Corner of Berkshire & Fairfax Message Board

General Category => Investment Ideas => Topic started by: antoninscalia on August 31, 2018, 09:47:12 AM

Title: TOO - Teekay Offshore Partners L.P.
Post by: antoninscalia on August 31, 2018, 09:47:12 AM
Anyone been following this company? Could be interesting with Brookfield's involvement.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: chrispy on August 31, 2018, 10:12:18 AM
I can't determine whether it's better to own it thru BBU or to buy some TOO now that it is at a low. I own a good chunk of BBU.

Brookfield has received higher yielding debt from Teekay Offshore as well.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: redhots on August 31, 2018, 10:16:39 AM
Here are a couple of write-ups...

https://seekingalpha.com/article/4165045-bonhoeffer-fund-partner-letter-q1-2018

https://jdpcap.com/wp-content/uploads/2018/04/Teekay-FINAL-PRESENTATION-2.pdf
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: JRM on August 31, 2018, 10:37:27 AM
I own through TK.  There is also nice exposure to TK LNG partners with no K-1 to mess with. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Deepdive on August 31, 2018, 12:31:22 PM
I believe TOO is treated as a C Corp for tax purposes.  Check the IR website.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: JRM on September 01, 2018, 06:34:52 AM
I believe TOO is treated as a C Corp for tax purposes.  Check the IR website.

I think TK LNG Partners has a K-1.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bjakes00 on September 06, 2018, 08:28:14 AM
The key questions here, which I don't have the answer to, are likely:

1) Who are the contracts with?
2) Where are the oil fields that they are serving on the cost curve?

Basically if oil comes down to $40/bbl, how much strain will the majors they are working for take?

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: chrispy on September 06, 2018, 09:24:31 AM
I believe those questions are covered in the PDF s that redhots posted. It is not economically viable to shut down FPSO/FSOs in a down oil market
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: peterHK on September 06, 2018, 10:42:29 AM
We saw in the last oil price collapse that revenue stayed fairly intact so I believe the theory that it's a stable business; this is almost a BIP sort of play.

Big question I had was about this promise of $200mn of EBITDA improvement that was supposed to come this year. I didn't see it last quarter, and their outlook for Q3 was just as bad as Q2.

Haven't done in depth analysis on this, but BAM are no fools, so I suspect it's worth the time.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: walkie518 on September 06, 2018, 11:50:41 AM
Here are a couple of write-ups...

https://seekingalpha.com/article/4165045-bonhoeffer-fund-partner-letter-q1-2018

https://jdpcap.com/wp-content/uploads/2018/04/Teekay-FINAL-PRESENTATION-2.pdf
The assumption in the JDP paper is that Teekay is worth 10x EBITDA. 

This feels a bit like what Fairfax is doing with Seaspan...
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Packer16 on September 06, 2018, 12:01:51 PM
There is more support for the 10x multiple as a direct comp (Knot Offshore) has a higher EBITDA multiple & there are one 2 competitors in the shuttle tanker market.  Although Seaspan has excellent management & counterparties, container lease & shipping much more competitive than shuttle tankers.

Packer
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: kab60 on September 06, 2018, 12:06:49 PM
Just took a quick look. What's contracted backlog and contract length like? JDP writes 5 years, but I couldn't find it.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Packer16 on September 06, 2018, 12:10:44 PM
It is detailed in the 10-K & it varies depending upon ship type and arrangement.

Packer
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: walkie518 on September 06, 2018, 12:40:28 PM
Better to review more recent filings, but in July 2017, Brookfield marked contacts at 4 years and they expected extensions

https://bbu.brookfield.com/en/press-releases/2017/07-27-2017-035001869
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 06, 2018, 12:58:21 PM
Intrigued by this. Just starting DD.

Not immediately obviously dirt cheap on their nonGAAP DCF measure. At first glance I can't justify the claims linked above of 25-20% FCF yields. How does DCF inflect from here?

Maintenance capex looks stupidly high (p10 of this: https://www.teekay.com/wp-content/uploads/2014/12/TOO-Q2-18-ER-Presentation-v_FINAL_FINAL.pdf).

Much more work to do!

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Packer16 on September 06, 2018, 01:48:00 PM
There a few things that are going on here.  You have underearning FPSO/FSO assets that are being provided to some users on a temporary price reduction basis.  These price reductions should be unwound in 2019.  You also have some assets that are not generating any revenue.  These include some assets that may never generate revenues but if oil stays high there is a chance & finally the re-investment opportunity from FPSO/FSOs to shuttle tankers should be able to generate the before mentioned 20/25% DCF yield on today's prices.  The depreciation is high due to restating shuttle tanker life from 25 to 20 years and depreciation associated with some assets TOO would not invest in if they were investing today.

Packer
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 06, 2018, 01:54:17 PM
Thanks. Aside from the obvious (20F etc) what would you advise I read?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Packer16 on September 06, 2018, 01:59:21 PM
Take a look at the BBU disclosures as they purchased this entity as one of their higher expected return investments.  TOO also discloses a quarterly DCF bridge but it is quite noisey with all of the FPSO/FSO activity.  There is also a Shuttle Tanker stand alone financials on the TOO websites which provides some insight into that business.

Packer
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 06, 2018, 11:27:43 PM
Thank you.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Snorky on September 07, 2018, 12:40:44 AM
I do not see any positive FCF at all. What i am missing ?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bjakes00 on September 07, 2018, 02:07:17 AM
I do not see any positive FCF at all. What i am missing ?

Can you elaborate on which numbers you are looking at and provide how you are getting to FCF? Then let's discuss further.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 07, 2018, 02:51:20 AM
I do not see any positive FCF at all. What i am missing ?

Probably all the adjustments management are making to make themselves look better ;)

Note: this is a joke, before all the bulls get snarky.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Snorky on September 07, 2018, 05:15:33 AM
Im just looking at morningstar and deduct capex from  operating cash flow.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: peterHK on September 07, 2018, 06:52:10 AM
Im just looking at morningstar and deduct capex from  operating cash flow.

Last 12 months I believe they had significant new build obligations that were being completed.

Last quarter they generated $47.8mn cash from ops and spent $14.4 in capex, with $10.4mn in asset sales, so really only about $4.4mn in net capex (data from CapIQ).

My question is really what's the normalized level of FCF from the business. I know capex was elevated recently, but I don't have a great sense of the earnings power or margins or capex requirements yet as I haven't really looking into this in dept. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 07, 2018, 07:19:22 AM

Last quarter they generated $47.8mn cash from ops and spent $14.4 in capex.


That's a very different number from the $53m in maintenance capex cited in the presentation linked above.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bjakes00 on September 07, 2018, 08:48:12 AM
Yes their average quarterly maintenance capex over the last 6 quarters has been $42m (min: $32m, max: $53m).

That being said, their average quarterly cash flow (pre. maintenance capex) is $70m and average EBITDA is $130m over the same six quarters, which provides the roughly $28m average distributable cash flow that I see.

My source for this are the Net Income to DCF bridges they provide at the end of their results presentations each quarter.

Two things to note in from the recent two quarters that you can clearly see from the same bridges:
1) The distributions on preferred units have come down 30% or so since the BAM refi (which is good)
2) The partnerships share of equity accounted JV's DCF has almost doubled (which is also good, but given the partnership does not control these DCFs it is difficult to count on the timing of the distributions).

Additionally, their Net Debt / EBITDA averaged 6.8x prior to the BAM recap, whereas it is now 5.8x currently.

Annualised DCF based on the current 6c DCF is 24c providing a c. 11% yield on the current price.

The key metrics I'll be watching are the leverage ratios, and the (EBITDA - capex) to DCF conversion.

Let me know if you have any other views as I really need to hear all sides to this story.

The other point I am not fully comfortable with is that there is "no oil price risk" - whats clear to me is that they did take some strain in 2014 when the price collapsed but that was also obviously because they were over levered (which is not to say they have a pristine balance sheet at the moment...)

EDIT: I have a lot more work to do on figuring out how the cash flow statement and the DCF bridge hangs together!
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Packer16 on September 07, 2018, 09:30:53 AM
Remember you have a good business (shuttle tankers) & an OK to bad business (everything else).  In the OK bad business, you have unused vessels & contracts with counterparties at reduced rates (on the order of $50 m per year through 2019).  Looking at this in the aggregate is difficult especially given the Brookfield will invest in the good business but not in the bad business.  Looking at as 2 business with an option to run-off as much of the OK to bad business IMO is the best way to look at this.

Packer
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Schwab711 on September 07, 2018, 09:44:51 AM
Yes their average quarterly maintenance capex over the last 6 quarters has been $42m (min: $32m, max: $53m).

That being said, their average quarterly cash flow (pre. maintenance capex) is $70m and average EBITDA is $130m over the same six quarters, which provides the roughly $28m average distributable cash flow that I see.

My source for this are the Net Income to DCF bridges they provide at the end of their results presentations each quarter.

Two things to note in from the recent two quarters that you can clearly see from the same bridges:
1) The distributions on preferred units have come down 30% or so since the BAM refi (which is good)
2) The partnerships share of equity accounted JV's DCF has almost doubled (which is also good, but given the partnership does not control these DCFs it is difficult to count on the timing of the distributions).

Additionally, their Net Debt / EBITDA averaged 6.8x prior to the BAM recap, whereas it is now 5.8x currently.

Annualised DCF based on the current 6c DCF is 24c providing a c. 11% yield on the current price.

The key metrics I'll be watching are the leverage ratios, and the (EBITDA - capex) to DCF conversion.

Let me know if you have any other views as I really need to hear all sides to this story.

The other point I am not fully comfortable with is that there is "no oil price risk" - whats clear to me is that they did take some strain in 2014 when the price collapsed but that was also obviously because they were over levered (which is not to say they have a pristine balance sheet at the moment...)

EDIT: I have a lot more work to do on figuring out how the cash flow statement and the DCF bridge hangs together!

Then you get credit for the growth depreciation in cash flow without ever considering the cost of growth. If there's no growth, we can't use a valuation multiple since the company would be finite-lived. I think maintenance capex is a good starting point but it's a minimum bound of whatever 'true' LT capex is.

I agree with Packer in that I think it's easier to look at the shuttle tankers biz separate from the other biz lines. The shuttle tankers portion should probably be valued at 10x EBITDA like KNOP. What's the value of RemainCo is the question.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bjakes00 on September 07, 2018, 10:34:40 AM
Looking at as 2 business with an option to run-off as much of the OK to bad business IMO is the best way to look at this.

Thanks this is super helpful and will put some work into understanding what the good business is worth first. Cheers
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 09, 2018, 12:05:13 AM
Preliminary thoughts on this. FYI I'm a shareholder in SSW so it's a natural compare. I want to like this because I like buying cheap cash flows run by very smart people - but so far I'm not quite there. My major concerns are below:

- These vessels are clearly more specialised than Seaspan's but to my surprise they're also (on average) older vessels on shorter contracts. That reduces the visibility of cash flows and also reduces the value of the termination payments should any arise.
- There is no commentary in the 20F or quarterly releases on the pricing cycle. Perhaps that means there isn't one but that would surprise me, and the fact that the company has taken major writedowns as they have adjusted DCF assumptions for each asset suggests prices have been falling. I find it very hard to tell whether contracts will roll on to higher or lower prices, which matters given the short contract durations.
- The writedowns suggest this isn't all that insulated from oil prices (indeed several of the contracts have explicit links to prices).
- One of the things I like about SSW is that the combination of consolidation and low orderbook might lead to better price discipline, and I'm not sure I can make the same argument here.
- P:BV (once you adjust for prefs) isn't much below 1.
- Free cash flows will be enormous compared to market cap if capex drops. Another thing I really like about SSW is that newbuild capex is pretty much over and maintenance capex is low. TOO is still ordering vessels so investing capex will continue (but fall). What confuses me badly is the maintenance capex figure in their quarterly releases. If that's a real, sustained maintenance capex figure then the FCF isn't all that exciting. Understanding capex is my major project.

The other thing I am wary of is assuming shuttles is a "good" business and assigning a 10x multiple to it. Certainly there's some specialised kit on these vessels but none of it is rocket science in this technological age. There's no moat there. And it's a small market - less than 100 vessels worldwide - so it doesn't take a lot of newbuilds or many field shutdowns to create overcapacity. Fundamentally this is, like containers, a business where the major barrier to entry is access to capital and ROCE's won't be high. The way to make money is to capture a high (>>20%) FCF yield to equity and ride the deleverage as debt paydown causes equity value to grow within the EV.

More work to do and all thoughts welcome.

P

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Packer16 on September 09, 2018, 07:13:32 AM
I was once a SSW shareholder so a top level comparison is the shuttle tanker market is shuttle tankers is a duopoly primarily defended by reputation & operations of shuttle tankers.  The oil companies number one concern is safety & prevention of an oil spill then price.  This the opposite of containers.  For containers price is everything & the appealing point of SSW was the longer term contracts they had with creditworthy counterparties.  However, if pricing competition rears it head again & the levered shippers run into financial difficulties the contracts will be renegotiated.

Since shuttle tankers are more of a mission critical part of offshore transportation value chain, the contract durations are not as important as with Seaspan when you have a least a half dozen other folks that can provide similar services versus 2 for shuttle tankers.  Since there are only 2 rational competitors the orderbook has been small.  I think the Knot Offshore presentation has some data on orderbook size.

IMO specialized ships can be more valuable to the owner than commodity ships as the commodity ships always have alot of being deployed because the ships are bankable.  Specialized ships require customization that customers will pay for when there are few competitors like RoRos & shuttle tankers.  Look at the returns for RoRo shippers and shuttle tankers as an example versus containers.  Although I like SSW management and contracts, it is a commodity business with a great jockey.  RoRos & shuttle tankers are better businesses.   The return on assets for shuttle tankers is in the low teens.  You can see the economics of this business via there financial statements on TOOs site.

The FPSO/FSO side of the business is different.  This business is more competitive than the shuttle tankers and key part of the value here is the option to no longer invest or maybe sell FPSO/FSOs & re-invest in shuttle tankers.  The write-down have primarily been in this part of the business.  The valuation of players here is lower than 10x EBITDA for shuttle tankers close to 6x.  This is also where TOO has had to provide price concessions.

Packer
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 09, 2018, 07:51:43 AM
That’s useful, thanks. The FPSO market is part of what worries me. FPSOs are mission critical bits of kit. Why do shuttles earn teens ROAs when FPSOs can’t? Sorry if I’m missing something obvious.

Broadly agree with your assessment of SSW, btw. I just like jockeys with cash flows.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Packer16 on September 09, 2018, 09:28:31 AM
The FPSO may be able to make those returns if oil prices stay high.  There are a few engineering firms that provide for leasing of ships designed for offshore oil fields (MODEC, SBM Offshore & BW Offshore) so the competition here is higher.  The other ships are owned by the oil companies.  The FPSO/FSO market is driven by oil prices but are still a part of offshore infrastructure.  Part of the thesis here is Brookfield is going to make the right capital allocation move here.  Part of the reason they won the deal is they were willing to accept keeping the FSO/FPSOs versus selling them off in today's down market.  If oil prices stay high, there may an opportunity to sell them.  As a worse case, the FPSO/FSOs can be cash flowed into run-off & the capital returned to shareholders with re-investment only occurring with the shuttle tankers.

Packer
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 09, 2018, 11:31:40 AM
That (reallocating capital) makes a lot of sense.

Still makes my head hurt, though, that one business would have so much higher returns than the other. Both are fundamentally oil-related asset businesses. One has two competitors, one has several more, but I struggle to get confident that reputation is enough to prevent other operators coming in (or customers insourcing the shuttle function). And if I am right then both returns *and* multiple will fall (assuming you're starting at 10x) which is very dangerous.

I'll have a look at Knot.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Packer16 on September 09, 2018, 01:00:06 PM
The shuttle business is not one can easily enter.  These 2 firms have been the duopoly for many years.  You have to get into the design process for these offshore transportation systems which is also not easy.  I am sure some have tried but given the expertise needed (you need to convince oil companies to change to someone new) & the small size of the market it does not make sense for the big boys to bother with.

Packer
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: whistlerbumps on September 10, 2018, 12:26:03 PM
There a few things that are going on here.  You have underearning FPSO/FSO assets that are being provided to some users on a temporary price reduction basis.  These price reductions should be unwound in 2019.  You also have some assets that are not generating any revenue.  These include some assets that may never generate revenues but if oil stays high there is a chance & finally the re-investment opportunity from FPSO/FSOs to shuttle tankers should be able to generate the before mentioned 20/25% DCF yield on today's prices.  The depreciation is high due to restating shuttle tanker life from 25 to 20 years and depreciation associated with some assets TOO would not invest in if they were investing today.

Packer

Agreed.. the two key issues here are when the Petrojarl starts earning full rates and whether they can new long-term contracts for the Varg, Spirit, Ostras, Arendhal Spirit etc.  If/when those things start to happen, DCF should inflect materially higher and we should see the impact of the incremental 200mln of EBITDA.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bjakes00 on September 15, 2018, 01:38:25 PM
I hadn't seen the Massif Capital write up on this previously, including here:
https://static1.squarespace.com/static/55cbe47de4b0a1e3b9b911fe/t/5ae32b58575d1f4839c0056d/1524837208712/Teekay+Offshore.pdf (https://static1.squarespace.com/static/55cbe47de4b0a1e3b9b911fe/t/5ae32b58575d1f4839c0056d/1524837208712/Teekay+Offshore.pdf)
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Schwab711 on September 15, 2018, 02:25:25 PM
Will IMO 2020 effect EBITDA margins for TOO?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 17, 2018, 12:12:26 PM
Any news today?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: peterHK on September 17, 2018, 12:29:01 PM
I struggle with this one. I think the re-contracting risk of the FPSO's are higher than what most bulls are assuming, so that means no revenue growth, and FCF growth hard to come by. That then puts more in jeopardy the de-leveraging story which is really is what's going to drive this (ie until it's clear they can really deleverage, they're going to trade at depressed multiples).

I have a lot of faith in BAM/BBU, but because they own the debt and they own the majority of the LP, they have a few ways to extract value here for their investors that we don't by just buying the stock, so their risk/reward is a little more skewed IMO.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Steven B on September 17, 2018, 12:42:12 PM
I've become less certain about the FPSOs, I'll concede to that.

However, I came for 25% FCF yield. Having a hard time getting there as well. Packer, do you believe this lofty yield is only in play after the shift their focus from FPSO/FSO to shuttle tankers? Is there any way to ascertain what their true maintenance CAPEX is? They have plenty of older shuttle tankers as well. Will the new ship builds be growth or just maintaining the current cash flow?

That being said, these are all upside questions. A hell of a lot better than downside questions!

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on September 17, 2018, 03:37:45 PM
Packer and I have debated about TOO extensively and it has forced me to really sharpen the pencil.  The question of maintenance cap ex is a real one and rather tricky to figure out.  I am sharing my thoughts in hope of further sharpening my pencil. 

At first glance, if you have a business with $309mm of D&A and the company claim that the maint cap ex is $200mm, it seems ludicrous.  I focus quite a bit on real asset investing, kind of similar to Brookfield but on a much smaller scale.  Real asset maint cap ex can be a funny topic.  Adding in GoodCo and BadCo dynamic can further muddy the water.  For example, there are apartments in Rome, Italy that were built in 700 AD that can still be rented out as AirBnbs.  The land, brick and mortar lasted for over 1,400 years.  When you apply a 30-40 year D&A on that, it produces an unrealistically high D&A that is not real.  This is largely the case when you own valuable real estate in desirable locations such as Rome and NYC.  On the other end of the spectrum is your personal auto.  Useful like is likely 10 years.  If you don't think that accounting D&A mirrors real expenses, I have a bridge that I can sell you.  Hence, both the FPSO and Shuttle Tankers have real finite lives.  I personally agree with Packer that FPSO, Towage, UMS, etc are all in run-off mode.  Perhaps, they get sold if oil prices goes higher.  Our understanding is that Teekay is a really good operator and very well respected in the industry (for shuttle tankers).  However, their capital allocation was severely lacking.  Marrying all of this with a yield driven structure is just a recipe for disaster.  The reflexivitiy works in both directions. 

So, what are we really looking at today?  I think the method of thinking that is most representative of economic reality today is looking at Teekay as a BadCo in run off mode.  The cashflow from FPSO is used to pay interest payment and pay off debt.  Eventually, there will be no FPSO, unless the customers will agree to sign a 10 year contract or something that materially de-risk the capital investment.  Where it gets interesting is the shuttle tanker financials.   

The shuttle tanker segment does about $250mm of EBITDA on $1,445mm of net PP&E.  The total asset is about $1,977mm of total assets.  What is really interesting is that the total debt is $1,257.  Teekay Shuttle Tanker LLC was formed in July 2017.  It raised $250mm sr unsecured bonds in the Norweigian bond market on August 2017, on October 2017, it refied a $600mm five year facility with The Group (Brookfield and Teekay Corp).  In Oct and Nov, the Company took delivery on 3 shuttle tankers servicing the East Coast of Canada market.  I estimate that the cost is roughy $450mm.  It subsequently refi the debt tied to these 3 vessels for $266mm or roughly 60%.  The question then becomes why are the debt capital markets so willing to lend what seems like 87% of the net PPE of the shuttle tanker business and 60% of the 3 tankers servicing the East Coast of Canada.  Btw, the 3 shuttle tankers have 12.5 year contracts in place.

Let's do an inversion exercise, what appears to be a commoditized business with low barrier to entry actually have lenders who are willing to lend 60% to the assets.  Well, the contract is what is important.  It is not the assets.   

So, let's do some ROA and ROE exercises.  EBITDA/Net PPE is roughly 17% for the shuttle tanker LLC.  I don't use the total assets because current assets and current liabilities tend to wash each other out.  If we assume a 10% residual value for the tankers after 20 years.  A 20 year straight line depreciation will amount to roughly 4.5%.  So the assets are earning 12.5% real economic ROA.  If we look at a $250mm consistent EBITDA less $80mm of interest payment and then less $2,140mm of gross PP&E less 10% residual divided by 20 years straight line results in real D&A expenses of $96.3mm.  This results in a FCF of $73.7mm.  Dividing this figure by the book value of $516mm results in a ROE of 14.3%. 

Continue in next post   
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on September 17, 2018, 04:35:36 PM
I believe Brookfield has made it very clear that they are looking to invest in more shuttle tankers that earns 14% ROE at a 60% LTV.  The proof is in the pudding.  Look at the following from the Q2 financials:

In July 2017, certain subsidiaries of the Company entered into shipbuilding contracts with Samsung Heavy Industries Co., Ltd. to
construct four Suezmax DP2 shuttle tanker newbuildings, for an aggregate fully built-up cost of approximately $602 million. These
newbuilding vessels are being constructed based on the Company's new Shuttle Spirit design which incorporates technologies to
increase fuel efficiency and reduce emissions, including liquefied natural gas (or LNG) propulsion technology. Upon expected delivery
in late-2019 through 2020, these vessels are to provide shuttle tanker services in the North Sea, with two to operate under the Company’s
existing master agreement with Equinor, and two to operate directly within the North Sea CoA fleet, which will add vessel capacity to
service the Company’s CoA portfolio in the North Sea. As at June 30, 2018, payments made towards these commitments were $25.4
million and the remaining payments required to be made are estimated to be $52.0 million (remainder of 2018), $333.1 million (2019)
and $192.0 million (2020). The Company expects to secure long-term debt financing related to these shuttle tanker newbuildings.

I believe the way to think about this capital allocation is that the $600mm will likely yield 17% EBITDA/Net PP&E.  Real economic ROA (net of 4.5% real D&A expense) will be 12.5%.  Thus, EBITDA will increase by $102mm in the shuttle tanker segment.  Now, the reality is that the company will also have some older shuttle tankers that will become obsolete.  There will be some cashflow that goes away.  The company typically sells the 20 year old tankers for 10% residual.  I don't know how much cashflow goes away due to the retiring of the fleets.  This is a piece of the puzzle that I have not been able to figure out.  Now extrapolating this out 5 yeas, if we assume that TOO invest roughly $300mm a year in shuttle tankers, this would equate to $1,500mm of shuttle tanker investments.  With a 17% EBITDA/Net PP&E return, this will generate $255mm more in EBITDA.  Of course, some of the older tankers will have to be retired.  But I can imagine that the run rate EBITDA for the shuttle tanker goes to roughly $400mm (assuming $250mm existing + $255 in newly acquired - $100mm in lost EBITDA due to retirement of tankers).  How much will this cost?  If we assume an overall 60% LTV, the equity needed would be $600mm for the $1.5bn of purchases.  The debt amount will increase by $900mm.  The additional interest cost will be $54mm.  TOO generates roughly $570mm of EBITDA as a company today.  The current interest payment is roughly $205mm.  In short, there is $365mm available for allocation towards debt pay down and new shuttle tanker purchases. 

Now let's be realistic, the FPSO, towage, and UMS and other badco assets have finite lives and they are worth less each year.  Their cashflow will also deteriorate over time.  But if we start with $570mm of EBITDA and $365mm available for cap ex and debt paydown.  It looks like we will generate $1,825mm of cash, and we will pay $600mm of equity for the shuttle tankers, and add on $900mm of debt into the shuttle tanker LLC segment.  This leaves roughly $1,225mm of cash available to pay down the BadCo debt.  Thus in five years, the GoodCo will have $400mm of EBITDA (some assumptions here) and roughly $1,257 + $900mm of debt which totals $2,157mm.  The BadCo will have paid off $1,225mm of debt.  Total net debt would be reduced by $325mm.  However, we now have a shuttle tanker business that does $400mm of EBITDA.  At a 10x multiple, that's worth $4 bn.  Better yet, let's examine the FCF generation of this segment.  With a $2,157mm of debt and at weighted average cost of 6%, the interest payment would be roughly $130mm.  Real D&A will be an additional $67.5mm.  We will have five years of D&A that runs off.  Let's say that the original D&A figure of $96mm gets cut by 25% (5 years out of 20 years).  So the maint cap ex will be $140mm.  $400mm less $130mm of interest payment and less $140mm of maint cap ex equals $130mm of true FCF in the shuttel tanker business.  Given that this figure likely approximates true FCF after adjusting for payments for cap ex, it likely merits a 15x FCF multiple for a duopoly business.   This is roughly $1,950mm of equity for the shuttle tanker segment.  On the BadCo side, there will be roughly $600-700mm of debt left.  Let's assume that the EBITDA is now only $150mm rather than the high $200mm.  Let's assume that this is worth 6x EBITDA.  The value would be roughly $900mm.  There is roughly $200-300mm worth of equity value in this segment.  The Towage and UMS segment actually generates losses currently.  But they are likely worth something.  In the next five years, 25% of the fleet will be scrapped and the proceeds will likely be $5mm-$10mm per shuttle tanker.  This is another $40-90mm of cash.  If you think that the FPSO is currently under earning by $50mm per Packer's comments, then that's another $250mm over five years.

At some point, the debt gets shifted from the BadCo over to GoodCo.  The GoodCo will have lower cost of financing.  There are opportunities to save on interest cost.  One thing that I forgot to mention is that preferred dividends.  That's going to be a $150mm cost over 5 years at an average of 8%.  I maybe wrong on that figure.  If you run any levered financial models, you will see that there is a compounding effect on the operating cashflow that grows at debt amount paid down x interest rate.  This could be meaningful. 

I estimate that there is a 150-200% upside over five years.  But let's not kid ourselves, we're dealing with a commodity exposure and high leverage.  I am still trying to wrap my head around this.  A couple observation is important.  Early 2016 is one of the worst O&G environment that I have seen.  It is almost as bad as 2008/2009.  Yet, the shuttle tanker EBITDA didn't really drop much.  That is a testament of a good business if I ever seen one.  Not many businesses operate in duopolies.  If outside firms can enter, why haven't they?  We've been told, that it is operating expertise etc.  I can imagine that no one wants an oil spill and no one wants to shut down production if their "floating pipeline" scheduled the wrong time for pick up.  I have watched some youtube video of shuttle tankers and it does look pretty complicated.  But then so is semi-submersibles and drill ships.  Anyhow, I am still trying to wrap my head around this.   

More on next post
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on September 17, 2018, 04:59:24 PM
I will talk about a line of reasoning that I hate to use.  I believe that people do stupid things when they outsource their research to some investment guru, i.e. Brookfield, Buffet, etc.  Nonetheless, it is an interesting exercise to reverse engineer the guru's process. 

Brookfield restructured Teekay over a year ago at $2.50 per share.  They got some warrants.  Over the years, we have gotten to understand Brookfield better and their process.  They like getting involve when they are the only people who is looking to provide capital.  Think Brazilian pipeline 2-3 years ago.  Assets in India recently.  Obviously O&G in 2016 was a very troubled space.  Our understanding is that TOO involves Brookfield Business Partners.  BBU is one of BAM's more impressive partnerships.  Look at their involvement with Graphtec.  That was an 8x in about 3 years.  BBU likes to invest in unique businesses during distress times.  Shuttle tanker business seems to fit the mold.  It is our understanding that BBU typically require a 15-20% IRR on their investments net of fees.  We're getting to buy TOO at a discount to the $2.50 price one year after BBU's involvement.  If BBU is correct, there is a 15-20% headstart already in addition to any discount to $2.50.  I believe that BBU's involvement addresses one of the biggest risk for the TOO thesis, capital allocation.  I think that BBU absolutely understands the GoodCo and BadCo dynamic and as far as I understand, they do not have any orders for non-shuttle tanker assets.  I believe that BBU will only buy new shuttle tanker if they can lock into long term contracts.  All of this is messy and hard to decipher.  It took me weeks to figure out the ROA and it was Packer's astute commentary that I should be using the Net PP&E rather than total net asset figures.  More importantly, the capital markets is very willing to lend to the shuttle tanker business.

The downside is very obvious.  Too much leverage, capital intensive, and commodity exposure.  I also think many other analysts missed the GoodCo and BadCo dynamic and put a blanket $200mm FCF multiple on the business.  In my analysis, I think that FCF for the shuttle tanker in year 5 is $130mm.  But I think that's a FCF figure that I am comfortable with and am willing to put a 12-15x multiple on.  10x EBITDA and 15X FCF gets us to the same ballpark around $4 bn EV for the shuttle tanker business. 

What's the further upside?  What if the company can allocate even more capital to the shuttle tanker business?  What if they can allocate $3 bn in the next 7 years.  At a 17% EBITDA/Net PP&E, that could be a $510mm of incremental EBITDA + $250mm today - $150mm form obsolescence.  At 10x EBITDA, this would imply a $610mm of EBITDA.  At 10x, this would imply a $6.1bn of EV.  With 60% LTV, the equity required would be $1,200mm and the incremental debt would be $1,800mm.  There would be about $3bn of equity in the shuttle tanker segment.  Now we have to go back re-do the debt paydown, etc. 

My head hurts from the math.   
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on September 17, 2018, 05:03:08 PM
BTW, feedbacks and comments welcome.  Please poke holes in the thesis. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Gregmal on September 17, 2018, 07:05:21 PM
I'll play a little devil's advocate but first preface it with the following statement. I'll take your math at face value. Same as I would Brookfield. I've personally found that getting that granular is often just too time consuming relative to what's already out there(IE a larger investor already being there) versus the likelihood the numbers play out that way due to macro circumstances. In other words, all the time you've spent breaking it down and crunching projected numbers, how often is this justified vs just kind of getting a general view of consensus numbers and as Munger has said "not needing to know a man's weight to see if he's fat"? I know it's different, but it's why for an investment like BRK, AAPL, GOOG or AMZN(FD:I only currently own GOOG but have prior owned all at one point or another), I do zero number crunching because the likelihood I have an edge over every other market participant in the name, is zero.

Second, is this not more or less a macro bet? Again, I own some cyclical stuff and IE GM have been hearing "peak auto" forever now, so I'm not saying macro bets are bad, but does this not more or less boil down to that?

I actually remember talking with you a while back and discussing an MLP that was boring but promising and buying after you spoke highly of it. It then got bought out. I owe you a beer! But generally MLP's, LP, etc are just kind of neglected areas that carry stigma's and seem to be out of favor since about 2015. I'm not sure I see a catalyst to that ending. Especially if rates keep rising.

Third, not saying this is the case with your investment, although I don't think one consciously does this, but I feel the longer the bull market rages on the further into complexity a lot of value investors tend to go. I mean earlier in the decade it was BAC and AIG. Now I see a lot of very different stuff. Last couple years it's been into highly levered companies/distressed assets. At the end of the day, if you are right, that's all that counts. But I've always personally steered away from companies with high debt/EV levels but have noticed a lot of value investors have moved to this space recently. Is this in any way a biproduct of something potentially being optically quite cheap, but at the same time a higher risk investment than you'd typically get into?

A lot of what you wrote seemed to be giving credit to Brookfield's track record. If Brookfield wasn't in this, would you look at it the same?

The assets in many cases as you mentioned depreciate and become worthless. I view this as time working against you.

So, I admire all the work and knowledge you have here, but isn't this kind of the classic "to hard" pile investment? It seems you disagree but I just think sometimes simpler is better and when there are too many moving parts that can move the needle rapidly, the investment becomes much more of a speculative gamble than anything else. I'll point to FRP, there just wasn't a way to lose with that investment. It was classic value. Here's I see a lot of ways I can lose. As you pointed out "The downside is very obvious.  Too much leverage, capital intensive, and commodity exposure. " Isn't this then just a tough business to be in? Or in other words, aren't there easier investments out there?

Just my 2c and a lot is simply general observations from a distance so take it with a grain of salt.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 17, 2018, 10:45:14 PM
Very useful reasoning BG2008 (although Gregmal raises some good points especially about value investor taking complexity and leverage risk at the top of the cycle - that’s me and it worries me).

My primary pushback is there’s no way I’d put Goodco on 15x FCF. 10x max, for me, but each to their own. That has to do with my lack of real confidence in the barrier to entry, plus at 15x I’d want higher FCFPS growth in steady state.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: chrispy on September 18, 2018, 05:36:08 AM
That is very helpful BG. I'll need to read it one or two more times to digest it all.

I was also thinking, Brookfield is totally in tune with Brazil where a lot of the shuttle tankers operate. Modec has at least 2 25yr FPSOs in the works for Petrobras. Brookfield may be able to use their connections in that region to get better contracts for TOO.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on September 18, 2018, 06:00:43 AM
All very valid points and I'll address them within your comments.  I want to be absolutely open and transparent with TOO.  Despite my long analysis that goes into a lot of detail, there are pockets of value that I am finding that have lesser upside but the downside is significantly less.  So depending on the price of TOO and other opportunities, I may swap out of TOO into other investments. 

I'll play a little devil's advocate but first preface it with the following statement. I'll take your math at face value. Same as I would Brookfield. I've personally found that getting that granular is often just too time consuming relative to what's already out there(IE a larger investor already being there) versus the likelihood the numbers play out that way due to macro circumstances. In other words, all the time you've spent breaking it down and crunching projected numbers, how often is this justified vs just kind of getting a general view of consensus numbers and as Munger has said "not needing to know a man's weight to see if he's fat"? I know it's different, but it's why for an investment like BRK, AAPL, GOOG or AMZN(FD:I only currently own GOOG but have prior owned all at one point or another), I do zero number crunching because the likelihood I have an edge over every other market participant in the name, is zero.

Getting granular is about "trust, but verify".  I've met with Brookfield and we have exchanged some views on why they got involved.  Brookfield getting involved was the signal.  But being able to back into the 17% EBITDA/NET PP&E figures was a critical break through in my analysis.  Being able to independently arrive at a 12.5% real ROA is really really important for me.  In your case with Goog, Amazn, AAPL and BRK, I think it's a different animal.  IN Amazn and Goog, and Aapl, you've got businesses that has network effect and very high return on incremental capital.  These companies are a lot more qualitative.  You can't compare a network effect company to a distressed "floating pipeline" type company.  

Second, is this not more or less a macro bet? Again, I own some cyclical stuff and IE GM have been hearing "peak auto" forever now, so I'm not saying macro bets are bad, but does this not more or less boil down to that?

Given that this deals directly with O&G, the Macro bet was Brookfield getting involved in 2017 when there were no buyers of O&G assets.  The last 2-3 years has not been kind to the O&G sector.  I have been kindly reminded by smart investors that there is a bear market somewhere even in a raging bull market like we had.  But yes, TOO is sensitive to overall macro conditions as it affects the price of oil.


I actually remember talking with you a while back and discussing an MLP that was boring but promising and buying after you spoke highly of it. It then got bought out. I owe you a beer! But generally MLP's, LP, etc are just kind of neglected areas that carry stigma's and seem to be out of favor since about 2015. I'm not sure I see a catalyst to that ending. Especially if rates keep rising.

I have actually been hunting in this specific segment because people no longer want to or care to invest in MLPs.  You don't get a K-1 with TOO.  It pays a negligible distribution today.  Brookfield likely view it as a C corp in the current form.  I have many people mention this to mee.  Actually my whole book pretty much consist of off the beaten path companies in unpopular structure.  In the last 2-3 years, I have been hunting in this space specifically for this reason.  I think people eventually do care if you can demonstrate growth in distribution. 

Third, not saying this is the case with your investment, although I don't think one consciously does this, but I feel the longer the bull market rages on the further into complexity a lot of value investors tend to go. I mean earlier in the decade it was BAC and AIG. Now I see a lot of very different stuff. Last couple years it's been into highly levered companies/distressed assets. At the end of the day, if you are right, that's all that counts. But I've always personally steered away from companies with high debt/EV levels but have noticed a lot of value investors have moved to this space recently. Is this in any way a biproduct of something potentially being optically quite cheap, but at the same time a higher risk investment than you'd typically get into? 

Trust me, I worry about this constantly.  I actually just did a portfolio review.  About 80% of my portfolio is ultra conservative.  Think 8-25% LTV. TOO is my most leveraged holding and it's about 3-4% of the portfolio.  I generally think about Howard Mark's risk/reward curve.  I ask myself am I being compensated for taking on the extra risk.  If TOO is a 3-4x in 5 years, maybe.

A lot of what you wrote seemed to be giving credit to Brookfield's track record. If Brookfield wasn't in this, would you look at it the same?

Nope.  I need Brookfield for their parental guidance in capital allocation.  Brookfield is a signal.  Being able to verify the ROAs is the DD.  I'm still trying to figure out why there is a duopoly in this space.   

The assets in many cases as you mentioned depreciate and become worthless. I view this as time working against you.

Yes for the most part.  But being able to re-invest more capital into the shuttle tanker business and being able to earn a real economic ROA is a very important distinction.  I think most people who look at TOO basically thinks A) the FCF is $200mm today B) It's too hard to figure out and there is a lot of O&G and macro exposure.  This is a commoditity business.  If you want to see what a zero barrier O&G business look like, look at some of the E&Ps, equipment vendors, etc.  I used to own a seismic equipment vendor that is a net-net.  I figure out in early 2016 that the cashburn was too large and I have not way of knowing when the sales will return.  For an O&G company to go through 2016 with very little drop in EBITDA is very impressive (strictly shuttle tanker business.)

So, I admire all the work and knowledge you have here, but isn't this kind of the classic "to hard" pile investment? It seems you disagree but I just think sometimes simpler is better and when there are too many moving parts that can move the needle rapidly, the investment becomes much more of a speculative gamble than anything else. I'll point to FRP, there just wasn't a way to lose with that investment. It was classic value. Here's I see a lot of ways I can lose. As you pointed out "The downside is very obvious.  Too much leverage, capital intensive, and commodity exposure. " Isn't this then just a tough business to be in? Or in other words, aren't there easier investments out there?

The thing about "too hard" is that at somepoint, paying 6% cap rate for a trophy NYC building would've been "too hard" for me.  At one point, paying 10X FCF for a low cap ex, high switching cost, $5 bn company was too hard for me.  One of the things that I regret in my investing career is not aggressively learning as much as can about better/great companies.  In hind sight, there were a lot of cheap $1-20 billion market cap companies trading at 10x FCF that subsequently went on to become multi-baggers.  I was invested in almost entirely small caps.  What I have learned over time is that if you have to explain capital allocation and why share buybacks is actually good for the shareholders, maybe it's worth it to pay 2-3x more in FCF to a management team who will have the right capital structure and who will allocate incremental capital correctly.  Another concept that I learned overtime is that companies that stay at $200mm in market cap for 10-20 years in the capital markets tend to have good reasons.  It could be that the CEO is subpar or it could be that the business itself is subpar.  When you start to find billion dollar companies that command 30-50% of its market, it likely has some real leadership and structural advantage.  This is not a causation, but there is often a correlation. 

Yes, FRP was a no brainer.  But it was a no brainer after I thought about FRPH for 6 months.  How does anyone put a $200mm valuation on a bunch of rock pits that throws off $6-8mm of EBITDA?  I remember an analyst putting a $30mm valuation on the rock pits and used a DCF analysis.  That was a $17 delta in valuation back when the stock traded at $30 a share.   

I actually recently found a few other names that are cheaper and easier to understand.  So, yes, I may swap out of TOO into other names.  But I think the exercise is important.  The exercise is necessary to continue to expand the circle of competence.  Now, I understand that certain companies are simply not worth the time to understand, i.e. O&G production companies or generic shipping.  But as a value investor, one owe it to him/herself to keep expanding his/her knowledge base.  Given that this is a duopoly, it is extremely interesting to me.  The math that I laid out earlier is also helpful that TOO could potentially trade at the same price despite having $350mm of EBITDA in the shuttle tanker segment.  In that case, the risk has been significantly lowered.  But I agree that TOO likely has too much leverage for my liking in its current form.  Then again, the really good investors tend to own investments that has "ick" factors.   



Just my 2c and a lot is simply general observations from a distance so take it with a grain of salt.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Gregmal on September 18, 2018, 07:41:54 AM

The thing about "too hard" is that at somepoint, paying 6% cap rate for a trophy NYC building would've been "too hard" for me.  At one point, paying 10X FCF for a low cap ex, high switching cost, $5 bn company was too hard for me.  One of the things that I regret in my investing career is not aggressively learning as much as can about better/great companies.  In hind sight, there were a lot of cheap $1-20 billion market cap companies trading at 10x FCF that subsequently went on to become multi-baggers.  I was invested in almost entirely small caps.  What I have learned over time is that if you have to explain capital allocation and why share buybacks is actually good for the shareholders, maybe it's worth it to pay 2-3x more in FCF to a management team who will have the right capital structure and who will allocate incremental capital correctly.  Another concept that I learned overtime is that companies that stay at $200mm in market cap for 10-20 years in the capital markets tend to have good reasons.  It could be that the CEO is subpar or it could be that the business itself is subpar.  When you start to find billion dollar companies that command 30-50% of its market, it likely has some real leadership and structural advantage.  This is not a causation, but there is often a correlation. 

Yes, FRP was a no brainer.  But it was a no brainer after I thought about FRPH for 6 months.  How does anyone put a $200mm valuation on a bunch of rock pits that throws off $6-8mm of EBITDA?  I remember an analyst putting a $30mm valuation on the rock pits and used a DCF analysis.  That was a $17 delta in valuation back when the stock traded at $30 a share.   

I actually recently found a few other names that are cheaper and easier to understand.  So, yes, I may swap out of TOO into other names.  But I think the exercise is important.  The exercise is necessary to continue to expand the circle of competence.  Now, I understand that certain companies are simply not worth the time to understand, i.e. O&G production companies or generic shipping.  But as a value investor, one owe it to him/herself to keep expanding his/her knowledge base.  Given that this is a duopoly, it is extremely interesting to me.  The math that I laid out earlier is also helpful that TOO could potentially trade at the same price despite having $350mm of EBITDA in the shuttle tanker segment.  In that case, the risk has been significantly lowered.  But I agree that TOO likely has too much leverage for my liking in its current form.  Then again, the really good investors tend to own investments that has "ick" factors.   



I thought the above is excellent. I wholeheartedly agree with you. I guess I can clarify partly as I perhaps take into consideration the situations guys like us are in and didn't explain fully the context. You definitely put in a ton of time with your due diligence. But I'm sure you can also relate to not having 25+ analysts at your disposal and the fact that often all the work they'd be doing falls on you. Thus there is a value to the time you have to spend on an investment. That is part of the risk to reward equation. I think one should always try to expand their circle of competence. But there's also a bit of a time management skill involved and being able to determine when one is climbing Mt. Everest and getting paid $15 an hour to do so, just doesn't make sense.

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on September 18, 2018, 11:07:59 AM

The thing about "too hard" is that at somepoint, paying 6% cap rate for a trophy NYC building would've been "too hard" for me.  At one point, paying 10X FCF for a low cap ex, high switching cost, $5 bn company was too hard for me.  One of the things that I regret in my investing career is not aggressively learning as much as can about better/great companies.  In hind sight, there were a lot of cheap $1-20 billion market cap companies trading at 10x FCF that subsequently went on to become multi-baggers.  I was invested in almost entirely small caps.  What I have learned over time is that if you have to explain capital allocation and why share buybacks is actually good for the shareholders, maybe it's worth it to pay 2-3x more in FCF to a management team who will have the right capital structure and who will allocate incremental capital correctly.  Another concept that I learned overtime is that companies that stay at $200mm in market cap for 10-20 years in the capital markets tend to have good reasons.  It could be that the CEO is subpar or it could be that the business itself is subpar.  When you start to find billion dollar companies that command 30-50% of its market, it likely has some real leadership and structural advantage.  This is not a causation, but there is often a correlation. 

Yes, FRP was a no brainer.  But it was a no brainer after I thought about FRPH for 6 months.  How does anyone put a $200mm valuation on a bunch of rock pits that throws off $6-8mm of EBITDA?  I remember an analyst putting a $30mm valuation on the rock pits and used a DCF analysis.  That was a $17 delta in valuation back when the stock traded at $30 a share.   

I actually recently found a few other names that are cheaper and easier to understand.  So, yes, I may swap out of TOO into other names.  But I think the exercise is important.  The exercise is necessary to continue to expand the circle of competence.  Now, I understand that certain companies are simply not worth the time to understand, i.e. O&G production companies or generic shipping.  But as a value investor, one owe it to him/herself to keep expanding his/her knowledge base.  Given that this is a duopoly, it is extremely interesting to me.  The math that I laid out earlier is also helpful that TOO could potentially trade at the same price despite having $350mm of EBITDA in the shuttle tanker segment.  In that case, the risk has been significantly lowered.  But I agree that TOO likely has too much leverage for my liking in its current form.  Then again, the really good investors tend to own investments that has "ick" factors.   



I thought the above is excellent. I wholeheartedly agree with you. I guess I can clarify partly as I perhaps take into consideration the situations guys like us are in and didn't explain fully the context. You definitely put in a ton of time with your due diligence. But I'm sure you can also relate to not having 25+ analysts at your disposal and the fact that often all the work they'd be doing falls on you. Thus there is a value to the time you have to spend on an investment. That is part of the risk to reward equation. I think one should always try to expand their circle of competence. But there's also a bit of a time management skill involved and being able to determine when one is climbing Mt. Everest and getting paid $15 an hour to do so, just doesn't make sense.

Totally understand the sentiments here.  Frankly, I have missed out on a few big opportunities because I do not have a team of 25 analysts at my disposal.  Think big banks etc.  In hindsight, the big banks got really strict with underwriting.  I still can't refinance my mortgage.

Part of my journey into TOO is also tied to my background which specialize in hard assets.  The circle of competence starts at real estate and expands further out to pipelines (MLPs) and to some shuttle tankers.  It is a natural progression for me. 

Being a small fund, it is critical to decide and have a gut feel for what deserves your time and what doesn't.  None of us has the luxury of learning for the sake of learning.  That in itself is an art that gets refined over time.  The best way that I can describe TOO is that I think it sits above the risk/reward curve as you go up in leverage.  I think a lot of Brookfield investments tend to look very hairy at first.  I suspect there will be another entry point for TOO which may or may not be at a higher price but the leverage a lot more manageable today.  Hence, I could potentially swap out of TOO into something that's safer.  But it would be hard to achieve 5 year 3 bagger elsewhere. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: peterHK on September 18, 2018, 01:40:21 PM
Great thoughts and math BG.

I haven't done the math yet, but I agree with you on the following:

1) BAM is the signal. Asked if I would look at this the same way without BAM I would say that 1) capital allocation is better with BAM controlling the board and LP and; 2) yes, I would look at the underlying business the same way, BAM just found it before I did. What BAM (and I) want are the floating pipelines because of the superior economics. 

2) Goodco vs. badco is a good way to look at this (and I can see easily the differentiation between FPSO/Shuttle businesses). The other nice thing about goodco & badco structures is that the market tends to be lazy and not look through the financials. At some point you start getting inflection in the financials where goodco starts to take larger and larger share, and the metrics improve, and that's an additional catalyst to deleveraging that we can look forward to.

3) on oil/commodity risk. I think that's a risk on the growth side of things, but if we look how the company fared through 2015, revenues were remarkably stable, so in terms of business risk here, I think on the shuttle side it's relatively low. If you can buy it for a low enough value, then your margin of safety is that even with no growth, a 10% or 15% FCF yield results in pretty decent returns if the company pays out dividends or buys back shares.

4)  If we wanted to look at this really conservatively, then I'd start by taking the FPSO business down to $0, loading the debt on the shuttle business, and seeing how much of the current share price that justified and how they'd manage the debt. That's sort of your downside case really because of how stable the shuttle business is.

5) a wise investor with a 20 year track record of beating the TSX by 3% annually said to me "there's no investment where there's nothing wrong". The thing that's wrong here is leverage, but I think I tend to agree with how BAM is likely looking at this: it's much more like a pipeline than a shipping company (high capex, high value of in situ assets, contracted revenue stream, relatively stable earnings), and a pipeline can stand this sort of leverage if it's run well.

On the math, don't know if I'd agree or disagree as I haven't run the numbers myself. But qualitatively I think this is very interesting and has a lot of signs of what can be a very good business that is currently trading at a depressed multiple due to I think a capital structure issue that BAM and time can fix.

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on September 18, 2018, 02:29:57 PM
On the pipeline analogy, do the contracts actually look similar? My understanding is the pipelines tend to have long term (but I don’t know how long), take or pay, inflation linked contracts. Is that the same for the shuttles?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bjakes00 on September 18, 2018, 03:30:48 PM
Pg 13 and 14 from the latest quarterly has some detail on the contracts but still leaves a ton of questions:
https://www.teekay.com/wp-content/uploads/2018/04/Teekay-Shuttle-Tankers-Second-Quarter-Financials.pdf (https://www.teekay.com/wp-content/uploads/2018/04/Teekay-Shuttle-Tankers-Second-Quarter-Financials.pdf)

There is some reference to the contract being inflation linked for time charters and reimbursement of costs under the Contract of Affreightment. The actual pricing mechanism is less clear and I suspect more information can only be gleaned from someone in the industry.

In terms of contract duration, their new builds that are going to the East Coast of Canada all have 15 year contract durations to get a sense for the length. That being said, the companies stated strategic goals are "contract extension" and the contracts are obviously linked to the life of the field that the shuttles are attached to.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on September 18, 2018, 04:22:09 PM
If you take the FPSO and Badco assets down to $0, you're insolvent today.  Keep in mind, some of the FPSO assets have contracts in place.  Overall, TOO has something like $6 bn of contracted revenue.  You can't stress test all investments by attributing segments with $0.  In this case, Badco has roughly $1.8bn of debt atttributed to it.  I guess you can assume that there is no net equity and all the future cashflow will merely pay down the debt.  I can live with that.  Then you ask yourself, what's the shuttle tanker business worth in the long run. 

Great thoughts and math BG.

I haven't done the math yet, but I agree with you on the following:

1) BAM is the signal. Asked if I would look at this the same way without BAM I would say that 1) capital allocation is better with BAM controlling the board and LP and; 2) yes, I would look at the underlying business the same way, BAM just found it before I did. What BAM (and I) want are the floating pipelines because of the superior economics. 

2) Goodco vs. badco is a good way to look at this (and I can see easily the differentiation between FPSO/Shuttle businesses). The other nice thing about goodco & badco structures is that the market tends to be lazy and not look through the financials. At some point you start getting inflection in the financials where goodco starts to take larger and larger share, and the metrics improve, and that's an additional catalyst to deleveraging that we can look forward to.

3) on oil/commodity risk. I think that's a risk on the growth side of things, but if we look how the company fared through 2015, revenues were remarkably stable, so in terms of business risk here, I think on the shuttle side it's relatively low. If you can buy it for a low enough value, then your margin of safety is that even with no growth, a 10% or 15% FCF yield results in pretty decent returns if the company pays out dividends or buys back shares.

4)  If we wanted to look at this really conservatively, then I'd start by taking the FPSO business down to $0, loading the debt on the shuttle business, and seeing how much of the current share price that justified and how they'd manage the debt. That's sort of your downside case really because of how stable the shuttle business is.

5) a wise investor with a 20 year track record of beating the TSX by 3% annually said to me "there's no investment where there's nothing wrong". The thing that's wrong here is leverage, but I think I tend to agree with how BAM is likely looking at this: it's much more like a pipeline than a shipping company (high capex, high value of in situ assets, contracted revenue stream, relatively stable earnings), and a pipeline can stand this sort of leverage if it's run well.

On the math, don't know if I'd agree or disagree as I haven't run the numbers myself. But qualitatively I think this is very interesting and has a lot of signs of what can be a very good business that is currently trading at a depressed multiple due to I think a capital structure issue that BAM and time can fix.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: peterHK on September 18, 2018, 04:29:51 PM
If you take the FPSO and Badco assets down to $0, you're insolvent today.  Keep in mind, some of the FPSO assets have contracts in place.  Overall, TOO has something like $6 bn of contracted revenue.  You can't stress test all investments by attributing segments with $0.  In this case, Badco has roughly $1.8bn of debt atttributed to it.  I guess you can assume that there is no net equity and all the future cashflow will merely pay down the debt.  I can live with that.  Then you ask yourself, what's the shuttle tanker business worth in the long run. 

I don't stress test all investments by attributing segments with zero, but if you can show that the FPSO isn't really in the share price (ie trading at $0), but will generate cash flow in excess of the debt and thus have a positive NPV to the equity, that can be a nice margin of safety.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: gokou3 on September 18, 2018, 04:53:21 PM
Great discussion.  One thing I would note is that the price at which BAM bought the TOO shares is not really $2.50 but closer to $2.00.  If you look at Teekay's PR from July 27, 2017, by investing $610M for the common shares BAM also got ~62.43M warrants with an exercise price of $0.01, effectively free.  Thus, I would adjust their common purchase price to reflect the almost-free warrants.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Steven B on September 20, 2018, 12:29:28 PM
Great posts guys. I will raise my hand as one of the people who missed the Shuttle vs. FPSO goodco vs. badco. stuff that Packer and BG have highlighted. I knew that the Tanker was a less competitive business (hard time defining the duopoly/moat until I can reasonably explain it; I cant!) but missed the big picture. Thanks folks.

That being said I have some questions BG namely;



I believe the way to think about this capital allocation is that the $600mm will likely yield 17% EBITDA/Net PP&E.  Real economic ROA (net of 4.5% real D&A expense) will be 12.5%.  Thus, EBITDA will increase by $102mm in the shuttle tanker segment.  Now, the reality is that the company will also have some older shuttle tankers that will become obsolete.  There will be some cashflow that goes away.  The company typically sells the 20 year old tankers for 10% residual.  I don't know how much cashflow goes away due to the retiring of the fleets.  This is a piece of the puzzle that I have not been able to figure out.  Now extrapolating this out 5 yeas, if we assume that TOO invest roughly $300mm a year in shuttle tankers, this would equate to $1,500mm of shuttle tanker investments.  With a 17% EBITDA/Net PP&E return, this will generate $255mm more in EBITDA.  Of course, some of the older tankers will have to be retired.  But I can imagine that the run rate EBITDA for the shuttle tanker goes to roughly $400mm (assuming $250mm existing + $255 in newly acquired - $100mm in lost EBITDA due to retirement of tankers).  How much will this cost?  If we assume an overall 60% LTV, the equity needed would be $600mm for the $1.5bn of purchases.  The debt amount will increase by $900mm.  The additional interest cost will be $54mm.  TOO generates roughly $570mm of EBITDA as a company today.  The current interest payment is roughly $205mm.  In short, there is $365mm available for allocation towards debt pay down and new shuttle tanker purchases. 


Assuming that $1500M investment nets you 10 shiny new tankers, does it make sense that they contribute you the same about of EBITDA at the current fleet of ~25? I get some are older and have different ownership structures (I tried to adjust for that).

Additionally, isn't a healthy chunk of the $365M of leftover EBITDA earmarked for Maintenance CAPEX? 


Now let's be realistic, the FPSO, towage, and UMS and other badco assets have finite lives and they are worth less each year.  Their cashflow will also deteriorate over time.  But if we start with $570mm of EBITDA and $365mm available for cap ex and debt paydown.  It looks like we will generate $1,825mm of cash, and we will pay $600mm of equity for the shuttle tankers, and add on $900mm of debt into the shuttle tanker LLC segment.  This leaves roughly $1,225mm of cash available to pay down the BadCo debt.  Thus in five years, the GoodCo will have $400mm of EBITDA (some assumptions here) and roughly $1,257 + $900mm of debt which totals $2,157mm.  The BadCo will have paid off $1,225mm of debt.  Total net debt would be reduced by $325mm.  However, we now have a shuttle tanker business that does $400mm of EBITDA.  At a 10x multiple, that's worth $4 bn.  Better yet, let's examine the FCF generation of this segment.  With a $2,157mm of debt and at weighted average cost of 6%, the interest payment would be roughly $130mm.  Real D&A will be an additional $67.5mm.  We will have five years of D&A that runs off.  Let's say that the original D&A figure of $96mm gets cut by 25% (5 years out of 20 years).  So the maint cap ex will be $140mm.  $400mm less $130mm of interest payment and less $140mm of maint cap ex equals $130mm of true FCF in the shuttel tanker business.  Given that this figure likely approximates true FCF after adjusting for payments for cap ex, it likely merits a 15x FCF multiple for a duopoly business.   This is roughly $1,950mm of equity for the shuttle tanker segment.  On the BadCo side, there will be roughly $600-700mm of debt left.  Let's assume that the EBITDA is now only $150mm rather than the high $200mm.  Let's assume that this is worth 6x EBITDA.  The value would be roughly $900mm.  There is roughly $200-300mm worth of equity value in this segment.  The Towage and UMS segment actually generates losses currently.  But they are likely worth something.  In the next five years, 25% of the fleet will be scrapped and the proceeds will likely be $5mm-$10mm per shuttle tanker.  This is another $40-90mm of cash.  If you think that the FPSO is currently under earning by $50mm per Packer's comments, then that's another $250mm over five years.

Where did you get the estimated maintenance cap number from?


I estimate that there is a 150-200% upside over five years.


Gosh that would be nice.

Anyway, thanks again for the great posts and insight.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on September 27, 2018, 01:17:27 PM
Steven B,

Your question about 10 shiny new tankers versus the 25 is a great one and it is one that I am struggling with as well.  I think the best way to think about the concept is if you are in the rental car business.  Would 10 new shiny Mercedes earn more than 25 older ones?  Given that the useful life is 20 years instead of 10 years, it maybe more relevant.  My understanding is that the new shuttle tankers have more efficient features that makes them more productive.  Packer has spoken to this in his post.  In addition, Brookfield insist that they enter into long term contracts to justify a decent return on capital.  Trust me, my head hurts thinking about this dynamic and frankly, it is not like it's a building in NYC that I can go and see and figure out why people would pay $80/sqft for rent.   

Regarding the $365mm of leftover EBITDA earmarked for maintenance CapEx.  Given that this is a GoodCo and a BadCo, there is a conscious decision to runoff one division and invest capital in another one.  For the GoodCo, yes a portion will be for maint cap ex.  I have run some Excel analysis offline that shows what happen to cashflow if you generate a 17% EBITDA/Net PP&E over time.  It shows that the EBITDA will grow overtime.  There are a lot of sensitivity in the analysis.  Will TOO always get 17% EBITDA/Net PP&E on its invested capital?  The results will be great if yes.  Frankly, if you do $1.5 bn multiply by 17%, it shows you that you get $255mm of incremental EBITDA.  To be fair, I also add in an EBITDA decrease of $100mm ( I believe in my previous post) for the retirement and deterioration of the fleet over a 5 year time frame from the current $250mm figure.  When I did the Excel analysis, my conclusion is that if you're getting 17% EBITDA/Net PP&E, you need a cap ex figure that is lower than D&A to maintain your EBITDA figure.  This is largely because you're earning a real economic return on Net PP&E (think 17% less 4.5% real D&A a year).   


 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on September 27, 2018, 01:25:30 PM
In the interest of full transparency, I want to let people know that I have recently found a couple "one foot hurdles" and have since trimmed my position in TOO.  I think that TOO will work out great if it works out according to my math.  Given rate increase headlines lately, I have found some opportunities that are 100-200% upside in 5 years with much healthier balance sheets and businesses where the ROA and ROE are much easier to understand.  However, I will continue to monitor TOO because it fascinates me as an investment.     
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bizaro86 on September 27, 2018, 03:31:34 PM
While I know I personally have enjoyed your thoughts on TOO, if you've built positions would you consider sharing your 1 foot hurdles?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: walkie518 on September 27, 2018, 03:35:56 PM
In the interest of full transparency, I want to let people know that I have recently found a couple "one foot hurdles" and have since trimmed my position in TOO.  I think that TOO will work out great if it works out according to my math.  Given rate increase headlines lately, I have found some opportunities that are 100-200% upside in 5 years with much healthier balance sheets and businesses where the ROA and ROE are much easier to understand.  However, I will continue to monitor TOO because it fascinates me as an investment.     
like BAM itself  :P
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on September 27, 2018, 05:11:47 PM
While I know I personally have enjoyed your thoughts on TOO, if you've built positions would you consider sharing your 1 foot hurdles?

Bizaro,

I'm still building my positions. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bizaro86 on September 27, 2018, 10:40:17 PM
Fair enough, I've appreciated your candor in the past, if you feel at some point you can share I'd certainly be interested.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Gregmal on October 01, 2018, 12:07:13 PM
Given the outcome here appears to be kind of binary(either a wipeout or a big gain), this to me seems like an options play. I've been looking at a very small lottery ticket position in the 2020 2's, 3's, and 4's.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Pondside47 on October 01, 2018, 05:10:26 PM
Given the outcome here appears to be kind of binary(either a wipeout or a big gain), this to me seems like an options play. I've been looking at a very small lottery ticket position in the 2020 2's, 3's, and 4's.

I think viewing this as binary means one is not convinced on the staying power of the shuttle tanker business. Then if you are buying a lottery ticket with meaningful odds of 0, there are other options with better upsides than 2020 option on TOO.

Is it binary simply because of the leverage? Then a house is binary as well if financed the wrong way. I think Brookfield's approach in general is to finance great assets in a way that they will never be forced to sell at the wrong time. One should either be convinced on the moat of the shuttle tanker business or simply stay away from TOO and its derivates.

I'm gradually changing my view that BAM itself at around $40/share is a better option than TOO. The appeal to institutional money of investment options that don't mark to market and has proven track records of great return is just very obvious to me. If I still want to participate in the turn of offshore drilling, maybe tidewater is a better option at this point (trading at 1/3 of replacement value with net debt being zero)
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: chrispy on November 01, 2018, 05:38:33 PM
Positive quarter,
Settlement with Petrobras for $90m and a note that the agreement incentives Petrobras to give Teekay more contracts,
FPSO redployed in North Seattle (fixed contract) with life extension work payed for by Alpha.

FWIW, the new Brazilian governemtn is a positive development for private offshore investment there
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on November 07, 2018, 03:50:03 AM
Hey guys, this is Seth from JDP. Overall, this is a great discussion and I just wanted to offer some additional perspective on a few specific topics:

1)   Teekay Offshore is a Leasing + Logistics Business Model

I would submit that Teekay Offshore’s business model is more leasing-based than an asset owner and/or producer business model, which appears to dominate the perspective of some of the prior discussions.  TOO is essentially a collection of lease receivables and a logistics layer that resembles an Air Lease or containership lessor business model.

I would break down TOO’s value proposition into two main buckets:

a)   Cost of Capital Management

TOO utilizes its highly visible cash flow streams from its customers to utilize higher leverage and cheaper leverage and splits these economics with its customers.  Keep in mind that lenders leverage the cash flow streams NOT the assets. TOO’s leasing fundamentals are based on long-term lease receivables (>5 years) with investment grade counterparties.  Moody’s reports are helpful reads for further information on how they view risks in both shipping and offshore leasing.   

The key in these types of business models is to manage the duration of your lease receivables and build it to outlast the cycle of whatever hard assets are being leased.  Clearly, in TOO’s case, the prior management team really forgot this and screwed it up.  Brookfield should not.

b)   TOO offers its customers outsourced supply chain and logistics, enabling its customers to more greatly focus on managing their projects and more efficient working capital.

Offshore is more clearly more operationally intensive than pure equipment lessors, but Shell copied and proliferated the aircraft leasing + logistics business model for offshore, and Equinor (formerly Statoil) followed suit when it carved out and originated Teekay Offshore and its business model back in 2003.     

These are the primary value offerings of TOO’s business model, and when run properly, its business model should be both pro-cyclical (charter/backlog growth) and counter-cyclical (balance sheet management for customers)…these aren’t my words, GSL said it best

(http://www.globalshiplease.com/value-proposition)   

2)   Compare TOO and SSW

I think it is also very helpful to highlight David Sokol and Prem Watsa’s investment in Seaspan.  The comparisons to both companies are striking, $6bn in lease receivables, 5 year receivable duration, maritime lease + logistics, SSW’s leverage is even a bit higher at >5x than TOO’s <5x. 

I think it is a good exercise to ask, what are Brookfield, David Sokol, Prem Watsa and Dennis Washington all seeing in these businesses.  I would contend that they are not just taking a flyer on “oil options” or “levered bets.”


3)   No “goodco” or “badco” assets

I disagree that there are “badco” and “goodco” assets.  This line of thinking is incongruent with the long-term value proposition of TOO.  It is like running a firehose sales business and saying the nozzle of a firehose should be cut off and the store should just sell the rubber hoses because there is more margin on that part of the product for the moment.  Particularly as smaller independent operators and Private Equity players continue to step into the major basins, they will need partners with a full repertoire offshore supply chain to leverage versus simply leveraging an asset lessor.  I agree though, some assets are better than others and certain parts of the offshore supply chain are at different points in the cycle. 

4)   More on FPSOs

For what it is worth, I am more constructive than most on the FPSO segment.  I base my findings in researching the developments in Brazil (Campos and Santos) and in particular the record setting offshore block auctions, Johan Sverdrup in Norway, Bay Du Nord / Newfoundland Canada, consistent North Sea UK redevelopments, and maybe even more speculative development plays in Latin America.

I have yet to hear a compelling reason why Teekay Offshore, run by Brookfield, would not keep its relative market share with their customers as they significantly ramp up supply chain spending and production in Teekay’s primary fields of operation, particularly given that consortium bidding is on the rise, IOCs/PE are more likely to utilize independent leasing and logistics indy’s as they are more focused on shareholder pressures to return capital, and finally, returns-focused private equity are redeveloping fields that are a fit for used offshore equipment that is up to 80% less than the cost of a newbuild and 20% quicker to deploy. 

I don’t know what the offshore business will look like in ten years, or what the future price of oil is going to be, but I do know that tens of billions have been/will be spent on the above projects and that alone will drive TOO’s fleet utilization closer to 100%, which is all that is needed for a much higher equity price. 

Hopefully Brazil becomes a bigger catalyst for TOO’s FPSOs.  With the Brazilian election behind us and the repaired relationships with PBR and contract incentives get things moving ASAP.  PBR absolutely has to improve its production in these mature fields or sell to smaller players to repay debt, both of which should catalyze FPSO demand for TOO. 

Finally, in terms of the PBR settlement and 3 potential FPSO redeployments in Brazil.  I would hope that Brookfield feels confident that they can redeploy all 3 FPSOs or a majority of them, especially considering the opportunity costs of just scrapping those vessels and repaying high cost preferred.  If they fail at this it would look disastrous for them as an organization and it would really call into question the value of their 100 years of operating experience in Brazil.

5)   My thoughts on underperformance so far…

a)   Brookfield has been too aggressive. 

Brookfield acquired an intercompany loan for $140M from Teekay ParentCo, and then put the full principal back to TOO at $200M and charged a make whole of $12M. 

I am very curious to hear BBU’s reasoning on why they needed to make a 51% return on this piece of capital in one year to the detriment of their $640M equity investment. 

Further, I am curious why this $140M was only written up to $168M and not the full $200M at the time of the BBU strategic transaction or when they took control a few months ago knowing it was going to be repaid in full??  A good question for TOO’s financial reporting policy. 

If they let me on the conference call again these will be my line of questioning.

However, the capital structure has been overhauled.  The opportunity for BBU to siphon more cash is much less going forward, and it seems, the pressure for them to manage for capital appreciation of their equity investment is much greater going forward as the stock is down 20% over the past 18 months, and their public target of 15-20% CAGR on investments puts them 43% to 51% behind target at the moment.

b)   Transparency in this company is awful. 

The aforementioned Brookfield costs, NOK bond make wholes, PBR and Pirenema Spirit settlements, inflated G&A from trying to turn this company around have all caused massive confusion on shareholder returns. 

I believe management will improve visibility going forward, particularly now that Brookfield has taken its pound(s) of flesh.

6)   I certainly admire all of the independent thinking on this blog.  However, at some point, I would just suggest considering that you’re likely not going to come up with a more informed view of intrinsic value than the insider view of Brookfield (whose basis is now >20% greater than your potential entry), and why Prem Watsa and David Sokol bought into a similar group of marine leasing + logistics assets that trade at 40% premiums in equity multiples (along with TOO's closest public peers).

7)   Here is an update to our deck from last year…If you still want more…

https://jdpcap.com/when-1-1-too-updated/

Hope this is helpful!

Seth
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: whistlerbumps on November 07, 2018, 08:30:04 AM
Thanks for the detailed thoughts Seth... much appreciated and you lay out an interesting case... Couple of questions

1)"TOO utilizes its highly visible cash flow streams from its customers to utilize higher leverage and cheaper leverage and splits these economics with its customer"
Does this argument still hold water given TOO's much higher cost of capital (8.5% debt etc)
2) What do you think the best releasing opportunities are for Piranema Spirit and Ostras?
3) What would it take to get Towing/Accommodation more fully utilized and cash flow generating?
4) How do you bridge from current EBITDA to a more normalized state?

Thanks for a detailed analysis.

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on November 07, 2018, 09:32:39 AM
Hey guys, this is Seth from JDP. Overall, this is a great discussion and I just wanted to offer some additional perspective on a few specific topics:

1)   Teekay Offshore is a Leasing + Logistics Business Model

I would submit that Teekay Offshore’s business model is more leasing-based than an asset owner and/or producer business model, which appears to dominate the perspective of some of the prior discussions.  TOO is essentially a collection of lease receivables and a logistics layer that resembles an Air Lease or containership lessor business model.

I would break down TOO’s value proposition into two main buckets:

a)   Cost of Capital Management

TOO utilizes its highly visible cash flow streams from its customers to utilize higher leverage and cheaper leverage and splits these economics with its customers.  Keep in mind that lenders leverage the cash flow streams NOT the assets. TOO’s leasing fundamentals are based on long-term lease receivables (>5 years) with investment grade counterparties.  Moody’s reports are helpful reads for further information on how they view risks in both shipping and offshore leasing.   

The key in these types of business models is to manage the duration of your lease receivables and build it to outlast the cycle of whatever hard assets are being leased.  Clearly, in TOO’s case, the prior management team really forgot this and screwed it up.  Brookfield should not.

b)   TOO offers its customers outsourced supply chain and logistics, enabling its customers to more greatly focus on managing their projects and more efficient working capital.

Offshore is more clearly more operationally intensive than pure equipment lessors, but Shell copied and proliferated the aircraft leasing + logistics business model for offshore, and Equinor (formerly Statoil) followed suit when it carved out and originated Teekay Offshore and its business model back in 2003.     

These are the primary value offerings of TOO’s business model, and when run properly, its business model should be both pro-cyclical (charter/backlog growth) and counter-cyclical (balance sheet management for customers)…these aren’t my words, GSL said it best

(http://www.globalshiplease.com/value-proposition)   

2)   Compare TOO and SSW

I think it is also very helpful to highlight David Sokol and Prem Watsa’s investment in Seaspan.  The comparisons to both companies are striking, $6bn in lease receivables, 5 year receivable duration, maritime lease + logistics, SSW’s leverage is even a bit higher at >5x than TOO’s <5x. 

I think it is a good exercise to ask, what are Brookfield, David Sokol, Prem Watsa and Dennis Washington all seeing in these businesses.  I would contend that they are not just taking a flyer on “oil options” or “levered bets.”


3)   No “goodco” or “badco” assets

I disagree that there are “badco” and “goodco” assets.  This line of thinking is incongruent with the long-term value proposition of TOO.  It is like running a firehose sales business and saying the nozzle of a firehose should be cut off and the store should just sell the rubber hoses because there is more margin on that part of the product for the moment.  Particularly as smaller independent operators and Private Equity players continue to step into the major basins, they will need partners with a full repertoire offshore supply chain to leverage versus simply leveraging an asset lessor.  I agree though, some assets are better than others and certain parts of the offshore supply chain are at different points in the cycle. 

4)   More on FPSOs

For what it is worth, I am more constructive than most on the FPSO segment.  I base my findings in researching the developments in Brazil (Campos and Santos) and in particular the record setting offshore block auctions, Johan Sverdrup in Norway, Bay Du Nord / Newfoundland Canada, consistent North Sea UK redevelopments, and maybe even more speculative development plays in Latin America.

I have yet to hear a compelling reason why Teekay Offshore, run by Brookfield, would not keep its relative market share with their customers as they significantly ramp up supply chain spending and production in Teekay’s primary fields of operation, particularly given that consortium bidding is on the rise, IOCs/PE are more likely to utilize independent leasing and logistics indy’s as they are more focused on shareholder pressures to return capital, and finally, returns-focused private equity are redeveloping fields that are a fit for used offshore equipment that is up to 80% less than the cost of a newbuild and 20% quicker to deploy. 

I don’t know what the offshore business will look like in ten years, or what the future price of oil is going to be, but I do know that tens of billions have been/will be spent on the above projects and that alone will drive TOO’s fleet utilization closer to 100%, which is all that is needed for a much higher equity price. 

Hopefully Brazil becomes a bigger catalyst for TOO’s FPSOs.  With the Brazilian election behind us and the repaired relationships with PBR and contract incentives get things moving ASAP.  PBR absolutely has to improve its production in these mature fields or sell to smaller players to repay debt, both of which should catalyze FPSO demand for TOO. 

Finally, in terms of the PBR settlement and 3 potential FPSO redeployments in Brazil.  I would hope that Brookfield feels confident that they can redeploy all 3 FPSOs or a majority of them, especially considering the opportunity costs of just scrapping those vessels and repaying high cost preferred.  If they fail at this it would look disastrous for them as an organization and it would really call into question the value of their 100 years of operating experience in Brazil.

5)   My thoughts on underperformance so far…

a)   Brookfield has been too aggressive. 

Brookfield acquired an intercompany loan for $140M from Teekay ParentCo, and then put the full principal back to TOO at $200M and charged a make whole of $12M. 

I am very curious to hear BBU’s reasoning on why they needed to make a 51% return on this piece of capital in one year to the detriment of their $640M equity investment. 

Further, I am curious why this $140M was only written up to $168M and not the full $200M at the time of the BBU strategic transaction or when they took control a few months ago knowing it was going to be repaid in full??  A good question for TOO’s financial reporting policy. 

If they let me on the conference call again these will be my line of questioning.

However, the capital structure has been overhauled.  The opportunity for BBU to siphon more cash is much less going forward, and it seems, the pressure for them to manage for capital appreciation of their equity investment is much greater going forward as the stock is down 20% over the past 18 months, and their public target of 15-20% CAGR on investments puts them 43% to 51% behind target at the moment.

b)   Transparency in this company is awful. 

The aforementioned Brookfield costs, NOK bond make wholes, PBR and Pirenema Spirit settlements, inflated G&A from trying to turn this company around have all caused massive confusion on shareholder returns. 

I believe management will improve visibility going forward, particularly now that Brookfield has taken its pound(s) of flesh.

6)   I certainly admire all of the independent thinking on this blog.  However, at some point, I would just suggest considering that you’re likely not going to come up with a more informed view of intrinsic value than the insider view of Brookfield (whose basis is now >20% greater than your potential entry), and why Prem Watsa and David Sokol bought into a similar group of marine leasing + logistics assets that trade at 40% premiums in equity multiples (along with TOO's closest public peers).

7)   Here is an update to our deck from last year…If you still want more…

https://jdpcap.com/when-1-1-too-updated/

Hope this is helpful!

Seth

Seth,

Thank you for your awesome comments.  In your updated model, you have listed $240mm as the replacement and maintenance cap ex (I assume).  This is the biggest sticking point for me and many others who are invested in TOO.  How can replacement be lower than D&A and somehow the fleet can sustain itself in the long run?  The more detail and reasoning you can provide on this, the better.  If you have a I Banking style leasing model, I would love to see it and understand the input/outputs of a leasing model.  Love your work. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on November 07, 2018, 10:05:57 AM
Good questions...

1)"TOO utilizes its highly visible cash flow streams from its customers to utilize higher leverage and cheaper leverage and splits these economics with its customer"
Does this argument still hold water given TOO's much higher cost of capital (8.5% debt etc)

Generally speaking, this isn't a competitive rate.  It is a shame that these make up 20% of the debt stack.  But the 8.5% is more Brookfield blood money than growth capital, which is an important distinction.  TOO shouldn't need much capital to redeploy its idle fleet (Varg, etc.) and for its six newbuild shuttle tankers on order, those utilize first lien ship mortgages based on the contract quality, not the lessor.  Therefore growth debt capital is not marginally priced at 8.5% or anywhere near it...thankfully.     

2) What do you think the best releasing opportunities are for Piranema Spirit and Ostras?
  They are trying to get long-lived contracts through Petrobras with the incentives from the settlement.  However, if they can't get those, there are PE outfits that have apparently expressed interest, for instance there are media reports that DBO (norwegian)  may take over the Pirenema Field and that the contract would be close to length of field for 11 years.  I am taking these reports with a grain of salt, but Petrobras has clearly opened the doors for very long contract durations.  The Marlim FPSOs are 22 years.  Brookfield needs to earn its keep in these negotiations and offset their fees and unsecured debt, that is for sure! 

3) What would it take to get Towing/Accommodation more fully utilized and cash flow generating?
 I think these will inflect when the bigger projects I mentioned in my post above phase in.  Based on the CFO's comments on the call it seems like 1H19 will be breakeven-ish (which is actually a benefit considering the YoY comp, and 2H19 looks better. 

4) How do you bridge from current EBITDA to a more normalized state?

This is something TOO used to do.  If you look at their 2014 investor day they actually put out a ~$850M target with a smaller installed fleet base.  We are in different times now, so probably somewhere in between where we are now and there is the normalized range.     

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on November 07, 2018, 10:20:50 AM
Ahh yea, forgot to address the D&A versus replacement cost

Ultimately, the biggest thing to recognize is that the book value of these assets were journaled on the balance sheet based more on where the lease cycle was at the contract moment.  The values are not simply based on the metal.  Remember TOO aggressively ramped spending in late 2013/14 on about $1.6Bn in assets in a $100/bbl oil environment.  Also, Shuttle tanker useful life changing from 25 to 20 years. 

Check out some of the white papers out there on other maritime leasing structures like containers and clean product tanker leasing etc.  They have great data for comparison.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on November 07, 2018, 10:27:19 AM
Lastly, on models, detailed sharing etc. there is information out there on every single asset.  How much TOO paid by asset, what it used to be chartered for, etc.  It is a ton of work to sift through but it is out there.  I am trying to make a living in this business (emphasis trying) and I have a consulting arrangement / incentive comp tied to my work on this name with JDP Capital, so I can't share my detailed proprietary work beyond what we put in those public decks. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Steven B on November 14, 2018, 01:33:58 PM
Hi Seth,

Thank you for your color on TOO. It sounds like you really have boots on the ground on this one so I hope you'll humor me by answering some of this humble "generalist"'s questions. Thank you in advance and again, appreciate you hopping on here. Really cool of you.

1) Were you satisfied by the answer they gave to your question about buying back shares?

2) Do you feel there is any risk of mean reversion in CoA rates?

3) FCF yield that JDP uses is based on  EBITDA-interest,taxes, prefs, replacement. This number is significantly higher than DCF numbers and operating cash flow numbers on the Cash Flow statement (I'm disregarding changes in WC for sake of comparison and backing out replacement/Maint. CAPEX). It seems the discrepancy is based on  subtracting the unrealized gains on derivatives, FOREX, etc. from Cash Flow. (This normally wouldn't be a difference with a top of the line number like EBITDA, however the numbers added back on the DCF and CF statements are higher than than the gain on the income statement, so it's in there somewhere.) So which one is the economic reality? If I was TOO I definitely would much rather trumpet the JDP FCF numbers as opposed to DCF that's for sure!

In the same vein, the updated deck states that "Generalists are overly focused on DCF while missing Brookfield's strategy". It seems I'm the generalist that you refer to! Why shouldn't we be focused on DCF and what are we missing about Brookfield's strategy?

Quote
6)   I certainly admire all of the independent thinking on this blog.  However, at some point, I would just suggest considering that you’re likely not going to come up with a more informed view of intrinsic value than the insider view of Brookfield (whose basis is now >20% greater than your potential entry), and why Prem Watsa and David Sokol bought into a similar group of marine leasing + logistics assets that trade at 40% premiums in equity multiples (along with TOO's closest public peers).

While I agree 100%, what are you suggesting here? I'm sure you didn't mean that we should follow them blindly.  Is there some magical additional thesis that you're alluding to that you can provide color on? Maybe I'm hard headed, but seems like there is a subtle message here that I'm not getting.

Thanks.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: NorteCapital on November 15, 2018, 04:18:20 PM
Hi Seth,

Thank you for your insights.

I wanted to know why you did not ask the management in the Q3 Call about the intercompany loan that BBU took from TK.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on November 24, 2018, 10:54:48 AM
Just found this thread at COBF, wonderful discussion here. Can anybody help me to understand one thing:

Management had mentioned at the beginning of 2018 that TOO has growth project to add $200MM USD EBITDA in 2018. However, based on TOO's 3Q results, it is hard for me to see it. By my estimation, so far for the 9 months of 2018, TOO's EBITDA (CFVO) is $436 MUSD, while for last year same period in 2017, it was $375 MUSD. That's just an increase of ~$60 MUSD so far for 9 months. Where/when would the rest $140 MM come from? All in Q4?   Thanks!
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on November 25, 2018, 07:02:51 PM
Just found this thread at COBF, wonderful discussion here. Can anybody help me to understand one thing:

Management had mentioned at the beginning of 2018 that TOO has growth project to add $200MM USD EBITDA in 2018. However, based on TOO's 3Q results, it is hard for me to see it. By my estimation, so far for the 9 months of 2018, TOO's EBITDA (CFVO) is $436 MUSD, while for last year same period in 2017, it was $375 MUSD. That's just an increase of ~$60 MUSD so far for 9 months. Where/when would the rest $140 MM come from? All in Q4?   Thanks!

I think I was wrong in thinking that the $200MM incremental EBITDA is on top of 2017's total, and it is coming online gradually so probably it will have run its full course in 2019.

The biggest near term risk is the contract extension for Piranema + Ostras FPSOs. Anybody know how much CFVO they have generated in 2018?  I found a VIC write up on TOO here -
https://valueinvestorsclub.com/idea/Teekay_Offshore/6304552408#description (https://valueinvestorsclub.com/idea/Teekay_Offshore/6304552408#description)
in which they provided a table of "Rough bridge" from 2016 DCF to 2019 DCF. They modeled CFVO $100MM for Voyageur + Piranema, and $25MM for Ostras (Don't know how they came up with it).  We now know that Voyageur has 2019 covered completely, so the risk is mainly on Piranema + Ostras. Maybe $50MM total of CFVO loss from these two, if assume no contract extension?

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on November 28, 2018, 10:19:14 AM
Nobody interested in this one anymore? 

During their recent 3Q CC, they mentioned that they have a total of 800 (MM) capex in the near term on the shuttle tanker side. I assume this is for the 6 new shuttle tanker they have ordered. If we assume 40% of that is equity financing, then it works out to $320MM to be funded over the next two years. And I assume this will be funded by their cash flow, which is $640(CFVO)-$220(interest expense)=$420MM/year,  correct?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Gregmal on November 28, 2018, 10:50:35 AM
I've got a flier on some longer dated calls here, but ATM I think TDW warrants are a significantly more compelling way to play the space.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on November 28, 2018, 11:56:32 AM
I've got a flier on some longer dated calls here, but ATM I think TDW warrants are a significantly more compelling way to play the space.

Thanks, is there a thread or write up on TDW that I can get up to speed?

Anyway, TOO's market cap is almost at 1.1X EBITDA now. Companies do not trade at 1.1X EBITDA unless they are distressed or highly leveraged, neither of which is TOO's case (Well, their 5X leverage is not low by the absolute standard, but still reasonable by industry standard, a little bit high on the comfort zone of 4~5X).  Is market worrying that they will have difficulty refinance their debt due in the next couple of years?



Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Steven B on November 28, 2018, 12:47:20 PM
Hmmm think I might've scared Seth away.

 Anyway, still think it's interesting but thanks Greg, I'll look at Tidewater. Also Heth, while I don't profess to know the thought process of the market, you either need to look at EV/EBITDA or P/FCF, none of which are quite as low as 1.1 times.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Gregmal on November 28, 2018, 12:51:23 PM
I've got a flier on some longer dated calls here, but ATM I think TDW warrants are a significantly more compelling way to play the space.

Thanks, is there a thread or write up on TDW that I can get up to speed?

Anyway, TOO's market cap is almost at 1.1X EBITDA now. Companies do not trade at 1.1X EBITDA unless they are distressed or highly leveraged, neither of which is TOO's case (Well, their 5X leverage is not low by the absolute standard, but still reasonable by industry standard, a little bit high on the comfort zone of 4~5X).  Is market worrying that they will have difficulty refinance their debt due in the next couple of years?

I forget where so I'll have to look for it, but it's been covered a few places. I think Third Ave had written about it in one of their letters as well.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on November 28, 2018, 01:01:34 PM
Hmmm think I might've scared Seth away.

 Anyway, still think it's interesting but thanks Greg, I'll look at Tidewater. Also Heth, while I don't profess to know the thought process of the market, you either need to look at EV/EBITDA or P/FCF, none of which are quite as low as 1.1 times.

It all your fault, Steven.... just kidding. Yeah, hope Seth can come back and comment again :-)

Well, if we apply Seth's estimation of FCF of normalized ~$200MM a year, then this is at 3.5X FCF, which is cheap. I am trying to figure out why the share get to this low. What kind of distress the market is seeing? Do you see them having problem funding their 800MM*40%=320MM capex for the 6 new shuttle tanker over the next couple of years, while having 537MM debt mature in 2019, $349MM debt mature in 2020?  They should have about $400MM a year cash flow to deal with these, if those FPSO contracts can be extended.



Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: longlake95 on November 28, 2018, 01:11:31 PM
i thought that any funding issues were resolved by the Brookfield investment in TOO?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on November 28, 2018, 01:34:26 PM
i thought that any funding issues were resolved by the Brookfield investment in TOO?

Those funding issues resolved were for the FPSO/FSO/Shuttle growth project 2015-2017, that were supposed to add $200MM incremental EBITDA.  But since then, they just ordered 6 new shuttle tankers, and said on the 3Q CC that they have total of 800MM capex to fund. My understanding is that 60% of it will be debt financing and 40% of it will be equity financing, which should be coming from their cash flow.  I consider these 6 new shuttle tankers as replacement not growth, since they have quite bit of old shuttles that will need to be retired in the next 5 years.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on November 28, 2018, 10:28:58 PM
I am trying to figure out if TOO can comfortably handle their debt due + CAPEX for the next two year. From their 20F, page 69, "Contractual Obligations and Contigencies" table, they have 853MM  (590MM secured debt + 51MM op lease +  209MM CAPEX) in 2018. Then they have 1068MM (422 secured + 421 bonds + 225 CAPEX) in 2019, but we know the 421MM unsecured bonds is already refi'ed and pushed to 2023 by the new 700MM 8.5%, so the net is 647MM ($422 secured debt + 225 CAPEX), which is much less than what they did in 2018. Then they have 630MM (350MM secured debt + 280 CAPEX) in 2020, which is less than 2019.  So all the debt due in the next two years are secured debt. Question to knowledgeable people, when banks decide to roll these secured debt, what is their consideration? Would they require large down pay? Should they be able to easily roll those secured debt in 2019 + 2020?

After reviewing this, now I can understand why they had to issue preferred-E in 2Q to help to handle all the obligations in 2018, and did the 700MM @ 8.5% to push out those unsecured bonds due in 2019. It is a bit of pain, but makes the road ahead much easier. Comments?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on December 12, 2018, 04:41:38 PM
Is the Piranema field sold?  When I google "DBO energy Pirenema Field", the following popped up:

Double divestment deals for Petrobras | Upstream
https://www.upstreamonline.com/hardcopy/.../double-divestment-deals-for-petrobras
Nov 29, 2018 - According to Petrobras, the three fields have some identified ... the disposal of the mid-water Piranema field to newcomer DBO Energy, as well ...

 Double divestment deals for Petrobras
Brazil's Petrobras has reached a pair of deals worth a combined $823 million for the sale of a series of shallow-water and onshore fields, as part of its divestment strategy to raise up to $21 billion by the end of the year, writes Fabio

But I don't have access to the website. Anybody?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on December 27, 2018, 07:24:08 PM
I thought this one is not an oil bet but it came down even harder than oil. And it does not bounce back when oil bounce back! Really cannot figure out why, except guessing that some funds are dumping it due to redemption? Even assume that their 3 FPSO + UMS fail to get the contract extension, it still does not deserve current price level this low.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: chrispy on December 28, 2018, 08:24:07 AM
Tax loss selling may be happening too. Seems over sold. BBU has roughly followed its price movement too despite it being one of many holdings
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on December 28, 2018, 05:21:20 PM
Tax loss selling may be happening too. Seems over sold. BBU has roughly followed its price movement too despite it being one of many holdings

I get the tax loss selling in December, but who would have waited until Dec 20 or later to do it ...
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Spekulatius on December 29, 2018, 06:10:51 AM
Tax loss selling may be happening too. Seems over sold. BBU has roughly followed its price movement too despite it being one of many holdings

I get the tax loss selling in December, but who would have waited until Dec 20 or later to do it ...

Just my guess, but the stock market slump late this December messed up tax planning for many investors.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Steven B on December 30, 2018, 08:14:10 PM
Also generally follows the whole Teekay construct's trading pattern as of late...
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on December 31, 2018, 08:47:25 AM
Also generally follows the whole Teekay construct's trading pattern as of late...

The Teekay parent has a $600MM bond due in a year. Although they have $200MM cash on hand, they don't have good collateral's other than 3 very old FPSOs that are cash flow break even + the shares in TGP/TOO/TNK. Don't know if they will try to do funny things with TOO shares when rolling those bonds.

In the hind sight, BBU did a pretty good job by pushing TOO's debt maturity to 2023 earlier this year, before the market going down.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Steven B on December 31, 2018, 12:32:57 PM
Also generally follows the whole Teekay construct's trading pattern as of late...

The Teekay parent has a $600MM bond due in a year. Although they have $200MM cash on hand, they don't have good collateral's other than 3 very old FPSOs that are cash flow break even + the shares in TGP/TOO/TNK. Don't know if they will try to do funny things with TOO shares when rolling those bonds.

In the hind sight, BBU did a pretty good job by pushing TOO's debt maturity to 2023 earlier this year, before the market going down.
Don't see what they can do now that Brookfield is the GP...
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on December 31, 2018, 03:15:35 PM
The Teekay parent has a $600MM bond due in a year. Although they have $200MM cash on hand, they don't have good collateral's other than 3 very old FPSOs that are cash flow break even + the shares in TGP/TOO/TNK. Don't know if they will try to do funny things with TOO shares when rolling those bonds.

In the hind sight, BBU did a pretty good job by pushing TOO's debt maturity to 2023 earlier this year, before the market going down.
Don't see what they can do now that Brookfield is the GP...

Yeah, I don't worry that TK force to drop those old FPSOs down to TOO, but not sure about if they might fire sale their TOO shares when in distress...
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Deepdive on December 31, 2018, 09:30:58 PM
The Teekay parent has a $600MM bond due in a year. Although they have $200MM cash on hand, they don't have good collateral's other than 3 very old FPSOs that are cash flow break even + the shares in TGP/TOO/TNK. Don't know if they will try to do funny things with TOO shares when rolling those bonds.

In the hind sight, BBU did a pretty good job by pushing TOO's debt maturity to 2023 earlier this year, before the market going down.
Don't see what they can do now that Brookfield is the GP...

Yeah, I don't worry that TK force to drop those old FPSOs down to TOO, but not sure about if they might fire sale their TOO shares when in distress...

I doubt Brookfield is the kind of investor who let people drop down crap assets
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on January 08, 2019, 02:57:40 PM
Common unit distribution cut to zero. Although it makes sense from capital allocation point of view, I wonder if it means they are having difficulty to extend the FPSO contract? 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: chrispy on January 08, 2019, 04:01:12 PM
The story of the TOO in 2019 and forward was deleveraging and putting capital into the shuttle tanker business.  Cutting the dividend may very well be the correct move here.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on January 08, 2019, 04:05:49 PM
The story of the TOO in 2019 and forward was deleveraging and putting capital into the shuttle tanker business.  Cutting the dividend may very well be the correct move here.

I agree. Actually they should have just eliminated the distribution in 2017 when BBU bought in. I just wonder what makes them to decide to cut now, is it because there are new investing opportunities or because of some sort of distress?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: chrispy on January 08, 2019, 05:07:11 PM
That is a good question and I have no answer.

The market didn't give a hoot about the stock with the dividend. I am guessing whatever they do with the money will be more beneficial.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on January 08, 2019, 07:12:27 PM
That is a good question and I have no answer.

The market didn't give a hoot about the stock with the dividend. I am guessing whatever they do with the money will be more beneficial.

Here is another theory - BBU probably wanted to cut to zero from the very beginning. But in before, TK the parent company needed the distribution from TOO, but now since the other daughter company TGP is going to raise the distribution (from 14c to 19c), which more than offset TK's loss of distribution from TOO, they agreed to cut for now.  TK really need the distribution from its daughters to pay for SGA and interest on its debt because its 3 FPSOs cannot cover it.

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: RadMan24 on January 08, 2019, 09:08:49 PM
Well, the way this has played out, it looks like 2019 will have to include some resignings and contract wins, and stable cash flows (although the word "largely" in the press release was odd).

Just some recent articles if any interested in reading:

http://www.defesanet.com.br/naval/noticia/31680/Odebrecht-agora-Ocyan-avalia-fornecer-plataformas-a-Petrobras/  (use google and translate)

https://brazilenergyinsight.com/2018/11/17/compliance-issues-may-take-exmar-from-buzios-v/

https://www.oedigital.com/news/443910-mero-field-ultra-deepwater-challenges

https://www.oedigital.com/news/460637-chevron-gets-green-light-for-captain-eor

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: walkie518 on January 10, 2019, 04:11:08 PM
That is a good question and I have no answer.

The market didn't give a hoot about the stock with the dividend. I am guessing whatever they do with the money will be more beneficial.

Here is another theory - BBU probably wanted to cut to zero from the very beginning. But in before, TK the parent company needed the distribution from TOO, but now since the other daughter company TGP is going to raise the distribution (from 14c to 19c), which more than offset TK's loss of distribution from TOO, they agreed to cut for now.  TK really need the distribution from its daughters to pay for SGA and interest on its debt because its 3 FPSOs cannot cover it.

I wonder if they halt payments on pref shs too?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on January 10, 2019, 04:32:19 PM
That is a good question and I have no answer.

The market didn't give a hoot about the stock with the dividend. I am guessing whatever they do with the money will be more beneficial.

Here is another theory - BBU probably wanted to cut to zero from the very beginning. But in before, TK the parent company needed the distribution from TOO, but now since the other daughter company TGP is going to raise the distribution (from 14c to 19c), which more than offset TK's loss of distribution from TOO, they agreed to cut for now.  TK really need the distribution from its daughters to pay for SGA and interest on its debt because its 3 FPSOs cannot cover it.

I wonder if they halt payments on pref shs too?

HAMILTON, Bermuda, Jan. 08, 2019 (GLOBE NEWSWIRE) -- Teekay Offshore GP LLC, the general partner of Teekay Offshore Partners L.P. (Teekay Offshore or the Partnership) (NYSE:TOO), today announced that the Partnership is reducing its quarterly common unit cash distributions to zero, down from $0.01 per common unit in previous quarters, in order to reinvest additional cash in the business and further strengthen its balance sheet. There are no changes to the quarterly cash distributions relating to any of the Partnership’s outstanding preferred units, which were declared today and announced under a separate news release.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: walkie518 on January 10, 2019, 04:58:05 PM
That is a good question and I have no answer.

The market didn't give a hoot about the stock with the dividend. I am guessing whatever they do with the money will be more beneficial.

Here is another theory - BBU probably wanted to cut to zero from the very beginning. But in before, TK the parent company needed the distribution from TOO, but now since the other daughter company TGP is going to raise the distribution (from 14c to 19c), which more than offset TK's loss of distribution from TOO, they agreed to cut for now.  TK really need the distribution from its daughters to pay for SGA and interest on its debt because its 3 FPSOs cannot cover it.

I wonder if they halt payments on pref shs too?

HAMILTON, Bermuda, Jan. 08, 2019 (GLOBE NEWSWIRE) -- Teekay Offshore GP LLC, the general partner of Teekay Offshore Partners L.P. (Teekay Offshore or the Partnership) (NYSE:TOO), today announced that the Partnership is reducing its quarterly common unit cash distributions to zero, down from $0.01 per common unit in previous quarters, in order to reinvest additional cash in the business and further strengthen its balance sheet. There are no changes to the quarterly cash distributions relating to any of the Partnership’s outstanding preferred units, which were declared today and announced under a separate news release.
interesting...wonder if it stays that way
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on January 10, 2019, 06:25:55 PM
I wonder if they halt payments on pref shs too?
interesting...wonder if it stays that way

Unless they run into a liquidity issue, why would they suspend preferred dividend since it is accumulative? That will probably push the common below $1 instantly.

I am actually surprised how well common hold up yesterday after the announcement. Today is actually not bad either, considering the downgrade from Wells Fargo analyst Michael Webber.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on January 10, 2019, 07:51:37 PM
I wonder if they halt payments on pref shs too?
interesting...wonder if it stays that way

Unless they run into a liquidity issue, why would they suspend preferred dividend since it is accumulative? That will probably push the common below $1 instantly.

I am actually surprised how well common hold up yesterday after the announcement. Today is actually not bad either, considering the downgrade from Wells Fargo analyst Michael Webber.

I can see them turn off the prefer to horde cash and pay for new shuttle tankers. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on January 10, 2019, 09:33:58 PM
I can see them turn off the prefer to horde cash and pay for new shuttle tankers.

Can you explain why and in which situation, BG?

Here is a list of their 2019 obligations from latest 6K and how I think they can be handled:
1. Bond repayments $74.9MM (this can be simply paid off from CFVO)
2. secured debt      $366MM  (this can be refinanced against the ships)
3. secured debt        $85MM  (this can be refinanced against the ships)
4. unsecured revolver $125MM (this is sponsored by TK + BBU, so I assume it can be extended??)
5. Norwegian bond     $10.5MM (this can be simply paid off from CFVO)
6. new building         $377MM (assume 60% will be funded by new secured debt, 40%x377=150MM needs fund by CFVO)

So if I add (1), (5), (6) together, that is 74.9+10.5+150=235MM that need to be funded by CFVO. With 640MM CFVO, after interest expense and other, they probably have $350-$400MM left to work with. In addition, they should also have received $50MM in 4Q from the Petrobra settlement. So I don't see any difficulty there to cover the 235MM. They probably can even pay off the revolver (4), at least partially. 25MM of the 125MM revolver was sponsored by TK, who definitely need cash to handle their own debt maturity.

Turning off preferred only saves like $28MM/year, and they will need to pay it back in the future because it is accumulative. So I don't see it is necessary.

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: BG2008 on January 10, 2019, 09:56:15 PM
I can see them turn off the prefer to horde cash and pay for new shuttle tankers.

Can you explain why and in which situation, BG?

Here is a list of their 2019 obligations from latest 6K and how I think they can be handled:
1. Bond repayments $74.9MM (this can be simply paid off from CFVO)
2. secured debt      $366MM  (this can be refinanced against the ships)
3. secured debt        $85MM  (this can be refinanced against the ships)
4. unsecured revolver $125MM (this is sponsored by TK + BBU, so I assume it can be extended??)
5. Norwegian bond     $10.5MM (this can be simply paid off from CFVO)
6. new building         $377MM (assume 60% will be funded by new secured debt, 40%x377=150MM needs fund by CFVO)

So if I add (1), (5), (6) together, that is 74.9+10.5+150=235MM that need to be funded by CFVO. With 640MM CFVO, after interest expense and other, they probably have $350-$400MM left to work with. In addition, they should also have received $50MM in 4Q from the Petrobra settlement. So I don't see any difficulty there to cover the 235MM. They probably can even pay off the revolver (4), at least partially. 25MM of the 125MM revolver was sponsored by TK, who definitely need cash to handle their own debt maturity.

Turning off preferred only saves like $28MM/year, and they will need to pay it back in the future because it is accumulative. So I don't see it is necessary.

We need to check if it is merely cumulative or if it compounds as well.  Cumulative just means that it acrrues.  But compounding makes a big difference.  They say prefer is the hybrid of debt and equity and that's exactly what it is.  You can turn off the dividends without a lot of penalty unlike interest payment where people will seize your asset. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on January 10, 2019, 10:12:57 PM
We need to check if it is merely cumulative or if it compounds as well.  Cumulative just means that it acrrues.  But compounding makes a big difference.  They say prefer is the hybrid of debt and equity and that's exactly what it is.  You can turn off the dividends without a lot of penalty unlike interest payment where people will seize your asset.

Most preferred just accrues. But I think suspending the preferred is definitely a distressed move that is unnecessary at this point. Not sure if it will affect their credit ratings.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: chrispy on January 11, 2019, 05:56:48 AM
Heth, I appreciate the work you have shared here
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on January 11, 2019, 09:16:56 AM
Heth, I appreciate the work you have shared here

Thanks, Chris. Actually, it was the original discussion by BG, Packer, and later Seth, that helped me to understand and became really interested in this investment.

I welcome feedback by other board members on my thoughts shared above. E.g. I assumed that the $366MM + $85MM secured debt payment can be simply refinanced. If that assumption is not true, then TOO can run in to liquidity trouble.  On the other hand, they issued 700MM @ 8.5% unsecured debt last year, and used it to take out the 200MM @ 10% debt BBU bought from TK, that is due in 2022. This tells me that they don't foresee any trouble of liquidity in 2019, otherwise they would have kept that 200MM debt because it not due for 4 years. Does that make sense?

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Deepdive on January 12, 2019, 02:45:02 PM
heth,

That's nice of you to call out BG, Packer and Seth.  It is very un-Wall Street of you. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on January 12, 2019, 05:21:54 PM
heth,

That's nice of you to call out BG, Packer and Seth.  It is very un-Wall Street of you.

Hehe, I am indeed very "un-wall street", because I don't work in financial industry. I am a software engineer who is still learning value investing. I will try my best to contribute meaningfully to the discussion, and hope can learn from others here. thanks.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: walkie518 on January 14, 2019, 09:59:08 AM
Heth, I appreciate the work you have shared here

Thanks, Chris. Actually, it was the original discussion by BG, Packer, and later Seth, that helped me to understand and became really interested in this investment.

I welcome feedback by other board members on my thoughts shared above. E.g. I assumed that the $366MM + $85MM secured debt payment can be simply refinanced. If that assumption is not true, then TOO can run in to liquidity trouble.  On the other hand, they issued 700MM @ 8.5% unsecured debt last year, and used it to take out the 200MM @ 10% debt BBU bought from TK, that is due in 2022. This tells me that they don't foresee any trouble of liquidity in 2019, otherwise they would have kept that 200MM debt because it not due for 4 years. Does that make sense?
Unless Brookfield has other plans, I would think that buying into a firm to drive it into bankruptcy is not the goal.

My assumption is that Brookfield likely backs the business or finds a way to leverage its balance sheet to put financing in place at attractive rates that the business could not otherwise afford. 

There is also a lot of money that could be made on loans with high IRR and low absolute interest rates...likely a way to juice returns for some Brookfield funds should the market dry up?   Too incestuous?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on January 26, 2019, 02:37:09 PM
Does any body have access to the MS analyst's recent report on TOO, in which he set the target price to $1? I wonder how he models the normalized cash flow and arrive that kind of valuation. Thanks.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bjakes00 on February 01, 2019, 02:26:40 PM
I do but can't share. The analyst basically has an "MS estimate" of the value of the fleet of $4.1bn ($1.9bn for the shuttle tankers, $0.4bn for the FSO, $1.4bn for the FPSOs, $0.3bn for the Towage segment and $0.1bn for the UMS segment) and then nets off the debt and the preferreds to get to a common stock equity value of -$0.3. He then applies a 15% appreciation on the shuttle tankers and FPSO/FSOs to get to $1 for common equity...a magical approach.

I think a far better way is a cash flow based approach but the key question is whether that debt can be refinanced (which it seems like it can be from some explanations further up in the thread, especially from JDCap).

My other question is if there are no returns in this business to be had, why are they choosing to invest into new tankers? Surely there is someone with some capital allocation prowess on the board who can see the returns and is making that decision.

Either way, this is a really low return on capital business and I'm hoping a bit here that they can scrape this turnaround through. From what I gather, hope is not a great investment thesis but keen to be proven wrong here.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 01, 2019, 03:05:05 PM
I do but can't share. The analyst basically has an "MS estimate" of the value of the fleet of $4.1bn ($1.9bn for the shuttle tankers, $0.4bn for the FSO, $1.4bn for the FPSOs, $0.3bn for the Towage segment and $0.1bn for the UMS segment) and then nets off the debt and the preferreds to get to a common stock equity value of -$0.3. He then applies a 15% appreciation on the shuttle tankers and FPSO/FSOs to get to $1 for common equity...a magical approach.

I think a far better way is a cash flow based approach but the key question is whether that debt can be refinanced (which it seems like it can be from some explanations further up in the thread, especially from JDCap).

My other question is if there are no returns in this business to be had, why are they choosing to invest into new tankers? Surely there is someone with some capital allocation prowess on the board who can see the returns and is making that decision.

Either way, this is a really low return on capital business and I'm hoping a bit here that they can scrape this turnaround through. From what I gather, hope is not a great investment thesis but keen to be proven wrong here.

Thanks, that's about the same as what I heard from other sources. I agree that it makes more sense to valuate it based on cash flow. But since TOO's cash flow contains so many noises I wonder if the MS analyst at least make any effort to estimate the normalized FCF. Sounds like he didn't.

Why do you think this is a "low return on capital business"? The ebitda margin has been consistently > 35%.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bjakes00 on February 02, 2019, 05:40:11 AM
I’m referring to the sheer amount of capital it takes to generate that EBITDA (never mind the ongoing capex it requires).

When you look at the interest bearing debt and the full equity stack (incl. the preferreds) and compare that to the EBIT it generates, I start to get a bit worried.

I need to read all that stuff that JDCap linked around the financing of these assets, if you have long life asset level finance you might be able to focus less on ROCE/RONOA and focus more on ROE.

Also a bit concerned that Brookfield will transfer equity value to the debt holders here (of which it is both) and stuff the minorities.

That being said I’m along for the ride and it’s a small enough position that I’m not too concerned.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 02, 2019, 11:07:13 AM
I’m referring to the sheer amount of capital it takes to generate that EBITDA (never mind the ongoing capex it requires).

When you look at the interest bearing debt and the full equity stack (incl. the preferreds) and compare that to the EBIT it generates, I start to get a bit worried.

I need to read all that stuff that JDCap linked around the financing of these assets, if you have long life asset level finance you might be able to focus less on ROCE/RONOA and focus more on ROE.

Also a bit concerned that Brookfield will transfer equity value to the debt holders here (of which it is both) and stuff the minorities.

That being said I’m along for the ride and it’s a small enough position that I’m not too concerned.

I see. I guess the low ROIC so far is a result of management's past mistakes on bad capital allocation, and that is what BBU comes in as the fix. But the business itself is a good business that earns high margin.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on February 02, 2019, 12:21:39 PM
Why do you think this is a "low return on capital business"? The ebitda margin has been consistently > 35%.

EBITDA margins don’t necessarily have anything to do with ROIC. Partly because D&A can be high; and partly because the margin can be very high but revenue/capital employed can be low. For example if you rent your house (at least where I live) the margin may be 80-90% but the ROIC is about 4%.

As I’ve argued above here, I don’t see any hard evidence that this is a much better business than any other capital intensive, buy-the-asset-and-collect-the-rent business.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 02, 2019, 03:17:55 PM
Why do you think this is a "low return on capital business"? The ebitda margin has been consistently > 35%.

EBITDA margins don’t necessarily have anything to do with ROIC. Partly because D&A can be high; and partly because the margin can be very high but revenue/capital employed can be low. For example if you rent your house (at least where I live) the margin may be 80-90% but the ROIC is about 4%.

As I’ve argued above here, I don’t see any hard evidence that this is a much better business than any other capital intensive, buy-the-asset-and-collect-the-rent business.

Yes, you are right, ebitda margin is not the right metric to use here, should look at ROA. Actually, TOO's ebitda margin is kind of poor when compared to KNOP, which is close to 80%. But I guess that's because KNOP is a pure shuttle tanker play and their ships are all pretty new. TOO's shuttle tankers are mostly old, and under invested.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 04, 2019, 04:47:32 PM
As I’ve argued above here, I don’t see any hard evidence that this is a much better business than any other capital intensive, buy-the-asset-and-collect-the-rent business.

Petec, just curious, isn't SSW in a similar business model? Why do you prefer SSW over TOO?  Is it because they are more ahead in a stage where they are done with capex for new ships? 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on February 05, 2019, 12:57:07 AM
As I’ve argued above here, I don’t see any hard evidence that this is a much better business than any other capital intensive, buy-the-asset-and-collect-the-rent business.

Petec, just curious, isn't SSW in a similar business model? Why do you prefer SSW over TOO?  Is it because they are more ahead in a stage where they are done with capex for new ships?

Yes and yes, basically. I think they are fundamentally similar in that if ROIC ever rises much above WACC capital will come flooding in. And I prefer SSW because it's spewing FCF, and that FCF is in the hands of a very sound capital allocator who is looking outside the core business for high returns.

With TOO I gave up on due diligence fairly early because I couldn't easily calculate FCF (I found the accounting difficult at first glance), couldn't get a handle on capital deployment, and didn't like the fact that people seemed to think it had barriers to entry which I couldn't see. In other words, I couldn't immediately get a sense of its value and wasn't comfortable that other investors understood it, which can be a nasty combination.

Please note that I did not work deeply on TOO. I'm not saying I don't think the stock has deep value. It may be a far better buy than SSW but I didn't do enough work to determine the value.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on February 07, 2019, 08:04:09 AM
I thought I would chime in on a few things as I have looked like an idiot on this one…

Part I)
Here are some notes on the MS downgrade note...

Morgan Stanley’s thesis centered a perceived funding gap. Morgan Stanley assumes a “$503M funding gap” that will require an equity raise or debt for equity swap.  Morgan Stanley’s funding gap thesis is wrong for the following reasons:

1.       Misunderstands VARG FPSO Contract +$219M
 
MS misses the fact that the VARG FPSO will be financed by Alpha Petroleum upfront, NOT Teekay!  His model and the funding gap above includes $219M that is just simply an error.   
 
Slide 6 from presentation…
https://www.teekay.com/investors/teekay-offshore-partners-l-p/financials-presentations/
 
2.       MS still forecasts a common dividend +$58M
 
Incredibly, not only does Morgan Stanley forget that Teekay Offshore cut its dividend to zero, but he actually forecasts TOO to increase its dividends despite his “funding gap” thesis…this one is really baffling to me
 
3.       Liquidated Damages from Petrobras Settlement +$91M
 
MS does not factor this in
 
4.       Working Capital +$50M
 
Morgan Stanley forecasts a $50M use of working capital for no justifiable reason
 
5.       Aggressively assumes payoff of Arendal Spirit Flotel  +~$40M
 
MS assumes that this facility won’t get extended and that this vessel won’t get chartered for 3 years.  In reality, it is bidding for work in Brazil right now and Petrobras has incentive to charter this asset from the settlement above.  Further, the banking facility is likely secured against the liquidated damages and will be able to be extended without a charter.

6.      MS appears to be forgetting about the PetroJarl I contract reversion late this year which adds $30M of pure rate increase

7.       Miscalculates preferred interest costs by $8M
 
These six items total $496M or 99% of the $503M in Morgan Stanley’s shortfall is simply attributed to bad analysis


In addition to the mis-modeled items listed above, the remainder of the shortfall can be attributed to Morgan Stanley simply lowering his earnings assumptions in shuttle tankers and FPSOs.  It is hard to piece together, but he basically lowered his operating cash flows to only $238M a year.  I have no idea how he got that low, but keep in mind that TOO has $300M/year in D&A and another $20M-$30M or so in Other Amortization. 

MS forecasts a significant decline in shuttle tankers, and I find this particularly hard to believe since 1) in 2019 TOO will benefit from the full year of operations from the ECC newbuilds 2) rates are increasing and 3) it will take delivery of 6 newbuilds through 2020. 
So adding the six errors in modeling assumptions above and a normal forecast for FPSOs and Shuttle tankers means there is no funding gap in my view.

Therefore, there does not seem to be any funding risk for Teekay Offshore.  Also, there would be huge reputational risk for Brookfield if they screwed up the funding, particularly since they spent half of their equity capital on retiring preferreds in 2017 and last year they called the intercompany loan at full par ($212M) that wasn’t due until 2022.

However, shame on BBU and TOO for letting a narrative this bad dominate the market and cause this much confusion.  Lack of communication among the co-sponsors has been extremely disappointing.  It has caused skepticism among investors that they are mis-aligned.  I continue to believe that both of these sponsors have strong reasons not to screw minority common shareholders, and pick short-termism over long-term value investing principles (as they both trumpet) but its not like they are giving us a lot to go on.   

Part II)

I think the market is really misunderstanding the capital structure maneuvers of BBU/TOO but here is my take…

The market is failing to appreciate lending constraints in the shipping capital markets, principally from European banks.  Regulations have punished traditional European shipping bank debt lenders (RBS sold their book at 20c on the dollar).

This is why having BBU as sponsor, with significant capital access, positions TOO so much better on a relative basis.  All of the high quality shipping companies are issuing preferreds (albeit high cost) and termed debt (if they can) to supplant a lower level of bank debt and stricter lending standards.  Since BBU’s recap, duration has been pushed out from ~2 years to 5 years.  This is huge and greatly underappreciated.     

For details on why BBU and TOO are making capital structure changes look at SSW last quarter’s transcript.  They are running the same playbook.  There is also good info in GasLog’s investor day presentation. 

Consider TOO's/SSW's refinancing versus what its peer, KNOP Offshore faces.  KNOP is more leveraged and it is facing significant refinancing risk especially considering it is paying out a large dividend (12%) and it cash flows are being siphoned nearly 50% to its sponsor via IDRs. 

Bottom line, TOO’s blended debt capital costs went up ~2% but unlevered returns on its shuttle tankers went from HSD to low/mid-teens (see ECC shuttle tanker analysis in NOK bond deck).  TOO is winning on a relative basis, which can be a powerful dynamic in competition limited markets. 

Part III)
Capex on shuttle tankers is required so they can meet their obligations under the MSA with their major oil shuttle tankers.
They have now refreshed nearly 1/3 of their shuttle tankers in their fleet.

Secured debt is project finance and amortization is secured against the timecharter contract (not TOO credit profile or cash sweep) so keep that in mind when thinking about sources and uses for capex funding.

Part IV)
Be very careful with shipping accounting.  I would encourage everyone here to read the fine print and crack open excel and model in detail (or pay someone to do this).  EBITDA margins are simply not comparable across the space, ROA/ROE as well.  E.g. fee income, amortization of contracts, and even weirder stuff like contra-expense from earned pool revenues (as in the case of GLOP). 

For instance, SSW has the same financial profile as TOO, but it does not account for replacement cost…again, it does not account for replacement cost, $0 – look in their investor day presentation for details. And it trades for 10x EBITDA.  I actually like SSW as well, but not for its current financials...it is very interesting to compare SSW to TOO which has at least has OK replacement cost assumptions (I still model >20% replacement cost above TOO mgmt..) but TOO trades at 5x EBITDA. 

In my opinion, misunderstandings on shipping capital markets and in shipping accounting, particularly more sophisticated discussions on topics such as return of capital in replacement cost assumptions are burning investors hard i.e. Dynagas. 

I wish the shipping sector would clean up their act and report more normalized numbers and accounting treatments.  It would help long-term investment in the space.

Hope the above helps. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Pondside47 on February 07, 2019, 08:21:39 AM
Greatly appreciate the update especially on how different companies budget for replacement capex.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 07, 2019, 09:20:39 AM
Hey, Seth, great that you are back and posting, really appreciate your thoughts and update.  I am shocked to see the MS analyst made such a big mistake on Varg's funding, which was highlighted in the 3Q presentation!

For 2019, they have  $366+$85MM secured debt due, in your opinion, will those be just refinanced against the ships without any requirement of paydown, if the ships' value meet the covenants? Are those part of the "project finance" you talked about in below?

Quote
Secured debt is project finance and amortization is secured against the timecharter contract (not TOO credit profile or cash sweep) so keep that in mind when thinking about sources and uses for capex funding.

Thanks.

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 07, 2019, 10:19:01 AM
I believe Ostras' contract was supposed to end in Nov 2018 with extension options. According to the following link, it seems to be still active now, can we assume that its contract has been extended?
https://www.marinetraffic.com/en/ais/details/ships/shipid:370370/mmsi:309726000/imo:7920508/vessel:PETROJARL_CIDADE_DE_RIO_DAS_OS (https://www.marinetraffic.com/en/ais/details/ships/shipid:370370/mmsi:309726000/imo:7920508/vessel:PETROJARL_CIDADE_DE_RIO_DAS_OS)

On the other hand, Varg is still in "laid up" status, not on its way to Singapore:
https://www.marinetraffic.com/en/ais/details/ships/shipid:369663/mmsi:309123000/vessel:PETROJARL%20VARG (https://www.marinetraffic.com/en/ais/details/ships/shipid:369663/mmsi:309123000/vessel:PETROJARL%20VARG)

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on February 07, 2019, 10:47:34 PM
Seth, great post and very useful.

RE: accounting, personally I just look at FCF. That has two advantages and one disadvantage. The advantages are (1) that you don't have to think so much about accounting and (2) you are naturally drawn to these businesses at a point in the capex cycle where returns tend to accrue to equity holders (i.e., when assets go operational rather than while they are being built).

The disadvantage is that you can miss some deep value opportunities during the build phase. Maybe I need to dust off my TOO file ;)

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Read the Footnotes on February 08, 2019, 05:44:44 AM
Seth,

Fantastic post. Thank you for continuing to contribute your thoughts here.

Your synopsis of the MS report is fascinating in terms of the analysis of TOO, and as a data point in a larger picture of the quality and process of analyst reports. Assuming you are 100% correct, if Michael Lewis could make a book out of how such a flawed research report came to be produced and disseminated, I would read the book and watch the movie. I'd probably even buy copies of the book for all my friends. Michael Lewis, if you're reading this, here's a candidate for your next million dollar idea.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: saltybit on February 08, 2019, 06:40:21 AM
https://www.teekay.com/blog/2019/02/08/teekay-offshore-partners-reports-fourth-quarter-and-annual-2018-results/

https://seekingalpha.com/pr/17406351-teekay-offshore-partners-reports-fourth-quarter-annual-2018-results

Q4 2018 results

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: racemize on February 08, 2019, 07:15:10 AM
Brookfield on TOO:

Early in 2018, Teekay Offshore completed the last of its growth projects that were underway when we acquired
the business and these new vessels have driven improved financial results. Despite this performance, the public
unit market price for Teekay Offshore decreased during the fourth quarter reflective of, in our estimate, negative
sentiment toward the oil and gas industry. In contrast to much of the oil and gas industry, Teekay Offshore’s
recurring cashflows and EBITDA were stable year over year. Teekay Offshore has limited commodity exposure,
with medium to long term contracts with premium petroleum companies which provide stability of forward
revenues. In 2018 we assisted Teekay Offshore to refinance its near term debt maturities. Teekay Offshore’s
enhanced capital structure, together with its on-going growth projects, position the company well for the years
ahead.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 08, 2019, 12:05:43 PM
Seth,

Fantastic post. Thank you for continuing to contribute your thoughts here.

Your synopsis of the MS report is fascinating in terms of the analysis of TOO, and as a data point in a larger picture of the quality and process of analyst reports. Assuming you are 100% correct, if Michael Lewis could make a book out of how such a flawed research report came to be produced and disseminated, I would read the book and watch the movie. I'd probably even buy copies of the book for all my friends. Michael Lewis, if you're reading this, here's a candidate for your next million dollar idea.

Well, I am disappointed that we don't hear Seth on the call today. But again, thanks Seth, hope to see you continue coming back here!

On the call the MS analyst has confirmed his own mistake that Seth pointed out -- that the $40MM facility is not due for 2019.

It looks like Piranema is debt free now, and has a good chance of entering longer and more profitable contract once Petrobra find a buyer for the field. Arendal continue to have challenge to find a contract. Don't know about the outlook for Ostras though. Seems no talk about it longer future. Did I missed it?


Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: bjakes00 on February 08, 2019, 02:35:27 PM
+ve FCF and improving ROCE/RONOA - we're moving towards a cost of capital business here which is helpful.

A few more quarters of that and this business will start to look a lot less sick.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Steven B on February 11, 2019, 12:02:22 PM
A few thoughts if I may....

Obviously a tough year from a unitholder standpoint, however in securities like this that trade in the short term on so many short term themes ( TK complex, Oil, etc.) can't say that I expected them straight to the sky once I bought in. There are a lot of storm clouds priced in right now. Still tough though. I didn't have a big position to begin with which obviously helped.

Operationally things seems to be going OK. Yes, you'd like to see more movements on the FPSOs but this is the environment we live in. Comes and goes, it's what we signed up for. Obviously the real issue is refinancing, which hopefully won't be to much of an issue. As Seth pointed out earlier the presence of a quality sponsor is huge.

I've noticed that the last two years changes in WC were ~ -60M, -80M. Is this a trend that we can expect to continue? Does anyone have insight into this? If I remember correctly over the last decade or so Changes in WC had pretty much evened out so I was hoping to ignore it on year in, year out basis but if there was a shift obviously that would change.

Which brings me to my last point about TOO for now; this is the security that I understand the least in my portfolio. Lots of moving part and really tough to compare to it's peers, not that that's why I own it. Sure, I modeled all the vessels to the best of my ability but there are still tons that I don't know about contract terms, supply and demand dynamics around the industry etc. My continued ownership is based on the fact that I believe that it's at a low point in it's history post BBU recap where the bad stuff has already happened while being in a good position to refinance while generating and having the future capacity to generate FCF at a high yield of it's current MC. I don't have any special insight into the inner workings of TOO, which makes it the scariest and least favorite position to own (even before the drop). In fact I frequently question based on the above if I'm qualified to own at all.

Literally just my 2 cents.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on February 12, 2019, 02:06:10 PM
@Steven B - I think most people share this view including myself.

For what its worth, I continue to think approaching valuation on a FCF yield basis is best, starting with Adjusted EBITDA, then subtracting normalized expenses: maintainance capex (dry dock), then replacement capex, then cash interest.  Even on conservative assumptions this is compelling.
 
Further, 2019 is set to grow from 1) full year operations of 1H18 delivered fleet in 1h2018 and the Petrojarl I contract resets by +$30M in 2H19, so the business is growing well and will continue to do so.

This quarter was another step in the right direction in terms of fundamentals and improved shareholder communication although the sell-side remains 'lost in the sauce'

And for what its worth I did dial into the call but they blocked me this time :)
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 12, 2019, 05:12:24 PM
Hi, Steve, Seth, thanks for sharing your thoughts. Although I agree that  this one is traded for something close to 40%~50% FCF yield if we value it based on Seth's "normalized" approach, I still couldn't help drilling in to details in the short term, just to make sure that I understand it. So here it goes ... 

In their released full year results, they have adjusted EBITDA of $782MM in 2018 vs $522MM in 2017, that is a huge increase of $260MM of adjusted ebidta. However, their net operation cash flow has surprisingly decreased from $305M in 2017 to $280MM in 2018. How could that happen? Generally shouldn't we think operation cash flow should be approximately equal to (ajusted Ebitda - interest expense), which should equal to the amount available for (CAPEX/replacement + FCF/delevering)? But here there is such a big gap. I know that operation cash flow exclude the equity income from their JV, but that still does not explain it. What exactly is masking the true FCF here? Is it due to the $83MM of "change of non-cash working capital" ? How should we think of it?  thanks.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Steven B on February 12, 2019, 07:42:09 PM
@Seth, why did they block you?

@Heth, I cannot explain it fully all I can say that keep in mind adjusted EBITDA includes what I believe to be real cash expenses. The "adjusted" part kinda means normalized, but for instance the $55M loss on the bonds are a real cash charge. Probably better to work it through the CF statement using the adjusted EBITDA to figure out what the one-off things are....
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 12, 2019, 08:08:49 PM
@Seth, why did they block you?

@Heth, I cannot explain it fully all I can say that keep in mind adjusted EBITDA includes what I believe to be real cash expenses. The "adjusted" part kinda means normalized, but for instance the $55M loss on the bonds are a real cash charge. Probably better to work it through the CF statement using the adjusted EBITDA to figure out what the one-off things are....

Steve, but shouldn't the $55M loss on bonds mostly be cancel out by the 50M they received from Petrobra settlement?

Excluding growth from future FPSO/Shuttles, I was expecting $350~400M operation cash flow from 2018, but they only did $280M. I think the most likely explanation is due to the -$83M of  "change of non-cash working capital", which basically means that they have used more cash in 2018 to increased their working capital. Is that right? I know these are probably short term noises, but I still want to make sure I understand it.

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on February 12, 2019, 10:04:02 PM
What is working capital in this business? Is it just payment timings or do they carry inventory?

Also, why would they need to increase it? Could it be due to the new vessels delivered in 2018 starting service?

Finally, on the “normalised FCF” method, why would you only include maintenance and replacement capex? Growth capex is usually excluded from FCF too. And you have  to have a lot of confidence in the ROIC on growth capex to consider growth capex FCF to equity.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: whistlerbumps on February 13, 2019, 11:38:38 AM
I think a key question is whether the "normalized" cash flow is at all real. 

Thus I have been trying to tie EBITDA to reported CFO but been struggling (see attached) .  Can anyone think of something here that I am missing? 

I've also then attempted to go from reported CFO to "normalized" OCF.  However, I wonder how much of the swap losses are actually ongoing costs of the business given their debt and hedging program.  What do people think about the ongoing nature of those charges? I have also removed the 55mln Petrobras payment as I don't believe that should be considered part of normal operations.

Finally, I've estimated replacement capex for their existing assets as ~ a 20 year life on the balance sheet value of their PP&E+newbuilds+investment in JVs.  I'd be interested to hear what people think of these assumptions.


Net-net, it seems attractive on a "normalized FCF basis" but you have to believe in a lot of adjustments to get to normalized.

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: 5xEBITDA on February 13, 2019, 11:55:28 AM
Look at page 6 of the FY17 20-F and see if that answers your question
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: whistlerbumps on February 13, 2019, 12:11:12 PM
Thanks.  That's what I have been trying to do with the similar chart in the Q4 results but it doesn't quite tie.  Also, the more important question for me is the 2018 results where there is 60mln of cash outflow that I am missing.... 2017 is much closer once you adjust for the 22mln of deferred mobilization revenue and costs.


Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 13, 2019, 01:10:00 PM
Thanks.  That's what I have been trying to do with the similar chart in the Q4 results but it doesn't quite tie.  Also, the more important question for me is the 2018 results where there is 60mln of cash outflow that I am missing.... 2017 is much closer once you adjust for the 22mln of deferred mobilization revenue and costs.

Could the 60M be due to the "Adjusted EBITDA from equity-accounted vessels"?  They included 92M for it in the calculation of adjusted ebidta of 782M, but only account 33M in "Equity income" in operation cash flow.  And in 2017 we don't have those JV vessels contributing.

Btw, I think for the normalized FCF calculation, we should include those JVs income, they are significant.  E.g. TGP has lots of those JVs.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: whistlerbumps on February 13, 2019, 01:20:37 PM
Its possible but I think that's in my numbers... There was actually 33.4mln of equity income in 2017 adjusted EBITDA and I think the difference between reported equity income in EBITDA and equity income cash flow is reported in CFO and my numbers as the equity income outflow of 33.3mln.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 13, 2019, 02:21:44 PM
Its possible but I think that's in my numbers... There was actually 33.4mln of equity income in 2017 adjusted EBITDA and I think the difference between reported equity income in EBITDA and equity income cash flow is reported in CFO and my numbers as the equity income outflow of 33.3mln.

Maybe I don't quite understand it (since Im not an accountant), if you want to make it clean to exclude the equity adjusted ebitda + income, then shouldn't you start with the "consolidated adjusted ebitda" of $706M, instead of the 782M, as the top line of your spread sheet for 2018? Then you need to remove your own line of adjusting the (33.3M) for equity income because that's already subtracted in CFO calculation. After these two changes to your spread sheet, then you will end up with 24.2M as the delta for 2018, instead of 66.8M.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: whistlerbumps on February 13, 2019, 02:29:23 PM
They have an equity interest in the Libra FPSO.  Because they only own 50% and do not have control of Libra, its earnings do are not consolidated in EBIT but instead as equity income.   However, the company adjusts EBITDA to add back the earnings of their 50% interest in Libra because they consider it a core an operating asset (+92.6mln in FY18).  However, not all of Libra's 92.6mln of income was paid out as a dividend TOO thus Libra CFO<Libra equity income in EBITDA.  That difference is the -33.3 in the bridge from EBITDA to CFO.  Hope that helps.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 13, 2019, 02:52:38 PM
They have an equity interest in the Libra FPSO.  Because they only own 50% and do not have control of Libra, its earnings do are not consolidated in EBIT but instead as equity income.   However, the company adjusts EBITDA to add back the earnings of their 50% interest in Libra because they consider it a core an operating asset (+92.6mln in FY18).  However, not all of Libra's 92.6mln of income was paid out as a dividend TOO thus Libra CFO<Libra equity income in EBITDA.  That difference is the -33.3 in the bridge from EBITDA to CFO.  Hope that helps.

Thanks. I've always thought that  the 33.3M is not the bridge from a top line (ebitda) to a bottom line, but the bottom line itself, which stands for the net income they received from JVs like Libra. And in CFO, they have subtracted this 33.3M as "Equity income, net of dividend". So I assumed that they do not consider those as operating assets when calculating the CFO.  Looks like I am wrong.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 13, 2019, 05:40:24 PM
whistlerbumps, in their earning release, appendix D, they give the details on the 50% JV, and we can see how they bridge from the 39M net income to 92M adjusted ebitda.  There is a 18.6M interest expense + 3.5M realized swap loss in between. Was that already included in your number?  If not, then subtracting them will reduce the delta from 66.8 to 44.7, correct?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: whistlerbumps on February 14, 2019, 06:29:09 AM
Good catch... I think you could be right about that given that the CFO number adjusts off equity income and not proportional EBITDA.... so now we just have to figure out the 44.7mln.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 18, 2019, 09:31:14 AM
What is working capital in this business? Is it just payment timings or do they carry inventory?

Also, why would they need to increase it? Could it be due to the new vessels delivered in 2018 starting service?

Finally, on the “normalised FCF” method, why would you only include maintenance and replacement capex? Growth capex is usually excluded from FCF too. And you have  to have a lot of confidence in the ROIC on growth capex to consider growth capex FCF to equity.

Petec, those are good questions to ask but I don't have good answers, hope other people can help.

Regarding the "growth capex", if they are only invested in the shuttle tanker business (which is what we have been seeing so far after BBU took over), then I have confidence on the ROIC. But actually, I consider the order of the 6 new shuttle tanker more as "replacement" than "growth" because they have lots of old shuttle tankers. I don't think they need to invest more for "growth",  they just need to increase the existing fleet utilization rate to 100%, e.g. the Tow segment, the unemployed Arendal UMS, and new contract for Varg, Ostras and Piranema are all "growth" opportunities without the need for heavy growth capex.

Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: petec on February 18, 2019, 09:52:00 AM
I consider the order of the 6 new shuttle tanker more as "replacement" than "growth" because they have lots of old shuttle tankers.

Fair enough, but then you definitely need to take this off FCF!
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 18, 2019, 11:52:50 AM
I consider the order of the 6 new shuttle tanker more as "replacement" than "growth" because they have lots of old shuttle tankers.

Fair enough, but then you definitely need to take this off FCF!

there is no doubt the FCF is severely masked for 2019/2020 due to the new build of the 6 new shuttles. The question is, are they going to continue ordering at such a high rate after 2020?

If we look at their existing shuttle fleet, they have 6 built in 1998/1999 (if you count two 50% owned into 1), which will retire soon. So I believe the 6 new shuttles will replace them. But they also have another 5 shuttles that were built from 2000~2002 (also counting two 50% owned into 1), which probably will retire after 2022. So I ask myself, are the 6 new shuttles in order enough to replace the loss of income from the 6+5=11 old shuttles? I think they probably can because those old shuttles probably are getting very low rates for now.  Another way to think about it, TOO's shuttle tanker segment ebitda margin is 47%, while KNOP's is close to 76% with newer ships. So I would think newer ships are earning much more than older ones.  Welcome to punch holes in in my thinking.





 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on February 21, 2019, 06:10:16 AM
No - they were obligated to purchase these vessels under their MSA agreement, it was not a growth capex decision.  They will have replaced 10 of 33 vessels after this so capex will drop.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Steven B on February 21, 2019, 09:22:42 AM
So Seth, correct me if I'm wring, you're sating that these newbuilds are maintenance CAPEX? I guess the growth part will be the higher rate they command.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 21, 2019, 10:11:39 AM
No - they were obligated to purchase these vessels under their MSA agreement, it was not a growth capex decision.  They will have replaced 10 of 33 vessels after this so capex will drop.

Thanks, didn't know that. Does the 10 include the 3 that are already delivered in Canada? Basically, in addition to the 6 that are being built right now, do they need to order another 1 or 4 new shuttles?

Quote from: Steven B
So Seth, correct me if I'm wring, you're sating that these newbuilds are maintenance CAPEX? I guess the growth part will be the higher rate they command.
Steven, my understanding is that they are "replacement" in terms of shuttle ship count, but "growth" in terms of ebitda. Seth, correct?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on February 22, 2019, 05:44:58 AM
In the 10 I referenced it includes the 4 from last year.  These vessels should be considered replacement capex not growth capex.  Maintenance capex is just dry docking expense. 

However, incremental contribution margins on newbuild replacements flow through the income statement at inflation plus levels.  CEO spoke about this dynamic on the 2Q18 conference call if anyone wants additional details.  So we are replacing vessels at 1:1 but cash flows at slightly >1:1, But in my view, these shouldn't really be viewed as growth, they are just replacing a lot of the older fleet.

Replacement capex in this business is lumpy. I was just making the point that refreshing 1/3 of the fleet in 2-2.5 years when they are 20 year assets is a lot.  Replacement spending will drop considerably after these vessels because they won't have any material obligations coming due from their MSA.  TOO is basically spending >2x run-rate replacement cost for shuttle tankers right now.     

Run-rate EBITDA is $650M to $725M over the next few years
Cash + Pref Interest $220-$230
Maintenance $30-40
Replacement $200-$250
FCF ~40c to 50c 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on February 22, 2019, 06:20:58 AM
Actually, I just checked, 2 of the 6 vessels are actually on order for the master agreement, the other four are replacement capex for the COA fleet. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 22, 2019, 09:00:19 AM
In the 10 I referenced it includes the 4 from last year.  These vessels should be considered replacement capex not growth capex.  Maintenance capex is just dry docking expense. 

However, incremental contribution margins on newbuild replacements flow through the income statement at inflation plus levels.  CEO spoke about this dynamic on the 2Q18 conference call if anyone wants additional details.  So we are replacing vessels at 1:1 but cash flows at slightly >1:1, But in my view, these shouldn't really be viewed as growth, they are just replacing a lot of the older fleet.

Replacement capex in this business is lumpy. I was just making the point that refreshing 1/3 of the fleet in 2-2.5 years when they are 20 year assets is a lot.  Replacement spending will drop considerably after these vessels because they won't have any material obligations coming due from their MSA.  TOO is basically spending >2x run-rate replacement cost for shuttle tankers right now.     

Run-rate EBITDA is $650M to $725M over the next few years
Cash + Pref Interest $220-$230
Maintenance $30-40
Replacement $200-$250
FCF ~40c to 50c

Seth, so you are saying new ships only get slightly better cash flow (inflation+) than the old ships? That is a surprise to me. Although new ships need to pay debt while old ships are probably debt-free, I would have thought new ships get much higher rate and they also have less drydock time in the first few years.  How shall we think about the fact that TOO's shuttle tank segment ebitda margin is in the middle 40%, while KNOP's is close to 80%?  That is a big difference. Is KNOP just having better contracted rate, or because of their newer ships?   Thanks.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on February 26, 2019, 11:15:53 AM
Here are some rough modelling assumptions...
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 26, 2019, 01:18:12 PM
Here are some rough modelling assumptions...

thanks, Seth, that was very nice of you to share these models! A few questions:
1. You modeled the cash interest of shuttle tanker seg at ~$70M unchanged for the next three years. But aren't they supposed to take more debt when those new builds were delivered?
2. The detailed shuttle tanker analysis are very helpful. I can see that the big chunk of increase of ebitda comes from the COA pricing increase of 15% in 2019 and 10% in 2020. Are these assumptions or fact in the agreement? Sorry I haven't dig deep into their COA agrrement, where can I find the details of the COA?
3. What are the economics of the new ships? E.g. I can see you put there $14.2M in 2020 for the "Net COA ebitda newbuild contribution". Assuming this is for one ship, then we have a ship that cost $150M, but only earn $14.2M in ebitda, the ROA is < 10%. Is this the right way to look at it?

Btw, I have managed to get access to the MS analyst report that has $1 target for TOO. His quality of models is no where close to yours!
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on February 26, 2019, 11:05:42 PM
Just a quick update I forgot to add in one credit facility in that analysis, so cash interest is closer to $200. 

For Heth...
On the shuttle tanker interest, they are raising debt, but they are also swapping out an expensive acquisition facility.  But it is fair to add 3-5 million in 2020 to shuttle tanker interest as well. 

The COA pricing increases are estimated, although the company said they were confident of sustaining 20%-30% pricing increases a few quarters ago and nothing has really changed from a supply/demand standpoint for this part of the fleet - so those rates are just a discounted estimate. 

I would agree with your ROA math, but these vessels typically run a little cheaper than $150M. 
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 27, 2019, 11:43:57 AM
Hi, Seth, thanks for the reply.

For Heth...
On the shuttle tanker interest, they are raising debt, but they are also swapping out an expensive acquisition facility.  But it is fair to add 3-5 million in 2020 to shuttle tanker interest as well. 

Which expensive acquisition facility were you talking about, is it the 500M revolver at 7.3%, or the 250M public bonds at 7.1%?

Maybe I don't quite understand what you mean by "swapping out"... I thought they are going to add at least 540M new mortgages for the 6 new ships ( $150M x6 x 60%=540). Let's call it 500M since maybe those ships cost less than $150M each as you said. Assume 5% interest on this 500M, that is 25M extra interest payment. How could it be only 3~5M extra?  Are you saying this 500M new debt will replace some of existing debt, so the net of new debt is only something like 100M?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on February 28, 2019, 05:22:48 PM
20-F is out today, just quickly went through it, here are a few things I found out:


Please add if you find anything interesting or worth of attention.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: whistlerbumps on March 01, 2019, 02:39:41 PM
Why aren't interest derivative costs part of "normalized" FCF?  It seems like these swaps are part of their financing plan (ie. if they had just done fixed rate debt it would have been at a higher rate) so shouldn't those be considered normal?  In 2018, they lost 38mln because rates were below 2.9% (p.52 20F).  While these losses will decrease if rates go up, shouldn't that decrease be offset by an increase in the interest rate from their variable rate debt?  Thus, shouldn't we consider some level of interest derivative costs as part of ongoing financing costs?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on March 02, 2019, 10:57:33 AM
Why aren't interest derivative costs part of "normalized" FCF?  It seems like these swaps are part of their financing plan (ie. if they had just done fixed rate debt it would have been at a higher rate) so shouldn't those be considered normal?  In 2018, they lost 38mln because rates were below 2.9% (p.52 20F).  While these losses will decrease if rates go up, shouldn't that decrease be offset by an increase in the interest rate from their variable rate debt?  Thus, shouldn't we consider some level of interest derivative costs as part of ongoing financing costs?

They also have unrealized gain of 56M on those derivative instruments so the net is about 12.8M gain for 2018. I don't know what should be the proper way to "normalize" this kind of thing. Shall we only look at the "realized" part? For 2018, 2017, 2016, all the realized part are losses (page F-29  of 20F): 39M, 77M, 60M. I guess that is because interest rate kept rising. But how do you model this? Maybe should just model it with a little higher interest expense?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: Seth Lowry on March 12, 2019, 04:13:18 AM
New deck for reference...
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on March 12, 2019, 10:21:50 AM
New deck for reference...

Thanks for sharing this, Seth. I don't understand TOO's IR, they spent time to create this presentation for a conference, but did not want to share it with investors directly on their website....

One question is about slide 14, I am not sure how to understand it. It says "Majors going from 900 to 300 kboe/d". Isn't that a bad thing for TOO, since their customers are mostly the "Majors" (Shell, ENI, XOM)?
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: RadMan24 on March 12, 2019, 09:03:17 PM
It's a little silly to value TOO using adjusted EBITDA figures. It's much safer to value it on a cash basis, assuming a 10 year deleveraging, and going that route, than simply placing an adjusted "multiple" on it.

Adjusted EBITDA does not give a clear picture of TOO's financial flexibility, underlying business costs, and prior, let alone current, capital allocation decisions.

TOO looks cheap on an adjusted EBITDA basis no matter how you slice it. Just look at what EBITDA itself excludes: Dry dock expense, amortization of in-process revenue contracts, and interest expense. All recurring cash outflows, to the tune of $240 million (via cash basis) in 18. No sign of dropping for several years either, but it is acknowledged interest will eventually drop if they successfully pay down debt.

From that point of view, one just has to determine if the underlying assets provide enough punch to get through the next 5+ without sinking. Last year, they had $80 million in FCF. This includes net capex. It also includes an adverse working capital impact of probably $50-80 million that may reverse in 19 or 20. At $80 million, you have a FCF yield of 15%. Improve FCF by $50 million, you have a 25% yield, even after assuming all warrants exercised.

Seems like fair value around $3.25 or so a share. Also seems like a fair margin of safety.
Title: Re: TOO - Teekay Offshore Partners L.P.
Post by: heth247 on March 13, 2019, 10:30:57 AM
It's a little silly to value TOO using adjusted EBITDA figures. It's much safer to value it on a cash basis, assuming a 10 year deleveraging, and going that route, than simply placing an adjusted "multiple" on it.

Adjusted EBITDA does not give a clear picture of TOO's financial flexibility, underlying business costs, and prior, let alone current, capital allocation decisions.

TOO looks cheap on an adjusted EBITDA basis no matter how you slice it. Just look at what EBITDA itself excludes: Dry dock expense, amortization of in-process revenue contracts, and interest expense. All recurring cash outflows, to the tune of $240 million (via cash basis) in 18. No sign of dropping for several years either, but it is acknowledged interest will eventually drop if they successfully pay down debt.

From that point of view, one just has to determine if the underlying assets provide enough punch to get through the next 5+ without sinking. Last year, they had $80 million in FCF. This includes net capex. It also includes an adverse working capital impact of probably $50-80 million that may reverse in 19 or 20. At $80 million, you have a FCF yield of 15%. Improve FCF by $50 million, you have a 25% yield, even after assuming all warrants exercised.

Seems like fair value around $3.25 or so a share. Also seems like a fair margin of safety.

There is no doubt that it is cheap at price of $1.16, even based on current FCF that has been greatly masked by the abnormally high CAPEX for now. But it is still unclear to me what is Brookfield's plan to get the price to $4+. If you view this as a "mid-stream" business, who would pay 9X EV/EBITDA for a MLP if it does not pay out a distribution? However, "increasing distribution" has never appeared in the business strategy in any presentation from them, since Brookfield's take over. What is their end-game?