Teekay Offshore Issues Q/4 Results
Bermuda’s Teekay Offshore GP LLC, the general partner of Teekay Offshore Partners L.P. yesterday [Feb.23] reported the partnership’s results for the quarter ended December 31, 2011. During the fourth quarter of 2011, the partnership generated distributable cash flow of $41.6 million, compared to $26.9 million in the same period of the prior year.
The increase is mainly related to the partnership’s acquisition from Teekay Corporation of the remaining 49 percent interest in Teekay Offshore Operating L.P. [OPCO] in March 2011, the acquisition of the “Cidade de Rio Das Ostras” [pictured below] floating production storage and offloading [FPSO] unit in October 2010, the acquisition of three newbuilding shuttle tankers since December 2010 and the acquisition of the “Piranema Spirit” FPSO on November 30, 2011.
Teekay, which provides marine services to the petroleum industry, has posted mixed results in recent quarters.
The company has been striving to reduce its exposure to a stubbornly sluggish spot market, which has been hurt by a glut of new tankers ordered in an earlier commodities boom continuing to enter the market.
On January 19, 2012, a cash distribution of $0.50 per common unit was declared for the quarter ended December 31, 2011. The cash distribution was paid on February 14, 2012, to all unitholders of record on February 1, 2012.
“The partnership reported another quarter of strong operating results,” commented Peter Evensen, Teekay Offshore GP LLC’s Chief Executive Officer. “In particular, during the fourth quarter we were successful in reducing our operating expenses despite adding new vessels to our fleet.
“The completion of the ‘Piranema Spirit’ FPSO acquisition from Sevan Marine and the acquisition of the ‘Scott Spirit’ shuttle tanker from Teekay Corporation will add to the Partnership’s large portfolio of fixed-rate cash flows.” Mr. Evensen continued, “We have also been successful in further enhancing the partnership’s liquidity through the issuance of another unsecured Norwegian bond offering in January 2012 and the completion of a new debt facility secured by the ‘Piranema Spirit’ FPSO in February 2012. With approximately $430 million of liquidity, the partnership is well-positioned to take advantage of further growth opportunities that may be presented to us in the near future, including FPSO units which may be offered by our sponsor, Teekay Corporation.”
Summary of Recent Transactions
In late January 2012, the partnership issued in the Norwegian bond market NOK 600 million in senior unsecured bonds that mature in January 2017. The aggregate principal amount of the bonds is equivalent to approximately 100 million U.S. dollars (USD) and all interest and principal payments have been swapped into USD and fixed at an interest rate of 7.49%. The proceeds of the bonds have been used to reduce amounts outstanding under the Partnership’s revolving credit facilities and for general partnership purposes. The partnership will apply for listing of the bonds on the Oslo Stock Exchange.
On November 30, 2011, in connection with Teekay’s previously-announced transaction to acquire FPSO units from Sevan Marine ASA (Sevan), the Partnership completed the acquisition of the Piranema Spirit FPSO unit directly from Sevan for $165 million, which was financed through a $170 million equity private placement. The 2007-built Piranema Spirit FPSO is currently operating under a long-term charter to Petrobras S.A. on the Piranema field located offshore Brazil. The charter includes a firm contract period through March 2018, with up to 11 one-year extension options and includes cost escalation clauses.
On October 1, 2011, the partnership completed the acquisition from Teekay of another newbuilding shuttle tanker, the “Scott Spirit”, for a cost of $116 million, including $93.3 million of debt which was assumed by Teekay Offshore. The purchase price is subject to adjustment for up to an additional $12 million based upon incremental shuttle tanker revenues secured during the two years following the acquisition.
Future Growth Opportunities
Pursuant to an omnibus agreement that Teekay Offshore entered into in connection with its initial public offering in December 2006, Teekay is obligated to offer to the partnership its interest in certain shuttle tankers, floating storage and offtake [FSO] units and FPSO units Teekay owns or may acquire in the future, provided the vessels are servicing contracts with remaining durations of greater than three years. The Partnership may also acquire other vessels that Teekay or third parties may offer it from time to time.
Shuttle Tankers
In June 2011, the partnership entered into a new long-term contract with a subsidiary of BG Group plc to provide shuttle tanker services in Brazil. The contract with BG will be serviced by four Suezmax newbuilding shuttle tankers to be constructed by Samsung Heavy Industries for an estimated total delivered cost of approximately $470 million. Upon their scheduled delivery in mid-to late-2013, the vessels will commence operations under 10-year, fixed-rate time-charter contracts. The contract with BG also includes certain extension options and vessel purchase options.
FPSO Units
As previously announced, on November 30, 2011, Teekay acquired from Sevan the “Hummingbird Spirit” FPSO [which is currently operating under a short-term charter contract], and has agreed to acquire the “Voyageur Spirit” FPSO upon the completion of certain upgrades that are currently expected to be completed in the third quarter of 2012. Both FPSO units would be eligible pursuant to the omnibus agreement to be acquired by Teekay Offshore within approximately a year following commencement of charter contracts with a firm period of greater than three years in duration.
Pursuant to the omnibus agreement and a subsequent agreement, Teekay is obligated to offer to sell the Petrojarl Foinaven FPSO unit, an existing unit owned by Teekay and operating under a long-term contract in the North Sea, to Teekay Offshore prior to July 9, 2012. The purchase price for the Petrojarl Foinaven FPSO unit would be its fair market value plus any additional tax or other costs to Teekay that would be required to transfer the FPSO unit to the Partnership.
In October 2010, Teekay signed a long-term contract with Petrobras to provide a FPSO unit for the Tiro and Sidon fields located in the Santos Basin offshore Brazil.
The contract with Petrobras will be serviced by a newly-converted FPSO unit, named “Petrojarl Cidade de Itajai”. This FPSO unit is scheduled to deliver in mid-2012, when it will commence operations under a nine-year, fixed-rate time-charter contract to Petrobras with six additional one-year extension options. Pursuant to the omnibus agreement, Teekay is obligated to offer to the Partnership its 50 percent interest in this FPSO project at Teekay’s fully built-up cost, within 365 days after the commencement of the charter with Petrobras.
In May 2011, Teekay entered into a joint venture agreement with Odebrecht Oil & Gas S.A. (a member of the Odebrecht group) to jointly pursue FPSO projects in Brazil. Odebrecht is a well-established Brazil-based company that operates in the engineering and construction, petrochemical, bioenergy, energy, oil and gas, real estate and environmental engineering sectors, with over 120,000 employees and a presence in over 20 countries. As part of the joint venture agreement, Odebrecht is a 50 percent partner in the Tiro Sidon FPSO project and Teekay is currently working with Odebrecht on other FPSO project opportunities which, if awarded, may result in the Partnership being able to acquire Teekay’s interests in such projects pursuant to the omnibus agreement.
In June 2011, Teekay entered into a new contract with BG Norge Limited to provide a harsh weather FPSO unit for the Knarr oil and gas field located in the North Sea. The contract will be serviced by a new FPSO unit to be constructed by Samsung Heavy Industries for a fully built-up cost of approximately $1 billion. Pursuant to the omnibus agreement, Teekay is obligated to offer to the Partnership its interest in this FPSO project at Teekay’s fully built-up cost, within 365 days after the commencement of the charter, which is expected to commence during the first quarter of 2014.
Financial Summary
The partnership reported adjusted net income attributable to the partners of $22.3 million for the quarter ended December 31, 2011, compared to $13.8 million for the same period of the prior year. Adjusted net income attributable to the partners excludes a number of specific items that had the net effect of increasing net loss by $63.5 million and increasing net income by $36.2 million for the quarters ended December 31, 2011 and 2010, respectively, as detailed in Appendix A. Including these items, the Partnership reported, on a GAAP basis, net loss attributable to the partners of $41.2 million for the fourth quarter of 2011, compared to net income attributable to the partners of $50.0 million in the same period of the prior year. Net revenues for the fourth quarter of 2011 increased to $205.1 million compared to $203.1 million in the same period of the prior year.
The partnership reported adjusted net income attributable to the partners of $102.2 million for the year ended December 31, 2011, compared to $65.3 million for the prior year. Adjusted net income attributable to the partners excludes a number of specific items that had the net effect of increasing net loss by $206.4 million and decreasing net income by $7.1 million for the year ended December 31, 2011 and 2010, respectively.
Including these items, the partnership reported, on a GAAP basis, net loss attributable to the partners of $104.3 million for the year ended December 31, 2011 and net income attributable to the partners of $58.2 million for the year ended December 31, 2010. Net revenues(3) for the year ended December 31, 2011 increased to $823.6 million compared to $775.4 million in the same period of the prior year.
Due to the significant reduction in spot conventional tanker rates and asset values during the past several quarters, a change in the operating plans for certain older shuttle tankers, and escalating drydock costs, for accounting purposes, the Partnership recorded non-cash impairment charges of $57.9 million in the fourth quarter of 2011 associated with seven of the partnership’s older vessels. These non-cash charges do not affect the partnership’s operations, cash flows, liquidity or any of the partnership’s loan covenants. The partnership intends to sell two of its conventional tankers which are currently on time – charter to Teekay, and expects to receive an early termination fee from Teekay upon the sale of the vessels.
For accounting purposes, the Partnership is required to recognize, through the consolidated statements of loss, changes in the fair value of certain derivative instruments as unrealized gains or losses. This revaluation does not affect the economics of any hedging transactions or have any impact on the Partnership’s actual cash flows or the calculation of its distributable cash flow.
The partnership has recast its historical financial results to include the results of the “Falcon Spirit” FSO unit, the “Cidade de Rio das Ostras” FPSO unit and the “Amundsen Spirit” and “Scott Spirit” shuttle tankers relating to the periods prior to their acquisition by the partnership from Teekay when they were under common control, which pre-acquisition results are referred to in this release as the Dropdown Predecessor. In accordance with GAAP, business acquisitions of entities under common control that have begun operations are required to be accounted for in a manner whereby the partnership’s financial statements are retroactively adjusted to include the historical results of the acquired vessels from the date the vessels were originally under the control of Teekay. For these purposes, the “Falcon Spirit” was under common control by Teekay from December 15, 2009 until April 1, 2010, when it was sold to the partnership; the “Rio das Ostras” FPSO unit was under common control by Teekay from April 1, 2008 to October 1, 2010, when it was sold to the partnership; the “Amundsen Spirit” was under common control by Teekay from July 30, 2010 to October 1, 2010, when it was sold to the partnership; and the “Scott Spirit” was under common control by Teekay from July 22, 2011 to October 1, 2011, when it was sold to the partnership.
On October 1, 2010, Teekay Offshore agreed to acquire Teekay’s interest in the newbuilding shuttle tanker “Peary Spirit”. Prior to its acquisition by the partnership, this entity was considered a variable interest entity for accounting purposes. As a result, the partnership’s consolidated financial statements include the financial position, operating results and cash flow contribution of the “Peary Spirit” subsequent to October 1, 2010. The “Peary Spirit” was acquired by the partnership on August 2, 2011.
Shuttle Tanker Segment
Cash flow from vessel operations from the partnership’s Shuttle Tanker segment increased to $58.2 million for the fourth quarter of 2011 compared to $49.4 million for the same period of the prior year, primarily due to a decrease in vessel operating costs, lower time-charter hire expense, and a full quarter’s contribution from the “Nansen Spirit” and “Peary Spirit”. Vessel operating costs decreased due to a temporary lay-up of the “Basker Spirit” commencing in the first quarter of 2011 and from unexpected repair costs incurred on certain shuttle tankers in the fourth quarter of 2010.
Conventional Tanker Segment
Cash flow from vessel operations from the partnership’s Conventional Tanker segment decreased to $14.7 million in the fourth quarter of 2011 compared to $18.1 million for the same period of the prior year, primarily due to the sale of the “Scotia Spirit” in the third quarter of 2011 and the expiry of time-charter contracts on two of the tankers during the fourth quarter of 2011.
FSO Segment
Cash flow from vessel operations from the Partnership’s FSO segment increased to $7.9 million in the fourth quarter of 2011 compared to $7.4 million for the same period of the prior year, primarily due to increased revenues from favorable foreign exchange rate differences and lower vessel operating costs, partially offset by the sale of the “Karratha Spirit” FSO unit during the first quarter of 2011.
FPSO Segment
Cash flow from vessel operations from the Partnership’s FPSO segment increased to $20.9 million for the fourth quarter of 2011 compared to $19.5 million for the same period of the prior year, primarily due to the acquisition of the “Piranema Spirit.”
