Q2 2016 Teekay Offshore Partners LP Earnings Call
Aug 04, 2016 AM EDT
TOO - Teekay Offshore Partners LP
Q2 2016 Teekay Offshore Partners LP Earnings Call
Aug 04, 2016 / 04:00PM GMT
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Corporate Participants
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* Ryan Hamilton
Teekay Offshore Partners LP - Manager, Finance and Investor Relations, Teekay Corporation
* Peter Evensen
Teekay Offshore Partners LP - CEO
* Kenneth Hvid
Teekay Offshore Group Limited - CEO
* David Wong
Teekay Offshore Group Limited - CFO
* Vince Lok
Teekay Offshore Partners LP - CFO of Teekay Corporation
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Conference Call Participants
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* Michael Webber
Wells Fargo Securities, LLC - Analyst
* Fotis Giannakoulis
Morgan Stanley - Analyst
* Spiro Dounis
UBS - Analyst
* Wayne Cooperman
Cobalt Capital Management, Inc. - Analyst
* Nick Raza
Citigroup - Analyst
* Oliver Corlett
4th Street Capital - Analyst
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Presentation
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Operator [1]
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[This is] the Teekay Offshore Partners' second-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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Ryan Hamilton, Teekay Offshore Partners LP - Manager, Finance and Investor Relations, Teekay Corporation [2]
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Before Mr. Evensen begins, I'd like to direct all participants to our website at www.teekayoffshore.com, where you will find a copy of the second-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 second-quarter 2016 earnings release and earnings presentation, available on our website.
I will now turn the call over to Mr. Evensen to begin.
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Peter Evensen, Teekay Offshore Partners LP - CEO [3]
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Thank you, Ryan. Good afternoon, everyone, and thank you for joining us on our second-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 $46 million in the second quarter, resulting in distributed cash flow per limited partner unit of $0.42. Cash flow from vessel operations, or CFVO, generated by the Partnership in the second quarter was $144 million, up 8% from the same period of the prior year. For the second quarter, we declared a cash distribution of $0.11 per unit consistent with the prior quarter, resulting in a strong distribution coverage for the quarter.
I'm pleased to report that in June 2016 the Partnership completed $600 million of financings and other initiatives announced during our previous earnings call in May.
As I'll detail later in this presentation, Teekay Offshore has now secured debt financing for all of its existing growth projects, and with these financing initiatives we've also addressed all of our near- and medium-term debt maturities. As at June 30, 2016, the Partnership had total liquidity of $421 million.
As part of the financing initiatives completed in June, our subsidiary, Logitel, cancelled the shipyard contracts for the two remaining units for maintenance and safety, or UMS, which had been under construction in China.
On a related note, I'm pleased to report that our existing UMS, the Arendal Spirit, went back on-hire with Petrobras in early July, following the replacement of its gangway, which suffered extensive damage in late April.
Turning to slide 4, our on-the-water FPSO and shuttle fleets continue to generate stable and growing cash flows, supported by a diversified portfolio of long-term contracts with high-quality counterparties. And, with the exception of the Arendal Spirit, we had high uptime and utilization in our operations during the second quarter.
The macro energy environment remains challenging, but year on year we've effectively managed to offset reductions in cash flows from some assets that were redeployed or retired with new growth projects, which highlights the benefit of our fixed-rate contract portfolio.
Over the next several quarters, we expect the Partnership's CFVO to continue to grow as current projects deliver. CFVO for our FPSO fleet in the second quarter of 2016 was 50% higher than what we generated in the second quarter of 2015, mainly due to the acquisition of the Petrojarl Knarr PFSO in early July of 2015.
The Knarr FPSO is currently operating on the Knarr oil and gas field in the North Sea under a 10-year contract with Shell, formerly the BG Group. This has more than offset the reduced cash flow resulting from the decommissioning of the Varg FPSO during the second quarter, which ceased oil production in July after almost 18 years on the Varg oil field.
Since February 1, 2016, the Varg FPSO has been earning only the OpEx portion of its charter hire as part of the curtailment of operations, and at the end of July 2016 decommissioning of the Varg FPSO was complete, and the unit is now in lay-up at the Rosenberg yard in Stavanger, Norway, awaiting its next project.
We've continued to receive inbound enquiry from customers expressing interest in utilizing existing on-the-water FPSOs, as it is a more cost-effective way to develop new offshore oil fields compared to newbuildings, due to the lower capital cost of existing FPSOs, which reduces the field's breakeven per-barrel-day cost of production to a level at which field development can occur in today's lower oil price environment. We're having field development discussions with several oil companies. These discussions give us confidence we'll be able to successfully redeploy the Varg FPSO on a new multi-year contract in the North Sea.
Looking at our shuttle tanker business, cash flows have remained relatively steady in the second quarter of 2016 compared to the same quarter of 2015, despite the sale or redeployment of several older vessels in our fleet and the expiration of the Heidrun contract of affreightment in 2015.
Reduced cash flows from certain contracts were generally offset by the commencement of the East Coast Canada shuttle tanker contracts, other new contracts of affreightment, and increased charter rates under certain other contracts.
The shuttle tanker market remains tight, with strong underlying fundamentals, and we're encouraged by the level of enquiry we've been receiving on our contracts of affreightment service in the North Sea. Driven by a combination of more lifting points and new fields coming onstream faster than fields are rolling off, we expect global shuttle tanker utilization to continue to be high.
CFVO from our other segments, which include our FSO, towage, UMS and conventional tanker businesses, were down in the second quarter, largely due to the Arendal UMS being off-hire for 71 days -- i.e., most of the second quarter -- following damage to its gangway in late April, which I detailed at the opening of this call and on our earnings call in May.
In addition, during the fourth quarter of 2015, we sold two of our conventional tankers and also completed the sale-lease back of our two remaining conventional tankers in the first quarter of 2016, which resulted in a reduction in the cash flows generated by this segment.
Charter rates and utilization in our towage segment were lower in the second quarter of 2016 compared to the same period of 2015. However, moves in the drilling rig space continued to drive new towage opportunities and enquiry, and recently our towage business was awarded a long-distance newbuilding FPSO towage contract requiring two DP2s -- towage vessels, which will commence in the second half of 2016.
Turning to slide 5, we've provided an overview of the financing and other initiatives completed by the Partnership at the end of June. This includes $400 million of new bank financings and refinancings; extending the maturities on two of our Norwegian bond series to the end of 2018, with some amortization payments being made in 2016, 2017 and 2018; $200 million of new preferred and common equity issuances; and the cancellation by our subsidiary, Logitel, of approximately $400 million of future CapEx payments related to the two UMS units under construction; and the sale and lease back of our remaining conventional tanker assets.
Our finance team, assisted by multiple financial institutions, worked hard over the last 6 months and did a great job of sourcing and coordinating all of these financings. And while I want to assure our investors that it was certainly not pleasant to raise equity at these depressed price levels, we believe it was the right thing to do, because we've reduced the Partnership's financial risk at a time of great macro uncertainty in the energy space, and in particular the offshore space.
These initiatives, together with expected operating cash flow and previously arranged debt facilities, are expected to cover all of our medium-term liquidity requirements and fully finance all of Teekay Offshore's $1.6 billion of committed growth projects. And the completion of our growth projects will safeguard our cash flow and future for the next several years, as well as position us to be part of the energy rebound, which is in the interests of all of our stakeholders -- investors, customers, suppliers and employees.
Turning to slide 6, a slide we showed you last quarter but I think is worth revisiting. TOO's balance sheet is projected to de-lever over the next 3 years as a result of the amortization of its secured and unsecured debt, which will primarily be serviced with cash flow from operations.
Driven by various growth projects which deliver between mid-2016 and 2017, TOO's cash flow from vessel operations is expected to continue to grow over this period, and as a result we expect our net debt to CFVO to drop by almost two full turns, from 4.9 in Q2 2016 to approximately 3.1 in Q4 2018.
Based on the combination of lower financial leverage and what we hope will be an improved macro environment for energy, TOO will be in a much better position in 2017 and 2018 to access the capital markets to refinance its bonds.
Turning to slide 7, we've provided an updated summary of our 3-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 first quarter of 2017. Under our contract with the shipyard, we will be receiving cash payments to compensate us for lost revenue resulting from the delayed delivery. Once delivered, these vessels will be immediately available for towage charters, and we're already starting to build a book of contract for these high-spec vessels.
In the next row, the timing of the Petrojarl I FPSO unit has also shifted, due to a larger scope of work required relating to field-specific requirements and the age of the unit. The unit is currently scheduled to arrive at the field in the first quarter of 2017 rather than the fourth quarter of 2016, based on the scope of work remaining. Upon delivery, the unit will operate under a 5-year charter contract with QGEP as the operator of the Atlanta Field in the Santos Basin, offshore Brazil.
Next, the Gina Krog FSO conversion project is on schedule to be completed in the first half of 2017, at which time it will commence its 3-year-plus extension option contract with Statoil on the Gina Krog oil and gas field in the North Sea. The converted FSO unit is built around the hull of one of TOO's former shuttle tankers, the Randgrid, with conversion work taking place in Singapore.
The Libra FPSO conversion project, which is also using one of Teekay Offshore's former shuttle tankers, is currently underway at the Jurong Shipyard in Singapore. This newly-converted FPSO unit, which is owned through the Partnership's 50/50 joint venture with Odebrecht Oil and Gas, or OOG, will operate on the large Libra pre-salt field in the Santos offshore basin, with estimated reserves of 8 to 12 billion barrels, and currently considered to be one of the largest oil fields offshore Brazil.
As of June 30, this $1-billion conversion project is just over 70% complete, and delivery from the yard is scheduled for December 2016, with first oil expected in early 2017. The project remains on budget and is fully financed through an $800 million long-term debt facility.
Finally, construction is now commenced on our East Coast Canada shuttle tanker newbuildings, which are scheduled to deliver between late 2017 and early 2018. Following delivery, these vessels will replace existing shuttle tankers we have in-chartered, and one of our shuttle -- older shuttle tankers which are currently servicing 15-year, not including extension options, contracts with a consortium of nine oil companies producing in the East Coast Canada offshore basin. TOO is currently the sole supplier of shuttle tanker services for this region.
Construction of these vessels is in the initial stages, with steel cutting for the first vessel performed in June this year. At the end of June 2016, we completed a new $250 million facility to finance the construction of these vessels. In combination, the projects listed on this slide are expected to add approximately $200 million of new CFVO to TOO's annual run rate.
Wrapping up, on slide 8, with the delivery of our existing growth projects and realization of ongoing G&A and operating cost savings initiatives, we expect to generate approximately $850 million of annualized run rate 2017 CFVO, which assumes the projects are operating for a full year. This represents an increase of 25% over the Partnership's 2015 run rate CFVO. And with the completion of our recent financing initiatives, Teekay Offshore now has the financial runway to complete its existing growth projects and continue to further strengthen its balance sheet.
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). Michael Webber, Wells Fargo.
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Michael Webber, Wells Fargo Securities, LLC - Analyst [2]
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Peter, just a handful of questions. I wanted to start with the Varg -- you commented earlier, it's on kind of a breakeven contract, sitting in Norway. You recently put some leverage on that.
I'm just curious as to how -- just how that sequencing worked, and whether we should view the incremental debt you guys are able to put on the Varg as kind of an indictment of the residual value that the lenders see in the asset, or were there kind of changes to the employment profile following securing that debt? I know it wasn't a ton of leverage. I want to say it's about 30%. But, just curious about how that worked in general.
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Peter Evensen, Teekay Offshore Partners LP - CEO [3]
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Sure. So, we had -- the Varg FPSO had been financed by banks and was more of a cash flow-based loan, given that it was on -- to Talisman in the -- on the Varg oil field. And we went to our existing lenders as part of the financing initiatives and said, we would like to extend the loan, i.e. refinance, at a lower amount. And they -- so, it's more of an assets-based loan at a relatively low loan-to-value.
And they were willing to give us $75 million, which we put together on an 18-month facility. Because they know that there's an inherent value in the Varg FPSO that's far greater than $75 million. And then, when we get a new contract for the Varg FPSO, we plan to refinance that as well as any upgrades that are required for the existing contract. But then we'll return to a cash flow-based loan against a long-term contract.
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Michael Webber, Wells Fargo Securities, LLC - Analyst [4]
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Got you. Okay. That's helpful. Just to stick with the FPSOs, earlier in the year, with the Libra, there were some -- I'm trying to think of the right adjective, but [you] thought there were -- there was an option that was put in place with your JV partner that ended up not getting exercised, but the segment of Odebrecht defaulted on some bonds. I'm just curious as to where that process or situation stands now, aside from the fact that they still need the asset.
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Peter Evensen, Teekay Offshore Partners LP - CEO [5]
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Yes. Well, it's no secret that our joint venture partner, OOG, had -- has some financial distress. They are in negotiations with some bondholders on one of their facilities. And so, as part of that, they wanted the ability to sell half of their 50% venture to us, with the option to buy it back. We gave them that option as part of what was going on. But in the end, they didn't utilize that option, and that option just expired.
So, right now, they have paid in all of their equity on the project. We've paid in all of our equity. And so, now there's -- it's just the debt financing. And so, that was part of our work going on. So, the banks that are financing the projects are supportive, but they are rightly concerned with the financial strength of joint venture partners, including Teekay Offshore.
And that's why our completion of our financing initiatives was very important to reassure the Libra banks who were providing $800 million against a long-term contract with Petrobras, that the project would be completed. But now, all the equity's been paid in, so -- but we still rely upon Odebrecht, who's a good joint venture partner, to help us with the construction. And their personnel, together with Teekay Personnel, are doing a great job of building that unit.
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Michael Webber, Wells Fargo Securities, LLC - Analyst [6]
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(Inaudible) --
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [7]
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And that's really the key point. I mean, the -- [Mike], the project is progressing well. We are more than 70% complete on this. It's on time; on budget. And I think that's where everybody's -- all stakeholders are focused now -- the banks as well as the customer, obviously, who was keen to get the unit on the field.
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Michael Webber, Wells Fargo Securities, LLC - Analyst [8]
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Right. So, the equity's in, and the risk of an incremental capital call seems to be off the table. So, from this point, you view it as more or less kind of -- I guess that aspect of it is more or less de-risked?
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Peter Evensen, Teekay Offshore Partners LP - CEO [9]
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I never say that, as it relates to offshore --
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Michael Webber, Wells Fargo Securities, LLC - Analyst [10]
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Fair enough.
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Peter Evensen, Teekay Offshore Partners LP - CEO [11]
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Projects. But I -- but, as you hear from what Kenneth's saying, who works with it day-to-day, that we're relatively confident in that project.
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Michael Webber, Wells Fargo Securities, LLC - Analyst [12]
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Okay. That's fair. Just one more from me, and I'll turn it over. And Peter, this is just kind of a higher-level question. But you guys had a pretty successful quarter, just in terms of capital fundraising in general, kind of taking the wolf from the door.
I'm just curious how you think about -- conceptually, how you think about your cost of capital, and specifically in the equity -- I mean, as you well know, there's a big portion of the marine space that looks at NAV as kind of the barometer as to whether or not it's accretive to raise equity or not.
[TOO]'s a vehicle that's historically traded on a yield basis, and has had a pretty attractive -- a more attractive cost of capital. At what point do you transition away, or did you ever really look at -- and transition away from looking at, is this equity deal accretive on a NAV basis, while we're kind of scuttling along the trough here, to looking at it on a kind of pro forma yield basis, saying, okay, once we get through these deliveries, and when you get through these bond refis, we're going to be raising distribution again, and we want to make sure this is accretive on that basis. So, kind of -- well, how do you transition back from, kind of, all hands on deck, to managing it on a go-forward basis?
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Peter Evensen, Teekay Offshore Partners LP - CEO [13]
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Okay. So, that's a big question. But let me answer it by saying, I don't think things have realistically changed. We reduced the distributions in December because we saw that that using that money, that we weren't paying out to our distributions, which was a very hard decision -- in the end, we will end up with higher DCF, or distributable cash flow, per share, by -- because that will be our cheapest form of capital. And we thought that that dislocation in the MLP space, caused by the low oil prices was going to last for a considerable time.
That looks to be what has happened now. Obviously, none of us know exactly where oil prices are going to be. But I think -- we have said that that will be our cheapest form of capital, and we had to change our financing strategy for a while.
Our strategy is, we told our investors when we raised the $200 million this last quarter, is to firm up our balance sheet, de-lever, and restore, and increase our distribution. So, I believe that Teekay Offshore will begin to trade on its yield basis going forward. Then we can start to ask about what the yield will be of MLPs going forward, and that'll be dependent on the growth rate.
But as it stands right now, we're not looking at growth because we are selling at a distressed price, below what we consider our inherent value, and that's an inherent value based on NAV as well as a higher value based on our ability to pay out debt.
What we are changing, and I think going forward, is that rather than run at a higher level of debt which was 4.5 to 5 times debt to EBITDA, which would have promoted a higher equity payout, we have committed to run at a much lower distribution or debt level, which is 3 to 3.5 times. So, that'll mean that projects are not as accretive going forward. But what it will also mean is that the distributions will be more sustainable going forward.
So, yes, we're going to have to take down the financial risk. But what have we seen in the energy market, which is that it's a repeat of 1986. Oil prices went down 70%. But what I can see is that customers are going to need our units and Teekay's operations, because we can operate FPSOs and shuttle tankers much cheaper than our customers can. And as they come out of it, they're much more focused on return on invested capital. So, our ability to own and operate infrastructure assets, I think, puts us in a good position.
So, a lot of -- I'll go one step further and say, a lot of people have asked me, gosh, you got caught with a lot of growth. But the reality is, if you look 3 or 4 years going forward, Teekay Offshore will be in a better position by having these multiple-year contracts that we're putting in place -- the Libra; the Gina Krog -- and that puts us in a much better position with expanding CFVO rather than declining [CFVO] because we didn't have a lot of growth.
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Michael Webber, Wells Fargo Securities, LLC - Analyst [14]
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Right. Okay. Just -- and just to follow up on that, and then I'll turn it over -- if I just get a bit more specific and I think about the parent taking units back as opposed to cash, and resetting the rate on the vendor financing on the Knarr -- if I think about that rate now at 10%, kind of the basis for that financing -- how do -- do you think about eventually refi-ing or paying down that vendor financing?
I guess, how do you think about -- do you kind of isolate that, when you think about where your [yieldings would] be, or where you need to be relative to NAV in terms of refi-ing that? Or, do you kind of lump it in with the rest of your capital stack and decide, okay, we're just going to -- we're managing towards kind of a resumption of normalcy?
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Peter Evensen, Teekay Offshore Partners LP - CEO [15]
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Okay. So, for the benefit of everyone, Teekay Corporation has extended $200 million of vendor financing to Teekay Offshore, which was part of the dropdowns. And as part of the financing initiatives, we termed that out. And that has a 10% interest rate fee.
So, yes. I think as our debt leverage goes down, then Teekay Corporation would see that when we refinance our existing bonds, that taking out that seller credit financing would definitely be something that Teekay Offshore wants to do, and that would bring $200 million back up to Teekay Corporation.
For Teekay Offshore, we expect when we refinance to get a much cheaper interest rate than the 10% that we're paying right now to Teekay Corporation. But by the way, Teekay Corporation is helping us by taking some of that interest rate in units.
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Michael Webber, Wells Fargo Securities, LLC - Analyst [16]
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Okay. Great. I'll stop there and turn it over. But I appreciate the color, Peter. Thank you.
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Operator [17]
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Fotis Giannakoulis, Morgan Stanley.
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Fotis Giannakoulis, Morgan Stanley - Analyst [18]
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Peter, I would like to ask you if you can give us a little bit more color on the tenders that you are pursuing right now for the Varg. If I remember well, you have mentioned about four or five of them in Norway and North Sea. Can you give us some idea of the timing of this decision?
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [19]
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Hi, Fotis. It's Kenneth here. As we've covered on previous calls here, we have received a lot of inbound inquiry on the Varg unit. And the main reason for that is, of course, that we are seeing a number of the oil companies sitting on medium-sized fields in the North Sea that are looking for ways to develop those at lower oil breakeven costs, and doing that requires that they are actually looking at existing assets.
And Varg is, of course, subsea unit, being built to the NORSOK standards, and therefore really the only unit that's currently coming free, that is kind of grandfathered in under the Norwegian regulations.
So, as we've also said in -- on previous calls, we -- I think earlier in the year, we were looking at five opportunities broadly. And as it happens, when we look at opportunities, you obviously go through that sales funnel, and we're reducing it down.
So, we are maturing now, and are active on three opportunities. And that dialog is continuing with each of those customers, where they are, of course, expending resources, and so are we, on maturing it. And we'll -- we expect to continue that parallel track for another couple of months. And we'll update you on future calls here.
But that's a very active dialog. We won't detail the specific fields that we're working through at the moment, but we're encouraged, again, by the fact that we have three customers here that are very active in the dialog.
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Fotis Giannakoulis, Morgan Stanley - Analyst [20]
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And (inaudible) --
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [21]
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The startup, we're looking -- and just to touch on the startup, which I think you asked as well -- realistically, we are looking at, for each of the three opportunities, we will be with the startup between end of 2018 to end of 2020, I would say. (Inaudible).
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Fotis Giannakoulis, Morgan Stanley - Analyst [22]
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That's very helpful. And I understand that the -- each opportunity is very unique in nature, and cash flows, and structure. And certain fields -- they require a different investment, and upgrade, and customization of FPSO.
These opportunities that you are looking at -- what approximately is the CapEx that you will need to put on that vessel in order to upgrade it, and how much are you expecting to finance it? What I'm trying to understand is, what is the equity requirement, if any, for any of these projects?
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [23]
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Yes. As you rightly put, I mean, there is of course a range, and that's what we are evaluating in parallel here.
So, it's a pretty complicated matrix, obviously, in terms of the field, the counterparty, the contract length, and the upgrade -- the scope. The range, I would say, is probably in the $100 million, $200 million, $300 million, $400 million range, in terms of upgrade. We -- I don't think we would expect to put in more equity. But we are, of course, pursuing the financing packages in parallel. So, it's all part of the evaluation in terms of which one comes out as the more attractive one that -- of those alternatives.
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Fotis Giannakoulis, Morgan Stanley - Analyst [24]
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Thank you. And I want to ask also about the Petrojarl FPSO and the Gina Krog FSO. Can you elaborate a little bit more on the reasons why the delivery of the Petrojarl is delayed? And also, what is the reason that the cost overrun moved from $96 million last quarter to $126 million? It seems that this project -- since it was firstly announced, it has gone up from about $230 million to close to $300 million. Is there any proportional adjustment on the contract -- the revenues that you're going to be earning?
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [25]
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Yes. Some of the -- I would say, the delay and the anticipated delivery, and what we're looking at right now, has to do with variation orders, and some of it has to do with a more expanded scope than what we originally estimated on this older unit. We're working through it, and I'll say, in a very constructive way, with both the shipyard as well as the customer, on getting the right timing on it. And there will be some adjustments to the contract, but that's all discussions that are happening in parallel right now.
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Fotis Giannakoulis, Morgan Stanley - Analyst [26]
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Is there a way that you can give us a range on the anticipated EBITDA for this project?
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [27]
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No, we don't have that at this time.
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Fotis Giannakoulis, Morgan Stanley - Analyst [28]
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Okay. Thank you. And one last question about the cancellation of the UMS. Obviously, this is very good news for the liquidity of the Company. You have taken some loss provision from cancelling these two UMS contracts. Have you paid any amount of this provision during the second quarter? Or, what is the cash flow, if any, that you would have to pay for this cancellation?
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David Wong, Teekay Offshore Group Limited - CFO [29]
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No amounts have been paid as a result of this cancellation. And, as you know, these contracts are in a single purpose entity that has no recourse to the Partnership, and so we don't see any cash flow going out.
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Fotis Giannakoulis, Morgan Stanley - Analyst [30]
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Okay. So, it's not in your balance sheet, this amount?
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David Wong, Teekay Offshore Group Limited - CFO [31]
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We do have a provision or a balance sheet for damages as required under accounting rules. When a cancellation occurs, you do need to record damages. But that's purely, right now, accounting. And we don't see anything happening in -- particularly in the near future, absolutely. And as we -- as far as -- because it's non-recourse, it's held within that single purpose entity. Or, it's because it's a single purpose entity, it's non-recourse.
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Fotis Giannakoulis, Morgan Stanley - Analyst [32]
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Yes. Thank you very much. That's all for me.
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Operator [33]
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Spiro Dounis, UBS Securities.
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Spiro Dounis, UBS - Analyst [34]
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Thanks again for taking the question. Just wanted to -- and I realize it's a way out, but we had questions on it already. But the 2018 FPSOs that I guess are coming up for charter -- hard to predict but, I guess, when do discussions start there to talk about re-upping on the option, or I guess maybe when those things would have to start looking at new fields?
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [35]
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I mean, as you've seen on other companies that are declaring options, or where options are being declared, it really is often close to the maturity of the option declaration date. And that, of course, has to do with the fact that the -- it's an option that the charterer has. It's -- the units are on existing fields, and most of the time you basically assess the field's prospects as you come closer to the declaration date. On some fields you are, of course, looking at tie-ins and expansions, and those are typically the fields where you'd start the discussions earlier. And that's some of those that we could see us having earlier.
As a reminder, I mean, the three you're talking about are, of course, Voyageur, which is on an existing field. There, we would expect the production to continue beyond 2018. But, again, there is -- it would be early to start those discussions now.
Piranema is more or less in the same type of position, producing on an existing field where there are some opportunities to do further development and drilling on -- in that region, which of course is totally up to the customer, what they will end up doing. But they've already had the sunk cost, and the unit is producing.
And on the Ostras, which we've covered in previous call, is a little bit of a different unit, which is an early well test unit, which are producing -- or which is producing, and have been producing, on different heavy oil fields very successfully during the term of the contract. And that, of course, is more of a discussion about, when do we start discussing whether that is still Petrobras' strategy to have early well test units that can go in and explore these new fields? And that has not started yet.
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Spiro Dounis, UBS - Analyst [36]
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Okay. That makes sense. And I don't know if this ever makes sense, but would it ever be in your interest there to basically approach them earlier, renegotiate maybe a lower rate, which they attracted to, especially in this oil price environment, with the intent -- or, I guess, basically, on other end of that, them agreeing to maybe another 5-year extension earlier than they would have had to have? Or, is that not really -- is it worth just waiting?
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Peter Evensen, Teekay Offshore Partners LP - CEO [37]
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Yes. We are -- as we've said with the Voyageur, for example, we are open to what we call blend and extend. And -- but we usually try to get something back, i.e., linked it up to the oil price. So, it isn't that we're giving away the cash flow. But, yes, that's something that we're considering, as it results in a lower breakeven for the oil company. But we try to find a way to recover that if the oil price ends up being higher than where it is now.
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Spiro Dounis, UBS - Analyst [38]
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Got it. Okay. And then just last quick one from me. Back to the Varying. Just for modeling purposes, how should we think about the lay-up costs there? Is that already built into the CFVO guidance, or could you provide us maybe some sort of daily rate as to what that's costing?
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David Wong, Teekay Offshore Group Limited - CFO [39]
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That's built into the guidance.
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Spiro Dounis, UBS - Analyst [40]
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It is. Okay. Perfect. Thank you.
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Operator [41]
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Wayne Cooperman, Cobalt Capital.
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Wayne Cooperman, Cobalt Capital Management, Inc. - Analyst [42]
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After all these financings, and you've increased the preferred, and you've increased the shares, can you talk a little bit about what the outlook for the potential dividend increases is? What the bogey is on cash flow from operations, to get to a higher level of dividends, now that you've got more shares and more preferred and other instruments?
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Peter Evensen, Teekay Offshore Partners LP - CEO [43]
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Yes. Hi, Wayne. So, we have -- I think the biggest bogey right now is to complete the refinancings that we talked about, that are coming due in 2018/2019. And to the extent that we can bring down our leverage and refinance those at a lower interest rate and -- i.e., term out those refinancings -- that's really the prerequisite for restarting the distributions.
But as you see from the DCF, we have a big multiple coverage ratio, and that gives you an indication that it's in everyone's interest to restart the distributions -- both our sponsor, Teekay Corporation, as well as Teekay Offshore. And as I said in the earlier Q&A, Teekay Corporation, being the GP partner, took it hard. But they know that by having reduced the distributions temporarily, we'll ultimately get a higher DCF per share.
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Wayne Cooperman, Cobalt Capital Management, Inc. - Analyst [44]
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Is there a -- I mean, is there a number for cash or coverage, or there's something that we should look at, where you start to (inaudible) into the point where you will raise distribution?
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Peter Evensen, Teekay Offshore Partners LP - CEO [45]
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We can send it to you separately. We detailed it out -- what -- in our latest investor deck, which I think is on the website. But after the call I'll have somebody point you to that page, with that coverage (inaudible).
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Wayne Cooperman, Cobalt Capital Management, Inc. - Analyst [46]
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All right. Thanks.
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Operator [47]
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Nick Raza, Citibank.
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Nick Raza, Citigroup - Analyst [48]
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I just have a quick few housekeeping items. So, the Piranema -- I noticed that you guys addressed the reserve fees, or there's a reserve in there, relating -- I'm assuming that's relating to the agency's fees. But could you give us a little bit more color around that issue?
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [49]
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Yes. It's -- previously, we had an accrual for an agency fee in our accounts, which was -- which we disputed with our agent, and that was then reversed. And we're now decided to basically reinstate the liability this quarter, given the claim from Petrobras that we received of possibly returning that fee to Petrobras instead.
I think what's important to look at is that, over all the original economics of the Piranema charters, it's not really impacted. It was -- we had a 2% that we're supposed to pay to an agent. We think -- we took it back to us. Then, now, we are potentially looking at paying that back to Petrobras, but that's still a discussion point.
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Nick Raza, Citigroup - Analyst [50]
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Okay. And then, I guess the second question I have was really relating to the towage -- the [ALP] newbuilds. Typically, how long are those contracts? That's the first part of the question. Second part is, where are you seeing the most movement on rigs right now? Or (inaudible)?
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [51]
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Well, they're really happening worldwide. I mean, we see a bunch of rig moves that are going to lay-up or even to scrapping. So, they are coming off fields all over the world -- Gulf of Mexico; Brazil; West Africa; we have a rig move that we're looking to do right now in the Far East, or going actually into another employment, into Australia. So, I would say they are the rig moves that are happening all over the world.
The contracts that we're typically looking at obviously depends on the distance, as you will appreciate. The FPSO contract, which is the larger tows, which are a little bit more of our focus area, where we typically require at least two tugs, again, go from the shipyards in Asia into either Europe or West Africa or Brazil, typically. And those are tows that are ranging from 60, 90 days. And then typically there is some installation contracts on top of that.
And they typically work on a lump sum type of agreement. So, they are attractive in terms of building our book. Whereas the drilling rig moves, which there are many of at the moment, come up with shorter notice and a little bit more spot-type activity; but filling our books at the moment.
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Nick Raza, Citigroup - Analyst [52]
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Fair enough. That's all I had, guys. Thank you.
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Operator [53]
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Michael Webber, Wells Fargo.
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Michael Webber, Wells Fargo Securities, LLC - Analyst [54]
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Just had a quick followup. Kenneth, I think in one of your earlier answers to -- around a potential -- I guess the different timeframes for a potential restart on the Varg, I believe you said 2018 to 2020, I guess. And, one, correct me if I'm wrong; but, two, I know you've got to hit the summer window to get it in place, and there's probably going to be some refurb or something on the asset.
But can you maybe give us a distribution of what we're looking at in terms of how many projects are slated for 2018, or any conversations that are kind of geared more towards getting it -- trying to get it to speed sooner rather than later versus 2020? Because that's a pretty fair amount of downtime.
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [55]
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Yes. I mean, it really is three specific opportunities that we are looking at. And one of them -- the earliest one would have a startup of what we are currently estimating at the end of 2018. Then we have one in the middle, in 2019. And then we have one where we're looking at 2020.
And it's all part -- as I said earlier, a part of the sales funnel, right? It's a matrix of counterparty; upgrade scope; duration of the contract we can expect; the field risks associated with it, that we are evaluating in parallel. So, what we're focusing on is obviously maturing those projects for the remainder of this year, and then as we're homing in on the opportunity, we're deciding which one is the best one for us to go for.
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Michael Webber, Wells Fargo Securities, LLC - Analyst [56]
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Okay. So, it sounds like it's pretty even. Kind of like, a -- there's an opportunity potentially either summer 2018, summer 2019 or summer 2020, depending on how it starts.
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [57]
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That's correct.
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Michael Webber, Wells Fargo Securities, LLC - Analyst [58]
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Okay. Great. Thanks (inaudible).
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Operator [59]
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Oliver Corlett, 4th Street Capital.
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Oliver Corlett, 4th Street Capital - Analyst [60]
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Thanks for taking my questions. I wanted to ask about the shuttle market. You'd said that -- you said that the market's pretty tight, and that fields are coming on maybe faster and earlier than you had thought. My impression of the North Sea, at least, is that it's kind of a declining market. How do you explain the sort of continued buoyant activity there, and what kind of -- or, how much optimism do you have that that's going to continue?
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [61]
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Yes. I think if you look at overall production levels in the North Sea, oil and gas combined, you're absolutely right. I mean, that's been a maturing, declining market for the past decade, for sure. But what we've also seen is that a lot of the medium-sized fields are developed with floating solutions, and solutions where you don't have pipelines in. And that's really the market where the shuttle tankers -- that the shuttle tankers are catering for.
So, whilst the overall production may be going down, we actually see more lifting points in the North Sea. And of course, that's increasing the logistic need for the shuttle tankers, which is really the flexible solution to the pipelines, which the North Sea typically installs up against the larger-producing fields. So, I think it's fair to say that the larger-producing fields have been declining, but they -- that used to be pipeline volumes; but for the shuttle tanker volumes, they are actually very solid.
And if we look at the supply, which is -- for any shipping market, the supply of tanker tonnage there -- there are no newbuilding orders coming into the North Sea that have been ordered, that are not already linked up to a project. So, the supply of tonnage is very tight as we move forward here.
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Oliver Corlett, 4th Street Capital - Analyst [62]
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Right. That makes sense. I think in your 20-F you had said there's a fairly substantial order book in that market. Is that -- does that bother you longer-term, also?
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [63]
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No, I don't think that relates to the shuttle tanker order book. There is not a substantial order book for the shuttle tanker -- for [shuttle] (inaudible).
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Oliver Corlett, 4th Street Capital - Analyst [64]
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I thought it said there was something like 85 -- something in that area, of tankers on the water, and another 20-odd in the order book. But maybe I misread that.
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Kenneth Hvid, Teekay Offshore Group Limited - CEO [65]
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Yes. Maybe we can take that offline. I don't -- those numbers don't sound right to me.
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Oliver Corlett, 4th Street Capital - Analyst [66]
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Okay. Yes, that's fine. Harping back to the distributions again, in your projections in terms of your leverage, in that slide that you have, are you assuming in that slide that the distribution's going to be flat at $0.11 a quarter for the -- for that entire period?
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Peter Evensen, Teekay Offshore Partners LP - CEO [67]
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No, that doesn't materially affect that. But as it relates to it, we have assumed that the distribution doesn't move in order to achieve that leverage. If we refi'd the bonds earlier, then we could change that.
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Oliver Corlett, 4th Street Capital - Analyst [68]
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Right. But the amount of cash that you have on hand obviously, in the net debt calculation, is going to be affected by the distribution, right? So --
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Peter Evensen, Teekay Offshore Partners LP - CEO [69]
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Yes. So, you can assume that we haven't changed the distribution in that model.
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Oliver Corlett, 4th Street Capital - Analyst [70]
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So, it just -- it's just staying at $0.11.
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Peter Evensen, Teekay Offshore Partners LP - CEO [71]
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But that isn't necessarily where -- but that will change as we refinance the bonds.
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Oliver Corlett, 4th Street Capital - Analyst [72]
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Okay. And the -- that level of distributions -- does that in any way affect your MLP status, having such a low payout on the distributable cash flow?
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Peter Evensen, Teekay Offshore Partners LP - CEO [73]
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No, it doesn't. It's just a representation that the Board thought it was necessary to establish those reserves in order to repay the debt and complete its CapEx. But it the intention to restore the distributions when we get our leverage down. And now, of course, we have completed the capital expenditure program, as we talked about on the call.
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Oliver Corlett, 4th Street Capital - Analyst [74]
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Right. Got you. And just one last question. You -- in the DCF calculation, you've been estimating maintenance CapEx at about $40 million a quarter -- somewhere in that range. But that doesn't seem to be the level that you're actually spending, from your flow of funds statement. Am I missing -- is it being expensed, or am I missing something there? What's the disconnect?
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Vince Lok, Teekay Offshore Partners LP - CFO of Teekay Corporation [75]
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Yes. The maintenance CapEx reserve is a -- I call it a smooth number, which is basically calculated based on the estimated life of the assets, and at a discount rate. And so -- whereas the CapEx obviously is a lot more lumpy, especially in TOO, with a lot of the growth projects delivering over the next few quarters. So, there are some timing differences between the reserve, which is smoothed over a longer period of time, versus the CapEx timing.
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Oliver Corlett, 4th Street Capital - Analyst [76]
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But it's a pretty substantial difference over the period of time to date. I mean, is there a lot of deferred maintenance that we don't know about, is really what I'm getting at, I guess.
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Vince Lok, Teekay Offshore Partners LP - CFO of Teekay Corporation [77]
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No, most of the reserve is related to maintaining the existing fleet and maintaining the existing cash flow generation capacity. In terms of maintenance CapEx, I think you're referring to drydocking. Those occur fairly on a regular basis. Typically, we get to drydock the ships every 5 years. That is also built into the reserve. But most of the -- majority of the reserve is relating to replacing the existing fleet generation capacity -- cash flow generation capacity.
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Oliver Corlett, 4th Street Capital - Analyst [78]
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All right. Got you. All right. Thank you very much. That's all I have.
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Operator [79]
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There are no further questions in the queue. I'd like to turn the call back to you, Mr. Evensen.
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Peter Evensen, Teekay Offshore Partners LP - CEO [80]
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All right. Thank you all very much. We did a lot of project -- or, a lot of work on the financing side this quarter. And I thank everyone involved at Teekay, and our banks, and investors, for all the support that they have. Now, we're returning to focusing on the operations, and in specifically reemploying some of the assets like the Varg, which we discussed on the Q&A call. So, thank you all very much, and we look forward to reporting back to you next quarter.
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Operator [81]
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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 line, and have a great day.
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