when 1 + 1 = too merger of teekay offshore lp and ... · white knight steps in brookfield business...
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When 1 + 1 = TOO
Merger of Teekay Offshore LP and Brookfield Business Partners
Best Ideas 2018, Hosted by MOI GlobalJanuary 12, 2018
Vijzelstraat 68 - 78 |1017HL | Amsterdam | www.jdpcap.com
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disclaimer
Confiden'ality; Not to be disseminated – The informa-on set forth in this presenta-on is being furnished on a confiden-al basis to the recipient and does not cons-tute an offer, solicita-on or recommenda-on to sell or an offer to buy any securi-es, investment products or investment advisory services. Such an offer may only be made to qualified investors by means of delivery of a confiden-al private placement memorandum or other similar materials that contain a descrip-on of material terms rela-ng to such investment. The informa-on published and the opinions expressed herein are provided for informa-onal purposes only. This presenta-on is confiden-al and has been prepared solely for the informa-on of the intended recipient and may not be reproduced, distributed or used for any other purpose. Reproduc-on and distribu-on of this presenta-on may cons-tute a viola-on of federal or state securi-es laws.
No tax or legal advice – Nothing contained herein cons-tutes financial, legal, tax, or other advice. The Fund makes no representa-on that the informa-on and opinions expressed herein are accurate, complete or current. The informa-on contained herein is current as of the date hereof, but may become outdated or subsequently may change.
RISKS – An investment in the Fund is specula-ve due to a variety of risks and considera-ons as detailed in the Confiden-al Private Placement Memorandum of the Fund and this presenta-on is qualified in its en-rety by the more complete informa-on contained therein and in the related subscrip-on materials.
Facts & opinions – Although the statements of facts in this presenta-on have been obtained and are based upon sources, JDP Capital Management, LLC (“JDPCM”), the general partner of the Fund believes to be reliable, JDPCM does not guarantee their accuracy and any such informa-on may be incomplete or condensed. All opinions and es-mates included in this report cons-tute JDPCM’s judgment as of the date of this presenta-on and are subject to change without no-ce
No Recommenda'on – The men-on of or reference to specific strategies or instruments in this presenta-on should not be interpreted as a recommenda-on or opinion that you should make any purchase or sale or par-cipate in any transac-on.
The following presenta-on is intended only for affiliates of JDP Capital Management LLC and investors in JDPI, LP and JDP Offshore, Ltd
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Investment Overview
² Transformational merger completed, market has not caught up
² $600M capital injection to fund immediate growth
² 300%+ upside over 2 – 5 years
² Long-term contracts with largest blue chip E&P companies
² Highly undervalued regardless of oil price recovery
Elevator Pitch: Teekay Offshore LP (NYSE: TOO)
“Abandoned public stub of a mission-critical marine infrastructure business, re-capitalized by Brookfield Business Partners selling for a 25% cash flow yield”
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Yield* Asset
25% TOO equity cash flow yield
7.6% Alerian MLP Index (AMZ)
5.7% US junk bond yield index
5.5% S&P 500 “earnings yield”
3.8% REITs
3.5% Utilities
2.7% AA corporate bond yield index
2.5% US 10-Year Treasury
We’re on a Treasure hunt
Finding yield is difficult today
*JDP es-mate , January 2018
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Table of Contents
Background & History of Teekay Corpora-on
Overview of Teekay Offshore
Why TOO Became Distressed White Knight Recapitaliza-on
What’s It Worth?
Summary
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Origins of Teekay Corporation
² Founded in 1973 by Norwegian entrepreneur Torben Karlshoej “Teekay”
² Became one of the most respected shipping companies in the world
² Started by trading in niche shipping lanes to/from Asia
² Diversified into shuttle tankers, FPSOs and LNG assets
² Torben died in 1993 during a major industry downturn
² Torben’s brother led a turnaround and IPO in 1995
Gold standard in shipping
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Teekay 2.0
² Hard assets separated into three publicly traded Limited Partnerships
² Pass-through entities without standalone management
² IPO of NYSE: LNG, NYSE: TOO and NYSE: TNK between 2005 and 2007
² As General Partner, Teekay Corporation earns:
² Management Fees
² Dividends
² Incentive Distribution Rights (IDRs)
Adopts MLP financial structure in 2005
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Dividends baby!
Why? Markets ofen place more value on management-fee streams than tradi-onal income
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Mlp model is born
Teekay Corporation (NYSE: TK)
General Partner, Asset Manager
Teekay LNG, LP(NYSE: TGP)
Teekay Tankers, LP
(NYSE: TNK)
Teekay Offshore, LP(NYSE: TOO)
Publicaly traded DaughterCos
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Teekay offshore, LP
NYSE: TOO, October 2014 – June 2017
-2.00
3.00
8.00
13.00
18.00
23.00
28.00
33.00
Teekay Offshore Partners L.P. (NYSE:TOO) - Share
-94%
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Among the Teekay en--es today, we think Teekay Offshore LP (TOO) represents the
lowest risk, highest return opportunity
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Teekay Offshore, lp
“Floating Pipeline”
² $1.1B Market Cap
² $4.6B EV
² 26% public float
² Brookfield Business Partners subsidiary as of Sept 30, 2017
² $2.48/share JDP average price
World-class marine infrastructure asset porjolio
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Unique assets
² Niche infrastructure assets originally owned by oil companies
² Mission-critical components to offshore drilling
² TOOs fleet further specialized in North Sea, North Canada and Brazil
Not to be confused with commodi-zed oil tankers, container ships, dry bulk carriers, etc.
Vessel Descriptions
Shuttle tankers: Specialized ship designed to transport crude oil and condensates from offshore oil field installations to onshore terminals and refineries. Equipped with sophisticated loading systems and dynamic positioning systems that allow the vessels to load cargo safely and reliably in harsh weather conditions. Originally developed in the North Sea as an alternative to pipelines.
FPSO: Floating offshore production facilities that store processed crude. Typically used as production facilities to develop marginal oil fields or deep water areas remote from existing pipeline infrastructure.
FSO: Floating storage for oil fields that have no storage facilities or that require supplemental storage.
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Predictable cash flow
No direct commodity exposure
² Long-term contracts with world’s most prominent oil companies
² Operationally-driven pricing backed by the credit quality of lessee
² Contract terms protect against oil prices and cancelation risk
² Economically unrealistic to close most offshore wells keeps projects online throughout oil cycles
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Protected cash flow
Vessel-level finance terms bind all counterpar-es
TOO’s historical troubles stemmed from excessive non-secured, cash flow-based debt
² Shipping-bank lending terms explicitly protect against cancellations
² Contract termination = NPV of contract cash flows
² Broader industry eco-system implicitly aligned through validity of contacts between E&P, banks, operators, suppliers, etc.
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Wide moat
² High barriers to entry
² Largest oil companies only work with a handful of best in class operators
² Global footprint with focus on harshest environments
TOO eats first
Uniquely posi-oned to win profitable contracts even during periods of excess vessel inventory
² Scale and relationships ensure availability of specialized ship yard capacity
² Most stable capital base among peer group
² Capital intensive
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So, how do you tank a great business’s stock?
1. Misaligned incen-ves
2. Poor capital alloca-on
3. Bad -ming
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#1 Misaligned incentives
Teekay Corpora-on received three different cash streams from TOO:
1. Dividends from stock ownership
2. Management fees for managing the fleet
3. Incentive Distribution Rights (IDRs)
² IDRs are management fees calculated as a percentage of dividends paid to shareholders
² IDR structures can easily be abused
² Generally misunderstood by yield-seeking retail investors
IDRs ofen valued at 20x to 30x annual income
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A bit “too” aggressive
Higher the distribu-on, the less you keep
$0 – $0.40 $0.40 - $0.44 $0.44 – $0.53 $0.53 +
25% Fee 50% Fee
15% Fee 2% Fee
IDRs paid to Teekay Parent from TOO dividends
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3%
5%8%
10%
15%
19%
22% 22% 21%
3% 3% 3% 2% 2% 3% 3% 3% 3%
0%
5%
10%
15%
20%
25%
2007 2008 2009 2010 2011 2012 2013 2014 2015
TOO Distributionas% ofSales
S&PDividendas%ofSales
Grow the dividend at All Costs
7x
Div. cutin 2016
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Yield before the business
2007 … 2016 TotalEBITDA Less Capex ($M) 130 … 344 2,302 Interest and Distributions ($M) (157) … (498) (3,121)
Deficit ($M) (27) … (155) (819)
Ever-increasing dividends created a deficit
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#2 Poor Capital Allocation
$3.5Bn$120M
$42$0 $0 $0
$78
$918
$68
$945 $974
$600
$0$100$200$300$400$500$600$700$800$900
$1,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Historical Capex Spending 2007 – 2011 Significantly underinvested in fleet to fund dividend ramp 2012 – 2016 Over-invested in fleet during oil boom, con-nued to grow dividend Result Became dependent on selling stock and high risk debt to fund growth commitments
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Betting the farm
2007 … 2016 TotalEBITDA Les s Capex ($M) 130 … 344 2,302 Interes t and Dis tributions ($M) (157) … (498) (3,121)
Deficit ($M) (27) … (155) (819)
2007 … 2017 % ChgLeverage Ratio 4.3x … 5.8x 34%% Non - S ecured Debt -- … 40% --
High risk debt leveraged TOO directly to oil prices
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#3 bad timing
And just as boom--me spending ramped up: Oil collapsed..
170.00
270.00
370.00
470.00
570.00
670.00
770.00
870.00
970.00
S&P GSCI Brent Crude Index (^SPGSBR) - Index
-72%
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Situation Became Unmanageable
$587
$5,079
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2016EBITDA CapitalObligations
($M)
TOO’s leverage ballooned drama-cally
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Nail in the Coffin
AmtIssue Issued ($M) Coupon Convertible? WarrantsApril 2013 Preferred Offering $150 7.3% No NoApril 2015 Preferred Offering $125 8.5% No NoJuly 2015 Preferred Offering $250 8.6% Yes NoJune 2016 Preferred Offering $100 10.5% Yes 6.7M
ATM "Continuous" Equity Offering $200-$300
TOO was forced to issue a series of dilu-ve securi-es
Stock collapsed, equity funding failed
No way to fund obligations = investor panic
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Institutionally Constrained
Distress triggered a 40%+ decline in ins-tu-onal ownership*
Majority of TOO’s tradi-onal ownership base was forced to sell ² Dividend cut to 1 cent
² Fear of unknown dilution and restructuring
² Stock liquidity crunch
² Highly distressed sector
*JDP es-mate based on 13F filers
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Brookfield to the rescue
White knight steps in Brookfield Business Partners announces capital injec-on and board control on July 27, 2017, deal closed September 25th
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Post-brookfield cash flow
ü No more funding gap
ü Replenishes fleet assets
ü Free cash flow boosted by ability to fund fleet delivery
Run-Rate Deal Post ($000s) Standalone Additions Brookfield GrowthRevenues $1,071 $225 $1,296 21.0%Adjusted EBITDA $588 $92 $680 15.6%Levered FCF $168 $107 $275 63.7%
Capex Funding Gap -$300 $300 $0
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Post-brookfield Capitalization
ü Leverage materially improves
ü Swapped high cost preferred debt for stock
ü Removes intense dependency on capital markets
Capitalization 2017 Stand - Deal Pro($000s) Alone Dilution FormaNet Debt + Prefs $4,371 ($725) $3,646Shares 156 254 410Market Cap @ $2.50 $390 $1,025
Enterprise Value $4,761 $4,671Leverage Ratio 7.4x 5.4x
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Intangibles of Brookfield Deal
1. World-class capital allocators now control the board
2. Financial model shift to grower/compounder vs. leveraged dividend payer
3. Access to very low cost debt
4. Industry-leading Teekay management remains in place
5. Revenue synergies with Brookfield’s massive energy ecosystem
Beginning of a new Brookfield “plajorm” with access to billions in capital to pursue opportunis-c M&A
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Valuation
EBITDAMultiple 8.0x 9.0x 10.0x 11.0x 12.0xEBITDA $680 $680 $680 $680 $680
Impliedshareprice $4.64 $6.08 $7.52 $8.96 $10.40Totalgrossreturn 186% 243% 301% 358% 416%
TotalShares(millions)* 472 472 472 472 472NetDebt 3,250$ 3,250$ 3,250$ 3,250$ 3,250$
*Assumesfullwarrantandpreferredconversion
Hypothedical12-monthOutlook
FullYear2018EReasonable multiple of conservative 2018E EBITDA suggests a valuation range of$6 - $9 per share
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$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
KNOP (10x EBITDA)
MLP Peers (13x EBITDA)
Brookfield Peers (16x EBITDA)
Enterprise Value ($Bn)
Relatively speaking
+200%
+370% +550%
Implied TOOStock Price
Significant upside based on closest peer and industry comps
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So why does 1 + 1 = TOO? ² Realignment of interest between management and shareholders sets up
long-term compounder potential
² Current price lets you invest at Brookfield’s deal terms of $2.50 per share
² 300% upside with misunderstood margin of safety
² World-class institutional partner de-risks the capital structure and enhances growth
² No longer dependent on oil-leveraged capital markets
Summary
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“It is not the ship so much as the skillful sailing that assures the prosperous voyage” -George William Cur-s
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JDP Team
Jeremy Deal, Founder, Portfolio Manager Business Experience² Private equity ² Co-founder Secure Wireless Inc., sold to Nortek (NASDAQ: NTK) ² Co-founder Energy Eye Inc., sold to Somfy SA (EPA:SO) ² Honeywell International (NYSE: HON), Home Controls Division
JDP Offshore, June 2017
Seth Lowry, Senior AnalystBusiness Experience² Tech Coast Angels, Analyst² Citigroup, Equity Research, Transportation² Merrill Lynch, Investment Banking, Energy and Power² Merrill Lynch, Global Securities Research
Mark Chapman, Director, JDP Offshore Ltd.Business Experience² Azur Consulting, Partner² Director, Aquamarine Fund Zurich² Deloitte & Touche, Managing Partner, BVI² Deloitte & Touche, Senior Manager, Cayman Islands