Teekay Offshore Partners' (TOO) CEO Ingvild Sæther on Q1 2017 Results - Earnings Call Transcript

Teekay Offshore Partners L.P. (NYSE:TOO) Q1 2017 Earnings Conference Call May 18, 2017 12:00 PM ET

Executives

Ingvild Sæther - President and Chief Executive Officer

Ryan Hamilton - Investor Relations

David Wong - Chief Financial Officer

Kenneth Hvid - President and CEO, Teekay Corporation

Vince Lok - Chief Financial Officer, Teekay Corporation

Analysts

Michael Webber - Wells Fargo

Spiro Dounis - UBS Securities

Fotis Giannakoulis - Morgan Stanley

Ben Brownlow - Raymond James

Andy Gupta - Hite Hedge

Operator

Good day. and welcome to Teekay Offshore Partners' First Quarter 2017 Earnings Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session [Operator Instructions]. As a reminder, this call is being recorded.

Now for opening remarks and introductions, I would like to turn the call over to Ingvild Sæther, Teekay Offshore Group's President and Chief Executive Officer. Please go ahead.

Ryan Hamilton

Before Ms. Sæther begins, I would like to direct all participants to our Web site at www.teekayoffshore.com, where you will find a copy of the first quarter 2017 earnings presentation. Ms. Sæther 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 2017 earnings release and earnings presentation available on our Web site.

I will now turn the call over to Ms. Sæther to begin.

Ingvild Sæther

Thank you, Ryan. Hello everyone and thank you for joining us on our first quarter 2017 investor conference call. I'm joined today by David Wong, the CFO of Teekay Offshore Group as well as Kenneth Hvid, Teekay Corporation's President and CEO and Vince Lok, Teekay Corporation's CFO. During our call today, I will be taking you through the earnings presentation, which can be found on our Web site.

Turning to slide three of the presentation, I will briefly review some of Teekay Offshore's recent highlights. In the first quarter of 2017, the Partnership generated distributable cash flow or DCF of $30.6 million or $0.20 on a per unit basis. Results for the quarter were better than our expectations and were generally in line with market projections. This is driven mainly by the stronger than expected performance of our shuttle tankers, and FPSO segment.

There were a number of positive events during the quarter. I'm pleased to announce that we took delivery of the 50% owned Libra FPSO in late-March, which actually arrived in Brazilian Waters today to commence commissioning on the field for its scheduled start up at the end of June or early July. Since reporting earnings last quarter, our shuttle tanker business continues to perform strongly, and we recently secured two new multi-year contracts of affreightment in the North Sea. We completed a five year extension of the charter contract for the Falcon Spirit FSO unit.

And finally, in early April, we entered into a customer-funded front-end engineering and design, or FEED study, for the Varg FPSO unit on Cheviot field in the North Sea. However, despite our strong start to the year, the Partnerships’ results for the first quarter were negatively impacted by the continued nonpayment of charter hire on the Arendal Spirit unit for maintenance and safety or UMS. In addition, we have now received notices from Petrobras, the charter, instructing us to demobilize the units and thereafter terminating the charter contract. We are disputing this termination, which I will discuss later in my presentation.

Turning to slide four, we continue to push forward to deliver on our pipeline of committed growth projects. This is the slide we have shown you in previous quarters, updated to reflect the latest remaining CapEx and financing figures as of March 31, 2017. We are pleased to announce the delivery of the largest of these projects, the jointly owned Libra FPSO, which I will touch on in a moment. Updating you on a couple of the other large projects on this slide, our Gina Korg FSO project has experienced some delays and cost increases with the units now expected to be hooked up on the field during the third quarter of 2017. We are providing Statoil with an interim solution, using shuttle tankers that will enable Statoil to start off the Gina Korg field when they are ready.

Last quarter, I discussed the delays and additional cost we experienced on the Petrojarl 1 FPSO upgrade project and we continue to work constructively with the charter shipyard and our lenders to deliver this unit into operation as soon as possible. Progress at the shipyard continues with over 90% of pipes welding now completed and 99% of electrical cabling now pulled, both key measures of progress to sail away. We are targeting an early 2018 timeframe for the FPSO to commence the contract on the Atlanta Field offshore Brazil. As a reminder, once all these projects have delivered, they are projected to contribute an additional $200 million per year of run rate CFVO.

Turning to slide five, I will provide a few more details on the Libra FPSO conversion, which is getting closer to start up. The Libra FPSO unit, which is a 50-50 joint venture with Odebrecht Oil and Gas, was converted at their own shipyard in Singapore. The mechanical completion and delivery of this $1 billion conversion project on-time and on-budget is a great example of how a project of this scale and scope can be effectively executed.

As you can see from the chronological focus down at the right side of the slides, a significant amount of work and materials went into this project which are reflected in the statistics shown on the slide. And most importantly are the $20 million man hours worked without a loss time injury. The Libra FPSO unit actually arrived in Brazilian water this morning where it will soon commence commissioning on the Libra field for 12 year contract with the consortium of oil companies led by Petrobras. The charter contract is expected to commence by late June or early July.

Turning to slide six. Through inbound inquiry, discussions with our diverse customer base and reports in the media, there has been increasing evidence to suggest that we are beginning to see some clean shelf in our core aftermarket. As captured in the recent headlines on this slide. Positive progress is being made in bridging offshore field developments and bringing offshore field development costs down, which may enable certain new field developments to proceeds towards timing investment decision in the coming months. We are still in early days but already the headlines are translating into tangible results for Teekay Offshore's business in the form of new shuttle tanker contracts, existing charter extensions, and potential new offshore production contracts.

Turning to slide seven. Since reporting earnings in February 2017, our business development teams have continued to successfully secure new charter contracts and extensions. In addition to finalizing the five year shuttle tanker CoA contract, I mentioned last quarter, we have also recently secured another new three shuttle tankers CoA contracts, both done at successively higher rates. The contracts which will service the Kraken and the Catcher field in the UK sector of the North Sea will commence between the third quarter of 2017 and the first quarter of 2018.

Our shuttle tanker fleet continues to perform strongly and these new contracts will only add to the approximately $270 million of annualized cash flow from vessel operation or CSVO reported in the first quarter. Combined with the new planned line shuttle tanker CoA contract, the three recent contract awards will require approximately an additional 3.3 vessel equivalent per annum over the next eight months, which will increase the utilization of our CoA fleet. And these three contracts will add $230 million to our fixed forward revenues.

With the delivery of the three Suezmax class shuttle tanker newbuildings servicing our existing East Coast Canada operations, our shuttle tanker CSVO is expected to grow even further as these vessels deliver between Q3 '17 and Q1 '18.

Turning to slide eight, the offshore production market is also starting to see early signs of an uptick in direct investments. In March, Teekay Offshore entered into a customer funded front-end engineering and design, FEED, study for the Varg FPSO with Alpha Petroleum. During the six months FEED study, we will define the required field specific FPSO modification and negotiate terms of a potential FPSO lease and operate contracts for the development of the Cheviot fields, which is one of the largest undeveloped fields in the UK sector of the North Sea.

In addition, the Partnership finalized a five year contract extension plus extension options for the Falcon Spirit FSO unit with no material capital investments. The extension will commence in June 01, 2017. This extension demonstrates the continued economic liability of the Falcon Spirit FSO unit, which has been operating on the Al Rayyan field, located offshore Qatar since 2009.

Turning to slide nine. In late April, we received a termination notice from Petrobras for the Arendal Spirit UMS charter contract. As a reminder, in early November 2016, the Arendal Spirit UMS experienced an operational incident relating to its Dynamic Positioning or DP System. Following the November incident, the charter Petrobras, initiated an operational review and concurrently suspended charter higher payments to the Partnership. In response to that incident, we work with GE, the supplier of the DP system and upgrades were made to the softer controlled systems; the units meet all class requirements; has been thoroughly tested; and has been fully operational and ready for service since November 11, 2016.

While I am not currently able to get into specifics of determination notification and our response, I can confirm that we are disputing determination and reviewing all of our legal options. This includes our ability to collect all charter hire owing to the Partnership since November 11, 2016, when the units was once again available for operations by Petrobras as required under the charter contract.

At the same time, we are seeking alternative employment opportunities for the unit in the event that we are unable to resolve our differences with Petrobras. We are working with our lenders under the loan facility secured by the Arendal Spirit to grant an extension of the facility while we obtain new employment for the unit. This is one of our highest near term priorities.

Wrapping up, I believe the recent contract awards represent what is an improving trend in the offshore sector. Although, we have certain challenges to deal with, notably the Arendal Spirit termination and completing the Petrojarl I project; we remain committed to the priorities I highlighted last quarter; remaining focused on continually starving for high standards for safety and operations excellence; maintaining a key focus on project execution and delivering these projects to contract start up to drive continued growth in the Partnership operating cash flow; working diligently to extend or secure new contracts or assets; optimizing our asset portfolio, which may include certain asset sales and/or seeking joint venture partners; and finally continuing to strengthen our balance sheet and liquidity position.

Thank you all for listening. Operator, we are now available to take questions.

Question-and-Answer Session

Operator

Thank you. We’ll take our first question from Michael Webber with Wells Fargo.

Michael Webber

I wanted just to start at Petrobras and the Arendal Spirit. The notification period, is there a notification period or any degree of notification required to start the 180 day period after which the banks can potentially call alone on the Arendal Spirit? Does that start from the date that you actually got the notification from Petrobras when they were cancelling the charter?

David Wong

The loan would -- the 180 days would start with the date that we received the letter from Petrobras. So that would have been late April.

Michael Webber

And I know it's somewhat sensitive, but can you give any color to how the conversations have gone with your lending banks around the loans on that asset, and then also the Petrojarl I. And then David from a managing perspective and from the cash perspective, are capital calls associated with those loans, something that you think is likely enough that you’re budgeting in for the remainder of the year and/or looking at, I guess, liquidity leverage to deal to handle, or are they far enough out on the window that that is not something that’s consuming your time right now?

David Wong

Just to give you -- to address your questions, related to talking to our lenders, right now, it's early days. I mean we just received the notification but we are in active dialogue with our lenders on the Arendal loan to seek an extension or amendment associated with that. So with the Petrojarl I loan, we continue to discuss with our lenders as well. They have been fully briefed on the dialogues we’re having with the charter and the yard. And we had, as you probably seen, several extensions of that loan and we’ll continue to work with them on that.

Related to capital calls, certainly looking at the Arendal loan, we are looking at that and how it impacts to our liquidity, and then corporate all those related to refinancing, as well, in our medium to long term financing and liquidity requirements. And as we have mentioned and Ingvild mentioned in the presentation, we’re looking at various alternatives to address liquidity in addition to looking at partial asset sales with joint venture, which we feel will fulfill our needs over the long term.

Michael Webber

And I guess just one more and I'll turn it over. But along those lines, David, can you maybe -- can you weigh out maybe specifically the tools you guys have from the liquidity perspective, and then how you prioritize those; be it asset sales; but then the FPSO or the shuttle side; or other segments; new equity, be it pref or common. Just maybe kind of layout the toolkit you guys have to kind of handle some of these smaller rush fires?

David Wong

Well, as I mentioned, we're looking at partial asset sales or joint ventures. Building upon things that we've been doing throughout the Teekay organization, which you see is successful in TGP. At this point, we can't get into details related to the specific assets or areas that we're looking at. But certainly when we get closer to completion, we'll be excited to talk about that.

Operator

We'll go next to Spiro Dounis with UBS Securities.

Spiro Dounis

Just sticking with the Arendal Spirit, and trying to get a sense for your ability to re-charter that asset. I know you had two other UMSs at one point that were in the order book and cancelled. So can you give us a sense of the demand for these types of assets and how quickly you could theoretically get that back on charter?

Ingvild Sæther

Well, the accommodation market is quite a niche market with only 30-31 units worldwide. And there has actually been quite healthy activity in the last five-six months with several contracts concluded. We have seen both sides doing a couple of contracts; and we do see some requirements in the market, both in West Africa and in the UK sector; Mexico is also a typical market for the accommodation units. And with the oil companies cutting back on maintenance over the last couple of years as a result of preserving cash, we are quite hopeful that we will be able to find employment for this unit in the event that we’re not able to come to agreement with Petrobras.

Spiro Dounis

And just as I'm thinking about, I guess, obviously this is now your main focus. Is there a concern that this may be spread into the other initiatives you got in front of you; and specifically what I'm getting is you guys have debt that you need to refinance; you mentioned potential sales or partial sales to joint ventures; but then also you’ve got FPSOs coming off charter next year with Petrobras. Does this impact any of those negotiations? Is there any sort of contagion that occurs as a result of this?

Ingvild Sæther

We have a very constructive dialogue with Petrobras on several assets. They're a big customer of ours, as you mentioned, on the FPSO side, as well. And we don't have any indication that this is impacting other parts of the Petrobras relationship.

Spiro Dounis

And just last one from me, just on the Alpha FEED study; certainly, a lot of positive news there. Just ballpark figures, do you think you can provide. I think the Varg before was earning about $49 million in EBITDA. Can you give us a sense for maybe how much CapEx you might have to spend on this project and then maybe how to think about EBITDA in that context?

Ingvild Sæther

It's early days on that project and we are going through the FEED study now, so that will determine the level of investments that need to be made and then the subsequent charter hire. So it's too early to say.

Operator

Thank you. And we'll next to Fotis Giannakoulis with Morgan Stanley.

Fotis Giannakoulis

Just to follow up on the Arendal Spirit. If I calculate well expenses and G&A in the last 12 months for the UMS segment was around $38 million. Now that the vessel is without a contract, or if we assume that the vessel will stay idle for a period of time. How shall we think of the expenses of this vessel?

Ingvild Sæther

So our main focus will of course be to marketing the units and get it on a new contract. And it's difficult to say what level that will be at. So if we are -- if we would have an IP period between now and the possible new contract, we will of course be focused on limiting the cost as much as possible in that period.

Fotis Giannakoulis

And, regarding the debt repayments, can you first remind us of what are the debt outstanding on this unit and what happens with repayments during the period that the unit base between contracts.

David Wong

The debt, total amount is $120 million as of March 31st. And it will continue to amortize down during the period, whether the units are on-hire or off-hire.

Fotis Giannakoulis

I saw some -- you mentioned about some cost overruns for the Gina Korg. I saw that your estimated CapEx between the previous quarter and this quarter went down $12 million. It seems that you repaid this quarter $55 million for the owned vessels. Are these cost overruns all related to the Gina Korg, or there were some other vessels involved in this number? And also can you explain to us what were the components of this overruns at which part of the construction, the budget will exceeded?

David Wong

Maybe just to address to the cost overruns, the cost overruns are both within the Gina Korg project and Petrojarl I project. But not significant in magnitude but just related to some of the extensions associated with been at the yard; a little longer for Gina Korg and then just taking over some more additional work with the Petrojarl I.

Fotis Giannakoulis

Were there any upgrades on the vessel or changes in the specifications? And I was wondering if this increase in the cost will be even partially reimbursed by a modification on the contract?

Ingvild Sæther

So there are a number of reasons for the cost increases throughout the projects that’s much related to scope increase and also related to the to the time resulted expenses being driven by time, like project management and commissioning. These are not costs that will be compensated by the customer. But we are very, very close to finalizing and selling. So we feel we have a relatively good overview of what’s left and are keen to get vessel on contract with Statoil.

Fotis Giannakoulis

One last question from me, you mentioned that you're looking for JV partners and potential candidates for sales, we’ve seen your fleet. I was wondering if these discussions may include the possibility of a spinoff of any of your segments or the shuttle tanker segment or any other segment into a new entity that would facilitate this kind of transactions.

Ingvild Sæther

We're not in a position to provide any details, at this time. And we will update the markets at the appropriate times. But as you have seen, we are working with partnerships and joint ventures across many of parts of Teekay and that is the model that we see works well. So it is one of our priorities to look at that.

Operator

We'll go next Ben Brownlow with Raymond James.

Ben Brownlow

On the G&A color, what -- that bridging solution with the shuttle tankers. Can you just give a little color around what that revenue and fee structure would look like?

Ingvild Sæther

That would be basically shuttle tanker rates for the shuttle tanker. So this is a solution that we have put in place in order to be sure that we are not delaying the start-up of the field, which is off course very important for Statoil. So this will be a short-term couple of month solution where we will just be earning on a regular shuttle tanker rate for the shuttle tankers.

Ben Brownlow

And one more from me, on the tollage segment, I think you had a reimbursement from some of the delivery delays. Can you talk about the accounting there, when that will flow through?

David Wong

Yes. So we did get we get liquidity damages from the yards due to the delays. We received the money in April, and from an accounting perspective, it really just nets against the capital cost of the unit.

Ben Brownlow

And any updates around the trends within that segment that you’re seeing?

Ingvild Sætherv

Well, the tollage market is quite challenging with relatively low utilization and low rates, and we expect that to last for sale sometime. The activity in this segment is, as you know, driven by the number of rig moves; so it can be new units; movement of existing units; and movement of units sold for scrap. We have a fleet a new vessel that provides good customer value. So we are quite confident that when the market does pick-up, we will be one of the first to benefit from that.

Operator

We’ll go next to Andy Gupta with Hite Hedge.

Andy Gupta

Couple of quick questions here. On the FSO Falcon Spirit, any color on the rates for that.

Ingvild Sæther

What we can say is that this has been a discussion that has gone on for quite some time with this extension. So the -- and we have done a rate adjustment to get a longer contract, but that has already taken effect. So the income will be in line with the previous quarters.

Andy Gupta

Okay, and then…

David Wong

Yes, it's just about $7 million EBITDA annually. And as Ingvild said, it's already corporate into our cash flow as we have always had that amount over the past year.

Andy Gupta

And then it's positive to see the CFEO from the shuttles, this number $270 million that you put out, that is -- I'm just confirming. This is before the East Canada, East Coast Canada shuttles, right this is your existing fleet?

Ingvild Sæther

That is correct, that's the Q1 annualized cash flow. So there will be a number of new contracts coming in over the next couple of quarters to increase that.

Andy Gupta

To increase that…

David Wong

The $270 million doesn’t includes the newbuilds being added to the fleet, so that would add additional cash flow once those delivered.

Andy Gupta

And can you disclose approximately what the margin is, revenue minus OpEx? I know you've got some time charters, some CoAs and bareboat, so it will vary. But what sort of a good number to use for revenue and OpEx for the variety of contracts?

Ingvild Sæther

Well, for the new contract, there will be a number of factors influencing. So when they start-up, how quickly they ramp-up, and so it's a bit difficult to give that guidance exactly how that will play out in the next couple of quarters. But as I said, it is $230 million of the fixed forward revenue, so it's significant future cash flow to the Partnership.

Andy Gupta

Final question from me, on the $210 million loan to Arendal Spirit. Is that effectively non-recourse to TOO and Teekay?

David Wong

The loan, which is just to clarify $120 million loan, will be guaranteed by Teekay Offshore will stay within -- it’s within the Teekay Offshore facility.

Andy Gupta

It is guaranteed by -- you can't just handover the Arendal Spirit to the banks?

David Wong

No.

Operator

We will go next to Michael Webber with Wells Fargo.

Michael Webber

Just had one follow-up along those lines, can you remind us who is in the lending syndicates for the Arendal Spirit and Petrojarl I? And maybe what kind of overlaps there maybe there with there the rest of your book? Trying to get a sense on how intertwine your lending basis.

Vince Lok

Mike, its Vince. The loan of the Arendal is with a couple of our key banks, including an ECA. So it’s a small group of banks in that facility.

Michael Webber

Is it relatively isolated, or is there exposure there across the entire TOO structure?

Vince Lok

Well they are lenders to Teekay entities and other loans. So they are part of other facilities within the Teekay Group. But as you know, we have very supportive bank groups amongst the Teekay Group and that we are in discussions with them and keeping them informed as we have over the past several months.

Operator

And that will conclude our question-and-answer session. I would like to turn the conference back over Ms. Sæther for any additional or closing remarks.

Ingvild Sæther

Thank you. Well, as you heard, there is a lot going on across the Partnership. And over the next couple of quarters, we will have delivered all our major projects and they will contribute to our cash flow. So our focus will then be to focus on the redeploying our assets that’s coming up contracts. And we repositioning us for the strengthening shuttle market in what we believe will be a recovering offshore market. So thank you.

Operator

That does conclude today's conference. We thank you for your participation. You may now disconnect.