of the Foinaven FPSO unit’s new contract that effectively covers the remaining life of the unit, and eliminates our exposure to the previous loss-making contract; and we simplified our structure and fully aligned our interests with those of Teekay LNG’s other common unitholders through the elimination of our Teekay LNG Incentive Distribution Rights in exchange for 10.75 million newly-issued Teekay LNG common units.”

Mr. Hvid continued, “In the first quarter of 2020, our consolidated pro forma net debt(2) declined by over $580 million as a result of our strong operating cash flows, proceeds from asset sales and the new Foinaven contract. With our balance sheets continuing to strengthen, total pro forma liquidity(2) of over $900 million for the Teekay Group as at March 31, 2020, extensive contracted revenue from Teekay LNG and higher contracted revenue and strong rates to date at Teekay Tankers, and with no committed growth capital expenditures or significant upcoming debt maturities, we believe that the Teekay Group is financially well-positioned for both any potential market volatility in the near-term and the longer-term future of marine energy transportation.”

(1) Excluding the $22.3 million contribution during the first quarter of 2019 related to our equity interest in Altera (Teekay Offshore), which was sold in May 2019.

(2) Pro forma for the $67 million upfront cash payment received in April 2020 related to the new Foinaven FPSO contract and $14 million of proceeds related to the closing of Teekay Tankers’ sale of a portion of its ship-to-ship transfer business.

Summary of Results

Teekay Corporation Consolidated

The Company’s consolidated results during the quarter ended March 31, 2020 increased compared to the same period of the prior year, primarily due to: higher average spot tanker rates earned by Teekay Tankers in the first quarter of 2020; higher earnings in Teekay LNG due to the delivery and contract commencement of several newbuildings during the past year, commencement of the terminal use payments in January 2020 to Teekay LNG’s 30 percent-owned joint venture with National Oil & Gas Authority, Gulf Investment Corporation and Samsung C&T (the Bahrain LNG Joint Venture), as well as higher revenues earned from certain existing LNG carriers and multi-gas vessels; and lower general and administrative expenses incurred in the first quarter of 2020.

In addition, consolidated GAAP net income was positively impacted in the three months ended March 31, 2020, compared to the same quarter of the prior year, by various items, including a $44.9 million gain realized upon the commencement of the sales-type lease for the Foinaven FPSO unit as a result of a new bareboat charter agreement, and a $64.9 million loss that was recognized in the first quarter of 2019 on the Company’s equity-accounted investment in Altera. These increases were partially offset by write-downs of six multi-gas carriers in Teekay LNG and two FPSO units in the first quarter of 2020 totaling $91.5 million, as well as higher unrealized losses on non-designated derivative instruments.

Total adjusted EBITDA(1) in the first quarter of 2019 included $22.3 million related to Teekay Parent’s ownership interest in Altera, which was sold in the second quarter of 2019.

Teekay Parent

Total Teekay Parent Free Cash Flow(1) was $52.7 million during the first quarter of 2020, compared to negative $13.8 million for the same period of the prior year, primarily due to: higher contribution from the Foinaven FPSO unit due to the upfront receipt of lease payment totaling $56.1 million upon entering into the new contract structure in March 2020; lower net interest expense(1) as a result of the repurchase of unsecured bonds over the past year and the bond refinancing completed in May 2019; higher contribution from the Hummingbird FPSO unit due to higher revenues and lower operating costs; lower corporate general and administrative expenses incurred in the first quarter of 2020; and a 32 percent increase in Teekay LNG’s quarterly cash distributions, commencing with the distribution relating to the first quarter of 2020. Please refer to Appendix D of this release for additional information about Teekay Parent’s Free Cash Flow(1).

In addition, GAAP net income was positively impacted in the three months ended March 31, 2020, compared to GAAP net loss for the same quarter of the prior year, by various items, including the $64.9 million loss that was recognized in the first quarter of 2019 on Teekay Parent’s equity-accounted investment in Altera, offset by $46.5 million in write-downs of two FPSO units in the first quarter of 2020.

(1) This is a non-GAAP financial measure. Please refer to “Definitions and Non-GAAP Financial Measures” and the Appendices to this release for a definition of this term and a reconciliation of this non-GAAP financial measure as used in this release to the most directly comparable financial measures under GAAP.

Summary Results of Daughter Entities

Teekay LNG

Teekay LNG’s net (loss) income, adjusted net income and total adjusted EBITDA(1) for the three months ended March 31, 2020, compared to the same quarter of the prior year, were positively impacted by: earnings from the six liquefied natural gas (LNG) carrier newbuildings which delivered into Teekay LNG’s consolidated fleet and equity-accounted joint ventures between January and December 2019; commencement of the terminal use payments in January 2020 to Teekay LNG’s Bahrain LNG Joint Venture; higher earnings from Teekay LNG’s 52 percent-owned joint venture with Marubeni Corporation (the MALT Joint Venture) as a result of the charter contracts for two joint venture LNG vessels that were secured at higher rates in June and July 2019; and higher earnings from Teekay LNG’s 50 percent-owned joint venture with Exmar NV (the Exmar LPG Joint Venture) from higher LPG charter rates earned.

These increases were partially offset by a reduction in earnings upon the sales of two LNG carriers and two conventional tankers between January 2019 and January 2020 and lower earnings from the Magellan Spirit upon its redeployment in May 2019, which is currently chartered-in from the MALT Joint Venture.

In addition, GAAP net (loss) income attributable to the partners and preferred unitholders was negatively impacted in the three months ended March 31, 2020, compared to the same quarter of the prior year, primarily due to a $45 million write-down of six multi-gas carriers in the first quarter of 2020.

Please refer to Teekay LNG’s first quarter 2020 earnings release for additional information on the financial results for this entity.

Teekay Tankers

Teekay Tankers’ net income, adjusted net income(1), and total adjusted EBITDA(1) for the three months ended March 31, 2020 significantly increased compared to the same period of the prior year, primarily due to higher average spot tanker rates earned in the first quarter of 2020.

Teekay Tankers has so far secured spot tanker rates for its Suezmax and Aframax-sized vessels of $52,100 per day and $33,600 per day based on 69 percent and 62 percent of the available spot revenue days fixed to-date in the second quarter of 2020, respectively, compared to $49,100 per day and $34,400 per day in the first quarter of 2020, respectively.

Please refer to Teekay Tankers’ first quarter 2020 earnings release for additional information on the financial results for this entity.

(1) This is a non-GAAP financial measure. Please refer to “Definitions and Non-GAAP Financial Measures” and the Appendices to this release for a definition of this term and a reconciliation of this non-GAAP financial measure as used in this release to the most directly comparable financial measures under GAAP.

Summary of Recent Events

Teekay Parent

In May 2020, Teekay Parent and Teekay LNG completed the elimination of Teekay LNG’s IDRs in exchange for the issuance to Teekay Parent of 10.75 million newly-issued Teekay LNG common units. Following the completion of this transaction on May 11, 2020, Teekay Parent now beneficially owns approximately 36 million of the Partnership’s common units and remains the sole owner of the general partner of Teekay LNG, which together represents an economic interest of approximately 42 percent in Teekay LNG.

In March 2020, Teekay Parent entered into a new bareboat charter contract with the Foinaven field operator (Britoil Limited, a subsidiary of BP p.l.c.) for the Foinaven FPSO unit for up to ten years (the Contract). Under the terms of the Contract, Teekay Parent is entitled to an upfront payment of approximately $67 million in cash, which was received in April 2020, and will receive a nominal per day rate over the life of the Contract, and a lump sum payment at the end of the Contract period, which is expected to cover the costs of recycling the FPSO unit in accordance with the EU Ship Recycling Regulations. As part of the transaction, Altera entered into agreements with the Foinaven field operator directly to provide operations and shuttle tanker services for the Foinaven FPSO.

Teekay LNG

In May 2020, the MALT Joint Venture chartered the Marib Spirit LNG carrier to an international trading company for a period of six months, which is expected to commence in mid-June 2020.

In April 2020, the MALT Joint Venture secured new charters for the Arwa Spirit and the Methane Spirit LNG carriers for periods of 12 and eight months, respectively. The new charters are expected to commence upon completion and in direct continuation of their existing charters in May and July 2020, respectively.

In April 2020, Teekay LNG successfully refinanced its existing $225 million unsecured revolving credit facility, which was scheduled to mature in November 2020, with a new two-year facility of the same amount and pricing consistent with the previous facility of LIBOR plus a margin of 140 basis points.

In December 2018, the Board of Directors of Teekay LNG’s general partner approved a $100 million common unit repurchase program. Since that time, Teekay LNG has repurchased a total of 3.63 million common units, or approximately 4.6 percent of the outstanding common units immediately prior to commencement of the program, for a total cost of $44.2 million, representing an average repurchase price of $12.16 per unit.

Teekay Tankers

Since the beginning of the year, Teekay Tankers has entered into time charter-out contracts for five Suezmax tankers, each for a duration of one year at an average rate of $45,600 per day, one Suezmax time charter-out contract for six months at $52,500 per day, and three time charter-out contracts for Aframax-sized vessels for one to two years at an average rate of $26,750 per day.

In late-April 2020, Teekay Tankers closed its previously announced sale of a portion of its oil and gas ship-to-ship transfer support business, which also provides gas terminal management and gas consulting services, for approximately $27 million, of which $14.3 million has been received with the remaining amount due in the third quarter of 2020. Teekay Tankers retained its entire Full Service Lightering business that operates in the U.S. Gulf, which provides ship-to-ship oil transfers for both U.S. crude imports and exports. In addition, Teekay Tankers will continue to operate oil ship-to-ship transfer support services in North America and the Caribbean, a business that has synergies with its core Full Service Lightering business.

Liquidity

As at March 31, 2020, Teekay Parent had total liquidity of approximately $87.1 million (consisting of $48.4 million of cash and cash equivalents and $38.7 million undrawn on a revolving credit facility). Giving pro forma effect for the $67 million upfront payment received in early April 2020 relating to the new Foinaven FPSO bareboat charter contract, Teekay Parent’s total liquidity would have been approximately $154 million as of March 31, 2020.

On a consolidated basis, Teekay had consolidated total liquidity of approximately $827.9 million (consisting of $566.4 million of cash and cash equivalents, including cash held for sale, and $261.5 million of undrawn capacity from its revolving credit facilities). Giving pro forma effect for the $67 million upfront payment received in early April 2020 relating to the new Foinaven FPSO bareboat charter contract and the $14 million of proceeds from Teekay Tankers’ sale of a portion of its ship-to-ship transfer business that closed in April 2020, Teekay’s consolidated total liquidity would have been approximately $910 million as of March 31, 2020.

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