Teekay Offshore Partners L.P. (NYSE:TOO)

Q4 2016 Earnings Conference Call

February 23, 2017 12:00 ET

Executives

Ryan Hamilton - IR

Ingvild Sther - Teekay Offshore Group's President & Chief Executive Officer

David Wong - Teekay Offshore Group's CFO

Kenneth Hvid - Teekay Corporation's President & CEO

Vince Lok - Teekay Corporation's CFO

Analysts

Michael Webber - Wells Fargo

Spiro Dounis - UBS Security

Fotis Giannakoulis - Morgan Stanley

Espen Landmark - Fearnley

Ben Brownlow - Raymond James

Operator

Welcome to Teekay Offshore Partner's Fourth Quarter 2016 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder this call is being recorded.

Now for opening remarks and introductions I would like to turn the call over to Ingvild Sther, Teekay Offshore Group's President and Chief Executive Officer. Please go ahead.

Ryan Hamilton

Before Ms. Sther begins, I would like to direct all participants to our website at http://www.teekayoffshore.com, where you will find a copy of the fourth quarter of 2016 earnings presentation. Ms. Sther 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 fourth quarter 2016 earnings release and earnings presentation available on our website.

I will now turn the call over to Ms. Sther to begin.

Ingvild Sther

Thank you, Ryan. Hello, everyone, and thank you for joining us on our Fourth Quarter 2016 Investor Conference Call. I'm joined today by David Wong, the CFO at Teekay Offshore Group; as well as Kenneth Hvid, Teekay Corporation's President and CEO; and Vince Lok, Teekay Corporation's CFO. During our call today, I will be walking through the earnings presentation which can be found on our website.

Turning to Slide 3 of the presentation. I will briefly review some of Teekay Offshore's recent highlights. In the fourth quarter of 2016, the partnership generated the distributable cash flow or DCF of $21.6 million, resulting in a full-year DCF of $161.3 million. On a per unit basis, the partnership generated DCF of $0.15 per unit for the fourth quarter and $1.28 per unit for fiscal 2016. The partnership generated cash flow from vessel operations or CFVO of $135 million and $584 million in the fourth quarter and fiscal 2016 respectively.

Although we had anticipated better results in Q4, some key factors negatively impacted our results including a temporary suspension of operations for the Arendal Spirit UMS, which I will discuss further in the moment and higher operating cost in the shuttle fleets mainly to further upgrade the Naviod Anglia portrayed in the North Sea, off to returning her from a charter in Brazil earlier this year.

While Q4 was a challenging quarter, we have made good progress on initiatives to further reduce cost from our operations. In early January, we completed the sale of the 1995-built shuttle tanker Navion Europa for net proceeds of approximately $40 million and recorded a gain of approximately $7 million.

I'm also pleased to report that after having secured a three-year CoA contract for the Glen Lyon project in September 2016, we are now close to finalizing in new five-year plus extension option shuttle tank a contract of affreightment in the North Sea. This CoA is expected to commence during the first quarter of 2018 and because the contract will be serviced by the partnership's existing CoA shuttle tanker fleet, it will further increase our fleet utilization and enhance the partnership's cash flow without the need for incremental capital expenditures. We are encouraged by the continued strong fundamental in our shuttle tanker business where we are a market leader.

Turning to Slide 4, the shuttle tanker market continues to tighten with both charter rates and utilization increasing driven by strong underlying fundamentals. You can see this in the graph on the right side of the slide which compares North Sea shuttle tanker contract of affreightment or CoA rates, with North Sea anchor handler rates [ph]. All rates in other offshore services have weakened due to the low oil price environment and reduced ENP spending.

Shuttle tanker rates have been increasing due to both demand and supply factors. Demand for shuttle tanker capacity has continued to grow due to a combination of more listing points and newbuilds coming on stream. And at the same time, the supply of available shuttle tanker capacity fleet continues to strength with no uncommitted new buildings and order and an aging global fleet that will see several investors' retirement before the year 2020.

As a result, North Sea shuttle tanker CoA rates have increased by approximately 40% over the last two years, given the limited available capacity in the shuttle tanker markets, which Teekay Offshore has benefited from.

Turning to Slide 5, as noted in my opening remarks, we continue to work hard at reducing cost. In a shuttle tanker business, we have seen a steady decline in our North Sea shuttle tanker operating expenses since 2008 primarily driven by a shift in our manning model to employ more ratings and officer from the Philippines as well as a strong focus on reducing our supply chain cost.

Through our 2016, our FPSO business underwent a significant initiative to reduce operating expenses, which resulted in reduced supply chain cost and changes on board our FPSOs to reduce crude cost. During 2016, the partnership also took measure to reduce costs in its onshore organization. Through these initiatives, we have reduced our onshore headcount by approximately 75 employees which will result in run rate G&A savings in future quarters.

Turning to Slide 6, I would like to update you on the status of the Arendal Spirit UMS. In November 2016, the Arendal Spirit UMS experienced an operational incident related to its dynamic positioning system. We also had an April 2016 incident which resulted in the replacement of the unit's gangway. Following the DP incident, the charterer Petrobras initiated an operational review. While the operational review is underway, Petrobras has to spend the charter high payments to the partnership. Throughout this period, we have maintained an ongoing dialog with Petrobras and our main priority is to address their concerns and return the unit to full operation as soon as possible.

Turning to Slide 7. We continue to push forward to deliver on our pipeline on our committed growth project. This is a slide we have shown you in previous quarters, updated to reflect the latest remaining CapEx and financing figures as of December 31, 2016. As a reminder, once all of these projects have delivered, they are projected to contribute an additional $200 million per year of run rate CFVO. Over the next several slides, I will provide a brief update on each of these projects.

Turning to Slide 8. As noted during our third quarter earnings in November 2016, the Petrojarl I FPSO upgrade project has experienced delay an additional cost and is now scheduled to be on the field in late 2017. The main causes for delay include a more challenging top side upgrade than originally anticipated; a condition of the units following a cold layer prior to the project and scope changes. Despite these setbacks, progress is being made on the units which is now approximately 85% complete and we continue to increase resources at the yard to ensure work continues to progress according to the revised delivery schedule.

We have been in close dialog with the charterer QGEP [ph], and are close to reaching a commercial agreement on a revised delivery date. Given the commercial sensitivity of these negotiations, I can't provide additional details at the moment, but I look forward to offsetting you further once these negotiations have concluded.

Turning to Slide 9; progress on Gina Korg FSO conversion project, continues and as of today, the unit is approximately 98% complete. We have experienced a slight delay in the project as we come down the home stretch. However, we expect to commence the charter within mid-2017. The converted FSO unit [indiscernible] is expected to have a fully-built up cost of approximately $280 million. The unit will operate under a three-year term period contract, plus 12 additional one year extension auctions on the Gina Korg field in the in the North Sea.

Turning to Slide 10. The Libra FSO conversion project at the Jurong shipyard in Singapore remains on schedule and was 98% complete as of the end of January 2017. As you can see in the naming ceremony photo at the bottom right of this slide, we were very close to sail away. This has been a well-run project for Teekay Offshore and our joint venture partner, and we remain on-track to complete the project both on schedule and within the project's $1 billion budget.

This unit is expected to achieve first oil by Q3 2017 and we will operate on the Libra field [indiscernible] offshore per sale under 12-year charter for a consortium of oil major as shown at the bottom of the slide.

Turning to Slide 11; our three East Coast Canada shuttle tanker newbuildings are also on schedule and on budget. Construction on all three vessels has commenced with the first vessel now 65% complete and construction on the third vessel just under way. You can see on the total at the top right of this slide, one of the massive whole sections being lowered into place at the Samsung yard in Korea. These three vessels which have a total cost of approximately $375 million are scheduled to deliver during the second half of 2017 and first half of 2018. They will replace two end charters and one owned vessel, currently servicing this 15-year plus extension options, contract with the consortium of nine oil companies. The vessels are fully financed with a $250 million long-term debt facility secured in June 2016.

Turning to Slide 12; I will conclude the review of our projects with an offset on our towage newbuildings. Our towage business ALP currently has a fleet of 10 long-haul towage vessels consisting of seven underwater vessels and three remaining newbuilding vessels which are scheduled to deliver during 2017. The ALP phase is the most technologically advanced and youngest towage fleet in the market and we will be the only owner of 300 tons volatile vessels capable of the largest FPSO and FLNG tows.

In January 2017, we completed a successful tow of the Kraken FPSO from the Keppel yard in Singapore to the Kraken oil field in the UK sector of the North Sea, which you can see in the photo at the bottom of the slide. Although the long-haul towage market currently remains challenging. We have been maintaining fleet utilization by booking short-term contracts, which include drilling rig repositionings and scrapping, mooring and hook-up installations and ad-hoc emergency tows.

Turning to Slide 13. I would like to wrap up my first quarterly conference call by reviewing our top priorities for 2017. Foremost, we will remain focused on striving for high standards for safety and operational excellence. There is compromise here. This is what our customers expect from Teekay Offshore and this is vital both for retaining their trust and winning new business.

Teekay Offshore has 53 underwater assets of which 50 are on contract. Unlike many others in the offshore sector, our assets are producing cash flow. Although we have done a lot, I still see a great opportunity for us to continue to improve both our operations and bottom line performance through better decision-making at every level of the organization.

Second, as highlighted by the time on today's call devoted to our committed growth projects during 2017, we will be keenly focused on execution and delivering these projects for contract start up. Some of these projects are more challenging than others, but delivering on all of these projects will be essential for growing the partnership's operating cash flow.

Third, we have three FPSO charters which are coming up for renewal in 2018 and 2019, which we're working diligently to extend or secure new contracts. Extending these cash flow is a top priority and we are in active discussions with all of the current quarters. I hope to be able to provide further updates on these efforts in the coming quarters.

Fourth, as we mentioned previously, we also plan to focus on optimizing our asset portfolio which may include certain asset sales and/or seeking joint venture partners. This will help further strengthening our balance sheet and liquidity position. In this phase of a challenging offshore market, we remain focused on strengthening Teekay Offshore's financial position and financial flexibility so that we can take advantage of opportunities as the offshore markets recovers.

Thank you, all, for listening. Operator, we are now available to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] At this time, we'll go first to Michael Webber with Wells Fargo.

Michael Webber

Hey, good morning, guys. How are you?

Ingvild Sther

Good. Thank you.

Michael Webber

Good. Ingvild, congrats on your first call and it's good to be speaking with you again this morning. I wanted to start off with actually some business to get done at the parent level, some FPSO, FPSO extension. It looks like an amendment to the best but the implications for the FPSO space for the relet market for TOO's assets, it seems like they're in place. It was a nice surprise. I'm just curious, how should we think about the rechartering, the relet market, or the employment outlook for assets like the Voyager in a few years? Has it changed significantly? And I guess what are the successful extension in amendments to the parent level say about the assets of TOO and the FPSO market in general?

Ingvild Sther

Yes. I guess you would be hearing more about the Teekay FPSOs on the call tomorrow. But generally, we can say that the psychology of the market is different when the oil price is around $55 region than last year when it was around $30. It's obviously the focus of our customers to extract as much value as they can out of the field that we are on and that's a combination of how much oil we are producing, the oil price and the cost of the fuel. So we are working very closely with all the customers on the [indiscernible] contract will come off contract the next year to find the sweet spot where they can extract maximum value out of the field.

Michael Webber

Got you. That's helpful. You mentioned in your prepared remarks and the release as well, there's kind of an ongoing opportunity set within the shuttle tanker market. Can you talk to how deep you think that is? How much of an opportunity are there on a dollar basis or in terms of number of assets you really see out there for TOO for the next couple of years? It's been a bit surprising that you guys have been able to steadily add business specially over the past two years in this environment.

Ingvild Sther

Yes. There are two markets in the shuttle tanker business one is the time charter market where you are a charter for longer periods of time and the other one is the CoA market where the customers take at heart a fraction of a vessel. So more like it's actually service. And those are quite different. We know that there's a lot of vessels that will retire in the next two to three years in the North Sea. That will provide opportunities both for the time charter market where we see [indiscernible] is out with requirement for vessels right now and also for the CoA market. What's special about the COA market is that you have to have a combination of contracts and vessels to make it work. You need to have a certain size and that makes it more difficult to start from scratch to build up a position in this market.

Michael Webber

Got you. All right, that's helpful. A couple more and I'll turn it over. I do want to touch on the Arendal Spirit second issue there. I know it's under operational review. You probably can't get into too many details about the outcome, but I'm curious, what options does Petrobras have legally within the operational review? I guess what's the spectrum of outcomes here? They can pursue once that operational review is triggered. Can they renegotiate the contract? Can they walk away from it? Do we even kind of set the landscape for us maybe without getting into specifics about how the actual outcome and the booking like?

Ingvild Sther

I was on Brazil three weeks ago and that's what relevant people in Petrobras and the focus is for them to complete the operational review; and for us it's to provide them with the information they need to complete that operational review and to get the unit back in total operation.

Michael Webber

Got you. But does going into operational review trigger any potential rights for Petrobras within the contract that investors should be aware of in terms of spectrum of outcome?

Ingvild Sther

No. Our focus is really just to get the Petrobras comfortable with the operation and the safety of the unit and I think that is the focus of Petrobras as well. So, it is an operational review.

Michael Webber

Okay. Like in the follow up before. One more and I'll turn it over. The Gina Krog and I might have missed this did you guys give a reason for the slight delay there and is there any incoming adjustment to the charter contract or anything along those lines for the delay? I'm not entirely sure what the rational is behind it.

Ingvild Sther

We are working hard to complete the final stage of the project down in Singapore and have a focus on getting that completed. It's just taking a bit longer time at the home stretch of the project here. We have a very good and open dialog with charter and we expect that there won't be any...

Michael Webber

No changes to the charter?

Ingvild Sther

No.

Michael Webber

Okay. That's helpful. I'll turn it over, but thanks for the time.

Ingvild Sther

Thank you.

Operator

We'll go next to Spiro Dounis with UBS Security.

Spiro Dounis

Thanks, Ingvild. I just wanted to start off on the Varg. Sorry if I missed any update there. But just wondering if you could update us, just around timing of when you think that you could get rechartered and maybe what the cost parameters could be if it does actually need being worked on to a new field. I think historically, you guys have given a range anywhere between 2018 and 2020. is that still the case? Or have you been able to refine that at all?

Ingvild Sther

For Varg, we have been working and we are working on several opportunities. One of the opportunities we worked on was the winter [ph] that announced a couple of weeks ago that they will go with the tie back option. So we are now working on one specific project but we also see that there are still other inbound requirements for this unit. And as we know, it's a quite flexible unit that has -- meet the Norsok [ph] requirement. We are quite confident that we will find work for and I think the time line is same as what we said last quarter.

Spiro Dounis

Okay, that's helpful. And just as we think about the EBITDA uplift, I guess from these new shuttle tanker, the new CoAs that you signed, I was wondering if you could provide a number on that and maybe just had to think about how many shuttle tankers do you have right now that you feel are under-utilized and what are the uplifts that we can expect there for the ones that go into that CoA?

Ingvild Sther

It will really be to optimize the fleet and get the maximum utilization out of the fleet that we have and we are basically sold out for 2017 and we are getting a good utilizationals for 2018. What we will look at is how can we optimize the fleets even more to get more utilization out of it. So for instance, if some of the peers require storage to set the water for 10 days, can we free up some of the shuttle capacity by using ordinary tanker and then get some more utilization out on our fleet. Those are the things we are looking after to really get the maximum benefit out of our shuttle fleet the next couple of years.

Spiro Dounis

Got it. And then last one for me, just around funding projects and repaying debt over the next two years. Could you just maybe walk us through some of the big sources and uses of cash as we think about that going forward? From a vessel sale perspective or a sale lease back perspective, do you feel like you've done everything you can there? Could we expect more of that down the road? Thanks.

Ingvild Sther

Yes. I will redirect that question to Vince.

Vince Lok

Sure. As Ingvild mentioned and as what we mentioned last year, we've always contemplated further strengthening of TOO's balance sheet by I guess what we call it asset portfolio optimization, which is really looking at some asset sales and bringing some joint venture partners as we've done a little bit in TOO, but for more extensively in TGP. And that gives us additional source of capital as well to not only delever our balance sheet, but also provide another source of growth capital going forward. In terms of the major uses of capital, of course it's really to fund the equity portion of our remaining CapEx program. We have all the debt facilities in place, but there is some remaining equity that's still needed to fund those and we can use a lot of the existing liquidity to fund that, of course. But as you know, we do have some bond maturities that are coming up in late 2018, particularly these two knock [ph] bonds at the end of 2018. They do have a requirement that requires us to issue equity to offset any dividend. So it would be nice to start chipping away at some of those maturities and sort of remove the diluted effect of those bonds. So that's another thing we're considering as we're looking at asset sales.

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Teekay Offshore Partners' (TOO) CEO Ingvild Sther on Q4 2016 Results - Earnings Call Transcript - Seeking Alpha