Q1 2016 Teekay Offshore Partners LP Earnings Call

May 19, 2016 AM EDT
TOO - Teekay Offshore Partners LP
Q1 2016 Teekay Offshore Partners LP Earnings Call
May 19, 2016 / 04:00PM GMT 

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Corporate Participants
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   *  Peter Evensen
      Teekay Offshore Partners LP - CEO
   *  Kenneth Hvid
      Teekay Offshore Group Limited - CEO
   *  Unidentified Participant
      Teekay Offshore Partners LP

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Conference Call Participants
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   *  Spiro Dounis
      UBS - Analyst
   *  Fotis Giannakoulis
      Morgan Stanley - Analyst
   *  Mike Webber
      Wells Fargo Securities - Analyst
   *  Nick Raza
      Citigroup - Analyst
   *  Wayne Cooperman
      Cobalt Capital - Analyst
   *  Gilbert Creedberg
      EMG Investment Partners - Analyst
   *  Ben Brownlow
      Raymond James - Analyst

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Presentation
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Operator   [1]
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 Welcome to Teekay Offshore Partners' first-quarter 2016 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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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [2]
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 Before Mr. Evensen begins, I'd like to direct all participants to our website at www.Teekay.com, where you will find a copy of the first-quarter 2016 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 2016 earnings release and earnings presentation available on our website.

 I will now turn the call over to Mr. Evensen to begin. Thank you, [Cam]. Good morning, everyone, and thank you for joining us on our first-quarter 2016 investor conference call. I'm joined today by Kenneth Hvid and David Wong, the CEO and CFO of Teekay Offshore Group Limited; as well as Vince Lok, Teekay Corporation's CFO. 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'll briefly review some of Teekay Offshore's recent highlights. The Partnership generated distributable cash flow, or DCF, of $62 million in the first quarter, resulting in distributable cash flow per limited Partner unit of $0.58. Cash flow from vessel operations, or CFVO, generated by the Partnership in the first quarter was $166.1 million, up 22% from the same period of the prior year, driven by the acquisition of the Knarr FPSO in July 2015, and continued high uptime and utilization of our offshore units and fleet.

 For the first quarter, we declared a cash distribution of $0.11 per unit, consistent with the prior quarter, resulting in a strong distribution coverage of 5.16 times in Q1. Over the past few months, we've completed sale leasebacks on two of our remaining conventional tankers to a third party. This transaction allowed the Partnership to take advantage of strong asset prices, and added approximately $30 million to our liquidity, which totaled $336 million at the end of the first quarter.

 During our last earnings call in February, we announced that Teekay Offshore had funding needs of approximately $250 million in 2016, and $90 million in 2017. As I'll detail later in the presentation, I'm pleased to report on the great progress that the Teekay Offshore team has made since then. We're now in a position to tell our investors that we've completed or are nearing completion of a series of financing initiatives which fully address Teekay Offshore's near- and medium-term debt maturities, and fully finance our growth projects through 2018.

 Similar to other companies in the offshore value chain, Teekay Offshore has continued to be proactive during this period of rapid deflation in field development and production costs across the value chain. And has implemented various cost savings initiatives across the organization, which are expected to result in sustainable cost savings of over $30 million per year in G&A and operating costs. Teekay Offshore is also preparing to take delivery of its extensive pipeline of growth projects in 2016 through 2018, which our customers require for their contracted offshore field developments.

 Turning to slide 4, our on the water fleet continues to operate with high uptime and utilization, generating stable and growing cash flows, which are supported by a diversified portfolio of long-term contracts with high-quality counter-parties. The Partnership had a successful first quarter, which allowed us to grow our CFVO by 22% over the first quarter of 2015, despite a challenging macro energy environment. The delivery of several new growth projects in 2015 more than offset the lost CFVO from assets that were redeployed or retired, highlighting the continuity of our business. And we expect CFVO to continue to grow as projects deliver over the next several quarters.

 CFVO from our FPSO fleet grew by over 50% from the first quarter, prior-year, mainly driven by the acquisition of our largest FPSO to date, the Knarr FPSO. The Knarr FPSO is currently operating under a ten-year contract with Shell, formerly the BG Group, on the Knarr oil field in the North Sea. And the start-up of this contract at full rate in June 2016 has more than offset the reduction in revenue from the Varg FPSO, as the unit begins to wind down operations in August after almost 18 years on the Varg field. As a reminder, the first quarter of 2016 results already reflect the fact that the Varg FPSO no longer receives the capital portion of the charter rate hire, effective February 1.

 Our other FPSO units have continued to generate steady cash flows in the quarter, operating with high uptime. With the decline in the oil price, we've seen a change in our customers, who are now more interested utilizing existing FPSOs to develop new oil fields rather than new-build FPSOs, because the lower capital cost of existing FPSOs will result in a lower breakeven cost per barrel.

 Based on field development discussions being held with several oil companies, this gives us confidence that we will re-employ the Varg FPSO on a multi-year contract in the North Sea beginning in 2019. An additional benefit of using existing equipment is that it shortens the time from project sanction to start-up, and reduces project timing risk.

 Turning to our shuttle tanker business, despite the sale or redeployment of several older vessels from our fleet in the last year, and the expiration of the Hydron contract of a [freight in] last year, cash flows decreased only slightly in the first quarter of 2016 compared to the first quarter of 2015. Two of our retired shuttle tankers, the Randgrid and the Navion Norvegia, are currently undergoing conversion into offshore units, namely the Gina Krog FPSO and the Libra FPSO. Which highlights how we've been able to re-purpose older tonnage to generate future CFVO growth.

 In 2015, we commenced the East Coast of Canada shuttle tanker contracts, and have benefited from increased charter rates under several of our contracts. The shuttle tanker market remains tight, with strong underlying fundamentals, and we're encouraged by the level of inquiry we've had for receiving contracts of a [fragment] in the North Sea.

 Our shuttle tanker fleet is nearly sold out for 2016, and driven by a combination of more lifting points and new fields coming on-stream faster than fields are rolling off, we expect global shuttle tanker utilization to continue to be high. With our strong operating platform and leading market positions in the North Sea, Brazil and East Coast Canada basins, we can achieve a high level of fleet utilization and have the flexibility to interchange assets between basins to take advantage of additional growth opportunities.

 Our other segments, which include our FSO, Towage, UMS, and Conventional businesses, grew by 43% in the first quarter of 2016 compared to the first quarter of 2015. This was mainly due to the delivery of our first UMS, the Arendal Spirit, in mid-2015. Our CFVO growth from this new asset was partially offset by the sale of the two conventional tankers in the fourth quarter of 2015, and the sale leaseback of the two remaining conventional tankers in the first quarter of 2016.

 One of the leaseback vessels is currently making a small positive spread on a two-year time charter out-contract, while the other vessel is currently trading in the spot conventional tanker market. We've also received strong inbound inquiry in our towage business, and we expect further growth in this business as we start building a book of contracts for our four newbuildings as they deliver, starting in mid-2016 through early 2017.

 I do have an unfortunate operating incident to report. On April 21, we experienced an incident involving the gangway connecting the Arendal Spirit UMS to an FPSO in Brazil. The gangway of the Arendal Spirit was damaged beyond repair, resulting in the UMS being declared off-hire by its charterer until the gangway is replaced. We received strong support from Cosco Shipyard in dismantling the gangway from a sister ship UMS, which is currently under construction at the yard, and we've now arranged for the gangway to be air-freighted to Brazil this week.

 Turning to slide 5, we've provided an update on our proportionately consolidated run rate 2017 cash flow from vessel operations estimate, incorporating our latest assumptions on the delivery of growth projects over the next two years and the impact of our cost-saving initiatives. CFVO is expected to increase from a combination of various cost-saving initiatives, which are expected to translate into OpEx and G&A cost savings, and the scheduled delivery of various growth projects.

 Our growth projects include: the delivery of the four state-of-the-art long-distance towing and offshore installation vessels during 2016 and 2017; the upgrade of the Petrojarl 1 FPSO and the commencement of its five-year charter with QGEP in the fourth quarter of 2016; the Gina Krog FSO, which is scheduled to commence its contract with Statoil in the first quarter of 2017; the newbuilding Libra FPSO, which is scheduled to commence its 12-year charter contract with a Petrobras-led consortium of major oil companies in early 2017; and the delivery of two of three newbuilding shuttle tankers in 2017 that will operate under 15-year contracts for a consortium of field partners in East Coast Canada.

 These increases will more than offset the cash flow reductions from the Varg FPSO contract termination, the redelivery of the Navion Saga FSO, and the sale of four conventional tankers. We continue to receive strong interest from current and potential customers to utilize the Northrup-compliant Varg FPSO on various oil fields as a low-cost and quick-to-market solution.

 Factoring in all of these initiatives, we're now expecting to generate run rate 2017 CFVO of approximately $850 million, assuming the projects are operating for a full year -- which represents an increase of 25%. This excludes the additional contribution from the third East Coast Canada shuttle tanker, which is scheduled to deliver in early 2018.

 On slide 6, we've provided a summary of the current TOO financing initiatives we're undertaking to address our upcoming funding needs in 2016 and 2017. Since early this year, we've been working on a number of important initiatives involving each of our main sources of capital. This includes new bank facilities, amendments to certain of our existing Norwegian unsecured bonds, and a new preferred equity issuance; all of which are expected to be completed by June 30, 2016.

 Our bank financing initiatives include a new $250 million pre- and post-delivery debt facility to finance our three newbuilding shuttle tankers, which are currently being constructed to service the East Coast Canada contracts; a new $40 million debt facility secured by a fleet of six of our currently unmortgaged shuttle tankers and FSO units; a $35 million add-on tranche to an existing loan facility financing the Samba Spirit and Lambada Spirit shuttle tankers, operating under long-term contract for Shell in Brazil; and a $75 million refinancing of the Petrojarl Varg FPSO.

 In April, we closed the $35 million shuttle tanker add-on tranche, and have received commitments for the new $250 million and $40 million facilities. We've received commitments from a majority of the existing Varg syndicate banks, and expect to secure the remaining commitments for this financing within the next week. Our bondholder initiatives relate to amendments to our existing Norwegian Kroner bonds due in January 2017 and 2018, respectively. Through negotiations with the largest holders of these two bond series, we've reached an agreement whereby the final maturity payments will be extended to November and December 2018, respectively.

 For the 101 equivalent January 2017 bonds, 30% of the issuance will amortize in each of October 2016 and October 2017. And for the 144 million equivalent January 2018 bonds, 20% of the issuance will amortize in January 2018. We've now issued a summons package to all of the holders of these two bonds, to formerly vote on the agreement in early June, which only requires approval from 2/3 of those voting. As of today, bondholders representing more than a majority of the outstanding bonds have already given their undertaking to vote in favor of the proposal, which makes us confident in securing the requisite approval level.

 We're also in advanced discussions with a select group of equity investors for new $200 million issuance of preferred units with a warrant structure, which we expect to finalize in the next few weeks, following the completion of due diligence and documentation. To minimize the effect on near-term liquidity during the first two years, dividends on these new units would be paid in-kind in new common units.

 Finally, we've also reviewed our existing asset base and upcoming capital commitments to free up additional liquidity. In the fourth quarter of 2015, we completed the sale of the two conventional tankers, and in the first quarter of 2016 we completed the sale leaseback of our remaining two conventional tankers, with both initiatives bringing in a combined $60 million of liquidity. In addition, we're in discussions with the shipyard to defer delivery of our final two UMS newbuildings, which would result in the deferral of approximately $400 million of CapEx payments.

 Turning to slide 7, we've prepared a comparative liquidity sources and uses chart for each of 2016 and 2017, to illustrate the cash flow impacts of the initiatives I just discussed on the previous slide, relative to our cash requirements in each of these periods. In 2016, we started the year with approximately $280 million of available liquidity, including all of the financing initiatives expected to be completed by the end of June. We are now forecasting to finish the year with liquidity of approximately $310 million, which would represent an overall funding surplus translating to an increase in liquidity of approximately $30 million in 2016.

 For 2017, including our current financing initiatives, we expect to start and finish the year with liquidity of approximately $310 million, with the expectation we will complete refinancings during 2017 for three loans related to vessels under contracts. We believe the total liquidity of $310 million for Teekay Offshore is adequate, relative to our size and cash flow needs, and is comfortably above our current liquidity covenant level of approximately $165 million.

 On slide 8, we show the expected positive impact of our current financing initiatives on TOO's CapEx and debt maturity profiles. As you can see by comparing the chart on the left, which represents our maturity profile without the current initiatives, with the chart on the right, which is our maturity profile adjusted for the various financing initiatives. These initiatives provide TOO with a liquidity run rate to late 2018, with our growth projects being fully financed, and the scheduled UMS delivery dates and bond maturities deferred.

 In addition, you can also see that we've deferred existing near-term put options on related interest rate swaps. Although we have added to the various maturities in 2019, we're anticipating more normalized equity and energy market conditions at this time, which will provide further sources of funding or refinancing.

 Turning to slide 9, TOO's balance sheet is projected to de-lever over the next three years as a result of the amortization of its secured and unsecured debt, which is primarily serviced with cash from operations. Driven by various growth projects which deliver between 2016 and 2017, TOO's cash flow from vessel operations is expected to continue to grow over this period.

 As a result, we expect our net debt to CFVO to drop by more than a full turn, from approximately 4.5 times in Q1 2016 to approximately 3.2 times by Q4 2018. The combination of lower financial leverage and an improved macro environment for energy, TOO will be in a much better position in late 2017 and 2018 to access the capital markets to refinance its bonds.

 Wrapping up on slide 10, we provide a summary of our three-year pipeline of growth projects, with committed financing now secured. Starting at the top, the delivery dates of our four state-of-the-art, long-distance towing and offshore installation vessels have been pushed out slightly, and are now scheduled to deliver in the second half of 2016 and the first quarter of 2017. Under our contract with the shipyard, we will be receiving payments to compensate us for the delayed delivery. Once delivered, these vessels will be immediately available for towage charters, and we are already starting to build a book of contracts for these vessels.

 The next row down, the timing of the Petrojarl 1 FPSO has also shifted slightly, due to certain customer variation orders and the comprehensive scope of the project. The unit is now scheduled to commence operations in the fourth quarter of 2016, rather than the third quarter. Upon delivery, the unit will operate under a five-year charter contract with QGEP on the Atlanta field in the Santos Basin offshore Brazil.

 Next, the Gina Krog FSO is scheduled to commence its three-year-plus extension options contract with Statoil in the first half of 2017. This unit will operate under a contract with Statoil on the Gina Krog oil and gas field. The FSO unit is being converted from one of TOO's former shuttle tankers, the Randgrid. And work at the Sembawang Shipyard in Singapore is ramping up, with approximately 700 people currently working to have the unit ready to sail away from the shipyard in the fourth quarter of 2016.

 Turning to the Libra FPSO project, the unit is being converted from Teekay Offshore's shuttle tanker the Navion Norvegia at Jurong Shipyard in Singapore, and is a 50/50 joint venture with Odebrecht Oil & Gas, or OOG. The unit will operate on the large Libra pre-salt field in the Santos Basin offshore Brazil, with estimated reserves of 8 billion to 12 billion barrels -- currently considered to be the largest offshore oil field in Brazil. As of April 30, this $1 billion conversion project is approximately 65% complete, and delivery from the yard is scheduled for December 2016, with first oil expected in early 2017.

 While the project remains on budget and is fully financed through an $800 million long-term debt facility, we're currently in advanced discussions with the lenders of the Libra FPSO to insure the continued availability to draw down on this loan, despite the challenges facing our joint venture partner, OOG. As previously announced, in December 2015, the Partnership provided OOG a put/call option, which would have enabled OOG to sell to Teekay Offshore up to an additional 25% equity ownership in the project, as well as a call option to OOG to buy back this interest in January of 2018. On April 25, this put/call option expired without being exercised, which removes this potential use of TOO's liquidity.

 Finally, Teekay Offshore's East Coast Canada shuttle tanker newbuildings remain on schedule for delivery in late 2017 and early 2018. Following delivery, these vessels will replace existing in-charters and one of our older shuttle tankers, which are currently servicing the 15-year-plus-extension option contracts with a consortium of nine oil companies producing oil on three separate East Coast Canada offshore oil fields. TOO is currently the sole supplier of shuttle tanker services for the region. Construction of these vessels are in the initial stages, with steel cutting for the first two vessels scheduled to commence in July 2016.

 As mentioned previously, as part of our financing initiatives, we've now secured commitments from our bank group for a new $250 million pre- and post-delivery debt facility to finance the construction of these vessels. And with the signing of this loan, we will have secured financing for all of our growth projects through 2018. Together, we expect these projects to make significant cash flow contribution -- over $200 million to TOO's annual CFVO, as I talked about earlier.

 Finally, I really want to thank all of our financing partners and stakeholders who have participated in the financing initiatives including, refinancing existing maturities, delaying bond maturities, and committing new funds -- to enable us to complete our growth projects that will increase our CFVO and DCF per share over the next few years. The confidence they've shown in our business will put Teekay Offshore in a stronger and more healthy financial position, since we had to temporarily reduce the equity distributions in order to conserve cash to complete our capital growth projects.

 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 so much.

 (Operator Instructions)

 The first question comes from the line of Spiro Dounis of UBS.

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 Spiro Dounis,  UBS - Analyst   [2]
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 Hey, Peter; hey, Vince. How are you?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [3]
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 We're good, thanks.

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 Spiro Dounis,  UBS - Analyst   [4]
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 Good. First off, congratulations on nearing an end here to closing this gap. Clearly a lot of work has been done over the last quarter, so pretty impressive, from our standpoint. Just wanted to touch first, Peter -- I know you're in the middle of the process -- with the preferred equity. And the color you gave was good on the warrants.

 And if I'm thinking about reasons why maybe the stock traded down this morning, I guess there might be some concerns around dilution. And I realize, once again, you can't say too much. But maybe if you could book-end cost-of-capital ranges, or relative to alternatives, to issuing preferred, to maybe why preferred route was the best way to close most of this gap?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [5]
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 Sure. Well, I think it has to do with investor interest, first of all. There is a investor interest in taking big participations on a preferred level with companies that have steady cash flow. And we've seen that, and obviously we're targeting on the Targa deal. So I would say -- while I can't be drawn on specifics, I would say it's following, basically, the Targa structure. And that included a preferred equity perpetual with a warrant structure.

 So we're in discussions with a number of investors to finalize the terms and conditions. And we expect to move into the due diligence and documentation next week. So that's what gives me comfort that we'll close in mid-June.

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 Spiro Dounis,  UBS - Analyst   [6]
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 Got it. That's helpful. Second question is just around the distribution, when or how that might come back on. It looks like a lot of your cash flows through 2018 are going to go towards de-leveraging. Am I right in thinking that we probably shouldn't expect distribution increase before you sort of reach the target leverage level?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [7]
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 I'm not going to get drawn on when we're going to restore the distribution and increase it. But that remains our plan, as we articulated in December. And what we're doing on the financing initiative side, I think, gives us the opportunity to, one, complete our CapEx, but two, then we don't have any significant CapEx beyond 2017.

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 Spiro Dounis,  UBS - Analyst   [8]
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 Got it, okay. And just last really quick one for me. It sounds like obviously the gap is closed for the time being, and things have been pushed out. Just wondering in terms of the other things you mentioned that you could have been doing, in terms of JVing assets or sale leasebacks or selling assets. For the time being, should we not expect any additional announcements of those actions for the foreseeable future?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [9]
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 Obviously those kind of things take longer. We have had various discussions with parties that have expressed interest in buying some of our assets and/or taking minority stakes in those. So I'm not excluding that. But we would have to have a good use of the cash. When you actually look at selling our assets, that would take away from our cash flow increase, and therefore, that would actually hurt our ability to de-lever. So the combination of our cash flows increasing will allow us to de-lever faster, so that remains our go-to strategy.

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 Spiro Dounis,  UBS - Analyst   [10]
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 Got it, that makes sense. Thanks again, appreciate the color, and congrats.

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [11]
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 So I would just say it's all about maximizing the long-term value, rather than getting short-term. And I think what we've articulated is our financing strategy, which has been supported by the banks, reflects that.

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 Spiro Dounis,  UBS - Analyst   [12]
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 Got it. Appreciate the color. Thanks, Peter.

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [13]
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 Thank you.

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Operator   [14]
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 The next question comes from the line of Fotis Giannakoulis of Morgan Stanley.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [15]
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 Yes, hi, gentlemen, and thank you. Peter, I want to ask about the refinancing of the Varg FPSO. Is the $75 million that you're expecting to get refinancing, subject to a contract? And can you share some information about the repayment of this $75 million, especially until the contract comes in place?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [16]
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 Sure. So the Varg has been on the Varg oil field for 18 years. It was subject to options. And so the actual field isn't producing very much oil, but it's still producing 6,000 barrels of oil a day -- but the charterer so far has decided to close it down. So that means we need to refinance the $100 million coming due in June of 2016. We've been in discussion with that existing syndicate.

 We will reduce the loan to $75 million and put in place an 18-month loan. We reduced the loan because, as you point out, it does not have a contract. But when we looked at the value of the Varg and went out and took third-party valuations, it was worth somewhere between $250 million and $300 million. Which, I can tell you from the discussions we're having on new contracts, would be justified. And therefore, it's become an asset-based loan. But it will be for 18 months, from June of 2016 to December of 2017.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [17]
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 And regarding the deployment of the Varg, what kind of CapEx would you expect that it will require if it goes to a nearby field?

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 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [18]
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 Yes, so hi, Fotis, this is Kenneth. So as Peter said, we are in the middle of the commissioning, and now, we'll have slowly started that up. And we expect the FPSO to permanently leave the field here in early August. And discussions we are on potential new deployments are really ranging from anything from early well test, where you'd need to do minimum operates to something for a longer period where we would be doing both the upgrades to the hull, as well as the top side, all depending on which field we're going on.

 So what we are really focused on, on the Varg FPSO is that it's, as Peter said, built to the [North Star] standards. Which makes it the only unit out there that meets these strict Norwegian standards, which are very difficult to operate for, if you aren't either grandfathered in or you're doing a newbuilding. So Varg is in a unique position on that, having production capacity of over 50,000 -- or 56,000 barrels per day.

 And that's really what we're out there marketing in this lower oil price environment. This is really a unit that can go into that asset production mix, that can lower the price to where we see our customers being prepared to sanction projects. So I can't give you an exact number in terms of what the upgrade is. It's anything from very minimal, to maybe $100 million to $150 million. That's all the (multiple speakers) we're looking at.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [19]
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 Thank you, that's very helpful. And I want to ask about the UMS newbuildings. In your [20th], you were mentioning there is a possibility of cancellation. You didn't talk about cancellation at the beginning of the call, and I was wondering if this is option is not there any longer? Or if you think that there can be a cancellation, even if you have to pay some penalty, or even sale of these newbuildings?

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 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [20]
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 What I can say is that we are in very constructive discussions with the shipyard to defer the delivery of the two UMS newbuildings. But also, due to confidentiality reasons, we cannot really comment on the specifics at this time. But it's clear we have a number of stakeholders here, and we expect what we agreed to is something that is going to be satisfactory to all our stakeholders, bondholders and banks, et cetera. So I can just say that the discussions are very constructive.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [21]
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 Just to clarify, because I (multiple speakers)

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 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [22]
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 The other point to be mindful of is, of course, that the contracts continue -- were entered into by a large seller, and they continue to be non-recourse to Teekay Offshore, as we've pointed out before.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [23]
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 Yes, that's very helpful. Just to clarify, because I think in your previous call, you mentioned that the last vessel was already delayed by one year. Are you talking about a further delay of the last vessel, or you are talking about the second vessel, that you hadn't discussed about?

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 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [24]
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 Yes, both.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [25]
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 Okay, great. That's very helpful. And I also want to ask about your discussions with Petrobras. Obviously there are a lot of rumors about Petrobras and the changes in the government, and the scandal that you mentioned also in your risk factors. Do you have any color that you can give us regarding the counterparty risk, and if there are any thoughts of amending any of the existing contracts?

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 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [26]
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 Yes, I would say we -- first of all, all our assets are also fully utilized by Petrobras, in what I would say is revenue-generating activities. So I think that in itself is a fundamental thing that's very important here, as we look at the different assets that, not only Petrobras, but all oil companies either have a use for, or not have a use for. And our assets are all being fully utilized. So that's really what we first look at.

 The second point is also, which is a question received, is, if we are receiving payment on time. And yes, we have. So obviously, as we are having with customers around the world, we are having discussions about contracts. But they have only been constructive up to this point, and we have not had any amendments to our contracts up to now.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [27]
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 Thank you very much.

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [28]
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 I would just add that, as we've said to investors, that there's been a lot of talk about Petrobras abrogating charters. But all of that is on the exploration side, when all of our assets are contributing to generating cash flow for Petrobras. So that's a different conversation when you're adding to someone's cash flow, rather than subtracting from their cash flow.

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 Fotis Giannakoulis,  Morgan Stanley - Analyst   [29]
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 Thank you very much, Peter. Thank you both.

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 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [30]
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 Thank you.

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Operator   [31]
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 The next question comes from the line of Mike Webber of Wells Fargo.

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 Mike Webber,  Wells Fargo Securities - Analyst   [32]
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 Hey, good morning, guys. How are you?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [33]
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 Good, thanks.

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 Mike Webber,  Wells Fargo Securities - Analyst   [34]
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 I just wanted to, while we're on the subject, just follow up on Petrobras, and maybe just be specific about, I guess, one of the assets. So it would be the FAU, the Arendal Spirit, where you've got that gangway issue. One, can you give a value on the gangway? I can't imagine that it's so expensive. And the fact that it's getting airlifted over makes sense, but I actually had not thought about how you'd get one over there.

 But two, while I'm sure that it's employed in a profitable enterprise, it can always be more profitable. So does the fact that there is now -- it's now off-hire, provide a window for the contract to get renegotiated? And if you can't give me a specific there, is that something that you think -- is there a viable probability that, that could happen, or a possibility that could happen? And how you think about that from a budgeting perspective?

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 Peter Evensen,  Teekay Offshore Partners LP - CEO   [35]
------------------------------
 Sure. I'll take the first part of the question, and then Kenneth will talk about negotiations to extend that contract. So you're right. First of all, it's an insurable event. So we're buying the gangway from the Cosco Shipyard, and it's going to be air-freighted to Brazil this weekend. The Arendal Spirit has departed the field and has moved closer to shore, where we will be installing the new gangway.

 And so we're in close dialogue with Petrobras for the start-up, and as well as to ensure we don't have a repetition of this incident. So all in all, we hope to be back in operation, and of course generating cash, in the next couple of weeks. And Petrobras really likes the contract.

------------------------------
 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [36]
------------------------------
 That's correct, Peter. We actually are very close to finalizing a potential extension of the contract. And without being drawn on the details, which we won't until we conclude the discussions, it is under a plan-and-extend model that is clearly in our interest, obviously, but also works for Petrobras. But we'll be back in due course with more details on it. But we have only received positive feedback on the unit, and that's of course, the reason why we are also discussing an extension.

 All of the features that the unit has, and where it's at. First of all, it's had very high upside, up until the unfortunate incident here. But where we've seen it being used and has added value to the operations is that it has a very large deck capacity and more high-train capacity. So in particular, in some of the heavy-lift operations for on the larger FPSOs, where you take large pieces of equipment off, its proven itself as being very stable and extremely useful in these operations. And that's the feedback we're getting.

------------------------------
 Mike Webber,  Wells Fargo Securities - Analyst   [37]
------------------------------
 Okay.

------------------------------
 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [38]
------------------------------
 And then it's also being used -- as we mentioned before, it had some of these features, and we've actually seen that being used for the hydroblasting, which is a big part of the job when you go out and maintain the FPSOs. So we use produced water, and because we have a lot of tank storage in these monohulls which you don't have on a semi-sub, we're using that to produce the water and basically go out. So its been fully utilized.

------------------------------
 Mike Webber,  Wells Fargo Securities - Analyst   [39]
------------------------------
 Right, no, I guess the question was just, does this provide a window for it to lower the -- bring the rate down? Or does it impact the amend and expense idea? But it seems like that's kind of TBD. I guess one more on this asset, just out of curiosity, the issue with the gangway. I know you're not giving the specifics with what happened with it, but is it in any way unique to the cylindrical design of the asset? Is it something that would have also happened with a ship shape, or is there something that we need to think about with the [Sivan] design around those?

------------------------------
 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [40]
------------------------------
 No, we don't believe so.

------------------------------
 Mike Webber,  Wells Fargo Securities - Analyst   [41]
------------------------------
 Okay. I did want to follow up on another question around the FAU, the additional FAU deliveries. And this is more nuance, and Peter you kind of touched on this. But I just want to be clear. In the deck, the language said that you're in negotiations to push those back. I know those are obviously -- one has been falling off, or I guess it fell off the liquidity side last year. But it's been pushed back to 2019, into 2017, and it seems like it gets relatively [tentative]. I know most of that, if 90%-plus of that CapEx, is due upon delivery, so you really are just pushing back one bullet.

 Is that nuanced language for a specific reason? Or is there any real probability that there is going to be some sort of issue in terms of not being able to push those back? I'm trying to figure out as to why that wouldn't be finalized? And/or what are the major hurdles remaining to actually locking that down?

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [42]
------------------------------
 Well, discussions take time. And as Kenneth pointed out, those shipyard contracts are non-recourse to Teekay Offshore. So I think you can read into slide 8, when we looked at our anticipated maturity profile, and (multiple speakers)

------------------------------
 Mike Webber,  Wells Fargo Securities - Analyst   [43]
------------------------------
 Right, okay. No, that's what I figured, I just wanted to double-check the language. Just to stay on the FPSOs and Odebrecht, you touched on this a bit earlier, but they defaulted on their bonds. Actually, I believe it's two of the entities within Odebrecht. And they didn't exercise the put option, but it's a bit more complex and just, I guess, a simple benefit to the liquidity, your near-term liquidity profile.

 I guess, can you maybe lay out for us or walk us through, one, how you think about some of the existing value at risk associated with that project? And how the foreign ownership restrictions would impact your ability to proceed with or without Odebrecht? And maybe just give us the lay of the land around that process? Because it's certainly something that's a bit more esoteric than some of the business you guys have been focused on in the past. And it seems a bit more complex than simply not exercising the option.

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [44]
------------------------------
 Well, that was Odebrecht that did not exercise the option, and they didn't meet the terms to exercise the option. As you have pointed out, Odebrecht, as well as OOG, which is 80% owned by Odebrecht, they have various financial issues. That has drawn concern from us, as well as from the banks financing the Libra FPSO.

 But what Odebrecht has agreed to do and has already done is, they have put up all of the equity required for this project up front. So we are not at risk that Odebrecht will not fund their portion of the project. And for me, as a joint venture partner, that reduces -- not having to come up with somebody else's cash in a negative event is something that I would see as not being -- that's my biggest risk, and we don't have that risk. So as far as changing the ownership, we don't have any issues as it relates to that. But we have to wait for what's happening at Odebrecht and OOG to play itself out.

 But as far as it relates to the project, it is not affecting the project. The construction is ongoing, it's 65%, and we haven't been affected by Odebrecht going forward. And I just will say that the people that Odebrecht has contributed to the project have been key individuals. So we've been very happy with the contribution that Odebrecht has made to this project.

------------------------------
 Mike Webber,  Wells Fargo Securities - Analyst   [45]
------------------------------
 Got you. And then in terms of any availability of Odebrecht to call back that equity? Either them or their bondholders? I mean, in the first place, (inaudible), if they made them put the option in, and they defaulted on the bond and made that payment. Is there any risk that (multiple speakers)

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [46]
------------------------------
 No, they have prepaid all of their equity. So that's where it is. So we feel good about that, from being a joint venture partner.

------------------------------
 Mike Webber,  Wells Fargo Securities - Analyst   [47]
------------------------------
 Okay, fair enough. I will stop there and get back in the queue, but I appreciate the time, guys. Thank you.

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [48]
------------------------------
 Thank you.

------------------------------
Operator   [49]
------------------------------
 The next question comes from the line of Nick Raza of Citigroup.

------------------------------
 Nick Raza,  Citigroup - Analyst   [50]
------------------------------
 Thanks, guys. Most of my questions were answered. I just had a couple of follow-ups. In terms of the prepaid equity for Odebrecht, does that cover any potential cost overruns as well?

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [51]
------------------------------
 No it doesn't. It just covers the actual amount that they had to put in, that was pre-agreed. But we remain on-budget right now, so we aren't seeing any cost overruns, as we sit here right now.

------------------------------
 Nick Raza,  Citigroup - Analyst   [52]
------------------------------
 Okay. And then my second question is, understanding that you're sort of are in the works for delaying the UMS vessels, is there a cost associated with delaying them?

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [53]
------------------------------
 No.

------------------------------
 Nick Raza,  Citigroup - Analyst   [54]
------------------------------
 Okay. And what should we look towards in terms of positive news in terms of contracting them, besides an oil price?

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [55]
------------------------------
 I think they've been deferred. And so we're concentrating on, as Kenneth said, extending the Arendal Spirit. And that's where we're looking at right now.

------------------------------
 Nick Raza,  Citigroup - Analyst   [56]
------------------------------
 All right, thank you.

------------------------------
 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [57]
------------------------------
 But if you look at the [fixer] as such, I think you read across as probably on the conversation, so you may read that as well. But it's -- as we pointed out before, there's probably some scrapping of older units that looks like is in the works, and that will happen. And we still believe fundamentally that there's a lot of maintenance that needs to be done offshore. Some of that is maybe being timed a little bit differently, but some of those requirements have not gone away on a permanent basis. So it's a timing thing. But as you say, we are all looking at the oil price.

------------------------------
 Nick Raza,  Citigroup - Analyst   [58]
------------------------------
 Fair enough. Actually I did have one follow-up question regarding the shuttle tanker segment in Canada. What percentage of a producer's cost does a shuttle tanker actually represent?

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [59]
------------------------------
 I don't know the answer to that question. What I will tell you is that all nine oil companies agreed that Teekay could do it cheaper than they could do it themselves. So I don't have the field specifics on what the lifting cost is on the East Coast Canada. You could look at Wood MacKenzie, or whatever, and get that data.

------------------------------
 Nick Raza,  Citigroup - Analyst   [60]
------------------------------
 Okay. Thanks, guys, that's all I had.

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [61]
------------------------------
 Thank you.

------------------------------
Operator   [62]
------------------------------
 The next question comes from the line of Wayne Cooperman of Cobalt Capital.

------------------------------
 Wayne Cooperman,  Cobalt Capital - Analyst   [63]
------------------------------
 Hey, guys. I just want to know how I get involved with these discussions for preferred equity. Given that I'm a relatively large shareholder, I'd be interested in participating.

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [64]
------------------------------
 Okay, well, give me a call afterwards, Wayne.

------------------------------
 Wayne Cooperman,  Cobalt Capital - Analyst   [65]
------------------------------
 Sure.

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [66]
------------------------------
 Okay?

------------------------------
 Wayne Cooperman,  Cobalt Capital - Analyst   [67]
------------------------------
 Yes.

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [68]
------------------------------
 Good, thanks.

------------------------------
Operator   [69]
------------------------------
 The next question comes from the line of [Gilbert Creedberg] of EMG Investment Partners.

------------------------------
 Gilbert Creedberg,  EMG Investment Partners - Analyst   [70]
------------------------------
 Thank you. Both of my questions were answered in prior commentary. So I appreciate your time, thank you.

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [71]
------------------------------
 Thank you.

------------------------------
Operator   [72]
------------------------------
 The next question comes from the line of Ben Brownlow of Raymond James.

------------------------------
 Ben Brownlow,  Raymond James - Analyst   [73]
------------------------------
 Hi, Peter, congratulations on all of the financing initiatives. On the cost reduction plan of $30 million, how far along are you to fully realizing that? Just some color on the timeline? And is that weighted more towards the OpEx side?

------------------------------
 Kenneth Hvid,  Teekay Offshore Group Limited - CEO   [74]
------------------------------
 We are pretty far on that. This is Ken here. I'd say out of the $30 million, it's probably a little bit more heavy-weighted on the G&A side now. But we see more we can get on the OpEx side going forward for that. It needs to be worked on, so we make sure that it's actually sustainable. But we are very close on the $30 million, and we expect to go beyond it, and will report back in that in future quarters.

------------------------------
 Ben Brownlow,  Raymond James - Analyst   [75]
------------------------------
 Okay. So that was pretty notable, already realized in the first quarter, in terms of just kind of modeling purposes, and how we should think about that on a quarterly run rate?

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [76]
------------------------------
 No, there are some one-offs that you have to pay, as people are made redundant. So I wouldn't model in the full $30 million until Q4.

------------------------------
 Unidentified Participant,  Teekay Offshore Partners LP   [77]
------------------------------
 Yes, we would have to start it in Q3/Q4, and then full realization would happen in 2017.

------------------------------
 Ben Brownlow,  Raymond James - Analyst   [78]
------------------------------
 Right. Very helpful, thank you, guys.

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [79]
------------------------------
 Thank you.

------------------------------
Operator   [80]
------------------------------
 Next question comes from the line of Mike Webber, Wells Fargo.

------------------------------
 Mike Webber,  Wells Fargo Securities - Analyst   [81]
------------------------------
 Hey, guys, thanks. I just wanted to hop back on, just to clarify something, Peter, around delaying the [EMS] vessel. There is a carry cost associated with that, correct?

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [82]
------------------------------
 No.

------------------------------
 Mike Webber,  Wells Fargo Securities - Analyst   [83]
------------------------------
 Is that something that was --?

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [84]
------------------------------
 Not unless we take delivery with it. Not unless we take delivery.

------------------------------
 Mike Webber,  Wells Fargo Securities - Analyst   [85]
------------------------------
 Okay. So there's a cost if you push the delivery back, it's like 5% to 6% of the remaining CapEx in terms of carry. But you don't take delivery, you're saying there's no walk-away fee or anything like that?

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [86]
------------------------------
 I answered the question. I'm not answering any more.

------------------------------
 Mike Webber,  Wells Fargo Securities - Analyst   [87]
------------------------------
 Okay, thanks, guys.

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [88]
------------------------------
 Thank you.

------------------------------
Operator   [89]
------------------------------
 There are no further questions in the queue at this time. Please continue, Mr. Evensen.

------------------------------
 Peter Evensen,  Teekay Offshore Partners LP - CEO   [90]
------------------------------
 All right. Thank you all very much. We made a lot of progress this quarter, in particular on the financing side. And as Kenneth said, there's also a lot of work going on the operating side. And so we look forward to reporting back to you next quarter, and of course, giving you an update in the interim on the completion of the financing initiatives. Thank you all very much.

------------------------------
Operator   [91]
------------------------------
 Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line, and have a good day.




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