Q3 2013 Teekay Offshore Partners LP Earnings Conference Call

Nov 08, 2013 AM EST
TOO - Teekay Offshore Partners LP
Q3 2013 Teekay Offshore Partners LP Earnings Conference Call
Nov 08, 2013 / 05:00PM GMT 

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Corporate Participants
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   *  Ryan Hamilton
      Teekay Offshore Partners - IR 
   *  Peter Evensen
      Teekay Offshore Partners LP - CEO

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Conference Call Participants
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   *  Amit Chanda
      Wells Fargo Securities - Analyst
   *  Nish Mani
      JPMorgan - Analyst
   *  Edward Rowe
      Raymond James - Analyst

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Presentation
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Operator   [1]
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 Welcome to the Teekay Offshore Partners third-quarter 2013 earnings results conference call.

 (Operator Instructions)

 As a reminder, this call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr. Peter Evensen, Teekay Offshore Partners' Chief Executive Officer. Please go ahead, sir.

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 Ryan Hamilton,  Teekay Offshore Partners - 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 will find a copy of the third-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 third-quarter 2013 earnings release and earnings presentation available on our website.

 I will 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 morning, everyone, and thank you for joining us on our third-quarter of 2013 investor conference call. I'm joined today by Teekay Corporation's CFO, Vince Lok; Chief Strategy Officer, Kenneth Hvid; and MOP controller, David Wong.

 During our call today, I'll be walking through the third quarter of 2013 earnings presentation, which can be found on our website. Starting on slide number 3 of the presentation, I will briefly review some of Teekay Offshore's recent highlights.

 We generated distributable cash flow of $43 million in the third quarter, an 11% increase from the same quarter one year ago. We declared a cash distribution of $0.5253 per unit for the third quarter.

 In September, we took delivery of the Bossa Nova Spirit, the third newbuilding shuttle tanker, which will commence a 10-year contract to BG in mid-November following its arrival in Brazil. In mid-November, we also expect to take delivery of the Sertanejo Spirit, the fourth and final BG shuttle tanker, from the shipyard. And this vessel is expected to commence its 10-year contract with BG in Brazil, early in the new year.

 During the quarter, we completed our acquisition of the HiLoad Dynamic Positioning Unit from Remora AS. The modifications to the unit required to service the long-term contract with Petrobras were recently completed, and the unit is currently in transit, and is expected to arrive in Brazil early next week.

 After a four-month testing period, the DP HiLoad unit is expected to commence its 10-year charter with Petrobras in the second quarter of 2014. As previously announced, the total purchase price of the DP HiLoad Unit is approximately $55 million, including modification costs, and the unit is expected to generate approximately $7.5 million of distributable cash flow per year.

 We intend to increase the Partnership's fourth-quarter distribution per unit by approximately 2.5%, or $0.052 per annum, bringing Teekay Offshore's total annual distribution to approximately $2.15 per unit, representing a yield of approximately 6.2%, based on Wednesday's closing unit price. Combined with the 2.5% distribution increase in Q1 earlier this year, the Q4 distribution increase will bring the total increase for 2013 to 5%. With several visible FPSO acquisition opportunities at our sponsor, Teekay Corporation, and a number of offshore tender opportunities that we're directly bidding on, or engaged in front-end engineering or feed studies, Teekay Offshore remains well positioned for growth in its distributable cash flow over the next several years.

 Turning to slide number 4, I want to take a moment to update you on the Voyageur Spirit FPSO operational startup issue we discussed in detail on last quarter's call. I'm pleased to report that the repairs to the defective gas compressor were made, and the FPSO achieved full production capacity, and has been on full rate since August 27.

 As a reminder, Teekay Corporation, as the seller, agreed to indemnify Teekay Offshore for revenue it would have otherwise earned had the unit not been declared off-hire, and accordingly, the Partnership was fully indemnified for the period prior to August 27. The Partnership continues to be indemnified by Teekay Corporation until the certificate of final acceptance from E.ON is received, subject to a $54-million cap.

 We're still awaiting the certificate of final acceptance, which is subject to us completing certain operational production tests. However, the commencement of these tests has been delayed due to operational issues at the oil field, which are the responsibility of the charterer. Once we're permitted to proceed with the operational tests, we do not anticipate any difficulties in receiving the certificate of final acceptance, as we are operating at full production before the customer alerted us about the operational issues at the field.

 2013 has been a busy year for Teekay Offshore, as we have laid out on slide number 5. We started with the acquisition of the Voyageur Spirit FPSO, which, despite the operational issues on startup, is now generating cash flows for the charterer-- from the charterer, and has been indemnified for revenue foregone prior to August 27.

 In June, we acquired a 50% interest in the Cidade de Itajai FPSO, which is currently operating in Brazil on a long-term contract with Petrobras. And to date, we have successfully taken delivery of three shuttle tanker newbuildings, with the fourth-best vessel in this series expected to deliver in the next couple of weeks.

 Based on the distributable cash flow growth in 2013 from these transactions, we intend to increase the Partnership's quarterly distribution by 2.5% commencing with the fourth quarter's distribution to be paid in 2014.

 On slide number 6, I will review our consolidated operating results for the quarter, comparing an adjusted third-quarter 2013 income statement with an adjusted second-quarter 2013 income statement, which excludes the items listed in Appendix A of our third-quarter earnings release, and reallocates realized gains and losses from derivatives to their respective income statement line items.

 Starting at the top of the income statement, net revenues increased by $9.3 million mainly due to the revenue from the Voyageur Spirit FPSO, as the unit commenced full-hire on August 27 and from higher shuttle fleet revenues from the commencement of the charter contracts on the first two BG shuttle tankers, partially offset by re-deliveries of two of our shuttle tankers as they completed their time-charter contracts.

 Similar to the second quarter of 2013, I'd like to point out that $13 million was received during the third quarter, under the indemnification from Teekay Corporation associated with the lost revenue from the Voyageur Spirit FPSO. This amount is effectively treated as a reduction in the purchase price paid by the Partnership, and is not included in net revenues or cash flow from vessel operations.

 However, this amount is included in our calculation of distributable cash flow, and is being treated as a reduction to the maintenance capital expenditure reserve. The result is a distributable cash flow amount for the third quarter, the same as if the $13 million was recorded in revenues.

 Vessel operating expenses increased by $4.3 million, primarily due to a full quarter of operations from the Voyageur Spirit FPSO and the two BG shuttle tankers. Time-charter hire expenses were consistent with the prior quarter. Depreciation and amortization expense increased by $2.8 million, mainly due to the delivery of the first three BG shuttle tanker newbuildings, and a full quarter of depreciation for the Voyageur Spirit FPSO.

 General and administrative expense increased, mainly due to a full quarter of operations from the Voyageur Spirit FPSO, which included costs to focus on resolving the startup issues on the unit. Net interest expense, including realized losses on interest rate swaps, increased by $1.3 million, mainly due to interest income earned in the second quarter on the $150-million prepayment to Teekay Corporation for the Voyageur Spirit. Equity income increased by $800,000, relating to a full quarter of earnings from our 50% ownership in the Cidade de Itajai FPSO, which was acquired in early June.

 Net loss from discontinued operations increased $2.1 million, as a result of the sale of the Poul Spirit and the Gotland Spirit conventional tankers in the second and third quarters of 2013, respectively. Net income attributable to non-controlling interests decreased $2.4 million, mainly from the drydock of one of our shuttle tankers in which the Partnership owns through a 50% owned subsidiary.

 I won't walk through all of slide number 7, 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 $43 million in distributable cash flow, which, when compared to our total distribution payout, resulted in a coverage ratio of 0.90 times for the third quarter, which was in line with the last quarter.

 Looking ahead to the fourth quarter, even after taking into account the intended cash distribution increase of 2.5% in Q4, we are expecting an increase in our coverage ratio compared to the third quarter, primarily due to growth in our distributable cash flows from the shuttle tanker newbuilding deliveries over the past several months, and the re-delivery of one of our in-charter shuttle tankers.

 On slide number 8, we provide a summary of Teekay Offshore's visible and potential growth opportunities. Our visible growth includes the fourth BG shuttle tanker, the Remora HiLoad unit, which I mentioned earlier, and the two FSO conversion projects discussed last quarter. The Salamander project, which is scheduled to come onstream in the middle of next year, and the Gina Krog, which is expected to come online in early 2017.

 The Canara FPSO is expected to deliver onto its long-term contract with BG during the second half of 2014, at which time we expect to receive an offer to acquire, at least a portion of that $1-billion FPSO, from our sponsor, Teekay Corporation.

 In addition to these firm projects, the Partnership has several potential future growth opportunities, including four on-the-water FPSOs currently owned by Teekay Corporation, which may be offered to us under the existing omnibus agreement, upon securing suitable contracts for these units. And as I mentioned previously, we're currently bidding several -- directly on several multiple offshore projects. And finally, we have agreements in place with Sevan Marine and Remora, which may provide us with additional growth opportunities in the future.

 Thank you all for listening. And, 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)

 Michael Webber, Wells Fargo Securities.

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 Amit Chanda,  Wells Fargo Securities - Analyst   [2]
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 This is [Amit] again, on for Mike.

 In terms of the way we think about Teekay Offshore, we see you guys in terms of the pre-Canara and post-Canara period, in terms of growth. Just wondering if you can get some additional color from you guys in terms of FPSOs. Is there any potential dropdowns which we can see pre-Canara at this time?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [3]
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 We are looking at, as I mentioned in my prepared remarks, we have four FPSOs up at the parent company, or the sponsor. And when those get the optimal time-charter contracts or we get permission from the charterer, then we're going to make those available. So I can't give you an exact timeframe on when those four FPSOs will come down, but it is the intention that they will be dropped down.

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 Amit Chanda,  Wells Fargo Securities - Analyst   [4]
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 Got you. And digging into one of the FPSOs a little closer, the Hummingbird specifically, just because we noticed that the contract got extended until March 2016. Would you say, in terms of timeline, that it would be potentially the first one which could be offered to Teekay Offshore at this point?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [5]
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 I won't say exactly which one will be offered, but the Hummingbird -- we are waiting to see if the charter will get extended. And since we're all about having medium-term contracts for the Hummingbird, we are waiting to see if the charterer, Centrica, will extend it by one more year; in which case it would probably become eligible; or if we can line up alternative employment for that, should they not declare the option, which we'll know in the next six or seven weeks.

 Now, we have the Petrojarl Foinaven FPSO, which we're still working with the charterer to get permission to drop down.

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 Amit Chanda,  Wells Fargo Securities - Analyst   [6]
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 Got you. That's helpful.

 And in terms of growth post-Canara, you mentioned that you're looking at about $3 billion in projects right now, of which, the Gina Krog is one of the projects in the potential future. Could you give us more a breakout in terms of the $3 billion projects you guys are looking at, and more of a timeframe, in terms of when those projects could potentially come online?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [7]
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 Yes. First of all, the Gina Krog is not in the $3 billion. That one has already been ordered by the Partnership-- or it is owned by the Partnership, and we are going to convert it. So that one is not in the $3 billion. But those are FPSOs that we're looking at. And our FPSOs cost anywhere from $800 million up to $1 billion if we're doing newbuildings.

 And so, you can say we're looking at three FPSO projects, and in addition we are looking at a few FSO projects, and shuttle tanker opportunities.

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 Amit Chanda,  Wells Fargo Securities - Analyst   [8]
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 Got you. That's helpful. Thanks for the color, guys. I'll turn it over.

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Operator   [9]
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 Chris Combe, JPMorgan.

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 Nish Mani,  JPMorgan - Analyst   [10]
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 This is actually Nish Mani on for Chris.

 I wanted to follow-up on some of the points on growth that we just discussed. Specifically, you mentioned that for the Canara, there is the likelihood of it potentially being a JV, or perhaps 50% interest, and not fully acquired at TOO. Just wanted to get a sense of whether or not there is any appetite to do it all at TOO, just given the fact that the other FPSO projects have a degree of uncertainty built into them for both timing and contract structure?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [11]
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 Yes. When we started Teekay Offshore, we actually dropped the shuttle tanker franchise. We first started it with 25%, and then we dropped it down in increments of 25%. So our intention is that the Canara will fully be in the Partnership at some point.

 And going forward, that's why all of the fixed assets up at Teekay Corporation will ultimately be dropped down to their respective daughter companies. It is just a question of sizing. It is a lot to drop-down all at one time, $1 billion. So we may drop it down in increments.

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 Nish Mani,  JPMorgan - Analyst   [12]
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 Okay. Got it. That's helpful.

 And then, thinking about the coverage ratio, we've seen it tick up over the past couple quarters, and we're still below the 1.0 threshold. Wanted to get a sense of how you guys think about getting back to the target, and eventually getting to a degree of comfort at the 1.15 to 1.2 guidance you guys have previously discussed.

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [13]
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 Sure. Well, the good news is, because we have the visible growth, we can see what the accretion will be. And for example, I mentioned the Remora, which is an extremely accretive deal, since we're spending a little over $50 million and getting $7.5 million of Bcfs, so we can start to see that we can rebuild it. We did have some, what I will call headwinds, as we have had redeliveries of some of the shuttle tankers. That's what's caused us to drop below 1. But I'm fully confident we'll get back there, because I can see the accretion of the future projects coming on.

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 Nish Mani,  JPMorgan - Analyst   [14]
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 Okay. And then finally --

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [15]
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 So I guess you could say we've had to use some of the accretion from the growth in order to make up for the redelivery of some of the conventional and shuttle tankers. But that's just part of having a big portfolio.

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 Nish Mani,  JPMorgan - Analyst   [16]
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 Understood.

 And in terms of distribution growth -- congratulations on increasing the distribution this quarter. Just wanted to get a sense of where you guys think about distribution growth coming in the next year to 18 months. I mean, you've already baked in, to some degree, in your estimates, of course, the Remora and the Salamander over the next year. But outside of that, just mentioned previously, the FPSO uncertainty -- is there a chance -- do you see material headwinds coming in 2014 where distribution growth might not be possible again?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [17]
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 No, I don't, actually. We continue to target at least mid-single digits. And if we are able to drop more projects down, then we can exceed that.

 But we always target about mid-single digits, and now you're seeing this year we'll have increased the distribution by 5%. When we see accretive deals like Canara, which can power 2015 into 2016, and we have the built-in growth with the BG and Remora for 2014 as well as Salamander, then I'm very confident about that.

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 Nish Mani,  JPMorgan - Analyst   [18]
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 Great. Thanks so much for the time. I'll turn it over.

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Operator   [19]
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 (Operator Instructions)

 Edward Rowe, Raymond James.

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 Edward Rowe,  Raymond James - Analyst   [20]
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 All my questions have been answered. Thank you.

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Operator   [21]
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 Mr. Evensen, there are no further questions at this time. You may continue.

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [22]
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 All right. Thank you all very much. We look forward to reporting back to you next quarter.

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Operator   [23]
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 Thank you. 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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