Teekay Offshore Partners LP Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.22.13 | About: Teekay Offshore (TOO)

Teekay Offshore Partners LP (NYSE:TOO)

Q4 2012 Earnings Call

February 22, 2013 12:00 pm ET

Executives

Scott Gayton

Peter Evensen - Chief Executive Officer of Teekay Offshore GP L L C, Chief Financial Officer of Teekay Offshore GP L L C, Principal Accounting Officer of Teekay Offshore GP L L C and Director of Teekay Offshore GP L L C

Kenneth Hvid - Director of Teekay Offshore GP L L C

David Wong

Vincent Lok - Chief Financial officer, Principal Accounting Officer and Executive Vice President

Analysts

Michael Webber - Wells Fargo Securities, LLC, Research Division

Martin Roher

Operator

Welcome to Teekay Offshore Partners Fourth Quarter and Fiscal 2012 Earnings Results Conference Call. [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 Offshore Partners' Chief Executive Officer. Please go ahead, sir.

Scott Gayton

Before Mr. Evensen begins, I would like to direct all participants to our website at www.teekayoffshore.com, where you will find a copy of the fourth quarter of 2012 earnings presentation. Mr. Evensen will review this presentation during today's conference call.

Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the fourth quarter of 2012 earnings release and earnings presentation available on our website.

I will now turn the call over to Mr. Evensen to begin.

Peter Evensen

Thank you, Scott. Good morning, everyone, and thank you for joining us on our fourth quarter of 2012 investor conference call. I'm joined today by Teekay Corporation's CFO, Vince Lok; its Chief Strategy Officer, Kenneth Hvid; and its MLP controller, David Wong. During our call today, I'll be walking through the fourth quarter of 2012 earnings presentation, which can be found on our website.

Starting on Slide #3 of the presentation, I will briefly review some of the Teekay Offshore's recent highlights. We generated distributable cash flow of $45.9 million in the fourth quarter, up 11% from the same quarter of the prior year. For the fourth quarter, we declared a cash distribution of $0.5125 cents per unit which was paid on February 14 and was consistent with the previous quarter. We now expect the previously announced acquisition of the Voyageur Spirit FPSO to be completed in March 2013 upon final installation of the FPSO on the Huntington field and commencement of its 5-year charter to E.ON.

In connection with this pending acquisition, the partnership expects to increase its cash distribution for the first quarter of 2013 to be paid in May 2013. I will discuss the partnership's ability to increase distributions in 2013 and into the future during this presentation.

I'm pleased to announce that Teekay Offshore signed a letter of intent to provide a floating storage unit in Asia to London Stock Exchange-listed Salamander Energy. This project represents a broader trend we're seeing in the market of increased demand for FPSO and floating storage unit solutions that I'll discuss later in this presentation.

Our sponsor, Teekay Corporation, reported a major milestone was reached on the Cidade de Itajai FPSO this past weekend. On February 16, the FPSO achieved first oil and began its 9-year contract, plus extension options, with Petrobras. As a reminder, this FPSO is jointly owned by Teekay Corporation and Odebrecht in Brazil. Under the terms of an Omnibus Agreement, Teekay Corporation is obligated to offer the partnership their 50% ownership interest in this unit within 1 year of commencement, and announced that they intend to offer it to us in the next 30 days.

Finally, as I highlighted last quarter, Teekay Offshore remains in a strong financial position with $587 million of liquidity in the form of cash and undrawn revolving credit facilities, pro forma for the net proceeds of approximately $167 million received from our recent Norwegian bond offering, net of the repurchase of $66 million of our existing Norwegian kroner bond. Of this $587 million in liquidity, only $170 million will be needed for completion of the Voyageur Spirit FPSO acquisition.

On Slide #4 I will discuss our recently signed letter of intent with Salamander Energy to provide an FSO on the Bualuang Field in the Gulf of Thailand. The proposed terms of the contract are for a 10-year charter, plus extension options for an additional 5 years, and the expected start-up date is in mid-2014. We plan to use one of our older remaining shuttle tankers, the 1993-built Navion Clipper, to be the conversion vessel for this project, with the total project estimated to be approximately $50 million. This FSO will service the Bualuang Field, which was originally brought on stream back in 2008.

In order for Salamander to lower the cost of oil production, the field is undergoing a redevelopment which includes a production platform and an FSO. The FSO solution will be similar to another Teekay Offshore-owned FSO, the Pattani Spirit, which also operates in the region. If finalized, this new FSO project will enable us to successfully extend the life of one of our remaining older shuttle tankers under a long-term fixed-rate contract which will continue to support the cash flow stability of the partnership.

Moving on to Slide #5, I want to discuss how Teekay Offshore is at the leading edge in terms of innovation in 2 growing offshore markets. With our pending acquisition of the HiLoad Dynamic Positioning unit and Teekay's investment in Remora as well as Sevan's cylindrical FPSO, we have one of the broadest service offerings in the offshore sector in terms of handling all of our customers' transportation, storage and production needs through multiple service offerings.

Importantly, each of these solutions has been tested or utilized in our core markets of the North Sea and Brazil, which constitute some of the most exciting areas in the offshore oil space today. We're currently engaged in 5 front-end engineering, or FEED studies, analyzing various FPSOs and floating storage solutions. And these projects represent over $3 billion in future potential project value in 2016 and 2017. As the graph on the bottom left of this slide depicts, we are excited that these markets are expected to continue to grow. We see a lag factor of approximately 10 years between drilling and production. And with drilling activity increasing over the past few years and predicted to grow through 2017, we believe there will continue to be a strong demand for our production, storage and transportation services for at least the next decade.

Turning to Slide #6, I will expand on our fleet renewal that has been ongoing since January 2011. Over the course of the past 2 years, Teekay Offshore has sold or laid up a total of 11 older vessels as part of our fleet renewal process where related charters have either been terminated or expired. This includes 5 conventional tankers, 1 floating storage unit and 5 shuttle tankers. While the partnership generated approximately $17 million in upfront charter termination fees and $61 million in vessel sales proceeds, the approximate annual lost distributable cash flow, or DCF, to the partnership as a result to removing these 11 vessels from the operating fleet, is approximately $36.5 million. However, as I'll show on a later slide, this lost cash flow will be more than made up through acquisitions and organic growth that are already in Teekay Offshore's growth pipeline.

On Slide #7, we provided an age profile of Teekay Offshore's remaining conventional and shuttle tanker fleets in blue, with our recent sales illustrated by the green shaded bars. With these recent disposals, other than the Poul Spirit and Gotland Spirit conventional tankers, our current fleet renewal program is now largely complete with the remaining older vessels earmarked for offshore or floating storage unit conversion projects like the 1993-built Navion Clipper for the Salamander Project, or other FSO projects which are currently in the FEED study stage.

Our recent acquisition of the Amundsen Class shuttle tankers in 2010 and 2011 and the 4 newbuildings delivering this year, which will service BG's needs in Brazil, are helping to renew the fleet and reduce the average age of our trading vessels from 12.3 years to approximately 9.5 years, well below their expected useful life in the current trading capacity of approximately 25 years.

Moving to Slide #8, I will walk through how we expect our new near-term growth will more than rebuild the lost cash flow I already discussed. Distributable cash flow has been reduced by approximately $36.5 million due to the vessel sales and associated contract terminations. However, with the addition of the Voyageur Spirit FPSO, the delivery of our 4 newbuilding shuttle tankers and the commencement of the HiLoad DP unit contract with Petrobras, Teekay Offshore will more than offset the lost DCF from our fleet renewal program, allowing for future distribution increases even after adjusting for the additional common units issued during this period.

Looking at the graph on the right we've highlighted the lost DCF from our fleet renewal program relating to conventional tankers, shuttle tankers and an FSO in green. This lost DCF is then expected to be more than offset with new cash flows of over $77.5 million, shown in blue, generated through near-term acquisitions and organic growth. In addition to the known near-term acquisitions, our sponsor, Teekay Corporation, has a number of other FPSO acquisition opportunities which may be offered to the partnership. These will be reviewed in more detail on the next slide.

On Slide 9, I will review the significant visible growth opportunities for Teekay Offshore which will help us further grow the partnership and its LP distributions over the coming years. In addition to the near-term growth already discussed, we may be offered a number of attractive assets serving under long-term contracts with high-quality customers over the next several years. And we believe this growth pipeline will allow us to drive distribution growth to unitholders going forward.

Notably, as indicated at the bottom of the slide, Teekay Offshore has developed a potential pipeline of new projects through a total of 3 Omnibus Agreements: one with our sponsor, Teekay Corporation; another with Sevan Marine; and one more with Remora AS. These Omnibus Agreements have expanded Teekay Offshore's product offerings, improved our market position and should provide a steady flow of new development projects into the future. In addition, as indicated at the right side of the slide, Teekay Offshore is currently working on 5 FPSO and FSO FEED studies related to projects valued at over $3 billion. Should some, or all, of these studies translate into project awards, Teekay Offshore's long-term growth pipeline will be full through 2016 and 2017.

On Slide #10, I will review our consolidated operating results for the quarter, comparing an adjusted fourth quarter 2012 income statement with an adjusted third quarter 2012 income statement which excludes the items listed in Appendix A of our fourth quarter earnings release and reallocates realized gains and losses from derivatives to their respective income statement line items.

Net revenues increased by $8.1 million mainly due to customer reimbursements of $5.5 million associated with FEED studies related to 2 North Sea floating storage projects that we're currently pursuing, higher revenues from the Navion Saga FSO unit since it was in dry dock in the third quarter and $2 million of catch-up revenues from the volatile organic compounder, VOC, equipment recently acquired.

FPSO revenue also increased from credits earned on unused shutdown days on the Rio das Ostras and Piranema Spirit FPSOs. This was offset by lower project revenues from our shuttle fleet and redelivery of 2 in-charter shuttle tankers.

Vessel operating expenses increased by $8.5 million mainly from costs incurred on the 2 FSO FEED studies I spoke about earlier. Please note that the revenues and costs associated with the FEED studies are both recognized when the FEED studies are completed. Time-charter hire expenses increased $600,000 mainly due to higher seasonal spot in-chartering to service our contract of affreightments.

Depreciation expense decreased by $500,000 mainly due to the write-down of the Navion Clipper in Q3. General and administrative expense decreased by $1.5 million primarily related to cost reduction initiatives and timing differences. Net interest expense, including realized losses on interest rate swaps and cross-currency swaps, decreased by $1.2 million primarily due to the proceeds of the September 2012 equity offering which were applied toward the reduction of revolving credit facilities.

Net loss income from discontinued operations reflects the results of our conventional tankers that were sold in 2012. The loss in the current quarter mainly relates to the write-downs and loss on the sale of 3 conventional tankers that occurred late in 2012.

Looking at the bottom line, adjusted net income increased to $29.1 million in the fourth quarter from $24.3 million in the previous quarter.

I won't walk through all of Slide #11, which was included on our recent earnings release. However, I'd like to highlight the information in the box at the bottom of the slide. We generated approximately $45.9 million in distributable cash flow which, when compared to our total distribution payout, resulted in a coverage ratio of 1.04x for the fourth quarter.

As discussed earlier, although our cash flows from our older shuttle and conventional tankers will decline as a result of the current fleet renewal program, the pending acquisitions and newbuilding deliveries more than offset this lost cash flow, particularly our upcoming $540 million acquisition of the Voyageur Spirit FPSO.

Thank you for listening. And operator, I'm now available to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Michael Webber of Wells Fargo.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Quick question on the Voyageur. You mentioned, the first -- the distribution is payable in May of '13, assuming the completion of the drop-down, it's only going to be operating for a brief period of Q1. Is that going to be a 2-stage bump to that distribution or would you do it all in one take?

Peter Evensen

I think we'll do it all on one take. We're used to increasing the distributions in order to reflect the run rate. And so the fact that it comes on late in the quarter shouldn't affect that.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. Around the FSO contracts, can you give us a sense on where the IRR is for that asset, maybe a range?

Peter Evensen

On the new ones that we're looking at or the Salamander?

Michael Webber - Wells Fargo Securities, LLC, Research Division

The Salamander and the new ones.

Peter Evensen

Kenneth, do you want to take the Salamander?

Kenneth Hvid

Salamander is basically, Mike, $50 million over 10 years. So I think if you back [ph] on running around $20,000 a day roughly on an EBITDA basis, it's pretty close.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And then the new FPSO -- or FSO business you're doing is around the same level?

Peter Evensen

Well, we haven't contracted that yet. So I don't really want to be drawn on that. If -- but it will be well above 10%.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Fair enough, fair enough. Just a couple more. The color on Slide 9 is definitely helpful around the FEED studies on the 5 FPSOs. Are those relatively uniform in size or do you have any of those that are sticking out larger than $1 billion along the size of the Knarr?

Peter Evensen

Well, in -- so there's 3 different kinds, I guess, you could say. We have our 2 FPSOs where we're looking at shipshape and cylindrical. So the shipshape, we're interested in those that are more of, what I call, a sister vessel concept. So we're looking at Knarr type of FEED studies. So those would be, call it, around about $1 billion. And then we're looking at -- using the Sevan design, and those would be $600 million or $700 million depending on the topside configuration. So those are that size. And on the FSOs, those are revolving around conversion of existing units that we have in the North Sea and they range depending on the topside configuration. So they can go anywhere from $200 million to $400 million.

Michael Webber - Wells Fargo Securities, LLC, Research Division

That's very helpful. One more for me and I'll turn it over. The Remora HiLoad system, I know it's only been 1 quarter and it delivers in -- you think -- I think you said Q1 '14. But any early color from Petrobras? I mean, it was -- is it something that we'll need to see trade and perform for a little while before you get a sense of the additional interest? Just any additional color on that asset is -- I'd just find it very interesting.

Peter Evensen

Actually I was down in Brazil in December, meeting with Petrobras as well as meeting other customers. And since we became involved, we've seen more interest in that unit, in particular, that we can operate it. So we're actually more enthusiastic about being able to deliver multiple units there. Of course, the system has to be proven. But there's a lot of enthusiasm for the Remora unit because when you look at its cost of lifting and how much it can save the customers, like Petrobras, it's significant. And so we're seeing a lot of traction from other oil companies besides Petrobras.

Operator

The next question comes from Edward Rowe [ph] of Raymond James.

Unknown Analyst

In regards to the Cidade receiving first oil, and then I think you reiterated, I guess, 30 days before you can get -- there may be an offer in place. What -- how should we look at the drop-down of the Cidade timing-wise?

Peter Evensen

So Teekay Corporation yesterday announced that they would offer it in the next 30 days to Teekay Offshore. So I don't have a formal offer yet, but I've been told it's coming. And so I think that as per -- that takes somewhere around 30 to 90 days to go through the system. But the important thing is that we don't drop these down until we've gotten first oil. So we know it's up and operating, and in fact, one of the wells is already producing 12,000 barrels of oil per day.

Unknown Analyst

All right, very good. My next question is, is there any update on the Foinaven?

Peter Evensen

So this is an FPSO that's up at Teekay Corporation which we've indicated in the past is available to be dropped down and is still on Slide 9. That's on charter to BP and we have, so far, been unable to reach agreement with BP on the terms under which they would agree to the transfer of the unit to Teekay Offshore. So as Teekay Corporation said yesterday, there were some operational issues on that unit. And that's what's occupying the dialogue between Teekay and BP right now. So that continues to be available and it is the intent of Teekay, as well as Teekay Offshore, that it will be sold down when we reach agreement with BP.

Unknown Analyst

Okay. And a couple other questions. In Slide 8, the lost conventional tanker DCF, that $21.5 million, is that taking into account the -- once the Poul Spirit and the Gotland are sold? Is that the DCF lost? Or is that from previous cash flows lost from other vessels?

Peter Evensen

David, do you want to take that?

David Wong

Sure. If you refer back to Slide 6, it's just the vessels that are sold as of now.

Unknown Analyst

Okay. So whenever the -- there's some clarification around the Gotland Spirit and Poul, where you guys say that you expect to sell these in mid-2013. But are these -- are the contracts still expiring in 2014 and -- as per one of the Teekay presentations around 3Q of last year?

Vincent Lok

That's right. The original contracts are still in place. They expire in 2014. So if we do sell them early and terminate the charters with Teekay, there would likely be a termination fee. It's similar to what you saw on Hamane Spirit last year.

Operator

The next question comes from Martin Roher of MSR Capital Management.

Martin Roher

My question is regarding your dividend growth target over the long-term. In the past, you've talked about mid single-digits, I believe. But given the increased number of projects being constructed with charters in place, and the 2 accretive acquisitions you've done, it appears, at least to me, that Offshore will grow its cash flow on a per-share basis at a rate higher than that. Is that accurate? And what are your current thoughts regarding the long-term dividend growth? I know you've been increasingly conservative on the balance sheet but what can you share with us?

Peter Evensen

Yes, we're comfortable saying that will grow at a mid single-digits. But as you point out and as we show on Slide 9, if those come a little faster, you could actually see much greater growth. And there's some very big units like the Knarr for $1 billion that could materially increase the cash flow. But we haven't been drawn on those. So we're sticking to what we're saying, which is we're comfortable that every year we'll grow by at least mid single-digits.

Operator

There are no further questions at this time.

Peter Evensen

All right. Thank you very much. As you've heard there's a lot going on in Teekay Offshore space, both on the shuttle tankers where we're delivering ships as well as on the FPSOs, and we're already setting up for multi-year growth. So thank you for your support and I look forward to reporting back to you next quarter.

Operator

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

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Teekay Offshore Partners (TOO): Q4 Net income of $65.7M. Revenue of $211.4M misses by $4.6M. (PR)