Securities registered, or to be registered, pursuant to Section 12(b) of the Act.
Title of each class
Name of each exchange on which registered
New York Stock Exchange
Series A Preferred Units
TOO PR A
New York Stock Exchange
Series B Preferred Units
TOO PR B
New York Stock Exchange
Series E Preferred Units
TOO PR E
New York Stock Exchange
Securities registered or to be registered, pursuant to Section 12(g) of the Act.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
411,148,991 Common Units
6,000,000 Series A Preferred Units
5,000,000 Series B Preferred Units
4,800,000 Series E Preferred Units
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No ý
Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark if the registrant (1) has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨ Accelerated Filer ý Non-Accelerated Filer ¨ Emerging growth company ¨
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act ¨
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x
International Financial Reporting Standards as issued
by the International Accounting Standards Board ¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
* On January 23, 2020, the New York Stock Exchange (the “Exchange”) filed a Form 25 notifying the Securities and Exchange Commission of its intention to remove the registrant’s common units from listing and registration on the Exchange, pursuant to Rule 12d2-2(a) promulgated under the Securities Exchange Act of 1934.
This Annual Report should be read in conjunction with the consolidated financial statements and accompanying notes included in this report.
Unless otherwise indicated, references in this Annual Report to “Teekay Offshore,” “we,” “us” and “our” and similar terms refer to Teekay Offshore Partners L.P. and/or one or more of its subsidiaries, except that those terms, when used in this Annual Report in connection with the common or preferred units or publicly issued senior notes described herein, shall mean specifically Teekay Offshore Partners L.P.
In addition to historical information, this Annual Report contains certain forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. Such forward-looking statements relate to future events and our operations, objectives, expectations, performance, financial condition and intentions. When used in this Annual Report, the words “expect,” “intend,” “plan,” “believe,” “anticipate,” “estimate” and variations of such words and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this Annual Report include, in particular, statements regarding:
our distribution policy and our ability to make cash distributions on our units;
our future growth prospects, business strategy and other plans and objectives for future operations;
future capital expenditures and availability of capital resources to fund capital expenditures;
our liquidity needs and meeting our going concern requirements, including our working capital deficit, anticipated funds and sources of financing for liquidity needs and the sufficiency of cash flows, and our estimation that we will have sufficient liquidity for at least the next one-year period;
our ability to refinance existing debt obligations, to raise additional debt and capital, to fund capital expenditures, and negotiate extensions or redeployments of existing assets;
our ability to maintain and expand long-term relationships with major crude oil companies, including our ability to service fields until they no longer produce, and the negative impact of low oil prices on the likelihood of certain contract extensions;
the derivation of a substantial majority of revenue from a limited number of customers;
our ability to leverage to our advantage the expertise, relationships and reputation of Brookfield Business Partners L.P. together with its institutional partners (Brookfield Business Partners L.P. and/or any one or more of its affiliates referred to herein as Brookfield) to pursue long-term growth opportunities;
any offers of shuttle tankers, floating storage and off-take (or FSO) units, or floating production, storage and offloading (or FPSO) units and related contracts from Teekay Corporation (Teekay Corporation and/or any one or more of its affiliates or subsidiaries referred to herein as Teekay Corporation) and our accepting such offers;
the outcome and cost of claims and potential claims against us, including claims and potential claims by COSCO (Nantong) Shipyard (or COSCO) relating to Logitel Offshore Rig II Pte Ltd. and Logitel Offshore Pte. Ltd (or Logitel) and cancellation of Units for Maintenance and Safety (or UMS) newbuildings, by Damen Shipyard Group’s DSR Schiedam Shipyard (or Damen) relating to the Petrojarl I FPSO unit upgrade and related to Brookfield's acquisition by merger of all of our outstanding publicly held common units not already held by Brookfield;
the outcome of the investigation by Norwegian authorities of potential violations of Norwegian pollution and export laws in connection with the export of the Navion Britannia shuttle tanker from the Norwegian Continental Shelf in March 2018 and its subsequent recycling;
our continued ability to enter into fixed-rate time charters and FPSO contracts with customers, including the effect of a continuation of lower oil prices to motivate charterers to use existing FPSO units on new projects;
results of operations and revenues and expenses;
offshore and tanker market fundamentals, including the balance of supply and demand in the offshore and tanker market and spot tanker charter rates;
our competitive advantage in the shuttle tanker market;
the expected lifespan and estimated sales price or recycling value of vessels;
our expectations as to any impairment of our vessels;
acquisitions from third parties and obtaining offshore projects that we bid on or may be awarded;
certainty of completion, estimated delivery and completion dates, commencement of charter, intended financing and estimated costs for newbuildings and acquisitions, including our shuttle tanker newbuildings;
the expected employment of the shuttle tanker newbuildings under our existing master agreement with Equinor ASA and the expected required capacity in our contract of affreightment (or CoA) fleet in the North Sea;
expected employment and trading of older shuttle tankers;
expected redelivery dates of in-chartered vessels;
the expectations as to the chartering of unchartered vessels;
our expectations regarding competition in the markets we serve;
our entering into joint ventures or partnerships with companies;
our ability to maximize the use of our vessels, including the re-deployment or disposition of vessels no longer under long-term time charter contracts;
the duration of dry dockings;
the future valuation of goodwill and potential impairment;
our compliance with covenants under our credit facilities;
the ability of the counterparties for our derivative contracts to fulfill their contractual obligations;
our hedging activities relating to foreign exchange, interest rate and spot market risks;
our exposure to foreign currency fluctuations, particularly in Norwegian Krone, Brazilian Real and British Pound;
increasing the efficiency of our business and redeploying vessels as charters expire or terminate;
the adequacy of our insurance coverage;
the expected impact of heightened environmental and quality concerns of insurance underwriters, regulators and charterers;
our ability to comply with governmental regulations and maritime self-regulatory organization standards applicable to our business;
the passage of climate control legislation or other regulatory initiatives that restrict emissions of greenhouse gases;
anticipated taxation of our partnership and its subsidiaries and taxation of unitholders and the adequacy of our reserves to cover potential liability for additional taxes;
our intent to take the position that we are not a passive foreign investment company;
consequences relating to the phasing-out of the London Inter-bank Offered Rate (or LIBOR);
our general and administrative expenses as a public company and expenses under service agreements with Teekay Corporation and for reimbursements of fees and costs of Teekay Offshore GP L.L.C., our general partner; and
our ability to avoid labor disruptions and attract and retain highly skilled personnel.
Forward-looking statements are necessary estimates reflecting the judgment of senior management, involve known and unknown risks and are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially include, but are not limited to, those factors discussed below in Item 3 – Key Information: Risk Factors and other factors detailed from time to time in other reports we file with the U.S. Securities and Exchange Commission (or the SEC).
We do not intend to revise any forward-looking statements in order to reflect any change in our expectations or events or circumstances that may subsequently arise. You should carefully review and consider the various disclosures included in this Annual Report and in our other filings made with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Selected Financial Data
Set forth below is selected consolidated financial and other data of Teekay Offshore Partners L.P. and its subsidiaries for each of the five fiscal years ended December 31, 2019, which have been derived from our consolidated financial statements.
The following tables should be read together with, and are qualified in their entirety by reference to, (a) Item 5. Operating and Financial Review and Prospects, included herein, and (b) the historical consolidated financial statements and the accompanying notes and the Report of Independent Registered Public Accounting Firm thereon (which are included herein), with respect to the consolidated financial statements as at December 31, 2019 and December 31, 2018 and for each of the fiscal years in the three-year period ended December 31, 2019.
In July 2015, we acquired from Teekay Corporation the Petrojarl Knarr FPSO unit, along with its operations and charter contract. The selected financial data and other financial information herein reflect this unit and the results of operations of the unit, referred to herein as the Dropdown Predecessor, as if we had acquired it when the unit began operations under the ownership of Teekay Corporation. The Petrojarl Knarr FPSO unit began operations on March 9, 2015. For a further description of the Dropdown Predecessor, please refer to our Annual Report on Form 20-F for the year ended December 31, 2017.
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (or GAAP).
Year Ended December 31,
(in thousands of U.S. Dollars, except per unit, unit and fleet data)
Income Statement Data:
Operating (loss) income (1)
Net (loss) income
Limited partners’ interest:
Net (loss) income
Net (loss) income per
Common unit - basic (2)
Common unit - diluted (2)
Cash distributions declared per common unit
Balance Sheet Data (at end of year):
Cash and cash equivalents
Vessels and equipment (3)
Investments in equity accounted joint ventures
Common units outstanding
Preferred units outstanding (4)
Cash Flow Data:
Net cash flow provided by (used for):
Other Financial Data:
Net revenues (5)
Adjusted EBITDA (6)
Expenditures for vessels and equipment
Average number of shuttle tankers (7)
Average number of FPSO units (7)
Average number of conventional tankers (7)
Average number of FSO units (7)
Average number of towing vessels (7)
Average number of units for maintenance and safety (7)
(1)Operating (loss) income includes, among other things, the following:
Year Ended December 31,
(Write-down) and gain on sale of vessels
Please read Item 18 - Financial Statements: Note 16 - Total Capital and Net Income Per Common Unit.
Vessels and equipment consists of (a) vessels, at cost less accumulated depreciation and write-downs and (b) advances on newbuilding contracts.
Preferred units outstanding includes the Series A Preferred Units from April 23, 2013 through December 31, 2019, the Series B Preferred Units from April 13, 2015 through December 31, 2019, the Series C Preferred Units from July 1, 2015 through June 29, 2016, the Series C-1 and Series D Preferred Units from June 29, 2016 through September 25, 2017, and the Series E Preferred Units from January 18, 2018 through December 31, 2019.
Net revenues is a non-GAAP financial measure defined as revenues less voyage expenses. For additional information about this measure, please read Item 5 - Operating and Financial Review and Prospects - Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Important Financial and Operational Terms and Concepts. We principally use net revenues because it measures vessel performance on a time-charter equivalent (or TCE) basis, which provides more meaningful information to us about the deployment of our vessels and their performance, than revenues, the most directly comparable financial measure under GAAP. Net revenue should not be considered as an alternative to revenues or any other measure of financial performance in accordance with GAAP. The following table reconciles net revenues with revenues:
Year Ended December 31,
To supplement the consolidated financial statements prepared in accordance with GAAP, we have presented EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. EBITDA and Adjusted EBITDA are intended to provide additional information and should not be considered substitutes for net (loss) income or other measures of performance prepared in accordance with GAAP.
EBITDA represents net (loss) income before interest expense (net), income tax expense and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to exclude certain items whose timing or amount cannot be reasonably estimated in advance or that are not considered representative of core operating performance. Such adjustments include vessel write-downs, gains or losses on sale of vessels, unrealized gains or losses on derivative instruments, foreign exchange gains or losses, losses on debt repurchases, and certain other income or expenses. Adjusted EBITDA also excludes realized gains or losses on interest rate swaps as our management, in assessing performance, views these gains or losses as an element of interest expense, realized gains or losses on derivative instruments resulting from amendments or terminations of the underlying instruments and equity income. Adjusted EBITDA is further adjusted to include our proportionate share of Adjusted EBITDA from our equity-accounted joint ventures and to exclude the non-controlling interests' proportionate share of the Adjusted EBITDA from our consolidated joint ventures.
These measures are used as supplemental financial performance measures by management and by external users of our financial statements, such as investors and our controlling unitholder.
EBITDA and Adjusted EBITDA assist our management and security holders by increasing the comparability of our fundamental performance from period to period and against the fundamental performance of other companies in our industry that provide EBITDA or Adjusted EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest expense and income, taxes, depreciation and amortization, and, for Adjusted EBITDA, by excluding certain additional items whose timing or amount cannot be reasonably estimated in advance or that are not considered representative of core operating performance. These items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including EBITDA and Adjusted EBITDA benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing financial and operational strength and health in assessing whether to continue to hold our equity or debt securities as applicable.
EBITDA should not be considered as an alternative to net (loss) income, operating (loss) income or any other measure of financial performance presented in accordance with GAAP. EBITDA and Adjusted EBITDA exclude certain items that affect net income and these measures may vary among other companies. Therefore, EBITDA and Adjusted EBITDA as presented in this Annual Report may not be comparable to similarly titled measures of other companies.
The following table reconciles our historical EBITDA and Adjusted EBITDA to net (loss) income.
Year Ended December 31,
(in thousands of US Dollars)
Reconciliation of “EBITDA” and “Adjusted EBITDA” to “Net (loss) income”:
Net (loss) income
Depreciation and amortization
Interest expense, net of interest income
Income tax expense (recovery)
Write-down and (gain) on sale of vessels
Realized and unrealized loss (gain) on derivative instruments
Equity income (i)
Foreign currency exchange (gain) loss
Losses on debt repurchases (ii)
Other expense (income) - net
Realized (loss) gain on foreign currency forward contracts
Adjusted EBITDA from equity-accounted vessels (i)
Adjusted EBITDA attributable to non-controlling interests (iii)
Adjusted EBITDA from equity-accounted vessels, which is a non-GAAP measure and should not be considered as an alternative to equity income or any other measure of financial performance presented in accordance with GAAP, represents our proportionate share of Adjusted EBITDA (as defined above) from equity-accounted vessels. In addition, this measure does not have a standardized meaning, and may not be comparable to similar measures presented by other companies. We do not have control over the operations, nor do we have any legal claim to the revenue and expenses of our investments in equity-accounted joint ventures. Consequently, the income generated by our investments in equity-accounted joint ventures may not be available for use by us in the period that such income is generated. Our proportionate share of Adjusted EBITDA from equity-accounted vessels is summarized in the table below:
Year Ended December 31,
Depreciation and amortization
Interest expense, net of interest income
Income tax expense
Add (subtract) specific items affecting EBITDA:
Write-down and loss on sale of equipment
Realized and unrealized loss (gain) on derivative instruments
Foreign currency exchange (gain) loss
Adjusted EBITDA from equity-accounted vessels
Losses on debt repurchases of $55.5 million for 2018, relates to the prepayment of our $200.0 million promissory note amended and transferred to Brookfield in September 2017 (or the Brookfield Promissory Note) and the repurchases of $225.2 million of the existing $300.0 million five-year senior unsecured bonds that matured in July 2019, and NOK 914 million of the existing NOK 1,000 million senior unsecured bonds that matured in January 2019. The losses on debt repurchases are comprised of an acceleration of non-cash accretion expense of $31.5 million, resulting from the difference between the $200.0 million settlement amount of the Brookfield Promissory Note at its par value and its carrying value of $168.5 million, and an associated early termination fee of $12.0 million paid to Brookfield, as well as 2.0% - 2.5% premiums on the repurchase of the bonds and the write-off of capitalized loan costs. The carrying value of the Brookfield Promissory Note was lower than face value due to it being recorded at its relative fair value based on the allocation of net proceeds invested by Brookfield on September 25, 2017.
Losses on debt repurchases of $3.1 million for 2017, relates to the repurchase of NOK 508 million of the remaining NOK 1,220 million senior unsecured bonds that matured in late-2018.
Adjusted EBITDA attributable to non-controlling interests, which is a non-GAAP measure and should not be considered as an alternative to non-controlling interests in net (loss) income or any other measure of financial performance presented in accordance with GAAP, represents the non-controlling interests' proportionate share of Adjusted EBITDA (as defined above) from our consolidated joint ventures. In addition, this measure does
not have a standardized meaning, and may not be comparable to similar measures presented by other companies. Adjusted EBITDA attributable to non-controlling interests is summarized in the table below:
Year Ended December 31,
Net (loss) income attributable to non-controlling interests
Depreciation and amortization
Interest expense, net of interest income
EBITDA attributable to non-controlling interests
Add (subtract) specific items affecting EBITDA:
Write-down and (gain) loss on sale of vessels
Realized and unrealized loss on derivative instruments
Foreign currency exchange loss (gain)
Adjusted EBITDA attributable to non-controlling interests
Average number of vessels consists of the average number of owned and chartered-in vessels that were in our possession during the period, including the Dropdown Predecessor. For 2019, 2018, 2017, 2016 and 2015 this includes two FPSO units in our equity accounted joint ventures, in which we have 50% ownership interests, at 100%.
Some of the following risks relate principally to the industry in which we operate and to our business in general. Other risks relate principally to the securities market and to the ownership of our preferred units. The occurrence of any of the events described in this section could materially and adversely affect our business, financial condition, operating results and ability to pay distributions on, and the trading price of, our preferred units.
Our cash flow depends substantially on the ability of our subsidiaries to make distributions to us.
The source of our cash flow includes cash distributions from our subsidiaries. The amount of cash our subsidiaries can distribute to us principally depends upon the amount of cash they generate from their operations, which may fluctuate from quarter to quarter based on, among other things:
the rates they obtain from their FPSO contracts, charters, voyages, management fees and contracts of affreightment (whereby our subsidiaries carry a customer's crude oil production from offshore fields to terminal and ports for an agreed period of time);
the rates and the utilization of our towage fleet;
the price and level of production of, and demand for, crude oil particularly the level of production at the offshore oil fields our subsidiaries service under contracts of affreightment;
the operating performance of our FPSO units, whereby receipt of incentive-based revenue from our FPSO units is dependent upon the fulfillment of the applicable performance criteria, including additional compensation from periodic production tariffs, which are based on the volume of oil produced, the price of oil, as well as other monthly or annual operational performance measures;
the level of their operating costs, such as the cost of crews and repairs and maintenance;
the number of off-hire days for their vessels and the timing of, and number of days required for, dry docking of vessels;
the rates, if any, at which our subsidiaries may be able to redeploy shuttle tankers in the spot market as conventional oil tankers during any periods of reduced or terminated oil production at fields serviced by contracts of affreightment;
the rates, if any, at which our subsidiaries may be able to redeploy vessels, particularly FPSO units, after they complete their charters or contracts and are redelivered to us;
the ability of our subsidiaries to contract our newbuilding vessels and the rates thereon (if any);
delays in the delivery of any newbuildings and the beginning of payments under charters relating to those vessels;
prevailing global and regional economic and political conditions;
currency exchange rate fluctuations; and
the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of business.
The actual amount of cash our subsidiaries have available for distribution also depends on other factors such as:
the level of their capital expenditures, including for maintaining vessels or converting existing vessels for other uses and complying with regulations;
their debt service requirements and restrictions on distributions contained in their debt agreements;
fluctuations in their working capital needs;
their ability to make working capital or long-term borrowings; and
the amount of any cash reserves, including reserves for future capital expenditures, working capital and other matters, established by the board of directors of our general partner at its discretion.
The amount of cash our subsidiaries generate from operations may differ materially from their profit or loss for the period, which will be affected by non-cash items and the timing of debt service payments. As a result of this and the other factors mentioned above, our subsidiaries may make cash distributions during periods when they record losses and may not make cash distributions during periods when they record net income.
Our ability to pay distributions on our units, and the amount of distributions that we may pay in the future, largely depends upon the distributions that we receive from our subsidiaries, and we may not have sufficient cash from operations to enable us to pay distributions.
The source of our earnings and cash flow includes cash distributions from our subsidiaries. Therefore, the amount of distributions we are able to make to our unitholders will fluctuate in large part based on the level of distributions made to us by our subsidiaries. Our subsidiaries may not make quarterly distributions at a level that will permit us to maintain or increase our quarterly distributions in the future.
Our ability to distribute to our unitholders any cash we may receive from our subsidiaries is or may be limited by a number of factors, including, among others:
interest expense and principal payments on any indebtedness we incur;
distributions on any preferred units we have issued or may issue;
capital expenditures related to committed projects;
changes in our cash flows from operations;
restrictions on distributions contained in any of our current or future debt agreements;
fees and expenses of us, our general partner, its affiliates or third parties we are required to reimburse or pay, including expenses we incur as a result of being a public company; and
reserves the board of directors of our general partner believes are prudent for us to maintain for the proper conduct of our business or to provide for future distributions, including reserves for future capital expenditures and for anticipated future credit needs.
Many of these factors reduce the amount of cash we may otherwise have available for distribution. The actual amount of cash that is available for distribution to our unitholders depends on several factors, many of which are beyond the control of us or our general partner.
We may issue additional equity securities in the future. The issuance of additional equity securities may be dilutive to unitholders and increases the risk that we will not have sufficient available cash to make cash distributions to our unitholders. The issuance of any securities with rights and preferences senior to those of existing units may reduce distributions on the existing securities.
Issuing additional equity securities in the future may result in unitholder dilution and increase the aggregate amount of cash required to make quarterly distributions. Issuing any securities with rights or preferences senior to those of existing units may reduce distributions on the existing securities.
We are required to distribute all of our available cash to our limited partners, which may adversely affect our ability to grow, meet our financial needs and make distributions on our preferred units.
Subject to the limitations in our partnership agreement, we are required to distribute all of our available cash each quarter to our limited partners. “Available cash” is defined in our partnership agreement, and it generally means, for each fiscal quarter, all cash on hand at the end of the quarter (including our proportionate share of cash on hand of certain subsidiaries we do not wholly own), less the amount of cash reserves (including our proportionate share of cash reserves of certain subsidiaries we do not wholly own) established by our general partner to:
provide for the proper conduct of our business (including reserves for future capital expenditures and for our anticipated credit needs);
comply with applicable law, any debt instruments, or other agreements;
provide funds for payments to holders of preferred units; or
provide funds for distributions to our limited partners (including on preferred units) and to our general partner for any one or more of the next four quarters;
plus all cash on hand (including our proportionate share of cash on hand of certain subsidiaries we do not wholly own) on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter. Working capital borrowings are generally borrowings that are made under our credit agreements and in all cases are used solely for working capital purposes or to pay distributions to partners.
In January 2019, we announced that we reduced our quarterly common unit cash distributions to zero in order to reinvest additional cash in our business and further strengthen our balance sheet. Since this time and for these same reasons, the common unit cash distribution has remained at zero each quarter. If we resume paying quarterly cash distributions on our common units in the future, these distributions under our cash distribution policy, and the timing and amount thereof, could significantly reduce the amount of cash we otherwise would have available in subsequent periods to grow our business, meet our financial needs and make payments on our preferred units.
We have limited current liquidity.
As at December 31, 2019, we had total liquidity of $304.4 million and a working capital deficit of $184.5 million. Our limited availability under existing credit facilities and our current working capital deficit could limit our ability to meet our financial obligations and growth prospects. We expect to manage our working capital deficit primarily with net operating cash flow, including extensions and redeployments of existing assets, debt financing and re-financings, and our existing liquidity. However, there can be no assurance that any such funding will be available to us on acceptable terms, if at all.
Current market conditions limit our access to capital and our growth prospects.
We have relied primarily upon bank financing and debt and equity offerings to fund our growth. Current depressed market conditions in the energy sector and for master limited partnerships may significantly reduce our access to capital, particularly equity capital. Debt financing or refinancing or equity offerings may not be available on acceptable terms, if at all, from external sources or from Brookfield. Incurring additional debt may increase our leverage, susceptibility to market downturns or adversely affect our ability to pursue future growth opportunities. Lack of access to debt or equity capital at reasonable rates could adversely affect our growth prospects and our ability to refinance debt, finance our operations and make distributions to our unitholders.
Our ability to repay or refinance our debt obligations and to fund our capital expenditures and estimated funding gaps will depend on certain financial, business and other factors, many of which are beyond our control. To the extent we are able to finance these obligations and expenditures with cash from operations or by issuing debt or equity securities, our ability to make cash distributions may be diminished, our financial leverage may increase or our unitholders may be diluted. Our business may be adversely affected if we need to access other sources of funding.
To fund our existing and future debt obligations and capital expenditures, we will be required to use cash from operations, secure extensions and redeployments of existing assets and/or seek to access other financing sources, including re-financing or obtaining new loans/extending the maturities of existing loans. Our ability to draw on committed funding sources and potential funding sources and our future financial and operating performance will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control.
If we are unable to access additional bank financing and generate sufficient cash flow to meet our debt, capital expenditure and other business requirements, we may be forced to take actions such as:
•restructuring our debt;
•seeking additional debt or equity capital;
•selling additional assets or equity interests in certain assets or joint ventures;
•reducing, delaying or cancelling our business activities, acquisitions, investments or capital expenditures; or
•seeking bankruptcy protection.
Such measures might not be successful, and additional debt or equity capital may not be available on acceptable terms or enable us to meet our debt, capital expenditure and other obligations. Some of such measures may adversely affect our business and reputation. In addition, our financing agreements may restrict our ability to implement some of these measures. The sale of certain assets will reduce cash from operations and the cash available for distributions to unitholders.
Use of cash from operations for capital purposes will reduce cash available for distribution to unitholders. Our ability to obtain bank financing or to access the capital markets for future offerings may be limited by our financial condition at the time of any such financing or offering as well as by adverse market conditions in general. Even if we are successful in obtaining necessary funds, the terms of such financings could limit our ability to pay cash distributions to unitholders or operate our business as currently conducted. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional equity securities may result in significant unitholder dilution and would increase the aggregate amount of cash required to resume and make any increase in our quarterly distributions to unitholders.
Primarily as a result of the working capital deficit and committed capital expenditures, over the one-year period following the issuance of our 2019 consolidated financial statements, we will need to obtain additional sources of financing, in addition to amounts generated from operations, to meet our liquidity needs and our minimum liquidity requirements under our financial covenants. Additional potential sources of financing include refinancing or extension of debt facilities and redeployments of existing assets. We are actively pursuing the funding alternatives described above, which we consider probable of completion based on our history of being able to raise and refinance loan facilities. We are in various stages of completion on these matters.
Our substantial debt levels may limit our flexibility in obtaining additional financing, refinancing credit facilities upon maturity, pursuing other business opportunities and paying distributions.
As at December 31, 2019, our total debt was approximately $3.2 billion. We plan to increase our total debt relating to financing of our shuttle tanker newbuildings. If we are awarded contracts for additional offshore projects or otherwise acquire additional vessels or businesses, our consolidated debt may significantly increase. We may incur additional debt under these or future credit facilities. Our level of debt could have important consequences to us, including:
our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes, and our ability to refinance our credit facilities may be impaired or such financing may not be available on favorable terms;
limiting management’s discretion in operating our business and our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
we will need a substantial portion of our cash flow from operations to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and distributions to unitholders;
our debt level may make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our industry, increases in interest rates or the economy generally;
if our cash flow and capital resources are insufficient to fund debt service obligations, forcing us to reduce or delay investments and capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness; and
our debt level may limit our flexibility in responding to changing business and economic conditions.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our debt obligations, which in turn may not be successful.
Given volatility associated with our business and industry, our future cash flow may be insufficient to meet our debt obligations and other commitments. Any such cash flow shortfall could negatively impact our business. A range of economic, competitive, business and industry factors, including those beyond our control, may affect our future financial performance, which in turn may affect our ability to generate cash flow from operations and to pay our debt obligations. If our cash flows and capital resources are insufficient to fund our debt service obligations and other commitments, we may be forced to reduce or delay planned investments and capital expenditures, sell assets, seek additional financing in the debt or equity markets or restructure or refinance our existing indebtedness. Our ability to restructure or refinance our existing indebtedness will depend on the condition of capital markets and our financial condition at such time. Any refinancing of our indebtedness could include higher interest rate obligations and may require us to comply with more onerous covenants, all of which in turn could further restrict our business operations. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which in turn could harm our ability to incur additional indebtedness. In the absence of sufficient cash flows and capital resources, we could face substantial liquidity problems and may be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or obtain particular anticipated proceeds that we could have realized from them and any proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may result in us being unable to meet our debt service obligations.
Financing agreements containing operating and financial restrictions may restrict our business and financing activities.
The operating and financial restrictions and covenants in our current financing arrangements and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, the arrangements may restrict the ability of us and our subsidiaries to:
•incur additional indebtedness or guarantee indebtedness;
•change ownership or structure, including mergers, consolidations, liquidations and dissolutions;
•make dividends or distributions or repurchase or redeem our equity securities;
•prepay, redeem or repurchase certain debt;
•issue certain preferred units or similar equity securities;
•make certain negative pledges and grant certain liens;
•sell, transfer, assign or convey assets;
•enter into transactions with affiliates;
•create unrestricted subsidiaries;
•make certain acquisitions and investments;
•enter into agreements restricting our subsidiaries' ability to pay dividends;
•make loans and certain investments; and
•enter into a new line of business.
One revolving credit facility is guaranteed by us for all outstanding amounts and contains covenants that require us to maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) in an amount equal to the greater of $75.0 million and 5.0% of our total consolidated debt. One revolving credit facility is guaranteed by subsidiaries of ours, and contains covenants that require Teekay Shuttle Tankers L.L.C. (or ShuttleCo) to maintain a minimum liquidity (cash, cash equivalents and undrawn committed revolving credit lines with at least six months to maturity) in an amount equal to the greater of $35.0 million and 5.0% of ShuttleCo's total consolidated debt, a minimum ratio of twelve months' historical EBITDA relative to total interest expense and installments of 1.20x, which can be mitigated by cash deposits, and a net debt to total capitalization ratio no greater than 75.0%. The revolving credit facilities are collateralized by first-priority mortgages granted on 17 of our vessels, together with other related security. Our ability to comply with covenants and restrictions contained in debt instruments may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, compliance with these covenants may be impaired. If restrictions, covenants, ratios or tests in the financing agreements are breached, a significant portion or all of the obligations may become immediately due and payable, and the lenders’ commitment to make further loans may terminate. This could lead to cross-defaults under other financing agreements and result in obligations becoming due and commitments being terminated under such agreements. We might not have, nor be able to obtain, sufficient funds to make these accelerated payments.
Obligations under our credit facilities are secured by certain vessels, and if we are unable to repay debt under the credit facilities, the lenders could seek to foreclose on those assets. We have two revolving credit facilities and seven term loans that require us to maintain vessel values to drawn principal balance ratios of a minimum range of 100% to 150%. As at December 31, 2019, these ratios ranged from 126% to 501% and we were in compliance with the minimum ratios required. The vessel values used in calculating these ratios are the appraised values provided by third parties where available, or prepared by us based on second-hand sale and purchase market data. Changes in the shuttle tanker, towage and offshore installation, UMS, FSO or FPSO markets could negatively affect these ratios.
Furthermore, the termination of any of our charter contracts by our customers could result in the repayment of the debt facilities to which the chartered vessels relate.
At December 31, 2019, we were in compliance with all covenants in our credit facilities and other long-term debt agreements.
Restrictions in our financing agreements may prevent us or our subsidiaries from paying distributions.
The payment of principal and interest on our debt reduces cash available for distribution to us and on our units. In addition, our and our subsidiaries’ financing agreements prohibit the payment of distributions upon the occurrence of the following events, among others:
•failure to pay any principal, interest, fees, expenses or other amounts when due;
•failure to notify the lenders of any material oil spill or discharge of hazardous material, or of any action or claim related thereto;
•breach or lapse of any insurance with respect to vessels securing the facilities;
•breach of certain financial covenants;
•failure to observe any other agreement, security instrument, obligation or covenant beyond specified cure periods in certain cases;
•default under other indebtedness;
•bankruptcy or insolvency events;
•failure of any representation or warranty to be materially correct;
•a change of control, as defined in the applicable agreement; and
•a material adverse effect, as defined in the applicable agreement.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase, as well as risks related to the phasing out of LIBOR.
We are subject to interest rate risk in connection with borrowings under our revolving facilities and secured term loan facilities, which bear interest at variable rates. Interest rate changes could impact the amount of our interest payments, and accordingly, our future earnings and cash flow, assuming other factors are held constant. We cannot assure that any hedging activities entered into by it will be effective in fully mitigating our interest rate risk from our variable rate indebtedness.
In addition, the LIBOR and certain other interest “benchmarks” may be subject to regulatory guidance and/or reform that could cause interest rates under our current and future debt agreements to perform differently than in the past or cause other unanticipated consequences. The
United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop encouraging or requiring banks to submit LIBOR rates after 2021, and it is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve. While the agreements governing our revolving facilities and secured term loan facilities provide for an alternate method of calculating interest rates in the event that a LIBOR rate is unavailable, if LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, there may be adverse impacts on the financial markets generally and interest rates on borrowings under our revolving facilities and secured term loan facilities may be materially adversely affected.
Uncertainty as to the nature of potential changes to LIBOR, alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based securities, including our preferred units.
If the calculation agent for our preferred units determines that LIBOR has been discontinued, the calculation agent will determine whether to use a substitute or successor base rate that it has determined in its sole discretion is most comparable to three-month LIBOR, provided that if the calculation agent determines there is an industry accepted successor base rate, the calculation agent shall use such successor base rate. The calculation agent in its sole discretion may also implement changes to the business day convention, the definition of business day, the distribution determination date and any method for obtaining the substitute or successor base rate if such rate is unavailable on the relevant business day, in a manner that is consistent with industry accepted practices for such substitute or successor base rate. Unless the calculation agent determines to use a substitute or successor base rate as so provided, if a published three-month LIBOR rate is unavailable, the distribution rate our preferred units during the floating rate period will be determined using specified alternative methods. Any such alternative methods may result in distribution payments that are lower than or that do not otherwise correlate over time with the distribution payments that would have been made on our preferred units during the floating rate period if three-month LIBOR were available in its current form. Further, the same costs and risks that may lead to the discontinuation or unavailability of three-month LIBOR may make one or more of the alternative methods impossible or impracticable to determine. If a published three-month LIBOR rate is unavailable during the floating rate period and banks are unwilling to provide quotations for the calculation of LIBOR, the alternative method sets the distribution rate for a distribution period as the same rate as the immediately preceding distribution period, which could remain in effect in perpetuity unless we redeem our preferred units, and the value of our preferred units may be adversely affected.
We must make substantial capital expenditures to maintain the operating capacity of our fleet.
We must make substantial capital expenditures to maintain, over the long term, the operating capacity of our fleet. Maintenance capital expenditures include capital expenditures associated with dry docking a vessel, modifying an existing vessel or acquiring a new vessel to the extent these expenditures are incurred to maintain the operating capacity of our fleet. These expenditures could increase as a result of changes in:
the cost of labor and materials;
increases in fleet size or the cost of replacement vessels;
governmental regulations and maritime self-regulatory organization standards relating to safety, security or the environment; and
In addition, actual maintenance capital expenditures vary significantly from quarter to quarter based on the number of vessels dry docked during that quarter. Certain repair and maintenance items are more efficient to complete while a vessel is in dry dock. Consequently, maintenance capital expenditures will typically increase in periods when there is an increase in the number of vessels dry docked. Significant maintenance capital expenditures reduce the amount of cash that we have available to make distributions to our unitholders.
We require substantial capital expenditures and generally are required to make significant installment payments for acquisitions of newbuilding vessels or for the conversion of existing vessels prior to their delivery and generation of revenue.
Currently, the total cost for our existing shuttle tankers is up to approximately $150 million, the cost for our existing FSO units is up to approximately $400 million and the cost for our existing FPSO units is up to approximately $1.5 billion, although actual costs vary significantly depending on the market price charged by shipyards, the size and specifications of the vessel, governmental regulations and maritime self-regulatory organization standards.
We regularly evaluate and pursue opportunities to provide marine transportation services and offshore oil production and storage services for new or expanding offshore projects.
Although delivery of the completed vessel will not occur until much later (approximately two to three years from the time the order is placed), we typically must pay between 5% to 10% of the purchase price of a shuttle tanker upon signing the purchase contract. During the construction period, we generally are required to make installment payments on newbuildings prior to their delivery, in addition to incurring financing, miscellaneous construction and project management costs. If we finance these acquisition costs by issuing debt or equity securities, we may increase the aggregate amount of interest or cash required to make quarterly distributions to unitholders, if any, prior to generating cash from the operation of the newbuilding.
Our substantial capital expenditures may reduce our cash available for distribution to our unitholders. Funding of any capital expenditures with debt may significantly increase our interest expense and financial leverage, and funding of capital expenditures through issuing additional
equity securities may result in significant unitholder dilution. Our failure to obtain the funds for future capital expenditures could have a material adverse effect on our business, operating results and financial condition.
Over time, the value of our vessels may decline, which could adversely affect our operating results.
Values for shuttle tankers, FSO and FPSO units, towage and offshore installation vessels and UMS can fluctuate substantially over time due to a number of different factors, including:
prevailing economic conditions in oil and energy markets;
a substantial or extended decline in demand for oil;
increases in the supply of vessel capacity;
competition from more technologically advanced vessels;
the cost of retrofitting or modifying existing vessels, as a result of technological advances in vessel design or equipment, changes in applicable environmental or other regulations or standards, or otherwise; and
a decrease in oil reserves in the fields in which our FPSO units or other vessels are or might be deployed.
Vessel values may decline from existing levels. If the operation of a vessel is not profitable, or if we cannot re-deploy a vessel at attractive rates upon termination of its contract, rather than continue to incur costs to maintain and finance the vessel, we may seek to dispose of it. Our inability to dispose of the vessel at a reasonable value could result in a loss on its sale and adversely affect our operating results and financial condition. Further, if we determine at any time that a vessel’s future useful life and earnings require us to impair its value on our financial statements, we may need to recognize a significant charge against our earnings.
We have recognized write-downs on certain vessels and may recognize additional vessel write-downs in the future, which could adversely affect our operating results.
During 2019, we recognized a net write-down of vessels of $332.1 million, relating to our determination that five of our vessels were impaired and that their carrying values should be written down to their respective estimated fair values based on a discounted cash flow approach or using appraised values. Please read "Item 18 – Financial Statements: Note 18 – (Write-down) and Gain on Sale of Vessels." The non-cash charges related to these or other impairments or write-downs will reduce our operating results for the applicable period. We may recognize additional vessel write-downs in the future.
We derive a substantial majority of our revenues from a limited number of customers, and the loss of any such customers or a contract dispute with any such customer could result in a significant loss of revenues and cash flow.
We have derived, and we believe we will continue to derive, a substantial majority of revenues and cash flow from a limited number of customers. Royal Dutch Shell Plc (or Shell, formerly BG Group Plc) and Equinor ASA (or Equinor, formerly Statoil ASA) accounted for approximately 25% and 13%, respectively, of our consolidated revenues during 2019. Shell, Petroleo Brasileiro S.A. (or Petrobras) and Equinor accounted for approximately 23%, 18% and 13%, respectively, of our consolidated revenues during 2018. Shell, Petrobras, Equinor and Premier Oil plc (or Premier Oil, formerly E.ON Ruhgras UK GP Limited or E.ON) accounted for approximately 31%, 17% 10% and 10%, respectively, of our consolidated revenues during 2017. No other customer accounted for 10% or more of revenues during any of these periods.
We could lose a customer or the benefits of a contract if:
the customer fails to make payments because of its financial inability, disagreements with us or otherwise;
we agree to reduce the payments due to us under a contract because of the customer’s inability to continue making the original payments;
the customer exercises certain rights to terminate the contract; or
the customer terminates the contract because we fail to deliver the vessel within a fixed period of time, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or prolonged periods of off-hire, or we default under the contract.
If we lose a key customer, we may be unable to obtain replacement long-term charters or contracts of affreightment and may become subject, with respect to any shuttle tankers redeployed on conventional oil tanker trades, to the volatile spot market, which is highly competitive and subject to significant price fluctuations. If a customer exercises its right under some charters to purchase the vessel, or terminate the charter, we may be unable to acquire an adequate replacement vessel or charter. Any replacement newbuilding would not generate revenues during its construction and we may be unable to charter any replacement vessel on terms as favorable to us as those of the terminated charter.
The loss of any of our significant customers or a reduction in anticipated revenues due from them could have a material adverse effect on our business, operating results and financial condition. Or future growth depends on the ability to expand relationships with existing customers and obtain new customers.
Future adverse economic conditions or other developments may affect our customers’ ability to charter our vessels and pay for our services and may adversely affect our business and operating results.
Future adverse economic conditions or other developments relating directly to our customers may lead to a decline in our customers’ operations or ability to pay for our services, which could result in decreased demand for our vessels and services. Our customers’ inability to pay for any reason could also result in their default on our current contracts and charters. The decline in the amount of services requested by our customers or their default on our contracts with them could have a material adverse effect on our business, financial condition and operating results.
Exposure to currency exchange rate fluctuations results in fluctuations in cash flows and operating results.
We currently are paid partly in Norwegian Krone, British Pound and Brazilian Real under some of our charters and FPSO contracts. The strengthening or weakening of the U.S. Dollar relative to the Norwegian Krone, British Pound and Brazilian Real may result in significant decreases or increases, respectively, in our revenues and vessel operating expenses, which may affect our operating results. We have entered into foreign currency forward contracts to economically hedge portions of our forecasted expenditures denominated in Norwegian Krone and Euro.
We depend on Brookfield and certain joint venture partners to assist us in operating our businesses and competing in our markets.
We have entered into, and expect to enter into additional, joint venture arrangements with third parties to expand our fleet and access growth opportunities. In particular, we rely on the expertise and relationships that our joint ventures and joint venture partners may have with current and potential customers to jointly pursue FPSO projects and provide assistance in competing in new markets.
Our ability to compete for offshore oil marine transportation, processing, offshore accommodation, support for maintenance and modification projects, towage and offshore installation and storage projects and to enter into new charters or contracts of affreightment and expand our customer relationships depends on our ability to maintain our status as a reputable service provider in the industry in addition to our ability to leverage our relationship with Brookfield or our joint venture partners and their reputation and relationships in the shipping and offshore industries. If Brookfield or our joint venture partners suffer material damage to their reputation or relationships, it may harm the ability of us or other subsidiaries to:
•renew existing charters and contracts of affreightment upon their expiration;
•obtain new charters and contracts of affreightment;
•successfully interact with shipyards during periods of shipyard construction constraints;
•obtain financing on commercially acceptable terms; or
•maintain satisfactory relationships with suppliers and other third parties.
If our ability to do any of the things described above is impaired, it could have a material adverse effect on our business, operating results and financial condition.
A decline in oil prices may adversely affect our growth prospects and operating results.
A decline in oil prices may adversely affect our business, operating results and financial condition, as a result of, among other things:
a reduction in exploration for or development of new offshore oil fields, or the delay or cancellation of existing offshore projects as energy companies lower their capital expenditures budgets, which may reduce our growth opportunities;
a reduction in, or termination of, production of oil at certain fields we service, which may reduce our revenues under volume-based contracts of affreightment, production-based and oil price-based components of our FPSO unit contracts or life-of-field contracts;
lower demand for vessels of the types we own and operate, which may reduce available charter rates and revenue to us upon redeployment of our vessels, in particular FPSO units, following expiration or termination of existing contracts or upon the initial chartering of vessels, or which may result in extended periods of our vessels being idle between contracts;
customers potentially seeking to renegotiate or terminate existing vessel contracts, failing to extend or renew contracts upon expiration, or seeking to negotiate cancelable contracts;
the inability or refusal of customers to make charter payments to us due to financial constraints or otherwise; or
declines in vessel values, which may result in losses to us upon vessel sales or impairment charges against our earnings.
Our growth depends on continued growth in demand for offshore oil transportation and processing and storage services.
Our long-term growth strategy focuses on expansion in the shuttle tanker and FPSO segment. Accordingly, our growth depends on continued growth in world and regional demand for these offshore services, which could be negatively affected by a number of factors, such as:
decreases in the actual or projected price of oil, which could lead to a reduction in or termination of production of oil at certain fields we service or a reduction in exploration for or development of new offshore oil fields;
increases in the production of oil in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-oil pipelines to oil pipelines in those markets;
decreases in the consumption of oil due to increases in its price relative to other energy sources, other factors making consumption of oil less attractive or energy conservation measures;
availability of new, alternative energy sources; and
negative global or regional economic or political conditions, particularly in oil consuming regions, which could reduce energy consumption or its growth. Reduced demand for offshore marine transportation, processing, storage services, offshore accommodation or towage and offshore installation services would have a material adverse effect on our future growth and could harm our business, operating results and financial condition.
We may be unable to make or realize expected benefits from acquisitions, and implementing our growth strategy through acquisitions may harm our business, financial condition and operating results.
Our long-term growth strategy includes selectively acquiring or constructing shuttle tankers and FPSO units as needed for approved projects only after charters for the projects have been awarded to us, rather than ordering vessels on a speculative basis. Historically, there have been very few purchases of existing vessels and businesses in the FPSO segment. The relatively small number of independent FPSO fleet owners may contribute to a limited number of acquisition opportunities for FPSO units in the near term. In addition, competition from other companies, many of which have significantly greater financial resources than do we could reduce our acquisition opportunities or cause us to pay higher prices.
Any acquisition of a vessel or business may not be profitable at or after the time of acquisition and may not generate cash flow sufficient to justify the investment. In addition, our acquisition growth strategy exposes us to risks that may harm our business, financial condition and operating results, including risks that we may:
•fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements;
•be unable to hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and fleet;
•decrease our liquidity by using a significant portion of available cash or borrowing capacity to finance acquisitions;
•significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions;
•incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired; or
•incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.
Unlike newbuilding vessels, existing vessels typically do not carry warranties as to their condition. While we generally inspect existing vessels prior to purchase, such an inspection would normally not provide us with as much knowledge of a vessel’s condition as we would possess if it had been built for us and operated by us during its life. Repairs and maintenance costs for existing vessels are difficult to predict and may be substantially higher than for vessels we have operated since they were built. These costs could decrease our cash flow and reduce our liquidity.
In addition, we may not be successful if we seek to enter new markets, which may have competitive dynamics that differ from markets in which we already participate, and we may be unsuccessful in gaining acceptance in any such markets from customers or competing against other companies with more experience or larger fleets or resources in these markets. We also may not be successful in employing the Petrojarl Varg FPSO unit or the Arendal Spirit UMS, each of which is currently in lay-up, on contracts sufficient to recover our investment in the vessels.
Because payments under our contracts of affreightment are based on the volume of oil transported and a portion of the payments under certain of our FPSO contracts are based on the volume of oil produced and the price of oil, utilization of our shuttle tanker fleet, the success of our shuttle tanker business and the revenue from our FPSO units depends upon continued production from existing or new oil fields, which is beyond our control and generally declines naturally over time.
A portion of our shuttle tankers operates under contracts of affreightment. Payments under these contracts of affreightment, which depend upon the level of oil production at the fields we service under the contracts. Payments made to us under certain of our FPSO contracts are partially based on an incentive component, which is determined by the volume of oil produced. Oil production levels are affected by several factors, all of which are beyond our control, including: geologic factors, including general declines in production that occur naturally over time; mechanical failure or operator error; the rate of technical developments in extracting oil and related infrastructure and implementation costs; the availability of necessary drilling and other governmental permits; the availability of qualified personnel and equipment; strikes, employee lockouts or other labor unrest; and regulatory changes. In addition, the volume of oil produced may be adversely affected by extended repairs to oil field installations or suspensions of field operations as a result of oil spills or otherwise.
The rate of oil production at fields we service may decline from existing levels. If such a reduction occurs, the spot market rates in the conventional oil tanker trades at which we may be able to redeploy the affected shuttle tankers may be lower than the rates previously earned by the vessels under the contracts of affreightment. Low spot market rates for the shuttle tankers or any idle time prior to the commencement of a new contract or our inability to redeploy any of our FPSO units at an acceptable rate may have an adverse effect on our business and operating results.
The duration of some of our shuttle tanker, FSO and FPSO contracts is the life of the relevant oil field or is subject to extension by the field operator or vessel charterer.
Some of our shuttle tanker contracts have a “life-of-field” duration, which means that the contract continues until oil production at the field ceases. If production terminates or the field is abandoned, or if the contract term is not extended, or the applicable contract is not renewed, for any reason, we no longer will generate revenue under the related contract and will need to seek to redeploy affected vessels. If we are unable to promptly redeploy any affected vessels at rates at least equal to those under the prior contracts or if we are not successful in redeploying any such vessels at all, our operating results could be harmed. Other shuttle tanker, FSO and FPSO contracts under which our vessels operate are subject to extensions beyond their initial term. The likelihood of these contracts being extended may be negatively affected by reductions in oil field reserves, low oil prices generally or other factors. If we are unable to promptly redeploy any affected vessels at rates at least equal to those under the contracts, if at all, our operating results will be harmed. Any potential redeployment may not be under long-term contracts, which may affect the stability of our cash flow.
The redeployment risk of FPSO units is high given their lack of alternative uses and significant costs.
FPSO units are specialized vessels that have very limited alternative uses and high fixed costs. In addition, FPSO units typically require substantial capital investments prior to being redeployed to a new field and production service contract. These factors increase the redeployment risk of FPSO units. One of our FPSO production service contracts will expire in 2020 and, unless extended, a contract will expire in 2021 and a further two contracts will expire in 2022. Our clients may also terminate certain of our FPSO production service contracts prior to their expiration under specified circumstances. Any idle time prior to the commencement of a new contract or our inability to redeploy the vessels at acceptable rates may have an adverse effect on our business and operating results.
The results of our shuttle tanker and FPSO operations in the North Sea are subject to seasonal fluctuations.
Due to harsh winter weather conditions, oil field operators in the North Sea typically schedule oil platform and other infrastructure repairs and maintenance during the summer months. As the North Sea is one of our primary existing offshore oil markets, this seasonal repair and maintenance activity schedule contributes to quarter-to-quarter volatility in our operating results, due to the fact that oil production is typically lower in the second and third quarters in this region compared with production in the first and fourth quarters.
Since a portion of our North Sea shuttle tankers operate under contracts of affreightment, where revenue is based on the volume of oil transported, the results of these North Sea shuttle tanker operations are generally reflective of the seasonal pattern of transportation demand. Additionally, our North Sea FPSO units, the Petrojarl Knarr and Voyageur Spirit FPSO units, operate higher in the winter months, as favorable weather conditions in the summer months provide opportunities for repairs and maintenance to our units, which generally reduces oil production. When we redeploy affected shuttle tankers as conventional oil tankers during platform maintenance and repair periods, the overall financial results for the North Sea shuttle tanker operations may be negatively affected as the rates in the conventional oil tanker markets are usually lower than contract of affreightment rates. In addition, we generally seek to coordinate a portion of the general fleet dry-docking schedule with this seasonality, which may in turn result in lower revenues and increased dry-docking expenses during the summer months.
Our recontracting of existing vessels and our future growth depends on our ability to expand relationships with existing customers and obtain new customers, for which we will face substantial competition.
One of our principal objectives is to enter into additional long-term, fixed-rate time charters and contracts of affreightment, including the redeployment of our assets as their current charter contracts expire. The process of obtaining new long-term time charters and contracts of affreightment is highly competitive and generally involves an intensive screening process and competitive bids, and often extends for several months. Shuttle tanker, FSO, FPSO, towage and offshore installation vessel and UMS contracts are awarded based upon a variety of factors relating to the vessel operator, including:
•industry relationships and reputation for customer service and safety;
•experience and quality of ship operations;
•quality, experience and technical capability of the crew;
•relationships with shipyards and the ability to get suitable berths;
construction management experience, including the ability to obtain on-time delivery of new vessels or conversions according to customer specifications;
willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter for force majeure events; and
•competitiveness of the bid in terms of overall price.
We expect competition for providing services for potential offshore projects from other experienced companies, including state-sponsored entities. Our competitors may have greater financial resources than us. This increased competition may cause greater price competition for charters. As a result of these factors, we may be unable to expand our relationships with existing customers or to obtain new customers on a profitable basis, if at all, which would have a material adverse effect on our business, operating results and financial condition.
Delays in the operational start-up of FPSO units or deliveries of newbuilding vessels could harm our operating results.
The operational start-up of FPSO units, the completion of final performance tests of FPSO units, or the deliveries of any newbuilding vessels we may order or undertake could be delayed, which would delay our receipt of revenues under the charters or other contracts related to the units or vessels. In addition, under some charters we may enter into, if the operational start-up or our delivery of the newbuilding vessel to
our customer is delayed, we may be required to pay liquidated damages during the delay. For prolonged delays, the customer may terminate the charter and, in addition to the resulting loss of revenues, we may be responsible for substantial liquidated damages.
The operational start-up of FPSO units or completion and deliveries of newbuildings or of vessel conversions or upgrades could be delayed because of:
•quality or engineering problems, the risk of which may be increased with FPSO units due to their technical complexity;
•changes in governmental regulations or maritime self-regulatory organization standards;
•work stoppages or other labor disturbances at the shipyard;
•bankruptcy or other financial crisis of the shipbuilder;
•a backlog of orders at the shipyard;
•political or economic disturbances;
•weather interference or catastrophic events, such as a major earthquake or fire;
•requests for changes to the original vessel specifications;
•shortages of or delays in the receipt of necessary construction materials, such as steel;
•inability to finance the construction or conversion of the vessels; or
•inability to obtain requisite permits or approvals.
If the operational start-up of an FPSO unit or the delivery of a newbuilding vessel is materially delayed, it could adversely affect our operating results and financial condition.
Charter rates for towage and offshore installation vessels may fluctuate substantially over time and may be lower when we are attempting to charter our towage and offshore installation vessels, which could adversely affect operating results. Any changes in charter rates for shuttle tankers, FSO or FPSO units and UMS could also adversely affect redeployment opportunities for those vessels.
Our ability to charter our towage and offshore installation vessels will depend, among other things, on the state of the towage market. Towage contracts are highly competitive and are based on the level of projects undertaken by the customer base. There also exists some volatility in charter rates for shuttle tankers, FSO and FPSO units and UMS, which could affect our ability to charter or recharter these vessels at acceptable rates, if at all.
The nature of our operations exposes us to substantial environmental and other regulations, which may significantly limit operations or increase expenses and could result in significant environmental liabilities.
Our operations are affected by extensive and changing international, national and local environmental protection laws, regulations, treaties and conventions in force in international waters, the jurisdictional waters of the countries in which our vessels operate, as well as the countries of our vessels’ registration, including those governing oil spills, discharges to air and water, and the handling and disposal of hazardous substances and wastes. Many of these requirements are designed to reduce the risk of oil spills and other pollution. In addition, we believe that the heightened environmental, quality and security concerns of insurance underwriters, regulators and charterers will lead to additional regulatory requirements, including enhanced risk assessment and security requirements and greater inspection and safety requirements on vessels. The costs of compliance associated with environmental regulations and changes thereto could require significant expenditures. We expect to incur substantial expenses in complying with these laws and regulations, including expenses for vessel modifications and changes in operating procedures.
These requirements can affect the resale value or useful lives of our vessels, require a reduction in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in, certain ports. Under local, national and foreign laws, as well as international treaties and conventions, failure to comply with such regulations could result in the imposition of material fines and penalties or temporary or permanent suspension of operations and we could incur material liabilities, including cleanup obligations, in the event that there is a release of petroleum or hazardous substances from our vessels or otherwise in connection with our operations. We could also become subject to personal injury or property damage claims relating to the release of or exposure to hazardous materials associated with our operations. In addition, failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations, including, in certain instances, seizure or detention of our vessels. An incident involving environmental contamination could also harm the Partnership's reputation and business.
In January 2020, Økokrim (the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime) and the local Stavanger police raided the premises of our subsidiary Teekay Shipping Norway AS in Stavanger, Norway, based on a search and seizure warrant issued pursuant to suspected violations of Norwegian pollution and export laws in connection with the export of the Navion Britannia shuttle tanker from the Norwegian Continental Shelf in March 2018. Although we have not identified any such violations and deny the charges, such violations of Norwegian pollution and export laws, where they do exist, have the potential to trigger financial penalties, with
a number of factors taken into consideration when assessing the size of the penalty to be enforced, including the financial capacity of the company, any preventative measures taken, the gravity of the offense and the benefit derived from the violation.
Climate change and greenhouse gas restrictions may adversely impact our operations and markets.
Due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These regulatory measures include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards, and incentives or mandates for renewable energy. Compliance with changes in laws, regulations and obligations relating to climate change could increase our costs related to operating and maintaining our vessels and require us to install new emission controls, acquire allowances or pay taxes related to our greenhouse gas emissions, or administer and manage a greenhouse gas emissions program. Revenue generation and strategic growth opportunities may also be adversely affected.
Adverse effects upon the oil industry relating to climate change may also adversely affect demand for our services. Although we do not expect that demand for oil will reduce dramatically over the short term, in the long term, climate change may reduce the demand for oil or increased regulation of greenhouse gases may create greater incentives for use of alternative energy sources. Any long-term material adverse effect on the oil industry could have a significant adverse financial and operational impact on our business that we cannot predict with certainty at this time.
Our and many of our customers’ substantial operations outside the United States expose us to political, governmental and economic instability, which could harm our operations.
Because our operations are primarily conducted outside of the United States, they may be affected by economic, political and governmental conditions in the countries where we engage in business or where our vessels are registered. Any disruption caused by these factors could harm our business, including by reducing the levels of oil exploration, development and production activities in these areas. We derive some of our revenues from shipping oil from politically unstable regions, in particular, our operations in Brazil. Hostilities or other political instability in regions where we operate or where we may operate could have a material adverse effect on the growth of our business, operating results and financial condition. In addition, tariffs, trade embargoes and other economic sanctions by the United States or other countries against countries in Southeast Asia, the Middle East or elsewhere as a result of terrorist attacks, hostilities or otherwise may limit trading activities with those countries, which could also harm our business. Finally, governments could requisition one or more of our vessels, which is most likely during war or national emergency. Any such requisition would cause a loss of the vessel and could harm our cash flow and operating results.
The vote by the United Kingdom to leave the European Union could adversely affect us.
The United Kingdom referendum held in 2016 on its membership in the European Union (or EU) resulted in a majority of United Kingdom voters voting to exit the EU (or Brexit). We have operations in the United Kingdom and the EU, and as a result, we face risks associated with the potential uncertainty and disruptions that may follow Brexit (which occurred on January 31, 2020), including with respect to volatility in exchange rates and interest rates, and potential material changes to the regulatory regime applicable to its business or global trading parties. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets. Any of these effects of Brexit, and others we cannot anticipate or that may evolve over time, could have a material adverse effect on our business, financial condition, operating results or cash flows.
Marine transportation and oil production is inherently risky, particularly in the extreme conditions in which many of our vessels operate.
An incident involving significant loss of product or environmental contamination by any of our vessels could harm our reputation and business.
Vessels and their cargoes, and oil production facilities we service, are at risk of being damaged or lost because of events such as:
•grounding, capsizing, fire, explosions and collisions;
•human error; and
•war and terrorism.
A portion of our shuttle tanker fleet and our towage fleet, two FSO units, the Voyageur Spirit and Petrojarl Knarr FPSO units, and three FPSO units we manage on behalf of the disponent owners or charterers of these assets operate in the North Sea. Harsh weather conditions in this region and other regions in which our vessels operate may increase the risk of collisions, oil spills, or mechanical failures.
An accident involving any of our vessels could result in any of the following:
•death or injury to persons, loss of property or damage to the environment and natural resources;
•delays in the delivery of cargo;
•loss of revenues from charters or contracts of affreightment;
•liabilities or costs to recover any spilled oil or other petroleum products and to restore the eco-system affected by the spill;
•governmental fines, penalties or restrictions on conducting business;
•higher insurance rates; and
•damage to our reputation and customer relationships generally.
Any of the foregoing could have a material adverse effect on our business, financial condition or operating results. In addition, any damage to, or environmental contamination involving, oil production facilities serviced by our vessels could suspend that service and thereby result in loss of revenues.
Our insurance and indemnities may not be sufficient to cover risks, losses or expenses that may occur to our property or as a result of our operations.
The operation of shuttle tankers, FSO and FPSO units, towage and offshore installation vessels, and UMS, is inherently risky. All risks may not be adequately insured against, and any particular claim may not be paid by insurance. In addition, all but three of our vessels, the Petrojarl Knarr FPSO unit, the Itajai FPSO unit and the Pioneiro de Libra FPSO unit (or Libra FPSO unit), are not insured against loss of revenues resulting from vessel off-hire time, based on the cost of this insurance compared to our off-hire experience. We do not insure against all risks and may therefore be exposed under certain circumstances to uninsurable hazards, losses and risks. Any significant off-hire time of our vessels could harm our business, operating results and financial condition. Any claims relating to our operations covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material. Certain insurance coverage is maintained through mutual protection and indemnity associations, and as a member of such associations we may be required to make additional payments over and above budgeted premiums if member claims exceed association reserves.
We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. For example, more stringent environmental regulations have led in the past to increased costs for, and in the future, may result in the lack of availability of, insurance against risks of environmental damage or pollution. A catastrophic oil spill or marine disaster or natural disaster could exceed the insurance coverage, which could harm our business, financial condition and operating results. Any uninsured or underinsured loss could harm our business and financial condition. In addition, the insurance may be voidable by the insurers as a result of certain actions, such as vessels failing to maintain certification with applicable maritime regulatory organizations.
Changes in the insurance markets attributable to terrorist attacks or political change may also make certain types of insurance more difficult to obtain. In addition, the insurance that may be available may be significantly more expensive than existing coverage.
We may experience operational problems with vessels that could result in a loss of revenue and/or increased costs.
Shuttle tankers, FSO and FPSO units, towage and offshore installation vessels and UMS are complex and their operations are technically challenging. Marine transportation and oil production operations are subject to mechanical risks and problems as well as environmental risks. Operational problems may lead to loss of revenue or higher than anticipated operating expenses or require additional capital expenditures. Any of these factors could harm our business, financial condition or operating results.
Terrorist attacks, piracy, increased hostilities or war could lead to further economic instability, increased costs and disruption of business.
War, military tension, revolutions, piracy and terrorist attacks, or increases in such events or activities, could create or increase instability in the world’s financial and commercial markets. This may significantly increase political and economic instability in some of the geographic markets in which we operate or may operate in the future, and may contribute to high levels of volatility in charter rates or oil prices. Hijacking as a result of an act of piracy against any of our vessels, or an increase in cost or unavailability of insurance for such vessels, could have a material adverse impact on our business, financial condition or operating results
In addition, oil facilities, shipyards, vessels, pipelines, oil fields or other infrastructure could be targets of future terrorist attacks or warlike operations and our vessels could be targets of pirates, hijackers, terrorists or warlike operations. Any such attacks could lead to, among other things, bodily injury or loss of life, vessel or other property damage, increased vessel operational costs, including insurance costs, and the inability to transport oil to or from certain locations. Terrorist attacks, war, piracy, hijacking or other events beyond our control that adversely affect the distribution, production or transportation of oil to be shipped by us could entitle customers to terminate the charters and impact the use of shuttle tankers under contracts of affreightment, towage and offshore installation vessels under voyage charters and FPSO units under FPSO contracts, which would harm our cash flow and business.
Acts of piracy on ocean-going vessels have continued to be a risk, which could adversely affect our business.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, Gulf of Guinea and the Indian Ocean off the coast of Somalia. While there continues to be a significant risk of piracy in the Gulf of Aden and Indian Ocean, recently there have been increases in the frequency and severity of piracy incidents off the coast of West Africa. If these piracy attacks result in regions in which our vessels are deployed being named on the Joint War Committee Listed Areas, war risk insurance premiums payable for such coverage can increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs which are incurred to the extent we employ on-board armed security guards and escort vessels, could increase in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, hijacking as a result of an act of piracy against our vessels, or an increase in cost or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition and operating results.
Public health threats could have an adverse effect on our operations and financial results.
Public health threats and other highly communicable diseases, outbreaks of which have already occurred in various parts of the world near where we operate, could adversely impact our operations, the operations of our customers, suppliers and the global economy, including the worldwide demand for crude oil and the level of demand for our services. Any quarantine of personnel, restrictions on travel to or from countries in which we operate, or inability to access certain areas could adversely affect our operations. Travel restrictions, operational problems or large-scale social unrest in any part of the world in which we operate, or any reduction in the demand for our services caused by public health threats in the future, may impact our operations and adversely affect our business, financial condition and operating results. Shutdowns of, or restrictions placed on, shipyards as a result of such outbreaks, could lead to project delays both in respect of our own vessels under construction and those vessels of our customers in relation to which we provide services, such as long-distance towage.
A cyber-attack could materially disrupt our business
We rely on information technology systems and networks in our operations and the administration of our business. Cyber-attacks have increased in number and sophistication in recent years. Our operations could be targeted by individuals or groups seeking to sabotage or disrupt our information technology systems and networks, or to steal data. A successful cyber-attack could materially disrupt our operations, including the safety of our operations, or lead to unauthorized release of information or alteration of information on our systems. Any such attack or other breach of our information technology systems could have a material adverse effect on our business or operating results.
Our failure to comply with data privacy laws could damage our customer relationships and expose us to litigation risks and potential fines.
Data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries in which we provide services and continue to develop in ways which we cannot predict, including with respect to evolving technologies such as cloud computing. The European Union has adopted the General Data Privacy Regulation (or GDPR), a comprehensive legal framework to govern data collection, use and sharing and related consumer privacy rights which took effect in May 2018. The GDPR includes significant penalties for non-compliance. Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace, which could in turn have a material adverse effect on our business, financial condition or operating results.
Many seafaring employees are covered by collective bargaining agreements and the failure to renew those agreements or any future labor agreements may disrupt operations and adversely affect our cash flows.
A significant portion of seafarers that crew certain of our vessels and Norwegian-based onshore operational staff that provide services to us are employed under collective bargaining agreements. We may become subject to additional labor agreements in the future. We may suffer labor disruptions if relationships deteriorate with the seafarers or the unions that represent them. The collective bargaining agreements may not prevent labor disruptions, particularly when the agreements are being renegotiated. Salaries are typically renegotiated annually or bi-annually for seafarers and annually for onshore operational staff and higher compensation levels will increase our costs of operations. Although these negotiations have not caused labor disruptions in the past, any future labor disruptions could harm our operations and could have a material adverse effect on our business, operating results and financial condition.
We and certain of our joint venture partners may be unable to attract and retain qualified, skilled employees or crew necessary to operate our business, or may have to pay substantially increased costs for its employees and crew.
Our success depends in large part on our ability to attract and retain highly skilled and qualified personnel. In crewing our vessels, we require technically skilled employees with specialized training who can perform physically demanding work. Any inability we experience in the future to hire, train and retain a sufficient number of qualified employees could impair our ability to manage, maintain and grow our business.
Our general partner and its other affiliates own a controlling interest in us and have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to those of unitholders.
As the date of this Annual Report, affiliates of Brookfield holds 98.7% of our outstanding common units and a 100% interest in our general partner. Although our general partner has a fiduciary duty to manage us in a manner beneficial to us and our unitholders, the directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to its members. Furthermore, certain directors of our general partner are directors of affiliates of our general partner. Conflicts of interest may arise between Brookfield and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our
general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:
neither our partnership agreement nor any other agreement requires Brookfield or their respective affiliates (other than our general partner) to pursue a business strategy that favors us or utilizes our assets, and Brookfield’s respective directors have fiduciary duties to make decisions in the best interests of the shareholders of Brookfield, which may be contrary to our interests;
five directors of our general partner serve as officers, management or directors of Brookfield or its affiliates;
our general partner is allowed to take into account the interests of parties other than us, such as Brookfield, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders;
our general partner has restricted its liability and reduced its fiduciary duties under the laws of the Republic of the Marshall Islands, while also restricting the remedies available to our unitholders and unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner, all as set forth in our partnership agreement;
our general partner approves our annual budget and the amount and timing of our asset purchases and sales, capital expenditures, borrowings, reserves and issuances of additional partnership securities, each of which can affect the amount of cash that is available for distribution to our unitholders;
our general partner can determine when certain costs incurred by it and its affiliates are reimbursable by us;
our partnership agreement does not restrict us from paying our general partner or its affiliates for any services rendered to us on terms that are fair and reasonable or entering into additional contractual arrangements with any of these entities;
our general partner intends to limit its liability regarding our contractual and other obligations;
our general partner controls the enforcement of obligations owed to us by it and its affiliates; and
our general partner decides whether to retain separate counsel, accountants or others to perform services for us.
The fiduciary duties of directors of our general partner may conflict with those of the officers and directors of Brookfield and Teekay Corporation.
Our general partner’s officers and directors have fiduciary duties to manage our business in a manner beneficial to us and our partners. However, six directors of our general partner also serve as officers, management or directors of Brookfield (five directors) or Teekay Corporation (one director) and/or other affiliates of Brookfield or Teekay Corporation. Consequently, these directors may encounter situations in which their fiduciary obligations to Brookfield or Teekay Corporation, or their other affiliates, on one hand, and us, on the other hand, are in conflict. The resolution of these conflicts may not always be in the best interest of us or our unitholders.
The international nature of our operations may make the outcome of any bankruptcy proceedings difficult to predict.
We were formed under the laws of the Republic of the Marshall Islands and our subsidiaries were formed or incorporated under the laws of the Republic of the Marshall Islands, Norway, Singapore and certain other countries besides the United States, and we conduct our business and operations in countries around the world. Consequently, in the event of any bankruptcy, insolvency, liquidation, dissolution, reorganization or similar proceeding involving us or any of our subsidiaries, bankruptcy laws other than those of the United States could apply. We have limited operations in the United States. If we become a debtor under U.S. bankruptcy law, bankruptcy courts in the United States may seek to assert jurisdiction over all of our assets, wherever located, including property situated in other countries. There can be no assurance, however, that we would become a debtor in the United States, or that a U.S. bankruptcy court would be entitled to, or accept, jurisdiction over such a bankruptcy case, or that courts in other countries that have jurisdiction over us and our operations would recognize a U.S. bankruptcy court’s jurisdiction if any other bankruptcy court would determine that it had jurisdiction.
Our partnership agreement restricts our general partner’s fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner.
Our partnership agreement contains provisions that restrict the standards to which our general partner would otherwise be held by the Republic of the Marshall Islands law. For example, our partnership agreement:
permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. Where our partnership agreement permits, our general partner may consider only the interests and factors that it desires, and in such cases, it has no duty or obligation to give any consideration to any interest of, or factors affecting us, our subsidiaries or our unitholders. Decisions made by our general partner in its individual capacity are made by Brookfield, and not by the board of directors of our general partner. Examples include the exercise of call rights, voting rights with respect to the common units they own, registration rights and their determination whether to consent to any merger or consolidation of the partnership;
provides that our general partner is entitled to make other decisions in “good faith” if it reasonably believes that the decision is in our best interests;
generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the Conflicts Committee of the board of directors of our general partner and not involving a vote of common unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a
transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships between the parties involved, including other transactions that may be particularly favorable or advantageous to us; and
provides that our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general partner or those other persons acted in bad faith or engaged in fraud, willful misconduct or gross negligence.
Fees and cost reimbursements, which our general partner determines for services provided to us, may be substantial and reduce our cash available for distribution to our unitholders and for debt service.
We reimburse our general partner for all expenses it incurs on our behalf. Our general partner can determine when certain costs are reimbursed. The reimbursement of expenses to our general partner could adversely affect our ability to pay cash distributions to unitholders and debt service.
Our general partner, which is owned by Brookfield, makes all decisions on our behalf, subject to the limited voting rights of our unitholders.
Unlike the holders of common stock in a corporation, common unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Common unitholders did not elect our general partner or its board of directors and have no right to elect our general partner or its board of directors on an annual or other continuing basis. Brookfield, which own our general partner, appoint our general partner’s board of directors. Our general partner makes all decisions on our behalf. If the unitholders are dissatisfied with the performance of our general partner, they have little or no ability to remove our general partner.
Control of our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. In addition, our partnership agreement does not restrict the ability of the members of our general partner from transferring their respective membership interests in our general partner to a third party. In the event of any such transfer, the new members of our general partner would be in a position to replace the board of directors and officers of our general partner with their own choices and to control the decisions taken by the board of directors and officers.
Unitholders may have liability to repay distributions.
Under certain circumstances, unitholders may have to repay amounts wrongfully distributed to them. Under the Republic of the Marshall Islands Limited Partnership Act (or Marshall Islands Act), we may not make a distribution to unitholders to the extent that at the time of the distribution, after giving effect to the distribution, all our liabilities, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of ours, exceed the fair value of our assets, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds that liability. Republic of the Marshall Islands law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Republic of the Marshall Islands law will be liable to the limited partnership for the distribution amount. Purchasers of units who become limited partners are liable for the obligations of the transferring limited partner to make contributions to the partnership that are known to the purchaser at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement.
We have been organized as a limited partnership under the laws of the Republic of the Marshall Islands, which does not have a well-developed body of partnership law.
Our partnership affairs are governed by our partnership agreement and by the Marshall Islands Act. The provisions of the Marshall Islands Act resemble provisions of the limited partnership laws of a number of states in the United States, most notably Delaware. The Marshall Islands Act also provides that, for nonresident limited partnerships such as us, it is to be applied and construed to make the laws of the Republic of the Marshall Islands, with respect to the subject matter of the Marshall Islands Act, uniform with the laws of the State of Delaware and, so long as it does not conflict with the Marshall Islands Act or decisions of certain Republic of the Marshall Islands courts, the non-statutory law (or case law) of the courts of the State of Delaware is adopted as the law of the Republic of the Marshall Islands. There have been, however, few, if any, court cases in the Republic of the Marshall Islands interpreting the Marshall Islands Act, in contrast to Delaware, which has a fairly well-developed body of case law interpreting its limited partnership statute. Accordingly, we cannot predict whether Republic of the Marshall Islands courts would reach the same conclusions as Delaware courts. For example, the rights of our unitholders and the fiduciary responsibilities of our general partner under Republic of the Marshall Islands law are not as clearly established as under judicial precedent in existence in Delaware. As a result, unitholders may have more difficulty in protecting their interests in the face of actions by our general partner and its officers and directors than would unitholders of a limited partnership formed in the United States.
As a Marshall Islands partnership with several of our subsidiaries being Marshall Islands entities, our operations may be subject to economic substance requirements of the European Union, which could harm our business.
Finance ministers of the European Union (or EU) rate jurisdictions for tax transparency, governance, real economic activity and corporate tax rate. Countries that do not adequately cooperate with the finance ministers are put on a “grey list” or a “blacklist”. Various countries, including the Republic of the Marshall Islands, have been on the blacklist from time to time. The Marshall Islands has been removed from this list. EU member states have agreed upon a set of measures, which they can choose to apply against the listed countries, including increased monitoring
and audits, withholding taxes, special documentation requirements and anti-abuse provisions. The European Commission has stated it will continue to support member states' efforts to develop a more coordinated approach to sanctions for the listed countries in 2019. EU legislation prohibits EU funds from being channeled or transited through entities in countries on the blacklist. It is not assured that jurisdictions in which we operate will not be put on the blacklist going forward. If so, the effect of the EU blacklist, and any noncompliance by us with any legislation adopted by applicable countries, could have a material adverse effect on our business, financial condition and operating results.
The Marshall Islands have enacted economic substance laws and regulations with which we are obligated to comply. We believe that we and our subsidiaries are compliant with the Marshall Islands economic substance requirements and do not currently expect that these requirements will have a material adverse effect on our business, financial condition and operating results. However, if there were a change in the requirements or interpretation thereof, or if there were an unexpected change to our operations, any such change could result in noncompliance with the economic substance legislation and therefore could result in fines or other penalties, increased monitoring and audits, and dissolution of the noncompliant entity, which could have an adverse effect on our business, financial condition or operating results.
Because we are organized under the laws of the Republic of the Marshall Islands, it may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.
We are organized under the laws of the Republic of the Marshall Islands, and all of our assets are located outside of the United States. Our business is operated primarily from our offices in Bermuda, Norway, Brazil, the United Kingdom, Singapore and the Netherlands. In addition, our general partner is a Republic of the Marshall Islands limited liability company and a majority of its directors and officers are non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult or impossible to bring an action against us or against these individuals in the United States. Even if successful in bringing an action of this kind, the laws of the Republic of the Marshall Islands and of other jurisdictions may prevent or restrict the enforcement of a judgment against our assets or the assets of our general partner or its directors and officers.
We are subject to litigation related to the merger with Brookfield.
Brookfield, we, and directors of our general partner and certain members of senior management are subject to class action litigation challenging the Merger. The plaintiffs in such litigation may make further efforts to seek monetary relief from Brookfield or us. We cannot predict the outcome of the existing or any additional potential litigation, nor can we predict the amount of time and expense that will be required to resolve such litigation. The costs of defending the litigation, even if resolved in favor of Brookfield, us, directors of our general partner and members of senior management, could be substantial and such litigation could distract us from pursuing potentially beneficial business opportunities. Please read Item 18 - Financial Statements: Note 14(d) - Commitments and Contingencies.
In addition to the following risk factors, you should read "Item 4E – Taxation of the Partnership", "Item 10 – Additional Information – Material United States Federal Income Tax Considerations" and "Item 10 – Additional Information – Non-United States Tax Considerations" for a more complete discussion of the expected material U.S. federal and non-U.S. income tax considerations relating to us and the ownership and disposition of our units.
U.S. tax authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to U.S. holders.
A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company” (or PFIC), for such purposes in any taxable year for which either (i) at least 75% of its gross income consists of “passive income,” or (ii) at least 50% of the average value of the entity’s assets is attributable to assets that produce or are held for the production of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property and rents and royalties (other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business). By contrast, income derived from the performance of services does not constitute “passive income.”
There are legal uncertainties involved in determining whether the income derived from our time-chartering activities constitutes rental income or income derived from the performance of services, including the decision in Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009), which held that income derived from certain time-chartering activities should be treated as rental income rather than services income for purposes of a foreign sales corporation provision of the Internal Revenue Code of 1986, as amended (or the Code). However, the Internal Revenue Service (or IRS) stated in an Action on Decision (AOD 2010-01) that it disagrees with, and will not acquiesce to, the way that the rental versus services framework was applied to the facts in the Tidewater decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for PFIC purposes. The IRS’s statement with respect to Tidewater cannot be relied upon or otherwise cited as precedent by taxpayers. Consequently, in the absence of any binding legal authority specifically relating to the statutory provisions governing PFICs, there can be no assurance that the IRS or a court would not follow the Tidewater decision in interpreting the PFIC provisions of the Code. Nevertheless, based on our and our subsidiaries current assets and operations, we intend to take the position that we are not now and have never been a PFIC. No assurance can be given, however, that this position would be sustained by a court if contested by the IRS, or that we would not constitute a PFIC for any future taxable year if there were to be changes in our assets, income or operations.
If the IRS were to determine that we are or have been a PFIC for any taxable year during which a U.S. Holder (as defined below under "Item 10 – Additional Information – Material United States Federal Income Tax Considerations") held units, such U.S. Holder would face adverse tax consequences. For a more comprehensive discussion regarding the tax consequences to U.S. Holders if we are treated as a PFIC, please
read Item "10 – Additional Information: Material United States Federal Income Tax Considerations –- United States Federal Income Taxation of U.S. Holders – Consequences of Possible PFIC Classification."
We are subject to taxes, which reduces our cash available for distribution to partners.
We or our subsidiaries are subject to tax in certain jurisdictions in which we or our subsidiaries are organized, own assets or have operations, which reduces the amount of our cash available for distribution. In computing our tax obligations in these jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot assure you that upon review of these positions, the applicable authorities will agree with our positions. A successful challenge by a tax authority could result in additional tax imposed on us or our subsidiaries. We have established reserves in our financial statements that we believe are adequate to cover our liability for any such additional taxes. We cannot assure you, however, that such reserves will be sufficient to cover any additional tax liability that may be imposed on our subsidiaries. In addition, changes in our operations or ownership could result in additional tax being imposed on us or on our subsidiaries in jurisdictions in which operations are conducted.
Unitholders may be subject to income tax in one or more non-U.S. countries as a result of owning our units if, under the laws of any such country, we are considered to be carrying on business there. Such laws may require unitholders to file a tax return with, and pay taxes to, those countries.
Unitholders may be subject to tax in one or more countries as a result of owning our units if, under the laws of any such country, we are considered to be carrying on business there. If unitholders are subject to tax in any such country, unitholders may be required to file a tax return with, and pay taxes to, that country based on their allocable share of our income. We may be required to reduce distributions to unitholders on account of any withholding obligations imposed upon us by that country in respect of such allocation to unitholders. The United States may not allow a tax credit for any foreign income taxes that unitholders directly or indirectly incur.
No ruling has been requested with respect to the tax consequences of the Merger.
Although it is intended that the Company and holders of the Company’s preferred units will generally not recognize any gain or loss as a result of the Merger, no ruling has been or will be requested from the IRS, with respect to the tax consequences of the Merger.
Unitholders will be allocated our taxable income and gains through the time of the Merger and will not receive any additional distributions attributable to that income.
Unitholders will be allocated their proportionate share of our taxable income and gain for the period ending at the time of the Merger. Unitholders will have to report, and pay taxes on, such income even though they will not receive any additional cash distributions attributable to such income.
Information on the Partnership
Overview, History and Development
Overview and History
We are a leading international midstream services provider to the offshore oil industry, focused on the ownership and operation of critical infrastructure assets in offshore oil regions of the North Sea, Brazil and the East Coast of Canada. We were formed as a Republic of the Marshall Islands limited partnership in August 2006 by Teekay Corporation (NYSE: TK), a portfolio manager and project developer in the marine midstream space. We are structured as a master limited partnership.
In September 2017, affiliates of Brookfield Business Partners L.P. (NYSE: BBU) (TSX: BBU.UN) purchased from an affiliate of Teekay Corporation a 49% interest in our general partner and purchased additional common units, representing an approximately 60% interest in our total common units outstanding, and certain warrants to purchase additional common units from us. In July 2018, Brookfield, through an affiliate, exercised its option to acquire an additional 2% interest in our general partner from an affiliate of Teekay Corporation. In May 2019, Brookfield purchased Teekay Corporation's remaining interest in us, which increased Brookfield's ownership to a 100% interest in our general partner and approximately 73% of our outstanding common units.
In May 2019, we received an unsolicited non-binding proposal from Brookfield to acquire all issued and outstanding publicly held common units representing limited partnership interests of us that Brookfield does not already own in exchange for $1.05 in cash per common unit. The Conflicts Committee of our general partner's board of directors, consisting only of non-Brookfield affiliated directors, evaluated the proposed offer on behalf of the owners of the non-Brookfield owned limited partnership interests, and on October 1, 2019, we announced that we entered into an agreement and plan of merger with Brookfield (or Merger Agreement). On January 22, 2020, Brookfield completed its acquisition by merger (or the Merger) of all of the outstanding publicly held and listed common units representing our limited partner interests held by parties other than Brookfield (or unaffiliated unitholders) pursuant to the Merger Agreement among us, our general partner and certain members of Brookfield.
Under the terms of the Merger Agreement, a newly formed subsidiary of Brookfield merged with and into us, with us surviving as a wholly owned subsidiary of Brookfield and our general partner, and with common units held by unaffiliated unitholders being converted into the right
to receive $1.55 in cash per common unit (or the cash consideration), other than common units held by unaffiliated unitholders who elected to receive the equity consideration (as defined below). As an alternative to receiving the cash consideration in the Merger, each unaffiliated unitholder had the option to elect to forego the cash consideration and instead receive one of our newly designated unlisted Class A common unit per common unit (or the equity consideration). The Class A common units are economically equivalent to the Class B common units held by Brookfield following the Merger, but have limited voting rights and limited transferability.
As of December 31, 2019, the public held a total of 26.9% of our outstanding common units and Brookfield held 73.1% of our outstanding common units and 100% of the general partner interest.
As a result of the Merger, Brookfield owns all of the Class B common units, representing approximately 98.7% of our outstanding common units. All of the Class A common units, representing approximately 1.3% of our outstanding common units as of the closing of the Merger, are held by the unaffiliated unitholders who elected to receive the equity consideration in respect of their common units. Pursuant to the terms of the Merger Agreement, our outstanding preferred units were unchanged and remain outstanding following the Merger.
On January 23, 2020, the NYSE filed a Form 25 with the United States Securities and Exchange Commission (the SEC) notifying the SEC of the delisting of our common units on the NYSE and the deregistration of the common units. The deregistration will become effective 90 days after the filing of the Form 25 or such shorter period as may be determined by the SEC.
Our near-to-medium term business strategy is primarily to focus on extending contracts and redeploying existing assets on long-term charters, repaying or refinancing scheduled debt obligations and pursuing additional growth projects.
Our long-term growth strategy focuses on expanding our fleet of shuttle tankers and FPSO units under medium-to-long term charter contracts. Over the long-term, we intend to continue our practice of primarily acquiring vessels as needed for approved projects only after the medium-to-long-term charters for the projects have been awarded to us, rather than ordering vessels on a speculative basis. We have entered and may enter into joint ventures and partnerships with companies that may provide increased access to such charter opportunities or may engage in vessel or business acquisitions. We seek to leverage the expertise, relationships and reputation of Brookfield to pursue these growth opportunities in the offshore sectors and may consider other opportunities to which our competitive strengths are well suited. Our operating fleet primarily trades on medium to long-term, stable contracts.
As of December 31, 2019, our fleet consisted of:
FPSO Units. Our FPSO fleet consisted of six units, in which we have 100% ownership interests, four of which are operating under FPSO contracts with major energy companies in Norway, United Kingdom and Brazil and two of which are currently in lay-up. We also have two FPSO units, in which we have 50% ownership interests, which are operating under contracts in Brazil. We use the FPSO units to provide production, processing and storage services to oil companies operating offshore oil field installations. The FPSO contracts have an average remaining term of approximately 3.2 years, excluding extension options. As of December 31, 2019, our FPSO units had a total production capacity of approximately 0.4 million barrels of oil per day.
Shuttle Tankers. Our shuttle tanker fleet consisted of 26 vessels that operate under fixed-rate contracts of affreightment (or CoAs), time charters and bareboat charters, seven shuttle tanker newbuildings, which are expected to deliver through early-2022, and the HiLoad DP unit, which is currently in lay-up. Of these 34 shuttle tankers, four are owned through 50%-owned subsidiaries and two were chartered-in. The remaining vessels are owned 100% by us. All of our operating shuttle tankers, with the exception of two shuttle tankers that are currently trading as conventional tankers and the HiLoad DP unit, provide transportation services to energy companies in the North Sea, Brazil and the East Coast of Canada under CoAs, time charters or bareboat charters. Our shuttle tankers occasionally service the conventional spot tanker market. The average term of the CoAs, weighted based on each CoA's vessel demand, is 3.4 years. The time charters and bareboat charters have an average remaining contract term of approximately 4.5 years. As of December 31, 2019, our shuttle tanker fleet, including newbuildings, had a total cargo capacity of approximately 4.2 million dead-weight tonnes (or dwt).
FSO Units. Our FSO fleet consisted of four units, in which we have 100% ownership interests, and one unit, the Apollo Spirit, in which we have an 89% ownership interest. Our FSO units operate under fixed-rate contracts, with an average remaining term of approximately 2.6 years. As of December 31, 2019, our FSO units had a total cargo capacity of approximately 0.6 million dwt.
UMS. Our UMS fleet consisted of one unit, the Arendal Spirit UMS, in which we have a 100% ownership interest and which is currently in lay-up.
Towage and Offshore Installation Vessels. Our long-distance towage and offshore installation fleet consisted of ten operating vessels. We have 100% ownership interests in all our towage and offshore installation vessels. All of our operational towage and offshore installation vessels operate under voyage-charter and spot towage contracts.
Please read Item 18 – Financial Statements: Note 4 – Segment Reporting for a description of our capital expenditures during the three years ended December 31, 2019.
We were formed under the laws of the Republic of the Marshall Islands as Teekay Offshore Partners L.P. and maintain our principal executive offices at 4th Floor, Belvedere Building, 69 Pitts Bay Road, Pembroke, HM 08, Bermuda. Our telephone number at such address is (441) 405-5560.
The SEC maintains an Internet site at www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our website is www.teekayoffshore.com. The information contained on our website is not part of this annual report.
Potential Additional Shuttle Tanker, FSO and FPSO Projects
Please see Item 5. Operating and Financial Review and Prospects – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Potential Additional Shuttle Tanker, FSO and FPSO Projects for a description of possible future vessel acquisitions.
FPSO units are offshore production facilities that are ship-shaped or cylindrical-shaped and store processed crude oil in tanks located in the hull of the vessel. FPSO units are production facilities employed to develop oil fields that typically are marginal or located in deepwater areas remote from existing pipeline infrastructure. Of four major types of floating production systems, FPSO units are the most common type. Typically, the other types of floating production systems do not have significant storage and need to be connected into a pipeline system or use an FSO unit for storage. FPSO units are less weight-sensitive than other types of floating production systems and their extensive deck area provides flexibility in process plant layouts. In addition, the ability to utilize surplus or aging tanker hulls for conversion to an FPSO unit provides a relatively inexpensive solution compared to the new construction of other floating production systems. A majority of the cost of an FPSO unit comes from its top-side production equipment and thus, FPSO units are expensive relative to conventional tankers. An FPSO unit carries on board all the necessary production and processing facilities normally associated with a fixed production platform. As the name suggests, FPSO units are not fixed permanently to the seabed but are designed to be moored at one location for long periods of time. In a typical FPSO unit installation, the untreated well-stream is brought to the surface via sub-sea equipment on the sea floor that is connected to the FPSO unit by flexible flow lines called risers. The risers carry the mix of oil, gas and water from the ocean floor to the vessel, which processes it on board. The resulting crude oil is stored in the hull of the vessel and subsequently transferred to tankers either via a buoy or tandem loading system for transport to shore.
Traditionally for large field developments, the major oil companies have owned and operated new, custom-built FPSO units. FPSO units for smaller fields have generally been provided by independent FPSO contractors under life-of-field production contracts, where the contract’s duration is for the useful life of the oil field. FPSO units have been used to develop offshore fields around the world since the late 1970s. At December 31, 2019, we owned six FPSO units, in which we have 100% ownership interests, two of which are in lay-up, and two FPSO units in which we have 50% ownership interests. Most independent FPSO contractors have backgrounds in marine energy transportation, oil field services or oil field engineering and construction. Other major independent FPSO contractors are SBM Offshore N.V., BW Offshore, MODEC, Bumi Armada, Yinson Holdings, Bluewater and Rubicon Offshore International.
The following table provides additional information about our FPSO units as of December 31, 2019:
Production Capacity (bbl/day)
Field name and location
Contract End Date
Pioneiro de Libra (1)
March 2021 (2)
Cidade de Itajai (3)
Bauna and Piracaba, Brazil
February 2022 (4)
Voyageur Spirit (5)
February 2022 (6)
May 2023 (7)
Petrojarl Cidade de Rio das Ostras
The Pioneiro de Libra was converted to an FPSO unit in 2017. The original hull was built in 1995.
The contract has a 6-year duration with a firm period expiring in March 2021. From March 2021 to March 2024, the charterer has the annual option to extend the contract, with failure to exercise these options resulting in the payment of certain termination fees. The charterer has further options to extend the service contract from March 2025 to March 2035.
The Cidade de Itajai was converted to an FPSO unit in 2012. The original hull was built in 1985.
The charterer has options to extend the contract to February 2028.
In January 2020, we received confirmation from the charterer of the Voyageur Spirit that the FPSO unit would be redelivered to us upon the completion of the contract in April 2020 and the subsequent decommissioning of the unit, which is expected to be completed in June 2020.
The charterer has termination rights with ten months' notice.
Until May 2023, the charter has termination rights with four months' notice subject to the payment of certain termination fees.
During 2019, approximately 43% of our consolidated net revenues were earned by our FPSO units, compared to approximately 42% in 2018 and 45% in 2017. Please read Item 5 – Operating and Financial Review and Prospects: Results of Operations.
Shuttle Tanker Segment
A shuttle tanker is a specialized ship designed to transport crude oil and condensates from offshore oil field installations to onshore terminals and refineries. Shuttle tankers are equipped with sophisticated loading systems and dynamic positioning systems that allow the vessels to load cargo safely and reliably even in harsh weather conditions. Shuttle tankers were developed in the North Sea as an alternative to pipelines. The first cargo from an offshore field in the North Sea was shipped in 1977, and the first dynamically-positioned shuttle tankers were introduced in the early 1980s. Shuttle tankers are often described as “floating pipelines” because these vessels typically shuttle oil from offshore installations to onshore facilities in much the same way a pipeline would transport oil along the ocean floor.
Our shuttle tankers are primarily subject to long-term, fixed-rate time-charter contracts or under contracts of affreightment for various fields. The number of voyages performed under the contracts of affreightment depends upon the oil production of each field. Competition for charters is based primarily upon price, availability, the size, technical sophistication, age and condition of the vessel and the reputation of the vessel’s manager. Shuttle tanker demand may be affected by the possible substitution of sub-sea pipelines to transport oil from offshore production platforms. The shuttle tankers in our contract of affreightment fleet may operate in the conventional spot market during downtime or maintenance periods for oil field installations or otherwise, which provides greater capacity utilization for the fleet.
Shuttle tankers primarily operate in Brazil, the North Sea and off the East Coast of Canada. As of December 31, 2019, we owned 32 shuttle tankers (including seven vessels under construction and the HiLoad DP unit), in which our ownership interests ranged from 50% to 100%, and chartered-in an additional two shuttle tankers. Other shuttle tanker owners include Knutsen, MOL and AET Tankers. We believe that we have competitive advantages in the shuttle tanker market as a result of the quality, type and dimensions of our vessels combined with our market share in the North Sea, Brazil and the East Coast of Canada.
The following tables provide additional information about our shuttle tankers, including newbuildings, as of December 31, 2019:
“CoA” refers to contracts of affreightment, "TC" refers to time charters, "BB" refers to bareboat charters, "NB" refers to newbuilding vessel.
Not all of the contracts of affreightment or time-charter customers utilize every ship in the contract of affreightment or time-charter fleet.
Owned through a 50% owned subsidiary. The parties share in the profits and losses of the subsidiary in proportion to each party’s relative ownership.
Under the terms of a master agreement with Equinor, the vessels are chartered under individual fixed-rate annually renewable time-charter contracts. The number of vessels Equinor is committed to in-charter may be adjusted annually based on the requirements of the fields serviced and the charter end date is based on the latest production forecast.
The charterer may adjust the number of vessels servicing the East Coast of Canada contract by providing at least 24 months' notice.
Charterer has the right to purchase the vessel at end of the bareboat charter.
The vessel was delivered to us in January 2020.
The vessel was delivered to us in February 2020.
The newbuildings will operate in the North Sea contract of affreightment fleet.
The newbuilding will operate in the East Coast of Canada.
Vessel was sold in January 2020.
Self-propelled DP system that attaches to and keeps conventional tankers in position when loading from offshore installations.
On the Norwegian continental shelf, regulations have been imposed on the operators of offshore fields related to vaporized crude oil that is formed and emitted during loading operations and which is commonly referred to as Volatile Organic Compounds (or VOC). To assist the oil companies in their efforts to meet the regulations on VOC emissions from shuttle tankers, we have played an active role in establishing and participating in a unique co-operation among 22 owners of offshore fields in the Norwegian sector. The purpose of the co-operation is to implement VOC reduction systems on selected shuttle tankers to reduce and report VOC emissions according to Norwegian authorities’ requirements. Currently, we own VOC systems on 14 of our shuttle tankers, including newbuilding vessels on order. The oil companies that participate in the co-operation have also engaged us to undertake the day-to-day administration, technical follow-up and handling of payments through a dedicated clearing house function.
During 2019, approximately 41% of our consolidated net revenues were earned by the vessels in the shuttle tanker segment, compared to approximately 42% in 2018 and 45% in 2017. Please read Item 5 – Operating and Financial Review and Prospects: Results of Operations.
Historically, the utilization of shuttle tankers in the North Sea is higher in the winter months, as favorable weather conditions in the summer months provide opportunities for repairs and maintenance to our vessels and to the offshore oil platforms. Downtime for repairs and maintenance generally reduces oil production and, thus, transportation requirements.
FSO units provide on-site storage for oil field installations that have no storage facilities or that require supplemental storage. An FSO unit is generally used in combination with fixed or floating production systems that do not have sufficient storage facilities. FSO units are moored to the seabed at a safe distance from a field installation and receive cargo from the production facility via a dedicated loading system. An FSO unit is also equipped with an export system that transfers cargo to shuttle or conventional tankers. Depending on the selected mooring arrangement and where they are located, FSO units may or may not have any propulsion systems. FSO units are often conversions of older shuttle tankers or conventional oil tankers. These conversions, which include installation of a loading and off-take system and hull refurbishment, can generally extend the lifespan of a vessel as an FSO unit by up to 20 years over the normal shuttle tanker lifespan of 20 years.
Our FSO units are generally placed on long-term, fixed-rate time charter or bareboat charter contracts as an integrated part of the field development plan, which provides stable cash flows to us.
As of December 31, 2019, we had five FSO units in which our ownership interests ranged from 89% to 100%. The major markets for FSO units are Asia, West Africa, Northern Europe, the Mediterranean and the Middle East. Our primary competitors in the FSO market are conventional tanker owners who have access to tankers available for conversion, and oil field services companies and oil field engineering and construction companies who compete in the floating production system market. Competition in the FSO market is primarily based on price, expertise in FSO operations, management of FSO conversions and relationships with shipyards, as well as the ability to access vessels for conversion that meet customer specifications.
The following table provides additional information about our FSO units as of December 31, 2019:
Field name and location
Contract End Date
Gina Krog, Norway
Suksan Salamander (1)(3)
Dampier Spirit (1)(3)
Falcon Spirit (4)
Al Rayyan, Qatar
Apollo Spirit (3)(5)
Charterer has option to extend the time charter.
The vessel was converted into an FSO unit in 2017.
Charterer has option to purchase the unit.
Charterer has early termination rights for an 18-month notice period.
Charterer is required to charter the vessel for as long as the Petrojarl Banff FPSO unit produces in the Banff field in the North Sea.
During 2019, approximately 12% of our consolidated net revenues were earned by the vessels in the FSO segment, compared to 11% in 2018 and 7% in 2017. Please read Item 5 – Operating and Financial Review and Prospects: Results of Operations.
UMS are used primarily for offshore accommodation, storage and support for maintenance and modification projects on existing offshore installations, or during the installation and decommissioning of large floating production and storage units, including FPSO units, floating liquefied natural gas (or FLNG) units and floating drill rigs. The UMS is available for world-wide operations, excluding operations on the Norwegian Continental Shelf, and includes a DP3 positioning system that is capable of operating in deep water and harsh weather. The Arendal Spirit is currently in lay-up.
The following table provides additional information about our UMS as of December 31, 2019: