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No. of Recommendations: 6
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Reusing a previous paragraph

About 4-5 years ago, TK decided to "extract/realize value" from its fleet. What this entailed
was basically a spin-off of a subsidiary into a separate trading entity. The parent company holds a stake, and offers ownership rights to other vessels. When the subsidiary wants/needs to expand, their
management typically goes to the parent to acquire a new (to them) vessel. The capital for this
acquisition is facilitated via available cash, a secondary offering, giving parent company shares/units,
assuming debt on vessel, or some combination of those options. So TK extracts value by moving
an asset over to its subsidiary's books, and "monetizing" on the transaction. Teekay has done this
with three separate subsidiaries- Teekay Gas Partners (TGP), Teekay Tankers (TNK),
and Teekay Offshore Partners (TOO).


I should make a clarifying point. Although I have suggested above, that a subsidiary is looking to expand, I suspect the initiator in most cases is Teekay parent. I will discuss a recent case a little later.

TOO is a lot more complicated than Teekay Tankers (TNK), primarily because it owns multiple vessel types used for different purposes and because of OPCO (Teekay Offshore Operating LP). The partnership fleet includes
35 Shuttle tankers
11 Aframax tankers
6 Floating Storage and Offtake (FSO) units
2 Floating Production, Storage and Offloading (FPSO) units
1 Shuttle tanker newbuild

I am reusing last year's definition of a Shuttle tanker
http://www.marin.nl/web/Ships-Structures/Merchant-vessel-Wor......

A shuttle tanker is a ship designed for oil transport from an off-shore oil field.
It is equipped with off-loading equipment compatible with the oil field in question. In order
to approach the oil field and to maintain position relative to the field these ships are
normally equipped with two or three bow thrusters and stern thrusters. In some cases DP functionality
is used to keep the tanker in position. Furthermore flap rudders and controllable pitch propellers
are often used to increase their low speed manoeuvrability. Generally these ships have a length
between 230m and 270m and have a high block coefficient.

TOO claims to have the world's largest fleet of Shuttle tankers, which includes five chartered-in
vessels. These vessels vary in capacity from 565,000 bbls => 1,093,000 bbls.
9 vessels each have a capacity of at least 1M bbls .

The parent company had 4 Aframax Shuttle tankers on order for $480M, or average $120M each,
with delivery dates in 2010 and 2011. Two of these vessels have been acquired by TOO and a third will transfer over to TOO in July 2011. The vessels appear to transfering over at greater than cost ($129M for the first one, $130M for #2 & #3)

Besides adding two shuttle tankers, TOO added an FSO and an FPSO in 2010

The Shuttle tankers are TOO's bread-and-butter, represent about 60.5% of revenue, and 54% of
cashflow in 2010

Quarterly data (rounded up in Ms) - rev; cash flow
Shuttle tankers 455 189
Conv tankers 95 67
FSOs 73 34
FPSOs 129 60
Total 752 350


At the end of 2010, TOO owned 51% of OPCO, and TK owned the remaining 49%. As mentioned last year, OPCO is the entity that consolidated the initial TOO assets. So essentially, the OPCO assets include 33* Shuttle tankers, 11 Aframax tankers and 4 FSOs.

* - In other press releases, I've seen the 2 2010-build + newbuild Shuttle tanker included in OPCO.


At least 20 Shuttle tankers are 12 years or younger, lots of working life left.

The FSOs are relatively older vessels 1978, 1986, 1987, 1988, 1988, 1991

The FPSOs are a 1981-build and a 1998-build. The 1981-build secured a contract with Petrobras through 2017. That's nice for TOO, because acquiring a 30 yo asset for $158M made little sense otherwise.

The Aframax tankers are
1992 3
1994 1
1995 2
1997 1
2003 1
2004 1
2008 2

Other than the Shuttle tanker newbuilds @ $120M, I haven't seen costs for earlier Shuttle vessels.
Figuring out FMV of those vessels, would be a reach. Similar problem with the FSOs.
Though given the FSO vessel ages and the quantity, I could take a WAG and feel less worried if I was off. My value on the FSOs is $70M-$115M. The newer FPSO was a $320M acquisition (mid 2009), the 1981-build was a $158M acquisition, and I get $230M-$270M for the Aframaxes.



Growth going forward?
I had waited to provide a TOO update. The complex tie-in that is OPCO is going away. TK offered TOO the remaining 49% of OPCO in Jan 2011, and it was just announced that TOO will acquire those assets for $390M, a combination of cash and TOO units.

http://www.teekayoffshore.com/News-and-Media/News-Releases/N...

Hmm! Now I have another issue to mull over. There was $1.7B in debt before the acquisition, most of it presumably on the OPCO assets. So how does TOO acquire 49% of a group of assets, but no debt? Does all the debt show on TOO's books because it is majority owner? I mean the assets outside OPCO are two FPSOs, two FSOs, the two newest Shuttle tankers and a newbuild Shuttle tanker.
- Newer FPSO - $320M
- Older FPSO + Shuttle tankers - $286M
- Shuttle tanker + newbuild Shuttle tanker - $260M
The last two transactions show up here (and the Shuttle tankers being part of OPCO)
http://www.teekayoffshore.com/News-and-Media/News-Releases/N...

Gah! These guys certainly make things easy - Not!


The Omnibus agreement between parent company and subsidiary, indicates vessels get offered to the subsidiary if a vessel has a time-charter deal three years, or longer. TOO now has two FPSOs, there's four more existing ones. TK secured another FPSO contract with Petrobras with a newbuild vessel scheduled to deliver in 2012. With a contract in place, that's an easy one for down the road. There's also the final Shuttle tanker. So TOO has growth opportunties from the TK fleet.


TOO have steadily grown their distribution since the entity started trading publicly 4 years ago. The 2009 distribution was $1.80/unit (45c/sh quarterly) and TOO bumped it up to 47.5c/unit, or $1.90/unit on an annual basis for 2010. Even with the unit dilution for the OPCO deal, I think TOO will add significant distributable cash flow from the 49% stake in the assets to at least maintain the distribution. The long-term contracts on the various assets offer some stability to the distribution.


TOO was my first tanker stock purchase in 2010. I had already reaped nice gains from FRO, when "Flash Crash" showed up. It spooked me enough to trim some ideas, TOO was one of them. TOO was one of the better performing tanker ideas in 2010. Ugh! for me. TK are the General Partner of TOO (and also own a sizable stake in common units), so they have control. OTOH, TOO have the nicer yield. TK gets all of its cash to pay its own dividend from the TOO and TGP stakes, so it does have a vested interest in seeing the entity succeed.


Hohum
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