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Edited Transcript of TOO earnings conference call or presentation 6-Feb-20 5:00pm GMT

Q4 2019 Teekay Offshore Partners LP Earnings Call

Hamilton Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Teekay Offshore Partners LP earnings conference call or presentation Thursday, February 6, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ingvild Sæther

Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd

* Jan Rune Steinsland

Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd.

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Conference Call Participants

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* Daniel Kelsh;UBS;Senior Credit Analyst

* Sanford Murray Burns

Stifel, Nicolaus & Company Inc, Fixed Income, Research Division - Research Analyst

* Sunil K. Sibal

Seaport Global Securities LLC, Research Division - MD

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Presentation

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Operator [1]

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Welcome to Teekay Offshore Partners' Fourth Quarter and Fiscal 2019 Earnings Results Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

Now for opening remarks and introductions, I would like to turn the conference over to Ingvild Sæther, Teekay Offshore Group's President and Chief Executive Officer. Please go ahead.

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [2]

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Before Ingvild begins, I would like to direct all participants to our website at teekayoffshore.com, where you will find a copy of the fourth quarter 2019 earnings presentation. Ingvild and I will take you through this presentation during today's conference call.

Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statement is contained in the fourth quarter 2019 earnings release and earnings presentation that are available on our website.

I will now turn the call over to Ingvild to begin.

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [3]

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Thank you, Jan Rune. Hello, everyone, and thank you for joining us on our fourth quarter 2019 earnings call. With me today, I have Jan Rune Steinsland, CFO of the Teekay Offshore Group.

Starting with Slide 3. Our large and diversified portfolio of forward revenues stands at approximately $4.6 billion at the end of the fourth quarter. This provides significant cash flow stability to Teekay Offshore. And this is before including any contract options or upside from oil price and production tariffs on certain FPSO contracts.

On top of this stable portfolio, we have additional upside to earnings from redeployment opportunities towards spot market operations and improving market fundamentals. As an example, we currently have 2 of our DP1 shuttle tankers trading in the conventional tanker market, where we have seen strong rates in the fourth quarter.

Turning to Slide 4. In the fourth quarter, Teekay Offshore delivered solid results, both operationally and financially. We generated adjusted EBITDA of $167 million in the quarter, an increase of $9 million from the third quarter 2019. And with this, we complete the full year at a strong adjusted EBITDA of $672 million.

We have taken delivery of the first E-Shuttle early in the year, and we are looking very much forward to seeing it in operation in the North Sea. In January, the acquisition of Teekay Offshore by Brookfield was completed, and as a result, Brookfield owns approximately 99% of the outstanding unlisted common units, with the remaining 1% owned by those unaffiliated unitholders who elected to receive equity in respect of their common units.

With the acquisition completed, we now focus our energy and passion into the launch of our new brand, vision and values. And from March 2020, Teekay Offshore will become Altera Infrastructure.

I will now turn it over to Jan Rune to go over the financial results.

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [4]

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Thanks, Ingvild. Turning to Slide 5. Adjusted EBITDA came in at $167 million.

(technical difficulty)

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Operator [5]

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(Operator Instructions)

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [6]

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Okay, everyone. I think we're reconnected. Sorry for that.

We're turning to Slide 5. Adjusted EBITDA came in at $167 million, which is up $9 million from the third quarter. This increase is mainly related to the recognition of a $13 million annual maintenance bonus on the Libra FPSO earned during 2019 but recognized for accounting purpose in the fourth quarter. This increase is partly offset by $5 million of onetime cost related to the privatization process and the shared services carve-out process with Teekay Corporation.

Our FPSO segment adjusted EBITDA came in at $82 million, up $9 million from the third quarter, driven by the maintenance bonus that I just addressed. Our Shuttle Tanker and FSO segment adjusted EBITDA came in at $65 million and $23 million, respectively and are consistent with the third quarter. Our long-distance Towage segment came in with an adjusted EBITDA of $2 million, an increase of $3 million from the third quarter.

I will now turn back the call to Ingvild to cover our operating performance in more detail.

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [7]

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Thanks, Jan Rune. Turning to Slide 6. We continue to see solid economic uptime on our FPSO units, and we recorded another quarter at 99%. Our maintenance bonus for Libra that Jan Rune just mentioned, reflects how the high uptime also affects our bottom line results.

Looking at Slide 7. Our Shuttle Tanker segment continued to deliver strong operational results in the quarter. For the time charter and CoA shuttle tankers, this is the third quarter in a row of 100% uptime. In January of this year, we took delivery of Aurora Spirit, the first of the 6 E-Shuttle newbuildings being constructed at the Samsung yard in Korea, for fleet renewal in the North Sea. The second vessel, Rainbow Spirit, is expected to be delivered in the first quarter and the remaining 4 vessels through to January 2021.

As a reminder, the E-Shuttle vessels are fueled by LNG, have batteries for peak shaving and are also using vapor from the cargo, which effectively is turning waste into fuel. As a result, the CO2 emissions are reduced by almost 50%.

We continue to see enthusiasm and strong interest from our clients for these vessels, and we have received innovation awards that support a view that the configuration of these vessels has been a result of a revolution in design rather than an evolution.

On January 28, ØKOKRIM, the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime and the local Stavanger police raided Teekay Shipping Norway AS premises. Teekay Shipping Norway is a subsidiary of the partnership. The police had a search warrant issued pursuant to suspected violations of the Norwegian pollution and export laws in connection with the export of the shuttle tanker, Navion Britannia, from the North Sea in March 2018. The partnership has not identified such violations but continues to evaluate any potential liabilities together with advisers.

Turning to Slide 8. Our FSO segment continues to generate strong and consistent results, reflecting high uptime. This quarter, we recorded 100% technical uptime.

On Slide 9, you see the results of our Towage segment. We saw an increase in our utilization up to 69%. We also took the decision to reactivate the ALP Ace from lay-up and expect it to be back in operation at the end of this month.

In addition, we are proud to announce that we have signed a contract that will require up to 5 vessel -- 5 of our towage vessels, at the Coral South LNG project in Mozambique in the fourth quarter of 2021 and the day rate secured to reflect the anticipated improvement in demand in the market.

I will now turn it over to Jan Rune to go over our recent financings in more detail.

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [8]

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Thank you, Ingvild. As you can see on Slide 10, we completed 2 financing initiatives in the fourth quarter, and that concluded a very comprehensive financing and refinancing program in 2019. As both these initiatives took place early in the quarter, we addressed them on the previous earnings call. So I will just briefly note that this was the $125 million senior unsecured green bonds due in 2024 that was issued by our 100% owned and fully ring-fenced subsidiary, Teekay Shuttle Tankers, as well as the $100 million bridge loan for the fourth East Coast Canada shuttle tanker.

We are working to refinance this bridge loan into the fleet financing for the existing 3 East Coast Canada shuttle tankers before we draw on it. And we expect this to be concluded in the first half of this year.

On Slide 11, we have included an updated debt maturity schedule as per year-end, where there are no major changes from the third quarter presentation. We want to underline that the maturity schedule includes all balloon payments as well as all scheduled debt installments. Furthermore, the schedule includes all debt, including RCFs, that is revolvers; and debt related to newbuilds on a fully drawn basis. But it excludes the nonrecourse debt in 2 FPSO joint ventures, consistent with the presentation in our balance sheet.

In this context, I can mention that the total remaining CapEx for our newbuilding CapEx as per year-end 2019 is approximately $690 million, of which approximately $580 million will be covered by financing that we already have secured, and approximately $110 million will be paid from our cash flow and cash on hand.

As you can see from the maturity schedule in 2020 and 2021, we have relatively normal amount of schedule installments. While in 2022 and 2023, we also have the maturities of the 2 senior unsecured bonds.

Turning to Slide 12. As you all know, the merger with Brookfield and affiliates took place on January 22, 2020, at which point, Brookfield acquired all outstanding common units not already held, excluding unaffiliated unitholders that elected as part of the merger to receive unlisted common units in exchange for their common units.

The merger agreement provides that each common unit issued an outstanding will be converted into their right to receive $1.55 in cash. As an alternative to receiving the cash consideration, each unaffiliated unitholder had the option to elect to receive 1 newly designated unlisted Class A common unit of the partnership per common unit. This represented approximately 1% of the outstanding common units. Please refer to the SEC filing made by the partnership on December 12 for further details.

I will then hand back to you, Ingvild.

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [9]

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Thank you, Jan Rune. Turning to our last slide on the presentation. Our focus on strong and stable operation is reflected in our 2019 financial results, and we will continue this focus also in 2020. To remind you, our top business priorities are maintaining safety standards and operational excellence, secure FPSO charter extensions and redeployments, increase the profitability in our existing business, execute the contemplated financing initiatives and strengthen balance sheet through delevering.

Overall, we considered 2019 to be a very successful year that concluded the expansion of the Piranema and Voyageur FPSO contracts, and we saw increased activity in our core markets.

This will be our last earning call as Teekay Offshore, and we look forward to sharing our new brand, vision, values as Altera Infrastructure with you in our next quarterly call.

Operator, we are now available to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Sandy Burns with Stifel.

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Sanford Murray Burns, Stifel, Nicolaus & Company Inc, Fixed Income, Research Division - Research Analyst [2]

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Just one on the shuttle tankers. As you start to receive the new tankers and replace the older vessels in your fleet, anything you could share with us, like in terms of approximate cost savings per year each tanker will achieve, just given all the new technology on it?

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [3]

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Well, we are very excited to have the new shuttle tankers coming into operation. And as you know, the first one is on its way up to the North Sea now and will be in operations sometime during the quarter. I think we will -- we are very eager to see how much more fuel-efficient these vessels are when they get into operation, but we are confident that there are significant savings in the cost of the fuel or in the volume and the cost of the fuel. I'm not sure if we will -- if we can give any indication on that yet before we have had it in operation, but we hope that it's above 50% compared to the vessels they are replacing.

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Sanford Murray Burns, Stifel, Nicolaus & Company Inc, Fixed Income, Research Division - Research Analyst [4]

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Okay. And just also under the CoA agreements, maybe it's a little early to have visibility on this. But in your discussions with clients, any sense on like utilization expectations for this year? Or does it really change quite dramatically as each year progresses?

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [5]

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No. I would say that the utilization of the shuttle tankers have been quite stable year-on-year for many years. We tailor the supply to what we expect the demand would be. So we have a pretty good long-term planning for the utilization, and it stays pretty stable year-on-year.

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Sanford Murray Burns, Stifel, Nicolaus & Company Inc, Fixed Income, Research Division - Research Analyst [6]

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Great. And last question for me on the FSO side. The Randgrid, the contract there expires in October. Any initial discussions with the customer you could share with us? Any expectations on if that will be extended or not?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [7]

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No. I think we can say that we have a series of, I think, it's 12 1-year options, and we expect Equinor to be rational and declare the first one this year.

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Operator [8]

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Our next question comes from Sunil Sibal with Seaport Global.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [9]

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Can you guys hear me?

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [10]

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Yes. We can hear you.

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [11]

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Sure.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [12]

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So my first question is related to the newbuild shuttle tankers. I was wondering if you could give us some idea on return on those $900 million total investments that you have ongoing in the fleet.

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [13]

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So I think those numbers are somewhat sensitive. I think -- but I think we can say for the Shuttle Tanker business, the more profitable part is probably double digits on an unlevered basis, and the less profitable part is single digit. I don't think I can go further into that.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [14]

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Okay. No, that's helpful. And then on the investigation by the Norwegian authorities, could you talk a little bit about what's the next kind of step there that we should be looking for in terms of resolution of that?

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [15]

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No. As you appreciate and as per our previous practices, we -- it's difficult for us to comment on any investigation by authorities until it is concluded. And we won't really have a time line on what the next steps will be here. It happened last week, and it could take some time before there are any further steps from the investigation.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [16]

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Okay. And then on the Towage side, you talked about a new contract with a FLNG client. Could you talk a little -- is there any specific requirements in those contracts which might require you to update your fleet? Or is there any kind of CapEx associated with that? Or is your current fleet geared for those requirements?

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [17]

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So that is a fantastic contract for us, and it's going to happen in 2021. And it is tailored to the fleet we have today. So there are no CapEx or new investment that needs to be made to do this.

I think contrary, it's an endorsement of the fleet that we have because there are not that many that can do a 5-vessel operation -- an operation that requires 5 vessels at the same time.

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [18]

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We're also excited to see that, that clients now start to book this capacity forward. We see a line of FPSOs, FLNG projects, et cetera, lined up in the Far East that will have to be transported to and towed to North Sea, West Africa, Brazil and so on. And we think there will be a little bottleneck on the supply side out there. And obviously, the first clients start to see that and book well in advance.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [19]

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No, no. That's helpful. And then is there any update on FPSO Knarr deployment in North Sea?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [20]

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No. The Knarr contract goes to '25, can be terminated against a fee from '21. The Knarr field has been disappointing for Shell. We don't expect the unit to be on to '25. We think -- and we have discussions with Shell on how to proceed. But I think we'll have to give you more news on that further down the road.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [21]

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Okay. Got it. And then just last one for me, the name change with the Altera Infrastructure. Is that entails any other changes with regard to how you look at the business or how you bid for new work?

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [22]

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I think it is a reflection of how our existing business operates, both on the FPSOs and the shuttle tankers are, in reality, infrastructure assets. That's part of the energy infrastructure for the -- for our customers. And we have seen that during a quite volatile oil price environment in the last 4, 5 years, our earnings have actually been very stable. So I think it's more a reflection of what we have and also a reflection of where we will continue to invest going forward.

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Operator [23]

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We'll take our next question from Dan Kelsh with UBS Wealth Management.

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Daniel Kelsh;UBS;Senior Credit Analyst, [24]

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I wanted to ask quickly if you guys had commented at all on -- just is there any change in tone of conversations with your customers as you guys approach the closing of the Brookfield transaction or have now closed it? Is there any reaction you're getting from customers in favor of having that type of capital backstop? Or has there been any change in conversations in the other way and then raising any concerns about that shift in ownership mix?

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [25]

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Yes. So we have been quite active in having the dialogue with the customers both on the Brookfield ownership and also on our change of name and the rebranding of the company. I would say that the customers are focused on the fact that it will be the same company, the same people, the same operating standards, the same values and the same brand promise as we've had in the Teekay group. And I think they see it as a positive with a strong financial backing of Brookfield. And we haven't really had any negative comments or concerns from our customers.

I think, in general, we see that there is a very strong uptick in activity with the customers, and that is also making the conversations very positive.

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [26]

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I think a strong stakeholder group is also lenders in terms of banks and on investors. And I think for that group, we also received positive reaction.

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Daniel Kelsh;UBS;Senior Credit Analyst, [27]

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Yes. I believe you guys may have done some type of road show, helping maybe to market some of that existing senior bonds that you have outstanding. Was there any real reaction you got from institutional investors in terms of that? Did you -- were you able to kind of recruit some more people to, I guess, come in that and purchase part Brookfield's existing stake in the bond?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [28]

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Yes. We -- in December, we did a non-deal road show in New York, Boston, primarily to maintain the relations that we had from the issuance of that bond 1.5 years earlier. That was a good timing to go back. As you say, Brookfield holds a large portion of that bond. And I think there are some smaller movements on that, but Brookfield has been a very disciplined holder. And I think there are no big movements. So as such, we had a good round with investors, existing and potential bondholders, and we appreciate the advice.

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Daniel Kelsh;UBS;Senior Credit Analyst, [29]

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Sure. And last one for me is, do you -- are there any further announcements that you might be looking to make around your preferred securities, obviously the Form 15 filing that came out earlier this week? Is there any chance that you might make a move to delist those securities as well?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [30]

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No. We have no plans other than to continue to have the preferred outstanding listed and continue our reporting obligations in relation to those securities.

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Operator [31]

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Ladies and gentlemen, this concludes today's question-and-answer session. I will now turn it back to Ingvild Sæther for closing remarks.

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [32]

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I would just thank everyone who called in today and wish you a continuous good day.

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO of Teekay Offshore Group Ltd. [33]

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Thank you.

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Operator [34]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation, and you may now disconnect.