Teekay Offshore Partners (TOO, Financial) has declined by 16.5% in 2014, and the company has done well as compared to peers in the industry. The carnage in the oil and gas stocks has seen several drillers decline by 30% to 40%. In this article, I will discuss the critical reasons to remain bullish on Teekay Offshore for the medium to long-term.
The first and a critical reason to be bullish on Teekay Offshore are the company’s long-term contracts. As of September 2014, the company had an order backlog of $7.8 billion with average contract duration of 5.3 years. The long-term contract duration ensures that the company’s revenue and cash flow is very stable over the next few years. In turn, this ensures that the distribution to unit holders also remains very stable in the coming years.
For the third quarter of 2014, Teekay Offshore offered a distribution of $0.5384 and this implies an annual distribution of $2.15 per share. At the current share price of $27.65, the distribution yield comes to 7.8% and this distribution yield is sustainable with the current revenue backlog with the company. Therefore, the investment option is attractive as it provides stability in an uncertain environment.
Another factor that is positive about Teekay Offshore is the right focus by the company in terms of regions. There is a strong demand that is likely in Brazil in the coming years related to FPSO projects, and Teekay Offshore has been increasingly focusing on Brazil for growth in the foreseeable future. I believe that the region will be one of the key growth drivers over the next 3-5 years, and growth in Brazil will ensure that the company’s order backlog remains strong.
In terms of numbers, it is expected that 55 new FPSO projects will be on offer in Brazil and North Sea over the next five years with each project in the region of $500 million to $1 billion. Teekay Offshore already has the first mover advantage in the Libra field in Brazil and the partnership with Odebrecht will also help the company make strong inroads in Brazil.
Currently, Teekay Offshore is expecting to bid on four projects over the next 24 months in the region and that projects can be potentially worth $2 billion to $4 billion. Therefore, besides the existing order backlog, the company’s potential backlog visibility is also robust.
In terms of the company’s growth, Teekay Offshore has acquired six long distance tonnage and anchor handling vessels through its wholly owned subsidiary ALP. The vessels are scheduled for delivery in 4Q14 and 1Q15 for a total cost consideration of $220 million. This is an important move as it positions ALP as the leader in long-distance DPII vessel towing segment with a total fleet of 10 vessels.
Further, from a capital expenditure perspective, Teekay Offshore has a committed capital expenditure pipeline of $3.5 billion over the next four years, which will increase on further opportunities. This means that the company is well positioned to grow its revenue and cash flow over the next few years and in line with this growth, the company’s distribution per unit is also likely to increase at a robust pace.
From a balance sheet perspective, Teekay Offshore has a debt of nearly $2.6 billion. I believe that this is not a matter of major concern as the company’s strong order backlog with strong customers means that the company’s cash flow will remains robust and the company’s debt servicing will also not be an issue.
In conclusion, Teekay Offshore has strong growth drivers in place and the company is focusing on the right regions for growth. The stock has declined by 16.5% in 2014, but that has largely been due to weak industry sentiments and I believe that the decline in the stock is a good opportunity to consider long-term exposure to Teekay Offshore. The company’s distribution yield is the biggest positive as it a healthy and very sustainable.
