When 1 + 1 = TOO Merger of Teekay Offshore LP and Brookfield Business Partners Best Ideas 2018, Hosted by MOI Global January 12, 2018 Vijzelstraat 68 - 78 |1017HL | Amsterdam | www.jdpcap.com
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Investment Overview Elevator Pitch: Teekay Offshore LP (NYSE: TOO) “Abandoned public stub of a mission-critical marine infrastructure business, re-capitalized by Brookfield Business Partners selling for a 25% cash flow yield” ² Transformational merger completed , market has not caught up ² $600M capital injection to fund immediate growth ² 300%+ upside over 2 – 5 years ² Long-term contracts with largest blue chip E&P companies ² Highly undervalued regardless of oil price recovery 2
We’re on a Treasure hunt Finding yield is difficult today Yield* Asset 25% TOO equity cash flow yield 7.6% Alerian MLP Index (AMZ) 5.7% US junk bond yield index 5.5% S&P 500 “earnings yield” 3.8% REITs 3.5% Utilities 2.7% AA corporate bond yield index 2.5% US 10-Year Treasury 3 *JDP es-mate , January 2018
Table of Contents Background & History of Teekay Corpora-on 1 Overview of Teekay Offshore 2 Why TOO Became Distressed 3 White Knight Recapitaliza-on 4 What’s It Worth? 5 Summary 6 4
1 Background & History of Teekay Corpora-on 5
Origins of Teekay Corporation Gold standard in shipping ² Founded in 1973 by Norwegian entrepreneur Torben Karlshoej “Teekay” ² Became one of the most respected shipping companies in the world ² Started by trading in niche shipping lanes to/from Asia ² Diversified into shuttle tankers, FPSOs and LNG assets ² Torben died in 1993 during a major industry downturn ² Torben’s brother led a turnaround and IPO in 1995 6
Teekay 2.0 Adopts MLP financial structure in 2005 ² Hard assets separated into three publicly traded Limited Partnerships ² Pass-through entities without standalone management ² IPO of NYSE: LNG, NYSE: TOO and NYSE: TNK between 2005 and 2007 ² As General Partner, Teekay Corporation earns: ² Management Fees ² Dividends ² Incentive Distribution Rights (IDRs) 7
Dividends baby! Why? Markets ofen place more value on management-fee streams than tradi-onal income 8
Mlp model is born Teekay Corporation (NYSE: TK) General Partner, Asset Manager Teekay LNG, LP Teekay Teekay Offshore, LP (NYSE: TGP) Tankers, LP (NYSE: TOO) (NYSE: TNK) Publicaly traded DaughterCos 9
What What co could g go wro wrong ng? 10
Teekay offshore, LP NYSE: TOO, October 2014 – June 2017 33.00 28.00 23.00 18.00 13.00 8.00 -94% 3.00 -2.00 Teekay Offshore Partners L.P. (NYSE:TOO) - Share 11
Amo Among ng t the T he Teekay en- eekay en--es t es today, ay, we think Teekay Offshore LP (TO TOO) represents the low lowest t risk, highest return opportunity 12
2 Overview of Teekay Offshore 13
Teekay Offshore, lp World-class marine infrastructure asset porjolio ² $1.1B Market Cap ² $4.6B EV ² 26% public float ² Brookfield Business Partners subsidiary as of Sept 30, 2017 ² $2.48/share JDP average price “Floating Pipeline” 14
Unique assets Not to be confused with commodi-zed oil tankers, container ships, dry bulk carriers, etc. ² Niche infrastructure assets originally owned by oil companies ² Mission-critical components to offshore drilling ² TOOs fleet further specialized in North Sea, North Canada and Brazil Vessel Descriptions Shuttle tankers: Specialized ship designed to transport crude oil and condensates from offshore oil field installations to onshore terminals and refineries. Equipped with sophisticated loading systems and dynamic positioning systems that allow the vessels to load cargo safely and reliably in harsh weather conditions. Originally developed in the North Sea as an alternative to pipelines. FPSO: Floating offshore production facilities that store processed crude. Typically used as production facilities to develop marginal oil fields or deep water areas remote from existing pipeline infrastructure. FSO: Floating storage for oil fields that have no storage facilities or that require supplemental storage. 15
Predictable cash flow No direct commodity exposure ² Long-term contracts with world’s most prominent oil companies ² Operationally-driven pricing backed by the credit quality of lessee ² Contract terms protect against oil prices and cancelation risk ² Economically unrealistic to close most offshore wells keeps projects online throughout oil cycles 16
Protected cash flow Vessel-level finance terms bind all counterpar-es ² Shipping-bank lending terms explicitly protect against cancellations ² Contract termination = NPV of contract cash flows ² Broader industry eco-system implicitly aligned through validity of contacts between E&P, banks, operators, suppliers, etc. TOO’s historical troubles stemmed from excessive non-secured, cash flow-based debt 17
Wide moat TOO eats first ² High barriers to entry ² Largest oil companies only work with a handful of best in class operators ² Global footprint with focus on harshest environments ² Scale and relationships ensure availability of specialized ship yard capacity ² Most stable capital base among peer group ² Capital intensive Uniquely posi-oned to win profitable contracts even during periods of excess vessel inventory 18
3 Why TOO Became Distressed 19
So, how do you tank a great business’s stock? 1. Misaligned incen-ves 2. Poor capital alloca-on 3. Bad -ming 20
Greed is not always good 21
#1 Misaligned incentives Teekay Corpora-on received three different cash streams from TOO: Dividends from stock ownership 1. Management fees for managing the fleet 2. Incentive Distribution Rights (IDRs) 3. ² IDRs are management fees calculated as a percentage of dividends paid to shareholders ² IDR structures can easily be abused ² Generally misunderstood by yield-seeking retail investors ID IDRs ofe ofen va value lued d at t 20x 20x to to 30x 30x annua ual l incom ome 22
A bit “too” aggressive IDRs paid to Teekay Parent from TOO dividends $0 – $0.40 $0.40 - $0.44 $0.44 – $0.53 $0.53 + 2% 2% Fee 15% 15% Fee 25% 25% Fee 50% 50% Fee Higher the distribu-on, the less you keep 23
Grow the dividend at All Costs 25% TOO Distribution as % of Sales 7x 22% 22% 21% S&P Dividend as % of Sales 19% 20% 15% 15% 10% 10% 8% 5% 5% 3% 3% 3% 3% 3% 2% 2% 3% 3% 3% Div. cut in 2016 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 24
Yield before the business Ever-increasing dividends created a deficit 2007 … 2016 Total EBITDA Less Capex ($M ) 130 … 344 2,302 Interest and Distributions ($M ) (157) … (498) (3,121) Deficit ($M) (27) … (155) (819) 25
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