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Edited Transcript of TOO earnings conference call or presentation 8-Feb-19 5:00pm GMT

Q4 2018 Teekay Offshore Partners LP Earnings Call

Hamilton Feb 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Teekay Offshore Partners LP earnings conference call or presentation Friday, February 8, 2019 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

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Conference Call Participants

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* Fotis Giannakoulis

Morgan Stanley, Research Division - VP, Research

* Michael Webber

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

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Presentation

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Operator [1]

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Welcome to Teekay Offshore Partners' Fourth Quarter 2018 Earnings Results Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

Now for opening remarks and introductions, I'd like to turn the call 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 [2]

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Before Ingvild begins, I would like to direct all participants to our website at www.teekayoffshore.com, where will you (sic) [you will] find a copy of the fourth quarter 2018 earnings presentation. Ingvild and I will review 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 2018 earnings release and earnings presentation 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 investor conference call. With me today, I have Jan Rune Steinsland, the CFO of Teekay Offshore Group.

During 2018, and in the fourth quarter, we experienced great progress, both operationally and commercially. Teekay Offshore generated adjusted EBITDA of $290 million this quarter, which is up $117 million or 68% from the prior quarter. The primary driver of this significant increase over the third quarter is related to the Petrobras settlement and higher earnings in our shuttle tanker fleet.

As we announced previously, we came to a positive settlement agreement with Petrobras for a total of $96 million. $55 million of this settlement has already been received, with the remainder to be received in 2020 and 2021.

Today, we announced a contract extension for up to 3 years on the Piranema Spirit FPSO, with our existing customer, Petrobras, which I will speak more about later in this presentation.

Our shuttle team was also very busy this quarter, securing 5 new shuttle CoA contracts, primarily renewals to existing customers, servicing existing fields. And our towage segment was awarded a towage and installation contract for Total's Kaombo Sul project, where we had utilized 5 of our vessels in January, and the project will require a total of 300 to 350 vessel days.

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 [4]

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Thank you, Ingvild. I would, first of all, like to draw your attention to the fact that in the fourth quarter 2018, we have made certain changes to our non-GAAP financial measures to more closely align with internal management reporting, annual reporting with the SEC under Form 20-F, and metrics used by our controlling unitholder.

Primarily cash flow from vessel operations, CFVO, from consolidated vessels and total CFVO, are replaced with consolidated adjusted EBITDA and adjusted EBITDA, respectively. Distributable cash flow is no longer reported. Adjusted net income is reported with a modified definition. Please refer to definitions and non-GAAP financial measures in the earnings release for definitions of these non-GAAP financial measures and in Appendix E of the earnings release for the reconciliations of the new to the old metrics.

We will then turn to Slide 4. Adjusted total EBITDA of $290 million in the quarter was up $117 million or 68% over the last quarter and up $147 million or 103% over the same period last year. This is primarily driven by the recognition of $91 million of revenue related to the Petrobras settlement and the contract start-up of growth projects during 2017 and '18, but is also driven by a solid operational performance in fourth quarter.

Our FPSO segment recorded an adjusted EBITDA of $109 million, up $16 million from the third quarter. $14 million was attributable to accelerated noncash in-process revenue in relation to the current Piranema contract that expires end of January. The balance is related to ongoing operations that for the FPSOs were basically in line or slightly better than third quarter.

Our Shuttle Tanker segment adjusted EBITDA came in at $124 million, which represent an increase of $59 million compared to last quarter. This segment benefited from the recognition of $55 million of the $91 million Petrobras settlement, which is related to the HiLoad DP unit. In addition, operations during the quarter was solid, with both higher fleet utilization and higher average tanker rates compared to the third quarter.

Our FSO segment adjusted EBITDA of $26 million was up $5 million, primarily driven by lower off-hire, lower repair cost, and a contract amendment on a run rate FSO. The contract amendment will remove certain performance criteria that in the past has resulted in lower commercial uptime for this unit.

Our UMS segment adjusted EBITDA of $35 million improved by $36 million, reflecting primarily the recognition of $37 million of the $91 million Petrobras settlement related to Arendal Spirit UMS.

Our Conventional Tanker and towage segment's adjusted EBITDA were both negative by $1 million in the quarter, which is in line with the third quarter. Looking ahead, we expect that our Conventional Tanker segment will no longer have any operations from second quarter 2019, as we plan to redeliver both tankers to their owners in March 2019.

I then turn it back to you, Ingvild.

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

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Thank you, Jan Rune. Turning to Slide 5. We continue to focus on securing charter contract extensions and new contracts for our existing FPSO units. The contract extension with Petrobras we announced today is for up to 3 years for the Piranema Spirit FPSO. This extension allows production on the existing Brazilian field out to as late as early 2022. Petrobras has a termination right with a 10-month advance notice. We do not expect any offsets against the recent Petrobras settlement for this contract extension. The new contract is expected to improve adjusted EBITDA by $25 million in 2019 compared to decommissioning the unit and going into layoff mode.

Last quarter, we announced a conditional 7-year charter agreement with Alpha Petroleum for the use of the Varg FPSO for the Cheviot oil field development. We continue to monitor and work with Alpha in their efforts to lift the remaining condition precedents, including completing financing and securing government approval. Although there has been more delays than we expected, we remain optimistic that this important project will commence in the near future.

Looking at Slide 6. Our Shuttle Tanker segment delivered strong results this quarter. In our CoA segment, which makes up about 30% of our shuttle fleet, we signed 5 new contracts. The contracts range in length from 1 to 5 years, with rates in line or better than our recent fixtures, and this is confirming the tightness in this segment. The combined volume is equivalent to 0.6 vessel demands in 2019.

We are making good progress on our new buildings, which were ordered over the last 18 months. The vessels continue to be on time and on budget, and we are looking forward to their delivery later this year and early into 2021. We have received 2 innovation awards for these groundbreaking vessels. The environmental footprint from the new shuttle tankers are only 50% of the vessels they are replacing, measured in CO2 equivalent emissions. We expect to complete the long-term financing of all 6 newbuilds in the second quarter.

As announced previously and as detailed on Slide 7, we successfully entered into a settlement agreement with Petrobras related to the early termination of the Arendal Spirit UMS and HiLoad DP units. We agreed on a settlement of $96 million with Petrobras and have already received $55 million of this during the fourth quarter. Future payments will be received by the end of 2020 and 2021. Should Petrobras enter into new contracts with us on certain assets, a portion of the $41 million in future payment to us can be offset against the revenue paid by Petrobras under a new contract.

We are excited by the future offshore projects for shuttle tankers and FPSO in Brazil, and therefore, very pleased with the outcome of this settlement and our continued strong relationship with Petrobras.

Turning to Slide 8. Our large and diversified portfolio of forward revenues stands at year-end at approximately $5.7 billion. This provides significant cash flow stability to Teekay Offshore and it is before including any contracts 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 and improving market fundamentals. I would also like to underline the low counterparty risk from working with a very strong customer base we are engaged with under these contracts.

Then, to conclude this presentation, I want to take the opportunity to remind you of our top business priorities. We have talked about this in 2018 and it remains our focus also in 2019: maintain safety standards and operational excellence; secure FPSO charter extensions and redeployments; increase profitability in existing business; execute contemplated financing initiatives; strengthen balance sheet through delevering.

Although some onetime settlements made 2018 a very strong year, it is good to know that also the underlying regular cash flow now benefited from all the large capital projects we have delivered in 2018 and in 2017. Even without the recognition of the Petrobras settlement, our results are up 30% or about $170 million in adjusted EBITDA over 2017. All the new assets are operating well with high uptime and to the customer's satisfaction.

As our core customers are increasing their investment budgets in our core markets of North Sea and Brazil, we are quite optimistic about the opportunities we expect to see for Teekay Offshore, the recent extension of the Piranema FPSO being one of those opportunities.

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) And we'll take our first question from Michael Webber with Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [2]

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I want to touch on the Piranema extension first. Can you maybe give us a cash-on-cash return level, maybe just on kind of what would be FY 1 cash flow. If I look at what you give in the deck, the $25 million improvement on EBITDA, but I would imagine that's a net number, and you're probably burning cash by keeping it off-hires. I'm just curious what the annual contribution for that extension is, and then, where would you put that on a kind of the FY 1 cash-on-cash basis?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO [3]

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Michael, I'll try to respond to your question. As you see, we have, as normal for commercial reasons, restricted our disclosure a little bit on this contract. Day rates are down somewhat from the regular period. And when we say it will contribute $25 million versus going into layoff and a decommissioning process, that reflects, of course, that there would have been cost on that, and that we would have been in normal operation in January. So...

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [4]

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So if you strip that out -- I'm trying to get the actual EBITDA contribution from the contract.

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO [5]

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Yes. If you -- I think somewhere between in the $10 million and $20 million or in the middle of that range, approximately, would be kind of a rough guidance.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [6]

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So $15 million, plus or minus a few -- a couple of million, is probably the right way to think about it?

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

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Yes. On an ex G&A basis and as an annual contribution, yes. So...

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [8]

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When you say ex G&A, you're talking about ex layoff cost? Or ex like a pro rata G&A?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO [9]

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Oh, ex any allocations from overhead -- onshore overhead costs. That in -- basically would have been there anyway, but then could also be distributed on this unit.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [10]

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Right. And I've already -- okay, I can probably come up with that number...

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

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So on a vessel basis -- on a vessel basis, in the middle of the range, $10 million to $20 million.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [12]

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Okay. The -- and then, I guess, when you look at that asset, like one of the hardest things, we -- one of the biggest problems we have in trying to value TOO is obviously coming up with a realistic value for some of these relatively opaque FPSOs. If it's -- if you're at $15 million -- ballpark of $15 million, maybe a bit less than that when you pro rata some G&A, and then you put a mid- to high-single digit multiple on that asset, is that the right way to think about what you think that asset is ultimately worth? Obviously, NAV is a pretty essential figure for us. And so maybe you can -- the pretty wide range of outcomes when you look at these. I'm just trying to think about how do you guys think about the value of the Piranema in the context of a contract like this?

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

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I think the extension is very important in terms of keeping the unit going, being on positive cash flow and gaining more time for another long-term contract for the units. And I think we -- the alternatives we're working with going forward would, for that unit, for the Voyageur and others, and as we see it for the Varg, probably provide better economics and that can go into your evaluation. So I think -- a normal new contract would be -- would provide better profitability than this one. But it -- as such, it's very important puzzle to get in place when we are rolling off contract.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [14]

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And the ability for Petrobras to walk from that with 10 months notice, that can start on day 1, theoretically? Am I correct in interpreting that? Or is there specific events or criteria they would need to see for them to trigger that walk away?

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

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No. That's a running 10-month notice period they have, and we are already into day 8 of the contract.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [16]

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No. I'm just trying of like whether to think about it as a 3-year contract or if that's kind of an ongoing -- is it more like I think a 3, 1-year, one, plus one, plus one, kind of a scenario. It just seems like it might be more apt.

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

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Yes. So what we do know is that this is a field that is on the divestment list of Petrobras. And they are in dialogue with potential investors who are interested to invest in the field and develop the nearby fields. So it's really to buy more time, I think, to find the best solution for the field from a Petrobras perspective. And for the potential buyers, an asset like Piranema is obviously, a very important part of the infrastructure of the field. So there could be also longer-term opportunities for the asset at the field.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [18]

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Okay. And just one for me, I'll turn it over. I believe this is the first quarter you've done this, where you've pivoted away from reporting distributable cash flow and we're kind of moving back towards an EBITDA and a net income -- adjusted net income figure. Obviously, we're pretty far along the path of reduced distributions and kind of almost like a post-MLP model for TOO. But I'm -- the signal would be that there -- any latent or minimal residual economic value associated with the IDRs, if you guys are kind of pivoting away from even reporting DCF would be pretty close to 0. Is that accurate or fair in your mind?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO [19]

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Yes, I think that's reflecting well. We've moved away from several of the characteristics from the MLP model. And as you point out, we have reduced the distribution to common unitholders to 0. And I would like to take the opportunity to say that we are not looking at doing anything similar to the preferred. But we take down the distribution to common unitholder in order to strengthen the balance sheet, build liquidity, and improve flex -- financial flexibility going forward.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [20]

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Got you. Okay. Yes. It remain more for the parent than for TOO, but I appreciate it.

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Operator [21]

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And next we'll go to Fotis Giannakoulis with Morgan Stanley.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [22]

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I would like to ask about the financing of the newbuilding shuttle tankers. If I calculate well, you are -- you need an additional $750 million to $800 million of remaining CapEx. How much of this CapEx can be financed based on the discussion that you have right now?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO [23]

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We're looking to raise the financing for the shuttles into 2 package, 1 for the first 4, and that will be in the range of plus/minus $400 million. And for the latter 2, it's a separate package, that will be about half of that.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [24]

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Okay. And regarding that there is an outstanding of the 2019 bond of around $75 million. What are your plans of repaying that -- this amount?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO [25]

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I think we will just end up paying that on maturity.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [26]

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Okay. And can you give us an update about the UMS and the towage business, where these 2 sectors are standing right now from a supply demand perspective? What are the opportunities to deploy these assets? And how do you view the debt that these assets have, and the ability to extend it further?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO [27]

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Before Ingvild will takes that question, I think I said plus/minus $400 million and $200 million, in order for you not to have 4 numbers in your spreadsheet. I think both financings are expected to be north of $400 million and north of $200 million for the latter 2, just to clarify that.

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [28]

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Thank you, Fotis. I'll try to answer your questions on the UMS segment then and on the towage segment. So on the USM -- UMS segment, there has been increased activity in the last few months, and we recently, just a couple of weeks ago, saw Petrobras out with 3 tenders for longer-term contract, 3-year contracts, for the accommodation market. The competition on these contracts were quite intense and rates went a bit lower than we expected, and it didn't make sense for us to compete at those levels with the mobilization cost and everything we have, but the positive thing is that activity has picked up. And we are very focused on getting this modern unit back to work and are following closely all the potential contract and tenders, and are in active dialogue on concrete opportunities. But as said, we saw that there were quite high competition for the 3 contracts from Petrobras lately. On the Towage segment, as we speak, we are doing a big project for Total, for the Kaombo Sul installation and the towage of that FPSO from Singapore to Angola. So that makes us basically sold out for January and February, after decent rates consuming, as I said, 300 to 350 vessel days. But it's fair to say that 2018 were quite challenging for the towage segment. And we expect also 2019 to be a challenging year, but somewhat better than 2018. And I think the positive we see is the ability we have with these new future class vessels that are quite unique compared to competition in that segment, and that allow us to take project like the Total project, for instance.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [29]

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Are there any thoughts or any opportunities of disposing these assets? They seem that they are not the core assets, at least as much as the FPSO and the shuttle tanker business. Have you thought about it? And could you dispose these assets if you would choose it?

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [30]

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Yes. So I -- we talk about how our shuttle tankers and the FPSO are the really core segments for TOO. And we would be looking at opportunities to divest, for instance, these assets at the right time. However, we don't feel that the time is right, right now because these are very modern, very good units, and should have a significant value. And we want to find the right time to capture that value when we think the time is right.

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO [31]

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To put it in perspective, we, last year, had an annual EBITDA on the towage of minus $7 million and that was running at a utilization of just north of 60%. So there is a very good operational leverage in that segment and we're very excited about seeing the markets improve. That will take some time, but we're looking on working hard to get it EBITDA-positive for 2019.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [32]

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One last question about financings. The Piranema Spirit does not have any debt from what I understand. Now with the new extension, would you be able to add some debt on -- raise some debt on the back of this contract? And also, there is an outstanding -- small outstanding for the UMS that matures this year, and if I'm not mistaken a balloon portion, or a tranche of the Knarr FPSO that is also maturing this year. Can you refinance these and extend these outstandings?

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

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Let me first address the Knarr. That is -- there are no maturities on the Knarr this year. The...

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [34]

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I thought there was a $40 millions, onetime $40 million, this is not the case?

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Jan Rune Steinsland, Teekay Offshore Partners L.P. - CFO [35]

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No, that's not the case for 2019. So we can discuss that more in detail if we have a call, but on -- let me focus on the FPSOs because that's where we're -- all the other FPSOs, that's where we're putting in some work these days. And as you said, we just repaid now in January the Piranema loan. So there is no debt on that unit. We also have the facility for the Varg, the Voyageur and the Ostras coming up for maturity in -- or in April with a small balloon of, I think, $23 million or so. And we're looking at putting these units together to a package to make a refinancing. And currently, we're looking whether we should have 3 or 4 in there. And that would be some kind of short finance, probably, while we're waiting for Piranema and Voyageur to enter on to longer contracts. And while we're awaiting for the Varg project to move forward closer to first oil, when we would look at a separate refinancing of the Varg. So while relatively small facility that we're looking at now, it will still add quite a bit of liquidity in the near term.

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Operator [36]

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And next we'll go to Michael Webber, for a follow-up, from Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [37]

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Sorry to hop back in, but just wanted to ask about additional FPSO units. I know that the remaining 3 FPSOs at the parent have been off the menu for TOO for several years. And a lot of the premise behind that was that the contract structures didn't necessarily kind of fit an MLP model. As it stands now, I know there's some contracting work there, but considering that the TOO is owned and controlled by Brookfield at this point. Has the attitude or the thought process around those 3 parent-level FPSOs changed in any way? If it's just purely, maybe a return or residual value trade that might be more suited to what TOO is now versus what it might have been 4 or 5 years ago? Is it more likely that we eventually see those assets at whatever -- at the Teekay Offshore entity at some point in the future?

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [38]

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Well, we are, obviously, very coordinated with Teekay Corp. on operation and business development of these FPSOs. The assets are interesting in their contracts and are producing well for the clients. But over the long term, we believe that certain of these assets may be better suited for employment in markets that we consider outside of TOO's core markets of the North Sea and Brazil, and we don't have any immediate plans from a TOO perspective related to those assets.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [39]

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And so the future of those assets might be in Southeast Asia, effectively?

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [40]

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Well, it's hard to say where they will end up. Currently, they are -- all 3 of them are on contract and producing on the fields that they are on. So -- but we don't have any active dialogue on those assets for TOO at the moment. Because they are operating for their -- on their current fields.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [41]

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Okay. And I appreciate -- that kind of puts you in a tough spot, but I appreciate you answering that as best as you could.

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Operator [42]

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And that does conclude today's question-and-answer session. I'd like to turn the call back over to Ingvild Sæther for any additional comments or closing remarks.

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Ingvild Sæther, Teekay Offshore Partners L.P. - President & CEO of Teekay Offshore Group Ltd [43]

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Yes. Thank you, and thank you for joining us on this fourth quarter earnings release. It is really rewarding for the team here to see how the hard work from delivering all these growth projects into operation is finally starting to flow through to our results. So thank you for joining us today and have a good weekend.

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Operator [44]

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And that does conclude today's conference. We thank you for your participation. You may now disconnect.