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Teekay Offshore Partners L.P. (NYSE:TOO)
Q3 2019 Earnings Call
Nov 7, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Teekay Offshore Partners Third Quarter 2019 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 Saether, Teekay Offshore Group's President and Chief Executive Officer. Please go ahead.

Jan Rune Steinsland -- Chief Financial Officer

Before Ingvild begins, I would like to direct all participants to our website at teekayoffshore.com, where you will find a copy of the third quarter 2019 earnings presentation. We 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 third quarter 2019 earnings release and earnings presentation that are available on our website.

I will now turn the call over to Ingvild to begin.

Ingvild Saether -- President and Chief Executive Officer

Thank you, Jan Rune. Hello, everyone, and thank you for joining us on our third quarter 2019 earnings call. With me today I have Jan Rune Steinsland, CFO of Teekay Offshore Group and Duncan Donaldson, General Counsel of the Teekay Offshore Group.

Starting with Slide 3. Our large and diversified portfolio of forward revenues stands at approximately $4.9 billion at the end of third quarter. This provides significant cash flow stability to Teekay Offshore and this is before including any contract options or upside from the oil price and production tariffs of certain FPSO contracts. On top of this stable portfolio, we have additional upside to earnings from redeployment opportunities, Towage spot market operations and improving market fundamentals. As an example, we have two of our DP1 shuttle tankers currently trading in the conventional tanker segment, where we see very strong rates at the moment. I would also like to underline that relatively low counterparty risk from working with the strong customer base.

Turning to Slide 4. In the third quarter Teekay Offshore delivered solid results both operationally and financially. We generated adjusted EBITDA of $158 million in the quarter, consistent with the second quarter 2019. In August, we agreed with the group of East Coast Canada oil companies to expand our contract for the charter of a fourth newbuild shuttle tanker, which we also ordered in August. We have executed several financing initiatives in third quarter and into October. I would like to highlight that we in October placed $125 million of senior unsecured green bonds that will partly finance of first four shuttle tankers newbuilds that are under construction at Samsung. And this was the first ever green bond in the maritime sector in the Western Hemisphere. In May, the Partnership received an unsolicited non-binding proposal for Brookfield to acquire all common units, they do not already own. On October 1 the Partnership entered into an agreement and plan of merger with Brookfield in which Brookfield will acquire all the outstanding publicly held common units.

I will now turn it over to Jan Rune to go over the financial results.

Jan Rune Steinsland -- Chief Financial Officer

Thanks, Ingvild. We're turning to Slide 5. Adjusted EBITDA came in at $158 million, which is basically in line with the second quarter. The FPSO and FSO segment recorded an adjusted EBITDA of $73 million and $24 million respectively, consistent with the second quarter. Our Shuttle Tanker segment adjusted EBITDA came in at $65 million, $3 million lower than in the second quarter, primarily reflecting the two shuttle tankers turned 20 years and were retired in July.

Our Long-distance Towage segment came in with an EBITDA of $1 million negative, a decrease of a small million taking rounding into account. We earned some mobilization fees from repositioning the fleet that will be reflected in the fourth quarter.

Now back to Ingvild to cover our operating performance in more detail.

Ingvild Saether -- President and Chief Executive Officer

Thanks, Jan Rune. Turning to Slide 6, we continue to see solid economic uptime on our FPSO units and recorded another quarter at 99% uptime. In addition, the long-running dispute with the charter of the Petrojarl Knarr FPSO has been finally results by arbitration awards.

Looking at slide 7. Our Shuttle Tanker segment delivered strong operational results this quarter with 100% uptime, for the time charter and CoA shuttle tankers for the second quarter in row. We have a significant new building program for fleet renewal in the North Sea, with a total of 6 vessels under construction at Samsung yard in Korea. The deliveries will be from December 2019 through January 2021and with a CapEx of approximately $800 million.

As a reminder, these vessels are fueled by LNG, have batteries for peak shaving and are also using vapor from the cargo, which effectively is turning waste into fuel. We continue to see enthusiasm and strong interest from clients for these vessels, and since we've reviewed second quarter earnings with you, we have received additional awards that supports our view that the configuration of these vessels has been a result of a revolution in design rather than an evolution. In August, we expanded the current agreement with the group of East Coast Canada oil companies for the charter of the fourth newbuild shuttle tanker, based on increased production volume forecast.

The shuttle tanker will be delivered in early 2022 and with the CapEx of approximately $120 million, excluding capitalized interest.

Turning to slide 8, our FSO segment continues to generate strong and consistent results reflecting high uptime. This quarter we recorded 99% technical uptime. We are also pleased to announce a one-year extension of the Apollo Spirit FSO that is operating for Teekay Corporation on the UK Banff field. In addition, we have finally settled our shipyard dispute relating to the conversion of the Randgrid FSO.

On Slide 9, you can see the results of our Towage segments. We saw some further reduction in utilization in the quarter, as we spend time repositioning and waiting for projects to commence in the fourth quarter, which we expect will be stronger than the third quarter.

I will now turn it over to Jan Rune to go over our recent financings in more detail.

Jan Rune Steinsland -- Chief Financial Officer

Thanks, Ingvild. As you can see on Slide 10, we have once again made good progress on our extensive 2019 financing and refinancing program by executing several initiatives in the third quarter and into October. The financing of the shuttle tanker newbuilds number 5 and 6 has been completed, with a $214 million sale on leaseback transaction with a 10-year tenor, 19-year profile and based on the interest rate of LIBOR plus 2.85%.

In September we closed a US private placement of $120 million in relation to our 50% holding in the Libra FPSO. These notes amortized to zero in 2027 and bear fixed coupon of 7.11%. In October our 100% owned and fully ring-fenced subsidiary Teekay Shuttle Tankers issued a $125 million of senior unsecured green bonds due in 2024. The floating rate notes bear an interest rate of LIBOR plus 650 basis points, which swapped to a fixed five-year rate corresponds to 7.8% at the time of the issuance. We have also arranged for $100 million bridge loan for the fourth East Coast Canada shuttle tankers, but we are looking at refinancing the fleet financing for the East Coast Canada shuttle tankers and include the fourth one before we draw on the bridge loan.

In addition to these new facilities, we have refinanced a $26 million of debt related to the Suksan Salamander FSO for another three years, extended the $38 million debt related to the Arendal Spirit to '23, as well extended by one year the $125 million revolving credit facility from Brookfield to October 2020.

On slide 11, we have included an updated debt maturity schedule. The status is not for quarter-end, but to as per to-date in order to also include a green bond. The schedule, includes all debt including RCFs and debt-related to newbuilds on a fully drawn basis, but it excludes the non-recourse debt in the two FPSO joint ventures, consistent with the presentation in our balance sheet. Furthermore, you can see from the maturity schedule in 2020 and '21, we have relatively normal amount of repayments and maturities. While in 2022 and 2023, we also have the maturities of our two senior unsecured bonds coming up.

I will then hand over to Duncan.

Duncan Donaldson -- General Counsel

Thank you, Jan Rune. Turning to Slide 12, as previously communicated on October 1 2019, the Partnership announced that it had entered into an agreement and plan of merger with Brookfield and Affiliates. Pursuant to the merger agreement Brookfield has agreed to acquire all of those approximately 27% of outstanding publicly held common units representing limited interest of the Partnership not already held by Brookfield. The merger agreement provides that at the effective time each common unit issued and outstanding as of immediately prior thereto, other than those Brookfield units will be converted into the right to receive $1.55 in cash to be paid, without any interest thereon and reduced by any applicable tax withholding.

As an alternative to receiving the cash consideration each unaffiliated unit-holder will have the option to elect to receive one newly designated unlisted Class A common unit with the Partnership's common unit.

A few quick points on October 28, the Partnership filed with the US Securities and Exchange Commission its transaction statements under Rule 13e-3 and an accompanying notice of action by written consent and information statement. The Partnership currently anticipates that the merger will be completed in the fourth quarter of 2019. We plan not to take your questions on this call about the merger and refer you instead to the aforementioned documents on file with the SEC, for description of the transaction and answers to questions you may have regarding the transaction.

I will then hand back to you, Ingvild.

Ingvild Saether -- President and Chief Executive Officer

Thank you. Turning to the final slide of our presentation today. To conclude this presentation, I want to take the opportunity to remind you of our top business priorities in 2019, which is to maintain safety standards and operational excellence, secure FPSO charter extensions and redeployments, increase profitability in existing business, execute the contemplated financing initiatives and strengthen the balance sheet through delevering. And with less than two months left of the year, I'm pleased to see our progress in these areas, including the extension of the Piranema and Voyager contracts during the year. We see increased activity in our core markets. However, we will continue to be disciplined and selective in working on the opportunities that offer the most attractive risk-adjusted return.

I will now turn it over to the operator and we are available to take questions.

Questions and Answers:

Operator

Thank you [Operator Instructions] And our first question comes from Sunil Sibal with Seaport Global Securities.

Sunil Sibal -- Seaport Global Securities -- Analyst

Yes. Hi. Good afternoon, guys. So thanks for all the clarity. I just wanted to go back to the dispute resolutions, especially with regard to the Knarr and I was wondering is there any -- so it seems like you settled for $25 million payment. Is there any other impact on the rate or your contract terms beyond what you settled? So the contract keeps on ongoing for the duration for the original rates?

Ingvild Saether -- President and Chief Executive Officer

Yes. That is correct. There is no impact on the contract terms on the ongoing contracts. So, this was LDs related to before the vessel was delivered.

Sunil Sibal -- Seaport Global Securities -- Analyst

Okay. Could you remind us, you know, when does this contract ends and what's the approximate utilization the Knarr is running at currently?

Ingvild Saether -- President and Chief Executive Officer

So this is a firm contract until 2025 with certain milestones for cancellation or where you can pay a cancellation fee to terminate the contract. And we're not able to comment on the production. I think the main point is that Shell is controlling the assets and it's producing at the Knarr Field and it's really within Shell's control.

Sunil Sibal -- Seaport Global Securities -- Analyst

Understood. And then I think you also talked about in the press release about the vessel conversion dispute. Beyond these two, are there any other ongoing kind of disputes that you have contractual side?

Duncan Donaldson -- General Counsel

Yes, I'll go for that, Ingvild. We do have kind of public filings, we have an ongoing dispute with the Damen Shipyard Group that is in relation to the conversion and upgrade of the Petrojarl Varg FPSO, so that dispute continues. We are also in dispute with a subsidiary of the Teekay Offshore Group Logitel and is in disputes with COSCO shipyards in relation to the Stavanger Spirit and Nantong Spirit new building contracts.

Sunil Sibal -- Seaport Global Securities -- Analyst

And any estimate on impact or magnitude or the time-line on resolution on those?

Duncan Donaldson -- General Counsel

No estimate at this time on when they'll be resolved other than that's already been communicated.

Sunil Sibal -- Seaport Global Securities -- Analyst

Okay, got it. And one last one for me, it seems like your commentary indicated some strengthening in the shuttle tanker market, I was wondering if you could frame it a little bit in terms of magnitude or in contract duration terms the impact of this tightening in market? I mean are you signing more longer duration contracts or are you signing higher contracts in terms of magnitude? What are you seeing in the market?

Ingvild Saether -- President and Chief Executive Officer

I think it's a bit different in the different markets. So if we go to Brazil, I think the strength of the market, there is better, there are several new contracts out for tendering. More contracts than we have seen for quite some time. These are typically new buildings that are built specifically for those contracts. So that's -- the strength of the market there, it's really related to the activity level. And then we talked about how we have ordered a new shuttle tanker for our East Coast Canada contract, so that is an existing contract where the customers will have more volumes and therefore the call off an option they have in the contract to expand that contract and we are obviously very pleased with how that contract is developing. And then we have the market in the North Sea, which is more of a contract of affreightment market, where you don't have these long time charter contract but you order the vessel for picking up your cargo when you need it. So you have long contracts, but it's a call off within that contract, and there we have seen that there has been a strengthening in the rates reflecting the value proposition of this type of contract, where size of the fleet that we have is one of the very important factors.

Sunil Sibal -- Seaport Global Securities -- Analyst

Okay, got it. That's all I had. Thanks so much for the color.

Jan Rune Steinsland -- Chief Financial Officer

Thanks, Sunil.

Operator

This will conclude today's question-and-answer session. I will now turn it back to Ingvild Saether for closing remarks.

Ingvild Saether -- President and Chief Executive Officer

Yes, thank you everyone for calling into the call today and have a continued good day.

Operator

[Operator Closing Remarks]

Duration: 21 minutes

Call participants:

Jan Rune Steinsland -- Chief Financial Officer

Ingvild Saether -- President and Chief Executive Officer

Duncan Donaldson -- General Counsel

Sunil Sibal -- Seaport Global Securities -- Analyst

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