Canada Markets closed

Edited Transcript of TGP earnings conference call or presentation 21-May-20 5:00pm GMT

Q1 2020 Teekay LNG Partners LP Earnings Call

Hamilton Jun 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Teekay LNG Partners LP earnings conference call or presentation Thursday, May 21, 2020 at 5:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Mark J. Kremin

Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd

* Scott Gayton

Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd

================================================================================

Conference Call Participants

================================================================================

* Benjamin Joel Nolan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* J. Mintzmyer

Value Investor's Edge - Lead Researcher

* Michael Webber

Webber Research & Advisory LLC - Managing Partner

* Randall Giveans

Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen. And thank you for standing by. Welcome to today's Teekay LNG Partners First Quarter 2020 Earnings Results Call. (Operator Instructions) As a reminder, this program is being recorded.

And now for opening remarks and introductions, I'd like to turn the call over to the company. Please go ahead.

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [2]

--------------------------------------------------------------------------------

Before Mr. Kremin begins, I would like to direct all participants to our website at www.teekaylng.com, where you will find a copy of the first quarter of 2020 earnings presentation. We 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 of 2020 earnings release and earnings presentation available on our website.

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

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [3]

--------------------------------------------------------------------------------

Thank you, Scott. Good morning, everyone. And thank you for joining us on our first quarter of 2020 earnings conference call for Teekay LNG Partners. We hope that you and your families are all safe and healthy. I'm joined today by Scott Gayton, Teekay Gas Group's CFO.

Before we get into our results, we will take a moment to say thank you to all our seafarers and shore-based staff for their extraordinary dedication to maintain business continuity. While COVID-19 is having an unprecedented impact on the world and is clearly a major focus for us, our long-term contract cover has ensured it has had minimal impact on Teekay LNG's operations and cash flows. We are truly proud of our seafarers and our onshore colleagues how they 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 for our customers.

Turning to Slide 3 of the presentation. We will review some of Teekay LNG's recent highlights as well as a few key takeaways that summarize how we believe Teekay LNG is uniquely positioned today and not just against our LNG shipping peers, but also how we are uniquely compared against most energy-related companies out there.

Our first quarter adjusted net income increased to over $52 million, the seventh consecutive quarterly increase. And as we will discuss in a moment, we expect our adjusted net income will increase again next quarter. With the recent charter of the Marib Spirit, our LNG fleet is now 100% fixed for 2020, which is in line with our strategy of optimizing the utilization of our fleet, which we think benefits all our key stakeholders.

As announced last week, we agreed with our sponsor, Teekay Corporation to eliminate their incentive distribution rights or IDRs. We believe this creates greater alignment between Teekay Corporation and the rest of our investors and removes one of the primary uncertainties for new and existing TGP investors, and importantly, we believe we are trading at attractive multiples of earnings and cash flow that aren't reflective of the strength of our business and therefore, represents a compelling opportunity for new investors.

During these last few months, the energy, LNG shipping and equity markets have experienced enormous volatility, but our business and the partnership as a whole have largely been insulated from this volatility. On this slide, we have listed 5 key takeaways that we believe make Teekay LNG unique in the markets today and a compelling investment for existing and new investors.

First, Q1 2020 was another record quarter for Teekay LNG and our total adjusted EBITDA up nearly 20% over the same quarter 1 year ago. Second, our LNG fleet is 100% fixed for 2020 and 94% fixed for 2021. And as we will discuss in a moment, all of our fixed rate charters are take-or-pay in nature. Third, we have a strong financial foundation with leverage decreasing, a strong liquidity position, no remaining debt maturities in 2020 and no growth CapEx needs. Fourth, based on the stability of our business, we are reaffirming our 2020 financial guidance, and we expect this year's adjusted earnings will increase by nearly 50% over 2019. Fifth, we continue to increase returns to our investors in the form of increasing distributions and buybacks. In combination, this puts Teekay LNG in unique category of companies that only a few, if any of our peers in the broader shipping space can match.

Before reviewing each of these key takeaways in more detail, we would like to turn to Slide 4 to discuss our experiences while operating in today's COVID-19 environment. Operationally, we have transitioned each of our vessels smoothly into the environment and everyone onshore is working efficiently from home. We have not experienced any impact on our vessel availability, owing in part to no cases of COVID onboard any of our vessels. Our focus remains on the safety and health of our crews. And while we have been unable to effect crew changes, except for extraordinary cases, we are working with both industry and intergovernmental organizations to allow for the safe passage of crews. At the same time, we are hopeful that borders will be reopening soon.

We were able to stock up on critical spares prior to travel restrictions being put in place and our 2020 dry dock schedule was already back-end loaded. For the few dry docks we are expecting in Q1 and Q2, we have been able to delay them as needed until later this year.

And lastly, all of our fixed rate charters are operating as expected. We have not had any impact on our business as a result of cargo cancellations that may have been taking place, and all of our fixed rate contracts are operating as expected. Similar to previous downturns in the spot LNG shipping markets, we have received no request for contract cancellations and none are expected.

Looking to Slide 5. We mentioned upfront that this was another record quarter for Teekay LNG. With the final delivery of our $3.5 billion growth program in December of last year, we are now beginning to recognize the associated cash flow and earnings, which is leading to year-over-year and quarter-over-quarter growth. We took delivery of 6 LNG carriers and the Bahrain regas terminal over the past year. And we have enjoyed higher LPG rates and our 50% owned JV with Exmar, all of which contributed to a nearly 20% increase in total adjusted EBITDA and a 57% increase in adjusted net income, comparing the first quarter of 2020 to the same quarter of the prior year. And comparing the same cash flow and earnings items in the first quarter of 2020 to the fourth quarter of 2019, we experienced sequential increases due to deliveries late in 2019 and receiving terminal use payments for Bahrain in early January.

Importantly, as you can see in the appendix on Slide 5, we are expecting that Q2 2020's results will exceed this first quarter.

We have been including Slides 6 and 7 in our presentations for many quarters now, and perhaps this quarter, more than any previous quarters, these slides set us apart from nearly everyone in our sector. Looking first to Slide 6 and focusing on the text to the left. We would like to take a moment to discuss the key characteristics of our fixed rate contracts. Our contracts are take-or-pay, and there are no provisions for a unilateral change in terms or charter rates. Take-or-pay means that we get paid every day that the vessel is available for operation, irrespective of how the customer uses the vessel. If our ship is full of LNG cargo and steaming to its destination, we get paid. If it is empty and in route to pick up an LNG cargo, which the customer subsequently cancels with the producer, we get paid. If it is empty, while waiting for a cargo, we get paid. If it is full, and there is nowhere to offload the cargo due to onland storage or gas transportation issues, we get paid. If the spot LNG market drops or rises and is significantly different than our contracted rate, we continue to receive the contracted rate. For these reasons, we do not foresee that any of our fixed rate contracts, which are detailed on this slide, are in jeopardy of being canceled despite the uncertainty in today's energy environment.

Turning to Slide 7. As announced today, we fixed our final remaining LNG carrier up for renewal in 2020 on contract last week. Looking at the top 3 bars on this chart inside the Red Dash box. Today, we have announced a 6-month fixed rate contract on the 52%-owned Marib Spirit commencing on June 21, which follows on from the announcement last month that we had fixed the 52%-owned Methane Spirit on an 8-month contract and a 52% owned Arwa Spirit on a 12-month contract. All told, we are now 100% fixed for the remainder of 2020 and 94% fixed for 2021.

Importantly, 2 of the charters are in direct continuation of their existing charters, which means that no days of off-hire while waiting for the new contracts to commence. This is great work by our chartering team to maximize the utilization and thus, the earnings of these vessels.

I will now turn it over to Scott, who will discuss the next 2 slides before we conclude.

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [4]

--------------------------------------------------------------------------------

Thank you, Mark. Turning to Slide 8. Another one of the key takeaways we hope you take from this call is our strong financial foundation. As can be seen to the top right of this slide and looking at the blue line, our leverage, as measured by net debt-to-total-adjusted EBITDA on a proportionate basis continues to decrease. We have moved from an annualized 7.6x as of the first quarter of 2019 to 6.1x as of the end of Q1 2020 on an annualized basis. And we expect our delevering efforts will continue into the future with approximately $300 million in scheduled amortization per year. This delevering benefits investors by building financial flexibility through a higher equity base and through interest expense savings.

We expect annualized interest savings of $20 million to $25 million per year simply due to interest savings resulting from scheduled debt amortizations and savings from repaying our 2020 NOK bond with existing cash. While a significant portion of our interest rate exposure has been hedged, should interest rates remain low, the interest cost on our floating rate debt will also decline. Looking at the chart to the bottom right, we also believe that our financial foundation is strong because of our very manageable debt repayment profile. After repaying our NOK bond, which matured this past Tuesday, with cash, we have current liquidity of over $260 million and no further debt maturities in 2020. We have 3 facilities that mature in 2021 and we are already negotiating term sheets with existing lenders on the Tangguh LNG and Exmar LPG joint venture facilities. Each of these facilities are backed by attractive vessels and in the case of Tangguh contracts with BP that extend out to 2029.

The 2021 NOK bond doesn't mature until October of next year, and so we have over a year before we would need to refinance this maturity. Our expectation is that we will refinance this bond prior to its maturity, albeit at a reduced amount. In summary, we have a strong liquidity balance, a very manageable debt maturity profile and a strong bank group, and therefore, we believe Teekay LNG has a strong financial foundation, which benefits all stakeholders.

Turning to Slide 9. We continue to believe TGP represents a compelling investment with a 10.5 year fixed rate contract revenue backlog of approximately $9.3 billion, while trading at a 2020 adjusted earnings multiple of 4x, a cash flow multiple of 7.7x and with a dividend yield of over 9%. Teekay LNG has already raised its distributions by over 30% for 2 consecutive years, and we have reaffirmed our 2020 financial guidance range today. We took advantage of the weakness in our unit price by repurchasing shares during the quarter, repurchasing 810,000 units since reporting earnings in late February at an average price of $9.75 per unit, which brings our total repurchases to nearly $45 million or 4.6% of our outstanding unit count since the start of the program in late 2018. However, going forward, I expect maintaining a healthy balance sheet and strong liquidity balance will outweigh additional unit repurchases.

Before I turn the call back to Mark to conclude and looking at the chart at the top of this page, adjusted net income and total adjusted EBITDA in 2020 are expected to be up materially over 2019, which is already up significantly over 2018, which, as Mark mentioned earlier, makes us truly unique amongst our peers in LNG shipping and the energy markets at large.

I would now like to turn the call back to Mark to conclude.

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [5]

--------------------------------------------------------------------------------

Thank you, Scott. Before we open up the call for questions, we would like to close out today by recognizing the unprecedented volatility and uncertainty that has occurred in the natural gas and LNG markets both from a demand, supply and pricing point of view, and this -- and the impact this has had on LNG shipping and the outlook for new projects. As economies begin to reopen and hopefully return to the same or some level of normalcy, more will become clear to us. However, during these uncertain times, we take comfort in our robust business model, which -- with a fully fixed out LNG fleet, a strong financial foundation, and dedicated staff, seafarers, who will keep everyone safe as we plan to reorient around the new normal.

Thanks for your time today. And operator, we are now available to take questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Frist, we'll hear from the line of Randy Giveans with Jefferies.

--------------------------------------------------------------------------------

Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [2]

--------------------------------------------------------------------------------

Obviously you have been working on eliminating IDRs, getting the NOK bond paid off. A question on the NOK bonds. Was that more of a deleveraging decision? Or kind of has that market really dried up and just the pricing was exorbitant that you wouldn't want to refinance that? And then kind of going forward, is there plans to kind of reenter or recap that market or kind of staying away for the time being?

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [3]

--------------------------------------------------------------------------------

Yes. Thanks, Randy. This is Scott. No, that market, we believe, is open. It obviously went through some pretty significant volatility like we saw in the U.S. but similarly, now that we have seen a ton of issuances in both the investment-grade and high-yield space and in the energy space in the U.S., I would say that I would imagine that the same is achievable in Norway. We have talked to a number of our investors that we have good relationships with as well as a number of our bankers that ultimately help to issue these bonds. And we do believe that we could have issued in that market today. But I think that the pricing that we would have received is probably not one that we would have expected to be attractive. And really is not required as we're sitting on over $250 million of liquidity today given that we don't have any CapEx looming for an operating company that is fixed out as we are we just looked at that as being rather expensive insurance, I think it's maybe one way to think about it.

And then I said in my remarks, we do have a maturity in October of next year. So we've obviously got a lot of time to chip away at that. It is about $147 million that matures, and I think that we'll be maturing that for a smaller dollar value. And I think that if you see a window open up later this or early next year, then -- or maybe open up wider and see some better pricing, then I think, you'll see us look at chipping away that maturity well in advance of October.

--------------------------------------------------------------------------------

Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [4]

--------------------------------------------------------------------------------

Perfect. And then on the LNG shipping side, any kind of charters in this environment are basically a win. With that, can you give a little more clarity in terms of rates, on the Marib Spirit, the Arwa Spirit, the Methane Spirit. I'm just trying to see kind of sensitivities around modeling, obviously not massively impactful as you reiterate your guidance, just kind of seeing where rates are today for those, let's call it, short-term time charters?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [5]

--------------------------------------------------------------------------------

Sure, Randy. They're all around the 30s or 40s per day. In terms of the market, we probably see that already a little lower today for the next 6 months or so. We've been seeing TFDEs and MEGIs are getting a bit of a premium. So you'll recall that these are actually not the 2 stroke, they're the DFD or TFDE. But that's the kind of rate we're getting. And the interesting thing about these charters, as we mentioned, to some extent, in the headline, in the scripted remarks is that they are, if not continuous, in 2 cases, we basically go off to another major trader on an absolute continuous basis. The third is very close. So there's very little waiting time or repositioning cost to us in any of these or none in these charters. And that's really important for us over the next quarters or 2.

--------------------------------------------------------------------------------

Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [6]

--------------------------------------------------------------------------------

Yes. No, that make sense. And then you mentioned briefly that if the vessel has a cargo on it, you're getting paid. If it doesn't have a cargo, you're getting paid. If someone's is using it for a waiting, you're getting paid. Well, have you seen a lot of kind of changes in fleet function -- functionality with all of the maybe production shut-ins and some of these other things? Are there more vessels kind of balancing for longer? I know it doesn't affect your payment in the receipt of those contracts, but just looking at the operations of the vessels?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [7]

--------------------------------------------------------------------------------

Yes. This is something I read about in the news a lot, but it doesn't necessarily align with what we see with our own fleet. And we get a pretty good look at a cross-section of LNG with our 47 LNG carriers. We know where they're all going. We're not seeing floating storage to the extent that others are referring to. I'll just preempt any discussions they're going to have. It's kind of difficult to make those economics work. And along the same lines, we're not seeing necessarily a slowdown in our ships. So we've seen a couple from, we'll call it Australia that have slower speeds than we usually have on those trades. But for the most part, we're not doing a lot of slow steaming. We have seen some cancellations. So they don't really impact us, as I said, typically another charter maybe picks up the cargo or it goes elsewhere, we have seen a fair amount of subcharters. So what I always refer to is the shadow inventory. We have 47 LNG carriers chartered out, but we can also see who's subchartering because of the operational orders and whatever will change. So there is a fair amount of subchartering that we can see in the market right now. But to kind of reiterate, no, we're not seeing an operational change for the most part in how we're steaming and certainly not in how we're sitting yet.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Moving on, from Stifel we have Ben Nolan.

--------------------------------------------------------------------------------

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [9]

--------------------------------------------------------------------------------

So I have a few questions and I'll try to go through pretty quick here. But the first is, I was just hoping, is it possible to give any now that everything has been delivered, the CapEx is done, a lot of the refinancing has been taken care of. Any color on what you're thinking about with respect to the pace of distribution growth going forward? I realize it's a board-level decision and whatnot. But just any color as to what you're thinking about there?

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [10]

--------------------------------------------------------------------------------

Yes. Randy, sorry, Ben. Yes, it is nice to -- obviously, to have that removed. And I think that does give us some additional flexibility to consider how we allocate capital. And I think as we've highlighted before and again on this call is that we're really prioritizing that -- the balance sheet delevering and that's probably going to last for at least the next few years. And we have been returning capital, obviously, in the form of buybacks and in dividend increases over the last couple of years. But I think looking ahead, it is a very uncertain environment. And so we are going to continue to prioritize balance sheet delevering now. And we'll see where we are once we have gained back some of that financial flexibility through the delevering to see what it is that we are going to do with any excess capital. But I think really it's too tough for us to tell at this point or give any type of distribution guidance because there's just too much uncertainty.

--------------------------------------------------------------------------------

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [11]

--------------------------------------------------------------------------------

Okay. Understand, Scott. But that -- given that, it sort of leaves me scratching my head a little bit on the timing of the IDR buyout. I mean, obviously, you expect the share price to increase over time as the leverage falls as do I. But this -- not only diluted earnings, but there's dividends or distributions being paid on that. So it's dilutive to your ability to repay debt. Can you maybe talk through why -- what the motivation was to do this now relative to maybe waiting a few years until the debt is paid down and you have a little bit better line of sight on distribution growth?

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [12]

--------------------------------------------------------------------------------

Sure. Maybe I'll take a stab at it and see if Mark's got any follow-ups. I think from an overall delevering point of view, I don't think this really impacts us too much. Like I said in my remarks, we do amortize around $300 million in debt per year and the distributions that are being paid on the new units is at $1 anyway, is $10.75 million per year. So I don't think that it really has a huge detrimental impact on our delevering efforts.

And then from a valuation point of view and a timing point of view, I think one way to maybe think about it is, it is a discounted value. And so when the valuation would have been performed, there would have been a discounting factor that would have gone along with it. And so I actually look at it that it was probably cheaper today because of that discounting factor than it would have been in a couple of years once we were in a delevered position and maybe it would have been easier to have that line of sight directly on to value in the IDR. So yes, I don't like issuing a lot of stock at these levels. But I also think that you get it coming the other way, which is just an overall lower valuation.

And then the last part from the timing is, we've seen a lot of carnage across the energy space, across the LNG shipping space, and I think for the most part, due to a lot of prudent actions taken over the last number of years, Teekay LNG is really going to be the -- one of the only LNG shipping companies that is available for investors to really invest in. And what we heard from a lot of investors was that with the IDRs in place and given some of the atrocities we've seen with respect to these IDR transactions, in particular, the midstream space, people were not willing to invest and TGP was kind of uninvestable. So I think as the world recovers, as the energy markets recover, and people look to put their money, hopefully into LNG shipping companies then with these IDRs removed, over $9.5 billion of cash flow, and steadily increasing returns to investors that they're going to put their money into TGP. And so I think that this actually was an opportune timing to do it, so this sets us up well for a recovery.

--------------------------------------------------------------------------------

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [13]

--------------------------------------------------------------------------------

Okay. That's very helpful and clear. You had mentioned sort of the discounting factor on how you're thinking about valuation, but could you maybe -- it wasn't initially in the release, could you maybe talk through the economics of how you got to the prices you got to, in terms of both the timing of how long you were discounting, and sort of what -- what you were assuming for, let's call it, a fully baked buyout price?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [14]

--------------------------------------------------------------------------------

We mentioned -- on the Teekay call, but we'll mention it again, we don't have direct access to that Ben. That's -- this went through a robust project process, as we say, with the conflicts committee, which is independent board members. So we don't have the actual valuation that they have, but what we can see is a compelling way forward. I mean, this was -- there was a lot of uncertainty, as Scott said, around the stock, which has been removed. And so everyone's on the same plane field going forward, and that includes Teekay. So when we talk about alignment, there was no cash here. They've taken all shares. And so we've got that going forward. And they, like everyone, I think, should be not so focused on the distribution right now, but it's the PE that we have, which is unbelievably mispriced, in my opinion. We have a pre-IDR transaction PE of around high 3s. And we've gone to around 4. So as we all are on the same plane field together, including TK, that's what I look forward to, and that's the valuation that I see that is very mispriced.

--------------------------------------------------------------------------------

Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [15]

--------------------------------------------------------------------------------

Yes. No. And from my point of view, I agree, there's no question, the units are undervalued here. But I'll turn it over at this point and let somebody else take a stab.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Next question will come from J Mintzmyer with Value Investor's Edge.

--------------------------------------------------------------------------------

J. Mintzmyer, Value Investor's Edge - Lead Researcher [17]

--------------------------------------------------------------------------------

Congrats on an excellent call. Very excellent quarter. So we'll start off with little housekeeping questions and then move bigger picture. So first of all, a little bit of a quarterly slip. It was a great quarter, but a little bit of a quarterly slip, I think, in revenues and income. But if you look at your Q2 outlook, it seems like that bounces back in Q2. There's a line item for reduction in claims. Can we talk about what that means? And what that netback is?

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [18]

--------------------------------------------------------------------------------

Yes. So on a -- basically, every quarter, there are operational claims that we may receive from charters. And sometimes they're a little bit higher, sometimes they're a little bit lower. And I think what you saw in Q1 was there was a little bit of a catch-up of some claims maybe from last year or previous quarters that were recorded this year. And then we -- or sorry, this quarter, and then we actually expect that a number of those will likely get reversed next quarter. So there is a movement around, but it's all of what I would say, just general LNG shifting operations.

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [19]

--------------------------------------------------------------------------------

If I could add just some slight color to that, may or may not be useful. But most of these LNG charters, most claims come in the way of fuel performance. And most LNG charters, you price your fuel according to what the fuel oil equivalent of high sulfur today, excuse me, low sulfur oil is. And if you look at Q1, in particular, we had this spike of pricing. And going forward and already, in fact, as you know from your tanker discussions, high sulfur fuel, both prices and spreads have really come down. So that will hopefully be, as we say, a headwind -- sorry, tailwind for us in any future claims.

--------------------------------------------------------------------------------

J. Mintzmyer, Value Investor's Edge - Lead Researcher [20]

--------------------------------------------------------------------------------

Excellent. And just one other thing. When I look at Slide 6 and 7, looking at your fleets, we're looking into 2020 and 2021 to sea exposure and I see Excalibur pop up. It's a 50%-owned steam vessel. It's a financing transaction. I believe you sold the sister Excelsior. I think it was off a couple of years ago. Is Excalibur also sort of noncore and for sale? Or do you continue to hope to roll that one?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [21]

--------------------------------------------------------------------------------

It is -- all the steam ships are relatively noncore. It's a smaller part of our business, as you know, certainly from a revenue side already. It's not as material as our TFDEs or our MEGIs or any of other propulsions. As you say, it's the first of our steam ships to come off. I think it doesn't come off until 2020-'21. And so we have a little bit of time with our joint venture partner, Exmar, to think about that.

The sister ship was a little bit different. That was a small FSRU that we sold. But we have to figure out, like everyone else in the world, our steamship strategy here in terms of whether we divest or whether we continue to roll over. It's not going to roll over to Accelerate, which is the current charter, but whether redeploy in some way. The good news is that when it comes to Teekay LNG, we have very limited steamship exposure. Our roll off is very staggered, and it doesn't come for a few years, as you've already pointed out. But it's not a business we're going to be growing, to put it that way.

--------------------------------------------------------------------------------

J. Mintzmyer, Value Investor's Edge - Lead Researcher [22]

--------------------------------------------------------------------------------

You mentioned in the prepared remarks that deleveraging would continue to outweigh repurchases. And of course, that makes sense, you have $300 million of scheduled amortization. You took out the NOK bonds. Look, we see the stuff in 2021 coming up. Does that mean repurchases are paused or off the table? Or are you just saying they're going to be a lower priority?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [23]

--------------------------------------------------------------------------------

I'm going to hand this over to Scott, but I just want to clarify one thing. I think I had said 2021, but actually, it's 2022 before the Excalibur will, at the very least, it's like late, late, late, late December on an earliest redelivery. So let's just think about that as 2022. And I apologize for that error, I'll turn it over to Scott.

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [24]

--------------------------------------------------------------------------------

Yes. And then the other point I was going to make on that vessel Mark is that actually, when it does roll, it's got extremely minimal debt on it. And so it won't be much of a drag for us from an operational point of view or a revenue point of view.

I think, J, with respect to buybacks, I would probably look at it as more of a pause, like we're seeing going on across the space. We still believe the stock is undervalued. We've done it before. We've now got greater alignment with the parent to look at things like buybacks. But I just think that given all the uncertainty that we just need to give it a pause and see where things shake out.

--------------------------------------------------------------------------------

J. Mintzmyer, Value Investor's Edge - Lead Researcher [25]

--------------------------------------------------------------------------------

Understandable, Scott, with COVID-19, I think investors do understand that. I think investors bigger concern, and I brought this up on the Teekay call as well. It's something I hear literally every day, is that capital is going to be squandered on new growth, on new investments at a time when the stock trades at, frankly, ridiculous valuation, right? I mean we can argue at how big a discount, but whether it's 30% or 50%? I know you made sort of -- we had a podcast, and we kind of talked about capital allocation and stuff. Quarterly call is kind of a different place here, but are you willing to reiterate the fact that no, we are not looking for growth at this time that we will not commit to growth unless it makes sense on an ROE basis as in it was more accretive than repurchasing units?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [26]

--------------------------------------------------------------------------------

No, we are not committed for growth at this time. We will not do it unless it makes sense on an ROE basis. Absolutely, J. That is not the first priority for us. As you've heard many, many times, delevering and other things will take priority even if we wanted to grow, it's going to be tough. So we'll just -- I know this is a bit off topic, but as you probably know, as you do, the FIDs, the financial investment decisions have been pushed back by most, if not everyone, for at least 6 months or probably a year and even fundamentally, we'll have to look at where this all goes. I think it might still come out this year. It's a bit uncertain. I've seen the bids from Nigeria, but we're uncertain about who might even come out this year. As I said, all FIDs are likely to be delayed. So yes, the first priority is not -- is certainly not growth. And -- but we'll see what happens with these opportunities. It's not anytime soon, is my guess.

--------------------------------------------------------------------------------

J. Mintzmyer, Value Investor's Edge - Lead Researcher [27]

--------------------------------------------------------------------------------

Excellent, Mark. It's literally the number one concern of all investors that I talk to. Final question for you. Look, we had a lot of heat on the Teekay call about the GP IDR. I think we had a good discussion earlier on this call. There's sort of that, hey, it's not us. It was this conflicts committee that did it. And yes, I get the legal perspective that it's hands off, it's an independent committee. Is there any potential or a chance for that report or for that valuation to be filed or disclosed somewhere in the future, so folks can reference that exhibit, right? Because right now, it's like black box, it's not us, don't blame us. Yes, and we get that, but people still want to see some sort of valuation, some sort of connection, howbeit.

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [28]

--------------------------------------------------------------------------------

My understanding, J, is no. The valuation will not be or the process on the valuation will not be disclosed. So that's the short of it all. I would just urge everyone. First of all, I think, it's a good deal because before I was hearing that the biggest uncertainty -- from every investor that I spoke to, that the biggest uncertainty was whether we had an IDR deal done or not. And now I've just heard that the biggest shift is moving on to whether we're going to grow. So we've already managed, in some part, what we've been dealing with for the last year or 2. And so that's fortunate in itself. As we move forward and we talk about growth and things other than the IDR, I'd just remind everyone how well we trade or how poorly I should say we're trading on a PE basis. And I think it's a great bet, so Scott, do you have anything?

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [29]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

J. Mintzmyer, Value Investor's Edge - Lead Researcher [30]

--------------------------------------------------------------------------------

Congrats on a good quarter. We're looking forward to more.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Looks like we have a question from Mike Webber with Webber Research.

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [32]

--------------------------------------------------------------------------------

So I'm going to dig back into the IDRs, if you don't mind. So I know J just touched on this, and there seems to be some degree of kind of conflating of independent versus something being secret. Irrespective of whether that's secret you guys have seen. I assume that you get an independent assessment of the valuation. And then you would decide, does that make sense. Do we think that's a good deal or not. So it implies that you guys would have done your own work already, right? So maybe if you can't get into what the independent assessment came up with? What did you use when you were evaluating whether or not you thought that they came up with a good deal and whether or not you probably wanted to pull the trigger on it Mark.

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [33]

--------------------------------------------------------------------------------

Well, we are not able to pull the trigger. And I'm not trying to brush this off or -- but again, it goes through an independent committee. That's who decides whether or not this is going to be done and at what price.

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [34]

--------------------------------------------------------------------------------

Who gets to decide whether you're going to do, right?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [35]

--------------------------------------------------------------------------------

Teekay puts an offer to the independent committee, which then makes the recommendation to the Board, and that's how that works.

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [36]

--------------------------------------------------------------------------------

So you get the number and you get to evaluate it, right? So they came up with $500 million. You wouldn't be stop paying $500 million. You get to say, okay, maybe I don't want to do that right now, right? So you had to do your own work at some level, right?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [37]

--------------------------------------------------------------------------------

No. This goes to -- this doesn't involve Scott or myself for it, this is done by independent directors who together form the conflicts committee. And it's their decision as to whether recommended this deal or not. And it doesn't involve management, but I'm happy to speak to what Scott and I see, which is, as you've heard from the same thing from Teekay Corporation, we've got very visible, predictable cash flows. Everyone I spoke to is talking about the overhang and the uncertainty. Fortunately, by the way the stock has been trading since we've done the deal that seems to have been somewhat relieved. The -- we trade at a low PE, which is...

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [38]

--------------------------------------------------------------------------------

I understand that. I understand it. But just to go back, so you commit to the deal before you have any idea what the price is? Basically. It goes into -- you say you want to do it, it goes to independent committee, and you have no say over it from that point on?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [39]

--------------------------------------------------------------------------------

To some extent, that is correct. We were helpful in comparing what's the limit and the assumption. So that's it.

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [40]

--------------------------------------------------------------------------------

So you are actually -- you are helpful, but in the assumption, but all I guess, in terms of what your cash would be? Okay. So you would -- it wasn't in Teekay's hands, it wasn't in your hands. There was -- it's unclear who actually made the decision. I guess in terms of like when they come up with the price, if I compare against some of the recent deals, right, I guess, maybe, first of all, are the units restricted at all at Teekay? And is there any kind of earn-out provision like we've seen in recent deals?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [41]

--------------------------------------------------------------------------------

No, there's not. We're completely aligned. Everyone is a common unitholder, all the same, total alignment.

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [42]

--------------------------------------------------------------------------------

Right. So considering how far out of the money they are, right, having an earn-out structure where as the distribution progressed, it would be similar to what we saw with GasLog in terms of, I guess you are on the same level in terms of being the same kind of unitholder, but you don't get the distributions until you actually got to a level where the IDRs would have been in the money there. The earn-out structures are pretty common, was there an opportunity to go back and say, "Hey, there's a chance we might not raise our distribution by 160%, and it might not actually be a headwind and we put some protections in there just to make sure that we're not paying for something we're never going to use?"

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [43]

--------------------------------------------------------------------------------

No. I think the deal is done, and we're all looking forward already to what's next. When I look at some peer, I'm not even sure we have great visibility on how those different structures work. They're going to be talking about those structures for some time and how they work. No, from our standpoint, we're looking forward to what's next. We're trading at a very attractive value. We're looking at growth prospects eventually. And we're not looking to recut this deal.

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [44]

--------------------------------------------------------------------------------

Okay. I guess, if I think about it as a use of capital, right? Like I think you mentioned in one of the earlier -- one of your earlier questions around, you're not looking to go out and grow for growth's sake. And I guess I'm taking liberty, but I assume going on ordering a couple of LNG carriers on spec right now is not something you guys would swing at, at the moment? Right. Is that fair?

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [45]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [46]

--------------------------------------------------------------------------------

If I think about this as the use of capital, right? Would you guys take $123 million of equity? Buy 2 LNG carriers that don't have contracts on them. So you're not sure if that deal is actually going to be in the money in 3 years or not, right? If you were to do that with steel that actually has an inherent value I'm trying to decide why this is a good time when you're focused on deleveraging, you take $123 million of equity and allocate it to something that you're not sure is going to have any value in 3 years.

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [47]

--------------------------------------------------------------------------------

So to your point exactly, Mike, I don't know exactly what the LNG carriers can trade in 3 years or 2.5 years when it delivers, but I do know what our cash flows will be. We've got certainty for the next 10. And so this is a very different analogy, I think you're pointing to.

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [48]

--------------------------------------------------------------------------------

Right. So I'm trying to juxtapose that with the fact that there's -- the message on the earnings call today is delevering, don't expect distribution growth or a significant distribution growth over the next handful of years, but we're going to spend $123 million -- $124 million on IDRs that are so far out of the money that we have no idea whether they're actually going to be -- there is going to be any real value to them. I'm just trying to think about that from a capital deployment perspective, but -- right.

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [49]

--------------------------------------------------------------------------------

I'm not sure (inaudible)

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [50]

--------------------------------------------------------------------------------

It seems to be a bit of a disconnect between the risk profile and (inaudible)

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [51]

--------------------------------------------------------------------------------

I'm not sure that everyone shares that view, Mike. There will be a fairness opinion involved in this. And so I'm not...

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [52]

--------------------------------------------------------------------------------

I think the math implies they're not in the money. I mean, the distribution at a level where the IDRs are actually paying out right now?

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [53]

--------------------------------------------------------------------------------

Mike, maybe another way to think about it is we're sitting here right now with a coverage ratio of around 4x. And we do expect that this will be sustained well into the future. This isn't a spot tanker company. As Mark says, you've got 10 year contracts, $9.5 billion. So our cash flow profile and our delevering is actually extremely certain. I think if we look at some of the other similar transactions, and I think we can all admit that this one is rather unique. Other IDR monetization transactions in shipping, midstream, whatever, they were paying out all their cash flow. So it made it very easy to throw a multiple on it. And everybody sits back and says, okay, was that a good multiple or not. The problem is, and what we've seen since is that they were paying around 1x. So therefore, the monetized -- the IDRs get monetized off of that extremely high level. Well, then what happened? So that benefits the GP enormously. But then what happens? As we've seen, they cut their distributions, and that actually impacts the LPs enormously. So they have to shore up their balance sheet, maybe (inaudible)

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [54]

--------------------------------------------------------------------------------

So this cutting out the middleman, basically?

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [55]

--------------------------------------------------------------------------------

(inaudible) ...

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [56]

--------------------------------------------------------------------------------

Bump the distribution, you still get to monetize them? I mean, at least in the former scenario, the LP holders get the distribution along the way, right?

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [57]

--------------------------------------------------------------------------------

Sure, sure. Maybe they got the distribution along the way. And it would have been easier. We could have -- Corp. could have jacked the distributions, get to 1x, do the monetization. And then as we've seen other people do, they turn around and they cut the distributions, and that kills the LP value. Right now, Teekay LNG is on an upswing. We're generating a lot of cash flow. We're generating a lot of earnings. We're trading at what we think is a very attractive multiple for investors. And I would far rather be on that path and have these IDRs behind us, then to go through some level of financial engineering, just so that it makes it easier to show the value of the IDRs, make you happy because you can put a multiple on it. And then ultimately, that you have to cut the distribution, that to me, just does not make any sense.

--------------------------------------------------------------------------------

Michael Webber, Webber Research & Advisory LLC - Managing Partner [58]

--------------------------------------------------------------------------------

Look, I think the notion of removing the IDR is one thing, but making people happy about putting a multiple on it, that's just the math, right? So I think people generally -- it's -- I used an analogy on a previous call, like standing on a tee box and just taking a gimme and giving yourself a hole in one, assuming you got there, where as the last 7 or 8 years would show that there's a degree of heritability and things change and maybe something that far out of the money, maybe it's not, maybe valuing like a forward shot annuity might not be accurate. But anyway, if I go -- the valuation work would be helpful in the notion that there is -- that there was some variability priced into that. I think that's the biggest thing to catch that people buy that cutting out the middle man and thing, it's going to be dilutive for LP holder, no matter what, we'll just take the money now. I don't think it particularly intellectually satisfying answer. But we can kind of -- we can move on.

I think I've got -- I think that's fine -- I think that's all my questions. I appreciate that.

--------------------------------------------------------------------------------

Scott Gayton, Teekay LNG Partners L.P. - CFO of Teekay Gas Group Ltd [59]

--------------------------------------------------------------------------------

Happy to discuss on the 19th hole, Mike.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

And ladies and gentlemen, at this time, I'd like to turn the floor back to Mr. Mark Kremin for any additional or closing remarks.

--------------------------------------------------------------------------------

Mark J. Kremin, Teekay LNG Partners L.P. - President & CEO of Teekay Gas Group Ltd [61]

--------------------------------------------------------------------------------

Well, I'd just like to thank everyone on behalf of everyone at Teekay LNG. We look forward to seeing many of you in person, again, hopefully, sooner rather than later. So thank you very much. Take care.

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

And once again, ladies and gentlemen, that does conclude our call. We do thank you for joining us today. You may now disconnect.