Worldwide demand for more oil is increasing and with it, oil prices. For 2010 oil demand is projected to rise by 1.6 million barrels per day, or 1.8% year on year, to 86.6 million barrels per day.

Now, increasing oil prices also lead to higher day rates, which explains the recent upside breakout for the oil tanker sector. These stocks hum when they come into fashion, and now appears to be their time.

Enter Teekay Offshore Partners, LP (TOO), a leader in marine transportation and storage services to the offshore oil industry. The company hauls crude oil and condensates from offshore oil fields to onshore terminals and refineries. It also uses conventional oil tankers for transcontinental seaborne shipping, and floating storage units allow for on-site storage for oil field installations.

TOO was founded in 2006 as a subsidiary of Teekay (TK). The company continues to hold a 51% controlling interest in TOO, ensuring investors that the general manager has the most at stake.

TOO recently announced its fourth-quarter 2009 financial results. The company generated distributable cash flow of $18.2 million, up from $13.4 million the previous quarter, and declared a cash distribution of 45 cents per unit. I fully expect this quarterly payout to climb in the year ahead, as well as the price of the units in response to a sequentially higher payout.

And I’m not the only one who’s positive on Teekay’s prospects. Analysts that follow TOO are looking for 2011 revenues to increase by 11% to $810 million and net profits to grow by a healthy 31% to $1.38 per unit, which is revised higher from $1.24 per unit just 90 days ago. I’m a big fan of upward revisions, as it attracts the attention of fund managers looking for such earnings progression.

I’m also a big fan of Master Limited Partnerships (MLPs) that have strong cash reserves relative to their size. At the end of last year, the partnership between TOO and TK had total liquidity of $285.7 million. TOO has a market capitalization of $755 million and a price/sales ratio of only 0.92. Nope, that’s not a typo. Crude tanker stocks tend to carry lower ratios because of the cyclical nature of their earnings. Like any publicly traded MLP, when net income grows, so do tax-free distributions to unit holders.

Currently trading around $21 and yielding 8.8%, TOO shares seem to have cleared any overhang from a recent secondary offering, telling me there is plenty of upside in store if we get involved now.

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