Teekay Offshore GP L.L.C., the general partner of Teekay Offshore Partners L.P. (Teekay Offshore or the Partnership) (NYSE:TOO), reported the Partnership’s results for the quarter ended September 30, 2010. During the third quarter of 2010, the Partnership generated distributable cash flow of $20.8 million, compared to $28.1 million in the quarter ended June 30, 2010, primarily as a result of seasonal factors associated with the scheduled maintenance of North Sea oil fields during the summer months.
On October 25, 2010, the Partnership declared a cash distribution of $0.475 per unit for the quarter ended September 30, 2010. The cash distribution will be paid on November 12, 2010, to all unit holders of record on November 5, 2010.
Acquisition of FPSO and Shuttle Tankers
On October 18, 2010, the Partnership announced that it had completed the acquisition of the Cidade de Rio das Ostras (Rio das Ostras) floating production storage and offloading (FPSO) unit from Teekay Corporation (Teekay), which is on a long-term charter with Petroleo Brasileiro SA (Petrobras), for a purchase price of approximately $158 million. In addition, Teekay Offshore announced that its 51 percent-owned subsidiary, Teekay Offshore Operating L.P. (OPCO), had acquired a newbuilding shuttle tanker, the Amundsen Spirit, from Teekay for approximately $128 million and had agreed to acquire two additional newbuilding shuttle tankers, the Nansen Spirit and the Peary Spirit, from Teekay for a total purchase price of approximately $260 million. The acquisitions of the two newbuilding shuttle tankers are expected to coincide with the commencement of their time-charter contracts under a Master Agreement with Statoil in January 2011 and July 2011, respectively. The Partnership financed the acquisition of the Rio das Ostras FPSO unit and the Amundsen Spirit newbuilding shuttle tanker through the assumption of $187 million of debt secured by these assets, with the remainder of the purchase price financed from available capacity under the Partnership’s revolving credit facilities.
These transactions are expected to increase the Partnership’s cash flow from vessel operations(2) by approximately $60 million in 2011, and distributable cash flow(1), which includes only 51 percent of OPCO’s cash flow, by approximately $20 million in 2011.
“As expected, the Partnership’s cash flow declined in the third quarter primarily due to the scheduled seasonal maintenance of the North Sea oil fields, which typically occur during the summer months, and the concurrent planned maintenance shutdown of the Petrojarl Varg FPSO unit,” commented Peter Evensen, Chief Executive Officer of Teekay Offshore GP L.L.C. “With the completion of the North Sea field maintenance, our shuttle tanker fleet and our Petrojarl Varg FPSO unit have returned to normal production levels in the fourth quarter. In addition, the recently signed Master Agreement with Statoil, initially for seven shuttle tankers, which replaces volume-dependent contracts of affreightment with fixed-rate, time-charter contracts effective September 1, 2010, should reduce the seasonal variability in the Partnership’s cash flows going forward.”
Evensen continued, “Teekay Offshore’s FPSO and shuttle tanker businesses have experienced several exciting developments during the past three months. The accretive acquisition of the Rio das Ostras FPSO unit, located in the opportunity-rich Brazil offshore market, provides us with a second FPSO unit and compliments our fleet of 13 shuttle tankers operating in Brazil. In addition, we acquired the first of three shuttle tanker newbuildings, all of which will operate under the new Master Agreement with Statoil.”
OPCO’s fleet includes 33 shuttle tankers, including six chartered-in vessels, 4 FSO units, and 11 conventional oil tankers.
Future Growth Opportunities
Pursuant to an omnibus agreement that Teekay Offshore entered into in connection with its initial public offering in December 2006, Teekay is obligated to offer to the Partnership its interest in certain shuttle tankers, FSO units, FPSO units and joint ventures it may acquire in the future, provided the vessels are servicing contracts in excess of three years in length. Teekay Offshore also may acquire additional limited partner interests in OPCO or other vessels that Teekay may offer the Partnership from time to time in the future. Teekay currently owns 49 percent of OPCO and Teekay Offshore owns the remaining 51 percent, including the general partner interest.
Shuttle Tankers
As described above, OPCO recently acquired one Aframax shuttle tanker newbuilding (the Amundsen Spirit) and has committed to acquire two additional Aframax shuttle tanker newbuildings (the Nansen Spirit and the Peary Spirit) that are scheduled to deliver to OPCO in January and July 2011. Teekay is obligated to offer to sell to the Partnership its interest in a fourth shuttle tanker newbuilding within 365 days after its delivery, provided the vessel is servicing a charter contract in excess of three years in length.
FPSO Units
Pursuant to the omnibus agreement and a subsequent agreement, Teekay is obligated to offer to sell the Petrojarl Foinaven FPSO unit, an existing FPSO unit of Teekay operating under a long-term contract in the North Sea, to Teekay Offshore prior to July 9, 2012. The purchase price for the Petrojarl Foinaven FPSO unit would be at its fair market value plus any additional tax or other similar costs to Teekay that would be required to transfer the FPSO unit to the Partnership.
On October 19, 2010, Teekay announced that it had signed a contract with Petrobras to provide a FPSO unit for the Tiro and Sidon fields located in the Santos Basin offshore Brazil. The contract with Petrobras will be serviced by a new converted FPSO unit, to be named the Petrojarl Cidade de Itajai, which is currently under conversion from an existing Aframax tanker at Sembcorp Marine’s Jurong Shipyard in Singapore for a total estimated cost of approximately $370 million. The new FPSO unit is scheduled to deliver in the second quarter of 2012, when it will commence operations under a nine-year, fixed-rate time-charter contract to Petrobras with six additional one-year extension options. Pursuant to the omnibus agreement, Teekay is obligated to offer to the Partnership its interest in this FPSO project at Teekay’s fully built-up cost, within 365 days after the commencement of the charter to Petrobras.
Financial Summary
The Partnership reported adjusted net income attributable to the partners(1) (as detailed in Appendix A to this release) of $12.9 million for the quarter ended September 30, 2010, compared to $18.9 million for the quarter ended June 30, 2010. Adjusted net income attributable to the partners excludes a number of specific items that had the net effect of decreasing net income by $16.8 million and $21.7 million for the quarters ended September 30, 2010 and June 30, 2010, respectively, as detailed in Appendix A. Including these items, the Partnership reported, on a GAAP basis, net loss attributable to the partners of $3.9 million (as detailed in Appendix A to this release) for the third quarter of 2010, compared to net loss of $2.8 million in the previous quarter. Net revenues(2) for the third quarter of 2010 were $172.7 million compared to $181.0 million in the previous quarter.
For accounting purposes, the Partnership is required to recognize, through the consolidated statements of (loss) income, changes in the fair value of certain derivative instruments as unrealized gains or losses. This revaluation does not affect the economics of any hedging transactions or have any impact on the Partnership’s actual cash flows or the calculation of its distributable cash flow.
The Partnership has recast its historical financial results to include the results of the Falcon Spirit FSO unit and Petrojarl Varg FPSO unit relating to the periods prior to their acquisition by the Partnership from Teekay, and for which pre-acquisition results are referred to in this release as the Dropdown Predecessor. In accordance with GAAP, business acquisitions of entities under common control that have begun operations are required to be accounted for in a manner whereby the Partnership’s financial statements are retroactively adjusted to include the historical results of the acquired vessels from the date the vessels were originally under the control of Teekay. For these purposes, the Falcon Spirit was under common control by Teekay from December 15, 2009 until April 1, 2010, when it was sold to the Partnership, and the Petrojarl Varg FPSO unit was under common control by Teekay from October 1, 2006 to September 10, 2009, when it was sold to the Partnership.
Operating Results
Shuttle Tanker Segment
Cash flow from vessel operations from the Partnership’s shuttle tanker segment decreased to $45.6 million for the third quarter of 2010, compared to $49.3 million for the second quarter of 2010, primarily due to reduced revenues as a result of reduced oil production in the North Sea due to seasonal oil field maintenance.
Conventional Tanker Segment
Cash flow from vessel operations from the Partnership’s conventional tanker segment of $14.9 million in the third quarter of 2010 was consistent with the $14.8 million generated in the second quarter of 2010.
FSO Segment
Cash flow from vessel operations from the Partnership’s FSO segment decreased to $8.2 million in the third quarter of 2010 from $9.4 million in the second quarter of 2010, primarily due to a contractual reduction in the charter rate on the Navion Saga FSO unit effective May 1, 2010.
FPSO Segment
Cash flow from vessel operations from the Partnership’s FPSO segment decreased to $9.2 million for the third quarter of 2010, compared to $15.5 million for the second quarter of 2010, primarily due to a planned maintenance shutdown of the Petrojarl Varg FPSO unit during the third quarter, resulting in lower production tariff revenue and higher vessel operating expenses.
Liquidity
As of September 30, 2010, the Partnership had total liquidity of $448.0 million, which consisted of $158.5 million in cash and cash equivalents and $289.5 million in undrawn revolving credit facilities. Total liquidity increased from $246.1 million as at June 30, 2010, primarily as a result of the Partnership’s follow-on equity offering completed in August 2010, which provided net proceeds to the Partnership of $130.4 million, cash flow from operations and the completion of a new $32 million debt facility secured by Falcon Spirit FSO in September 2010.
