Q3 2014 Teekay Offshore Partners LP Earnings Call
Nov 07, 2014 AM EST
TOO - Teekay Offshore Partners LP
Q3 2014 Teekay Offshore Partners LP Earnings Call
Nov 07, 2014 / 05:00PM GMT
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Corporate Participants
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* Unidentified Company Representative
Teekay Offshore Partners, LP
* Peter Evensen
Teekay Offshore Partners, LP - CEO
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Conference Call Participants
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* Darren Horowitz
Raymond James - Analyst
* Michael Webber
Wells Fargo Securities - Analyst
* John Hopkins
Chartwell Investment Partners - Analyst
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Presentation
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Operator [1]
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Welcome to Teekay Offshore Partners Third-Quarter 2014 Earnings Results conference call.
(Operator Instructions)
As a reminder, this call is being recorded. Now for opening remarks and instructions, 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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Unidentified Company Representative, Teekay Offshore Partners, LP [2]
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Before Mr. Evensen begins, I would like to direct all participants to our website at www.teekayoffshore.com, where you will find a copy of the Third-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 Third-Quarter 2014 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, Scott.
Good afternoon, everyone, and thank you for joining us on our Third-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 3 of the presentation, I will briefly review some of Teekay Offshore's recent highlights. The Partnership generated distributable cash flow of $45.2 million in the third quarter, up 5% from the same period of the prior year. The increase is mainly due to the delivery of the three BG shuttle tankers in August and November 2013 and January 2014, respectively, and the delivery of the Suksan Salamander FSO in August of 2014. This was partially offset by the expiration of time charters for three of our existing shuttle tankers since the fourth quarter of 2013.
For the third quarter of 2014, the Partnership declared a cash distribution of $0.5384 per unit. During the quarter, TOO continued to secure growth for both its offshore production and offshore logistics businesses. Last week, TOO's wholly-owned subsidiary, ALP Maritime, agreed to acquire six on-the-water long-distance towing and anchor-handling vessels from a consortium of German KG owners for approximately $220 million.
In early October, Teekay Offshore's 50/50 joint venture with Odebrecht signed a letter of intent with Petrobras for a 12-year FPSO contract, commencing in 2017, for the Libra pre-salt oil field in the Santos Basin in Brazil. The FPSO will be converted from an existing TOO shuttle tanker for a totally fully built-up cost of approximately $1 billion, with TOO's 50% portion being approximately $500 million.
Finally, the Petrojarl Knarr FPSO, which arrived in Norway in September, is anticipated to achieve first oil in December of this year. In September, TOO received an offer from Teekay Corporation to acquire the Knarr FPSO for Teekay Corporation's fully built-up cost of approximately $1.16 billion. The offer is currently being reviewed by the Conflicts Committee of TOO's Board of Directors.
Turning to slide 4, I will provide some additional details on ALP's accretive acquisition of six long-distance towing and anchor-handling vessels. Last week, ALP agreed to acquire six dynamically-positioned, or DP2 vessels, all built between 2006 and 2010 from a consortium of German KG owners for an en bloc purchase price of approximately $220 million. These on-the-water vessels are well known to ALP, which had previously commercially managed these vessels from 2010 to 2012.
Under the purchase agreement, the six vessels will all be acquired by ALP during the remainder of the fourth quarter of 2014 and the first quarter of 2015. However, ALP will have delivery flexibility to provide time to market the vessels for prospective contracts and will benefit from certain performance clauses, which would provide for a reduction in vessel purchase price in the event that earnings over the first year of operations are unable to meet certain minimum thresholds. Combined with ALP's four newbuildings on order, delivering in 2016, this transaction positions ALP as the clear market leader in the long-distance DP2 towing segment, with a fleet of 10 vessels.
We acquired ALP earlier this year with the intention of providing TOO with an additional channel for growth. This transaction complements ALP's existing newbuilding program, and kick starts our ambition to become the premium provider of vessels capable of both high-end long-distance towage and offshore installation and decommissioning work.
Turning to slide 5, I will provide a brief update on the Libra FPSO project. As I noted in my opening remarks, in October our 50/50 joint venture with Odebrecht signed a letter of intent with Petrobras for a 12-year early well test FPSO on the Libra field. The Libra field is currently considered to be the largest oil field in offshore Brazil, containing an estimated 8 billion to 12 billion recoverable barrels of oil.
The contract with Petrobras is expected to commence in early 2017, following the completion and delivery of a new FPSO that will be converted from an existing 1995-built TOO shuttle tanker, the Navion Norvegia. In October, the joint venture signed a contract with Jurong Shipyard in Singapore to complete the conversion project for a totally built up cost of approximately $1 billion, of which our share is half of it. This will be the second FPSO project for Teekay Offshore Partners' joint venture with Odebrecht, and demonstrates the value of this partnership for new offshore business development in Brazil.
The establishment of a site office at the Jurong shipyard is well underway, with many of the project team now on site. With a large portion of the project team coming from our Knarr FPSO project team, we expect to benefit from a significant amount of project knowledge transfer between the two projects.
Turning to slide 6, I will provide a brief status update on the Knarr FPSO. Since arriving in Norway, the unit has been undergoing testing. And I am pleased to report, we have now received our required Norwegian regulatory approvals; and the unit is currently in transit to its field in the North Sea. Following field installation and testing, the unit will commence a ten-year contract with BG. Although December 2014 continues to be our anticipated time frame for commencement of the Knarr FPSO, this timing remains subject to favorable weather conditions during field installation and offshore testing.
In accordance with our omnibus agreement with Teekay Corporation, in September Teekay Offshore received an offer from Teekay Corporation to acquire the Knarr FPSO for its fully built up cost, which is currently estimated to be approximately $1.16 billion. The acquisition, which remains subject to TOO Board approval, is currently being reviewed by the TOO Conflicts Committee. Once the acquisition of the Knarr FPSO is completed, the unit is expected to contribute approximately $70 million of annual distributable cash flow to Teekay Offshore. And will be a key driver for the Partnership, achieving the illustrative 7.5% distribution growth target for 2015 that we provided at our recent Investor Day.
On slide 7, I will review our financial results for the third quarter of 2014, as compared to the second quarter of 2014. You will notice this quarter we've changed the format of our financial results slide to focus more on distributable cash flow instead of net income. For a reconciliation of distributable cash flow to net income, please refer to Appendix B of our earnings release.
Starting at the top of the statement, net revenues increased by $14.7 million, primarily due to the settlement of outstanding claims with the charterer of the Voyageur Spirit; higher utilization of the shuttle tanker fleet; and the commencement of the ten-year charter contract of the Suksan Salamander FSO in August. These were partially offset by the scheduled dry docking of the Navion Saga FSO in the third quarter.
Vessel operating expenses increased by $3.5 million, primarily due to higher repair and maintenance costs on the FPSO units, partially offset by a decrease in crewing expense on the shuttle tanker fleet. Time charter hire expense increased by $2.1 million, mainly related to the scheduled dry docking of two in-charter vessels during the second quarter. Maintenance CapEx expenditures increased by $600,000, mainly related to the commencement of operations for the Suksan Salamander FSO in the third quarter.
General and administrative expenses decreased by $4 million, primarily due to a business development fee paid to Teekay Corporation during the second quarter related to the acquisition of ALP, and higher business development costs to support our FPSO tenders during the second quarter. Our share of distributable cash flow related to our equity accounted joint venture, net of estimated maintenance CapEx, decreased by $1.5 million, primarily from higher repair and maintenance costs for the Itajai FPSO in the third quarter.
Interest expense increased by $1.6 million primarily due to a full quarter of interest expense on the $300 million bonds issued during the second quarter. Income tax expense increased by $1.3 million, primarily due to a full quarter of earnings on the Dampier Spirit, which commenced its new ten-year charter contract extension after completing an upgrade in the second quarter. Capitalized distributions related to equity financing of newbuildings and the conversion costs decreased, mainly due to the delivery of the Suksan Salamander during the third quarter. As a result, our coverage ratio improved to 0.89 times during the third quarter, compared to 0.79 times in the second quarter.
Turning to slide 8, with the reduction in global oil prices over the past few months, it is important to highlight that Teekay Offshore's revenues are generated from fee-based contracts with no exposure to oil commodity pricing. And as a result, the Partnership's business is largely insulated from oil price movement.
As we indicate on this slide, TOO's business is almost exclusively focused on the production portion of the oil value chain, which is much more insulated from oil price-driven cuts in the industry's E&P budget. The main reason for this is the existing production units and the peripheral transportation and storage assets. They continue to operate at relatively lower marginal cost on fields that have already been developed. Even fields which have successfully completed the exploration phase will likely move into production phase over the next few years, even in a lower oil price environment.
In contrast to the exploration part of the oil value chain, which TOO is not really involved with, deals with the development of new oil fields for which expenditure decision can more easily be postponed due to lower oil prices or other profitability factors. The important takeaway here is that the recent decline in oil commodity prices has had no effect on Teekay Offshore's earnings or cash flows.
Wrapping up on slide 9, we provided an update to a slide we presented at our recent Investor Day. Including the six long-distance towing and anchor-handling vessels which will be acquired by ALP, Teekay Offshore's total committed growth CapEx now stands at approximately $3.5 billion. This is another $220 million of growth CapEx above and beyond what was booked only a month ago which, when added to our existing pipeline of visible growth projects, will further contribute to our future increases in the Partnership's distributable cash flow.
Our business development teams in both the Offshore Production and Offshore Logistics are continuing to pursue attractive opportunities for accretive growth. And I look forward to announcing additional TOO growth projects in the future quarters.
Thank you all for listening.
Operator, I am now available to take questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Darren Horowitz, Raymond James.
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Darren Horowitz, Raymond James - Analyst [2]
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Hi, Peter. A quick question for you -- and this seems to be a common theme on a lot of the calls. With regard to your comments around the FPSO market and sensitivity around oil prices, I know that at the Analyst Day you were looking at possibly bidding on three projects in the next 24 months in the North Sea, and maybe another four projects additional in the next two years in Brazil. And I'm just wondering, as you're talking with producers with regard to the current forward curve for oil prices, has anything changed in terms of scale or scope of those projects, or more specifically around timing?
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Peter Evensen, Teekay Offshore Partners, LP - CEO [3]
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No, it hasn’t. In fact, most of the exploration drilling has been done on these projects. On some of the projects we’re engaged in feed studies. I was just on a trip to visit some of our customers and I asked that question and the answer was no. They have spent enough money in the exploration phase that the production phase should go forward. In another words, it’s already in the pipeline.
And so, obviously, people are looking at what can they do to reduce costs as part of the development plan. But that’s something you would expect. But we haven’t found that. And we just got the schedule, if you want to call it, of bids that will probably come from Petrobras, and nothing has changed there either.
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Darren Horowitz, Raymond James - Analyst [4]
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Okay. So, you're still comfortable with the opportunity set over the next five years, maybe looking like 55 new FPSO projects?
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Peter Evensen, Teekay Offshore Partners, LP - CEO [5]
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Yes. I would say some projects that are farther out there we think might be postponed. It isn't a question of how many projects, it's when the projects come. But we still see, from our point of view, that we have more opportunities that fit within our skill sets than we have capabilities.
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Darren Horowitz, Raymond James - Analyst [6]
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Okay. So, as you’re discussing with customers, is it getting to the point where they're starting to talk -- with regard to reducing costs are they starting to talk about a blend between duration and price in terms of what type of contracts you might look at? Because the way that we had always modelled and thought about FPSO returns, cash-on-cash, was somewhere in that 11% to 13%, or maybe 12% to 14% [zip] code. And I’m just wondering if the discussions are happening now where they are starting to feel you out or push you a little bit on price?
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Peter Evensen, Teekay Offshore Partners, LP - CEO [7]
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No. We haven’t changed our parameters for the kinds of returns that we want to have. What we’re seeing is that through the whole supply chain people are saying what can we do to reduce costs going forward. The amount of profitability depends upon the competition. And across the FPSO industry we still see that there is a limited number of players, there is a limited number of -- there is more opportunities for the sets going forward.
So the big question is, can we get the conversion costs to become reduced, can we get down some of the pricing that we have on compressors, on some of the other steel components that are going forward. That’s something you would normally expect in any industry, which is to try to have efficiencies. Some of that has to do with the design -- do they really want all the extra? We’re looking at the sizing of generators, we’re looking at the sizing of compressors, and people are trying to get lower costs and efficiencies through that mechanism.
I think, actually, it sets up pretty well for us because we continue to have units which are rolling over. And what we've seen is the replacement cost of FPSOs has gone up, and that gives us opportunities to re-employ our existing units, which set up quite well for some of the marginal oilfields that people are going to want a produce.
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Darren Horowitz, Raymond James - Analyst [8]
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That makes sense. I appreciate it. Thanks, Peter.
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Operator [9]
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(Operator Instructions)
Michael Webber, Wells Fargo Securities.
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Michael Webber, Wells Fargo Securities - Analyst [10]
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Good morning, guys. How are you? Peter, I wanted to touch base on the ALP acquisition. There's an article out in trade press today around the operator of those assets contesting the sale. I'm just curious as to whether or not that is something new, post announcement, whether that impacts the timeline around that deal. Just any color or commentary around where that deal stands.
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Peter Evensen, Teekay Offshore Partners, LP - CEO [11]
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Okay. To be specific, the existing manager has threatened to sue the sellers of these six vessels that we’re buying. They have a management agreement to manage the ships. But our -- that’s a matter between the sellers and their existing managers. It doesn’t affect us.
So, it’s unrelated to Teekay. We have signed MoAs or purchase agreements with the sellers in order to buy the ships. We’re going through a normal inspection process and I expect this to happen. But obviously they don’t want to lose the management of the six ships.
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Michael Webber, Wells Fargo Securities - Analyst [12]
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Got you, okay. I’ll keep an eye on that. I wanted to touch on the Knarr drop. And you mentioned it's a bid on the parent call, but it’s probably worth going over on the TOO call. With all the chop in the equity and the energy markets, where the question is around the Knarr is the equity portion of that funding.
You mentioned on the Teekay call potentially, you talked about the different leverage you have, and potentially maybe looking at a one- or two-stage drop, and that all the doors are open. But maybe a little bit of color around just how you think about that now. And is it any different than it was a month ago?
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Peter Evensen, Teekay Offshore Partners, LP - CEO [13]
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Yes. Let’s just look at the facts. The acquisition price is about $1.16 billion. We have the ability to borrow $815 million. So, the equity component is $300 million. As we said, our preference would be to drop it in one-time, and Teekay would probably take back some units. So the actual amount of equity that we would need is somewhere around $100 million to $200 million. Teekay could take more if it wanted. Or, as we discussed yesterday, we could drop it in two parts, but that isn’t our preference.
But we have the ability to time out -- or time when we raise the equity. But nothing has changed our strategy, which is Teekay Offshore wants to buy this unit, it’s the natural home of it. And I actually think, as the equity markets calm down, people see that we’re not reflected in -- or we are not exposed to the oil prices, as I said in my prepared remarks, that people will see that this is a good accretive deal, and it’s good for the unit holders. But we do have contingency plans should that not be the case.
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Michael Webber, Wells Fargo Securities - Analyst [14]
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Great. Thank you. That's all I have.
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Operator [15]
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John Hopkins of Chartwell Investment Partners.
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John Hopkins, Chartwell Investment Partners - Analyst [16]
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Hello, Peter. I was wondering if the skill set that you just picked up from the development of the Knarr would appreciably change the conversion cost of the Navion Norvegia.
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Peter Evensen, Teekay Offshore Partners, LP - CEO [17]
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No. First of all, this is the second conversion that we’re going to do at Jurong Shipyard. We did a conversion that resulted in the Itajai FPSO. So, this is the second conversion we do for an FPSO that’s going down to Brazil. We’re moving the people down from the Knarr FPSO, which is a newbuilding. This is a conversion, so we’re seeing the knowledge we had from doing the previous conversion in Jurong and the skill sets of the people that we have on the Knarr.
But the Knarr is a much more complicated FPSO than the Libra will be. The Libra is an early well test. We don’t have the same issues that we do on the Knarr where we have both to take oil, treat the gas, put the gas into a pipeline. We don’t have any of that, that’s involved on the Libra. So, I don’t want to minimize it but it’s an easier kit, if you will, that we’re going to go there. It’s akin to what we’re doing on some of the heavier oilfields that we are already operating on in Brazil.
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John Hopkins, Chartwell Investment Partners - Analyst [18]
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Got it. Thank you. Is it the price of inflation, then, the fact that this is going to be about $1 billion and the Knarr was $1.1 billion?
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Peter Evensen, Teekay Offshore Partners, LP - CEO [19]
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Yes, that's absolutely true. There's been inflation going up. But it's a different kit. There's heaters on it. But, absolutely, we've seen inflation since the three years or almost close to four years since we ordered the Knarr.
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John Hopkins, Chartwell Investment Partners - Analyst [20]
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Thank you very much.
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Operator [21]
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Michael Webber.
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Michael Webber, Wells Fargo Securities - Analyst [22]
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My apologies, I did have one more. During the quarter you had delay in getting the Hi-Load DP under contract. And in the release, Peter, you mentioned additional testing was needed. Do you have a timeframe around when that would go on contract? It's a decent chunk of DCF there. My apologies if you said that somewhere, I missed it.
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Peter Evensen, Teekay Offshore Partners, LP - CEO [23]
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This is a new technology and it’s going to require new testing. It isn’t actually a large acquisition for Teekay Offshore. It’s $60 million. But as the original testing went on, it was discovered that they wanted to see it in other environmental scenarios. So, we’ve agreed to do increased testing.
As Vince said yesterday, we don’t anticipate that -- we’re being conservative and not anticipating that we will get any revenue on it in the fourth quarter. But as a reminder to everyone, this is a contract we signed with Petrobras for 10 years. And we’re still excited about the Hi-Load technology, which has for customers the ability to load a conventional tanker directly from an FPSO and thereby saving the customer, in this case Petrobras and its field partners, a significant amount of money.
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Michael Webber, Wells Fargo Securities - Analyst [24]
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Got you. So, from a modeling perspective Q1 2015 is the best estimate is when that could go on contract?
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Peter Evensen, Teekay Offshore Partners, LP - CEO [25]
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That is right.
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Michael Webber, Wells Fargo Securities - Analyst [26]
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Okay. Thanks.
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Operator [27]
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Thank you.
(Operator Instructions)
There are no further questions at this time. Please continue.
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Peter Evensen, Teekay Offshore Partners, LP - CEO [28]
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Okay. Thank you all very much. We look forward to reporting back to you next quarter.
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Operator [29]
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Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line. And have a great day.
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