Teekay Offshore Partners L.P. (TOO)

TOO 
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Teekay Offshore Partners LP (TOO)

Q2 2013 Earnings Call

August 09, 2013 12:00 pm ET

Executives

Peter Evensen - Chief Executive Officer of Teekay Offshore GP LLC, President of Teekay Offshore GP LLC, Chief Financial Officer of Teekay Offshore GP LLC, Principal Accounting Officer of Teekay Offshore GP LLC and Director of Teekay Offshore GP LLC

Vincent Lok - Chief Financial officer, Principal Accounting Officer and Executive Vice President

Analysts

Michael Webber - Wells Fargo Securities, LLC, Research Division

Nishant Mani - JP Morgan Chase & Co, Research Division

Presentation

Operator

Welcome to Teekay Offshore Partners' Second Quarter 2013 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.

Unknown Executive

Before Mr. Evensen begins, I'd like to direct all participants to our website at www.teekayoffshore.com, where you'll find a copy of the second quarter 2013 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 of 2013 earnings release and earnings presentation available on our website.

I'll now turn the call over to Mr. Evensen to begin.

Peter Evensen

Thank you, Ryan. Good afternoon, everyone, and thank you for joining us on our second quarter of 2013 investor conference call. I'm joined today by Teekay Corporation's CFO, Vince Lok; Chief Strategy Officer, Kenneth Hvid; and MLP Controller, David Wong. During our call today, I'll be walking through the second quarter of 2013 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. We generated distributable cash flow of $43 million in the second quarter. For the second quarter, we declared a cash distribution of $0.5253 per unit after raising our distribution by $0.025 -- excuse me, 2.5% in the first quarter. During the second and third quarter of 2013 to date, the partnership completed a number of acquisitions, vessel deliveries and new contracts, all of which will contribute to Teekay Offshore's future distributable cash flow growth.

In May and June, respectively, the partnership completed $744 million of accretive FPSO acquisitions, including the Voyageur Spirit FPSO in May and a 50% interest in the Itajai FPSO in June, bringing the partnership's total FPSO fleet count to 5 units. During the second quarter, the partnership also took delivery of the first 2 of 4 BG Shuttle Tanker newbuildings that will operate under 10-year time charters with BG in Brazil. The Samba Spirit was accepted by the charterer and went on hire in July, and the Lambada Spirit is currently sailing to Brazil from the shipyard in South, Korea with a cargo to help offset some of the cost to mobilize the vessel. The ship is expected to go on charter with BG in the next 10 days. The first 2 vessels were financed with a new $170 million bank facility and a portion of the proceeds from the partnership's $150 million preferred unit offering completed in April.

The second pair of BG Shuttle Tankers are currently on time and budget and scheduled to deliver from Samsung in September and November this year and will go on charter to BG when they arrive in Brazil. These 2 vessels will be financed with the proceeds of a new U.S. private placement bond, recently agreed, that will be completed in 2 tranches, in September and November, timed to coincide with the deliveries of these 2 vessels.

In May, we were awarded a contract by Statoil to convert one of our existing shuttle tankers, the 1995-built Randgrid, into a floating storage offtake, or FSO, unit for a minimum 3-year maximum 15-year time charter contract when including the 12 additional 1-year options. It will go on to the Gina Krog oil and gas field in the North Sea. The development at Gina Krog will be among Statoil's major new developments with an estimated 225 million barrels of oil and gas.

Looking ahead, the partnership is directly bidding on several new FPSO project tenders, and we're currently engaged in multiple front-end engineering design or FEED studies, which are paid for by the customer and place us in a strong position to compete for these new build, own and operate FPSO projects.

Turning to Slide #4. I want to take a moment to update you on the operational start-up issues we experienced with the Voyageur Spirit FPSO in the second quarter. On April 13, the Voyageur Spirit achieved first oil and commenced production on the Huntington field in the North Sea. And following this, on May 2, Teekay Offshore Partners acquired the FPSO from our sponsored Teekay Corporation. Under its time charter contract, the unit had a specified period from first oil, to achieve full production and receive its certificate of final acceptance from the charterer E.ON. However, due mainly to a defect in one of the FPSO's 2 gas compressors, the unit was unable to reach full production within the allowable time frame under the contract. And subsequently, E.ON declared the Voyageur Spirit off-hire, retroactive to first oil. Because the Voyageur Spirit did not achieve final acceptance from E.ON as of the date of the partnership's acquisition, which was a condition of the purchase contract, Teekay Corporation, as the seller, has agreed to indemnify the partnership for revenue it would otherwise have earned had the unit not been declared off-hire, up to 10% of the initial purchase price or $54 million. Teekay Corporation's indemnification payments to the partnership will not be recorded as revenue for accounting purposes, but instead, will be effectively treated as a reduction in the $540 million purchase price the partnership paid to Teekay to acquire the FPSO. However, the Voyageur Spirit indemnification will not impact the partnership's distributable cash flow because a corresponding adjustment will be made to the partnership's replacement CapEx reserve as I'll detail later in this presentation. For the second quarter of 2013, the amount of the purchase price adjustment was approximately $12.5 million from the date of acquisition to the end of the quarter, and we expect there will be another adjustment in the third quarter as well. It's important to note that the Voyageur Spirit FPSO has actually been producing oil, albeit at partial capacity, since April 13, and so did produce oil volumes for E.ON during the second and third quarters. Accordingly, Teekay Corporation and Teekay Offshore intend to enter into commercial negotiations with E.ON to recoup a portion of the losses on the contract. Any recouped losses received by Teekay Offshore will be credited back toward Teekay Corporation indemnification payments, and thus will not impact Teekay Offshore.

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