Q1 2013 Teekay Offshore Partners LP Earnings Conference Call
May 10, 2013 AM EDT
TOO - Teekay Offshore Partners LP
Q1 2013 Teekay Offshore Partners LP Earnings Conference Call
May 10, 2013 / 04:00PM GMT
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Corporate Participants
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* Ryan Hamilton
Teekay Offshore Partners LP - IR
* Peter Evensen
Teekay Offshore Partners LP - CEO
* Vince Lok
Teekay Offshore Partners LP - CFO
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Conference Call Participants
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* Edward Rowe
Raymond James - Analyst
* TJ Schultz
RBC Capital Markets - Analyst
* Unidentified Participant
JPMorgan - Analyst
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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to Teekay Offshore Partners first-quarter 2013 earnings results conference call. During this call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session.
(Operator Instructions)
As a reminder, this call is being recorded.
Now, for opening remarks and introductions, I would like to turn the call over to Mr. Peter Evensen, Teekay Offshore Partners Chief Executive Officer. Please go ahead, Mr. Evensen.
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Ryan Hamilton, Teekay Offshore Partners LP - IR [2]
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Before Mr. Evensen begins I'd like to direct all participants to our website at www.TeekayOffshore.com where you'll find a copy of the first-quarter 2013 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 first quarter of 2013 earnings release and earnings presentation available on our website.
I'll now turn the call over to Mr. Evensen to begin.
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Peter Evensen, Teekay Offshore Partners LP - CEO [3]
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Thank you, Ryan. Good afternoon, everyone, and thank you for joining us on our first-quarter of 2013 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 our first quarter of 2013 earnings presentation, which can be found on our website. Starting on slide 3 of the presentation, I will briefly review some of Teekay Offshore's recent financial highlights. We generated distributable cash flow of $41.8 million in the first quarter, down slightly from the same quarter of the prior year, partially due to the effect of the partnership's fleet renewal activities, as I'll talk about later on this call.
For the first quarter of 2013 we declared a cash distribution of $0.5253 per unit, which is an increase of 2.5% from the previous quarter. In addition, we announced our intention to increase Teekay Offshore's distribution by a minimum of 2.5% later this year as a result of the expected deliveries of the four BG shuttle tankers and the potential acquisition of the Itajai FPSO. I'm pleased to report that the partnership remains in a strong financial position, due primarily to the completion of two capital raises in April for a total of $210 million. I'll review these transactions in more detail later in this presentation, but what I'd like point out now is that with the completion of these offerings, the equity requirements for the acquisition of the Cidade de Itajai FPSO and the four BG shuttle tanker new buildings are now covered.
On slide 4 I want to highlight the various ways we're currently growing each of our Offshore businesses and on the subsequent slides I'll go into more detail on a few of these projects. With the recent completion of the Voyager Spirit FPSO acquisition, Teekay Offshore now owns and operates four FPSOs and this total will increase again if we acquire Teekay Corporation's 50% interest in the FPSO. Our shuttle fleet grew today with the delivery of the Samba Spirit and we expect to take delivery of its three sister ships over the next six months. And following on from the letter of intent that we announced last quarter, we have now finalized and signed a 10-year plus up to 5 additional years time charter contract with Salamander Energy to convert the Navion Clipper shuttle tanker into an FSO for an estimated fully built-up cost of approximately $50 million.
We expect the FSO will generate cash flow from vessel operations, or CFVO, of approximately $6.5 million per year upon delivery of the FSO to the oil field in the third quarter of 2014. 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. In addition, Teekay Offshore's currently directly bidding on FPSO new building and FSO conversion projects, which we hope to update you on later in coming quarters.
Turning to slide 5, on May 2 we completed the acquisition of the Voyager Spirit's cylindrical FPSO for a price of $540 million. The FPSO has commenced its firm five-year charter with German utility company E.ON and is currently producing oil from the Huntington field in the North Sea. We expect the FPSO will generate average annual CFVO of approximately $70 million during the five-year firm period, which could be extended if any of the 10 one-year options are exercised.
Moving on to slide 6, I'd like to take a moment to walk through a few of the details of the recent offer received from Teekay Corporation to acquire its 50% interest in the Cidade de Itajai FPSO. In February of this year, the FPSO commenced a nine-year contract, plus extension options, with Petrobras producing oil from the Bauna and Piracaba fields in the Santos Basin Offshore Brazil. The FPSO is expected to generate annual CFVO of approximately $25 million on a 50% basis. Because the unit is owned in a 50/50 joint venture with Odebrecht Oil & Gas, if accepted we will account for this FPSO as an equity investment. The FPSO offer's currently being reviewed by the conflicts committee of the partnership's Board of Directors and if accepted we expect the unit to be acquired during the second quarter of 2013. Importantly, the FPSO is currently financed with a 10-year debt facility and the equity component of the acquisition can be funded from existing liquidity.
Looking at slide 7, as you can see in the bottom right-hand picture, I had the pleasure of attending the ship naming ceremony of the Samba Spirit shuttle tanker new building at the Samsung shipyard in South Korea last month. The shuttle tanker is now on route from Korea to Brazil and will commence its 10-year charter to BG upon its arrival in June. The other three new buildings, the Lambada Spirit, the Bossa Nova Spirit and the Sertanejo Spirit, are expected to deliver in mid June, late September and November, respectively, with their BG charters expected to commence approximately two months after delivery from the shipyard.
On slide 8 I will review our consolidated operating results for the quarter, comparing an adjusted first-quarter 2013 income statement with an adjusted fourth-quarter 2012 income statement, which excludes the items listed in Appendix A of our first-quarter earnings release that reallocates realized gains and losses from derivatives to their respective income statement line items. First of all, commencing this quarter, we've included the cost of ship management activities in vessel operating expenses. We'd previously included these items in general and administrative expenses. This new presentation is more consistent with the presentation utilized by many other shipping companies and peers. We have reclassified such costs in comparative periods to be consistent with this new presentation.
Starting at the top of the income statement, net revenues decreased by $14.7 million, mainly due to $5.5 million of customer reimbursements received in the fourth quarter associated with front-end engineering [or feed] studies relating to projects that we're currently pursuing, $2 million of catch-up revenues received in the fourth quarter from our volatile organic compound equipment acquisition last quarter, and lower revenues from our shuttle fleet. Our shuttle fleet revenues declined mainly due to transferring the Navion Clipper into lay-up during the first quarter while that vessel is now awaiting conversion for the Salamander FSO project, the sale of the Navion Savonita in late 2012 and less shuttle tanker project work. Although not included in our adjusted revenues, our first-quarter distributable cash flow included a $6.8 million termination fee from Teekay Corporation relating to the early termination of the time charter of the Poul Spirit conventional tanker as of March 31. Since this vessel is 15 years of age, it was beneficial for Teekay Offshore to sell the vessel prior to its upcoming expensive drydocking. The Poul Spirit is expected to be sold by the end of May.
Vessel operating expenses decreased by $8.8 million, mainly due to the recognition of costs incurred on the two FSO feed studies in the fourth quarter I spoke about earlier. As a reminder, the revenues and costs related to feed studies are both recognized for accounting purposes when the studies are completed.
Time charter hire expenses decreased by $700,000, mainly due to lower spot in chartering to serve some of our shuttle contracts. Depreciation and amortization expense decreased by $1.7 million, mainly due to the vessel impairment that was recognized in the fourth quarter. General and administrative expense increased by $3 million, primarily related to the timing of recognizing certain compensation expenses. Net interest expense, including realized losses on interest rate swaps, increased by $900,000, mainly from the issuance of Norwegian Krone bonds in January. Income tax recovery decreased by approximately $2 million, mainly due to a one-time recovery in the prior quarter from a restructuring in our Norwegian operations.
I won't walk through all of slide 9, which was included in our recent earnings release. However, I would like to highlight the information in the box at the bottom of the slide. We generated approximately $41.8 million in distributable cash flow when compared to our total distribution pay out resulted in a coverage ratio of 0.92 times for the first quarter. This is lower than we would like it to be. However, we expect the recent completion of the Voyager Spirit acquisition and the deliveries, of the BG shuttle tankers will contribute to rebuilding our coverage ratio above one.
Finally, on slide 10, I'd like to highlight a new source of capital recently tapped by Teekay Offshore. In April we completed a $150 million perpetual preferred unit offering priced at a fixed coupon of 7.25%. We decided to issue these units in part because they're non-dilutive to TOO's existing common unitholders, and with a fixed dividend investors in the preferred offering will not participate in future increases to the common LP unit distribution. This preferred security trades on the New York Stock Exchange under the symbol TOOPRA and it is currently trading at approximately $25.75 per unit, representing a yield of 7.05%. Importantly, at the bottom of slide -- as the bottom of slide 10 highlights, when the $150 million of preferred proceeds are coupled with the $60 million that we raised via private placement, Teekay Offshore does not need additional equity proceeds to take delivery of the remaining three BG shuttle tankers nor, if accepted by the conflicts committee, to complete the acquisition of the Cidade de Itajai FPSO.
Thank you for listening. Operator, I'm now available to take questions.
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Questions and Answers
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Operator [1]
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Thank you.
(Operator instructions)
We'll move to our first question from Edward Rowe of Raymond James. Please go ahead.
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Edward Rowe, Raymond James - Analyst [2]
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Good morning guys.
In regards to the Knarr -- given the size of the project -- I know it's some time away but how are you guys thinking about potentially dropping that down? Are you guys thinking about dropping it down 100%? Or finding a 50/50 JV partner for this project?
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Peter Evensen, Teekay Offshore Partners LP - CEO [3]
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So this is the Knarr FPSO, which we expect to be completed in the second quarter of 2014, so it's about a year away. And we would expect that, that's such a big investment, about $1 billion, that if it were dropped down, we would drop it down in -- not all at once, but in sections or parts, which we've done previously in other MLP systems. But we have also said that we're also looking at perhaps bringing in minority partners, in which case we would only drop a majority into the partnership.
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Edward Rowe, Raymond James - Analyst [4]
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Okay, that's helpful, thank you.
In regards to the Gotland Spirit -- are you guys still targeting a third-quarter sale of this asset?
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Peter Evensen, Teekay Offshore Partners LP - CEO [5]
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Vince, do you have that?
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Vince Lok, Teekay Offshore Partners LP - CFO [6]
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Yes, as we indicated in the last quarter presentation, the Gotland Spirit, similar to the Poul Spirit, is similar age, so its got an expensive drydocking coming up. So our intention is likely to terminate that charter as well, and sell the vessel at that time.
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Edward Rowe, Raymond James - Analyst [7]
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All right, very good. Just a couple more questions.
When you think about coverage and cash distribution, I know you highlighted targeting around at least 2.5%. How are you guys thinking about balancing -- maintaining adequate coverage and offsetting the conventional tankers, and also just providing the investors the full benefit of these very accretive drop downs?
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Peter Evensen, Teekay Offshore Partners LP - CEO [8]
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Well, as we explained last quarter, we have assets that are available to drop down to increase the partnership. But we are going through a fleet renewal, which means that, as we sell some of the older tankers that were generating good cash flow, that's a headwind -- meaning that the net accretiveness of, say, the Voyager Spirit isn't as much as it normally would be. So that's just a normal part of what we're going through. But net-net, we're able to grow the partnership.
The other factor, which you saw this quarter, was the fact that we had raised the equity and the debt ahead of time on these acquisitions; and we have, in fact, as I said in my prepared remarks, raised the equity for all of the planned 2013 acquisitions. So that means that our equity -- or that our coverage ratio is hurt by the fact that we've already raised this. But we think that's prudent, even though times are good for raising equity for MLPs.
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Edward Rowe, Raymond James - Analyst [9]
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Very good. And last and final question.
I was just looking through some of the old notes. In terms of debt maturities, is there anything coming online that's due in 2013 and 2014 that we should be aware of that you guys have or are looking to refinance soon?
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Vince Lok, Teekay Offshore Partners LP - CFO [10]
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Yes, in 2013 we have the Varg FPSO debt facility coming up, and we're actually -- we've already received full commitments from the banks to refinance that already. So we're just in documentation stage. The other large one in 2013 is the Norwegian bond in November of 2013; but as you know we already issued a larger bond in January of this year, so that one is already effectively taken care of. We have a couple large revolvers in 2014 that are coming due, but we've been planning on that for several years and so we'll be in good shape to roll those over next year.
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Edward Rowe, Raymond James - Analyst [11]
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All right, thank you.
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Operator [12]
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Thank you. We'll move to our next question, from TJ Schultz of RBC Capital Markets. Please go ahead.
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TJ Schultz , RBC Capital Markets - Analyst [13]
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Can you give an update on the Hummingbird and the outlook to find a contract beyond the Centrica term to make it suitable to the MLP, or other options you have there?
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Peter Evensen, Teekay Offshore Partners LP - CEO [14]
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Sure. So this is the Hummingbird FPSO, which is owned by our sponsor, Teekay Corporation. So what we have said to investors is that it has a short-term contract through 2015. We have had to relook at how we can extend it, because the project that we had signed an LOI on, they agreed not to proceed. So we're now working with another charterer on extension options. If we get those extension options, then it'll, in our view, be eligible to be dropped down because it'll have a long enough contract.
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TJ Schultz , RBC Capital Markets - Analyst [15]
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Okay, thanks. Then the status of the Foinaven, as well -- I guess the July deadline's approaching to offer to the MLP?
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Peter Evensen, Teekay Offshore Partners LP - CEO [16]
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Yes, this is starting to get to be an annual thing. We have not made sufficient progress with the charterer of that FPSO to receive permission to drop it down. So until -- the charterer is allowed to -- has to consent to the change in ownership. So until we're able to secure their permission, we're unable to sell it from our sponsor Teekay Corporation to Teekay Offshore Partners.
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TJ Schultz , RBC Capital Markets - Analyst [17]
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Okay, so likely you would just be able to extend the deadline then?
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Peter Evensen, Teekay Offshore Partners LP - CEO [18]
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Yes. It is our intention to ultimately own that. As all FPSOs of Teekay Corporation, the loans would be owned by Teekay Offshore Partners.
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TJ Schultz , RBC Capital Markets - Analyst [19]
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Got it. Appreciate it, thanks.
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Peter Evensen, Teekay Offshore Partners LP - CEO [20]
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Thank you.
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Operator [21]
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Thank you.
(Operator Instructions)
We'll move to our next question, from Chris Combe of JPMorgan. Please go ahead.
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Unidentified Participant, JPMorgan - Analyst [22]
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Hey, good morning, guys, this is [Mishmani] for Chris. Congratulations, again, on a great quarter and for completing the variety of financing activities. Just a couple of quick follow-up questions.
In thinking about the capital structure, if we take a look at the Salamander FSO conversion and potentially the Knarr in 2014, obviously there's going to be an additional need for equity down the road despite 2013 being fully funded. Can you talk a little bit about how you are thinking about the mix between preferred equity and common, just given the recent preferred raise but also highlighting the strength of the unit price recently on the common side?
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Peter Evensen, Teekay Offshore Partners LP - CEO [23]
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Well, we have raised enough money for 2013, so I don't think you are going to find us back in the market any time soon. The Salamander isn't a very big acquisition, so we could just fund that out of liquidity. And we're looking at about 60% to 70% debt financing on these units; so the Salamander at $50 million isn't very much.
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Unidentified Participant, JPMorgan - Analyst [24]
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Right.
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Peter Evensen, Teekay Offshore Partners LP - CEO [25]
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On the Knarr, we have pre-delivery financing in place and our finance team is working on post-delivery financing -- post second-quarter 2014 -- and then we would probably raise common financing depending on how much of the unit was dropped.
I don't think you should see that we're going to issue a lot of preferred. We just thought that the preferred -- given the pricing of it compared to the pricing of our common, it was much better for our common unitholders to be getting to lock in that perpetual preferred because we can see so much growth in the partnership in the coming years. So it was less dilutive to our unitholders.
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Unidentified Participant, JPMorgan - Analyst [26]
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No, that makes complete sense.
And then thinking about the conventional tanker segment -- obviously with the Poul Spirit and the Gotland Spirit both being marked for sale the fleet has shrunk pretty substantially over time. But there is kind of a -- the fleet that does exist now is much more modern and on longer-term charters. Would you guys -- are you guys happy with the size of that fleet now and how it's going to shape up in the general mix of the Company?
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Peter Evensen, Teekay Offshore Partners LP - CEO [27]
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Yes. We aren't planning on increasing our exposure to the conventional tankers. That was good for the partnership but we have always been focused in on growing in the FPSO segment, which is more accretive or profitable, and has also got more stable cash flows. So I would call it more of a historic segment that we don't intend to grow.
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Unidentified Participant, JPMorgan - Analyst [28]
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Yes, and that's just what you guys have said before, just wanted to make sure the size has been right-sized for today's needs.
And then just finally, talking about the Salamander -- are you guys using this as a potential segue into expanding the shuttle tanker-to-FSO conversion space within TOO? Because I do see several shuttle tankers that are coming off longer-term charters and have reached 15-year age?
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Peter Evensen, Teekay Offshore Partners LP - CEO [29]
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Well, that's exactly right. We had hoped to actually have more of this business, both converting conventional tankers that are older as well as the shuttle tanker. But unfortunately there hadn't been as many opportunities that we won. So we're happy that we won this one and if we can get more of them we will, but if we can't we'll just sell the older shuttle tankers and move on.
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Unidentified Participant, JPMorgan - Analyst [30]
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Got it. Great, well thank you so much for your time. I'll turn it over.
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Peter Evensen, Teekay Offshore Partners LP - CEO [31]
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Thank you.
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Operator [32]
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Thank you. And there are no further questions at this time. Please continue.
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Peter Evensen, Teekay Offshore Partners LP - CEO [33]
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All right, thank you all very much. As you see, the partnership continues to grow in both the shuttle and the FPSO section, so we look forward to reporting on our progress next quarter. Thank you.
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Operator [34]
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Thank you. Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.
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