Daily Archives: July 22, 2017

Last year, Teekay Offshore Partners L.P. (TOO) reached a financing arrangement with the banks that resulted in a significant equity raise.

Source: Teekay Offshore Partners June, 2016, Equity Raise Presentation

The company raised about $200 million in preferred and common equity, and combined that with some new bank loans to fund the major commitments through the end of 2017. As shown above, there was some extra liquidity projected above the minimum requirements of the banks.

But a "straw in the wind" was the "at the market" sales of common units that persisted for months after this arrangement. So as definite as management sounded, the financing was not quite as secure as management was stating in the presentation. Persistent at the market sales of common units can be used for many reasons. But a company that has just patched together a financing initiative should not have needed more financing. That method of financing breaks even if it works and loses when it does not. This company needed a few things to go right for this solution to hold. Management needs a much better binary choice.

Source: Teekay Offshore Partners June, 2016, Equity Raise Presentation

Stock market valuations and capital market pricing have a strong correlation. Debt pricing and market favoritism appear to go together. The more out of favor a company appears to be, the more costly will be the debt (and probably equity). Therefore, the company needs to plan ahead and have a sizable cushion when conditions deteriorate. Banks often expect companies to solve their own problems when an industry is out of favor. At the very least the banker will demand more security, possibly more covenants, and probably a higher loan rate.

One example of this outside the industry would be Kinder Morgan (KMI) and Buckeye Partners L.P. (BPL). Kinder Morgan needed to delever the balance sheet. Many subsequent articles covered that process as the company struggled to maintain its credit rating. This company announced a debt to adjusted EBITDA ratio of 5.2. That ratio was ahead of many expectations on the way to 5.0 while the company found a way to finance the Trans Mountain Expansion project. But there was a distribution cut initially as well as some material asset sales to get the job done. Management had to get moving to solve the problem and did get moving.

Source: Buckeye Partners L.P. Annual Meeting Presentation, June 6, 2017

Buckeye Partners, on the other hand, has run things a little bit differently. The key ratio (long term debt to EBITDA) was well under the goal that Kinder Morgan management worked all year to achieve. As a result, the credit markets were open to Buckeye. Buckeye was fairly choosy for awhile, but as the markets opened up, Buckeye was a prime beneficiary and made a decent acquisition. Equity was sold by means of a shelf registration and the debt was negotiated without much fanfare. Mission easily accomplished. The partnership had no distribution cut nor did management worry about the deteriorating debt market conditions.

There is an article out about Teekay Offshore competitor Knot Offshore Partners L.P. (NYSE:KNOP). Knot is not as diversified as Teekay. But right now that diversification does not appear to be much of an advantage to Teekay. The debt markets appear to be wide open for Knot while Teekay Offshore appears to be on the outside looking in. Right now Knot is more profitable and banks love profits. So if a company is going to be dependent on the debt market, then the company needs financial cushions for those cyclical deterioration periods. In Knot's case, the company just avoided any weak markets completely so far.

Teekay Offshore management could have accomplished the same thing by selling the interests in all the relevant ships. Management could have decreased the partnership exposure to less desirable areas.

Source: Teekay Offshore Partners June, 2016, Equity Raise Presentation

Source: Teekay Offshore Partners Fourth Quarter, 2016 Earnings Presentation

The top slide shows the original schedule. But some of the projects began to show cost overruns. Plus, the Arendal Spirit contract payments ceased with a performance dispute. This was happening while the capital markets deteriorated for the company. That Arendal Spirit contract would later be canceled in the current year. But even before that, management had a priority of some asset sales and joint ventures to raise money and decrease risk.

To maintain its credit rating, Kinder Morgan management promptly started selling assets and achieving goals set to get to the final objective. Teekay Offshore management has been noticeably silent about raising cash through joint ventures and partial asset sales despite an announced priority a few months back. That is going to make Mr. Market wonder if those methods of raising cash are available.

One thing that always crosses industry lines is the signals sent by management through inaction. Here those signals may be critical. Martin Midstream (MMLP) sold some assets with investors screaming about the low price. Then came an equity offering and now the company appears to be on the road to recovery. The fact is that Teekay Offshore partners have had several months to show the market that the financing issues can be resolved.

Last June was a start. But management treated it officially as the end of the problem. There is no way so much debt should be due within a year at the current time after last year's solution. The debt due within a year represents about 20% of the total partnership debt. That is plain crazy when management stated that the capital markets were deteriorating.

So the recent market reaction to management silence is more than understandable. Teekay Offshore partners has now had several months to reassure the market and it has not happened. Management could have demonstrated a proactive strategy last year but did not. The end of the "at the market" sale of common units combined with the recent price decline of those units embodies the market fears due to management inaction.

Source: Teekay Corporation First Quarter, 2017, Earnings Results

One thing the parent company, Teekay Corporation (TK) has done is allowed Teekay Offshore to pay the limited partner interests, general partner interests, and preferred dividends shown above in the form of common units. These units should be saleable (or other equivalent units in the holdings of Teekay should be saleable) for the units to show on a cash flow statement above. However, it should be pointed out that Non-GAAP statements have no standard meaning within the accounting world and may not even be audited. So they can be used for whatever purposes the reporting company wishes. Comparisons of Non-GAAP statements needed to be very carefully done.

As shown above, Teekay Corporation has so far elected to keep the new shares received. That in-effect decreases the cash flow shown above. But it also means that at some point Teekay Offshore will have to begin paying all those distributions in cash. That is an extra $5 million or so that will need to be recovered in more cash flow above and beyond future cash flow needs.

"As of March 31, 2017, the Partnership had total liquidity of $216.7 million (comprised of $193.4 million in cash and cash equivalents and $23.3 million in undrawn credit facilities), excluding $60 million included in restricted cash relating to amounts deposited in escrow to pre-fund a portion of the remaining Petrojarl I FPSO upgrade costs. "

Source: Teekay Offshore First Quarter, 2017, Earnings Results

Banks hate missed forecasts. The very first slide forecast more liquidity than this. Admittedly, this liquidity is above the required minimum, but not by much. It appears to fit in with the management attitude of planning financing needs "almost exactly" without a sufficient cushion. This latest liquidity reflects something that is satisfactory at best but does not show a desire to excel. Banks like customers such as Kinder Morgan. Kinder Morgan management stated their deleveraging goals and then beat those goals.

The Teekay Offshore equivalent would have been to raise some money and stop running to the banker with every little financing need. Management appears to depend upon the banks too much. That attitude of depending upon the banks for financing could reverberate throughout the organization and have some unintended (and unfavorable) side effects.

Source: Teekay Offshore First Quarter, 2017, Earnings Results

The change in non-cash working capital accounts caused cash flow to surge the year before. Otherwise, both cash flow and earnings showed improvement over the previous year. It should be noted that an unrealized gain in derivative instruments accounts for the earnings posted for December 2016. An earnings increase combined with a cash flow decrease can be a sign of aggressive (but legal) accounting that can be anathema to lenders. Here, the relation of cash flow to earnings should allay any such fears.

Even so, cash flow of $98 million is not sufficient for a company with more than $3 billion in debt. $620 million of that debt is due within a year. At some point, total cash flow to total debt matters. That point may be now. Sometimes new construction or renovations no longer qualify as an excuse. The financing last year should have foreseen that debt coming due and proactively solved that refinancing. This partnership needed to skate through the capital market deterioration without financing needs. Capital markets were deteriorating as noted at the beginning of the article. Management further stated that no debt markets needed to be tapped until 2018 or so.

But management never considered that the banks might get a little antsy as the markets deteriorated. So not only is debt coming due in excess of the cash balance and expected cash flow, but cost overruns and a contract cancellation have to be dealt with as well. But management knew a year ago that the bankers attitude could be less than helpful. That is part of what deteriorating capital markets mean.

If there is a pattern here, it is a lack of proactive management action to prevent some of these challenges. That is how the company got into this mess. That is also how companies such as Kinder Morgan, Buckeye Partners, and probably competitor Knot Offshore Partners have managed to avoid these kinds of problems. Things happen to well run companies also, but because they have thought ahead, shareholders do not even realize there was a problem. That is good management. Teekay Offshore management needs a few lessons in proactive management. Until then, this stock is not going anywhere long term except maybe down.

Disclaimer: I am not a registered investment advisor and this article is not advice to buy or sell stock in any company. The investor needs to do his own independent investigation that includes reading the company governmental filings and press releases, as well as anything else relevant to determining if this company fits the investor's risk profile.

Disclosure: I am/we are long MMLP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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How Teekay Offshore Partners LP Got Into This Mess - Seeking Alpha

The Nike Corporations annual financial disclosure of income tax payments is always notable for two recurring trends: the Oregon-based companys steady shifting of profits into offshore tax havens, and Nikes apparent effort to conceal how its achieving this tax avoidance. This years report, released earlier this week, is no exception.

Nike now holds $12.2 billion of its profits offshore as permanently reinvested earnings, up from $10.7 billion last year. Designating its profits this way allows the company to avoid paying even a dime of U.S. income taxes on these profits until they are repatriated to the U.S.

This ability to postpone paying U.S. income taxes, known as deferral, isnt quite as troubling when the companies are clearly doing real business abroad and paying a reasonable amount of taxes in other countries. If these profits are repatriated to the U.S., the federal tax on foreign income is the statutory U.S. corporate tax rate of 35 percent minus whatever has already been paid to foreign governments.

But if a corporation reports that it would pay nearly 35 percent of its offshore profits in U.S. taxes upon repatriation, that means the company must be paying almost nothing in taxes in the foreign countries where it claims to earn these profits.

And that appears to be exactly what Nike is doing. The company estimates that if its $12.2 billion was repatriated to the U.S., it would owe $4.1 billion in U.S. taxes, for a tax rate of nearly 34 percent. The clear implication is that the company has paid a foreign tax rate of almost zero on this $12.2 billion, including the $1.5 billion the company shifted offshore in the last year.

In the past, its been easy to identify a likely candidate for the destination of this offshore cash: Bermuda. As we noted in 2013, Nike disclosed owning a dozen subsidiaries in this tiny (and income-tax free) country, almost all of which were named after specific brands of Nike shoes. Since it seems unlikely that the company needs all those subsidiaries to help it sell flip-flops to the good citizens of Bermuda, a highly plausible alternative explanation is that Nike has been shifting its intellectual property to its Bermuda subs, where the income generated by its patents and technology wont be taxed.

But Nike appears to have wised up to the negative publicity this stunt could create. In each year since 2013, the company has disclosed fewer and fewer Bermuda subsidiaries. The most recent report whittles down the list to just two, Nike Finance Ltd and Nike International Ltd. Has Nike abandoned its tax-sheltering ways and eliminated its other Bermuda subsor has the companys leadership decided to simply stop reporting the existence of these subsidiaries? The lax disclosure requirements governing subsidiary reporting make it impossible to know for sure. But the hard fact is that Nikes offshore cash is now even more tax-free, in 2017, than it was before its Bermuda subsidiaries started disappearing.

Nikes apparently tax dodging illustrates the problem with Trumps proposal to lower the federal corporate tax rate from 35 percent to 15 percent. Nikes continuing offshoring of profits is a sobering reminder that if deferral is allowed, the tax rate Republican leaders are really trying to compete with is zero. Nothing short of ending deferral will stop Nikes tax-avoiding ways.

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Tax Avoidance: Nike Just Did It Again, Moving $1.5 Billion Offshore Last Year - Just Taxes Blog (blog)

After over two decades, WorkBoat suspended its monthly offshore service vessel day rate analysis in April due to depressed market conditions.

In our August issue, we are introducing the new WorkBoat Gulf of Mexico (GOM) Index. It replaces the OSV and crewboat day rate and utilization information.

The new index aims to track market conditions in the U.S. Gulf that effect rates and activity levels for OSVs. The new index is comprised of three elements: West Texas Intermediate oil prices taken from the U.S. Energy Information Administration (EIA), active U.S. Gulf rig counts taken from the Baker Hughes rig count, and U.S. oil production figures also from the EIA. The baseline for the index is June 2016.

The price of oil is the key element in increasing and sustaining activity in the Gulf of Mexico. It has bounced around from highs in the $100-bbl.-plus range in the last few years and has settled lately in the $40-$50-bbl. range. Positive improvements in the price of oil, measured from the baseline, stimulate activity and are entered as positive numbers. Prices below the baseline are counted as negative numbers.

The active GOM rig count is also a key indicator and is driven both by the price of oil and gas and the costs of offshore exploration and production in the U.S. As each rig employs, on average, 2.5 workboats, an increase in rig count is a positive for the workboat industry.

Finally, the GOM Index incorporates domestic oil production figures. Oil production, and particularly burgeoning shale production, has displaced a significant amount of offshore activity due to its lower cost and higher productivity. That trend looks set to continue. An increase in oil production from the baseline has a negative affect on offshore activity. Conversely, a fall in oil production is positive, due to its potential to stimulate offshore activity.

The GOM Index is then compared with OSV utilization rates from IHS Markit. While there is always a lapse of several months in the OSV markets response to changing conditions in the U.S. Gulf, this index will help readers chart the emerging market trends in U.S. offshore waters.

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New WorkBoat offshore index launched - WorkBoat (blog)

Miami Herald

Two teens disappeared fishing offshore. Now one family blames the other in a lawsuit Miami Herald Before 14-year-old boys Perry Cohen and Austin Stephanos headed out on a boat one Friday morning in July 2015, Perry's mother, Pamela, kissed and hugged her son goodbye, expecting that the two friends were just embarking on a fishing day trip. and more »

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Two teens disappeared fishing offshore. Now one family blames the other in a lawsuit - Miami Herald

The Standard Club is driving developments in offshore P&I with the launch of the Standard Club Offshore Advisory Committee (SCOAC). SCOAC aims to analyse offshore trends, assist the club in further understanding and disseminating industry best-practice and develop new strategies to provide a focused direction for the benefit of the clubs offshore membership. The committee consists of leading offshore players including Allseas Group, Bumi Armada, Floatel International, Nortrans Offshore, Saipem, SBM Offshore and Subsea 7 all members of The Standard Club.

The members of the committee are senior figures in the offshore industry with extensive experience and knowledge allowing them to provide invaluable insight to the committee which in turn will be shared with the wider membership.

SCOAC will review the current issues and emerging challenges affecting key sectors in the offshore industry including production, drilling, accommodation, constructions/installation, support/supply and other specialist operations. The focus is on ensuring that the clubs response is the most appropriate and supportive for its members given the challenging market conditions that they currently face. SCOAC will also consider the implications of new regulations coming into force, offshore contracting trends and other topical subjects affecting the offshore industry.

The Standard Clubs board fully supports this initiative, recognising not only the importance of cultivating collaboration between offshore members but also in continuing to be innovative and create a formal platform in which industry issues can be discussed to further support its members.

James Bean, Managing Director, Standard Europe commented:

The Standard Club is a leader in the offshore P&I sector and has unparalleled experience having reviewed and underwritten a wide range of offshore risks for more than 40 years, supported by first class claims service and loss prevention advice. Through its broad range of covers and diverse membership supported by high limits of cover, the club is well positioned to launch an Offshore Advisory Committee bringing together leaders in this sector to work collaboratively on industry issues affecting our members.

Our committee members are established figures in the offshore world and being able to call upon their considerable expertise is invaluable. I would like to thank them for the enthusiasm with which they have greeted this initiative and to Claire Bromley from Subsea7 for kindly accepting the committees nomination to take on the role of chair.

Claire Bromley, Head of Insurance, Subsea 7 SA Chairman commented:

SCOAC reinforces The Standard Clubs commitment to understanding and appreciating the evolving needs of its members and in looking for ways in which to further support these. As chairman I am looking forward to working together with the rest of the committee to ensure SCOAC is a success.

Standard Club Offshore Advisory Committee: Claire Bromley, Head of Insurance, Subsea 7 SA Chairman Jonathan Cassidy, Group Risk Manager and Insurance Director, SBM Offshore Suchitra Narayanan, General Manager, Risk & Insurance, Bumi Armada Berhad Johann Preller, Insurance Lead, Allseas Group S.A. Bertrand Valentin, Offshore E&C and Drilling Insurance Manager, Saipem Group Trond Kyrkjeboe, CEO, Nortrans Offshore Pte Ltd Thony Lindstrm Hrdin, General Counsel, Floatel International Ltd Source: The Standard Club

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The Standard Club launches new offshore advisory committee - Hellenic Shipping News Worldwide