Offering Provides Opportunity in Teekay Liquefied Natural Gas

Includes: TGP, TK
by: Mike Maher

Shares of Teekay LNG (NYSE:TGP) partners are falling 4% in after hours trading after announcing plans to issue 3.7 million units. The firm plans on using the proceeds of the offering to fund the acquisition from Teekay Corp. (NYSE:TK) of a 33% interest in 4 LNG carriers currently being built, as well as to pay down debt. The new ship builds will begin being delivered between late 2011 and early 2012, and will operate under charter to the Angola LNG project. As with other MLPs, equity offerings are often great opportunities to enter into shares at a discount, and with that in mind, Teekay LNG is worth a closer look.

Teekay LNG owns and operates LNG carriers, LPG carriers and oil tankers, as well as Floating Storage Regasification Units. The MLP was formed by Teekay Corp, which owns the GP of Teekay LNG as well as 47% of the common units. TGP focuses on signing long term charters (10-25 years) to avoid the volatility of spot rates, which ensures stable cash flows and distributions. The partnership raised it's distribution to $0.63 a quarter, or $2.52 a year at the end of January, an increase of 5%. Shares trade at a tight distribution coverage ratio of 1.03, but new ships being delivered should allow the partnership to continue to expand its distribution.

Shares of the partnership were up about 11% since the Japanese earthquake until the close of trading today, as investors assume Japan will have to increase LNG imports to replace the lost nuclear power. The theory is that this will lead to higher spot rates for LNG shippers, and should provide distribution growth. However, Teekay LNG still has on average 16 years remaining on its LNG charters, so there is not a short term catalyst to drive big distribution jumps. However, slow and steady distribution increases will continue to be the norm, and investors will still be paid about 6.5% to hold the shares for the next decade until charters can be re-negotiated at higher prices. The LNG shipping industry is also highly fragmented, and Teekay LNG has said it will continue to look for opportunities to consolidate the space, adding another potential catalyst for higher distributions.

A strong yield, long term charters and expanding LNG projects around the world are all positives for Teekay LNG. While the firm will not be able to instantly participate in higher charter rates, investors who buy shares of this MLP will be paid to wait for the charters to be renewed at higher rates. The firm's latest quarterly report points out that there were only 9 new LNG carrier orders placed in the last two years, so operators should have the upper hand in pricing for quite a long time. The dip on the equity offering is an opportunity to get in on a discount, and investors looking to enter the space should use this weakness to buy TGP.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TGP over the next 72 hours.