Teekay Offshore Partners L.P.'s (TOO) CEO Peter Evensen on Q3 2015 Results - Earnings Call Transcript

| About: Teekay Offshore (TOO)

Teekay Offshore Partners L.P. (NYSE:TOO)

Q3 2015 Earnings Conference Call

November 5, 2015 12:00 PM ET

Executives

Kim Barbero - Investor Relations

Peter Evensen - Chief Executive Officer

Vince Lok - Chief Financial Officer

Kenneth Hvid - Chief Strategy Officer

David Wong - MLP Controller

Analysts

Spiro Dounis - UBS

Sunil Sibal - Seaport Global Securities

Mike Webber - Wells Fargo Securities

TJ Schultz – RBC Capital Markets

Operator

Welcome to Teekay Offshore Partners Third Quarter 2015 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 conference over to Mr. Peter Evensen, Teekay Offshore Partners’ Chief Executive Officer. Please go ahead, sir.

Kim Barbero

Before Mr. Evensen begins, I would like to direct all participants to our website at www.teekay.com, where you’ll find a copy of the third quarter 2015 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 the 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 third quarter 2015 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, Kim. Good morning everyone and thank you for joining us on our third quarter 2015 investor conference call. I’m joined today by Teekay Corporation’s CFO, Vince Lok; Chief Strategy Officer, Kenneth Hvid; and MLP Controller, David Wong.

During our call today, I’ll be walking through the earnings presentation, which can be found on our website. Starting on Slide 3 of the presentation, I'll briefly review some of Teekay Offshore’s recent highlights. The partnership generated distributable cash flow or DCF of $58.8 million in the third quarter of 2015, up 30% from the same period of the prior year.

While the DCF increased significantly from the prior year, our third quarter results were negatively impacted by a combination of seasonal and one-off items, which if excluded would have resulted in an additional $11 million of DCF generated in the quarter. This would have resulted in a DCF of approximately $70 million and a coverage ratio of 1.02 times for the third quarter.

As I’ll discuss later, we expect the fourth quarter's coverage ratio to be more in-line with the first half of 2015, which averaged 1.08 times. Based on the increased cash flows generated during the quarter, Teekay Offshore increased its quarterly cash distributions by 4% to $0.56 per unit for the third quarter. This distribution will be paid on November 13.

Looking at our offshore production business, we completed our largest acquisition today purchasing the Knarr FPSO for $1.26 billion from our sponsor Teekay Corporation on July 1. Concurrent with the acquisition, we completed $550 million of equity financing, including $300 million of common units issued to Teekay Corporation.

Turning to our Offshore Logistics business, in early September one of the partnership's existing shuttle tankers the Navion Hispania commenced operations on the East Coast of Canada, which is expected to provide additional distributable cash flow growth in the fourth quarter. Earlier this year, the partnership took over as the sole provider of shuttle tankers to oil companies operating offshore and East Coast, Canada.

Last week, I had the pleasure of attending a customer event in St. John's, Newfoundland where we’ve opened the newest Teekay Office. I saw firsthand the opportunity we have to grow the shuttle business in that region as new offshore fields are brought on in future years. Our customers believe that new production will continue to be developed even in today's low oil price environment in the region.

The first chapter is already being written, as we’re constructing three Suezmax-size, DP2 shuttle tanker newbuildings, which will serve under the 15-year contract delivering in 2017 and 2018. Until their delivery, we will continue to inch out our two shuttle tankers to service the areas’ transportation requirements.

Finally, the partnership continues to secure long-term debt financing for its portfolio of growth projects with the recent completion of a new $185 million long-term debt facility for our four state-of-the-art long distance towing and offshore installation vessel newbuildings, currently under construction, which are scheduled for delivery throughout 2016.

Turning to Slide 4, we continue to build on our book of forward fee-based revenues that support the partnership's stable and growing cash flows. On this slide, we provided a breakdown of our existing contract portfolio of forward fee-based revenues of $8.2 billion, based on revenues attributable to our existing assets, which are currently in operation and which support our current cash distribution and revenues attributable to our existing growth projects, which are expected to provide incremental coverage and cash distribution growth in the future.

Our portfolio of $5.6 billion of forward revenues related to our existing assets and operations are contracted with oil majors where we are a critical component of their oil production in logistics chain and therefore their revenue generation. I would also note that the forward revenue figure excludes the extension options, but we’re not sitting still.

In the current market environment, we’re increasing our focus on extracting maximum cash flows from our existing assets by implementing various cost reduction initiatives and fleet efficiencies, including operating our assets with higher uptime and utilization. We have no significant scheduled near term contract explorations and remain positive on the supply and demand fundamentals in the niche oil production segments in which we operate.

We have an ongoing dialogue with our customers regarding re-contracting of our assets longer-term, as they become available or exercising options on existing contracts. In this lower oil price environment, we continue to see increased demand for our existing units, which provide a faster and more cost effective solution, compared to the more expensive alternative, which would be newbuildings.

Our portfolio of new growth projects and associated forward fixed rate revenues of $2.6 billion are scheduled to deliver and commence their respective long-term contracts between mid-2016 through the first half of 2018. We expect this portfolio will grow as we secure this new - as we secure new charter contracts for our second accommodation newbuilding and build a book of contracts for our towage newbuildings.

Overall, our focus here is to execute on our existing committed growth projects and ensure these projects deliver on time and budget, while continuing to seek charters for our unchartered growth projects. Looking ahead, with the current weakness in the energy space and the MLP markets, including Teekay Offshore's equity valuation we've adopted a new approach to future growth. First of all, we've increased our hurdle rates for new projects, which takes into account both our ability to build and operate at a lower cost, and our slightly higher all-in cost to capital.

As a reminder, we are able to debt finance our offshore assets up to 80%. Cost to which has declined over the past two years, which partially offsets the inflated cost of equity. Secondly, we’re prioritizing our capital allocation, first to existing assets for contract redeployment and extensions and upgrades, followed by high quality on the water M&A opportunities over the large organic projects, which is what we expect to be, in what we expect to be a target rich M&A environment over the next few years. Turning to Slide 5, I’ll provide some updates on our offshore production projects.

The Petrojarl I FPSO will operate on the Atlanta field in the Santos Basin offshore Brazil that has an estimated reserve of 216 million barrels of oil equivalent. Petrojarl I will become an integral part of what is expected to be a much larger development over time. The FPSO is undergoing upgrades at Damen shipyard in the Netherlands and is expected to achieve first oil in mid-2016, which will be its 12th field redeployment.

Petrojarl I’s upgrade solution is a great example of how we can use an existing unit to provide a faster and more cost effective solution to our customers, compared to a newbuilding alternative. This is especially attractive given the current lower oil price environment. In addition, as we will be operating in a benign environment, we’ve also been able to extend the life of the FPSO for an additional 10 years after its initial five-year contract term, which provides opportunities for contract extensions with QGEP or redeployment in the area after the initial term.

During the third quarter, the conversion achieved 50% of fiscal progress and whole reinforcements in steel renewal work is expected to be completed during the fourth quarter. Under its contract the FPSO unit is expected to generate approximately $55 million to $60 million of annual cash flow from vessel operations and will be a strong contributor to increasing our distributable cash flow starting in mid-2016.

During the third quarter, the partnership secured $180 million long term debt facility for the unit, used as the primary funding for the upgrade. The Libra FPSO will operate on the larger Libra pre-salt field in the Santos Basin offshore Brazil that has an estimated reserve of 8 billion to 12 billion barrels of oil equivalent, which is currently considered to be the largest oilfield offshore Brazil. This field is a high priority for the strong consortium of international partners, including Total, Shell, CNOOC and CNPC and led by Petrobras.

Our FPSO will be used as an early well test unit to support a much larger development with multiple large FPSO’s. The Libra FPSO is currently being converted from one of the partnership's existing shuttle tankers, the Navion Norvegia at the Jurong shipyard in Singapore and is currently on schedule to achieve first oil in early 2017, at which point it will commence its 12-year contract. During the third quarter, the vessel dry docks for steel upgrades to the whole top side fabrication continued and all long lead items were ordered. The partnership has already secured an $800 million long-term debt facility as the primary funding for the conversion.

Turning to Slide 6, I’ll cover a few of our Offshore Logistics projects. The Gina Krog FSO will operate on the Gina Krog oil and gas field in the North Sea, which will be among Statoil's major new development with an estimated 225 million barrels of oil equivalent. The FSO is currently undergoing conversion using one of the Teekay Offshore's existing shuttle tankers, the Randgrid at the Sembawang Shipyard in Singapore.

During the third quarter, engineering was handed over to the yard and the site team was fully mobilized with demolition and prefabrication work ongoing. The FSO unit is expected to commence its minimum three-year contract with Statoil in the second quarter of 2017. The contract also includes 12 additional one-year contract extension options. The FSO is designed to operate for a minimum of 15 years of uninterrupted operations, without the need to leave the field for dry docking.

The partnership is currently in the process of securing a $230 million long-term debt facility as the primary funding for the conversion, which is expected to be finalized during the fourth quarter. Looking at the partnership's long haul towage business, our wholly-owned subsidiary ALP Maritime has four state-of-the-art coastline design newbuildings currently undergoing construction at the Niigata Shipyard in Japan, which are on schedule to deliver throughout 2016.

A major milestone was achieved by the ALP Striker, the first vessel scheduled to be delivered in the first quarter of 2016, as the vessel was successfully launched out of the shipyards dry dock in October. These new buildings incorporate powerful engines and higher fuel capacity, which reduced the number of stops required on long haul voyages getting the customers offshore units to its field faster and cheaper. We’re currently building a book of contracts for these four vessels and anticipate having contracts in place prior to the delivery. During the third quarter, the partnership secured $185 million long-term debt facility as the primary funding source for the construction of these vessels.

Turning to Slide 7, it’s important that investors understand that Offshore Production segment that Teekay Offshore operates in, is critically different than offshore exploration in the low oil price environment. Oil companies are responding to low oil prices by cutting cost, which includes severe reductions in their exploration budgets. This has significantly reduced the demand for deepwater drilling rigs and has left roughly one-third of the drilling fleet idle.

Unlike FPSO’s the drilling rig market is challenged by lower barriers to entry with many units ordered on speculation and without contract coverage. Lower switching cost for the customer and less market concentration increases competitive pressures and shorter duration charters lead to more volatile rates.

In contrast, FPSO units serve the production portion of the offshore value chain, which provides field owners and operators with much needed revenue and cash flow. FPSOs are also a more defendable and stable segment of the offshore market. FPSOs are somewhat field specific and built or converted to suit. This minimizes speculative ordering and results in longer term time charters. Higher switching and friction cost for customers and a significant market concentration results in less aggressive competitive pressures and more stable rates.

The greater stability of Teekay’s FPSO segment makes Teekay Offshore Partners comparable to pipeline MLP rather than the more volatile exploration and production MLPs whose level of activity is more correlated to oil prices. This positions TOO as an attractive and stable investment in the future of offshore energy production and logistics.

On Slide number 8, I’ll review our financial results for the third quarter of 2015 comparing components of distributable cash flow for the third quarter of 2015 to the second quarter of 2015. For the full reconciliation of distributable cash flow to net income, please refer to Appendix B of our earnings release. Looking at the bottom line, our coverage ratio decreased to 0.86 during the third quarter compared to 1.06 times during the second quarter of 2015.

The main factors contributing to the decrease in the coverage ratio for the third quarter include lower revenues for the Piranema Spirit FPSO due to a shutdown from scheduled repairs in the third quarter of 2015. Lower shuttle tanker revenues related to a seasonal decrease in shuttle tanker utilization, the exploration of a long term contract of affreightment during the second quarter, the scheduled dry-docking of the Nansen Spirit during the third quarter of 2015 and the redelivery of the Amundsen Spirit from the exploration of its time charter contract during the second quarter of 2015.

Lower towage vessel earnings due to a decrease in utilization and rates in the fleet during the third quarter and an increase in the preferred unit distributions from the issuance of $250 million of Series C convertible units during the quarter and a 4% increase in cash distributions on our common units for the third quarter of 2015. These decreases were partially offset by the acquisition of Knarr FPSO on July 01 and a full quarter of UMS earnings due to the commencement of the Arendal Spirit time charter contract during the second quarter of 2015 which also experienced small fire during the third quarter related to damage gangway.

Turning to Slide 9, we provided an adjustable distributable cash flow and resulting adjusted coverage ratio to show the impact of seasonal and one-off items experienced in the third quarter. The partnerships third quarter distributable cash flow was in line with our expectations. However, the results included the impact of regular seasonal maintenance of the North Sea oil fields as well as temporary downtime associated with two of our offshore units. Production was shutdown on the Piranema Spirit FPSO for approximately 45 days in the third quarter to complete top side pipeline repairs. All repair work has been completed and the unit remains on hire with no additional off hire since the restart of production on August 12.

In addition, our new UMS the Arendal Spirit experienced 13 days of unscheduled off hire during the third quarter due to the damage to the gangway, which was caused when crew members did not lift the gangway quickly enough during bad weather. Since being fully repaired in early September, the unit has been operating on contract with Petrobras as expected. Adjusting for these seasonal and one-off items, the partnership would have generated an additional approximately $11 million of DCF in the quarter resulting in an adjusted distributable cash flow of $69.8 million and an adjusted coverage ratio of 1.02 times.

Looking ahead to the fourth quarter with our fleet operating near full capacity, we expect our distributable cash flow and coverage ratio to be more in line with the results for the first half of 2015 which average 1.08 times. Please refer to the appendix to the presentation for additional details on our fourth quarter outlook.

Wrapping up today’s call on Slide 10, Teekay Offshore’s distributable cash flow remain stable and growing supported by our strong operating track record and a large diversified contract portfolio of fee based contracts which serve our customers oil production requirement. Our $8.2 billion of forward revenues have no direct link to oil prices and are contracted with strong counterparties.

Looking ahead with continued growth in offshore production, we continue to seek new opportunities for higher return growth including prioritizing capital first for redeployment of existing assets on to new contracts followed by high quality on the water M&A that provides immediate accretion in what we expect to be a target rich environment over the next few years. And lastly, we continue to have access to competitive bank financing and multiple capital market as we continue to seek ways to diversify our sources of capital as well as reduce our overall cost of capital.

Thank you all for listening and operator, I’m now available to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] First question comes from Spiro Dounis from UBS, please go ahead.

Spiro Dounis

Peter, just wanted to touch real quick on the hire hurdle rates. I was just wondering what that means for multiples on future dropdowns and I asked you in the context of I guess we’ve seen traditional midstream MLPs in that space reduce multiples in recognition of the currently challenged market and I guess we are looking to marine MLPs, is that kind of something you see coming?

Peter Evensen

No, the short answer is no, we don’t. Teekay Corporation wants to maximize the cost or the value of its existing assets and therefore they are waiting till they can recontract those units as well as lower their cost in order that the project is accretive. So in terms of Teekay Offshore, we have enough growth as I said through the first half of 2018 that with our higher cost of capital, we would rather put off those dropdowns rather than lower the price in order to make them accretive. And we can do that because of the forward order book so we can see the distributable cash flow growth will go up just based on our organic projects. And so we think there will a better time with lower cost of capital which will make those projects as accretive as we had originally thought.

Spiro Dounis

Okay, that makes sense and that kind of segway into the next question here for 2016. So it looks like coverage should get back up above 1 next quarter, 1.08 if you take the average and I won’t ask you for a precise figure but just directionally I guess where would you expect the coverage to go in 2016 and what I’m trying to get a sense of is how much will the increase of hire for next year kind of offset by newer assets coming online?

Peter Evensen

We are seeing that the coverage for next year would be slightly lower than maybe what we do on average for this year, but the Petrojarl I coming in line that will help us continue to grow distributable cash flow as we mentioned there. So, it overall keeps I’d say stable year-over-year.

Spiro Dounis

Okay, right. I guess implicit that is with those dropdowns some sort of distribution increase right?

Peter Evensen

That’s right.

Spiro Dounis

Got it. And then just last one so I believe you had shuttle tankers come off charter in 2Q and sorry if I missed it what is the current status of those two shuttles?

Peter Evensen

They went back into our CoA fleet. So we’ve used them and they’re generating cash inside of our contract of affreightment fleet which is where we actually needed them.

Spiro Dounis

Great. That’s it from me. Thanks guys.

Peter Evensen

Thank you.

Operator

The next question comes from Sunil Sibal from Seaport Global Securities, please go-ahead.

Sunil Sibal

Hi, good afternoon guys. Couple of questions for me, first, I think you touched upon opportunities in terms of your existing asset management cost as well as two deficiencies. I was wondering if you could talk about that a little bit and give us an idea what kind of [indiscernible] you have there.

Peter Evensen

I’m sorry, I don’t understand the question.

Sunil Sibal

I was wondering I think you talked about in your presentation efforts on cost management and fleet efficiencies as part of managing through the current cycle. I was wondering if you could talk about that and what kind of opportunity you have there, quantify that a little bit.

Peter Evensen

It’s pretty clear what we’ve been through is basically a five, six year cycle where we know that we’ve seen pressure on premise the entire supply chain throughout the offshore industry which was of course supported by Odebrecht Oil [ph]. You say that as we are seeing everybody, our customers or peers in adjacent sectors are laying up assets and reducing their cost. Obviously that’s something that’s benefiting the wider industry. So we have a combination of things that are coming to us which we obviously also exploring although we don’t - we are not under the same pressures as those adjacent sectors, but of course we will benefit from lower pressures on salaries, which yielded a supply chain having more slack from equipment manufacturers.

We see that the raw materials are down so a lot of the index, the prices that we are using loop oils to fuel oil etc is obviously down as well. And we see benefits from all the displacements on various occurrences which are benefiting us. So we are using this period very actively to continue to drive our daily OpEx numbers down on all of the units that we have and really looking to optimize that, because that’s how its more label, but it was on.

Sunil Sibal

Okay, that’s helpful. And then in terms of the M&A environment, I think again in your presentation, you touched upon accretive on the larger acquisitions, I was wondering if you could describe how that market is evolving as you see opportunities in the marketplace currently.

Peter Evensen

Yeah, we see - first of all our fast forward is really investing in the core segments that we already in just to be clear on that. And we see that our customers obviously very bullish on how they optimize their balance sheets going forward and that we see that opportunities are raising out of that. We see that players that have a strong operational platform that can extract more value from those assets sit in a very competitive position and those are discussions that we’re looking at and having actively at the moment. So that’s really what we think we can bring value to our customers, that is our broader very focused operational platform or we can hopefully operate these assets more efficiently and deliver efficiencies and cost savings to the industry.

Sunil Sibal

Okay, very helpful. That’s all I had. Thanks.

Operator

The next question comes from [indiscernible]. Please go ahead.

Unidentified Analyst

Hi, good morning. Thank you for taking the call. Just a goal on M&A question here, if you were to lot of nuances rough this course, but when you look at valuations for M&A and what you might have to pay. On your volume, you’re buying floating stocks, buying assets. How do you think those prices will compare to just a new build prices. Do you think you’re going to be able to buy assets at big discounts or what’s the play there.

Peter Evensen

Yeah. We see that some people because of their different and new financial strategies will come out and decides to divest and we see a relatively small competitive landscape in terms of people that are interested in bidding on these assets. So opportunistically yeah, we believe that the best will create some opportunities. The other benefit of that is of course that near term growth are on the water ground. We can mist more certainty and look at the accretion of these assets as opposed to when we are bidding on long term contracts which have a start we’ll say three years out in time where cost efficiency and other things are a bit more uncertain. So the attraction to those is getting closer to our customers at a time where we know that their financial strategic alternatives are being looked at and are shifting.

Unidentified Analyst

Okay. And just maybe a little bit bigger picture here, I’m just - what valuations look like for ships and what the opportunities in the market. We are looking at a ship today if you buy something? What sort of full cycle for that ship IRR does that generate? Just looking at what you can place a ship for and obviously then there is dry-docking and there is eventual scrapping that life of ship IRR looks like what right now?

Kenneth Hvid

No, I wouldn’t, and again it is a little bit back to both competitive reasons when we are bidding on long term projects, so I wouldn’t be drawn on commenting on that because that’s obviously what everybody is looking at.

Unidentified Analyst

Okay, I am just trying to get out is that above your current cost to capital, cost of capital has really gone up an awful lot and so I’m just trying to get out the basic feasibility of the business at the snap shot in time, are you able to acquire assets at your cost of capital that we are, you know you are adding value where you can produce, where it is NPB positive.

Kenneth Hvid

Yeah. I mean, If you look at the different segments that we are operating in, if you look at the shuttle tanker business and the rates that we have there and as we have said many times on prior calls, that is really the floating pipelines for the year, for the off shore industry and if you look at the rates that are being paid on those there, they have historically been very, very stable, they are, they tend to be - it tends to be a market where we are ordering up against either long term contracts or against the expectation of oil to be lifted in a certain region, mostly of course the North Sea, Brazil and East Coast, Canada. So, you don’t see the same rate volatility on those assets and we actually don’t see the big changes going forward either. I mean this is not an area where people are ordering speculatively.

Peter Evensen

But, what we also see on the cost to capital is obviously we’re not very happy with our distribution dividend being around about 14%, but the fact of the matter is that is just part of the capital structure. And we are able to employ more debt, which has a much lower cost going forward. So, when we look at the overall cost to capital of an acquisition, we have to take - we have to look at the total cost and we are able to make it work.

Unidentified Analyst

Okay, now with regard to the preferred issuance in the summer you got that done, but on the bond side, at least the U.S. bond that traded about 13.5% and so imagine that door is closed.

Peter Evensen

Yeah, but when we look at the price of that issue, that issue has no support. So that is the kind of an aberration. So, I don't take that as a realistic mark to market.

Unidentified Analyst

Yeah that is a fair point, but in terms of other sources of debt capital beyond just for secured markets, do you really - what would that look like today?

Peter Evensen

Well as you saw we were able to do our convertible preferred going forward and I think we can access other markets, but the majority of it would clearly be secured financing where with the right contract and the long enough and the stability that Kenneth talk about, we can get ourselves up to 80%. We don't like to use that much, but in the short term we could make that work.

Unidentified Analyst

Okay, pardon my ignorance on this point, but are those amortizing structures?

Peter Evensen

Yes.

Unidentified Analyst

Okay. Okay good, thank you for answering the questions.

Peter Evensen

Thank you.

Operator

The next question comes from Mike Webber from Wells Fargo, please go ahead

Mike Webber

Hi good morning guys, how are you?

Kenneth Hvid

Good thanks.

Mike Webber

Peter, just wanted to follow-up around the new approach, which echoes what we heard on Teekay LNG, I am just curious kind of specifically within the offshore space, we’ve seen actually your neighbor in Vancouver and some other players and kind of the more term oriented shipping markets, come up with larger scale JVs that end up helping the cost of capital on deferring any sort of equity overhang to kind of facilitate consolidating the market during pockets where you have got an expanded cost of capital. I’m just curious and I know it’s something you guys have at least looked at, but when you look at your - the funding possibilities for rolling up some of that, that fleet maybe at 2016 or 2017, how viable is that, is that something you guys get approached about there can’t be that many natural buyers for these assets, particularly with any sort of operational background, and does any color on that possibility, because we have seen that happen in other markets?

Peter Evensen

Well we have actually have people who come and want to co-invest with us on opportunities, but we are, you said the word consolidating, we’re not interested in consolidating or rolling up the FPSO market. We are interested in right now looking at buying units with contracts from our customers. We will then decide whether we issue MLP equity, whether we employ more partners, whether we bring partners in then little higher in the capital structure. But the big thing is to know if we have joint venture financing partners, what their risk appetite is and that is everything from 5 years with the ability to re-employ in what will probably be a higher rate or people who want a more full payout 10 year contract. And I think we have that ability, but as Kenneth said, we’re focusing in more on buying existing infrastructure assets and operating them safely and cheaper than our customers, which provides [indiscernible] for them.

Mike Webber

As the single owner outside of any sort of JV structure you are saying?

Peter Evensen

We could include partners, but they usually bring something besides capital.

Mike Webber

Okay, alright that's helpful. The Petrojarl I, you kind of highlighted that this quarter and if memory serves the terms on that I think the payback is actually inside of that initial contract, so it’s basically kind of free residual value. I'm just curious you mentioned you kind of do more of that kind of business, is that the right benchmark to think about the kind of returns and our payback period you would need to the kind of take in older asset like that and put some money into it and then put it back out onto a field that is kind of a short of a payback period, is that a lower rate or was that more of a one off kind of solid deal?

Peter Evensen

No, I don't think so, but Kenneth you work on that more, why don't you answer that?

Kenneth Hvid

Yeah, I think Petrojarl I is first of all a very good example of how we see we can play in a new oil environment here because it is exactly the asset that we talk a lot about, existing assets that can be deployed faster and more cost effectively and as we invested here, as you, as we mentioned earlier as well, we essentially operated the vessel for another 15 years of life, but we are on a firm contract with five years, which we feel very good about and then there is a potential upside at the end of that. And that’s exactly the segment of redeployment of some of these medium size FPSO’s that are ideally suited to go in on those medium sized field.

Some of them will go on for longer and others are - maybe have a 5 year to 7 year profile. It is so that - where most of these fields, you never really know whether it is 5 years or whether the field can produce for another 3 years for example. That’s not the case Petrojarl I, but that’s the case on a number of medium size fields in the North Sea that we look at.

And we see in this environment that the hurdles will make the one, the big say 1.2 billion investment on a medium size field is much, much higher and therefore the attraction of operating existing assets that can go in and produce and maybe they don’t produce a 100% to perfection what it was that you otherwise could have designed a new unit for, but it’s good enough and it’s faster and it’s more cost effective. And I think that’s exactly the market that Petrojarl I has actually played in over the years. This would be its 12th deployment. So that’s exactly what it has been doing in the North Sea.

Peter Evensen

So, when we competed on the Atlanta project, we with budget including upgrades of about 250 million were competing up against a billion dollar FPSO. So, we’re getting $55 million to $60 million in [CFPO], but that billion dollar FPSO would have needed much more in EBITDA or [CFPO]. So, what you see is that translates to an oil company in a much higher oil price breakeven and in the current environment they will not go forward with a new building because that’s a higher breakeven, but by using an existing asset as Kenneth was saying, we can lower down that breakeven and therefore that will mean that that development can go forward, especially on these marginal fields and these oil companies don’t want to lose their licenses. They either develop within a certain period of time or they have to give back the license.

Mike Webber

Got you. That makes sense. Just two more and I’ll turn it over and I’m not sure differences on the line or not, but around the Knarr on the quarter, if I just kind of pass through your slide in the back, the color on the P&L, which is always helpful looks like around $40 million of EBITDA from the Knarr on the quarter, curious around whether or not there is any incremental, I know delivered on July 1 and in terms of any cost that might not be there on a go forward basis whether we could see that move around by 1 million or 2 million just kind of look for a run rate on that for the next couple of quarters beyond kind of what we have is like the general guidance.

Vince Lok

Yeah Mike, as we guided before the Knarr EBITDA is about a 140 million annualized and that is pretty much what you say in the third quarter and I would expect that to be surely stable going forward as well. The contract does have certain features where we get higher reimbursements of OpEx for example in the first year, but for DCF and the accounting purposes we assume that over the - just move that out over the life of the contract. So, that’s why we expect the cash flows to be fairly stable.

Mike Webber

Okay. I’m backing out [indiscernible] I can follow with you off line. And then I guess finally Peter, I guess as earlier in the quarter, Sevan was noted in the - the kind of widening Petrobras scandal, this is specifically the Piranema, which you guys acquired a couple of years ago, just curious I think it is only 2% to 3% of your total cash flow, but just curious if you are - hoping you can kind of talk to how Teekay approaches that scenario, the risk of any contagion and then how it impacts the, you know Sevan is on the block, just how it impacts that potential sale or whether you got a view on that at all?

Peter Evensen

So, for the benefit of everyone Sevan Marine is a company that we have a 40% interest in, and I don’t really want to comment on what’s going on with their legal case.

Mike Webber

Okay, that’s fair. All right guys thanks for the time, I appreciate it.

Peter Evensen

Thank you.

Operator

The next question comes from TJ Schultz from RBC. Please go ahead.

TJ Schultz

Great thanks. Just one question, the comment that you wanted to maximize the value of the parent FPSO is that just a comment that you will wait on drops until MLP valuation improves, you’re still actively looking on contracts and extensions and you will just keep them at the parent level for the next couple of years or are you considering other options for those FPSO’s?

Peter Evensen

So, you can ask the question again tomorrow TJ, but I will answer it here today, which is that we continue to want to maximize the amount of value that Teekay Corporation gets to them. So, I was directly answering the question, will you discount the value of those in order to make them more accretive? And the answer to that was, no. So, we continue to look at each asset upstairs as its own asset and want to maximize the value of that. At the same time, as I said there is enough growth down at TOO that we don’t feel that we have two increase it by, I guess I would say dropping down the FPS source at a lower price, which is what you need to do to make it accretive.

So, we continue to look at each asset and as Kenneth was saying, we see that there is a need from bio oil companies for the existing units and so to the extent we can re-employ and get them with better contracts will increase the net present value, which ultimately increases their value to both TOO, as well as to Teekay.

TJ Schultz

Okay. Makes sense. Thanks, Peter.

Peter Evensen

Thank you.

Operator

And so there are no further questions at this time, please continue.

Peter Evensen

All right, thank you all very much we look forward to reporting back with you next quarter.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.

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