Q1 2015 Teekay Offshore Partners LP Earnings Call
May 15, 2015 AM EDT
TOO - Teekay Offshore Partners LP
Q1 2015 Teekay Offshore Partners LP Earnings Call
May 15, 2015 / 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
* Kenneth Hvid
Teekay Corporation - Chief Strategy Officer
* Vince Lok
Teekay Corporation - CFO
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Conference Call Participants
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* Sunil Sibal
Global Hunter Securities - Analyst
* Spiro Dounis
UBS Securities - Analyst
* Peter Erick
ERS - Analyst
* Andy Gupta
HITE Hedge - Analyst
* Nick Raza
Citigroup - Analyst
* Michael Webber
Wells Fargo - Analyst
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Presentation
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Operator [1]
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Welcome to Teekay Offshore Partners' first-quarter 2015 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 LP - IR [2]
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Before Mr. Evensen begins, I would like to direct all participants to our website, at www.teekay.com, where you'll find a copy of the first-quarter 2015 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 2015 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 2015 investor conference call. I am 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 $60.6 million, and reported a relatively strong 1.10 times distribution coverage for the first quarter of 2015. For the first quarter of 2015, Teekay Offshore declared a cash distribution of $0.5384 per unit.
Teekay Offshore continued to make progress on several projects during the first quarter that will contribute to cash flow growth in future quarters. In March, the Knarr FPSO successfully achieved first oil, and commenced its charter contract with BG Group at partial rate. We currently expect to complete the acquisition of Knarr from our sponsor, Teekay Corporation, prior to the end of the second quarter. During the quarter, we took delivery of the Arendal Spirit, our first unit for maintenance and safety, or UMS, which is expected to commence its three-year charter contract with Petrobras next month in June.
During the past three months, TOO's wholly owned subsidiary, ALP Maritime, completed the acquisition of the first four of six on-the-water, long-distance towing and offshore installation vessels it agreed to acquire last October. All six vessels were acquired for a non-block price of approximately $220 million, and the remaining two vessels are expected to deliver in the second quarter of 2015.
In mid-April, we successfully completed a $125-million, 8.5% perpetual preferred unit offering, with the net proceeds to be used for General Partnership purposes, including using a portion for the acquisition price of the Knarr FPSO. This is another example of how Teekay Offshore has been diversifying its sources of capital, and reducing its overall cost of capital. Despite lower global oil prices, which have rebounded by approximately 45% since mid-January, we remain encouraged by the level of tendering activity we have seen for new transportation and production requirements in our offshore production and offshore logistics segments, which I'll touch upon more, later in the presentation.
Turning to slide 4, in March the Knarr FPSO, which is currently owned by Teekay Corporation, achieved first oil, and commenced its charter contract at approximately 70% of its full charter rate, pending the completion of certain operational tests. Since that time, Teekay has made steady progress on the commissioning process, including successfully producing and discharging the FPSO's first oil cargo into one of Teekay Offshore's shuttle tankers. And Teekay is now completing the final testing phase, which mainly relates to the start-up of the gas export system. We currently expect to complete the acquisition of the Knarr FPSO prior to the end of the second quarter, subject to the FPSO completing its 72-hour interim performance tests and, therefore, commencement of the full charter rate.
We expect to finance our purchase price of the Knarr FPSO, which is based on a fully built-up cost of approximately $1.25 billion, through the assumption of an existing $780 million long-term debt facility. A combination of vendor financing from Teekay, and new Teekay Offshore units to be issued directly to Teekay parent, and a portion of the approximately $121 million of proceeds from the preferred bond offering we completed last month. We do not currently intend to fund the Knarr acquisition with proceeds from a public equity offering. The Knarr FPSO is expected to generate annual distributable cash flow of approximately $80 million, which we expect will lead to at least a 4% annualized distribution growth in the quarters following completion of the Knarr acquisition.
Turning to slide 5, we've also continued to make progress on other growth projects in our offshore production segment. In early January, the Petrojarl I FPSO arrived at the Damen shipyard in Netherlands, and is currently undergoing required modifications and upgrades totaling approximately $235 million prior to commencing a new five-year contract on the Atlanta field in offshore Brazil. Engineering work has now been completed, and all long-lead items have been ordered. And as you can see from the picture on the top right of the slide, the Petrojarl I has already commenced work on the top-side equipment. We are pleased to report that we have had no HSE incidents to date, and the project remains on track to achieve first oil by mid-2016.
Turning to the Libra FPSO project, work is currently under way at the Jurong shipyard in Singapore, where one of TOO's former shuttle tankers, the Navion Norvegia, is being converted into an FPSO for a total cost of approximately $980 million. Upon completion, the converted FPSO will commence a 12-year contract with Petrobras on the Libra field, offshore Brazil. The vessel is owned through the Partnership's 50/50 joint venture with our Brazilian-based partner. And thus, TOO's 50% portion of the conversion cost is approximately $490 million.
Engineering and construction is progressing well, with approximately 40% of the engineering work completed; and again, we have ordered all long-lead items and major processing equipment. [Hull and] demolition work has been completed with no surprises, and fabrication of top-side equipment and turret commenced in March and April. As you can see from the picture, the bow of the vessel has been removed in preparation for installation of a new external turret mooring system. To date, the Libra FPSO conversion project has also experienced no HSE incidents, and remains on time and budget to achieve first oil by early 2017.
Turning to slide 6, during the quarter Teekay Offshore took delivery of the Arendal Spirit, our first unit for maintenance and safety, which arrived in Brazil on May 2 in preparation for the expected June 2015 start-up of a three-year charter contract with Petrobras, with options to extend for an additional three years. The Partnership's other two UMS newbuildings are currently scheduled to deliver in the first and fourth quarters of 2016. We continue to actively evaluate employment opportunities for these units; however, many UMS tenders have been delayed toward the end of this year.
Our shipbuilding contracts include terms which allow delivery flexibility, so that we can better match the timing of the shipyard delivery with the commencement of charter contracts. We are currently evaluating whether we should push back the delivery timing of these units by up to a year to better coincide with customer requirements.
Turning to slide 7, as I touched upon in my opening remarks, during the past three months Teekay Offshore's wholly owned subsidiary, ALP Maritime, completed the acquisition of four of six on-the-water, long-distance towing and offshore installation vessels that it agreed to acquire last October, with the remaining two vessels expected to be delivered in the second quarter. We are pleased to report that these newly acquired vessels have gotten off to a strong operational start, with the three vessels that delivered in the first quarter recording 100% utilization.
We are currently experiencing strong demand for offshore rig movements with relatively short lead time to short-term charter commencement. The last two contracts we have concluded have an estimated duration of 60 and 100 days, respectively. We are also actively bidding on tows of large offshore units on long-term contracts of 90 to 150 days, and mostly with later commencement one to two years in the future.
Given our customers' need to secure tows well in advance, ALP Maritime expects to build a strong contract backlog for these high-quality vessels over time. It's important to note that, while we are actively securing short- and longer-term opportunities for the six on-the-water towage vessels, we're also planning ahead for the delivery of our four state-of-the-art towage vessels being constructed at the Niigata shipyard in Japan, with the goal of ensuring that they achieve maximum utilization upon their delivery in 2016. With the delivery of all 10 vessels, ALP Maritime will become the world's largest owner of, and operator of, dynamically positioned, long-distance towing and offshore installation vessels, which we think gives us a competitive advantage.
Turning to slide 8, I'll take a moment to focus on recent developments in the external environment. Since the start of 2015, crude oil prices have improved by approximately 45%, with Brent increasing from a low of $45 per barrel to approximately $65 today. This is a supportive trend for production from existing oil fields, particularly as many oil companies have targeted production growth of 2% or higher in 2015, as shown by the chart on the right.
As I've noted in the past, the production part of the offshore value chain is less sensitive to oil prices compared to the exploration phase. Nevertheless, a higher oil price is positive for our customers, and allows existing oil fields to continue producing longer at current levels.
In terms of new project tenders, we do see that the lower oil price environment has resulted in the delay of many near-term projects. However, we can also see that our customers are very focused on preserving and growing future production and cash flow through more cost-effective solutions. We believe this plays well to our Partnership's unique offering of production-related services and strong operational platform, and that we are well placed to help our customers achieve that goal of lowering costs while encouraging new production.
On slide 9, I'll review our financial results for the first quarter of 2015, as compared to the fourth quarter of 2014. For a reconciliation of distributable cash flow to net income, please refer to appendix B of our earnings release and the appendix to this presentation. Starting at the top of the statement, net revenues decreased by approximately $8 million, primarily due to year-end, incentive-based revenues from our FPSO units in the fourth quarter of 2014, and lower utilization in our shuttle tanker fleet, partially offset by earnings from our first three towing vessels that delivered during the first quarter.
Vessel operating expenses decreased by approximately $10 million, primarily due to lower repair and maintenance costs on our FPSO units, some of which is due to the timing of expenditures, as well as the decrease in crew and manning expenses from the FPSO and shuttle tanker fleet. Maintenance CapEx increased by $1 million, mainly due to the delivery of the three towing vessels during the first quarter.
G&A expense decreased by approximately $6 million, primarily due to a one-off business development fee paid to Teekay Corporation during the fourth quarter of 2014 related to the acquisition of the Petrojarl I FPSO, lower business development costs related to our FPSO tenders, and a pension valuation adjustment recorded during the fourth quarter, partially offset by the timing of recognition of long-term, incentive-compensation expenses, which are typically higher in the first quarter of each year.
Our share of distributable cash flow related to our equity accounted joint venture, net of estimated maintenance CapEx reserve, increased by $3.1 million, primarily due to incentive-based revenue received during the first quarter, and lower repair and maintenance costs. Interest expense decreased by approximately $2 million, primarily due to scheduled repayments of various debt facilities, and the expiration of an interest rate swap during the first quarter. Income tax expense increased by $1.5 million, primarily due to a lower tax provision from our Norwegian entities recorded in the fourth quarter of 2014.
Capitalized distributions related to equity financing of newbuildings and conversion [costs] increased as a result of the units issued in the fourth quarter of 2014 to fund installation payments made on our newbuildings and conversions. As a result, our coverage ratio improved to a healthy 1.10 times during the first quarter, up from 0.91 times in the fourth quarter.
Looking ahead to the second quarter, we expect shuttle tanker revenues to decrease by approximately $12 million, of which roughly half relates to the sale of the Navion Svenita and the Randgrid leaving the CoA fleet to commence its conversion to an FSO for the Gina Krog project. The other half relates to temporary reductions resulting from unscheduled [off-hires] for repairs of the Bossa Nova Spirit shuttle tanker and a scheduled drydocking.
Some of these reductions are expected to be offset in future quarters with the ramp-up of new shuttle tanker contracts supporting the Knarr field and the new EnQuest CoA, which we highlighted in our earnings release. In addition, with the anticipated acquisition of Knarr FPSO and the start-up of the Arendal Spirit UMS in late second quarter, we expect the coverage ratio to improve in the second half of the year.
Wrapping up today's call on slide 10, we provide an update of our visible growth pipeline, which is currently comprised of approximately $3.3 billion of accretive projects that will drive future distribution increases. Many of our investors that I've met with recently asked me about the effect of lower oil price on our future growth. And I tell them that we are encouraged by the level of tendering activity that we see for new transportation and production requirements in our offshore production and offshore logistics segments. It's lower than you would expect, but still significant, and enough to satisfy our growth requirements. In addition, and as somewhat of a surprise, we are seeing more opportunities for the acquisition of quality, on-the-water assets with fixed-rate contracts, which Teekay Offshore has executed on in the past.
Finally, our ability to find good, re-employment or conversion of our existing offshore assets is enhanced in the low oil-price environment, as we work with our customers to lower offshore field production costs by using those existing assets rather than building new units. And when you combine those factors with Teekay Offshore's reputation for project execution and efficient operations, I remain confident in the Partnership's ability to secure the necessary growth to sustain future distribution increases.
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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(Operator Instructions)
Sunil Sibal, Global Hunter Securities.
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Sunil Sibal, Global Hunter Securities - Analyst [2]
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Hi. Good afternoon, guys.
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Peter Evensen, Teekay Offshore Partners LP - CEO [3]
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Good afternoon.
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Sunil Sibal, Global Hunter Securities - Analyst [4]
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A couple of questions from me on the next potential FPSO drop-down [Banff]. I think on yesterday's call you indicated that the new contract that you have for that vessel, cash flows increased by $9 million. So could you remind us what's the total cash flows on that FPSO now?
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Peter Evensen, Teekay Offshore Partners LP - CEO [5]
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Yes. The EBITDA on the Banff at the new rates is roughly about $15 million to $20 million a year. So that's the pick-up that we're getting right now.
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Sunil Sibal, Global Hunter Securities - Analyst [6]
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Okay. That's helpful. And then in terms of financing that, would it be fair to assume that Teekay would be willing to take equities similar to the way it's taking for Knarr, for that drop-down financing in the second half, if needed?
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Peter Evensen, Teekay Offshore Partners LP - CEO [7]
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We haven't determined how we're going to complete the financing of the Banff. That depends on market conditions at that time.
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Sunil Sibal, Global Hunter Securities - Analyst [8]
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Okay. And then, in terms of your new deliveries on the towage vessels that you get, is the expectation that you would be basically looking at relatively longer-term contracts of 90 to 150 days on those vessels? Or are they playing a different contracting market?
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Kenneth Hvid, Teekay Corporation - Chief Strategy Officer [9]
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It's Ken here. Essentially, what we are looking is to build a book of contracts going forward. And as you know, typically these tows, the longest tows would be up to about 150 days simply because the tows typically go up from the Far East, [west] Korea, Singapore to Brazil or to the North Sea. Those are typically the longest tows you can get. And the way we are looking at that business is that for the medium term, which is basically the two to three years out in time, we have some of those very large projects that are delivering.
And those, we typically see the [choppers] come into the market ahead of time because they are obviously vitally important that we have the right equipment to tow those out to the installations. And then, really the business model is that in between those jobs, you are looking for short-term opportunities, ad hoc rig moves that are coming up and where we are well positioned to cater for those.
So for the new fleet that we have just taken delivery of, because it was an M&A transaction, obviously we haven't been in a position to build a forward book, but we are responding to the market inquiries that are coming in. And as Peter said, we're really encouraged with the incoming inbound demand for rig moves, which as you can imagine, is quite large in this environment and probably one of the factors we didn't quite factor in. So it's been good, healthy demand. I would say a good start for our new venture here.
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Sunil Sibal, Global Hunter Securities - Analyst [10]
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That's very helpful color. And then just the last one for me on that particular segment; so once you have the full fleet ramped up with 10 vessels, what kind of OpEx would you be incurring on that? And considering if the utilization is not that high, is that a bit of a drag on the cash flow? How should we think about that?
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Kenneth Hvid, Teekay Corporation - Chief Strategy Officer [11]
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No. The OpEx on these vessels, I think right now we're trailing around $6,000, $7,000, which is on some of the older units. And that'll probably go up a bit towards maybe $8,000, $9,000, but that's what we have on those.
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Sunil Sibal, Global Hunter Securities - Analyst [12]
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Okay. That's very helpful. That's all I had. Thank you.
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Operator [13]
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Spiro Dounis, UBS Securities.
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Spiro Dounis, UBS Securities - Analyst [14]
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Gentlemen, just wanted to talk a bit about the preferred issuance if we could. I thought the move made a lot of sense, clear with a lower cost of capital, especially relative to where your yield was at the time. Just wondering if there was a desire to do anything bigger at the time or anything prevented you from issuing more preferred equity. Did you just feel like maybe that level of leverage didn't come down enough?
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Vince Lok, Teekay Corporation - CFO [15]
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Yes. This is Vince here. The preferred market is I guess sort of a smaller equity market than, say, obviously the MLP common market. I think we had launched it at about $50 million to $75 million and we got quite a bit of demand. We ended up upsizing to $125 million. So that's sort of reflective of the demand for that type of market.
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Spiro Dounis, UBS Securities - Analyst [16]
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Got it. That's helpful. And then I was just wondering if you could talk to some of the countercyclical demand that might surprise us over the next few quarters. It sounds like towage is doing well because you've got some equipment coming out of the fields and UMS is in demand because of enhanced oil recovery and maintenance on the producing units as owners stretch the productivity of each field. Are there any other factors that we are missing that kind of sound like that or that might be supportive over the next few quarters?
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Peter Evensen, Teekay Offshore Partners LP - CEO [17]
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I would just simply say that what we're seeing is that a lot of our customers want to work with us on being able to purchase existing assets and then use Teekay's lower operating costs in order to achieve lower costs going forward. So I think that what you're seeing overall is customers, rather than tendering out all the business, are willing to work with a certain group of suppliers in order to lower the costs. And I think that's reflective of a new trend.
And as I said, on some of our existing units, even if they are still out producing on fields, people are coming in and asking us -- hey, when will that unit be available, because we could use it on another field and use its greater production capacity. So that's why some of the value to new customers of some of our existing units is actually enhanced in a low oil price environment. So that's why, as I said, we are seeing some interesting M&A opportunities going forward.
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Spiro Dounis, UBS Securities - Analyst [18]
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Got it. Great. Thanks, guys. Appreciate the color.
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Peter Evensen, Teekay Offshore Partners LP - CEO [19]
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Thank you.
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Operator [20]
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[Peter Erick, ERS].
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Peter Erick, ERS - Analyst [21]
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Thanks for taking the question. So it's important to try to bring down the cost of capital and obviously, there's an awful lot of levers that you could pull for that. Can you talk through some other levers that you've explored? And even just one kind of, call it a simpler one, the bonds are only four-year paper and they are yielding 8.8% at $0.90 on the dollar. Is even getting a credit rating on those something that's helpful? And then just maybe some of the other broader things, just have you considered steps about just maybe, pretty importantly, increasing the size or diversity of the company or could you just talk through levers?
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Peter Evensen, Teekay Offshore Partners LP - CEO [22]
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Sure. Well, first of all, our bonds are not yielding 8%. Those are our perpetual preferred stock that we've put out. When we've issued bonds in the Norwegian market, we've been able to issue it lower down at closer to 5% to 6%. So we don't --
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Peter Erick, ERS - Analyst [23]
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Well, your 6% bonds trade at about $0.90 on the dollar, which is about 8.8% yield to 2019.
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Peter Evensen, Teekay Offshore Partners LP - CEO [24]
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Yes. But that's in the Norwegian market. That's relatively illiquid. So there's a big spread between the bid and offer.
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Peter Erick, ERS - Analyst [25]
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Well that was your high-yield issuance here in the US. The $300 million bond issue.
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Peter Evensen, Teekay Offshore Partners LP - CEO [26]
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No.
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Vince Lok, Teekay Corporation - CFO [27]
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I believe you're referring to the baby bonds that we issued. Is that correct?
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Peter Erick, ERS - Analyst [28]
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The $300 million 6%s of 2019.
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Peter Evensen, Teekay Offshore Partners LP - CEO [29]
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Okay. Yes. Well, that's a possibility that we could go and look and get a rating. But that's nothing that we are looking at in the near-term. It is something we're investigating for the longer term.
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Vince Lok, Teekay Corporation - CFO [30]
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To Peter's point earlier, as you saw, we did issue a Norwegian bond for our other MLP, Teekay LNG Partners, just recently. So that market is open now. It was closed for a few months during the winter. So that's another example where we can access other sources of capital and we have pretty diverse sources of capital available to the Partnership.
And in terms of a rating, we've been able to, as Peter said, access the Norwegian bond market as well as the baby bond market without a rating. And in terms of going forward in the future, given that the Partnership has grown, getting a rating is something we are considering over the long term to further diversify our sources.
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Peter Evensen, Teekay Offshore Partners LP - CEO [31]
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The other thing I would add is that our sponsor, when we've been buying assets from the sponsor like the Petrojarl I, they have been willing to give us seller financing and so that helps us as well.
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Peter Erick, ERS - Analyst [32]
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Okay. All right. Thanks.
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Peter Evensen, Teekay Offshore Partners LP - CEO [33]
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Thank you.
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Operator [34]
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Andy Gupta, HITE Hedge.
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Andy Gupta, HITE Hedge - Analyst [35]
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Good afternoon, guys. Thanks for taking the question. My question's around your distribution growth. I'm looking at the investor day presentation from last year. Can you help us understand how that distribution growth may be changed now? [That made April] the details on 2015 so [2018], in terms of distribution growth per unit as well as the LP unit growth.
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Peter Evensen, Teekay Offshore Partners LP - CEO [36]
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Sure. So I think there was some confusion on the call as well at Teekay Corporation. We haven't materially changed what we showed on that illustrative guidance that we gave at investor day. We are still targeting the same levels as investor day, but as I said in my prepared remarks, some of the projects we had looked at may get it delayed. And therefore, we may need more M&A than we had planned on when we looked at that. But we haven't materially changed what we're looking at.
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Andy Gupta, HITE Hedge - Analyst [37]
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Understood.
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Peter Evensen, Teekay Offshore Partners LP - CEO [38]
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And that relates to TOO as well as Teekay Parent.
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Andy Gupta, HITE Hedge - Analyst [39]
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Got it. So if you do need more M&A, would that affect the LP unit growth count?
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Peter Evensen, Teekay Offshore Partners LP - CEO [40]
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Yes. But without going too much into the model, you would, rather than having as much organic growth, you would have a little bit more M&A and --
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Andy Gupta, HITE Hedge - Analyst [41]
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Sure.
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Peter Evensen, Teekay Offshore Partners LP - CEO [42]
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Push out the organic growth out into future years. I would just emphasize that a lot of the projects we've been working on and when we go out and talk to our customers, they still want to do the projects. They just realize that all of their inputs are going to be cheaper. As they say to me, our drilling is going to be cheaper next year, our subsidy will be cheaper. Probably you can fabricate cheaper because the steel price will be down with low iron ore prices and the high dollar means you can fabricate cheaper in Asia.
So obviously, they have spent a lot of money on licenses, they spent a lot of money on exploration drilling. So they want to go ahead with the project, but not under the original timeframe. That gives us a chance to work with them and say, well, how can we lower the cost on the overall -- on our portion of the overall field development? And that's what every oil company is going through as they re-look at their CapEx, which is how can I do it cheaper and more cost-effectively to raise the return and/or lower the breakeven oil price?
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Andy Gupta, HITE Hedge - Analyst [43]
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That makes sense. And one last question for me is on the new proposal for Teekay taking equity back and the Knarr drop, does that at all change this guidance that was made at investor day? I don't think you'd included the Knarr drop and new equity issuance.
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Peter Evensen, Teekay Offshore Partners LP - CEO [44]
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Probably Teekay will end up with more units. We actually, as I said yesterday, Teekay Corp thinks it's a good investment in Teekay Offshore right now.
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Andy Gupta, HITE Hedge - Analyst [45]
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Sure.
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Peter Evensen, Teekay Offshore Partners LP - CEO [46]
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So we think it's a good investment and up at Teekay parent, we just won't repay as much debt, but on an accretive basis, taking back units and having a lower debt financing cost is actually a good and accretive investment in terms of the cash flow at Teekay parent. However, that's not material.
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Andy Gupta, HITE Hedge - Analyst [47]
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Sure. Understand. Thank you so much of for the answers to all the questions.
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Peter Evensen, Teekay Offshore Partners LP - CEO [48]
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Thank you.
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Operator [49]
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(Operator Instructions)
Nick Raza, Citigroup.
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Nick Raza, Citigroup - Analyst [50]
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Thank you. Thanks very much for taking the call, gentlemen. I had a quick question regarding the actual drop and the financing of the Knarr. Excuse me. So your presentation says that out of the $1.25 billion, $780 million will be assumed debt, possibly use some of the $125 million preferred offering. Could you sort of walk us through what the remaining split is between the vendor financing and units?
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Vince Lok, Teekay Corporation - CFO [51]
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Yes. Vince here. If you look at the total purchase price of about $1.25 billion, assumed debt of $780 million, you're left with about $470 million of equity. And as we indicated before, Teekay parent is committed to take at least $200 million of common units as part of the drop-down. And so for the rest, it's really -- we haven't determined exact split, but part of the preferred offering can be allocated to that and there's vendor financing that the parent has offered for up to $400 million. So the partnership has a lot of flexibility in terms of when to sort of take out the vendor financing.
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Nick Raza, Citigroup - Analyst [52]
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Right.
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Vince Lok, Teekay Corporation - CFO [53]
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So the unit's essentially fully financed at this stage.
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Nick Raza, Citigroup - Analyst [54]
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Fair enough. And could you also talk about some of the terms of the vendor financing? I mean obviously the cash flows are subordinated as a result of there being more debt. I know you don't have to worry about it from a ratings perspective, but just walk us through some of the mechanics of the actual financing terms.
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Vince Lok, Teekay Corporation - CFO [55]
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Well, the vendor financing is fairly simple. It has a coupon of about 6.5%, so that's a fairly straightforward vendor financing.
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Nick Raza, Citigroup - Analyst [56]
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Okay.
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Peter Evensen, Teekay Offshore Partners LP - CEO [57]
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And it allows prepayment without a penalty.
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Vince Lok, Teekay Corporation - CFO [58]
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That's right.
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Nick Raza, Citigroup - Analyst [59]
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Okay. Any thoughts on term?
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Vince Lok, Teekay Corporation - CFO [60]
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We're just sort of rolling it, it's on a 12-month basis, but it can be rolled.
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Nick Raza, Citigroup - Analyst [61]
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Okay. Fair enough. The other question I had was about the towage business. In terms of the on-the-water ships currently, the existing fleet, where are you see most of the activity? Is it taking rigs to drydocks or drydock facilities? Or are you just moving it around within the Golden Triangle? Could you sort of give us a little bit more color on that?
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Kenneth Hvid, Teekay Corporation - Chief Strategy Officer [62]
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It's actually a mix. We've had a couple of moves of all the rigs going out of the Gulf of Mexico. We have a move right now which is coming out of an older rig out of Brazil. We have a new rig that we are moving out from Korea. We have a couple of maiden ships with engine issues that we're bidding on.
So I'll say it's a good cocktail, which is really a function of demand for high-powered [chocks] that can take these on the long hauls. Where these vessels that we have are specially designed because of their large fuel capacity, which is a little bit different from some of the smaller towage vessels, which can't take the very heavy tows and also the anchor handlers, which typically aren't really designed to take the very long tows. So it is a bit of a niche, so you think of it as the bigger units that need a longer tow, that we'll take. But it's really all over the world, but mostly I'll say in Gulf of Mexico, South America and Asia at the moment. We're trying to stay away from the North Sea.
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Nick Raza, Citigroup - Analyst [63]
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And is there a reason you're staying away from the North Sea?
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Kenneth Hvid, Teekay Corporation - Chief Strategy Officer [64]
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Well, in the North Sea you have a lot of short-haul moves where the anchor handlers are typically going in right now and those you have a lot of anchor handlers that can cater for that in the North Sea. So that's a market we'll try to shy away from right now.
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Nick Raza, Citigroup - Analyst [65]
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Fair enough. Last question, guys, I'm so sorry, but in terms of your OpEx for these towage vessels, on a daily basis, does the OpEx bump up for longer voyages or is it just the same?
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Kenneth Hvid, Teekay Corporation - Chief Strategy Officer [66]
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No. It's roughly the same. I mean, we have a crew cost and a maintenance cost, so it doesn't really materially change.
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Peter Evensen, Teekay Offshore Partners LP - CEO [67]
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Although I guess the ones that we acquired just came out of drydock recently.
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Kenneth Hvid, Teekay Corporation - Chief Strategy Officer [68]
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Correct.
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Peter Evensen, Teekay Offshore Partners LP - CEO [69]
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So they may have --
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Kenneth Hvid, Teekay Corporation - Chief Strategy Officer [70]
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So they are a little bit lower, as is typical for any oil vessels that are coming out of drydock. You typically see for the first 6 to 12 months that we are tracking at a lower number.
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Nick Raza, Citigroup - Analyst [71]
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Okay. Thanks a lot, guys.
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Peter Evensen, Teekay Offshore Partners LP - CEO [72]
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Thank you.
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Operator [73]
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Sunil Sibal, Global Hunter Securities.
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Sunil Sibal, Global Hunter Securities - Analyst [74]
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Hi, guys, just have a quick follow up. When you think about the overall fleet profile, it seems like the contract structure is changing a little bit from what it has been historically. And I was kind of wondering, you know, how do you think about leverage in such a situation? Should we expect your target levels to change as you enter, change the contract profile on your portfolio of assets?
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Peter Evensen, Teekay Offshore Partners LP - CEO [75]
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I don't think it will change materially. I mean, we're still, if you look at the contracts and the main part of the business, the FPSOs and the shuttle tankers, that isn't necessarily changing that much; you look at the Libra contract, 12 years, for example. The towage business is still a relatively small part of the business.
And we will have a forward book of revenues that the banks can clearly see that we are building. So and as you've seen, in the past we have been sort of gradually delevering the balance sheet using a little bit more equity, but that can change from time to time. So overall, I wouldn't say it would change materially.
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Sunil Sibal, Global Hunter Securities - Analyst [76]
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All right. That's all I had. Thanks.
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Operator [77]
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Michael Webber, Wells Fargo.
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Michael Webber, Wells Fargo - Analyst [78]
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Hi. Good morning, guys. How are you?
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Peter Evensen, Teekay Offshore Partners LP - CEO [79]
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Good.
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Michael Webber, Wells Fargo - Analyst [80]
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Good. I hopped on a bit late from another call, but I did catch Andy's question around the growth rates at the parent and the implicit growth rates for the daughters. And so the 20% growth rate at the parent and the implicit growth rate for the daughters are still the current target. And it just seems like the mix shift in terms of whether that's organic growth versus M&A.
Peter, my question is, do you get a sense in terms of having set a model (technical difficulty) and/or kind of where, within the next two to three years, you see that falling? Do you think is it a bigger M&A chunk within 2015 or is it more of a 2016 event? Any color there would be helpful and then I've got kind of a follow-up to that.
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Peter Evensen, Teekay Offshore Partners LP - CEO [81]
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Well, as I said, we aren't materially changing what we showed on investor day and we are still targeting the same levels. But I believe that we actually could use more M&A, given the deferral of some of the projects. And if that happens, the M&A will be on-the water assets.
And so that's something that you'll see with the full effect in 2016 rather than later out. And that's just a function of if we are able to complete, then it's actually kind of easier to put in place the financing. You have a better sense of what the cost of the financing is and then you can quickly figure out what the accretion will be of that acquisition, as opposed to having more buffers as we do on organic projects.
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Michael Webber, Wells Fargo - Analyst [82]
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Right. Okay. And that makes sense. As a follow-up to that, is it too early to think about I guess a potential sweet spot in terms of asset size and/or geography? I'm assuming we're talking about larger FPSOs, and correct me if there are other assets that might fall into that? Is that too early or do guys already have something in mind in terms of that, that you would be more likely look at a little bit more closely?
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Peter Evensen, Teekay Offshore Partners LP - CEO [83]
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As you know, we have several verticals, Mike, and I'm not going to get drawn for competitive reasons at what we're looking at. But as I said in my prepared remarks, I'm actually quite surprised at the infrastructure assets that are available and we're much more targeting being able to buy from customers than to buy from competitors.
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Michael Webber, Wells Fargo - Analyst [84]
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Fair enough. Is it safe to say that every vertical would be employed to some degree then?
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Peter Evensen, Teekay Offshore Partners LP - CEO [85]
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No. I don't think so.
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Michael Webber, Wells Fargo - Analyst [86]
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Okay.
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Peter Evensen, Teekay Offshore Partners LP - CEO [87]
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Kenneth did a great job of explaining the towage business. I think we're fine there. We've gone from zero to 10 [vessels] quite quickly. We made that acquisition last year. I think it's a well-timed acquisition. I think we are fine on where we are on the accommodation UMS side of things. So then I think you're just really focusing in on the shuttle side and the FPSO side of things.
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Michael Webber, Wells Fargo - Analyst [88]
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Fair enough. All right, great. Thanks for the time, guys.
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Peter Evensen, Teekay Offshore Partners LP - CEO [89]
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Thank you.
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Operator [90]
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There are no further questions at this time. Please continue.
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Peter Evensen, Teekay Offshore Partners LP - CEO [91]
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Great. Thank you all for all the questions. We look forward to reporting back to you next quarter. Thank you.
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Operator [92]
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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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