Teekay Offshore Partners L.P. (TOO) is the largest owner in the shuttle tanker market with 33 shuttle tankers and one newbuilds on order. Through this, the company owns more than 50% of the world's shuttle tanker fleet based on total tonnage.
Besides the shuttle tankers, Teekay also has 5 FPSOs, 6 FSOs and 4 conventional tankers. This article looks into the reasons for believing why the high dividend yield will sustain and why the company’s outlook is bright for the long-term.
Strong Revenue Visibility
As at December 31, 2013, minimum scheduled future revenues under time charters and bareboat charters was $3.6 billion. This provides Teekay Offshore with four year revenue visibility based on FY2013 revenue of $931 million.
As the cash inflow remains steady and grows through the acquisition of new vessels, the dividend is expected to remain robust. For the first quarter of 2014, Teekay Offshore generated a distributable cash flow of $51.1 million, which translates into a cash distribution of $0.5384 per unit of the LP.
In other words, the annual dividend, based on a steady cash inflow, comes to $2.1536 and this translates into a dividend yield of 6.1% based on the current stock price of $35.3. I believe that the dividend payout will only increase with new vessels coming in operation over the next few years.
LOI to Acquire Logitel Offshore
In May 2014, Teekay Offshore signed a LOI to acquire Logitel Offshore, an offshore floating accommodation company carved out of Sevan Marine ASA. Logitel owns two floating accommodation units, which are currently under construction at the COSCO shipyard in China.
The first unit has secured a 3-year charter contract with an extension option with Petrobras. This vessel is scheduled for delivery in 1Q15. For 2015, the addition of this vessel will positively impact the revenue, cash inflow and the dividend payout.
The second unit is scheduled for delivery in 4Q15 and is yet to secure a charter contract. However, a contract is likely soon in a relatively attractive offshore floating accommodation market. While the second unit will not have a significant impact on revenue in 2015, both the units will contribute to revenue bump-up in 2016. This is positive for Teekay Offshore unit holders.
Acquisition Of ALP Maritime Services
Underscoring the company’s aggressive growth plan, Teekay Offshore also completed the acquisition of ALP Maritime Services in the first quarter of 2014 for $260 million.
Subsequent to this acquisition, Teekay Offshore and ALP have entered into an agreement with Niigata Shipbuilding & Repair of Japan for the construction of four ultra-long distance towing and anchor handling vessel new vessels. The vessels are expected to be delivered in 2016 and provide an additional source of revenue and cash inflow upside.
Both the points on recent acquisition are reflective of the company’s intent to expand its fleet size further and increase the per unit payout. With these acquisitions and the expected date of delivery of new vessels, I do expect that per unit payout will increase in 2015 and 2016. Investors can therefore expect the dividend yield to remain robust.
Strong Financial Position
Aggressive growth can be a boon or bane depending on the company’s existing financial position. For Teekay Offshore, strong fundamentals back the company’s growth plans.
As of March 2014, Teekay Offshore had a total cash position of $348.5 million, which includes $223 million in cash and $125.5 million in credit facilities. A strong cash position ensures that Teekay Offshore has funds for the current acquisition even through internal accruals.
In terms of debt, Teekay Offshore had a total debt of $2479 million as of March 2014. This translates into a debt to capitalization of 77% as of 1Q14 giving Teekay Offshore some financial flexibility.
Further, the debt to EBITDA and net debt to EBITDA as of 1Q14 was 5.6 and 5.1 respectively. With a cash interest of $146 million as of December 2013, the EBITDA interest coverage ratio translates to 3.1. Therefore, debt servicing is not a concern at this point of time.
Teekay Offshore is evidently more aggressive in its expansion in the recent past. As the new vessels are delivered, there will be an incremental impact on revenue, EBITDA and the cash payout.
With the outlook on the offshore market remaining positive, Teekay Offshore should continue to do well in the long-term. The stock can be considered for long-term as a dividend stock in one’s portfolio.
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