TOO - Teekay Offshore Partners L.P.

[BG2008]

I know that I kind of disappeared a bit, but I have recently bought back a good chunk of my position.  I guess it was luck last year when I dug into the unit economics and really couldn't definitively figure out the return on capital of owning a shuttle tanker over a 20 years time frame.  I wind up selling 70-80% of my position in the $2.20 to $2.50 range.  Lately, I have bought back a good chunk of my position in the $1.20 to $1.30 range.  What changed? Price and more clarity.  It is obvious that the lenders will more readily finance shuttle tankers on an asset level basis against contracts.  While I am not 100% a religious convert.  I feel that I can see that the cashflows are very stable and the banks are willing to lend.  I will try my best to provide my commentaries.  Is till believe that Teekay should be viewed as GoodCo/Badco. 

 

Some of you have asked, what did I buy with the proceeds instead?  I used the proceeds to buy Excelsior Capital.  It is an Australian net net that pays a 4.6% dividend.  They bought back quite a bit of stock recently.  The core business is a very high margin business with high barriers to entry.  In short, it is a very unusual net-net that generates 10% FCF yield, pays 4.6% dividend and recently bought back stock.  I was surprised to learn that some shareholders felt mis treated by management.  It was important for me to hear the bear thesis.  I just updated my thoughts in the Excelsior Capital thread.  You guys can buy Excelsior cheaper than what I paid. In hindsight, I guess it was a good or lucky swap from $2.30 per share in Teekay into Excelsior at $1.40+ per share but it trades at $1.30 now. 

[heth247]

I know that I kind of disappeared a bit, but I have recently bought back a good chunk of my position.  I guess it was luck last year when I dug into the unit economics and really couldn't definitively figure out the return on capital of owning a shuttle tanker over a 20 years time frame.  I wind up selling 70-80% of my position in the $2.20 to $2.50 range.  Lately, I have bought back a good chunk of my position in the $1.20 to $1.30 range.  What changed? Price and more clarity.  It is obvious that the lenders will more readily finance shuttle tankers on an asset level basis against contracts.  While I am not 100% a religious convert.  I feel that I can see that the cashflows are very stable and the banks are willing to lend.  I will try my best to provide my commentaries.  Is till believe that Teekay should be viewed as GoodCo/Badco. 

 

Some of you have asked, what did I buy with the proceeds instead?  I used the proceeds to buy Excelsior Capital.  It is an Australian net net that pays a 4.6% dividend.  They bought back quite a bit of stock recently.  The core business is a very high margin business with high barriers to entry.  In short, it is a very unusual net-net that generates 10% FCF yield, pays 4.6% dividend and recently bought back stock.  I was surprised to learn that some shareholders felt mis treated by management.  It was important for me to hear the bear thesis.  I just updated my thoughts in the Excelsior Capital thread.  You guys can buy Excelsior cheaper than what I paid. In hindsight, I guess it was a good or lucky swap from $2.30 per share in Teekay into Excelsior at $1.40+ per share but it trades at $1.30 now.

 

Good to see you are back in BG. Thanks for the idea of Excelsior, do you need certain special broker to buy it? I use TD Ameritrade and they don't even have a quote on it. It shows up in grey market in the symbol of CMI something....

 

Regarding TOO's new loan, it is $414M for 4 ships, which average out to $103.5M per ship. Previously we discussed the value of the ship is about $135M each. So this is a LTV of 76%, much higher than the 60% I assumed before. Looks like lenders are really comfortable to give them such high leverage, and the ROE should be fantastic.  Is this kind of thinking in the right direction? :-)

[BG2008]

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?

 

Speaking from my experience being involved in another Brookfield led restructuring called TerraForm Power.  TERP was a YieldCo of SunEdison which went bankrupt.  My thesis was that the PPA of TERP will stay in place.  I made some projections on what I think the "turned on" distributions for TERP will be once Brookfield is done restructuring them.  My estimate was low to mid teens.  It wind up being high single digits.  The market didn't react to it for a very long time.  They turned the distribution back on and paid dividends for a whole year and the market didn't blink an eye.  Finally, TERP increased its distribution.  It was the increase that did it for the market and TERP finally trades at around $14.  I got a bit tired of following the company for 2-3 years and swapped into some yield plays that was paying over 10% during Q4.  I guess my takeaway from all of this is that it may help to trade around the stock a bit.  We know the long term trajectory is likely upwards.  But from time to time, it could trade below $1.10 and then it would spike to $1.78.  We've been pretty good at picking up shares in the $1.10 to $1.20 range.  But haven't really sold any when it spiked earlier.  I get the sense that the full distribution "turn on" and "increases" won't happen for another 1-2 years as they pay for the shuttle tankers.  Frankly, it simply hasn't deleverage enough yet.  I think if you trade around 20-40% price swings, you can actually do okay.  Maybe, I should have kept those thoughts to myself.  But what's a community for? 

[walkie518]

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?

 

Speaking from my experience being involved in another Brookfield led restructuring called TerraForm Power.  TERP was a YieldCo of SunEdison which went bankrupt.  My thesis was that the PPA of TERP will stay in place.  I made some projections on what I think the "turned on" distributions for TERP will be once Brookfield is done restructuring them.  My estimate was low to mid teens.  It wind up being high single digits.  The market didn't react to it for a very long time.  They turned the distribution back on and paid dividends for a whole year and the market didn't blink an eye.  Finally, TERP increased its distribution.  It was the increase that did it for the market and TERP finally trades at around $14.  I got a bit tired of following the company for 2-3 years and swapped into some yield plays that was paying over 10% during Q4.  I guess my takeaway from all of this is that it may help to trade around the stock a bit.  We know the long term trajectory is likely upwards.  But from time to time, it could trade below $1.10 and then it would spike to $1.78.  We've been pretty good at picking up shares in the $1.10 to $1.20 range.  But haven't really sold any when it spiked earlier.  I get the sense that the full distribution "turn on" and "increases" won't happen for another 1-2 years as they pay for the shuttle tankers.  Frankly, it simply hasn't deleverage enough yet.  I think if you trade around 20-40% price swings, you can actually do okay.  Maybe, I should have kept those thoughts to myself.  But what's a community for?

markets are public auctions...makes perfect sense

 

Brookfield, however, paid a lot more than $1.10? 

 

If you believe in what they're doing, maybe you pick up a few extra bucks trading the stock minus the friction, but if BAM turns the company into a $20 stock, the after-tax difference might prefer buy and hold...

[BG2008]

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?

 

Speaking from my experience being involved in another Brookfield led restructuring called TerraForm Power.  TERP was a YieldCo of SunEdison which went bankrupt.  My thesis was that the PPA of TERP will stay in place.  I made some projections on what I think the "turned on" distributions for TERP will be once Brookfield is done restructuring them.  My estimate was low to mid teens.  It wind up being high single digits.  The market didn't react to it for a very long time.  They turned the distribution back on and paid dividends for a whole year and the market didn't blink an eye.  Finally, TERP increased its distribution.  It was the increase that did it for the market and TERP finally trades at around $14.  I got a bit tired of following the company for 2-3 years and swapped into some yield plays that was paying over 10% during Q4.  I guess my takeaway from all of this is that it may help to trade around the stock a bit.  We know the long term trajectory is likely upwards.  But from time to time, it could trade below $1.10 and then it would spike to $1.78.  We've been pretty good at picking up shares in the $1.10 to $1.20 range.  But haven't really sold any when it spiked earlier.  I get the sense that the full distribution "turn on" and "increases" won't happen for another 1-2 years as they pay for the shuttle tankers.  Frankly, it simply hasn't deleverage enough yet.  I think if you trade around 20-40% price swings, you can actually do okay.  Maybe, I should have kept those thoughts to myself.  But what's a community for?

markets are public auctions...makes perfect sense

 

Brookfield, however, paid a lot more than $1.10? 

 

If you believe in what they're doing, maybe you pick up a few extra bucks trading the stock minus the friction, but if BAM turns the company into a $20 stock, the after-tax difference might prefer buy and hold...

 

Walkie,

 

I like CoF because people are frank and blunt and with the exception of talking to ta few standouts like Eric and Packer, people just say what's on their mind to each other.  So thank you for your bluntness. 

 

1) I do own lots of stuff that I have no plan to sell and yes I do have a 20 year position in my portfolio

2) If you think TOO will be worth $20 in any time frame, I have a bridge...

3) Brookfield is good, but they are not God.  Turnarounds takes time and sometimes 3-5 years rather than the 1-2 years that people think.

4) They will still need to pay for the shuttle tanker delivery and deleverage the balance sheet simultaneously

5) I am not as bullish as others on what FCF because of 6)

 

6) These assets are like RVs with a long term leases on them and not like a site build house where you own the land and the land appreciates in value.  So every dollar of lease payment that you get you have to pay some of that to the bank as interest to service the debt, but you better pay off some of that amortization as well.  Because if you don't, you will be stuck with fully depreciated RVs in year 20s that you can only salvage for 10% of the original purchase price.  What is the correct amount of debt amortization is still something that I am trying to pinpoint and nail down.  Like I said, this is one of the most fascinating puzzle and yet one of the most frustrating company to analyze.  Until I have figured that out and gain full confidence, I am not going to wait around till $20 a share.  But I know that at $1.10, it is priced as if the company will go under.   

 

7) Let's try to "crowd solve" the unit economic on these shuttle tankers.

8) Seth, please feel free to tell us we are idiots and chime in

9) Walkie, can you walk me through your $20 math?  I have heard $4, $6, and maybe even $10. But never $20.  I am genuinely curious. 

 

[walkie518]

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?

 

Speaking from my experience being involved in another Brookfield led restructuring called TerraForm Power.  TERP was a YieldCo of SunEdison which went bankrupt.  My thesis was that the PPA of TERP will stay in place.  I made some projections on what I think the "turned on" distributions for TERP will be once Brookfield is done restructuring them.  My estimate was low to mid teens.  It wind up being high single digits.  The market didn't react to it for a very long time.  They turned the distribution back on and paid dividends for a whole year and the market didn't blink an eye.  Finally, TERP increased its distribution.  It was the increase that did it for the market and TERP finally trades at around $14.  I got a bit tired of following the company for 2-3 years and swapped into some yield plays that was paying over 10% during Q4.  I guess my takeaway from all of this is that it may help to trade around the stock a bit.  We know the long term trajectory is likely upwards.  But from time to time, it could trade below $1.10 and then it would spike to $1.78.  We've been pretty good at picking up shares in the $1.10 to $1.20 range.  But haven't really sold any when it spiked earlier.  I get the sense that the full distribution "turn on" and "increases" won't happen for another 1-2 years as they pay for the shuttle tankers.  Frankly, it simply hasn't deleverage enough yet.  I think if you trade around 20-40% price swings, you can actually do okay.  Maybe, I should have kept those thoughts to myself.  But what's a community for?

markets are public auctions...makes perfect sense

 

Brookfield, however, paid a lot more than $1.10? 

 

If you believe in what they're doing, maybe you pick up a few extra bucks trading the stock minus the friction, but if BAM turns the company into a $20 stock, the after-tax difference might prefer buy and hold...

 

Walkie,

 

I like CoF because people are frank and blunt and with the exception of talking to ta few standouts like Eric and Packer, people just say what's on their mind to each other.  So thank you for your bluntness. 

 

1) I do own lots of stuff that I have no plan to sell and yes I do have a 20 year position in my portfolio

2) If you think TOO will be worth $20 in any time frame, I have a bridge...

3) Brookfield is good, but they are not God.  Turnarounds takes time and sometimes 3-5 years rather than the 1-2 years that people think.

4) They will still need to pay for the shuttle tanker delivery and deleverage the balance sheet simultaneously

5) I am not as bullish as others on what FCF because of 6)

 

6) These assets are like RVs with a long term leases on them and not like a site build house where you own the land and the land appreciates in value.  So every dollar of lease payment that you get you have to pay some of that to the bank as interest to service the debt, but you better pay off some of that amortization as well.  Because if you don't, you will be stuck with fully depreciated RVs in year 20s that you can only salvage for 10% of the original purchase price.  What is the correct amount of debt amortization is still something that I am trying to pinpoint and nail down.  Like I said, this is one of the most fascinating puzzle and yet one of the most frustrating company to analyze.  Until I have figured that out and gain full confidence, I am not going to wait around till $20 a share.  But I know that at $1.10, it is priced as if the company will go under.   

 

7) Let's try to "crowd solve" the unit economic on these shuttle tankers.

8) Seth, please feel free to tell us we are idiots and chime in

9) Walkie, can you walk me through your $20 math?  I have heard $4, $6, and maybe even $10. But never $20.  I am genuinely curious.

$20 is a pie-in-the-sky figure, but one could study GrafTech as a similar approach to value creation...should Brookfield be able to buy control like this and achieve similar outcomes each time, regardless of where the market prices day-to-day, Brookfield wins

 

And yes, Brookfield is not God, but the firm's reach is palpable and its affiliates are collaborative. 

 

Brookfield can engineer cash flow for a company like Teekay b/c of control of other portfolio companies--this is the value Brookfield can bring as a large operating investor that passive investors cannot bring to their investments. 

 

[Deepdive]

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?

 

Speaking from my experience being involved in another Brookfield led restructuring called TerraForm Power.  TERP was a YieldCo of SunEdison which went bankrupt.  My thesis was that the PPA of TERP will stay in place.  I made some projections on what I think the "turned on" distributions for TERP will be once Brookfield is done restructuring them.  My estimate was low to mid teens.  It wind up being high single digits.  The market didn't react to it for a very long time.  They turned the distribution back on and paid dividends for a whole year and the market didn't blink an eye.  Finally, TERP increased its distribution.  It was the increase that did it for the market and TERP finally trades at around $14.  I got a bit tired of following the company for 2-3 years and swapped into some yield plays that was paying over 10% during Q4.  I guess my takeaway from all of this is that it may help to trade around the stock a bit.  We know the long term trajectory is likely upwards.  But from time to time, it could trade below $1.10 and then it would spike to $1.78.  We've been pretty good at picking up shares in the $1.10 to $1.20 range.  But haven't really sold any when it spiked earlier.  I get the sense that the full distribution "turn on" and "increases" won't happen for another 1-2 years as they pay for the shuttle tankers.  Frankly, it simply hasn't deleverage enough yet.  I think if you trade around 20-40% price swings, you can actually do okay.  Maybe, I should have kept those thoughts to myself.  But what's a community for?

markets are public auctions...makes perfect sense

 

Brookfield, however, paid a lot more than $1.10? 

 

If you believe in what they're doing, maybe you pick up a few extra bucks trading the stock minus the friction, but if BAM turns the company into a $20 stock, the after-tax difference might prefer buy and hold...

 

Walkie,

 

I like CoF because people are frank and blunt and with the exception of talking to ta few standouts like Eric and Packer, people just say what's on their mind to each other.  So thank you for your bluntness. 

 

1) I do own lots of stuff that I have no plan to sell and yes I do have a 20 year position in my portfolio

2) If you think TOO will be worth $20 in any time frame, I have a bridge...

3) Brookfield is good, but they are not God.  Turnarounds takes time and sometimes 3-5 years rather than the 1-2 years that people think.

4) They will still need to pay for the shuttle tanker delivery and deleverage the balance sheet simultaneously

5) I am not as bullish as others on what FCF because of 6)

 

6) These assets are like RVs with a long term leases on them and not like a site build house where you own the land and the land appreciates in value.  So every dollar of lease payment that you get you have to pay some of that to the bank as interest to service the debt, but you better pay off some of that amortization as well.  Because if you don't, you will be stuck with fully depreciated RVs in year 20s that you can only salvage for 10% of the original purchase price.  What is the correct amount of debt amortization is still something that I am trying to pinpoint and nail down.  Like I said, this is one of the most fascinating puzzle and yet one of the most frustrating company to analyze.  Until I have figured that out and gain full confidence, I am not going to wait around till $20 a share.  But I know that at $1.10, it is priced as if the company will go under.   

 

7) Let's try to "crowd solve" the unit economic on these shuttle tankers.

8) Seth, please feel free to tell us we are idiots and chime in

9) Walkie, can you walk me through your $20 math?  I have heard $4, $6, and maybe even $10. But never $20.  I am genuinely curious.

$20 is a pie-in-the-sky figure, but one could study GrafTech as a similar approach to value creation...should Brookfield be able to buy control like this and achieve similar outcomes each time, regardless of where the market prices day-to-day, Brookfield wins

 

And yes, Brookfield is not God, but the firm's reach is palpable and its affiliates are collaborative. 

 

Brookfield can engineer cash flow for a company like Teekay b/c of control of other portfolio companies--this is the value Brookfield can bring as a large operating investor that passive investors cannot bring to their investments.

 

$20 a share would imply an $8 billion market cap company.  I know you said pie-in-the-sky, but how?  Everything you said is qualitative, care to give some quantitative backing? 

[walkie518]

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?

 

Speaking from my experience being involved in another Brookfield led restructuring called TerraForm Power.  TERP was a YieldCo of SunEdison which went bankrupt.  My thesis was that the PPA of TERP will stay in place.  I made some projections on what I think the "turned on" distributions for TERP will be once Brookfield is done restructuring them.  My estimate was low to mid teens.  It wind up being high single digits.  The market didn't react to it for a very long time.  They turned the distribution back on and paid dividends for a whole year and the market didn't blink an eye.  Finally, TERP increased its distribution.  It was the increase that did it for the market and TERP finally trades at around $14.  I got a bit tired of following the company for 2-3 years and swapped into some yield plays that was paying over 10% during Q4.  I guess my takeaway from all of this is that it may help to trade around the stock a bit.  We know the long term trajectory is likely upwards.  But from time to time, it could trade below $1.10 and then it would spike to $1.78.  We've been pretty good at picking up shares in the $1.10 to $1.20 range.  But haven't really sold any when it spiked earlier.  I get the sense that the full distribution "turn on" and "increases" won't happen for another 1-2 years as they pay for the shuttle tankers.  Frankly, it simply hasn't deleverage enough yet.  I think if you trade around 20-40% price swings, you can actually do okay.  Maybe, I should have kept those thoughts to myself.  But what's a community for?

markets are public auctions...makes perfect sense

 

Brookfield, however, paid a lot more than $1.10? 

 

If you believe in what they're doing, maybe you pick up a few extra bucks trading the stock minus the friction, but if BAM turns the company into a $20 stock, the after-tax difference might prefer buy and hold...

 

Walkie,

 

I like CoF because people are frank and blunt and with the exception of talking to ta few standouts like Eric and Packer, people just say what's on their mind to each other.  So thank you for your bluntness. 

 

1) I do own lots of stuff that I have no plan to sell and yes I do have a 20 year position in my portfolio

2) If you think TOO will be worth $20 in any time frame, I have a bridge...

3) Brookfield is good, but they are not God.  Turnarounds takes time and sometimes 3-5 years rather than the 1-2 years that people think.

4) They will still need to pay for the shuttle tanker delivery and deleverage the balance sheet simultaneously

5) I am not as bullish as others on what FCF because of 6)

 

6) These assets are like RVs with a long term leases on them and not like a site build house where you own the land and the land appreciates in value.  So every dollar of lease payment that you get you have to pay some of that to the bank as interest to service the debt, but you better pay off some of that amortization as well.  Because if you don't, you will be stuck with fully depreciated RVs in year 20s that you can only salvage for 10% of the original purchase price.  What is the correct amount of debt amortization is still something that I am trying to pinpoint and nail down.  Like I said, this is one of the most fascinating puzzle and yet one of the most frustrating company to analyze.  Until I have figured that out and gain full confidence, I am not going to wait around till $20 a share.  But I know that at $1.10, it is priced as if the company will go under.   

 

7) Let's try to "crowd solve" the unit economic on these shuttle tankers.

8) Seth, please feel free to tell us we are idiots and chime in

9) Walkie, can you walk me through your $20 math?  I have heard $4, $6, and maybe even $10. But never $20.  I am genuinely curious.

$20 is a pie-in-the-sky figure, but one could study GrafTech as a similar approach to value creation...should Brookfield be able to buy control like this and achieve similar outcomes each time, regardless of where the market prices day-to-day, Brookfield wins

 

And yes, Brookfield is not God, but the firm's reach is palpable and its affiliates are collaborative. 

 

Brookfield can engineer cash flow for a company like Teekay b/c of control of other portfolio companies--this is the value Brookfield can bring as a large operating investor that passive investors cannot bring to their investments.

 

$20 a share would imply an $8 billion market cap company.  I know you said pie-in-the-sky, but how?  Everything you said is qualitative, care to give some quantitative backing?

 

a quantitative approach might not matter when the stock trades as if the company is teetering on bankruptcy, there should be material upside should TOO not file let alone the upside that $20/sh would imply

 

that said, the exercise doesn't really hurt though is more speculative than underwriting the credit risk, which alone might show a reasonable investment?

 

say we trust all of the figures presented by mgmt and 2018 adj ebitda makes sense excluding settlement ($692m)

 

say we believe that the current growth initiatives do what they say they will do (increase adj ebitda by $220m)

 

say Brookfield finds a way to increase EBITDA by 5% per year for 5 years (27% higher ebitda y5) using its affiliates to spur demand, say the affiliates then sell the contracting assets, they would do so with long-term contracts...and if TOO does what they say and keeps price in line, there will be deals behind the those...

 

we might see a business generating adj ebitda of $1.16B where Brookfield's buy-in was not so far? 

 

the path to ig credit is a good one for this business...it's fragmented and many players are highly levered, someone will be there to pick up the pieces and it's likely to be the ones with capital beyond its balance sheets, what happens after consolidation to three or four players? 

 

highly speculative thinking...but 10x adj EBITDA isn't nuts for a stronger balance sheet and operating statement linked to long-term contracts? 

[BG2008]

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?

 

Speaking from my experience being involved in another Brookfield led restructuring called TerraForm Power.  TERP was a YieldCo of SunEdison which went bankrupt.  My thesis was that the PPA of TERP will stay in place.  I made some projections on what I think the "turned on" distributions for TERP will be once Brookfield is done restructuring them.  My estimate was low to mid teens.  It wind up being high single digits.  The market didn't react to it for a very long time.  They turned the distribution back on and paid dividends for a whole year and the market didn't blink an eye.  Finally, TERP increased its distribution.  It was the increase that did it for the market and TERP finally trades at around $14.  I got a bit tired of following the company for 2-3 years and swapped into some yield plays that was paying over 10% during Q4.  I guess my takeaway from all of this is that it may help to trade around the stock a bit.  We know the long term trajectory is likely upwards.  But from time to time, it could trade below $1.10 and then it would spike to $1.78.  We've been pretty good at picking up shares in the $1.10 to $1.20 range.  But haven't really sold any when it spiked earlier.  I get the sense that the full distribution "turn on" and "increases" won't happen for another 1-2 years as they pay for the shuttle tankers.  Frankly, it simply hasn't deleverage enough yet.  I think if you trade around 20-40% price swings, you can actually do okay.  Maybe, I should have kept those thoughts to myself.  But what's a community for?

markets are public auctions...makes perfect sense

 

Brookfield, however, paid a lot more than $1.10? 

 

If you believe in what they're doing, maybe you pick up a few extra bucks trading the stock minus the friction, but if BAM turns the company into a $20 stock, the after-tax difference might prefer buy and hold...

 

Walkie,

 

I like CoF because people are frank and blunt and with the exception of talking to ta few standouts like Eric and Packer, people just say what's on their mind to each other.  So thank you for your bluntness. 

 

1) I do own lots of stuff that I have no plan to sell and yes I do have a 20 year position in my portfolio

2) If you think TOO will be worth $20 in any time frame, I have a bridge...

3) Brookfield is good, but they are not God.  Turnarounds takes time and sometimes 3-5 years rather than the 1-2 years that people think.

4) They will still need to pay for the shuttle tanker delivery and deleverage the balance sheet simultaneously

5) I am not as bullish as others on what FCF because of 6)

 

6) These assets are like RVs with a long term leases on them and not like a site build house where you own the land and the land appreciates in value.  So every dollar of lease payment that you get you have to pay some of that to the bank as interest to service the debt, but you better pay off some of that amortization as well.  Because if you don't, you will be stuck with fully depreciated RVs in year 20s that you can only salvage for 10% of the original purchase price.  What is the correct amount of debt amortization is still something that I am trying to pinpoint and nail down.  Like I said, this is one of the most fascinating puzzle and yet one of the most frustrating company to analyze.  Until I have figured that out and gain full confidence, I am not going to wait around till $20 a share.  But I know that at $1.10, it is priced as if the company will go under.   

 

7) Let's try to "crowd solve" the unit economic on these shuttle tankers.

8) Seth, please feel free to tell us we are idiots and chime in

9) Walkie, can you walk me through your $20 math?  I have heard $4, $6, and maybe even $10. But never $20.  I am genuinely curious.

$20 is a pie-in-the-sky figure, but one could study GrafTech as a similar approach to value creation...should Brookfield be able to buy control like this and achieve similar outcomes each time, regardless of where the market prices day-to-day, Brookfield wins

 

And yes, Brookfield is not God, but the firm's reach is palpable and its affiliates are collaborative. 

 

Brookfield can engineer cash flow for a company like Teekay b/c of control of other portfolio companies--this is the value Brookfield can bring as a large operating investor that passive investors cannot bring to their investments.

 

$20 a share would imply an $8 billion market cap company.  I know you said pie-in-the-sky, but how?  Everything you said is qualitative, care to give some quantitative backing?

 

a quantitative approach might not matter when the stock trades as if the company is teetering on bankruptcy, there should be material upside should TOO not file let alone the upside that $20/sh would imply

 

that said, the exercise doesn't really hurt though is more speculative than underwriting the credit risk, which alone might show a reasonable investment?

 

say we trust all of the figures presented by mgmt and 2018 adj ebitda makes sense excluding settlement ($692m)

 

say we believe that the current growth initiatives do what they say they will do (increase adj ebitda by $220m)

 

say Brookfield finds a way to increase EBITDA by 5% per year for 5 years (27% higher ebitda y5) using its affiliates to spur demand, say the affiliates then sell the contracting assets, they would do so with long-term contracts...and if TOO does what they say and keeps price in line, there will be deals behind the those...

 

we might see a business generating adj ebitda of $1.16B where Brookfield's buy-in was not so far? 

 

the path to ig credit is a good one for this business...it's fragmented and many players are highly levered, someone will be there to pick up the pieces and it's likely to be the ones with capital beyond its balance sheets, what happens after consolidation to three or four players? 

 

highly speculative thinking...but 10x adj EBITDA isn't nuts for a stronger balance sheet and operating statement linked to long-term contracts?

 

Walkie,

 

I can think of a few issues with your assumptions

 

I stick with my GoodCo and BadCo analysis.  People can say whatever they want about whether the FPSO is GoodCo or Badco.  It's kind of like defining "what is pornography?".  I know it when I see.  What's so critical in heavy equipment investing is how much of the assets sits around and not earn a return.  From about a decade of watching from the sidelines of TransOcean, Ensign, Pride, etc.  The issue is that when there is a chance for assets to sit around and potentially be stacked when there is volatility, it's simply not a good business.  Because when there is demand, you can't get dayrates anywhere close to the previous peak.  The offshore heavy equipment business is fraught with danger. 

 

So, you're going off the combine EBITDA of both FPSO and shuttle tanker and just adding in 5% growth a year and etc.  The reality is that the FPSO will never get a 10x EBITDA multiple.  TOO is not investing in FPSOs.  So those are melting ice cube EBITDAs.  Packer has found a few comps and they trade at 5-6x EBITDA.  I have issues with people slapping a 10x EBITDA on the combinedco.  People point to Knop as a comp.  Well pay attention to the composition of knop offshore.  They literally sign a long term contract and then drop it down to Knop. So every asset has a long term contract and the fleet is very young.  You can't compare a 11 year old fleet with a 3 year old avg age fleet with long term contracts.  They are apples to oranges.  The other problem I have with your $20 assumption is that the shuttle tanker market is attractive precisely because it is so small.  Worldwide there is less than 100 ships. There is a real limit on how much capital one can put into this market.  Let's assume that TOO controls 50% of all ships.  At $135mm per ship, it will be $6.75 bn of gross capital. The assets earn 8% real and about 12% EBITDA yield.  Let's assume that all shuttle tankers are brand new somehow and there is only 30% debt on it.  This will be merely $810 mm of EBITDA.  Put a 10x EBITDA on this crazy awesome number because TOO controls half of the entire market.  This is still only a $15 stock.  I believe that at a certain stock price, Brookfield also takes a cut.  I keep struggling to get to $20. 

 

Speaking of which, the stock is at $1.39 today.  I'm not an advocate of day trading.  But some stocks are more volatile than others.  It's not a bad strategy to trade a bit and "KEEP" all of the shares that you pick up over time.  That's a fun way to accumulate more shares overtime. 

 

 

[heth247]

 

say we trust all of the figures presented by mgmt and 2018 adj ebitda makes sense excluding settlement ($692m)

 

say we believe that the current growth initiatives do what they say they will do (increase adj ebitda by $220m)

 

 

What new "current growth initiatives" were you talking about? My understanding is that the $200M growth initiatives on FPSO + FSO + Canadian Shuttle tanker were already done and largely reflected in the $692M EBITDA, except for $25M step up on one of the FPSO later this year.  The 6 new shuttle tanker being built now is more like a replacement CAPEX (although there is some inflation price increase built-in per Seth). So I don't think they have significant growth EBITDA coming in except for recontracting of Varg, Arendle, Ostras, and more utilization of the towing fleet.

 

 

 

 

[walkie518]

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?

 

Speaking from my experience being involved in another Brookfield led restructuring called TerraForm Power.  TERP was a YieldCo of SunEdison which went bankrupt.  My thesis was that the PPA of TERP will stay in place.  I made some projections on what I think the "turned on" distributions for TERP will be once Brookfield is done restructuring them.  My estimate was low to mid teens.  It wind up being high single digits.  The market didn't react to it for a very long time.  They turned the distribution back on and paid dividends for a whole year and the market didn't blink an eye.  Finally, TERP increased its distribution.  It was the increase that did it for the market and TERP finally trades at around $14.  I got a bit tired of following the company for 2-3 years and swapped into some yield plays that was paying over 10% during Q4.  I guess my takeaway from all of this is that it may help to trade around the stock a bit.  We know the long term trajectory is likely upwards.  But from time to time, it could trade below $1.10 and then it would spike to $1.78.  We've been pretty good at picking up shares in the $1.10 to $1.20 range.  But haven't really sold any when it spiked earlier.  I get the sense that the full distribution "turn on" and "increases" won't happen for another 1-2 years as they pay for the shuttle tankers.  Frankly, it simply hasn't deleverage enough yet.  I think if you trade around 20-40% price swings, you can actually do okay.  Maybe, I should have kept those thoughts to myself.  But what's a community for?

markets are public auctions...makes perfect sense

 

Brookfield, however, paid a lot more than $1.10? 

 

If you believe in what they're doing, maybe you pick up a few extra bucks trading the stock minus the friction, but if BAM turns the company into a $20 stock, the after-tax difference might prefer buy and hold...

 

Walkie,

 

I like CoF because people are frank and blunt and with the exception of talking to ta few standouts like Eric and Packer, people just say what's on their mind to each other.  So thank you for your bluntness. 

 

1) I do own lots of stuff that I have no plan to sell and yes I do have a 20 year position in my portfolio

2) If you think TOO will be worth $20 in any time frame, I have a bridge...

3) Brookfield is good, but they are not God.  Turnarounds takes time and sometimes 3-5 years rather than the 1-2 years that people think.

4) They will still need to pay for the shuttle tanker delivery and deleverage the balance sheet simultaneously

5) I am not as bullish as others on what FCF because of 6)

 

6) These assets are like RVs with a long term leases on them and not like a site build house where you own the land and the land appreciates in value.  So every dollar of lease payment that you get you have to pay some of that to the bank as interest to service the debt, but you better pay off some of that amortization as well.  Because if you don't, you will be stuck with fully depreciated RVs in year 20s that you can only salvage for 10% of the original purchase price.  What is the correct amount of debt amortization is still something that I am trying to pinpoint and nail down.  Like I said, this is one of the most fascinating puzzle and yet one of the most frustrating company to analyze.  Until I have figured that out and gain full confidence, I am not going to wait around till $20 a share.  But I know that at $1.10, it is priced as if the company will go under.   

 

7) Let's try to "crowd solve" the unit economic on these shuttle tankers.

8) Seth, please feel free to tell us we are idiots and chime in

9) Walkie, can you walk me through your $20 math?  I have heard $4, $6, and maybe even $10. But never $20.  I am genuinely curious.

$20 is a pie-in-the-sky figure, but one could study GrafTech as a similar approach to value creation...should Brookfield be able to buy control like this and achieve similar outcomes each time, regardless of where the market prices day-to-day, Brookfield wins

 

And yes, Brookfield is not God, but the firm's reach is palpable and its affiliates are collaborative. 

 

Brookfield can engineer cash flow for a company like Teekay b/c of control of other portfolio companies--this is the value Brookfield can bring as a large operating investor that passive investors cannot bring to their investments.

 

$20 a share would imply an $8 billion market cap company.  I know you said pie-in-the-sky, but how?  Everything you said is qualitative, care to give some quantitative backing?

 

a quantitative approach might not matter when the stock trades as if the company is teetering on bankruptcy, there should be material upside should TOO not file let alone the upside that $20/sh would imply

 

that said, the exercise doesn't really hurt though is more speculative than underwriting the credit risk, which alone might show a reasonable investment?

 

say we trust all of the figures presented by mgmt and 2018 adj ebitda makes sense excluding settlement ($692m)

 

say we believe that the current growth initiatives do what they say they will do (increase adj ebitda by $220m)

 

say Brookfield finds a way to increase EBITDA by 5% per year for 5 years (27% higher ebitda y5) using its affiliates to spur demand, say the affiliates then sell the contracting assets, they would do so with long-term contracts...and if TOO does what they say and keeps price in line, there will be deals behind the those...

 

we might see a business generating adj ebitda of $1.16B where Brookfield's buy-in was not so far? 

 

the path to ig credit is a good one for this business...it's fragmented and many players are highly levered, someone will be there to pick up the pieces and it's likely to be the ones with capital beyond its balance sheets, what happens after consolidation to three or four players? 

 

highly speculative thinking...but 10x adj EBITDA isn't nuts for a stronger balance sheet and operating statement linked to long-term contracts?

 

Walkie,

 

I can think of a few issues with your assumptions

 

I stick with my GoodCo and BadCo analysis.  People can say whatever they want about whether the FPSO is GoodCo or Badco.  It's kind of like defining "what is pornography?".  I know it when I see.  What's so critical in heavy equipment investing is how much of the assets sits around and not earn a return.  From about a decade of watching from the sidelines of TransOcean, Ensign, Pride, etc.  The issue is that when there is a chance for assets to sit around and potentially be stacked when there is volatility, it's simply not a good business.  Because when there is demand, you can't get dayrates anywhere close to the previous peak.  The offshore heavy equipment business is fraught with danger. 

 

So, you're going off the combine EBITDA of both FPSO and shuttle tanker and just adding in 5% growth a year and etc.  The reality is that the FPSO will never get a 10x EBITDA multiple.  TOO is not investing in FPSOs.  So those are melting ice cube EBITDAs.  Packer has found a few comps and they trade at 5-6x EBITDA.  I have issues with people slapping a 10x EBITDA on the combinedco.  People point to Knop as a comp.  Well pay attention to the composition of knop offshore.  They literally sign a long term contract and then drop it down to Knop. So every asset has a long term contract and the fleet is very young.  You can't compare a 11 year old fleet with a 3 year old avg age fleet with long term contracts.  They are apples to oranges.  The other problem I have with your $20 assumption is that the shuttle tanker market is attractive precisely because it is so small.  Worldwide there is less than 100 ships. There is a real limit on how much capital one can put into this market.  Let's assume that TOO controls 50% of all ships.  At $135mm per ship, it will be $6.75 bn of gross capital. The assets earn 8% real and about 12% EBITDA yield.  Let's assume that all shuttle tankers are brand new somehow and there is only 30% debt on it.  This will be merely $810 mm of EBITDA.  Put a 10x EBITDA on this crazy awesome number because TOO controls half of the entire market.  This is still only a $15 stock.  I believe that at a certain stock price, Brookfield also takes a cut.  I keep struggling to get to $20. 

 

Speaking of which, the stock is at $1.39 today.  I'm not an advocate of day trading.  But some stocks are more volatile than others.  It's not a bad strategy to trade a bit and "KEEP" all of the shares that you pick up over time.  That's a fun way to accumulate more shares overtime. 

 

 

 

I don't disagree...calculating for tax and trading friction, I would trade around the position too

 

as far as valuation, there are ways for companies to compound at higher rates than expected with the right manager and near unlimited cheap capital, both of which BAM might bring to the table

[Seth Lowry]

Regarding unit economics on the shuttle tanker fleet...The hidden value of these assets are in the financing and fuel efficiency. 

 

Consider the value of ECA financing.  80% LTV and export banks absorb 90% first loss at L + 225 bps.  So these assets are incredibly advantaged from a cost of capital standpoint and they do not impact risk capacity on the existing lending syndicate.  Also consider that ECA banks don't finance companies that are going out of business (at least too often).  The tenure of this facility lasts well into the 2040s.  TOO's lenders clearly have a different view of Teekay Offshore's risk than the current equity market. 

 

Secondly, consider the fuel efficiency listed in the last presentation.  For the COA vessels where TOO pays for fuel this is highly advantageous.  Bunker fuel savings estimates are a bit too proprietary to share, but they are meaningful.

 

So for these assets i'm conservatively estimating ROICs in the 10-12% range, but with 4%-5% cost of funding at 80% LTV and rest with available FCF, you can get returns well into the 20% range.  But more importantly, these were financed with advantaged risk characteristics...quite a bit different than how Morgan Stanley thought there would be a $500M "funding gap."  I just wish the company was a bit more vocal on what the real value of this reinvestment capex was, it is not clear by the press release. 

 

 

[Seth Lowry]

Also, on the KNOP comp...consider that they are at nearly 50% cash flow splits in their IDRs, their level of distribution will limit their reinvestment opportunity, and  their return of capital assumptions on their maintenance capex and versus TOO which does not have those headwinds in the same degree, and you should argue TOO should trade much closer on an EBITDA basis.  Also consider that TOO's COA business, and to a lesser extent the MA with Statoil, is something that KNOP would kill to have and that they cannot structurally replicate...so while they don't technically have as many contracts in hand as KNOP, TOO is structurally just as long-term and arguably much more superior footprint in shuttle tankers and much more advantaged from a cost of capital standpoint.  Finally, if you weight TOO's shuttle fleet with the newbuilds by forward EBITDA contribution, and compare it to KNOP's, the comps close quite a bit in terms of fleet age per unit of economic contribution. 

[Seth Lowry]

Last one, sorry for polluting the page...just on FPSOs.  I certainly understand why some FPSO fleets trade at 5x-6x EBITDA.  Especially for used equipment and especially in less than ideal basins.  But why would TOO's Libra asset, which is running the preeminent EWT program in one of Brazil's most important basins, with a 14 year contract tenure @ ~$100M in EBITDA, trade anywhere near 6x? 

 

If you apply 10x to the shuttle fleet for the aforementioned reasons, and then take 10x on just the Libra asset you get $2...then DCF the rest of the fleet and still assume nothing on re-charter and you get a compelling valuation.

 

This stock is very frustrating!     

[5xEBITDA]

I think there is agreement that the stock is undervalued, and the degree to which it is undervalued is just a discussion point. But as you said Seth, the stock is frustrating here. What is the next catalyst to really get the market to wake up? Isn't that really the pressure point?

[Seth Lowry]

I would contend that any company that will generate more FCFE per share than its current stock price over the next 3 years - all on contracts with investment grade counterparties - has an investor relations and investor communication problem rather than a catalyst problem.  But I hear your point that valuation is a weaker catalyst.  Some potential catalysts in no particular order:

 

1) Improved KPIs, communication and/or investor day

2) Improvement in debt rating

3) Listing on Oslo exchange

4) Conversion to partnership structure to become more broadly ownable

5) Morgan Stanley writing something less incompetent

6) Rechartering of Floatel ~$20M in EBITDA

7) Uptick in Towage fleet from idle to cash flow positive (lots of large FPSOs greenlighted recently)

8) Deployment/sale of Hi-Load shuttle tanker

9) recharter of Rio de Ostras (idle)

10) Sale of Pirenema Field by PBR and longer-term/more economic charter for Pirenema Spirit FPSO

11) incharters on regular tankers rolling off this month ~$10M savings

12) Contract extensions / improvements on Voyageur Spirit (took low rate at bottom of cycle)

13) Alpha securing funding for VARG FPSO

14) Interest savings (ECA facility, FCF paying down higher cost debt/hybrid)

15) Petrojarl contract reversion in a few months +$50M

16) Maybe down the line a sale of Shuttle Tankers fleet if none of the above works

[heth247]

Seth, do we know that Ostras is for sure off contract now? I know its contract was supposed to end in March, but according to this link, it is still active - https://www.marinetraffic.com/en/ais/details/ships/shipid:370370/mmsi:309726000/imo:7920508/vessel:PETROJARL_CIDADE_DE_RIO_DAS_OS

 

Also, you mentioned in before that when they add the new debt facility, they are also swapping out an expensive acquisition facility. Can you elaborate which expensive acquisition facility they are swapping out?  thanks.

[5xEBITDA]

I would contend that any company that will generate more FCFE per share than its current stock price over the next 3 years - all on contracts with investment grade counterparties - has an investor relations and investor communication problem rather than a catalyst problem.  But I hear your point that valuation is a weaker catalyst.  Some potential catalysts in no particular order:

 

2) Improvement in debt rating

 

4) Conversion to partnership structure to become more broadly ownable

 

 

I like these two the best, any idea on dates - have they publicly commented on converting the corporate structure? The ratings agencies will have criteria for upgrades, I can check the boxes there.

 

Given the levered equity profile of the common, "buy and hold" makes me nervous on this one and I'd rather put it into my event-driven bucket if I can.

[Seth Lowry]

The ECA facility is replacing a combination of maturing secured debt, then with FCF, the remainder is probably going to pay off the NOK bond stub, and then likely some combination of the acquisition facility and $75M bond with the remaining sweep.

 

 

[heth247]

The ECA facility is replacing a combination of maturing secured debt, then with FCF, the remainder is probably going to pay off the NOK bond stub, and then likely some combination of the acquisition facility and $75M bond with the remaining sweep.

 

Seth, that is the part that I don't understand when you say the ECA facility is to replace existing maturing debt. The following is their obligation in 2019. Are you talking about replacing (2) and (3)?  But aren't those money they borrowed against their old ships? Unless those ships are already paid off, how can you use the debt from new ships to pay for the old ships? Then who is going to pay for the new ships when they are delivered? I've always thought the new ECA facility is new debt added on top of existing debt, which is (6) in below. Can you explain? thanks.

 

1. Bond repayments $74.9MM

2. secured debt      $366MM 

3. secured debt        $85MM 

4. unsecured revolver $125MM

5. Norwegian bond    $10.5MM

6. new building        $377MM

[Seth Lowry]

TOO's shuttle tankers use leverage against the contracts not the ships

[heth247]

TOO's shuttle tankers use leverage against the contracts not the ships

 

Can you help me understand how that works?  I thought for secured debt, they still have covenants covering ship's value ...

 

Anyway, regarding their obligations I listed above, they have $366+$85 secured debt due, and $377MM for new buildings. How can the new ECA facility of $414M take out both?  The numbers don't add up. Or, maybe I misunderstand you, and what you mean was using the $414M first to take out the $377M, and the rest to partially pay off the secured debt?  thanks.

[heth247]

 

TK selling all of their remaining interest in TOO to BBU for $100M!

https://www.globenewswire.com/news-release/2019/04/30/1812115/0/en/Teekay-Corporation-Agrees-to-Sell-Remaining-Interests-in-Teekay-Offshore-to-Brookfield-for-100-Million.html

[Steven B]

Seth, do we know that Ostras is for sure off contract now? I know its contract was supposed to end in March, but according to this link, it is still active - https://www.marinetraffic.com/en/ais/details/ships/shipid:370370/mmsi:309726000/imo:7920508/vessel:PETROJARL_CIDADE_DE_RIO_DAS_OS

 

Heth,  pg. 17 of the presentation lays out the length of contracts for the FPSOs. Seems like Ostras is done.

 

https://www.teekay.com/wp-content/uploads/2019/04/TOO-Q1-19-Earnings-Presentation.pdf

 

[heth247]

Heth,  pg. 17 of the presentation lays out the length of contracts for the FPSOs. Seems like Ostras is done.

https://www.teekay.com/wp-content/uploads/2019/04/TOO-Q1-19-Earnings-Presentation.pdf

 

Yes, Steve, on the same slides, page 6, it also mentioned that Ostras is in warm lay up. So I guess it is done for now. But I think the most interesting slide is page 10, which talks about  financing.

 

It mentions about the $414M ECA loan for new builds, which will address (6) in below. It also mentions refinancing of $450M shuttle tanker RCF, which is at libor +2.5, and oversubscribed and come with reduced amortization from $100M to $54M. I guess, this will address (2)(3) in below. It also mentioned a $100M FPSO RCF refinance. I guess it will address (1) in below?

 

1. Bond repayments $74.9MM

2. secured debt      $366MM

3. secured debt        $85MM

4. unsecured revolver $125MM

5. Norwegian bond    $10.5MM

6. new building        $377MM

 

I think they are making very good progress on the financing part. Just look at TK to see how difficult it is to access unsecured debt market now. They have to sell TOO at distress. Looking back, BBU has been doing a good job to refinance all TOO's unsecured last year.

 

And the towage segment back to profit is good new. The only thing that I am not happy is the $78M derivative hedge loss, although it is not realized yet.

 

Another thing is, now that BBU owns 75% of the common, what will prevent them from taking this private at a low price?