TOO - Teekay Offshore Partners L.P.

[Pondside47]

Greatly appreciate the update especially on how different companies budget for replacement capex.

[heth247]

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?

 

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.

 

 

[heth247]

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

 

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

 

 

[petec]

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 ;)

 

 

[Read the Footnotes]

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.

[saltybit]

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

 

 

[racemize]

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.

[heth247]

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?

 

 

 

[bjakes00]

+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.

 

[Steven B]

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.

 

[Seth Lowry]

@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 :)

[heth247]

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.

[Steven B]

@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....

[heth247]

@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.

 

 

[petec]

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.

[whistlerbumps]

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.

 

TOO_EBITDA_to_OCF.xlsx

[5xEBITDA]

Look at page 6 of the FY17 20-F and see if that answers your question

[whistlerbumps]

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.

 

 

 

[heth247]

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.

[whistlerbumps]

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.

[heth247]

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.

[whistlerbumps]

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.

[heth247]

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.

 

[heth247]

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?

[whistlerbumps]

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.