Q2 2014 Teekay Offshore Partners LP Earnings Call
Aug 08, 2014 AM EDT
TOO - Teekay Offshore Partners LP
Q2 2014 Teekay Offshore Partners LP Earnings Call
Aug 08, 2014 / 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
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Conference Call Participants
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* Darren Horowitz
Raymond James - Analyst
* Michael Weber
Wells Fargo Securities - Analyst
* Matthew Philip
Clarkston - Analyst
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Presentation
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Operator [1]
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Welcome to Teekay Offshore Partners second quarter 2014 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 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 LP - IR [2]
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Before Mr. Evensen begins I'd like to direct all participants to our website www.teekayoffshore.com. Where you will find a copy of the second quarter 2014 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 second quarter 2014 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 second quarter 2014 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 number 3 of the presentation, I'll briefly review some of Teekay Offshore's recent highlights.
The partnership generated distributable cash flow of $40.1 million in the second quarter, down 7% from the same period of the prior year. The reduction in the partnership's cash flow during the quarter is due to a combination of temporary operational issues and cash flow timing differences related to certain of our offshore contracts. While these matters have now been largely resolved, on a full quarter basis the effective fixed rate contracts would have generated an additional $8 million of distributable cash flow during the quarter. This would have resulted in distributable cash flow of $48.1 million in the second quarter, or an increase of 12% from the same period of the prior year.
For the second quarter of 2014, the partnership declared and paid a cash distribution of $53.84 per unit. This past week we completed the acquisition of Logitel Offshore, marking our entry into the growing global offshore floating accommodation market, providing further diversification through a complementary new channel for accretive growth. Our initial investment will be approximately $600 million which includes three new floating accommodations units. However, we believe the transaction could lead to a $1 billion plus business segment for Teekay Offshore.
In July, the conversion of the Salamander SSO was completed and the unit left the shipyard for its field in Thailand. Following field installation and testing, the unit is expected to commence its 10 year charter contract with Salamander Energy in August. In addition, our innovative Remora HiLoad export solution, the first offtake unit of its kind, is currently completing operational testing in Brazil and is also expected to commence its full charter higher payment during the third quarter but with retroactive effect to April 11th.
Finally, our 50/50 joint venture with Brazil based Odebrecht oil and gas was recently nominated by Petrobras as the leading commercial bidder for the Libra FPSO project in Brazil, subject to final contract negotiations. The FPSO unit will serve as the Libra presalt oil field in the Santos Basin and is expected to commence operations in early 2017, following completion of the FPSO conversion project. This will be the second FPSO project for our joint venture with Odebrecht.
Turning to slide number 4. I'll provide an overview of our recent acquisition of Logitel Offshore.
Just this past week we completed the acquisition of Logitel, an offshore floating accommodation company affiliated with Sevan Marine which included two new building floating accommodation units currently under construction at the COSCO shipyard in China. In addition, we separately exercised one of Logitel's existing six options with COSCO to order an additional floating accommodation unit.
Each of the Logitel units is based on Sevan's patented cylindrical hull design and will be equipped with dynamic positioning capabilities. A three year charter contract not including extension options has already been secured with Petrobras in Brazil for the first new building which is scheduled to deliver in the first quarter of 2015. We're currently bidding on charter contracts for the second new building and expect to secure contracts for both the second and third units prior to their scheduled deliveries in the fourth quarter of 2015 and the third quarter of 2016 respectively.
The Sevan cylindrical hull provides customers with an you attractive and reliable low cost solution that offers increased deck space, better stability, and greater storage compared to other available floating accommodation alternatives. We believe that the floating accommodation market provides an attractive new channel of accretive growth and is a strong complement to Teekay Offshore's existing business segments.
Turning to slide number 5. I'll spend a moment to provide a brief overview of the strong fundamentals we see in the floating accommodation market.
Demand for floating accommodation is already high and is expected to increase further in the coming years. This is particularly true in Brazil and the North Sea where demand is expected to double between now and 2018. In Brazil, the hookup of new offshore production units and maintenance of aging offshore installations are the primary drivers for future floating accommodation demand.
The accommodation units with dynamic positioning capabilities are particularly well suited for the Brazil offshore market as the large number of shipshape FPSOs that require servicing will benefit from floating accommodation with DP capability. The DP capability enables maximum uptime for the gangway between the FPSO and the floating accommodation unit as the FPSO turns or weathervanes around the turret. As the number of FPSOs installed offshore Brazil increases in the coming years, particularly from the presalt region. We expect that future demand for floating accommodation will grow.
In the North Sea, there's a growing shortage of high end accommodation units which are capable of operating in harsh weather conditions. While jack-ups are well suited at low water depth, in deeper water only DP submersible and cylindrical units can operate year round. The majority of offshore insulations in the North Sea were built in the 1970s and 1980s and are now approaching or have passed their original design line.
However, due to enhanced oil recovery techniques, many of these installations are undergoing life extension maintenance and modifications and this has created additional demand for floating accommodation units. The North Sea is also expected to see new floating accommodation demand for hookup work on new developments as well as for decommissioning of old platforms. In addition to floating accommodation unit demand for new units, in the coming years there will also be a requirement to replace an aging fleet of existing units.
The average age of the semisubmersible accommodation fleet is 28 years and many of the older units are approaching the end of their operational life and will need replacing. As shown in the chart at the bottom of the slide, the supply/demand outlook for floating accommodation units appears to be finely balanced and should result in the continuation of high fleet utilization and rates.
Turning to slide number 6. I want to provide an update of the Salamander FSO conversion project. In early July, we completed the conversion of an older shuttle tanker into an FSO unit for Salamander energy, and the unit arrived on the field in the Gulf of Thailand in mid-July.
The charter with the Salamander energy will extent the operational life of the 1993 built shuttle tanker, the Navion Clipper, by at least 10 years and possibly longer if contract extension options are exercised. The unit is currently undergoing field installation and operational testing and is expected to commence its charter in August. After which time, the unit is expected to earn annual cash flow from vessel operations or CFVO of approximately $7 million.
Turning to slides number 7, I'll provide an update on our Remora HiLoad DP unit. Operational testing on this innovative offshore loading technology has been successful to date. And the unit has already completed six loadings from an offshore unit to a conventional tanker.
We have provided a couple of photos of the Hiload test loading operations at the bottom of the slide. And we currently expect operational testing to be completed during the third quarter at which time the unit is expected to commence its 10 year contract with Petrobras in Brazil, retroactive to April 11th. Following commencements of its contract, the you unit is expected to earn annual cash flow from vessel operations or CFVO of approximately $13 million.
Turning to slide number 8. I will briefly update you on the Knarr FPSO project. Since Teekay Corporation took delivery in late June, the unit has been in transit to the North Sea.
Following field installation and testing, the unit is expected to commence a 10 year charter with BG in the latter part of the fourth quarter at which point the unit will be eligible to be acquired by Teekay Offshore. Although the fourth quarter of 2014 continues to be the expected time frame for commencement of the charter contract, this timing is subject to the receipt of Norwegian regulatory approvals along with favorable weather conditions on the journey from South Korea and during subsequent field installation and offshore testing.
Turning to slide number 9, I'll review our consolidated results for the quarter, comparing the adjusted income statement for the second quarter of 2014 to an adjusted income statement for the first quarter of 2014, both of which exclude the items listed in appendix A of the earnings release. Starting at the top of the income statement.
Net revenues decreased by $10.6 million primarily due to lower utilization and higher repair days in the shuttle tanker fleet, lower production from the Voyageur FPSO, the scheduled dry docking of the Dampier Spirit FSO associated with the 10 year extension of its time charter out contract and reduced rates on the extended Pattani Spirit FSO contract. Partially offset by an increase in earnings on the Peranema Sphere FSO. Related to the produced water treatment plant startup during the second quarter.
Vessel operating expenses decreased by $1 million, mainly due to lower repair and maintenance costs on the shuttle tankers and a decrease in crewing expenses on the FPSO and FSO units. Partially offset by an increase related to the HiLoad unit commencing operations in mid-April.
As I noted a moment ago, we will commence recording revenue retroactive to mid-April once operational testing has been completed on the HiLoad unit which is expected later in the third quarter. Time charter higher expenses decreased by $6.4 million primarily as a result of the redelivery in the first quarter of one time charter and shuttle tanker. A decrease in spot in chartering and the dry docking of two time chartering vessels during the second quarter.
Depreciation and amortization expense was consistent with the prior quarter. General and administrative expense increased by $2.3 million, primarily due to higher business development costs related to FPSO tenders including the Libra FPSO project as well as costs associated with the acquisition of ALB. Net interest expense increased by $2.6 million, primary due to interest expense on the $300 million, 6% unsecured bonds we issued during the second quarter, and a full quarter of interest expense on the Norwegian Kroner bonds we issued during the first quarter.
Equity income decreased by $300,000 primarily due to an annual incentive related revenues recognized in the first quarter on the [Etah-jayee] FPSO. Finally, income tax expense decreased by $1.1 million primarily due to lower taxes from our Norwegian and Brazilian entities.
I won't walk through all of slide number 10 which was included in our recent earnings release. However, I you would like to highlight the information in the box at the bottom of the slide.
We generated approximately $40.1 million in distributable cash flow, which when compared to our total distribution payout, resulted in a relatively low coverage ratio of 0.79 times for the second quarter. However, as shown at the bottom of the table, if we adjust for the temporary operational issues related to the Voyageur Spirit FPSO and the unscheduled off-hire of one of the Brazilian shuttle tankers as well as the cash flow timing difference related to the Hiload unit, the Dampier Spirit FSO and the Peranema water treatment plant, our coverage ratio would have been 0.95 times. With the resolution of these issues, we expect the partnership's coverage ratio to return to a level closer to 1 times in the third quarter.
Turning to slide number 11. In addition to the robust pipeline of accretive Teekay Offshore organic growth projects which will deliver over the next few years, the partnership also has a number of dropdown growth opportunities available from our sponsor.
This includes up to five FPSO units which once we offer to the partnership once they're operating under eligible fixed rate contracts. The largest and most near term dropdown is of course the Knarr FPSO and it remains on track for field installation and startup in the fourth quarter of 2014. We expect to receive an offer to acquire a portion of the Knarr FPSO later this year.
Before we turn the call over to questions, I would like to turn your attention to slide number 12, which provides some key information regarding Teekay Group's 2014 Investor Day which is scheduled for the morning of Tuesday, September 30th. The event will take place at the Saint Regis hotel in New York at which time we will provide a detailed presentation on TeeKay Offshore's strategy, financial position and market outlook.
The event will be webcast live for all interested investors and we encourage everyone to mark this date in their calendars and look forward to presenting and meeting with all current and prospective investors.
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)
Your first question comes from the line of Darren Horowitz from Raymond James. Please go ahead.
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Darren Horowitz, Raymond James - Analyst [2]
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Good morning, Peter. Hope you're doing well.
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Peter Evensen, Teekay Offshore Partners LP - CEO [3]
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I am good, Darren, thank you.
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Darren Horowitz, Raymond James - Analyst [4]
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Sure. Had a few questions for you. The first if I could refer back to slide 5 regarding your outlook for the floating accommodation market.
I'm just curious, how confident are you in the magnitude of adjusted supply that you think will get scrapped and are you concerned at all if there's any slippage in the amount of that capacity that possibly could get scrapped that that could have a pretty meaningful detrimental impact on either duration of contract or associated margin with regard to some of those new units getting put to work.
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Peter Evensen, Teekay Offshore Partners LP - CEO [5]
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I'm not concerned, because those units, if you think about these floating accommodation, it's a lot like the hotel business. You have to regularly refurbish them and people want newer units rather than older units. And that's before you get to the aspect of the fact that our units have dynamic positioning as well as they'll have better deck load capacity as well as gear.
So the question really becomes do people want low cost units and because we have workers on-board, the tendency is to want to have the newer units because they have greater efficiency. So there's a real efficiency change here that's taking place. And what you have to remember is some of the earlier floating accommodations, they were moored up and they tended to be on the field for quite a while.
Now, particularly when you're talking about Petrobras, when you're on an existing field with a lot of subsea work, they don't want to moore them and therefore even if they're cheaper it exposes you to a different risk profile if one of the anchors should more or disturb the subsea. As I talked about in the prepared remarks, particularly for FPSOs you want a gangway that will give you an uptime all the time.
The stability of the newer units compared to the older units means you don't have to pull the gangway as often. That's another way of saying that the workers can continue to work and return to the floating accommodation unit. That's why I'm confident.
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Darren Horowitz, Raymond James - Analyst [6]
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Do you have a sense when you think about the economics around some of the new build accommodation units, do you have a sense on unlevered IRR basis what some of the new units could command just on an absolute basis and also the difference between how much more of a premium the new units could get relative to older units?
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Peter Evensen, Teekay Offshore Partners LP - CEO [7]
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We'll be disclosing more of that at Investor Day, particularly the initial contract that we have with Petrobras. But I can tell you that we really like the market because even adjusting for utilization, we see mid-teens unlevered IRRs on this business. So it's a higher business -- it's a higher return business than what we have. But that's for a combination of reasons.
One, because of the Sevan unit we think we have low cost units relative to the competition. And then when you look at the market, you have to actually look at which units are designed in different locations. For example, if you're in the North Sea, people want single rooms.
If you're down in Brazil, they don't demand single rooms. You can go with double rooms. So there's a whole raft of capabilities that go into what is going on or what the rate structure is. Not just what the total bed capacity is.
The other part that I would say is that the market that we're going after is more of a fixed rate term market of six months to up to five years and what we also like about the floating accommodation market is because of the planning that goes in here, we can build a forward book and so for our partnership, we are not only interested in high returns. We're interested in being able to have stability in our revenues, so the ability to book employment one or two years out is what is attractive to our partnership and why we've decided to go into this market, which has the same customers, the same sort of manning that we have on our shuttle tankers or our FPSO.
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Darren Horowitz, Raymond James - Analyst [8]
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Fair enough. I appreciate the color. Last question, shifting over to the Knarr.
Has anything changed with regard to the expected unlevered rate of return there or is it still fair to assume that it should be about 12% to 14% on kind of an average basis?
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Peter Evensen, Teekay Offshore Partners LP - CEO [9]
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Nothing has really changed. I would gear you down to the lower number. But I think it's more important just to think about the enterprise value to EBITDA, because we're getting to the point where we're looking at the cash. So the unit cost's about $1 billion, and it will generate $130 million to $140 million of EBITDA.
We get paid for utilization. So that's quite favorable. And then of course when you figure the unlevered IRR you have to figure out how long it will last and various equipment that we have on. But we're very happy with that multiple that we get on that unit.
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Darren Horowitz, Raymond James - Analyst [10]
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Okay. And just from a --
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Peter Evensen, Teekay Offshore Partners LP - CEO [11]
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So that's about an enterprise value to EBITDA of 7 times. And that's pretty favorable cash on cash.
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Darren Horowitz, Raymond James - Analyst [12]
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Yes, that was going to be my final question. Just thinking about clearing your cost of capital, looking at cash on cash returns, is it fair to assume that somewhere around 11 or 11.5 times or 11% or 11.5% would be about the lowest unlevered rate of return that you would accept for an FPSO project of course based on similar type duration?
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Peter Evensen, Teekay Offshore Partners LP - CEO [13]
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I'm not going to get caught out because competitors read the transcripts of these calls. We always try to maximize the amount we get. Let me just say that.
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Darren Horowitz, Raymond James - Analyst [14]
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Okay. I think that's fair enough. Thanks, Peter. I appreciate it. Have a good weekend.
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Peter Evensen, Teekay Offshore Partners LP - CEO [15]
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Thank you.
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Operator [16]
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(Operator Instructions)
And your next question comes from the line of Michael Weber of Wells Fargo. Please go ahead.
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Michael Weber, Wells Fargo Securities - Analyst [17]
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Hey, good morning, guys. How are you?
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Peter Evensen, Teekay Offshore Partners LP - CEO [18]
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Fine.
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Michael Weber, Wells Fargo Securities - Analyst [19]
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We'll try this again. I apologize. I've got a bad connection, if I drop off, just assume I had a handful of very salient and profound questions for you.
Wanted to go back to the Brazilian potential FPSO with Odebrecht. Forgive me if you guys have given this and I haven't seen it. Can you give a vague sense in terms of capital outlay and where that conversion would actually take place?
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Peter Evensen, Teekay Offshore Partners LP - CEO [20]
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Sure. We're not going to give any specifics on it until we finalize it. But it will be a conversion of an existing Teekay shuttle tanker and we will convert it in Asia and also meet the Brazilian local content requirements that we have on that unit. And it will be an early well test unit and it will have a 12 year charter.
So it will be able to move around. And that sets up I think well with our capabilities. We already have some early well test units down there and so when we finalize, we'll give greater financial data. But we're very happy with the expected returns in line with the questions Darren had.
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Michael Weber, Wells Fargo Securities - Analyst [21]
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Got you. Very helpful. And just along those lines, do you think there are potentially some ancillary opportunities there in terms of shuttles or specifically FAUs for that FPSO in general or is it -- are we getting a bit ahead of ourselves to think about that?
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Peter Evensen, Teekay Offshore Partners LP - CEO [22]
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No. Well, first of all, yes, they will bid a shuttle contract off of that and I think that the interesting question will be -- but it isn't related to that. When we think about shuttle exports, we think about the doubling of Brazilian oil production. So whether it comes out of Petrobras or BG or some of the other partners that are down in Brazil, we see an abundance of shuttle opportunities as well as opportunities for Remora.
And then in our other companies, we ultimately see good opportunities on the conventional side. But on the floating accommodation, on an early well test unit you don't need floating accommodations. It has enough accommodation by itself.
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Michael Weber, Wells Fargo Securities - Analyst [23]
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Got you. Okay. That's helpful. I wanted to shift briefly to the existing pipeline at Teekay which is still pretty robust. One, just wanted to get a sense of how things are shaping up maybe post Knarr, what might be the next dropdown in 2015, whether it's the Banff coming back online or maybe the Hummingbird I would imagine.
Specifically around the Hummingbird, if that asset needs to move to a different field and would need upgrade work, do you think that's something that would be handled directly at done at Teekay or would that be done at the TLO level?
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Peter Evensen, Teekay Offshore Partners LP - CEO [24]
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I think that -- well, yesterday on the Teekay Corporation call, I said that when the contract on the Banff, which is now back up and operating which I'm happy to say, that will get much better by itself on January 2015 and because it's been off station for 30 months, we expect it to stay at least 30 months longer. So then that will be eligible for dropdown around January 2015.
And the Hummingbird, we actually think it will probably stay on the existing field. We're having discussions with the existing partner and -- sorry, with the existing charterer, Centrica and if it does stay on the field we would probably do the upgrade work on the field and which is consistent with life extension work.
And we already know what's required on that. And that way, we would continue to keep pumping. That's the name of the game, if you will.
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Michael Weber, Wells Fargo Securities - Analyst [25]
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Okay.
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Peter Evensen, Teekay Offshore Partners LP - CEO [26]
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The ones we have. Ultimately, when we finish all this conversation on Petrojarl Foinaven with BP, the charterer where we've addressed the operational issues, then we intend to drop that one down as well.
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Michael Weber, Wells Fargo Securities - Analyst [27]
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Got you. That's really helpful.
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Peter Evensen, Teekay Offshore Partners LP - CEO [28]
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All in all, we have a plan to drop down the assets in the next two years.
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Michael Weber, Wells Fargo Securities - Analyst [29]
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Very helpful. And then just one more and I'll turn it over. Specifically around the FAUs. You talked a bit about them.
I don't remember this specifically. Can you talk a little about the cost advantage you guys have with the cylindrical design relative to some of your other competitors in the market and how that might help you guys maybe even in a more competitive environment, need to build that business.
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Peter Evensen, Teekay Offshore Partners LP - CEO [30]
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We think that because --I won't get too specific for competitor reasons, but we have seen the contracts that some of our competitors have put in for their semisubmersible and we know we have a cheaper price. Obviously, those are the ones we're competing against and we like as well our ability to operate in places like Brazil as we have scale efficiencies going forward.
But it isn't just the capital investment. It's also the total service offering that you give and so we realize we're the new-comer coming out but because we have -- we're doing business with existing customers, we think we have that positive leverage effect of extending the Teekay franchise which new people don't always have.
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Michael Weber, Wells Fargo Securities - Analyst [31]
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Okay. Makes sense.
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Peter Evensen, Teekay Offshore Partners LP - CEO [32]
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So it's operating advantages as well as capital advantages. But the other thing is people like the Sevan design.
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Michael Weber, Wells Fargo Securities - Analyst [33]
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Got you. Okay.
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Peter Evensen, Teekay Offshore Partners LP - CEO [34]
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And I'm sure Kenneth will talk more about it at Investor Day. But it has various other efficiencies like good energy usage and things like that. So the operating costs including the fuel.
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Michael Weber, Wells Fargo Securities - Analyst [35]
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Okay. I'll follow up at the Investor Day. Thanks for the time, guys. I appreciate it.
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Peter Evensen, Teekay Offshore Partners LP - CEO [36]
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Thank you.
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Operator [37]
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(Operator Instructions)
And your next question comes from the line of Matthew Philip of Clarkston. Please go ahead.
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Matthew Philip, Clarkston - Analyst [38]
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Good afternoon, guys. Just a follow-up on the flowtells. Brazil the primary market for the Sevan design over the North Sea? And related to that, going forward, is there the potential for Brazilian cabin laws that come into play here potentially?
Because I know they've tried this with the drilling units before. Those are obviously much higher technical spec. Could they potentially domestic shipyards compete more on the flowtells and is that something you see as a risk for the two new buildings.
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Peter Evensen, Teekay Offshore Partners LP - CEO [39]
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We don't see that as a risk because Petrobras has a critical need for these, so they are -- so they don't have the time to develop a local market for it. And so that isn't falling under the local content rules because they're not going to be there forever.
When you have an FPSO, they are more interested in the local content because that's seen as part of the permanent infrastructure. So that's why we went seen those rules necessarily for shuttle tankers, supply boats or for floating accommodation units because you're not there permanently.
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Matthew Philip, Clarkston - Analyst [40]
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Okay. That makes sense. And do you think the North Sea will be a key market for these designs?
I know that the DP spec is useful for the harsh weather environment, but clearly Brazil seems to be the major growth area in general for these sort of assets.
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Peter Evensen, Teekay Offshore Partners LP - CEO [41]
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Yes, I think that they -- yes, I think they will and I didn't mention it but we think Mexico is also -- well, we know Mexico is a great area as well. When you think about all that development that's going to come out with Mexico, or hopefully will come with Mexico, that will be a big area as well. And so that's what we're seeing. Those are I would say the three big regions that we see.
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Matthew Philip, Clarkston - Analyst [42]
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Okay. Great. Thank you.
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Operator [43]
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Gentlemen, there are no further questions at this time. I would like to hand the call back over to our speakers for closing remarks.
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Peter Evensen, Teekay Offshore Partners LP - CEO [44]
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All right. Thank you all very much for listening today and we look forward to giving you much greater detail at Investor Day. Thank you.
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Operator [45]
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Ladies and gentlemen, this concludes the 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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