Welcome to Teekay Corporation's first quarter 2014 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, sir.

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 first quarter 2014 earnings presentation. Mr. Evensen and Mr. Lok 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 first quarter 2014 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Evensen to begin.

Thank you, Ryan. Good morning, everyone, and thank you for joining us today for Teekay Corporation's first quarter 2014 earnings call. I am joined this morning by our CFO, Vince Lok, and for the Q&A session, we also have our Chief Strategy Officer, Kenneth Hvid and our Group Controller, Brian Fortier. During our call today, we will be taking you through the first quarter 2014 earnings presentation, which can be found on our website. Beginning on slide three of the presentation, I will briefly review some recent highlights for Teekay Corporation. For the first quarter of 2014, Teekay Corporation generated $265 million of total consolidated cash flow from vessel operations for CFVO, an increase of 37% from the same period of the prior year. Teekay Corporation reported consolidated adjusted net income of $3.5 million or $0.05 per share for the first quarter compared to a consolidated adjusted net loss of $11.7 million or $0.17 per share in the same period of the prior year. The increase in our adjusted net income is mainly attributable to stronger spot tanker rates, interest income recorded on our investment in three term loans, contributions from acquisitions and organic growth project that delivered during the past year and savings resulting from the redelivery of six chartered and conventional tankers since the start of 2013, which was partially offset by lower revenues from our FPSO fleet due to operational issues and idle time between contract. During the quarter, we continued to execute on our strategic objective of having our ships and offshore units owned at the daughter company level. In late February Teekay Parent co-created and invested in Oslo listed Tanker Investments Limited or TIL to which we sold our last four directly owned Suezmax conventional tankers. In addition, Teekay Parent agreed to sell a 50%…

Thanks, Peter, and good morning, everyone. Starting with slide eight, I will review our consolidated results for the quarter, comparing the adjusted income statement for the first quarter of 2014 against an adjusted income statement for the fourth quarter of 2013, which excludes the items listed in Appendix A to our release and later on I will also provide our outlook for the second quarter of 2014. Starting at the top of the page. Net revenues increased by $10 million primarily due to the strong spot tanker rates in Q1 and a $12 million increase in interest income recognized on our three term loans upon assuming ownership of the three VLCCs in March as vessel values have appreciated during Q1. These increases were partially offset by a decrease in revenues from our FPSO units primarily due to incremental revenues from the Foinaven FPSO contract related to the annual true up amount typically recognized in the fourth quarter of each year, net of $7 million commercial settlement received in Q1 in relation to the Foinaven's 2013 production. Vessel operating expenses decreased by $4 million mainly due to the sale of six conventional tankers in the fourth and first quarters and lower repairs and maintenance costs on our FPSO units. Time charter hire expenses decreased $8 million due to the redelivery in the fourth and first quarters of five in-charter vessels, partially offset by an increase in spot in-chartering costs in our shuttle tanker fleet. Depreciation and amortization decreased $6 million due to the sale of four conventional tankers to TIL and the impairment charges recognized in the fourth quarter of 2013, which reduced the book size of two shuttle tankers. G&A expenses increased by $2 million, partly due to the timing of recognition of long-term incentive compensation expenses which are typically…

Thanks, Vince. Turning to slide 10. I am pleased to inform you about the Teekay Group's 2014 Investor Day, which is scheduled for the morning of Tuesday, September 30 and will take place at the St. Regis Hotel in New York. At this event, we will provide a detailed presentation for the Teekay Group of companies covering our strategy, financial position and the market outlook for Teekay Corporation and our three publicly traded daughter companies. The event will be webcast live for all interested investors. While this event is still several months away, we encourage everyone to mark this date in their calendars and we look forward to presenting a meeting with investors at that time. So to wrap up, lots of great activity going on all around Teekay and all around the world. Thank you for joining us on the call today and operator we are now ready to take questions.

(Operator Instructions). Our first question comes from Michael Webber of Wells Fargo. Please go ahead.

Hi, guys. This is actually Sumeer [ph] on for Michael. How are you?

Fine.

So our first question really is on the FPSOs at Teekay. Just wanted to get a sense. Now that, in our perspective, we think the Knarr is potentially the next drop down to TOO as it delivers closer to Q4, but given all the activity for all the other FPSOs, the Banff having a new contract and potentially the Hummingbird extending its contract with Centrica close March, how should we think about the order of drop downs post the Knarr to TOO?

We haven't changed our strategy, which is when the FPSOs become eligible, and by eligible we mean they have the right kind of contract, that's when we drop them down. So as I said in my prepared remarks, the Banff will go back on its original charter and what we are waiting for is a step-up in the rates that happens January 1, 2015, and then it becomes eligible, in our minds, for dropping down because it is an accretive transaction. The Hummingbird depends upon the outcome of our discussions that we have with Centrica because we would prefer to have a longer-term contract on that before it drops. Those are really the two. The Petrojarl 1, if it gets a new contract. As I said, we are in discussions with people in new contracts. Then when that gets put on to the new contract that also gets eligible to be dropped down.

So we don't have a particular exact date for it. As you heard, there are lots of ways for Teekay Offshore to grow. So actually the drop downs, with the exception of Knarr, can be done on a more opportunistic basis.

Got it, and regarding TOOs growth opportunities, the Logitel offshore deal, which was announced today. In terms of the value of those floating accommodation units, I believe the value mentioned was $1.5 billion for eight floating accommodation units, two under contract with six options. So just want to get a sense of how we should think about the potential returns associated with those assets in comparison to, say floating production and storage units and floating storage units?

Yes, it's Kenneth here. The order would be for three units firm and then we have a very long string of options that potentially could give us up to eight units. In terms of the valuation there, if we look at the range potential and current markups that we have, then the longer-term contracts that you are seeing out and reported in the market at the moment, they are roughly trading at around six times cash flow.

Got it, and in terms of potentially accretion associated with those assets, how should we think about that?

For competitor reasons, since we are bidding on contracts, we are not giving out that information.

Got it, and six of those are options to potential exercise. How should we think about the likelihood of exercising those options?

Well, we will be bidding and we have a lot of flexibility on it. So we will be active in this new space and we will not be longer than what we are at present. So basically it will be as we are fixing them, we will be exercising options. It's entirely contract dependent as we go about the exercise. Again, I want to stress that we have a lot of flexibility on the options. So they are non-contingent options that we have for the next number of years. So it gives us great flexibility to pursue this market.

And what's common as we have our FPSO and our shuttle tankers, is all companies need certainty on their accommodation requirements as they plan out field developments. So that gives us the chance to have greater forward visibility, which is what is required for us to clear the options. So we are quite excited about this and I think the Sevan design actually is quite innovative to have been applied to the accommodation. That's what we are hearing from customers that they really like the design.

Got it, and on the topic of growth of the daughters, switching to the Yamal LNG project. Based on your announcement from today, $1 billion for the 50/50 JV, that in our perspective comes out to about $330 million per vessel, which is quite expensive. So just want to get a sense on how you guys think about the risk associated with the vessels in the project and if there are sovereign guarantee you guys have for the project? Or just how should we think about that?

Yes, I will give a little bit more detail on the project tomorrow on the Teekay LNG Partner's earnings call, but these are not conventional LNG vessels. They are icebreaking vessels that are capable of breaking through ice of two meters and therefore they cost more. So you are actually absolutely right. $1 billion, 50% of six is about $330 million on a fully built-up cost basis, but that represents the fact that these vessels are innovative and cost a little bit more. They will have a long-term contract and we expect them to be quite accretive when they get delivered.

Got it. That's all a question I have for right there.

Thank you.

I will turn the call over.

Thank you. The next question comes from Gregory Lewis of Credit Suisse. Please go ahead.

Thank you. Good morning, guys.

Hi, Greg.

Peter, when we think about them, and congratulations on the Logitel deal. I think this is pretty exciting. You guys must be really excited about it. When we think about that the move into this business, does this sort of signal a pivot away from the FPSO market? Or is there a slowdown in the FPSO market? I am just trying to balance. Clearly FAUs seem like a natural extension of your business. But I mean, I guess at the end of the day, you only have so many bullets to fire at strategic growth. Cold you just sort of balance those two?

Sure. Well, first of all, we are quite excited about the Logitel opportunity, but it all stems from actually listening to our customers, because the same customers that need FPSOs are the same customers that need the accommodation units. So in true TK fashion, we were out talking with them and they were saying, hey, here is a need that we have, and if Teekay operates it and Teekay has a good design then that's something we are interested in. So I actually have different teams working on the FPSOs than is working on the accommodation side. So then if you back that down and look at it from Teekay Offshore Partners' point of view, Teekay Offshore Partners has to choose which project is the best one to develop. And I actually think we spent a lot of time with both the Teekay LNG and Teekay Offshore at having different business streams that all around revolve around the same customers on the offshore side. So we can choose between a Remora HiLoad investment, a shuttle investment, an FPSO investment or an accommodation unit. Now, naturally going in to some of these new areas, it has to look better than the activities that we have both on a financial basis as well as on a customer basis and we think that's what we will get off the accommodation side. We have a six times multiple on a cash on cash basis on the accommodation which sets up well for these kind of units. So if you think about it from Teekay Offshore's point of view, we are diversifying our revenue stream, we get a bigger amount of portfolio and then it's just a question of how much investment at any one time. But as we said on slide five, what we really like about these, is that they fit in quite well in 2015 and looking out. So you are right. We haven't won any FPSO projects for a while. But that's because we are able to bid on just the projects that we want. But I assure you that my FPSO team is bidding on projects, both in the North Sea as well as in Brazil and we actually think that continues to have a really great opportunity. All that drilling that you have had in the next two years is causing the fields to be put into production.

Okay. Great. Then just in thinking about the FPSO market, clearly it seems like one of the issues has been, historically these have been purpose built field development assets. Now, cost in the offshore, expensive, I think one of the things that the market is starting to talk about is some standardization coming across the FPSO for you and there is always going to be a degree to which you can be standardized and a degree which is going to be purpose project built. Are you seeing projects or bids or is the team at Teekay thinking about trying to get more towards more of a standardized type FPSO that can maybe go from one field to another more relatively easier? And the only reason I ask is, clearly the Petrojarl 1 is an older FPSO, so that was obviously purpose built and it seems like they are having issues you with the longer-term viability of that in its later life. So I am just trying to figure out if there is any way to standardized the FPSO design going forward that makes it a more of this defensive asset because it can go from one field to another?

Yes. So that actually is a great question. We spent a lot of time talking with suppliers about that as well as with customers and to use it in a metaphor, the question is, can you have FPSOs that are 737s, some are 777s, some are 787s. The reality is, no. Because of the different kinds of reservoirs that you have, the size, the amount of storage capacity, the API of it, how much gas there is, how much water, how much produced water is, you really don't and it is impossible to get a standardized unit. The reality is people want to optimize the reservoirs that they have and therefore we are still in a situation where, when we move from one field to another, we have to make modifications. We might have to add a heat exchanger. We might have to add some gas compression. So I can't really see that that is going to happen. What we are seeing, though, is that there is some standardization. For example, in the pre-salt, Petrobras is trying to go with bigger units that are more or less sisters of them, but they can do that because it's the same field basically, and it's the same viscosity of the oil. What we are seeing in the North Sea is an emphasis on more heavy, a smaller field, heavier oil and that actually sets up really well for Teekay because there are two kinds of really FPSOs or contracts. There are the small contracts where you go and you are on a field for three to five years and you have to move on to another field and we have purpose built our FPSOs so that they can be modified quite easily. Whereas if we just pop built them for the cheapest cost for certain field, we would hurt their rollover opportunity for residual value. So to answer your question, the Petrojarl 1, we are actively looking at projects all around the world. But the big question for us should be in a hearty weather environment like the North Sea, if it was, we would have to do greater modifications given its age or move it to a more benign water out in Southeast Asia or Brazil and given the configuration, its much more better suited as an early well test ship, given that it has a limited amount of risers coming up. So that's a long explanation, but the answer is that the standardization is a long way away. But people frequently look at the drilling market and say we can do the same thing on the FPSO market and the response has really been from engineers, customers, suppliers, the answer is no.

Okay. All right. Thank you, guys, very much for the time. Congratulations on a good quarter.

Thank you, Greg.

Thank you. The next question comes from Taylor Mulherin of Deutsche Bank. Please go ahead.

Good morning, guys. How are you doing?

Great.

So I wanted to get just a little bit more color on that VLCC added to the Teekay Parent fleet in March. So it sounds like looking at options for FPSO conversion there. So just wanted to know if you cold give any more color on how that thought process plays out and then just generally, what's the timeline for something like that would be? Then the last one was, could this in some way be something that could be done directly at the dollar level, like you mentioned is a goal in the past?

Sure. So I think this is pretty fortuitous. Teekay Tankers made a loan secured by two VLCCs. They didn't want them and they could sell them profitably. So they went ahead and sold them to TIL Teekay had a sister ship also took over ownership, but in that case, we suddenly saw that we had a project that would require that VLCC to convert it to an FPSO. So we are holding it and will bid it into that project. If we win that project, that project would be done down a Teekay Offshore and then Teekay will sell that unit down to Teekay Offshore. It's a real advantage when you are doing a conversion to have that unit in your operations because it gives us a much greater understanding of its requirements in order to convert it. Since it is in our operation, we can take much more detailed measurements and surveys of it and have a greater understanding, which helps us in the conversion process. So it's been bid actively into an existing tender and hopefully we win, in which case it will be sold down into TOO as part of an FPSO conversion project.

It makes sense. And then just something you alluded to earlier, but with the Hummingbird Spirit, it just looks like the charter extended out to year-end 2015, and then with that option for those two additional years, does that leave it in limbo in terms basically, you have that contract duration being uncertain at this moment, as far as a potential drop down. Are you in negotiations to get that a little bit more certain?

Yes. As I said in my prepared remarks, I think the good news is, we are talking with Centrica and just as the Dampier Spirit got extended with Apache, the natural way is that this field will continue in operation and therefore the Hummingbird Spirit is the natural unit in order to continue on this field. So since, as with the Dampier Spirit, we got a net present value positive, we want that amount to be represented in the drop down. So I don't want to sell it now. When it gets a better contract, then Teekay Parent can make more money by dropping it down because the fair market value will increase. So as I like to tell everyone inside Teekay, a dollars is a dollar is a dollar. So we want to maximize these contracts before they get dropped down.

Makes sense, and then one just housekeeping item on the Foinaven. I just wanted to make sure I understood the off-hire stuff. So is it going to be completely down in Q2 for 37 days and then after that be operating at two thirds of production or is that 37 days of downtime a netting out for that reduced utilization?

Yes. The 37 days is the estimated downtime for all of Q2.

Okay.

And then for the remaining period of the second quarter, well actually from the remaining period starting from probably next week, we hope to start producing closer to the two thirds of the targeted production.

Got it. Okay. Thanks for your time, guys.

Thank you.

Thank you. The next question comes from Keith Mori of Barclays. Please go ahead.

Hi. Good morning, gentlemen.

Good morning.

Peter, I just want to come back to the FPSO market. We see today drilling rates coming down, utilization coming down across the board. How do you see that playing out on the FPSO market maybe over the next two to three years with drilling activity maybe slowing here?

So I see short-term effect and a long-term effect. On the short-term effect, we never got those huge high-highs the drilling rates had where they were. You could get drilling rig rates that could repay us in four or five years. When we are inside the logistic system, we have much more consistent nonvolatile rates. So they are coming back down a little bit, but what has been drilled up over the last few years will continue to be put in place. It's much more a function of oil price for us rather than drilling rig rates. I think the good news that you are hearing is that as drilling rig rates come down, you will see an increased level of activity and that will lead to more development plans going forward. The big complaint was, as Greg was saying earlier, the high cost of developing oilfield and that high cost was preventing some fields from being put into development, taking FID and so with drilling rig rates coming down, which could be anywhere from 25% to 33% of the total field development, that will actually mean that there will be more FPSOs, but that's a medium-term issue, not a short-term.

All right. Thanks for that information. I would like to shift over to the cash flow story. Peter, you have a lot of growth projects coming online of the next two to three years and they are going to require a lot of capital commitments and I was just curious how your thought process is on Teekay supporting some of those capital commitments in terms of ownership percentages and how should we think about that going forward?

Well, as we indicated in the past and in today's call, all the new projects are done directly at the daughter company level, and we have been warehousing these projects and making acquisitions directly there and financing it with existing liquidity as well as issuing equity along the way. So we don't intend to utilize the Teekay Parent balance sheet for those new growth opportunities. So the only remaining CapEx to the parent really as summarized on page 15 of our presentation is the remaining $160 million of CapEx related to Knarr FPSO. Otherwise everything else is really done at the daughter company level.

Thanks. I think I should refine the question maybe a little bit. I know that you will be raising equity over the next year or two. How do we think about Teekay maintaining its ownership percentage in the daughter company's as those equity proceeds are raised?

We look upon on the LP side, or limited partner side. We look upon our investment in the MLPs, as well as any daughter on an investable basis. So if we think it makes sense, then we will invest, but it actually hasn't been our plan to increase our investment on the LP side. So we have a better use, which is we will raise the return on invested capital at Teekay Parent by having the GP value be a greater amount and if we do that and reduce investments in other things then the return on invested capital at Teekay Parent naturally goes up and that's the greatest way we can create value for our shareholders.

All right. Thanks for the time.

Thank you.

Thank you. The next question comes from Urs Dur of Clarkson Capital Markets. Please go ahead.

Good morning.

Hi, Urs.

You guys did a great job talking about the FPSOs. I don't really have anything else to ask. I do note that you beat your revenue line very, very significantly on the guidance and it's not really to poke anything at. I think it's an excellent result. But what's your confidence level on the guidance for this coming quarter?

Yes, as we laid out, Urs, it is on slide nine. Given the fixed-rate nature of the bulk of our revenues, we have a very high confidence on the guidance we are giving for the second quarter and as I mentioned, I think the outlook is better for the second half of 2014.

Okay. Very good and thanks for all the info on the FPSOs. Thanks, guys.

Thank you.

Thank you. The next question comes from (inaudible) of Morgan Stanley. Please go ahead.

Good morning, gentlemen. Thanks for the updates. I just have one quick question regarding TIL and the wider group. So well, the expansion of TIL has come from internal sales of tankers, and I was wondering if the future expansion is going to continue like that or if it is going to be focused more on external acquisitions?

In TIL, we are almost entirely focused on external acquisitions. As you heard earlier, we have sold our last Suezmaxes from Teekay now and we have one VLCC that we are holding for a potential FPSO project. So presently, we are looking at the external market. In TIL, six of the 13 vessels that we own there, you are correct, originated from Teekay, but that's only six of the 13.

Okay. From the wider group as well? Or just like, because some of them came from TNK, so I was wondering if there was any thoughts there?

No. There are absolutely no plans of selling the assets from TNK to TIL.

Okay. Great. That was actually it for me. Thank you very much. (inaudible). Thank you.

Thank you.

Thank you. (Operator Instructions). The next question comes from Sameer Panjwani of Raymond James. Please go ahead.

Hi, guys. Good morning.

Hi, Sameer.

Hi, Peter. Just a little while ago you mentioned the Teekay Parent's strategy of maximizing the GP value and obviously one of the ways you guys are going to do that is to become asset light at Teekay Parent. To that point, I saw, I guess compared to the fourth quarter presentation, in this quarter's presentation you have the KT Maritime towage newbuildings coming in at Teekay Parent. So could you maybe elaborate where those assets are? Are they going to be housed? Or are they going to be at Teekay Parent? Or are they going to be dropped down somewhere?

Yes. So this is a relatively small investment compared to what we have been talking about today, about $50 million. It was created by our Teekay Australia unit. We are really proud of them that that they have, but we actually have only 50% of that $50 million investment. So it's net $25 million. Ultimately, it will not be a Teekay Corporation. We just haven't figured out exactly where it is. It's a towage operation. So it looks a little bit like offshore, but it relates to a LNG project. So that has aspects of Teekay LNG, but it's $25 million. We have time to figure out which daughter it belongs in.

Okay. All right. I appreciate the color. Thank you.

Thank you.

Thank you. (Operator Instructions). There are no further questions at this time. Please continue.

Thank you all very much. It was an active quarter, and I am really proud of the whole Teekay team all around the world. So we look forward to reporting back to you next quarter. Thank you.

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line and have a great day.